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us stock market, trading system
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2/07/05 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Monday: CYCL
Buy alerts issued: LIZ; PUMP (bonus); FFIV
Trailing stops issued: None issued
Stop alerts issued: KERX
SUMMARY:
- Stocks sluggish on low volume after solid past week.
- Bush budget makes some cuts as it attempts to reign in some spending.
- More on what bonds are telling us now (along with the dollar and gold).
- NASDAQ and SP500 test support and hold. After this rest NASDAQ needs to get in gear.
- Another news-less session ahead so stocks can show us what they have.
Stocks take Monday off.
Very light volume and a very narrow range as stocks digested the nice gain last week that ended with the sprint into the Friday close. As far as consolidations, the action was just what you want as both SP500 and NASDAQ tapped near support and bounced, holding most of their gains and biding their time until the next move. Basically the indices did what they had to do, or more accurately, did not self destruct as has been their penchant after posting solid moves.
There was no real news to drive stocks as earnings started to slacken and the economic torrent slowed as well. The small amount of news out there was potentially powerful but had little impact Monday: oil down $1.20 ($45.28/bbl) and a pretty austere federal budget. Stocks were simply not ready to continue the move. That is often the case when the market gets in the groove one way or the other; it tends to put its head down and ignore the daily noise, focusing down the road on the bigger picture. Every day the financial stations try to play pin the reason on the move, but more often than not that is just white noise to the market. Some of it confirms the direction, but again, the market looks down the road with respect to its broader moves, not what happened this morning.
In sum, the market took a quick breather after a good recovery to test support it just broke and set up for the next move. SP500 and SP600 have shown the most strength, rising on strong volume; thus this is very good action. NASDAQ and SOX are still big question marks, the potential Achilles heel (heels?). NASDAQ has moved through the 50 day EMA and tested on the Monday low, but the move has been on very low trade. NASDAQ is still poised to move higher but will need more trade. SOX has rallied to the 200 day SMA once again, the point where it has stalled since June. Monday's doji on SOX did not instill much confidence it will make the breakout this time, but the market has changed character some since the last attempt.
THE ECONOMY
Bush tries to put some constraints on spending but his credibility is lacking.
Bush has put together some decent budgets before but the problem has been the execution; Bush has failed to even attempt to reign in spending having yet to dust off the veto pen. Indeed, the Medicare prescription drug plan would never have passed a republican Senate and House under a democratic president. The highway bill would have been chopped to pieces in the same instance.
That said, if this budget can somehow make it through Congress it would be a start to some needed restraint. It is the first budget since Reagan to actually reduce non-security spending (education, environment, housing, etc.), dropping that amount 0.7%. Overall discretionary spending rose 2.1%, quite modest when you compare it to inflation (2.3%) and projected GDP growth (3.5%). It is accomplished by eliminating 120 programs, something long overdue. Even Greenspan suggests sunsetting every program so action has to be taken to renew it rather than just letting things quietly ride. That is how the spending and thus the government grows ever larger: the quiet, wink-wink between congressmen when pet programs are allowed to continue even though they are not producing results.
The budget is austere enough to actually start making a dent in the growth of government. Of course the politicians were immediately fighting about what was and was not included in the budget. Some should just come out and say "we don't want to change anything at anytime." Unfortunately that is the pervasive mindset held by politicians that make lifetimes of congressional careers. Hey, for many it beats working and it also sets up an unbelievably lucrative retirement, one that they seem to think is good enough for them but is not for you and me. After all, that is basically all the Bush proposal does, i.e., give us the same choices for retirement as Congress gets. Somehow that is good for Congress but not for us.
In any event, Congress still has to attack the so-called non-discretionary spending areas, the entitlements that suck up nearly all of our tax dollars. Social Security reform is a stab at that as is Bush's aims at reducing Medicaid outlays. The granddaddy of all entitlements, however, is Medicare, a program that Bush helped inflate in his first term with passage of the prescription drug benefit. Some (mostly those opposing doing anything with social security) say Medicare should be our first worry since the shortfall in that program over the same 18 years it will supposedly take SS to go bankrupt in a business sense (less revenues than costs to the tune of $1 out for every $0.70 taken in) makes the SS $12T shortfall look like a rounding error. First, it would be really difficult for Bush to say Medicare needs reform given he just added to the bloat with the prescription benefit. Second, the idea in the administration is to tackle the more doable problem first, and show people that reform of these programs really works (i.e. younger workers see that they can actually grow THEIR accounts (not the government's; seniors see there is no benefit cuts). That makes it easier for future administrations to address Medicare with a better chance of making real reforms. Third, those suggesting looking at Medicare first have no intention of doing anything with Medicare either; they are simply using that as a ploy to avoid doing anything with SS.
