|
|
us stock market, trading system
* * * *
2/12/05 Investment House Alerts Report
* * *
IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Friday: NCR
Buy alerts issued: UNFI; VPI; MHK; INFY (bonus)
Trailing stops issued: VNWK
Stop alerts issued: BDK
SUMMARY:
- Another solid Friday as techs move past 50 day EMA, SOX blasts through 200 day SMA.
- Greenspan heads to Congress to discuss monetary policy and, oh yes, deficits, taxes, and entitlements as the parties jockey for political advantage.
- Economic torrent ahead after a quiet week, but oil and rates are still the key.
- SP500 makes the breakout as money is clearly returning to stocks.
- Significant crash or steady gains; pundits at odds over 2005.
Solid Friday sets stocks up once again for a further rally attempt.
Back to back Fridays post solid gains, and that is frequently a good sign technically for the market. Did not do much for stocks this past week, at least not all, as NASDAQ closed lower than last Friday even with the solid surge to end the week. But then again, NASDAQ has been the laggard and is still the laggard this year. SP500 closed higher on the week. DJ30 closed higher. SOX closed higher. SP400 (mid-caps) closed higher. The only other index that did not close above the prior week was SP600, but it is hardly a laggard.
The interesting feature(s) Friday were indeed interesting. After starting lower and selling even more, a rumor hit that North Korea's ruler had been deposed or otherwise taken out of power. That helped stem the selling tide and started some short covering and then longer term buying. Dell's earnings (best description of the day was 'soggy') started NASDAQ lower but did not sink the techs. Instead they held the Thursday low and reversed for a 40 point swing. NASDAQ had every opportunity, including a very weak pattern, to give up, but instead it reversed and rallied on what was widely considered bad news. SOX made a definitive break above the 200 day SMA after a nice test of a move over that level to start the week. Then SP500 made a breakout on volume over the handle to its short cup with handle base formed this year. These are all examples of a changing market character.
It was not all candy and roses just ahead of Valentine's Day. Most of the action occurred before lunch. After the mid-morning bottom, the rebound took all of an hour and fifteen minutes to run its course. The rest of the session the indices walked sideways, drifting ever so slightly higher (though SP500 was notably flat in its lateral move). NASDAQ managed to hold a whisker thin break above the 50 day EMA, a move made finally on some decent volume. Still quite precarious, but it laughed (chuckled is probably more accurate) in the face of Dell's disappointing earnings and rallied anyway. It was a turn for the better, but NASDAQ is still well behind the other indices in forming its new base and breaking higher. Thursday we asked the question if NASDAQ would drag the rest of the market lower or play follow the leader. For now it is following, and it is picking up some strength as it does. Maybe it has some good role models.
THE ECONOMY
Greenspan to speak to Congress; market hopes for more on rates.
This week Greenspan gives Congress his state of the union address. It used to be the Fed chairman would talk about inflation, money supply, interest rates and the outlook for economic growth. Now he covers basically all the points in the President's state of the union. Social security will be discussed (nothing new given Greenspan's warnings last year and the political football it is this year); tax cuts will still be on the burner because some want them permanent and some want the 'rich' to pay more; deficits (trade and federal) are another political issue; and surely the Iraq war will come up given it has to do with the 2005 budget. We used to call this Son of Humphrey-Hawkins; now it is more akin to State of the Union, Alan-style.
It is going to be wide-ranging. The market may hope for more information about easing rate hikes, but Greenspan never really gets into rates in that detail in front of Congress. Greenspan's statement will cover what the Fed statement covers regarding the economy continuing to show growth, employment improving, inflation under control; the usual. Then he will touch on controlling spending, deficits and how the trade deficit is looking better, and some entitlements. Just how far he goes on these will be very interesting. Will he reiterate his pleasure about renewed talk of budget austerity? Will he say the proposed social security changes are a good start? Then the questions will come flying about his stance on social security, taxes and deficits as the politicians try to spin what Greenspan said and glean something they can point to in the 'record' as to how Greenspan supports their position. After the testimony is over and Congress hits the talk shows you would think Greenspan endorsed all of their positions.
