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money investment, day trading
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01/25/05 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Tuesday: None issued
Buy alerts issued: UCOMA; USU; LCAV (bonus)
Trailing stop alerts: ASATM; EBAY
Stop alerts: STEM
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SUMMARY:
- Stocks rebound after 4 days down, but volume mixed, A/D weak.
- January confidence bounces, still easily within comfort range.
- Existing home sales fall 3.3%.
- China GDP continues to soar.
- US deficit moves higher than expected but still well below 2004 levels and falling.
- Stocks hold some gains into the close but it hardly a sterling session.
- Earnings parade after hours mostly positive and stocks will again try to hitch onto them Wednesday.
Strong move out of the gate and holds gains, but still gives back much of the gain.
Hard selling eventually dissipates and gives way to rebounds. Stocks had some additional impetus as the biggest earnings day of the season provided some solid results to build off of. They were out of the gates solidly, posting 1+% gains early on. SP500 rallied right up to key resistance at 1175 and paused. That pause turned into a lateral consolidation, and that turned into a late morning pullback. Stocks were not done, however, and at lunch rallied back with SP500 nudging to a slight session high. It was unable to clear resistance, however, and that second peak marked the high point of the session.
NASDAQ never made it back to the early session high as it made a lower high after lunch. That lower high and SP500's inability to clear resistance even with good early volume rolled the market over. It was not stampeded to negative territory as prior sessions, but the afternoon was a steady trend lower. NASDAQ gave back 17 points, more than half of the gain. SP500 gave back 6 points, also more than half of its gain. SOX actually held up the best, working laterally into the close, fighting off the selling that moved through the other indices in the afternoon. As with many of its components, however, SOX is still well below the 10 and 18 day EMA in a downtrend that started after breaking down form a head and shoulders in early January.
In sum, the market bounced Tuesday as the sellers backed off following four tough downside moves. The mixed volume on the recovery, the quite mediocre breadth, and the close well off the intraday highs are the general attributes of a relief bounce where some short sellers cover to banks some profit but few long term buyers step into the picture. There were some solid moves from leaders that had waited for some relief from the selling to give them the room to breakout, but most the majority of stocks were trying to win back territory lost in some pretty hard selling. For example, many chip stocks rebounded, but it was a rebound in a pretty nasty downtrend. That rarely leads to a sustained recovery without some more basing.
Tuesday's action was a part of that basing process. It could yield a breakout from here and never look back. After the selling, however, many stocks have suffered damage that needs to be repaired through some base building. Tuesday was a start, but just a start. The action did not change the character of the currently ongoing selling bias.
THE ECONOMY
Consumer confidence remains upbeat.
The 103.4 January reading was better than the 101 expected and December's 102.7 level. Present situation rose to 110.9 from 105.7, the highest reading since May 2002. Expectations slipped to 98.4 from 100.7, most likely on concerns regarding the resurgence in oil prices. Consumers felt jobs were more plentiful (20.7% from 19.4%).
You can parse the numbers all you want and as with any batch of data, one can find kernels of data to support most any position. With sentiment, the key is the general level; is it extreme either to the upside or the downside. This level is pretty much a happy medium, easily above levels that would suggest a consumer slowdown (in the fifties). When confidence is trading in this range the consumer is not going to give up sating his or her shopping habit any time soon.
Existing home sales dip 3.3% in December.
This is the largest part of the homes market, and it was a bit below expectations in December. Home sales, new and existing, have shown some month to month volatility of late, always a sign of change taking place. Indeed the market may be flattening a bit, but 2004 was again a record year for homes. While the pace may be getting ready to slow, many builders and sellers still see plenty of room in 2005 for another strong sales year. These trends rarely turn on a dime, and even with some month to month volatility the solid expansion in the housing market can continue well into 2005, particularly with baby boomers continuing to seek second homes in coastal, mountainous, or other picturesque areas.
Budget deficit expected to bump higher but then tail off.
Much was made of the $368B projected budget deficit for 2005 as that figure was $20B more than expected. It was fodder for democrats to rail against proposed social security reform as well as any other administration program they could recall at the moment. No question it is a big number, but it is not the boogeyman made out to be.
