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wise stock trade, us stock market
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02/03/05 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Thursday: None issued
Buy alerts issued: ACS; RSCR
Trailing stop alerts: None issued
Stop alerts: AMT
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:
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SUMMARY:
- NASDAQ leads pullback as expected, but modest losses outside tech and on mostly lower trade.
- January retail sales show 'gift card' effect.
- Productivity gains fall sharply as jobless claims continue trending lower ahead of jobs report.
- ISM services post slower expansion, factory orders gain less than expected.
- Company costs continue rising and despite government claims, those costs are starting to work into consumer prices.
- Another late rebound pushes SP500 and NASDAQ above near support after sellers run out of gas early.
Selling lacks punch, stocks cut losses in last hour.
After a week of gains and NASDAQ moving up to important resistance at the 50 day EMA on lower volume, AMZN's weak numbers had stocks set up to take a breather. The question was whether it would be a rest or something more serious, i.e. higher volume NASDAQ selling. The sellers had the upper hand early, and they took more control mid-morning. NASDAQ and SP500 undercut near support and volume was running a bit higher; there was some possible distribution taking shape.
There was the good, the bad and the ugly Thursday, but overall things were just slow. The good saw January retail sales excellent, jobless claims lower and close to 300K, and oil continued its recent dip. As for the bad, there was plenty of blame being spread around as to why stocks were selling early on. Lower than expected productivity, slower ISM services growth, and weaker factory orders all received some credit for the selling. The ugly was AMZN and SBUX, two former leaders with nasty gaps lower similar to EBAY's implosion earlier this year. Slowing earnings are like gravity for a mountain climber: always a worry, and win it wins out, it can be a real bummer. DELL, MSFT, INTC, SUNW, JDSU and a host of other big techs that were market leaders saw their earnings peak and start the decline. When that happens it can be painful to watch.
Even in the early afternoon stocks were still questionable, taking a dip to session lows at lunch. They rebounded, but an early afternoon bounce looked as if was rolling over. As we noted in the lunch alert, however, stocks have continued to show last hour strength. Sure enough the indices formed a higher low at the mid-morning interim peak and rallied into the close. It was not a blazing rally higher as stocks waffled in the last 20 minutes and slid back some. It was, however, a clear rebound from the sellers' attempt to take things lower. Even with Amazon washing downstream the majority of the market, or at least that represented by the major indices, managed a rebound.
It was good enough to push NASDAQ and SP500 back above near support that they broke during the morning session. They did not recover positive territory, but some were close (DJ30) and most losses were nominal. Volume was significantly lower on NYSE, though it did edge higher on NASDAQ. Overall the big money was not dumping the stocks that were just bought in this recent rebound.
Thus the day was more of a breather after all without any higher volume selling outside of some specific areas. Downside breadth was modest, volume was lower on the leading indices, and there were not a lot of breakdowns. All in all the first pullback from the recent rebound rally was tame, another good step for the upside in this attempt to recover from the January selling.
THE ECONOMY
Overview
There was a lot of economic data out Thursday though much of it was overshadowed by the Friday jobs report. Retail sales were strong but factory orders were slower, productivity was lower, the services sector grew slower than anticipated, and factory order growth was anemic. Coupled with the slower ISM reading and other prior reports that were okay but less than prior months (e.g. GDP), there is a trend we are seeing of the economy slowing some.
The economy has slowed before during the recovery, so alarm bells may be premature. This time, however, the Fed is active and plans to stay active with interest rates. We note, however, that money supply has remained healthy even with the rate hikes. That is more of an indication the Fed is truly trying to simply take back some percentage points of rates that it had to dole out during the prolonged recession. The bond market, however, is not responding to Fed rate hikes, at least not to the upside. The yield curve has flattened and is still doing that. The stock market drop and the yield curve indicate some potential further slowing is possible down the road though we note the market has rebounded decently and that bond spreads are still narrow, an indication that things are not getting out of hand.
There are some warning signs with respect to the economy. At least we are talking about the right things, e.g. entitlement reform, lowering government spending by eliminating programs, and making tax cuts permanent to insure capital inflows into the economy. All of that helps, but talk has to turn into action.
Retail sales show more strength than expected, and as usual some areas are stronger than others.
January has historically been a throw away month for retail sales. After the holiday season consumers are tapped out or worn out with respect to shopping. The rise of the gift card the past few years is changing that. All of those gift cards given to teenagers are cashed in after the holidays. Thus what some consider a decent but unspectacular holiday season should actually include January now because gift card sales are pushed out (as far as booking the sales) until the card is redeemed. Thus money spent in November and December is finally booked in January when the cards are presented. You now have to look at January in conjunction with November and December to accurately gauge the holiday sales.
