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world stock market, us stock market
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12/29/04 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Wednesday: None issued
Buy alerts issued: CVNS; MUSA
Trailing stop alerts: None issued
Stop alerts: None issued
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SUMMARY:
- Stocks start soft, rally past oil inventory data, but then are undercut by bombings in Saudi Arabia.
- Oil inventories mixed, but bombings send prices higher.
- Existing home sales jump versus new home sales, but existing sales tend to lag.
- Stocks show resilience even on a slow day as SP500 continues fight with 1215.
- Subscriber Questions
Stocks get undercut on the way to the next up session.
We anticipated a softer open Wednesday after the rally to the close Tuesday as market makers replenished their inventories. Stocks did start weaker but then rallied on some good existing home sales numbers and even recovered from somewhat disappointing oil inventory data to rally to session highs that pushed the indexes into positive territory. Oil bounced on the inventory numbers but then quickly gave much of the move back. SP500 was right back in the hunt as well, trying to get through 1215 resistance once more.
Then reports of two bombings and gunfire in Saudi Arabia sent oil back up almost $2/bbl, and stocks stalled in their tracks. The oil rise sent stocks back to negative through lunch. Then a slow, steady rebound began. It was most notable on SP500 that recovered its midmorning highs by the close. Overall stocks finished slightly lower though SOX and the SP400 mid-cap index posted gains (0.9%, 0.1%). Volume was lower, breadth was mixed but modest.
All in all a very quiet session that was driven back and forth by news. In the end, however, even with oil rising on new concerns regarding threats to world supply, stocks rebounded toward the close as the upside bias of the current trend continued to hold sway. Disappointing because stocks were on the way to continuing the rally, but decent action as stocks were able to rebound for the most part.
THE ECONOMY
Oil inventories fall overall, mostly match expectations otherwise.
Crude inventories were expected to rise 50K bbl but fell 800K. That was the big news in the report. Distillates fell 800K versus the 700K expected. Gasoline rose 900K. It was enough to rattle the market and send oil up $1.33/bbl, but almost as quickly the spike faded. Oil traders seemed to realize that these were not major swings that would pressure supply and thus price. Indeed, historically the most demand is in December and not in January and February as many think. Thus oil prices gave back the quick spike on the news.
Unfortunately that did not last. The news of the car bombings in the Saudi capitol, however, sent oil higher to stay for the session, rising almost $2/bbl. The fear is an old one that was a primary driver in the surge in prices last summer: if you cannot get to the US on the homeland, go after what it needs to run (the rest of the world as well), the Middle Eastern oil supply. It is kind of a two birds with one stone idea for Al Qaeda; hurt the US and hurt the Saudi ruling family as well. Though the attacks were not on oil facilities, and from what we understand the oil facilities remain heavily guarded, they show everyone that attacks can happen in Saudi Arabia, the world's largest oil producer.
Existing home sales jump an unexpected 2.7%.
November existing home sales were expected to rise 0.3%, and thus the 2.7% gain was well received, particularly after the thud lower in new home sales previously reported. Existing home sales make up 80% of the housing market, so when they report this type of gain, it shows the market is still quite solid.
Problem is, of the two reports, existing sales lag. They are recorded at closing versus when the contract is signed while new home sales are recorded at the signing of the contract. Thus there can be a 30 to 60 day discrepancy between the reports as existing home sales reflect activity that was initiated up to 2 months earlier. Therefore we may not get a real reading that compares apples to apples with the new home sales until the December and most likely the January report. With new home mortgage applications and refinancing applications both falling last week in the face of higher interest rates, one would expect existing home sales to show some of the affects embodied in the November new home sales report.
THE MARKET
The day was a wash overall with stocks maintaining the status quo after the rebound move was stymied by world events. A wash is not that bad, however, as the market continues its uptrend after breaking out from the 2004 base and rallying well in November and December. Wednesday was a disappointment in that the rally could not resume, but it was a decent showing in that it did not fold in the face of a reminder that terrorism is still a very real problem that can directly impact us even if it occurs half a world away.
The problem with the session is that it squandered a day of potential rally between the Christmas and New Years holiday. The market is in an uptrend and was ready to continue the move Wednesday. While we don't anticipate the breakout rally to suddenly vaporize at the end of the year, with the nice uptrend in place you want to take advantage of that upward bias on the easy days when volume is light and the upside trend continues to push stocks higher.
