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02/10/05 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Thursday: CRZO
Buy alerts issued: GLBL; CKR; TV; EYET
Trailing stop alerts: MSTR (took rest off table)
Stop alerts: AVO; CPS
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/alertdly.htm
SUMMARY:
- Modest rebound on better volume but techs still lag.
- Weekly jobless claims drop toward key level.
- Trade gap lower than expected, but we are focusing on the wrong issues.
- Trying to recover without technology.
- NASDAQ rebounds off lows but DELL likely to be an anchor Friday.
Stocks drift higher to close in a modest recovery from Wednesday selling.
Some strong earnings results from some 'old economy' stocks had DJ30 sitting in a leadership role. SP500 and SP600 were not far behind, but then again, they along with DJ30 have the better patterns. Even SOX was not a dog, retaking the 200 day SMA; it was no power move, but it did not fold up shop after giving up that level once more Wednesday. Techs were the weakest link once more, but at least they followed the leaders again, fighting back after undercutting some support at 2050.
The key for the session was the strength in the oil stocks and the large insurers. The latter had a synergistic effect on financial stocks and helped keep SP500 up in the early going. Indeed, it was SP500 holding the 50 day SMA that triggered the morning rebound and started stocks on the move higher for the session. Stocks bounced from that level, held, then started higher at lunch. It was not a great afternoon rally, but a steady melt higher.
Volume was up to average on the main indices, a positive development after the rising, though modest, volume selling Wednesday. Breadth was still lousy as the large cap, non-techs led. There were some positive developments and everything but NASDAQ looks to be in decent shape. Question is whether the tech 'laggardship' will infect the rest of the market after another disappointing earnings report from a tech bellwether or if technology will just continue to follow along. We are not going to bet against SP600 at this point.
THE ECONOMY
Initial jobless claims tumble.
Jobless claims continued their recent drop following the spike higher the first few weeks of the year. Those spikes were most likely the result of season adjustments that skewed the figure higher when it turned out retailers had not hired as much as the labor department estimated; that exacerbates the adjustments. On the other hand, there is a question as to whether the recent sharp drop toward 300K is accurate as well. Certainly the January jobs report did not indicate any such drop even though the jobless claim data and private employment trackers both suggested a tighter jobs market.
The 300K number is significant because at that level the labor pool is presumed to be reaching a point where it is considered 'tight', i.e. it is harder to find workers so they can demand more money or benefits or both and that can lead to something called 'wage-led' inflation. While there is no doubt that certain areas of any economy can be starved for qualified employees, it is rarely the case where workers on whole can demand higher wages because there are not enough workers. There are areas in the US right now without enough qualified workers (e.g. healthcare). In that area the best candidates can write their own ticket. With manufacturing still well off its former peaks and other industries still in the 'technology versus people' mindset, however, it would be a gross exaggeration to suggest that the labor pool is anywhere near reaching a level to drive all wages higher. Indeed, that scenario has been the exception throughout history.
Moreover, even if it does occur, it is another leap altogether for higher wages to led to higher consumer prices. Inflation is defined as more money chasing a finite number of goods. More wages without an increase in goods and services could lead to inflation if all of those increased wages are used to consume. At the same time, however, we know that businesses have incorporated more and more technology and thus the ability to create more goods and services. Thus it is overly simplistic and a huge leap in logic to conclude that the lower initial jobless claims is any kind of inflation indication. In addition to the lack of empirical evidence to support such a conclusion there are simply too many other economic shortcomings to look at one data point as being definitive.
December trade gap less than expected but 2004 gap rises 24% nonetheless.
December's gap fell to $56.4B, less than the 57B expected and the $59.3B in November. The decline was led by falling energy prices; remember in December oil prices were still on the decline and threatened to really break lower. That contributed to the falling deficit because we imported less costly oil; not less oil, just less costly. As we know, oil did not tank but rebounded, and that means imports will be under pressure to the upside for January.
On the positive, exports moved past $100B for the first time ever as the lower dollar continues to have some positive impact on exports. Rising oil and the weaker dollar in itself, however, are keeping imports higher making it hard to get the gap narrowed. Indeed, exports for 2004 rose 12% ($1.14T), but imports rose 16% ($1.76T).
Is the trade gap a problem and should and problem be fixed?
Basically the trade situation remains the same: the US consumes a lot of goods while foreign economies produce a lot of goods just for the US market. Some called for less consumption, not more savings, but less consumption in the US as a way to solve the trade 'problem'. Think about that. Because there is concern about a trade gap causing problems at some point (but no one knows where that point is if it even really exists) we should act to limit consumption. That is another way of saying we need to slow economic growth here in the US so that foreigners could not sell as many goods to us because we would not have the same purchasing capacity. In short they are advocating recession to some degree or even worse, some kind of government mandated savings or spending caps.