One thing to note is that while the number was bumped up by $20B in this last iteration, the deficit has fallen each year more than anticipated. Why? Because budget projections do not take into account that economic stimulus in the form of tax cuts and incentives produce more dollars than they cost. It is a concept that we all learn in grade school when we talk about leverage and how lending and borrowing creates more wealth such that the loan can be repaid and the new venture still turns a profit. It was reality in the 1960's after the Kennedy tax cuts and in the 1980's after the Reagan tax cuts: tax revenues surged. Spending surged as well, however, and put us into bigger deficits. Hardly voodoo economics, hardly creative accounting, but our government refuses to acknowledge facts (that is hardly surprising either).
Thus the deficits have been lower than expected up to this report, and we suspect they will resume their downward trend. Indeed, the CBO went further to state that the 2006 deficit should decline to $295B. If economic growth remains at 3.5% or better, it should be even less UNLESS the government goes back on the pro-growth policies that started the economic recovery and/or continues to spend out of control on programs that won't put us in better fiscal shape down the road. Indeed, some in Congress worried today that those who only look at the number with a static view would try to use it to push against changes to the tax code or making tax cuts permanent. Those born again deficit hawks ignore the trend because the trend defeats their argument. They want to take money that is going into the economy and creating growth and thus more tax revenues, shift it to none revenue generating programs, and somehow 'balance' the budget that way. If economic output and thus tax revenues fall off as a result of taking that money out of the economy, then the deficit stays the same or even grows in addition to getting a weaker economy. Nice trade off.
Federal deficit is not a household budget deficit.
A balanced budget at the federal level is not all the horror some born again (or born for the first time?) deficit hawks would have you believe. They play on the idea of a household budget and how if you spend more than you have at some point you are bankrupt. If that were the case we would not be concerned in the least bit about what the Federal reserve did over at the Treasury. Money supply watching would be a moot point. Why? Because money supply would be static, no more and no less. That is the fantasy world those that view $1 of tax cuts as $1 of budget deficit live in.
In reality the Fed actively manages the money supply; the Treasury is said to 'create' money when needed to stave off deflation or otherwise grease the economy's wheels. Congress can provide or take away incentives to encourage spending or saving. In your own household you cannot impact the rest of the world by deciding you are going to hold back payments in order to influence behavior by others. You would influence behavior, but having the repo man after you is not the kind of response you want to elicit.
To look at it another way, a WSJ reporter was on the television Tuesday discussing the budget deficit, droning out the theory about how the budget deficit leaves a problem for our children and beyond. He repeated the belief that higher deficits would cost our children in higher interest rates alone without even considering the actual debt itself. The problem he noted, however, was that interest rates were not rising even as the budget deficit rose since the recession. Indeed, that is the actual history as incongruous as it seems.
In the 1980's interest rates slid while the deficit surged along with the economy (as all of the huge jumps in revenues were spent and then some). When we started to retire debt in the 1990's interest rates started to rise. Pundits predict that rates will rise and the little guy will get 'crowded out' as the government has to borrow more to finance the debt. Again, actual history shows that does not happen. If incentives are properly structured where supply is encouraged, demand is met and there is little upward pressure on prices or rates as growth provides the revenues to run the government and the economy. The problem arises when tax rates become relatively too high and start to choke off that growth. Combine that with debt reductions as in the 1990's where the 'surplus' was used to retire debt and you get rising interest rates. What happened then was that money was taken out of the economy by the surplus (excess tax rates). Taxes took money right out of our pockets and out of the economy. Thus the 'real' money that is used to fund economic activity was scarcer and rates rose.
It is incongruous at first blush, but again, the actual empirical evidence shows the opposite of what we hear espoused each day by the deficit hawks. Thus we don't get too worried about the deficit at these levels of GDP. Projections don't really matter either. The deficit dropped from hundreds of millions to a surplus in roughly a year. The key is to control spending as the economy grows. That is the fiscal discipline needed as much to shrink bloated government to a more efficient size and thus provide more dollars for investment into the economy. That is a synergistic cycle that we should strive for as opposed to just blathering 'deficit bad, surplus good.' That is not the case. It should be 'spending bad, growth good.'
THE MARKET
Stocks managed to do something a bit different Tuesday in that they rallied early and managed to hold onto some gains. They did not close at session highs and in the afternoon you had to be wondering if they were going to hang onto anything at all as they pulled the familiar fade into the close. Tuesday they had built up enough gain, however, to hold positive as the bell rang. In other words time ran out before they could turn negative. Now that is a sign of strength.