The most interesting part, obviously, are his prepared comments and his responses to questions regarding private accounts for social security. He will say it is not his job to make the policy; after all, he is quick to remind Congress he just points out the problems ahead that impact his job (what exactly is his job these days?). He will also offer he is pleased that the issue is really being discussed given he brought it up last year. Despite his feigned modesty, however, he won't be able to resist making some comment about the potential for returns exceeding what younger workers would receive from the system as long as the investment choices are properly structured. He most likely will continue, saying that will go hand in hand with reducing the entitlement burden for the future.
As we noted, all of this is really interesting; politics can be very interesting and very tiring at the same time. Will it be market moving, however? Investors and bond traders will be watching, and if he does not back off the recent statements that the Fed won't take on the trade deficit with interest rates and other statements that some have interpreted as suggesting a pause in the rate hikes then there won't be a reason to change the current course.
Does the math add up?
We have discussed before how a system designed to pay a modest stipend for a few years if indeed you lived beyond the expected lifespan by three years had morphed into a system that provides death benefits, survivor benefits, and greatly expanded retirement payments beyond a mere stipend. Not only that, but it now routinely goes on for 20 to 25 years and even more because our average life expectancy has increased 12 years or more. That is only going to lengthen as the boomers live longer thanks to all of the great medicines and procedures our supposedly poor health system generates. With boomers far outnumbering the subsequent generations, that alone shows the math does not work.
Here is another piece of math that no one is calculating or at least not talking about. While Congress argues semantics as to whether a 27% shortfall in benefits (at current SS tax levels) in 18 years is bankruptcy of the system (in business and the law that is bankruptcy), somehow that difference had to be made up if the system is going to pay the promised benefits (though there is no promise; read the back of your SS card; you may or may not get the benefits at the government's whim). They thus argue over private accounts. The opponents say you are taking away a guaranteed benefit and 'gambling' in the market. Of course this is the plan Congress has and somehow for them it is not gambling. Well, think about it this way: the 'guaranteed' benefit is not going to be there if nothing is done. If you raise taxes, which is what the opponents really want to do (they never did like the tax cuts for the 'rich'), those who are 'guaranteed' the benefit will have to make up the 27% shortfall through taxes high enough to make up that 27%. That is to 'guarantee' what will be a 2% benefit. It makes a whole lot more sense to let younger workers take a chunk of their SS taxes and invest them in the market for the next 20 years and on; historically they will get a much better return (7% to 10% over that time). Would you rather pay more in taxes than the benefit you would receive as a result or pay the same or less taxes and receive a return that is 3 to 5 times better than what you are 'guaranteed' if you agree to pay more taxes to get the lesser benefit? Not only does the math not add up, it strains credulity to believe any young person would want that deal.
It is extremely ironic, and indeed disingenuous, for those in Congress to whine about passing on a federal deficit to our children and thus requiring them to pay more and more to service that debt while at the same burying their head in the sand and saying nothing is wrong with social security. Nothing is wrong with ANY program if you believe that all you have to do is raise taxes to fix it. You can raise taxes higher and higher and you can have what Europe has: high unemployment, low productivity, stagnant growth at best, lower standard of living.
No one says it, but SS has turned into a Ponzi scheme, and there are laws against those. Before you scoff, think of a system that promises guaranteed returns to an ever-growing class of recipients while the number of contributors supporting the system shrinks. It is basically the same problem: more and more bodies are required to keep the scheme going, but the available pool of contributors declines. As it stands, even with tax increases and the economic stagnation that would bring, the system still ultimately collapses without fundamental change. Do we go the route of a federal government as benefactor that inexorably moves into control of everything or do we champion the individual as we were designed to? We can do the latter, strengthen the system, and ensure that those who cannot do for themselves will be taken care of. That is the best legacy for our children and beyond.
The pause before the storm.
Last week was a quiet week economically, at least with regard to the scheduled reports issuing from Washington. This week is a different story. Retail sales, regional manufacturing, and PPI are the headliners to a very full week. With earnings these could take more precedence, but the market is still focusing on bigger issues and the economic data play something of a minor role in a stage that has been set for now.
Oil and interest rates.
