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us stock market, stock share
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1/24/05 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Monday: None issued
Buy alerts issued: MFE; KDE; SEBL; SHFL; DDDC
Trailing stops issued: None issued
Stop alerts issued: GERN; AMMD; DCAI
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. To subscribe to the Daily alert service you can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- One more time: early bounce, late selling.
- Industry group says business environment booming, CEO's still confident
- Many still calling this a profit taking pullback from 2004 run, but continued distribution clearly shows it is not just profit taking.
- Negative sentiment widely discussed Monday, but some key points missed.
- No relief move yet, but one is coming after 4 hard down sessions.
Play it again, Sam.
Stocks played the refrain learned at the start of the year: bid them early, sell hard into strength, close them down. After an attempt at staving off further selling after the initial downdraft to start 2005, stocks have returned to their early year pattern, i.e. sellers taking charge and selling on volume. Monday was not an across the board slaughter as SP500 and DJ30 posted comparatively modest losses on lighter trade. Nonetheless, the leaders of 2004 were blasted again as NASDAQ, SP600, and even SOX (though hardly a 2004 leaders) sold hard.
You always look for a scapegoat when there is selling. Humans like to attach a clear cause to anything good or bad. There were some decent earnings pre-market and during the session. A private business survey showed strong optimism for 2005. Stocks bounced on the open but within 10 minutes had peaked, at least for that opening run. NASDAQ was trending lower from that point. SP500 moved laterally and actually broke to a new session high right after lunch. That triggered the sell reflex, however, and stocks sold and sold hard from that point.
What was the catalyst? The predominant reason we still hear is a give back or pullback from the late 2004 rally. Oil gets some blame, and interest rates are also mentioned, but the financial stations are predominantly stuck on the 'normal' profit taking scenario. Well, NASDAQ volume rose, indicating more dumping of tech shares. SP500 volume shrank as the large caps fared better and the small caps, while taking a price hit, were not being totally routed. Breadth was weak once more, easily outstripping the upside breadth on recent upside sessions. Profit taking occurs on lower volume, narrow downside breadth, leaders continue to hold support, and key market support usually holds. Scratch all of those since the selling 2005 started.
Thus stocks continue to distribute, not showing what we would call a normal pullback to test the breakout. Indeed, in a breakout test it is implicit that the breakout holds. Otherwise it is a failed breakout. NASDAQ and DJ30 have already failed their breakouts. That leaves SP500 and SP600 as the great hopes to hold the line and return the upside. They may still hold their breakouts, but there is still more room downside before they get there, and this distribution still has to abate.
THE ECONOMY
NABE survey shows solid business confidence.
The National Association of Business Economics (NABE) survey reported strong demand in Q4, up 50% over the prior quarter. Faster growth in wages, employment, profits, and capital spending was reported across the board. Inflation and material costs were seen as lower. Big finish to 2004, and the respondents indicated they were expecting a strong 2005, at least the first half, as the demand continues.
Indeed, 60% said capital investment would rise in 2005. That is surprising to us. We anticipated the strong Q4 given the expiration of some of the investment incentives. The last tax cut package did extend some of those incentives, however, e.g. keeping the $100K expense feature for capital expenditures (though the you can no longer by an SUV and expense it). That will help keep the investment running at above normal levels. Other than that, it is up to the economy to spur additional investment.
You have to remember a couple of things about capital investment. Number one is that companies are slow to change their perspective of a good versus bad economy. Remember all of the negative CEO's right at the time the market was turning and the economic data was starting to show hints of recovery? We wrote at the time that CEO's are not a good leading indicator; to them there is no recovery until they are back to where they were before the downturn. They tend to remain pessimistic until they get back to the future so to speak. Thus, when we hear of business sentiment surveys about how much they are going to spend, that may be old news over the next month or two.
In addition, similar to consumers, businesses say one thing and can do another. They will create budgets to spend, an obviously critical step in spending that you don't even see when their business is still contracting, but that does not mean they are going to spend it. While a company division will try to spend all it gets (just as will a government agency), the CEO or others can always pull the plug if he or she does not like what the economy is showing. They can say one thing and do the other just as with the consumer, and as noted above, business sentiment is typically a lagging, not a leading, indicator.
Housing market remains strong even if it plateaus a bit.
Over the weekend we cited the housing market as one indicator as to where interest rates are heading. Despite what you hear from some analysts on the financial stations, housing is still, just as it always has been, interest rate sensitive. If rates rise fewer can afford new housing. This applies to those of lesser means attempting to buy their first homes as well as the baby boomers looking for a second or third residence. As interest rates rise you have to have more financial wherewithal to get a loan. If rates are rising substantially or are forecast to rise substantially, the housing stocks will show it.
