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2/24/05 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: EYET
Buy alerts: IHP; JAKK; CSX
Trailing stops: IMDC; STN; BCR
Stop alerts: None issued
SUMMARY:
- Stocks turn a soft open to their advantage.
- Transportation drags a good durables orders number lower even as BA gets orders for 80 jets.
- Saudi Arabia says get used to oil in this range.
- CEO's have a very rosy profits outlook.
- Market refuses to give in though it has yet to show any real upside power.
Stocks fight back as volume edges higher.
Stocks opened soft on a weaker durable goods report and some big name tech downgrades, but as has been the case this year, despite being on the ropes, the market managed to turn the tables and rally just as it looked ready to break down. SP500 recaptured the 50 day SMA as the small and mid-caps continued their moves higher off the 50 day EMA tests. SOX rebounded as well after its 200 day SMA test. Again, the price action trumped all of the negative internals.
That is something that did not change either. Volume edged higher, showing some slight accumulation, but it was still below the recent distribution volume that showed up last week. In addition, breadth remained relatively anemic at 2:1 on NYSE and just 1.6:1 on NASDAQ. The internal readings fail to show as much strength as the downside readings on the downside sessions. As we have seen that may not mean any immediate reckoning, but if it continues, the foundation of the market is eroded and it ultimately won't hold up.
Despite the relatively weaker internals and volume, however, that was not the case Thursday as stocks rebounded with just enough improvement in volume to keep the recovery move alive. There are still leaders, and we are not talking just energy, metals and materials. There are healthcare, biotech, business services, software, and even semiconductors that are posting good gains near new highs. As we noted earlier in the week, there is still leadership out there. It looked as if the overall market was going to drag it down, but it has not as of yet. What was that old Monty Python line? "I'm not dead yet."
THE ECONOMY
Durable goods orders suffer transportation slowdown but are strong otherwise.
Durable goods orders fell 0.9% when they were expected to rise 0.1%. Given that December was revised higher to 1.4% growth (1.1% originally reported), the durability of the orders was in question.
If you take out transportation, however, orders jumped 0.8%. Big swing. There is a pattern now in the durable goods that is very similar to the pattern in retail sales: wide month to month swings based on orders in one component. In retail sales it is autos; in durables it is transportation, specifically personal aircraft. Recall that the December durable goods orders were bolstered by a sharp jump in transportation orders.
Thus, as always, you look at the trend. The trend is solid orders as January was the first decline since October. Civilian capital goods orders excluding aircraft, the oft-cited proxy for business spending, rose a solid 2.9%. Metals, fabricated metal products, and machinery all gained as well. The manufacturing demand for materials continues.
Oil inventories mixed while Saudi Arabia plays the expectations gains.
It was just a couple of months ago that the Saudi oil minister was vowing that the price jumps in oil were largely caused by fear and speculation, that there was plenty of supply, and that prices would fall once the speculation died down in the face of Saudi output.
Thursday the minister was saying that as far as he could see, oil was going to be in the $40 to $50/bbl range for the rest of 2005 due to market demand. Nice, quick 180 degree reversal. We had noted how easily oil had settled into the $45/bbl range, magically within the $40 to $50 range cited by the minister. Right now it is on a jaunt higher due to storm worries, but still near the $50/bbl level (closed over $51/bbl again). As we noted last night, what has probably occurred is a realization by Saudi that its thick sludge oil does not have a lot of impact on a market that wants the sweeter versions to run through refineries that have evolved due to regulation here in the US to handle only the lighter or sweeter versions. In addition, Saudi and OPEC appear to have agreed in their last meeting that the west is holding up quite well economically despite the jump in oil prices, and thus oil at $45/bbl is the new goal.
That spells trouble for the western economies down the road. There is a demand binge right now as the economy grows, but as with additional tax hikes that bleed money from the economy, this additional siphoning from high oil prices month after month is also bleeding the economy of funds. Eventually it will lead to a slowdown. Some problem arises that puts pressure on the economy and that high oil price shows its impact. It is like having a virus under the surface that emerges when the body gets run down.
Oil inventories did not help much though they were pretty good numbers, something the recent spike in oil prices seems to have anticipated. Crude rose 600K (680K expected); distillates fell 700K versus expectations of a 2.4M bbl drop; gasoline rose 1.8M bbl (920K expected). The inventories were good news and put a dent in oil prices, but just a modest dent at that. Inventories and weather do impact oil prices, but they now affect them based upon a range in the mid-forties. Thus the recent jaunt to near $52/bbl on weather concerns. They will probably cool some, but deviations from the $45 to $50 range will occur as we have just seen.
CEO's see happy days once again.