The market is still dealing with the two big issues of the day: interest rates and oil prices. Before the year is out these two will have the most impact on the market. Yes the weekly economic data has some impact on how the market perceives what the Fed will do, but overall the economy is not at a turning point where the data is hypercritical. Moreover, the Fed is on a mission. It used to be that 3% was its goal. Now it is much more ambitious; things seem to be going fine thus far with the current rate hikes, so it is going to go for a bit more. It always goes until it wakes up the sleeping dog and that dog takes a chunk out of its (and more so our) hind end.
Oil certainly has settled into the $45/bbl range as if it was home. Oil has backed off from the rebound in January, but it is still at a very strong level. Oil has faded into the background compared to the second half of 2004 when every day there was a panel discussing where oil was going. It is not as widely discussed, but the market and oil still have an ongoing relationship. The market does not respond tick by tick to oil prices now, but there is a more general relationship. When oil makes a stronger move either direction as opposed to the jigs and jags in its daily range, the stock market moves as well. Up in December as oil faded, down in January as oil recovered. Now oil is sitting still and the market is edging higher.
Oil will be a factor again in 2005. The dollar is still weaker and that raises the price of oil even more. Not only do we pay more because demand has pushed prices higher but the weaker dollar makes imports, and oil is an import, more expensive. That is a double drain on the disposable income of the consumer and it further cuts into producers' profit margin. Appliance makers are already saying they will raise prices. Boat prices have jumped because of steel and petrochemical price increases. Oil may not be as exciting now because its gains are old news, but just because it has lost its news appeal does not mean it has lost its impact on the economy. The combination of interest rate hikes and oil price increases is powerful, and down the road the economy has to deal with them.
That is part of the reason the bond market remains soft at the long end even as the Fed raises the short end. Strong economic growth is tough with long term $45/bbl oil, and the long end is not pricing in dramatic economic growth because of this. On the positive side at least it is not pricing in a dramatic jump in inflation. Not much of a silver lining. In any event there has been no notable economic slowdown as of yet, and though the bond market is flattening some it is not at the level that forecasts a high probability of an economic slowdown.
THE MARKET
Talk about turning a sow's ear into a silk purse. SP500 broke lower through the neckline of a head and shoulders base on rising volume the third week of January, but caught itself, recovered, and formed a more bullish pattern. Friday it made the breakout from the short cup with handle on rising volume. This action was another follow through session to the rebound that started that third week in January. Pretty solid, and it was joined by the small caps, mid-caps, SOX and DJ30. NASDAQ put in its two cents as it cleared the 50 day EMA, but it is still trying to catch-up.
The price/volume action since SP500 recovered from its breakdown has been solid on the NYSE. Leadership has re-emerged in energy (again) and materials, and also in financials and healthcare. Even semiconductors have come to life; they may burn out as they have a lot of overhead resistance, but they are contributing to the upside this time.
Market Sentiment
VIX: 11.43; -0.08
VXN: 17.19; -0.73
VXO: 11.33; -0.21
Put/Call Ratio (CBOE): 0.86; -0.12. The back to back closes above 0.90 did in fact help propel a rebound.
NASDAQ
Sold back down but reversed and recaptured the 50 day EMA on rising volume.
Stats: +23.56 points (+1.15%) to close at 2076.66
Volume: 2.177B (+3.79%). Best volume of the month as NASDAQ tries to recapture and hold the 50 day EMA. This is what it has to do if it is going to build and complete its base.
Up Volume: 1.611B (+726M)
Down Volume: 529M (-650M)
A/D and Hi/Lo: Advancers led 1.94 to 1. Showing some positive breadth as it makes an important move.
Previous Session: Decliners led 1.14 to 1
New Highs: 101 (+21)
New Lows: 65 (+5)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ was in trouble out of the gates again. It tried to recover in the first few ticks, but then it dove lower to 2040 again. Once again it held that level and turned on a dime. It covered 41 points in less than 2 hours. That was pretty much the extent of the move, however, as it drifted laterally the rest of the session just below the 50 day EMA (2075). In the afternoon it crossed over the 50 day and held the move into the close. Volume was up above average for the second session, the only two above average volume days of this month. It is not leading, but it is doing what it needs to do and it is getting some help from SOX now.