Housing stocks have come under pressure and looked ready to crack more than a couple of times the past two years, but they always just base out again and break higher. As of yet they have not had the serious drop and distribution you would see if they had peaked. One reason they would peak would be the interest rate hikes by the Fed. As we noted over the weekend, however, the hikes in short term rates is thus far unable to generate any upside in longer term rates just as the rate cuts after the recession were at first unable to bring longer rates lower. Seems there is still a lot of elasticity between short term and long rates as several Fed rate hikes have been unable to push long term rates higher; indeed, they are falling even as the Fed talks of removing its 'measured pace' of accommodation.
The continued strength in the housing stocks suggests, along with the bond market itself, that there is no sharp rise in long term rates foreseen in the future. That either means the economy is not expected to rise significantly further, that it is going to rise but there are no inflation fears, a combination of both, or other factors are at work. While we can use the housing stocks as a gauge of future interest rates, we don't want to put too much emphasis on them simply because there may be other factors in place. One could be that there simply is going to be solid growth with little or no inflation as in the 1980's when Reagan's economic recovery plan spurred strong growth without rising interest rates or other inflation.
Another was referenced above, the baby boomers. Boomers have spurred whatever market they entered, causing that market to surge beyond expectations. First time homes, upscale homes, second homes, stock market, auto market; you name it, they have impacted it. Remember when $14K bought a really nice auto? Boomers hit the market and luxury became the norm; now autos stickers are huge. Part of the stock market boom in the 1990's was driven by boomers discovering equities as a way to line the nest egg. They will continue to drive equities as they live longer and longer; retiring at 65 means another 15 years or more these days. It is hard for conservative investments to keep up with your life and standard of living at that level. Boomers are driving the second home market hard as they look for places to 'get away from it all.' That is why juniper-infested, limestone hard scrabble that grows rattlesnakes, scorpions, and midget-sized deer west of Austin, Texas is fetching ridiculous amounts of money. That same story is being repeated all across the country. At some point it fades; for now the boomers are helping the housing market, and thus the housing market may be less than an exact indicator of interest rates. Still has an impact, but not as much because of the boomer effect.
THE MARKET
As noted, many are calling the current selling a profit taking pullback from the late 2004 breakout. The resumption of the high volume selling as NASDAQ has crashed back into its base, giving up its breakout, indicates it is more than that. Many leaders have been unable to hold support or their uptrends and are in need of new bases to set up their next runs higher. That takes time to accomplish, particularly when stocks are still undergoing heavy volume selling.
Now there are leaders in this market. When things get defensive medical and health services stocks are a safe haven as are drug stocks. The large cap drugs, however, look bad. The medical appliances, services, small drugs, and even some biotechs look much better, and they can provide real market leadership as they are growth stocks.
Other clear leaders are oil stocks. The problem with oil stocks leading is that they only do so because price is up. To the market it is something like suicidal leadership: price gains push energy stocks higher, but those same price increases eventually kill the economic rally. The market and economy suffer, and even the energy stocks ultimately fail because a falling US economy uses less oil, and when the energy hungry US economy uses less, prices will fall.
Thus the leadership at this juncture is questionable given that it feeds off what can kill the economy in the long run (rising energy prices), it is influenced by another factor (boomers and the housing market), or it is a safe haven sector where investors stick money to ride out the storm (medical, health). Leadership is key to the market, and a distributing market with no leadership or the wrong type of leadership still has a lot of work to do before it is ready to post the next growth-based rally.
Market Sentiment
Many are discussing the negative sentiment in the market given the continued selling and the general gloom experienced when talking to traders. There has been a modest change in sentiment, but as noted over the weekend and last week, traditional measures are no where near indicating a meaningful bottom to the selling. VIX continues to rise, but it is still at low levels, and levels below where the market has started more important bounces during the past year. Bullish sentiment versus bearish sentiment is shifting, but also nowhere near levels that would indicate a strong, sustainable upside is at hand. Even the put/call ratio, one indicator that has held high throughout much of the rallies, has backed off on this selling in rather curious action.
There are other areas being discussed, but the impact of which from a sentiment level is being overlooked or misinterpreted. One is the lack of inflows into equity mutual funds. January has seen net outflows. That means there is less and less money to invest in US equities right now. Moreover, as money is diverted or called back by investors, the funds have to raise the money to give them, and that can mean selling some fund assets in order to deliver the funds. That has a snowball effect on stock prices.