It was one of those sessions seen a couple of weeks back when stocks tried to follow through a prior reversal attempt but the action was mixed and the move thus lacked power. NYSE volume rose as SP500 advanced, but NASDAQ volume faded as the techs posted their move higher. Breadth was modestly upside. A familiar story with just part of the market really in there pitching. As noted, that gives this move the attributes of a relief bounce.
Not that a bounce is bad. Big rallies start from bounces. It just is not sufficient by itself. There were some good volume moves from well-positioned stocks, but a lot of the movers during the session were rebounding from some ugly selling that had pushed them out of patterns, through support, or into actual downtrends. Damage has been done and many will require more time to recover while others held up pretty well in the drubbing and are right back at that buy point. Those stocks are trying to lead, but the question is whether the overall market will let them or try to drag them back should hits relief bounce run out of gas.
Typically after a new low is hit in a pullback or correction it requires some type of test before a more sustained advance emerges. What that means is stocks sell, rebound, move sideways a bit, then sell back again. If they hold the prior low and leaders are still in position or have moved into position to rally, there is the possibility of a sustained move. You look for a reversal and then the follow through about four sessions later. You want it to be strong across the board and not a fragmented one as seen a couple of weeks back. Thus, while this rebound was part of the recovery process, it was not the move that set the bottom of the pullback from which stocks will rally to new highs for the year.
Market Sentiment
VIX: 14.06; -0.59
VXN: 19.52; -0.35
VXO: 13.63; -0.9
Put/Call Ratio (CBOE): 0.83; +0.08
NASDAQ
NASDAQ posted a gain, gapping higher and rallying. By the close it gave back everything but the initial gap. Lower volume, closed well off the high. Not one you want to write home to Mom about.
Stats: +11.25 points (+0.56%) to close at 2019.95
Volume: 2.019B (-5.95%). Volume was above 2B but that still did not get NASDAQ to average. Volume started light, recovered mid-session, and expanded a bit more into the close as the index sold off. No accumulation to show buyers were swarming back to techs. On the other hand no big volume on the intraday reversal to show that sellers really sold into techs stocks after that early rebound. As it was, just a lower volume attempt at a rebound that did nothing to change the character of an index in its second down leg of selling since the December peak.
Up Volume: 1.345B (+915M)
Down Volume: 646M (-1.051B)
A/D and Hi/Lo: Advancers led 1.2 to 1. Really anemic breadth.
Previous Session: Decliners led 2.38 to 1
New Highs: 43 (-7)
New Lows: 67 (-16)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Another gap higher and then a further run, something the index could not do much of during the prior selling. Still NASDAQ could not approach next resistance near 2050 before it turned and gave back over one-half of the session gain. Not a strong move, just one with the characteristics of a relief bounce. May still be some upside on this move toward the 2055 level, but the index did itself no favors Tuesday, unable to really post a solid gain with SP500.
NASDAQ 100 could not produce much better though it posted a slightly stronger gain than overall NASDAQ. That along with the lower volume and narrow breadth is another indication this was more relief than long term buying.
SOX posted the best move with its 1.8% gain. It did not tank along with the other indices in the last hour, holding most of its gain. It is still below the 10 day EMA (395.96) and thus deep in the downtrend that started this month after the early January breakdown from the head and shoulders pattern.
SP500/NYSE
Stronger volume as the large caps posted a gain, but closed well off the session high. Trying to get back to the 1175 support, but it does not look ready to do so.
Stats: +4.66 points (+0.4%) to close at 1168.41
NYSE Volume: 1.61B (+7.74%). Volume was stronger and well above average. It was not a light volume session as some of the big industrials posted volume advances. The index, however, spun its wheels. That indicates a bit of churn below resistance though it could be loosely labeled an accumulation session. That would be a stretch in this market. We will say it was a start.
Up Volume: 881M (+380M). Almost a standoff with respect to volume.
Down Volume: 710M (-267M)
A/D and Hi/Lo: Advancers led 1.04 to 1. With the small and mid-caps lagging, breadth was quite weak. Hard to make a serious rebound with only part of the stocks pulling the weight.