The teen stores and children specialty stores were the leaders, but some more traditional retailers such as JWN were solid as well. ANF +22%; ANF +17%; BEBE +29%; LTD +9. Luxury was strong as well: JWN +9%; NMGA +12%. Even the discounters are starting to see some better sales as the lower end of the market starts showing some better gains. That is a positive for the economy IF the middle and higher end remain strong as well. You want all oars in the water at once as opposed to taking turns. Still too early to see a trend, but it was very good to see the consumer still strong in January.
Q4 productivity much less than expected.
The 0.8% reading was a whole percentage point less than expected (1.8%). Productivity has been the herald of the new economy as companies put all of that promise of the 1990's to work. A wise man said in the 1990's that the real gains would be made when the traditional businesses that make the goods and services we all consume start using the technology all of the thousands of tech companies that formed during the boom created.
That is what has happened the past few years as the economy emerged from recession. We all know the existing, large companies have not rehired personnel but have instead become more productive with existing employees by introducing productivity enhancing equipment and systems. According the Fed that has helped businesses recover from recession, regain profits, and offset rising commodities prices without having to raise consumer prices.
The Fed has cautioned in the past few weeks about a drop in productivity coming and how that would increase inflation chances. Do you think the Fed had a heads up on these numbers or what? After years of expanding productivity, it took a dive in Q4 2004. Still expanding, but at a much slower pace, a pace seen before the 1990's.
That unnerved the market some, but not much. To us it is another indication that the Fed is building the case for more intensive rate hikes, and if it gets more data such as this it is going to implement them sometime during the summer. The Fed is hinting about trade gaps, productivity declines, and entitlement shortfalls. It is setting the stage for bigger rate hikes while it still perceives things as calm and in good shape, planning for the future when things might heat up more (could Congress do the same thing with social security? Ha!).
Jobless claims fall to 316K.
Jobless claims are heading rapidly toward that 300K level that has been something of the sonic barrier for the jobs market. It is a key level that the Fed worried about when it felt the jobs market was too tight in the 1990's. Jobless claims fell 9K the past week and claims are going to be at 300K before we know it.
That and when about 3M jobs have been created since the start of 2004 and the Fed will start using this as ammunition for reasons to raise interest rates further and faster. As stated before, we are not too concerned about faster rate hikes IF they get us to the Fed's unspoken target faster and then the Fed goes on hold. Of course, the likelihood of that happening is about as likely as social security reform passing with unanimous approval in the next month.
This suggests that the Friday jobs report might be a bit better than expected. Might. The water is still pretty muddy after the holiday seasonal adjustments shot jobless claims higher for a few weeks. These lower numbers are something of an adjustment of those adjustments, and in the end may offset each other. That would mean 150K new jobs or so, though we expect something just over 200K to be reported.
ISM services falls to 59.2, another indication of slower expansion.
Another more leading indicator (though it is also a sentiment indicator and thus still lags somewhat) showing a slower expansion. Expectations were for a 61 reading following the 63.9 from December (revised higher from 63). It is still expanding, but at that slower pace. Employment fell to 52.2 from 55.0 in December. Prices paid fell to 66.6 from 73.6 in December. Bad and good features are in the report. The end result is a sector that continues to expand, but as with the rest of the economy, it is slowing.
Factory order rise much less than expected.
Very volatile report and it showed it with a 0.3% gain versus the 0.6% expected and the 1.4% November gain (revised from 1.2%). Now that weaker ending for 2004 did not overshadow (at least it shouldn't have) the 11.1% gain for the year, the largest since 1992 when the records were first compiled.
The culprit was the usual one that bounces it up and down: transportation orders. They dropped 2.1% after a 9.4% explosion higher in November. Civilian aircraft was the largest falling component with its 64.7% decline. Airplanes were not the only problem, however, as electrical equipment and appliances fell 6.2%, their largest slide since July 2002.
Other parts of the report were actually good. Non-defense capital goods excluding aircraft (the business spending proxy) rose 2.1% on top of an upwardly revised 1.2% gain in November. Businesses were spending into the close of the year as expected given the expiration of bonus depreciation.
Costs are rising and companies trying to pass them on.
We reported in January regarding the boat show indicator and the slow boat sales. As noted then, many of the dealers indicated a form of sticker shock as boats that cost $25K in 2004 cost $29K - $30K this year based on higher steel and petrochemical costs. The result was a sharp decline in sales over 2004, some saying it was their worst show in years.
Whirpool (WHR) the maker of many well-known home appliances, reported earnings Thursday that were disappointing to the street. It noted one of the problems being rising materials costs that were up 9%. That cut into the bottom line and the earnings were lower than expected. It said it also was going to raise prices this year in order to offset those increases. Seems logical. The question is whether everyone does it such that consumers have no choice. It is a situation where costs are rising and those companies that are the most efficient will be able to offer the best price. Overall, however, we do not see how companies are going to be able to weather the strong increases in steel and oil prices (and OPEC appears to want oil to now stay at $40/bbl) without raising customer prices.