Short term that is a negative for stocks: less money to invest and the potential that funds have to sell some holding to raise cash for those redemptions. That is how most are viewing this. Longer term, however, as a sentiment indicator it is a positive. When money leaves the market that is when prices start hitting near bottom. We still see very large foreign inflows into equities as they are still willing to finance our debt hands down at these supposedly dangerous levels. That money will provide a floor, and after the individual easy seller money leaves the market, then supply and demand takes over. Not there yet.
Another area mentioned though not a heavy hitting sentiment indicator, is the price of a seat on the NYSE. A seat sold recently for the highest price in three years. That was reported as a positive by a few, but usually prices of stock exchange seats are just like any other commodity bought and sold by humans: prices hit multiyear highs when they are at peaks in sentiment. Thus a high price on the NYSE is not necessarily an indication of the good times ahead. It is a minor indicator at best, but another example making up overall sentiment on the street. In short, despite the gloom out there right now because of this selling, overall sentiment levels are not at extreme levels that would suggest a meaningful market turn.
VIX: 14.65; +0.29
VXN: 19.87; +0.5
VXO: 14.53; -0.02
Put/Call Ratio (CBOE): 0.75; -0.12
NASDAQ
Techs were a market leader, to the downside, continuing the second leg lower in the 2005 selling, and doing so on stronger volume once more. Big money was again leaving NASDAQ.
Stats: -25.57 points (-1.26%) to close at 2008.7
Volume: 2.147B (+4.24%). Not huge volume, but a solid increase as techs stocks turned tail and ran further south. That makes 3 distribution sessions in 4, but the damage has already been done. What the continued higher volume selling shows is that the index has yet to find bottom and start any kind of consolidation to set up a meaningful, sustained rebound.
Up Volume: 430M (-308M)
Down Volume: 1.697B (+416M)
A/D and Hi/Lo: Decliners led 2.38 to 1. Downside breadth continues to expand and remains much stronger than the last time the index put in an upside session (about a week ago).
Previous Session: Decliners led 1.29 to 1
New Highs: 50 (+1)
New Lows: 83 (+37)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Gapped higher in a 'rebound', but that was about it. Sold lower from that time on, increasing the pace in the late afternoon. Typical bearish intraday action, and with volume expanding, it was another day of tech share dumping. It may find enough purchase at 2000 to rebound, particularly given that QQQQ hit the 200 day SMA Monday and held. With NASDAQ still diving on volume and its 200 day SMA (1975) is still a fair piece lower. It is not at the point where it can put in a bottom and provide a new break higher.
NASDAQ 100 fell 1.5%, a bit harder than overall NASDAQ as it too dove lower once more. It is still above its 200 day SMA (1468) but that will likely provide some support for a relief bounce.
SOX lead to the downside with a 1.7% loss as it continues toward 375, the next support level. After hours chips got a bump from some earnings that were better than expected (e.g. SLAB). That may be good for a relief move after this hard dump, but a full test of 375 still seems likely.
SP500/NYSE
The large caps showed relative strength Monday, holding positive until the last hour. There was no volume on the move and thus it was easily shot down as the market turned over late in the session.
Stats: -4.12 points (-0.35%) to close at 1163.75
NYSE Volume: 1.494B (-9.85%). Lower volume shows no distribution. Indeed the large caps demonstrated relative strength all session even when they sold off late. Little consolation, however, as they headed still lower after breaking key support Friday.
Up Volume: 501M (-66M)
Down Volume: 977M (-53M). Selling volume still almost doubled up upside trade.
A/D and Hi/Lo: Decliners led 1.54 to 1. Breadth had disintegrated in the last hour, dropping from positive to negative. It managed to improve slightly on the close. Still not atrocious downside breadth on the NYSE, a potential point where the market can gather some strength.
Previous Session: Decliners led 1.09 to 1
New Highs: 90 (+7)
New Lows: 34 (+9)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large caps were positive most of the session but the afternoon selling dragged everything lower including SP500. It continued its break below 1175 support that marked the neckline of the head and shoulders pattern that formed from November to January; as noted before, the general rule of thumb is that SP500 falls as far as the base was high, and that puts the bottom near the 200 day SMA (1133). That is the general rule, and SP500 will most likely try a relief bounce well before it gets to that level. Still looking at 1157, the top of the 2004 base to see if it can stall the selling. Though no distribution Monday, SP500 distributed to end last week; thus we don't read too much into the relative tameness of the Monday selling.
