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12/27/04 Stock Split Report Update
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Stock Split Report Subscribers:
Full reports issue Tuesday, Thursday and Saturday.
MARKET ALERTS
Targets hit alerts issued Monday: None issued
Buy alerts issued: PRFT; MRGE (bonus)
Trailing stops issued: None issued
Stop alerts issued: None issued
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- Early rally as oil falls fails.
- Traditional measures of holiday sales not holding up.
- Durable goods rise, sentiment rises, new home sales fall.
- Holiday rally takes a Monday off on mixed but still very low volume.
- Lots of analysts positive on 2005.
Stronger start, weaker finish.
Stocks started the holiday rally again on the open, but it only took SP500 10 minutes to test resistance and then start to fade once more, just as it did Thursday. The results were a downturn Monday though volume did not rise with it, at least on NYSE (NASD showed a modest bump in continued below average volume). In the end all major indexes posted losses with the small caps leading downside (-1.1%) and techs actually reversing the early trend and showing relative strength at the close (-0.3%).
The action was driven on several fronts, but much as with volume, the headlines in each area were mixed. Retail results from the weekend were positive in some cases (WMT to meet prior guidance, COH seeing a 'mid-teens' sales rise, AMZN has best sales day ever, etc.) and busts in others (SHRP to miss Q4 by a mile, lowers guidance). Oil was down over $2/bbl, falling back below $42. Heating oil, gasoline, and natural gas also tanked as someone suddenly realized that even with the snow and nasty weather there was enough supply here.
No matter what the news, however, the overall market could not rally. Individual issues moved well, but modest upside breadth in the first hour turned negative in over lunch. Stocks tried intraday to consolidate in a nice tight range, and that led to a mid-afternoon bump higher. The move had no support, and it did not take many sellers in the last hour to turn the bounce into session lows for SP500, SP600, and DJ30. The low volume allowed a few buyers and a few sellers to push stocks around all session. The sellers simply had a plurality of the players on the field.
In the end you had NASDAQ and SP500 pulling back on continued low volume, holding near support, and basically taking a rest after drift higher last week off of an 18 day EMA test. Thus we are not too worked up over the Monday selling; it was more of a day off, and we saw some good news from some stocks that continue to move in leadership roles. As long as the market has leadership to the upside, it has the ability to continue the slow, halting holiday rally.
THE ECONOMY
Disconnect between retail sales results and charge card receipts.
The old way of measuring holiday season success, e.g. check tracking, mall traffic, and WMT sales is not yielding accurate results. From the start of the holiday retail season there were two diverging roads as to how strong sales were. Some estimated 7+% sales, some as low as 3%, with the consensus 4% to 4.5%. The results Monday tend to confirm the former and not the latter.
Master Card reported an 8.1% increase in sales over 2003. Visa reported almost 12% in sales increases. AMZN posted its best single day ever. WMT confirmed its 1% to 3% lowered target. That was good enough to boost WMT's stock, but it shows that discounters are suffering in the recovering economy as opposed to when they boomed in the recession. Trying to compare recession buying patterns to recovery buying patterns is the old square peg in the round hole problem.
Luxury sales were up, higher end department stores and specialty boutiques did well. On top of that estimates of internet sales were up 28%. What the credit sales and internet sales tell us is that more shopping is done online as the spread of broadband access puts more and more buyers in fast touch with online sellers. Add to that the gift card market that surged again this year (these sales are not recorded until redeemed in another great accounting rules decision) and you have a retail sales season that is going to be closer to the 8% gain than the 4% gain traditional measures anticipate.
This trend of underestimating sales started in 2002 when a 'late sales surge' pushed retail sales easily past expectations. The late surge is due to card buys, net sales, and a consumer willing to make at least some of the holiday purchases (particularly those 'and one for me' sales) after Christmas and thus take advantage of after Christmas sales. This year we noticed a trend among retailers, however, indicating they may be getting wiser to this. Some Sunday sales were over as of Monday. Merchandise was still marked down, but not at the levels on Sunday. One example of this was in, of all things, Christmas decorations. 75% off sales on Sunday were just 40% to 50% on Monday. Maybe retailers won't win this game, but they are trying to play it as they too adjust to the changes in the retail marketplace.
Durable goods orders reverse slide.