That is not thinking inside the box, that is thinking in one small dark corner of the box. That is advocating the very policies that do not work in other countries where growth and output perennially lag, by far, the US. What needs to happen is that OTHER economies need to reduce regulation and GROW their economies so that their citizens will consume more of their own goods and US goods as opposed to shipping them all to the US. The lack of growth in other economies is the real problem in the world, not the US trade gap created because we consume more goods because our policies promote a healthy economy. If the trade gap ever gets close to balanced and other economies have not changed their policies and grown, that means the US economy has collapsed.
Key point and major irony: The idea that the trade gap will eventually lead to economic upheaval in the US is based on theory; it may lead to problems at some point, but as we have discussed before and above, countries that cause the gap have a vested interest in keeping the US healthy and will continue to buy our treasuries and equities. The 'fix' to the trade gap that many advocate (slowing US consumption) will certainly slow the US economy and potentially put it into recession. Theory versus reality. Too many in DC are enamored with theories versus what history shows.
'Fix' number two: China floats its currency.
Still others were yapping that China needs to float its currency away from the dollar because the $160B in imports from China will never be affected by dollar drops until that happens. True. But if China does float its currency then it jumps higher (it is held artificially lower) and overnight we have substantial inflation in a fairly big trading partner. That means overnight inflation pressures rise here in the US. Again, that is a policy that punishes the US as opposed to equalizing the field.
There are a couple of keys to the trade gap. First, it is not clear that it is really a problem. Those foreign economies that sell a lot to the US are not going to suddenly fail to buy treasuries and equities here. They need the US consumption to keep their economies going. Second, the key is not slowing the US economy, the one economy that kept the world going the past twenty years when Japan was in a 15 year depression, Asia had its meltdown, and Europe continued its no growth policies. If the US consumption engine was not there the world economy would be back in the dark ages, just where Al Qaeda and others of similar beliefs want it. Instead of criticizing the US trade gap, the IMF, World Bank, and foreign governments need to concentrate on expanding other economies to join the twenty-first century and end overregulation and protective policies that only limit capital investment in those countries. We have often listened in amazement as international bodies populated by leaders of countries with repressed and backward economies try to lecture the US on how to run its economy. If we listened to them I suppose we would not have to listen to them because the world economy would melt down and we would all be dealing in stone knives and bear skins as opposed to semiconductors, wireless communications, space travel, etc.
THE MARKET
The market did an admirable job rebounding Thursday after techs led the Wednesday slide on another big name earnings disappointment (EBAY, JNPR, CSCO, QCOM, INTC, etc.). Volume was better Thursday as NASDAQ recovered from negative territory and the large and small caps posted decent gains. The better trade indicates a little more upside interest than selling strength on Wednesday, and that is always a positive. Particularly so when SP500 and SP600 continue to show solid price/volume action (up on up days, down on down days) and hold most of their recent gains.
That leaves the market still showing some accumulation in those indices despite the woes in technology. All through the late 1990's technology stocks rallied at the expense of the so-called 'old economy' stocks. Now, at least in the very recent history, those former outcasts are rallying at the expense of techs. They rallied through 2004 and techs went with them for most of that ride. Techs are definitely giving up the leadership role of late, however, and that raises the question we have raised: will the market be able to rally if the techs are just 'also rans' or worse?
Here is something to think about besides just the charts: all of that gear that was invented in the 1990's is now actually being put to use by companies outside of technology. The promise of all that 'new economy' gear is finally being met and companies are enjoying the productivity on the bottom line. That is also spawning new growth areas for these 'older' companies as technology is applied to their businesses and the result is new ideas and new products from 'old' companies. Thus there is life and indeed growth stocks outside of tech.
Market Sentiment
Bulls versus bears: Not much change and thus not much improvement in the market sentiment. Bulls ticked just slightly higher to 54.6%, near the 55% that is bearish. Bears eased lower to 23.2%; still above that 20% level considered bearish, but it is way too early for the two to start separating.
VIX: 11.51; -0.49
VXN: 17.92; -0.32
VXO: 11.54; -0.58
Put/Call Ratio (CBOE): 0.98; +0.05. Again, good to see the ratio rise for the second session on a modest gain. The odds of a good bounce are looking up.
NASDAQ
Sold below 2050 and the rebounded to post a modest gain on rising, average volume. Some hope there, but hope is not a solid investing principle.
Stats: +0.55 points (+0.03%) to close at 2053.1
Volume: 2.097B (+6.06%). Volume posted a solid rise to average as NASDAQ tested lower and then reversed for a modest gain. Positive action but NASDAQ will need to do more.
Up Volume: 885M (+614M)
Down Volume: 1.179B (-516M)
A/D and Hi/Lo: Decliners led 1.14 to 1
Previous Session: Decliners led 3.01 to 1
New Highs: 80 (-35)
New Lows: 60 (+13)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ made a low volume rebound from the January lows, and Wednesday it started to get what indices that rise on low volume get: a whacking. Thursday NASDAQ tried to make a comeback, and it did rebound after additional selling, holding some support near 2050 to 2054. Volume was up as it made the reversal, potentially signaling a reversal, but it was much too weak of a session to mean much. It remains below the 50 day EMA (2075), and it needs to use the Thursday reversal to pop it back up through that resistance on even better trade. It is trying to show better price/volume action, but there has been a clear lack of participation by big money on the upside move. The Dell results are not likely going to help it make any recovery early Friday.