You may not remember, but back when we were seeing signs the economy was turning higher many pundits were citing the lack of CEO optimism as an indication that there really was no economic recovery beginning. The theory is that who better knows the status of the economy than the business leaders. The fallacy is this: business leaders view everything from where they were before the slowdown, crash, recession, etc. They always say things are not back to where they were. That is their measuring stick. Thus when there are signs of improvement they are not that excited because it is still going to take a long trek to get back to where they were. Moreover, with the shareholder suits, they are not going to stick their necks out and call what turns out to be a false recovery attempt. As usual, the economy zoomed higher even as CEO's were still pessimistic.
The current CEO conference down in sunny Boca Raton is occurring under sunny, balmy skies, a reflection of the CEO attitude. Despite high oil prices, medical prices, and the Fed on a rate hiking campaign once more they are extraordinarily optimistic. 85% say profits will be up again in 2005 after a strong 2003 and 2004. 22% say that profits will be substantially higher. Given that profits are at record levels, that is some bold talk.
Just as CEO's are too pessimistic at the bottom, they are too optimistic at the top. That is how they got barbequed by the 2000 crash when business went from booming to the bottom, leaving massive, massive inventory overhangs that dogged their recovery attempts. Does this mean a crash is imminent? No. Optimism even among CEO's is a contrary indicator, but it is not a timing indicator. Optimism can run very high for a long time before a downturn actually comes. Thus enjoy the sun, the golf, the fishing boys, and be sure to bill your shareholders for it. With these strong profits, however, the shareholders are not going to mind.
THE MARKET
A much better rebound move Thursday with improving volume and decent breadth, at least on NYSE. SP500 recaptured another resistance level, and the better volume makes the move look better. SOX and SP600 looked pretty darn good as well. Once more stocks looked over the precipice and clawed back from the edge.
Right now they are surviving, with some pretty decent leadership kicking in from various sectors. The problem remains, however, that the market has lacked any real power on an upside move. It looked ready to make a serious break higher 7 sessions back with a rising volume gain as SP500 moved to the December highs. Volume was the best since early in the month, and despite lower overall volume, price/volume action was solid. Then some sellers hit on higher volume. Now it is working back upside again, once more on lower volume. Basically a microcosm of the January and February action up to 5 sessions ago.
What the market needs to show is a powerful upside session. After this recent thrust lower a good upside move early next week on some really powerful volume would be an indication the market was going to breakout from the range that started this year. That is what we look for on the upside, and until it shows itself we have to play cautiously because the downside moves remain stronger overall. Good leadership is a must, and the market has leadership. Leadership is not sufficient in itself, however. If there are more big money sellers than buyers, even the leaders struggle and many will break down as well. Thus we need to see a strong follow through to this resumed recovery attempt early next week.
Market Sentiment
VIX: 11.57; -0.82
VXN: 17.61; -0.83
VXO: 11.3; -0.98
Put/Call Ratio (CBOE): 0.99; +0.16. Sharp rise on an up session. There was some hedging being undone on the rally (i.e. protective puts).
NASDAQ
An early struggle but a solid recovery pushed NASDAQ up to the next resistance level on some rising, above average volume. Double bottom potential is still alive but NASDAQ will have to show a strong follow through as well.
Stats: +20.45 points (+1.01%) to close at 2051.7
Volume: 2.061B (+8.33%). Volume cleared 2 billion, not far behind the Tuesday selling level. Recall that NASDAQ downside volume that session was nowhere in the league of NYSE selling volume. Still needs to deliver a clear, strong upside volume session.
Up Volume: 1.421B (+508M)
Down Volume: 616M (-333M)
A/D and Hi/Lo: Advancers led 1.57 to 1. Pretty mediocre given NASDAQ was in rally mode all afternoon. NASDAQ 100 outperformed overall NASDAQ, and thus it was more of a large cap rebound.
Previous Session: Advancers led 1.03 to 1
New Highs: 84 (+34)
New Lows: 65 (+2)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Turned higher on rising, above average volume without testing down toward 2000 or the 200 day SMA (1983). NASDAQ has lagged the recovery, but it is potentially setting up a double bottom pattern of sorts that we call a flying W. That is where the right leg does not undercut the left. It is way to early to call this a double bottom, but it was a decent start on rising volume. Still has some major tests ahead at the 50 day EMA (2071) and the 'hump' in the middle of the pattern at 2100.
Similar pattern to NASDAQ, and even with the better performance Thursday it is still no better off than the overall index. It too has to face the 50 day EMA (1534) ahead and the simple MA at 1550. It is setting up, but it has to make the move and do it with some strength.
SOX continues to perform well as it comes off its bottom after lagging the market for quite some time. It rebounded off the Wednesday test of the 200 day SMA (418.76) and has formed something of a reverse head and shoulders pattern. That would put the breakout at 450, still a pretty good trek from here.
SP500/NYSE
The large caps rebounded on slightly above average volume as it recaptured the 50 day SMA. Getting there, but needs to show a follow through next week.