The SP600 small cap index slipped lower, dropping to next support at roughly 310, the neckline of its 9 week head and shoulders top. It appears to have downside momentum, and after being a relative strength leaders last Friday it was a downside leader Monday. Still, with the large cap indexes posting 4 sessions of sharp downside, we may see a rebound from this level. SP600 may undercut 310 and then recover intraday as it did 8 sessions back when the market reversed. This is a key level for SP600 and could be for the market as well if small caps are going to continue their leadership. With QQQQ at the 200 day SMA, SP600 at 310, and the large cap indices down four hard sessions in a row, this could easily be the relief bounce point.
DJ30
Another relative strength leader, the blue chips were positive much of the session and only turned negative as the late selling took nearly everything lower. Slipped a bit further below 10,400 support, but it was no bloodletting. It did slip below the neckline of its 9 week head and shoulders base, but the lower volume (average) and the stubborn refusal to sell off Monday indicates it was not a serious breakdown.
Stats: -24.38 points (-0.23%) to close at 10368.61
Volume: 259 million shares Monday versus 275 million shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
The major indices have sold pretty sharply for 4 straight sessions since reversing a follow through attempt on SP500. In doing so they have popped some important support and entered the second down leg in the 2005 selling. With SP600 at an important level, QQQQ testing and holding the 200 day SMA, and SP500 showing some relative strength, stocks may finally be set for a relief move. It won't hurt that after hours chips were helped by SLAB's earnings (up 21% after hours) while techs were in a better mood from NFLX and other earnings. There was also downside as PLMO was hammered on its results. Generally, however, tech stocks were higher after hours, and if NASDAQ bounces, as it was the main selling culprit, the rest of the market will find some relief as well.
Unless that move shows extraordinary strength, we still have to be very careful with respect to new upside positions; after hard distribution stocks typically need to rebuild over some time, particularly when the leadership has been hit pretty hard. There will be strong moves from stocks that have just waited for the selling to subside, and those will be our upside focus if they can deliver strong moves on strong volume.
For those stocks that have been riding the bubble during this selling, they will have to show some serious upside strength (along with the market) or else we use strength to lighten those positions until the market shows it is putting in a bottom and leaders are starting to make breaks higher.
Tuesday stocks could open higher; after hours they were up from the close on earnings news. Frankly, given the market action, even with four down sessions prior, an upside open still does not hold much allure for us. We would prefer to see some further early selling that undercuts the SP600 support at 310 and QQQQ below its 200 day SMA and then rebounds. That would give it more punch to the upside. In any event, any upside from here is suspect given the hard selling unless it is very, very strong. Narrow breadth and so-so volume on the recovery are the indicia of a relief bounce.
Support and Resistance
NASDAQ: Closed at 2008.70
Resistance:
2047, the June high.
2050-54, prior resistance and the June high.
2066 to 2070, the bottom of the January lateral move.
The 50 day EMA at 2085
2110 - 2112, the top of the November consolidation.
January high at 2154 (early 2004 high)
2250 - 2260 from January/February 2001 highs and lows.
2282 from 5-2001 high.
Support:
2000
The 200 day SMA at 1975
S&P 500: Closed at 1163.75
Resistance:
1175 second high in that double top that spanned late 2001.
The 50 day EMA at 1181
1185, the top of the November consolidation range.
The 18 day EMA at 1185
1200 acted as resistance on the last trip higher
Q1 1999 lows at 1215
October 1999 low at 1233
Q2 2001 peak at 1310.
Support:
1157 is solid support from January through March consolidation tops.
The 200 day SMA at 1133
Dow: Closed at 10, 368.61
Resistance:
10,400, the bottom of the November/December range
The late April, June peaks at 10,478 to 10,512
The 50 day EMA at 10,534
The 18 day EMA at 10,560
Price consolidation at 10,600 level
10,754 is the February high
10,975 - 11,000 from Q4 2000, Q1 2001
11,350 from the May 2001 highs
Support:
10342 the early September peak.
The 200 day SMA at 10,279
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
January 25
Existing Home Sales, December (10:00): 6.80M expected and 6.94M prior
Consumer Confidence, January (10:00): 101.3 expected and 102.3 prior
January 27
Durable Goods Orders, December (08:30): 0.7% expected and 1.4% prior
Initial Jobless Claims, 01/22 (08:30): 330K expected and 319K prior
Help-Wanted Index, December (10:00): 37 expected and 36 prior
January 28
GDP-Advance, Q4 (08:30): 3.5% expected and 4.0% prior
Chain Deflator-Advance, Q4 (08:30): 2.1% expected and 1.4% prior
Employment Cost Index, Q4 (08:30): 0.8% expected and 0.9% prior
End part 1 of 3
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