SP500 still has to deal with 1215, and Wednesday it looked ready to take it on before the market started its mid-morning fade. Solid uptrend, lots of money coming into equity funds each day, leaders still performing well. That is a good recipe. It is also good that CNBC and Bloomberg were talking all day about the record high bullishness among individual investors, investment advisors, and investment newsletters. That they are worried about worrisome levels of bullishness is a good in itself. The high bullishness and money flowing in is something to be concerned about, but as we have said, sentiment is a poor timing device. Leaders are performing well and money is flowing in. Near term those are positives.
Market Sentiment
As noted, sentiment levels are high. They have been high for a long time but the market continues to rise. It is something to continue to watch, but you watch it in perspective of overall price/volume action of the market and leader performance. The sentiment caution flag is raised.
VIX: 11.62; -0.38
VXN: 17.72; -0.07
VXO: 12.47; +0.16
Put/Call Ratio (CBOE): 0.9; +0.21. Lots of put activity when stocks stalled a bit. That provides something of an offset to the rising bullishness.
NASDAQ
Stalled out on lower volume after posting a modest gain as it rebounded from a weaker open.
Stats: -0.19 points (-0.01%) to close at 2177
Volume: 1.517B (-5.04%). A drop in volume as stocks sold intraday. Volume is so low it is hard to draw any conclusions, but the overall price/volume action remains positive even at these low levels.
Up Volume: 826M (-176M)
Down Volume: 666M (+91M)
A/D and Hi/Lo: Decliners led 1.15 to 1. Good to see it flat, matching the action of the market just as it was strong Tuesday, matching the gains in the market.
Previous Session: Advancers led 2.68 to 1
New Highs: 179 (-13). Remember, we want to see new highs start spiking on the next gains in the index.
New Lows: 7 (-2)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Went nowhere on no volume. Techs were trying to show some leadership in the morning after the oil inventories were released. That move was torpedoed by the bombing news. NASDAQ managed to rally off the lows to close basically flat. Not bad action as the news did not kill the rally, but a somewhat promising session wound up a nothing session.
Similar action with the large cap techs: modest rally that sold off and then a modest recovery late. The large caps remain in their 4 week lateral move below the December high (1635.70).
SOX was the best performer, rising above the 200 day SMA (431.71) on the high, but unable to hold that to the close given the overall market pullback. This is the critical level for the index as it has basically stalled the semiconductors the past 6 weeks when they have risen to take on the 200 day. As noted Tuesday, a definitive break above this level will help the rest of the market continue its move up the trend.
SP500/NYSE
Flat lining as well on lower volume. It tested 1215 early, faded, but then rallied right back up to that level at the close. Looks ready to try that resistance out.
Stats: +43.22 points (+0.31%) to close at 1213.45
NYSE Volume: 934.406M (-4.92%). Lower volume that remained very much below average. Not much to take from that except that volume was lower on the pullback, continuing the solid price/volume action.
Up Volume: 517M (-265M)
Down Volume: 384M (+207M)
A/D and Hi/Lo: Advancers led 1.33 to 1. Solid breadth on the Tuesday gains, modest advance on a very lukewarm session. As with NASDAQ, not bad action.
Previous Session: Advancers led 2.82 to 1
New Highs: 244 (-22)
New Lows: 8 (-13)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Rallied to 1215 resistance early (it did not have far to go), but then failed as the Saudi news hit and oil started to rise. S&P futures never fell much, and a late surge pushed SP500 right back up to that resistance level.
The small caps paused as well following the strong Tuesday move. This does not reverse or diminish that move, and we look for a continuation after possibly a small further test.
DJ30
The industrials struggled the most all session, but they never breached the 2004 high (10,754), never coming close. It rebounded with the rest of the market and closed just modestly lower. Continuing the nice run up the 10 day EMA (10,759) following the breakout two weeks back.
Stats: -25.35 points (-0.23%) to close at 10829.19
Volume: 162 million shares Wednesday versus 169 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Initial jobless claims and then the Chicago PMI at 10ET highlight the economic data, but you can bet many eyes will be watching how oil responds the day after it bounced on the Saudi bombings. The market's move has been inversely tied to oil prices with the big advances the past two months occurring as oil broke its uptrend and started to sell sharply. That lower price has found its way into gasoline and heating oil prices, and that has played a role in rising consumer sentiment. No one wants to see that trend undermined.