NASDAQ 100 rallied as well, but it is in worse shape than NASDAQ, having still failed to retake its 50 day EMA (1540). It held the 200 day SMA in late January and has moved slightly higher and laterally since. This increase in volume is what it needs.
SOX broke over the 200 day SMA (419.52) Tuesday, tested the move, and then blasted higher Friday. Finally some life in the semiconductors. They have shown this before with little success, but this is the best move for SOX in a short period and the most important since early 2004. It has some room here with next resistance near 450.
SP500/NYSE
Broke out from its short cup with handle base on rising, above average volume. Showed strength fighting off the selling, forming the base, and then breaking out.
Stats: +8.29 points (+0.69%) to close at 1205.3
NYSE Volume: 1.546B (+2.08%). Good volume, moving back above average on the gain. Not the strongest volume of the month as was seen as SP500 really broke up its head and shoulders, but a good volume follow through once more. Price/volume action on NYSE indices remains solid.
Up Volume: 1.178B (+331M)
Down Volume: 341M (-262M)
A/D and Hi/Lo: Advancers led 2.31 to 1. Very solid return of upside breadth though not the huge 3:1 we have seen recently. The small caps were up but they were not the strong leaders they had been to start the month.
Previous Session: Advancers led 1.25 to 1
New Highs: 294 (+87). Getting back toward respectable.
New Lows: 18 (-1)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Again, a breakout from the 6 week cup with handle base that rescues the index from the head and shoulders breakdown. The move puts SP500 back above 1200 and moving toward a new high for the year (1290) and indeed the past three years.
SP600 sold to the 18 day EMA early on but bottomed and posted a 6 point swing. It too is approaching its prior highs from late December and last week (331.17) after making a higher low. It is set up well to make that new high.
DJ30
Another nice break higher for the second decent gain of the week and a very good way to end it. Volume was up Friday, but it just made average; all week DJ30 volume has been lackluster but for Wednesday when HPQ canned Fiorina and its volume shot higher. DJ30 is right up there with SP600 in rushing toward another high. DJ30 tried for a week at the end of 2004 to get through 10,870. It looks as if it is ready for another try, but this time it needs to get some more trade than it has shown.
Stats: +46.4 points (+0.43%) to close at 10796.01
Volume: 263 million shares Friday versus 254 million shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THIS WEEK
We are in the new year and have seen the market drop hard and now rebound with some strength, heading back to take on the December highs hit after the late 2004 breakout moves. Predictions as to how the year will play out are always vetted at the change of year, but after a month or so it is worth taking a look just to see how things are setting up after the first of year selling or buying rush wanes.
Listening to the financial stations you hear the entire spectrum. One astrological investor says February 18 or right thereafter the market will take a significant dive. Others come to the same conclusion for the year (though not pinpointing 2-18) because of falling earnings. Prices follow earnings almost always, so they conclude the market has to fall during 2005. Others look at interest rates, oil, trade deficits, the dollar, etc. as the culprit. On the other side of the ledger there are predictions for a range of solid gains for SP500 based primarily upon historically low interest rates, continuing profitability due to productivity, and low inflation. The problem is most on both sides focus on just one element. Nothing works in isolation, however, and making specific conclusions based on a wide range of general factors is fraught with error.
We try to take the big picture approach mixed with what history shows. Not just some cherry picked historical facts, but all of them. There are two powerful factors at work this year that have historically dominated market direction: oil and interest rate hikes. Many other factors will influence the movement of stocks as well, but they will fall under the umbrella of these two. They are powerful because they directly impact company costs and consumer ability to consume. Both of those have direct impacts on earnings.
That bigger picture approach helps us key in on changes in market action, e.g. if it suddenly starts to struggle just after breaking out or simply cannot get its legs. In 2004 it struggled all year as the Fed raised rates and oil climbed, but then broke out late in the year when oil fell and there was a hint the Fed may be close to winding down. Oil rebounded and the Fed indicated it was not about to stop, and the struggle began anew. How stocks act when they hit and break through the prior highs on the current upside move will give us another look at just how these bigger factors are influencing the overall market movement. The market has had to fight for everything the past years except for the late 2004 breakout and rally. If it continues this struggle, that indicates these two overriding factors are still pulling the strings.