While Bush is at least making a good start and trying to reignite the Reagan 'government reduction plan', we probably will never get back to our roots, i.e. free market principals, that allowed us to grow into an economic powerhouse and would more efficiently provide these services. The best motivator in our system is having those that can fend for themselves do just that. In our household we expect our children to act responsibly. They know this so they do so most of the time. Capable adults should not have to have the government holding their hand. Set up the right environment, get out of the way, and let the genius of the American citizen go to work. We have proved time and again that we can learn what we need to and accomplish what we put our minds to if given the chance. Sure would be nice for that to be the mindset when we decide what the federal government should be involved in and what it should not be involved in.
More on the bond market.
Over the weekend we discussed some of the ills the bond market was suggesting for the economy and thus the stock market, but we also noted that there were areas where treasuries were still holding the line such as narrow spreads. Those spreads indicate the uncertainty about the future is still not showing up in the trading even though the curve has flattened some, i.e. longer yields are falling faster than shorter yields.
Taking a historical look at the level of flattening that suggests real economic trouble ahead, we can see that the bond market is not yet flashing any real warning sign for the economy and thus stocks. First, there is always a flattening when the Fed starts to raise short term rates as when it starts a new rate hiking campaign. Short term rates respond rather immediately to hikes in the Fed Funds rate. Thus some flattening is normal. The Fed has hiked rates the past year, however, so this is getting a bit long in the tooth to suggest it is the beginning of the hiking campaign (of course, the Fed may go up to 4.5% on this move, and that would require more hikes than already on the books if it stays at 25 BP per move; that restraint is something the Fed has been unable to demonstrate in the past).
Second, in comparing the short term Treasuries to the 10 year bond, the amount of flattening is not at levels that indicate the tipping point for the curve and thus the economy. Looking at the 3 month note versus the 10 year bond, typically it makes a 30% to 40% move with respect to the long bond. Right now it stands at 2.5%. There is some flattening, but it is not nearly the level that would historically suggest a major slowdown ahead. A word of caution: when it does move, the curve can move rather rapidly. This bond rally has been pretty strong, however, and yet the inroads are still minimal.
What does this show? For now it suggests, along with the spreads and the recovering stock market, that there is no immediate fear of a rapidly accelerating economic downturn. It does not mean that the economy won't keep slowing, but at this juncture it does not point to a certain, rapid drop. Indeed, when looking back at prior periods where the yield curve showed this modest percentage of flattening it actually preceded a period of low inflation and steady economic growth. Sounds too good to be true, so we will keep a close eye on NASDAQ and its attempts to hold the 50 day EMA and gain some volume.
THE MARKET
Both SP500 and NASDAQ held near support that they just took back, a necessary part of the rebound process. A day of rest, but when the market gets back to work this week NASDAQ will have to show some upside volume. SP600 rallied to its December high and showed a doji; it is going to have to fight off a double top, make a higher low on any test, and then break through to the new all time high. Moreover, SOX is going to have to make a move through the 200 day SMA for once. The market improved last week but it did not take it out of the woods.
Market Sentiment
VIX: 11.73; +0.52
VXN: 17.56; +0.64
VXO: 11.21; +0.29
Put/Call Ratio (CBOE): 0.73; -0.02
NASDAQ
Started softer, made a rather feeble attempt at continuing Friday's move, and settled for a test of the 50 day EMA. Did what it needed to do and now it needs to show us something.
Stats: -4.63 points (-0.22%) to close at 2082.03
Volume: 1.719B (-11.58%). The string of very low, below average volume sessions continues. At least it was a modest loss paired with the low trade as that shows there were no sellers running into the market in numbers even after a light volume rally Friday.
Up Volume: 668M (-831M)
Down Volume: 1.035B (+610M)
A/D and Hi/Lo: Decliners led 1.05 to 1. Matches the quiet session.
Previous Session: Advancers led 2.07 to 1
New Highs: 169 (+11)
New Lows: 24 (-11)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ traded in a narrow 16 point range, tapping the 50 day EMA (2076) on the low and modestly rebounding into the close. Low trade showed fewer buyers, but the lower trade last week showed less than enthusiastic support for the move higher. NASDAQ has recovered along with the market, but it has been unable to garner any volume support. It still has to clear the top of the November and early January range (2112; 50 day SMA at 2108) with some authority (i.e. volume) to give this move some guts.
NASDAQ 100 still has yet to make it to its 50 day EMA (1544), and that is a big drag on NASDAQ because those 100 control much of the index' movement (it is market cap weighted). So far NASDAQ 100 is still in a downtrend below its 50 day, a downtrend that started with the early January selling.
SOX is another tech index that put together a good move Friday on a Smith Barney upgrade of the sector, but technically is still in trouble. It has failed at the 200 day SMA (420.48) ever since it broke below that level in April 2004. It had made 5 attempts that that level, and this sixth one showed a tombstone doji Monday. As with NASDAQ 100, it is at a critical level. SMH (Semiconductors holders trust) shows the same action but it did have a very strong volume session Friday.