Given the light 'between the holidays' trade that is often compared to white noise, the market will be easily influenced by outside events just as it was Wednesday. Thus oil will play a key role, but also the continuing uptrend won't hurt. The action may be considered white noise, but when there is a strong trend in place and continued positive factors (money flowing in), the white noise can turn into more green for us.
The market was performing as we anticipated up to the bombing news. The recovery late in the session indicates that stocks will attempt to resume the rebound that showed its strength on Tuesday. Once again we may see a bit of softness, but if oil slides back we can expect to see traders take heart and move in on the upside. Volume will remain light, and we know that light volume moves can be quickly reversed once the big players return to the market after the holiday. Leaders, however, tend to hold up well even upon the return of the big money because they attract money being leaders in an uptrending market. When the market was weak, leaders became sell targets. They can still be hit with periodic downgrades (e.g., APPL and NTAP recently), but if the overall trend remains in place and the fundamental earning strength does not change, the leaders typically recover. Leadership remains solid thus far, and we will continue to try and pick them off as they give us entry points.
Support and Resistance
NASDAQ: Closed at 2177.00
Resistance:
2250 - 2260 from January/February 2001 highs and lows.
2282 from 5-2001 high.
Support:
January high at 2154 (early 2004 high) and the 10 day EMA (2153).
The 18 day EMA at 2144
2110 - 2112, the top of the November consolidation.
Price support at 2090.
The April high at 2079
The 50 day EMA at 2083
2050, prior resistance and the June high.
S&P 500: Closed at 1213.45
Resistance:
Q1 1999 lows at 1215
October 1999 low at 1233
Q2 2001 peak at 1310.
Support:
The 10 day EMA at 1205
1200 acted as resistance on the last trip higher.
The 18 day EMA at 1199
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 1176.90
January highs at 1158
1142-1146 are the June highs and the October high (1142).
Dow: Closed at 10, 829.19
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 10,759
The 18 day EMA at 10,692
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 10,499
10,400, the bottom of the recent range.
September high at 10,342
The 200 day SMA at 10,254
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
December 28
Consumer Confidence, December (10:00): 102.3 actual versus 94.0 expected and 92.6 prior (revised from 90.5).
December 29
Existing Home Sales, November (10:00): 6.94M actual versus 6.75M expected and 6.76M prior (revised from 6.75M)
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
SUBSCRIBER QUESTIONS
Q: You mentioned the "January effect" in [a recent] report and I've heard the term before, but never an explanation of what it entails and what is the (historical/financial/trading?) basis for same. Thanks for the response.
A: We mentioned the January effect in the December 22nd report as a positive sign resulting from the action of many stocks we have seen of late (stocks making strong moves off of the bottom of their bases and currently forming the right sides to these bases).
The January effect refers to the general tendency of the stock market to rise between the last day of December and the end of the first week in January (though the effect can sustain throughout the month, 25% of the activity historically occurs in the first week). It is generally considered to be a result of tax-related selling: many investors will sell some of their stocks (that are down) just before the end of the year to claim a capital loss on their taxes. Once the new year hits, these investors turn right around and reinvest their money in the market, which of course causes stock prices to rise in a short term, natural rebound effect. The effect is said to impact small-cap stocks more than mid- to larger-cap stocks. This better performance is an anomaly since the stocks that are usually sold are the ones that haven't previously performed well. However, stocks of all sizes tend to benefit at the start of a year from bonus money and an influx of cash into retirement accounts.
The phenomenon that has occurred regularly throughout history (Merrill Lynch reports 70% of the time since 1926), but it's debatable as to how much investors can profit from it if just looking at the first week in January. The possible reasons for this are two-fold: 1) the markets tend to expect it to happen and therefore have adjusted prices for it accordingly. And, the rise of stocks up the right sides of their bases over the last month or two might indicate that the effect of anticipation has pushed the buying into November and December, and 2) more people are using tax-sheltered retirement plans and thus have no reason to sell at year's end for tax losses.
End part 1 of 3
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world stock market
us stock market
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