Previous Session: Decliners led 1.54 to 1
New Highs: 83 (-7)
New Lows: 19 (-15)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Gapped higher as on NASDAQ and rallied up to next resistance at 1175, the neckline of the head and shoulders pattern. That stalled the index, but it made a second attempt to take that level out. When it failed that second attempt the market lost its starch. SP500 gave back 6 points into the close. A higher volume test of resistance and a close well off the high. Even after a sharp four day selling binge SP500 may be ready to resume the move lower from here. It will likely try the test again, but even with good earnings news and gains from several large caps it struggled to hold a gain.
The small caps ran well, moving back up toward the 50 day EMA (314.53) on the high (313.56). Still their percentage move was smaller than the rest of the market as the small and mid-caps lagged all session. The did manage to hold support at 310, the neckline of its head and shoulders pattern. It bounced as anticipated, but it had no strength to take out the 50 day. After holding here at 310, taking out the 50 day is the next key move for this index. Small steps.
DJ30
Outside of SOX, DJ30 was the best performer of the session, holding most of its gain on slightly higher, above average volume. It tapped just below the 50 day EMA (10,532) on the high and that stalled the move, but it managed to hold above the 10,400 level that marks some key support for the index. Basically this is the neckline of DJ30's own head and shoulders.
Stats: +92.95 points (+0.9%) to close at 10461.56
Volume: 260 million shares Tuesday versus 259 million shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Earnings will remain the main focus Wednesday with the usual suspects of interest rates and oil prices providing the overall umbrella. Also sneaking up is the Iraq election; no doubt there will be some impact but we do not foresee that event as a major market mover. A successful election is a positive similar to Afghanistan (have not heard much in the news about that country since the election, have we?) more in that it helps take it and the problems in Iraq off of the front pages to a certain extent.
After hours we saw more unexpectedly good earnings from stocks such as INSP, CYMI, and STK and some decent earnings by TXN (helped by semiconductors) fueled yet another post-close rally. Looks as if stocks will be poised for another shot at a higher open and that resistance that was just broken on high volume.
Thus the process of rebuilding after a hard sell off is underway. Stocks were roughed up at the start of 2005, tried to consolidate and failed, sold some more, and are testing that second leg lower. Earnings have yet to light a fire under the market, at least a good one, even with solid individual results. There have been enough stumbles by big names thus far to keep a damper on the earnings move. Tuesday saw some of that change with strong earnings from some large caps (JNJ, DD). With a decent cross section of other sectors rising on good earnings we can expect another early challenge to the near resistance levels.
Once more the quality of the move is the issue in determining whether a move will be successful. Tuesday was not there with lower NASDAQ volume, poor breadth, and a close well off the high. As noted, this is all a continuing work in progress, and the market chips away for awhile and then makes a big move. After the dump lower on volume it is test the move and may spend a few days trying to rebound before coming back to test the low. Good constructive sessions before that happens raises the likelihood of a successful test, i.e., one that holds, rebounds and then shows follow through after the initial short covering move.
The stronger stocks have held up on the selling and are either still working on their patterns or were starting to make some moves Tuesday when the selling pressure was relieved. The strongest will use this bounce to break higher and rally, and then when it tests, come back to varying degrees to test that move. That provides a second entry point for these stocks as long as the overall market test is successful.
We will continue to look at those stocks that maintained solid patterns during the selling for some upside here. We are less inclined to chase those that are rebounding off the lows in downtrends. While it looks as if the market is going to rally early again Wednesday, those stocks rebounding in downtrends are quite volatile and can turn quickly. We will be inclined to let them bounce, watch for those that do so on low volume, and be ready to play them to the downside on the test of the relief bounce.
Support and Resistance
NASDAQ: Closed at 2019.95
Resistance:
2047, the June high.
2050-54, prior resistance and the June high (the 10 day EMA is at 2056)
2066 to 2070, the bottom of the January lateral move.
The 50 day EMA at 2082
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 1168.41
Resistance:
1175 second high in that double top that spanned late 2001.
The 50 day EMA at 1180
1185, the top of the November consolidation range.
The 18 day EMA at 1183
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, 461.56
Resistance:
The late April, June peaks at 10,478 to 10,512
The 50 day EMA at 10,532
The 18 day EMA at 10,550
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:
10,400, the bottom of the November/December range
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): 6.69M actual versus 6.80M expected and 6.92M prior (revised from 6.94M)
Consumer Confidence, January (10:00): 103.4 actual versus 101.3 expected and 102.7 prior (revised from 102.3)
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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money investment
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