November order rose 1.6% (0.7% expected), and October was revised to a -0.9% loss from -1.1%. That was the strongest rise since July's 1.9% gain. Transportation surged 8.2%; without them durable goods orders fell 0.8% (-1.3% in October). That put a bit of tarnish on the big surge, but there is always something that skews the number up or down. Overall it was solid with room for improvement (sounds like some of descriptions used in modern teaching methods).
A very real bright spot was the non-defense capital goods orders, the de facto proxy for business investment. They surged 8.1% after a 3.4% October drop. That was the largest gain since 9.3% posted in . . . July. We stated in the fall that durables should surge toward year end as businesses rushed to take advantage of the bonus 50% depreciation before that expires in 2005. Sales did in fact surge, and they most likely will do the same in December. The big question is whether the durables can continue into the first quarter. We anticipate durables to naturally fall in January after surging in November and December, but then we will see if the strength in the economy rejuvenates buying at the end of Q1 or start of Q2.
Michigan sentiment rallies.
Its cold in the north but sentiment is warming. Last week the Michigan survey was 97.1, better than the 95.7 previously reported and November's 92.8. Good to see sentiment improving, particularly the expectations portion as show in this report, but sentiment is always overblown, or more specifically, misinterpreted.
Consumer sentiment, just as with market sentiment, means the most at extremes. At this level consumption will remain solid. It is nowhere near the fifties where sentiment hits the point it really digs into buying.
November new home sales drop 12%.
It was the weakest pace of sales since July (note that is the opposite of durable goods sales) and the sharpest percentage decline since 1994. This comes on the heels of the biggest housing starts decline in 11 years (-13.2%). Weakness was everywhere with the exception of the south.
These back-to-back weaker reports renewed the speculation regarding a housing bubble. Housing has hit a plateau the past year, but it has not imploded. Month to month data can be quite erratic, and thus we don't ever put too much emphasis on any one data point. As the market has been referred to as 'red hot' for months even years now, however, it is something to note. Of course unlike the economy in 2000 ('red hot' and 'white hot' where the phrases used to extremes themselves), a lot of people are concerned about a collapse.
That in itself makes this a bit different, but we again note that housing is an early economic cycle sector. It held up remarkably well in the recession due to an extreme sense of travel phobia after 9-11. Money was funneled into homes, and that kept the market strong. It led into the recovery. It can continue the slow decline it started this past year and the economy still grows as money is continually diverted elsewhere.
THE MARKET
SP500 took another look at 1215 resistance and once again that level was used as a selling point. The market faded after an early rise, closing near session lows (except for NASDAQ). Volume remained low. The indexes held above the 10 day EMA, just about the closest support level there is in an uptrending market. Thus the selling was just not that severe. The market is working higher, but slowly, slowly. Three up sessions, three down sessions, then repeat. That makes for a steady trend higher but also keeps things rather quiet if you are looking for New Year's fireworks a bit early.
Small caps lead the selling.
Small caps led the selling, dropping 1.1% and through the 10 day EMA. That is not an unusual move for this index as it has shown such sessions periodically the past several months. It came just after a modest break to a new high, and that always raises an eyebrow if not a yellow flag. Want to see it hold the 18 day EMA (322.47), set a higher low, and then rebound.
That continues the buzz about small caps fading into the new year after their long run. That may be the case; it has been a long run. They have also been dead and buried in the print most of 2004 only to continue leading the market. We also recognize that despite the strong run they based along with the market from April to October before the most recent breakout. That still leaves plenty of upside after this breakout, but at 13% above its 200 day SMA, a bit of a struggle can be expected. A lateral to slightly lower move here would not be out of the ordinary while some of the other sectors played catch-up.
Expectations run the gamut but market has based well during 2004.
This is the time of year that brokerages, etc. come out with their calls on the market for the next year. You see expectations of a 15% gain to modest losses. Many of the calls deal with an expected earnings slowdown from 2002 and 2003 levels. Others cite the gains this year as an indication there is not more upside to this move. To use the more germane factor is whether the Fed takes on the trade gap or gets more aggressive in rate hiking for any number of reasons. That kept the market moving laterally in 2004; but for this last spurt into the end of the year the market would have finished down for 2004.
It is that base that is an interesting factor that many overlook. We discussed this last week, but it bears another look with a slightly different twist. Similar moves in 1984 and 1994 set up a further run for years after despite similar troubles or at least apparently equaling daunting ones faced the economy. This basing activity, however, tends to work give the market the rest it needs and works out the sellers. The market spent a year moving laterally on rising oil prices and a tightening Fed. It broke out to end the year as oil prices broke their uptrend. That sets up another advance following a long, positive basing event just as in 1984 and 1994.