SP500/NYSE
Very low volume, very tight range as it holds support and Friday's gain.
Stats: -1.31 points (-0.11%) to close at 1201.72
NYSE Volume: 1.344B (-18.37%). Volume fell back below average for the first time in three weeks. This continues the string of very solid price/volume action on NYSE and the indices measured by its trade (SP500, SP600, SP400). They have been setting the pace and thus far continue to show the right action for the upside.
Up Volume: 616M (-632M)
Down Volume: 710M (+334M)
A/D and Hi/Lo: Advancers led 1.06 to 1. Matched the action.
Previous Session: Advancers led 3.31 to 1
New Highs: 369 (-47). Still a pretty good level with SP600 pushing at a new all-time high.
New Lows: 7 (-4)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large caps went nowhere slowly. A whopping 5 point range and below average volume had us hitting the snooze button most of the day. It did tap support at 1200 on the low and rebounded to close near the middle of the range. Still showing good action and the rest was very mild. It is setting up the next move and doing so in the right manner for more upside.
SP600 has been the leader on this last upside move. Friday it moves toward a new all-time high. Monday it stalled on the slow volume and general apathy, showing a doji at that December high (331.02). It is much stronger now but is at a critical level and needs to clear the prior high with some authority to break up any hint of a double top. May take a couple more days to set up, but that only makes the pattern stronger if the price/volume action continues its solid performance (lower on down days, higher on up days).
DJ30
The blue chips traded in a 34 point range; narrow as a gnat's hind end. Showed a very tight doji on very low volume. After breaking over 1600 last week we are not really too worried about this; just a breather from the look of it. Volume was higher Friday on the move through 10,600 (the shoulder peaks in the head and shoulders pattern), and DJ30 showed good upside volume as it rallied prior to that.
Stats: -0.37 points (0%) to close at 10715.76
Volume: 218 million shares Monday versus 246 million shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
No scheduled economic data from the government on Tuesday though we still have some earnings from DELL and CSCO upcoming that many are looking to as a barometer of the tech sector. Dell is hard to measure as an indicator; it has grown by taking market share. Nothing wrong with that as its operations are more efficient and effective. Snatching market share, however, does not necessarily mean tech is growing.
The market has some positives going its way right now, the most significant being the strong price/volume action on SP500 and SP600 as they rallied through resistance. Oil is falling, hitting close to $45/bbl even. That may not swing the market back and forth as it did back in the fall and early winter, but we note that the market performed better to end the year when oil was trending lower and it has struggled when oil has trended higher.
What the market needs to show to really set this thing off is a strong volume upside session on NASDAQ and SOX to go along with the strong volumes on NYSE. It may take another session or two to rest and consolidate the recent move, and that may spark some concern in the market as NASDAQ flirts with its 50 day EMA, SOX struggles again below its 200 day SMA (420.48), and SP600 fades back from its all-time high.
As long as the price/volume action remains reasonably solid and the strong stocks continue to hold up, the prognosis for SP500 and SP600 is still good. NASDAQ continues to concern us simply because it has yet to show any real buying as it tags along with the other indices. SOX is another issue with its history at the 200 day SMA. We are going to look at solid stocks holding support and setting up the next move. These periodic pullbacks can provide excellent entry points when we see the stocks hold and resume their moves.
Support and Resistance
NASDAQ: Closed at 2082.03
Resistance:
The 50 day SMA at 2108
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:
The 50 day EMA at 2076.51
2066 to 2070, the bottom of the January lateral move.
2050-54, prior resistance and the June high
2047, the June high.
2000
The 200 day SMA at 1977.73
S&P 500: Closed at 1201.72
Resistance:
Q1 1999 lows at 1215
October 1999 low at 1233
Q2 2001 peak at 1310.
Support:
1200 acted as resistance and now may hold as support.
1196, the mid-January high and the early December peak in the left shoulder.
The 50 day SMA at 1190
1185, the top of the November consolidation range.
The 50 day EMA at 1182
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 1136
Dow: Closed at 10, 715.76
Resistance:
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 SMA at 10,604
Price consolidation at 10,600 level is a key level.
The 50 day EMA at 10,543
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 10,286
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
February 07
Consumer Credit, December (3:00): $3.1B actual versus $8.0B expected and $2.0B prior (revised from -$8.7B)
February 09
Wholesale Inventories, December (10:00): 0.9% expected and 1.1% prior
February 10
Trade Balance, December (08:30): $57.0B expected and -$60.3 prior
February 10
Initial Jobless Claims, 02/05 (08:30): 325K expected and 316K prior
February 10
Treasury Budget, January (2:00): $8.6B expected and -$1.4B prior
End part 1 of 3
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us stock market
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