THE MARKET
There was a lot of action between the bells, but how stocks close is typically much more important than the gyrations. In the end both NASDAQ and SP500 regained near support they undercut mid-session. Lower volume on the leading NYSE stocks indicated no overall heavy selling. NASDAQ volume edged every so slightly higher, but it was still below average and thus did not represent a major shift to distribution. In the end stocks weathered the selling in decent shape, rebuffing a rather modest attempt to sell NASDAQ. Friday and the jobs report might inject a bit more life into the action, but we will still be concerned about a gap higher on the news.
Market Sentiment
Bulls versus Bears: Bulls slid a bit more last week despite the market gains, dropping to 54.5%, just below the level considered bearish. Still way too many to indicate a rebound of significance would be around the corner. Bears rose to 25.3%, moving further above that 20% level considered bearish. This is an improvement but there is still 29.2 points between the readings; typically they need to come close to crossing to be a strong indicator. Right now they are at the other extreme, i.e. the levels that show apathy or complacency. They have improved but are still at high and low levels, respectively.
VIX: 11.79; +0.13
VXN: 17.36; +0.06
VXO: 11.78; +0.4
Put/Call Ratio (CBOE): 0.85; +0.12
NASDAQ
Broke below near support but managed to recover that level on the close. Still struggling below the 50 day EMA on some slightly higher trade.
Stats: -17.42 points (-0.84%) to close at 2057.64
Volume: 2.001B (+0.47%). Volume edged slightly higher as NASDAQ traded a bit lower. Some distribution but still below average volume just as the all of the trade this week; that indicates tech investors are still just going through the motions both on the upside and downside.
Up Volume: 526M (-612M)
Down Volume: 1.46B (+645M)
A/D and Hi/Lo: Decliners led 1.42 to 1. Modest downside, recovering from in excess of -2:1 earlier.
Previous Session: Advancers led 1.37 to 1
New Highs: 119 (-29)
New Lows: 49 (+17)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ gapped lower on the AMZN news and the general lethargy in the index after a low volume rise to the 50 day EMA (2076) through Wednesday. It showed a doji Wednesday on rising trade and sold off Thursday on slightly rising though still below average volume. It was not heavy selling as volume was still below average, but there was some distribution though much of that was due to AMZN getting shellacked. NASDAQ managed to rebound and hold near support at 2054 in a late rebound, good action to close out an otherwise poor session. Volume did not spike higher so no renewed and vengeful selling. NASDAQ is still in a precarious position after its low volume rebound to fill the January gap and test the 50 day EMA breakdown, and we will have to see how it responds to the jobs report that may be better than expected.
NASDAQ 100 fared worse than overall NASDAQ as AMZN, JNPR and some other big names were whacked. It gapped below the 10 day EMA and was unable to come close to retaking that level on the close. With the big names struggling NASDAQ will have a harder time regrouping and retaking the 50 day EMA.
SOX was the downside leader, but it tends to lead upside on up days and downside on down days. Thus nothing out of the ordinary. It also rebounded late to hold some key support, this at 400. It has already undergone two selling sessions. How it responds Friday at the 400 support level will be telling for NASDAQ.
SP500/NYSE
Large caps undercut near support on the low but then rallied late to hold that level. Finished lower but so was volume.
Stats: -3.3 points (-0.28%) to close at 1189.89
NYSE Volume: 1.554B (-3.6%). Volume backed off as the large and small caps gave back some ground. That is good price/volume action as it shows fewer sellers in the market than buyers on the recent upside move.
Up Volume: 624M (-416M)
Down Volume: 902M (+380M). Pretty evenly matched even with the downside close.
A/D and Hi/Lo: Decliners led 1.16 to 1. Very modest negative breadth.
Previous Session: Advancers led 1.69 to 1
New Highs: 249 (-83)
New Lows: 18 (+10)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 closed mid-range for the session, using a late rebound to retake the 50 day SMA (1189.54) on the close. Volume remained above average but it was lower, indicating no dumping of shares. Indeed, volume was much lower than the prior upside volume as SP500 advanced off the January low. It is holding well and in good shape. NASDAQ will influence it to a certain extent and it may come back a bit more to test toward the 50 day EMA (1180), but it is not showing a lot of weakness.
The small caps barely moved. They sold back and undercut the Wednesday low but they rebounded for a loss of less than one point. Still the market leader after its rebirth following the December weakening and the January selling.