How close is the Fed to being done?
The remaining question as noted above is whether the Fed is getting to the end of its rate hiking. That would free the market to anticipate further economic growth. We are not sure the Fed does not have another 100 basis points or so left in it, however, unless action is taken that works to reduce future entitlements. Greenspan really wants that along with deficit reduction. The deficit is already $110B less than expected as the economy has grown and tax receipts, despite the tax cuts, is up. Greenspan is trying to talk Congress into seeing things his way, another potential chapter for his memoirs ("how I changed the entitlement structure"). If he gets some progress on that front his rate hiking bluff may not have to be put into action.
Breadth continues its solid advance.
Another consideration is the steady improvement in the cumulative market breadth. The advance/decline line has continued to improve with the market following the October 2002 low. It based with the market but broke higher ahead of the market breakout, moving out of its 2004 base in late August, helped by the small and mid-cap advance. It has continued its strong surge.
Historically, breadth deteriorates considerably before and advance runs out of upward momentum. With market breadth still improving into this move, there is little indication the advance has ended. We will be very interested in how small caps fare the next month or so as they have given breadth its strength. Again, after the 2004 base, stocks are still set to move higher. It might very well be the larger caps that have lagged that take over. Right now all are in decent shape with their recent breakouts, some more recent than others.
Market Sentiment
VIX: 12.14; +0.91
VXN: 18.33; +1.53
VXO: 12.16; +0.93
Put/Call Ratio (CBOE): 0.84; 0
NASDAQ
Volume was up slightly but still well below average as NASDAQ tapped the 10 day EMA and managed to hold near support at 1254.
Stats: -6.4 points (-0.3%) to close at 2154.22
Volume: 1.487B (+3.53%). Modest volume gain meant little as trade remained well below average. The light volume allowed the index to be shoved around, but it held on relative well to end the session.
Up Volume: 717M (-160M)
Down Volume: 749M (+253M)
A/D and Hi/Lo: Decliners led 1.36 to 1. Modest downside indicates again no real fervor to the move.
Previous Session: Advancers led 1.24 to 1
New Highs: 152 (-3)
New Lows: 10 (-5)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Techs were lagging or at least in the middle of the pack once the selling started. The large cap indexes showed relative strength early. As stocks slipped lower in the last hour, however, techs tapped the 10 day EMA (2147) and rebounded slightly to hold 1254 support (top of the 2004 base). That put them in the leadership role, at least relative to the other indexes that posted larger losses. NASDAQ continues to struggle near the top of the 2004 base, unable to provide a big breakaway move. the market has not been conducive to such a move, however, moving in baby steps higher. There is talk of massive liquidity in the market right now, but it is not able to push stocks definitively higher. Now that the IPO's are over for the year we will see if that liquidity can pus the existing issues higher.
NASDAQ 100 managed to hold its breakout as well, but the large cap techs gave up leadership to the overall index late in the session just as the other large cap indexes did. Tapped the 18 day EMA on the low and rebounded, still working in the four week lateral base.
SOX was leading early with a 1.1% gain and then reversed for a 0.8% loss. Chips continue to struggle but again held the 50 day EMA (421.26) on the low. Still getting pinched between the 200 day (432) and the 50 day.
SP500/NYSE
Tapped toward 1215 resistance again and then faded once more on low volume. Decent move last week, testing back toward near support this week.
Stats: -5.21 points (-0.43%) to close at 1204.92
NYSE Volume: 920.184M (-3.64%). Volume faded as the large caps reversed an early gain and some of last week's rise. No hard selling, just no buyers ready to get in after that move last week.
Up Volume: 325M (-227M)
Down Volume: 572M (+182M)
A/D and Hi/Lo: Decliners led 1.58 to 1. The small caps hurt overall breadth.
Previous Session: Advancers led 1.32 to 1
New Highs: 238 (-37)
New Lows: 7 (-1)
The Chart: http://www.investmenthouse.com/cd/^spx.html
As noted, 1215 acted as resistance once more, stalling the index the second straight session. This time stocks could not hold any of the gain. Looks as if it is coming back to test the 10 day EMA (1201.76), 1200, or the 18 day EMA (1195.88). Lower volume rise to end last week, even lower volume pullback to start the week. The index continues its renewed uptrend after the November breakout though it is hardly a powerful move. The strong uptrend remains in place after this pullback, and at this point it is showing nothing that would indicate it will not resume after this test.