Stats: +9.4 points (+0.79%) to close at 1200.2
NYSE Volume: 1.518B (+1.34%). Volume edged past average as SP500 rebounded further. Relative to the rest of the move it was still low.
Up Volume: 1.082B (+54M)
Down Volume: 401M (-40M)
A/D and Hi/Lo: Advancers led 2.15 to 1. Much better breadth but need to see better on the next strong move.
Previous Session: Advancers led 1.75 to 1
New Highs: 197 (+100). New highs jumped but they were still quite modest overall.
New Lows: 34 (+9)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Rallied through the 50 day SMA (1194) on better volume but stalled at 1200, the next resistance point. Once again SP500 was able to come back for the edge of the cliff. That resilience needs to translate into a strong upside move through 1215.
The small cap SP600 held the 50 day EMA (320.72) and has rebounded the past two sessions. Volume was better as on SP500, but just modestly so. It did what it had to do, holding that key support level, and now it is moving toward another shot at the late December and February high at 331.82. Small caps have had a volatile three months, appearing ready to breakdown as well but then making the comeback. As with the other indices, they are going to have to deliver a breakout this time.
DJ30
Similar to the small caps, DJ30 bounced off its 50 day EMA (10,620) Wednesday and added to the move Thursday, helped by BA and its airplane order. Volume was weak. It was below Wednesday's weak level. Always some index acting as the anchor chain as the market struggles to hang on or tries for a breakout.
Stats: +75 points (+0.7%) to close at 10748.79
Volume: 257 million shares Thursday versus 268 million shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Another GDP revision is out Friday along with existing home sales at 10ET. Stocks have managed to pullback from the edge this week and actually did it with some flare Thursday, showing a bit better volume. Still no strong move; that is yet to come and that will be the test of this rebound.
Whether that happens Friday is problematical. It would be better next week as that would show the buyers coming back in after a cooling off period. That shows commitment to the buying. That is also something that the market will have to prove given the relative strength of the selling to the buying and the overall negatives of high oil prices and the Fed on the interest rate hiking path. Those remain the key overlying influences on the market for 2005.
As for Friday, given the market has not shown any major return to accumulation, we have to stay cautious and be on the defensive. The last thing we want to see, at least for the potential for a breakout, is a reversal on even stronger volume. The market has been able to avoid breaking down, but the action has been eroding the foundation. That is why it needs the follow through next week on very strong volume. Until then we remain cautious. We will participate in solid moves by leaders, but if volume selling resumes we are not going to hang around too long.
Support and Resistance
NASDAQ: Closed at 2051.70
Resistance:
2050-54, prior resistance and the June high is stronger
2066 to 2070, the bottom of the January lateral move.
The 50 day EMA at 2071
The 50 day SMA at 2093
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:
2047, the June high is minor support.
2023, an early October 2004 peak.
2000
The 200 day SMA at 1983.60
S&P 500: Closed at 1200.20
Resistance:
1200 acted as resistance before.
Q1 1999 lows at 1215
December high at 1218.
October 1999 low at 1233
Q2 2001 peak at 1310.
Support:
1196, the mid-January high and the early December peak in the left shoulder.
The 50 day SMA at 1194
The 50 day EMA at 1189 is potential support.
1185, the top of the November consolidation range.
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 1141.26
Dow: Closed at 10, 748.79
Resistance:
10,754 is the February high
10,868 from the December 2004 high.
10,975 - 11,000 from Q4 2000, Q1 2001
11,350 from the May 2001 highs
Support:
The 50 day SMA at 10,655
The 50 day EMA at 10,620
Price consolidation at 10,600 level is a key level.
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 10,313
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
February 22
Consumer Confidence, February (10:00): 104.0 actual versus 103.0 expected and 105.1 prior (revised from 103.4)
February 23
CPI, January (08:30): 0.1% actual versus 0.2% expected and -0.1% prior
Core CPI, January (08:30): 0.2% actual versus 0.2% expected and 0.2% prior
FOMC Minutes, February 2 (14:00): Will continue to remove the policy accommodation to preserve low inflation, but will pick up the pace if required.
February 24
Durable Goods Orders, January (08:30): -0.9% actual versus 0.1% expected and 1.4% prior (revised from 1.1%)
Initial Jobless Claims, 02/19 (08:30): 312K actual versus 308K expected and 303K prior (revised from 302K)
Help-Wanted Index, January (10:00): 38 actual, 38 expected and 38 prior
February 25
GDP-Prel., Q4 (08:30): 3.5% expected and 3.1% prior
Chain Deflator-Prel., Q4 (08:30): 2.0% expected and 2.0% prior
Existing Home Sales, January (10:00): 6.75M expected and 6.69M prior
End part 1 of 3
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