NASDAQ 100 showed similar action, rebounding after breaking below 1500. It is still in the downtrend that started at the beginning of the year. A lot to overcome.
SOX was not powering higher, but it held the line at the 50 day SMA (416) once more on the low and rebounded to close over the 200 day SMA (419.65). It has done this before and failed. It is not getting a lot of help from NASDAQ.
SP500/NYSE
Volume was up and actually above average as SP500 held the 50 day SMA and posted a gain. Positive price/volume action continues.
Stats: +5.02 points (+0.42%) to close at 1197.01
NYSE Volume: 1.515B (+0.35%). Not much of an increase, but volume did surpass the Wednesday selling volume. That kept the string of solid price/volume action going and shows continued, even if moderate, accumulation.
Up Volume: 847M (+461M)
Down Volume: 603M (-498M)
A/D and Hi/Lo: Advancers led 1.25 to 1. Nothing major here, but it was not a major session.
Previous Session: Decliners led 1.9 to 1
New Highs: 207 (+1)
New Lows: 19 (-2)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 made the hold we were looking for, tapping the 50 day SMA on the low (1191.59) and that triggered a recovery. Volume was higher as it made the modest recovery. That accomplished two results. It took the starch out of the Wednesday selling and it showed that the buyers of SP500 stocks are still a bit stronger, continuing that positive price/volume action SP500 has shown during the recovery. A solid volume move past 1205 solidifies its positive bias.
The small cap SP600 tapped at the 18 day EMA (322.32) and rebounded for a positive close. Rising volume and it held easily above the 50 day SMA (320.55), something the SP500 could not do. Again the small caps show their strength and are in position to rebound and continue the move.
DJ30
Nice action as the blue chips held the 10 day EMA (10,646) and rebounded. They posted a stronger price gain than loss on Thursday. The disappointment was the lack of volume on the upside. Wednesday's spike had a lot to do with HPQ, so this is not bad action. It just was not great action. Still a nice pattern very similar to SP600. DJ30 is setting up for an attempt at the December high (10,868).
Stats: +85.5 points (+0.8%) to close at 10749.61
Volume: 254 million shares Thursday versus 310 million shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
DELL will dominate the pre-market news and action Friday, but oil is also in the mix as it quietly moved up over $1 Thursday. Dell posted basically in line earnings and revenues but the whisper was more for revenues, and it was down about $1.25 after hours. Not going to help out a lagging NASDAQ and NASDAQ 100 as they will once again have to try to fight off an earnings disappointment; not a miss, but a disappointment. There was nothing fundamentally wrong with Dell's results as it takes over more of the PC business and spreads into TV's, cameras and printers. It was simply not a picture of growth in the tech sector. Dell has prospered because it is more efficient in its operations. It is grabbing a bigger piece (nearly all) of the PC pie, but it is not a growth sector.
That said and even with expected troubles in tech land, we are not ready to say the market is going to fail this rebound. SP600, SP500 and DJ30 remain in solid patterns and SOX is even showing signs this time it might (might) hold the move over the 200 day.
After morning softness on the Dell numbers we are going to look for some strength in the 'old economy' and smaller cap stocks. NASDAQ may be the anchor chain and NASDAQ 100 hardly looks well, but as we said earlier, we are not going to bet against the small caps with the accumulation and pattern they have been showing.
Support and Resistance
NASDAQ: Closed at 2053.10
Resistance:
2066 to 2070, the bottom of the January lateral move.
The 50 day EMA at 2075
The 50 day SMA at 2106
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 1978
S&P 500: Closed at 1197.01
Resistance:
1196, the mid-January high and the early December peak in the left shoulder is not completely broken.
1200 acted as resistance and now may hold as support.
Q1 1999 lows at 1215
October 1999 low at 1233
Q2 2001 peak at 1310.
Support:
The 50 day SMA at 1191.51
1185, the top of the November consolidation range.
The 50 day EMA at 1184
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 1137
Dow: Closed at 10, 749.61
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 10,618
Price consolidation at 10,600 level is a key level.
The 50 day EMA at 10,563
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 10,290
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): 0.4% actual versus 0.9% expected and 1.2% prior (revised from 1.1%)
February 10
Trade Balance, December (08:30): -$56.4 actual versus -$57.0B expected and -$59.3 prior (revised from -$60.3)
Initial Jobless Claims, 02/05 (08:30): 303K actual versus 325K expected and 316K prior
Treasury Budget, January (2:00): $8.7B actual versus $8.6B expected and -$1.4B prior
End part 1 of 3
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