The small caps lagged all session, and they only grew worse as the session continued. They gave up the early December high (326.35) after just clearing it last week. The small caps also remain in a solid uptrend after the early November breakout. As noted that leaves plenty of upside after the breakout still remaining, but it is 13% above the 200 day SMA. That is a level where indexes tend to begin struggling. Quickly giving up the December high is something to watch as well as the lagging action the past two weeks. For now it is just a lull, but it could turn into more than that. Again, it is still in the uptrend right now.
DJ30
Similar to SP500, the blue chips ran into the same roadblock (10,870) on the high and again fell back. Volume was even lower, some of the lightest trade since August. Thus no high volume reversal of the recent breakout over 10,754 that marked the top of the 2004 base. Looking for a pullback to test that move or the 10 day EMA (10,719) for it to make a higher low and resume the move.
Stats: -50.99 points (-0.47%) to close at 10776.13
Volume: 170 million shares Monday versus 193 million shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
As noted, there is some pretty bullish sentiment regarding 2005. SP500 at 1350 to 1400 (16%), 1300 (7.4%), 1250, and on down. You can find pretty much whatever level you want. The predominant view, however, is upside. That is always a caution. The market already shows a lot of bullishness, and there is even more in the coming year based on the analyst comments. Again, however, bullishness, while a caution flag, is not a great timing indicator. Sentiment can run high for years before the market peaks (look at the 1995 to 2000 run). The bears were right, but everyone that sticks to a position is eventually right given the cyclical nature of markets.
This is a full week even with the New Year's holiday on Saturday. The market does not take New Year's Eve off, so we have a full week for the market to try and continue the holiday rally. We should anticipate continued low volume, and that means we can see the kind of swings shown Monday. It also means that after a bit more pullback here to test near support we can look for the existing trend to hold sway and buoy stocks back up. That sounds a bit pat, but the trend is solid thus far.
One problem may lie with the small caps. They have lagged the past few weeks and were weak again Monday. The market does well when they perform well; if they are starting another base or deeper pullback here the large caps and techs will have to pick up the slack. We cannot expect much from the semiconductors, at least based on their recent performance. At this juncture, given the flux the past few weeks even as the uptrend continues, it remains a stock by stock market.
Tuesday we are looking for a further test toward near support before the market tries to resume the advance. It may take the entire day and even into Wednesday; the market has moved up three and down three lately, and that would take it to Wednesday. Before that we will continue to look for leaders making good moves ahead of the rest of the market.
Support and Resistance
NASDAQ: Closed at 2154.22
Resistance:
2250 - 2260 from January/February 2001 highs and lows.
2282 from 5-2001 high.
Support:
January high at 2154 (early 2004 high).
The 18 day EMA at 2136
2110 - 2112, the top of the November consolidation.
Price support at 2090.
The April high at 2079
The 50 day EMA at 2076
2050, prior resistance and the June high.
S&P 500: Closed at 1204.92
Resistance:
Q1 1999 lows at 1215
October 1999 low at 1233
Q2 2001 peak at 1310.
Support:
1200 acted as resistance on the last trip higher.
The 18 day EMA at 1195.88
1180 to 1185, the top of the November consolidation range.
1175 second high in that double top that spanned late 2001.
The 50 day EMA at 1173
January highs at 1158
1142-1146 are the June highs and the October high (1142).
Dow: Closed at 10, 776.13
Resistance:
10,975 - 11,000 from Q4 2000, Q1 2001
11,350 from the May 2001 highs
Support:
10,754 is the February high
The 10 day EMA at 10,719
The 18 day EMA at 10,655
Price consolidation at 10,600 level
10,570 is the early April high
The late April, June peaks at 10,478 to 10,512
The 50 day EMA at 10,471
10,400, the bottom of the recent range.
September high at 10,342
The 200 day SMA at 10,242
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
December 28
Consumer Confidence, December (10:00): 94.0 expected and 90.5 prior
December 29
Existing Home Sales, November (10:00): 6.75M expected and 6.75M prior
December 30
Initial Jobless Claims, 12/25 (8:30): 335K expected and 333K prior
Help-Wanted Index, November (10:00): 37 expected and 37 prior
Chicago PMI, December (10:00): 63.0 expected and 65.2 prior
End part 1 of 2
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