That said, however, we still have to look at the market itself for the signposts as to what it is doing. It has not yet worked through its volatility this year with any kind of definitive breakout or breakdown, but it is getting close with the current rebound. If it fails and it slides back down into the 2004 range, that signals another tough first half of the year.
The action thus far looks encouraging but is yet to be proved up completely. SP500 broke out of the 2004 base in November 2004 and even with the selling in 2005, it held the breakout and formed up a new base. The SP600 enjoyed similar action. That bodes well if they can make the next breakout from the current short bases that have consolidated those prior moves. If that occurs that tells us the reasons for the breakout in late 2004 still hold for these indices, and that at least for the first half of 2005 stocks have some upside momentum.
That still requires watching the leadership and price/volume action. A solid recovery on good price/volume action the past three weeks has set up a breakout for SP500, SP600 and DJ30. They will have to carry the torch and continue to drag NASDAQ with them until that index can set up for the breakout. It may or may not make it; techs have not shown any quality accumulation yet, but they also have time as they are still working near the bottom of their bases for this young year. Indeed, if they can continue to build their patterns they will be ready to breakout just about the time SP500 and SP600 would need a breather from their breakouts ahead of the techs. Thus you would have the waves of breakouts, the rotation that is so critical to a healthy market. Not only that, but it would be the steadier rotation and not the frantic rotation seen in 2004 as stocks wandered up and down in a trading range.
This week the key will be how SP500, SP600, SP400 and DJ30 handle their prior highs. We might not know the answer by the end of the week, but if there is real strength in the current upside move they should run right through the recent highs and then come back to test and hold. They are not extended here, having based out, set up handles, and using that higher low to set the launch pad for the breakout. In addition, they have the long sideways base in 2004 as support. If they are not ready to go now, they are telling us they just don't see a lot of life in the economy down the road.
If they make that breakout that will provide opportunity for some new stock breakouts. In addition, SOX is providing some opportunity, but it may be more of a trade as they come off the bottom of their bases. We continue to look for leaders as they hold up best in this market. In any event we will take what the market gives us.
Support and Resistance
NASDAQ: Closed at 2076.66
Resistance:
The 50 day EMA at 2075 is cracking.
The 50 day SMA at 2105
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:
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 1978
S&P 500: Closed at 1205.30
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 1191.87
1185, the top of the November consolidation range.
The 50 day EMA at 1184.83
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 1137.63
Dow: Closed at 10, 796.01
Resistance:
10,975 - 11,000 from Q4 2000, Q1 2001
11,350 from the May 2001 highs
Support:
10,754 is the February high
The 18 day EMA at 10,633.
The 50 day SMA at 10,622
Price consolidation at 10,600 level is a key level.
The 50 day EMA at 10,572
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 10,292
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
February 15
NY Empire State Index, February (08:30): 20.0 expected and 20.08 prior
Retail Sales, January (08:30): -0.4% expected and 1.2% prior
Retail Sales ex-auto, January (08:30): 0.4% expected and 0.3% prior
Business Inventories, December (10:00): 0.2% expected and 1.0% prior
February 16
Housing Starts, January (08:30): 1930K expected and 2004K prior
Building Permits, January (08:30): 2000K expected and 2032K prior
Industrial Production, January (09:15): 0.3% expected and 0.8% prior
Capacity Utilization, January (09:15): 79.3% expected and 79.2% prior
February 17
Export Prices ex-ag., January (08:30): NA expected and 0.1% prior
Import Prices ex-oil, January (08:30): NA expected and 0.5% prior
Initial Jobless Claims, 02/12 (08:30): 318K expected and 303K prior
Leading Economic Indicators, January (10:00): -0.2% expected and 0.2% prior
Philadelphia Fed, February (12:00): 17.5 expected and 13.2 prior
February 18
PPI, January (08:30): 0.3% expected and -0.7% prior
Core PPI, January (08:30): 0.2% expected and 0.1% prior
Michigan Sentiment-Prel., February (09:45): 95.5 expected and 95.5 prior
End part 1 of 3
|
us stock market
trading system
|