DJ30
Led the market Thursday, closing basically flat after testing toward the 50 day EMA (10,529) on the low. Volume was much, much lower, coming in well below average. It was a true day of rest for the DOW. It is taking a breather as it pauses at critical resistance at 10,600, the point it has to break to continue the rebound.
Stats: -3.69 points (-0.03%) to close at 10593.1
Volume: 229 million shares Thursday versus 279 million shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
AMZN clocked NASDAQ Thursday with its narrower margins, its selling volume accounting for much of the increase in overall NASDAQ trade. Friday the jobs report will take center stage; one pundit called it the most important economic report there is. It isn't. Even the Fed does not get worked up by it though it watches average hourly wages. It is about as lagging an indicator as there is, yet it is treated as the verification of good or bad times.
We suspect that there may be more strength in the number than expected though hardly a blowout. The jobless claims reports were murky given the wild seasonal adjustments. The market has been trying to look past $40+/bbl oil and the Fed on an indefinite rate hiking campaign, and it has had some success the past two weeks. Now NASDAQ and DJ30 are at important levels for a continued move higher or the return to selling. DJ30 looks better than NASDAQ, and NASDAQ has turned into a follower since the interim bottom in late January.
NASDAQ has not tipped its hand as to which way it is going to head, but the selling on the AMZN news was as weak as the rally on the GOOG news. The NYSE stocks are in good position, and even if NASDAQ rolls lower from here its impact on those stocks won't be that strong.
Again we are going to look for good stocks that have taken a breather and are ready to move higher. The recent selling weeded out some of the wannabes; those that held onto support are the stronger, and we are looking for those as upside plays. As noted above, strong stocks held on while weak stocks remained weak. Those weak stocks will continue to provide some downside opportunity as well, particularly if NASDAQ continues to sell.
Support and Resistance
NASDAQ: Closed at 2057.64
Resistance:
2066 to 2070, the bottom of the January lateral move.
The 50 day EMA at 2075.90
The 50 day SMA at 2109
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:
2050-54, prior resistance and the June high
2047, the June high.
2000
The 200 day SMA at 1977
S&P 500: Closed at 1189.89
Resistance:
1196, the mid-January high and the early December peak in the left shoulder.
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:
The 50 day SMA at 1189.54
1185, the top of the November consolidation range.
The 50 day EMA at 1180.67
1175 second high in that double top that spanned late 2001.
1157 is solid support from January through March consolidation tops.
The 200 day SMA at 1135.63
Dow: Closed at 10, 593.10
Resistance:
The 50 day SMA at 10,596 is being tested.
Price consolidation at 10,600 level is a key level.
10,754 is the February high
10,975 - 11,000 from Q4 2000, Q1 2001
11,350 from the May 2001 highs
Support:
The 50 day EMA at 10,529
The late April, June peaks at 10,478 to 10,512
10,400, the bottom of the November/December range
10342 the early September peak.
The 200 day SMA at 10,283
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
January 31
Personal Income, December (08:30): 3.7% actual versus 3.3% expected and 0.4% prior (revised from 0.3%)
Personal Spending, December (08:30): 0.8% actual versus 0.9% expected and 0.4% prior (revised from 0.2%)
Chicago PMI, January (10:00): 62.4 actual versus 59.0 expected and 61.9 prior (revised from 61.2)
New Home Sales, December (10:00): 1098K actual versus 1200K expected and 1097K prior (revised from 1125K)
February 01
Auto Sales, January: 5.3M expected and 5.9M prior
Truck Sales, January: 7.8M expected and 8.7M prior
Construction Spending, December (10:00): 1.1% actual versus 0.5% expected and 0.3% prior (revised from -0.4%)
ISM Index, January (10:00): 56.4 actual versus 57.0 expected and 57.3 prior
February 02
FOMC policy announcement (2:15): 25 basis point rate hike to 2.5%, no change in 'measured pace.'
February 03
Initial Jobless Claims, 01/29 (08:30): 316K actual versus 330K expected and 325K prior
Productivity-Preliminary, Q4 (08:30): 0.8% actual versus 1.8% expected and 1.8% prior
Factory Orders, December (10:00): 0.3% actual versus 0.6% expected and 1.4% prior (revised from 1.2%)
ISM Services, January (10:00): 59.2 actual versus 61.0 expected and 63.9 prior (revised from 63.1)
February 04
Non-farm Payrolls, January (08:30): 200K expected and 157K prior
Unemployment Rate, January (08:30): 5.4% expected and 5.4% prior
Hourly Earnings, January (08:30): 0.2% expected and 0.1% prior
Average Workweek, January (08:30): 33.8 expected and 33.8 prior
Michigan Sentiment-Rev., January (09:45): 96.0 expected and 95.8 prior
End part 1 of 3
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