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2/26/05 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts issued: SOX; MFE; MATK; AFFX
Trailing stops issued: None issued
Stop alerts issued: None issued
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/alertttr.htm
SUMMARY:
- Another strong Friday rally pushes indices to 2005 closing highs.
- Week of solid economic data fights rising oil prices.
- Fed may say 'go slow' but it is draining the money supply again.
- Market has leadership but still lacks power.
- Looking for follow through this week . . . to the upside for a change.
- Lots of economic data to mull including the jobs report.
Stocks surge toward highs but still waiting for real volume.
For the third Friday in four stocks surged sharply and closed on their highs to close out the week. The old adage buy on Monday sell on Friday has somewhat held this year. Fortunately there have been a few more up sessions thrown in the past 4 weeks to get the indices back up near 2005 highs. In addition there media had a lot to chew on with the all but NASDAQ and SOX at new closing highs for the year (not new highs, but new closing highs). It is a nice headline for the news agencies, but the real move remains to come as the indices move for a post-crash high. That will hopefully come with a nice follow through session to the Wednesday turn back up from the recent distribution. It has not shown enough strength yet, but the time for that is this coming week.
Friday had some good news to propel it with a nice upside revision to Q4 GDP from 3.1% to 3.8%, but that was almost an afterthought to a week filled with mostly good, though some bad, economic news. The big stories were the CPI, the dollar, and oil. The dollar and Korea's statements about diversifying sent a major shudder through the market Tuesday, fostering the second hard distribution session in three. The indices broke lower and it was not looking good for the attempted rebound. Then on Wednesday the CPI came in below expectations, allaying for now the inflation fears sparked by a surging PPI the week before. Indeed, the government's inflation measure is tracking amazingly low given the spike in oil prices during 2004 and the continued solid economic growth. Oil was another counterbalance to the good news as it spiked toward $52/bbl on cold weather fears in the US and Europe, not to mention comments from the Saudi Arabia oil minister that demand was driving the price rise and that we had best get used to it.
In the end the positives won out and stocks rallied right back up Wednesday through Friday. Price/volume action showed improvement (up on the up sessions to close the week) though Friday was mixed with NASDAQ volume a substantial disappointment. It was not enough to undo the distribution. Sure the indices made it back to the closing highs for the year, but until they show that follow through with strong volume on top of excellent NYSE breadth shown Friday, it is susceptible to more sharp selling when sellers swoop in. In other words, what we want to see are the buyers coming back in and dominating. Once they show that dominance then they can trade punches with the sellers and it would take a strong resurgence of the sellers to chance the character back to negative. You prefer to play the side that is in control. Buyers looked as if they wanted to take back control with the upside flourish to finish the week. They still have to show a strong volume follow through to fully take the control back from the sellers.
THE ECONOMY
Q4 GDP revised to 3.8% from 3.1%.
GDP 'surged' in its revision to the first reading. The first reading was sharply lower than expected because of an error in calculating exports to Canada and the trade deficit narrowed more than expected. With that revision it was another solid reading and it helped push 2004 GDP to a solid 4.4%, topping 2003's 3% growth. That was the strongest since 1999 when GPD grew at 4.5%. That was a strong year.
Business investment continued strong as businesses took advantage of the tax incentives and drove investment to a 14% gain (10.3% previously reported) and above 13% in Q3. Computer and software purchases rose 18% on top of Q3's 17.5% gain. Consumer spending was revised lower to 4.2% from 4.6% (5.1% in Q3), but overall the signals are strong enough for most economists to conclude the economy can grow at 4% through the first half of 2005. That is strong growth, all the stronger when you consider $50/bbl oil and the Fed hiking interest rates.
The Q4 numbers were solid, and as seen Thursday, the solid business activity is not slowing. Transportation dragged the overall number lower, but that is volatile. The 'core' rose 0.8% and once more business investment was up 2.9%. That put the prior 12 months cumulative business investment at 17%, the best since late 1997. It seems that the expiration of some of the tax incentives (the bonus depreciation) has not slowed business spending. The CEO optimism reported Thursday has fed this. CEO's see record profits brought about by the recovery and their ability to put all of the new productivity devices to work. They are happy to continue investing in what has helped bring them to this point. That means productivity over people.
The signs are there but traditional jobs continue to lag.
Productivity over people still seems to be the phrase of the day, but the indicia of improvement continue to improve themselves. New jobless claims were low and near 300K for the third straight week. More importantly, the 4 week average fell to 308,750, the first break below 310K since November 2004. Continuing claims fell 62K to 2.65M. The help wanted index rose to 41 (38 expected). There are a lot of traditional signs employment should be picking up.
There has been jobs growth, just not explosive. A lot of the jobs have not been the traditional ones where companies rehire. Indeed, many of the big corporations are still cutting jobs as they move toward more productivity as their growth slows. They are focusing on their cash cows, and they do this by cutting costs and streamlining production. The jobs have been created by smaller companies and start-ups, and many of those are employee owners of their own businesses. That is why they are not showing up in the non-farm payrolls. It is a transition in the US economy, and it is always painful when it occurs.
The Fed remains a key figure in the economic future: money supply issues.
We have talked a lot about the Fed raising interest rates and how that can have detrimental effects on the market and the economy. The Fed insists it is in a go slow mode and that it only wants to seek neutrality after the many rate cuts required during the market crash and economic bust. That is pretty much typical, and it offers slight variations of this approach with each round of tightening. In most instances, however, it loses patience and hikes rates well beyond neutral and at an increased pace right up to the point it realizes it overshot and should have stopped months before. Lag time of the impact of the hikes is a key factor, not to mention selective recall of past events.
Well, there is another very important factor that used to be watched closely but now is somewhat ignored. Why it is ignored mainly rests with the Fed itself; it does not talk about it so no one else does. We think that is a ploy. The 'it' is money supply. The Fed likes to talk about rate hikes, but the lifeblood of the economy is money supply. Most think rate hikes control the money supply, but they are really just a subset of how money supply is influenced. The Fed can raise or contract the various categories of money supply to achieve results, and using money supply is the most effective. Rates can be raised or lowered, but if the money is not available, it does not matter what rates are.
The past two weeks overall money supply has seen its largest drop since early 2000 when the Fed sucked away all of the liquidity pushed into the market ahead of Y2K worries. A market juiced on money that was for Y2K but was invested because no one was worried about the turn of the century had to go cold turkey. The economy as well. The market vapor locked and started the bear market. The economy was showing some signs of slowing as well, but its crash followed many months later. The Fed even threw in that 50 basis point hike in May, the last 'take that' hike just as the economy really started to slow.
A sharp decline in money supply means that even with rates still historically low, money is tighter. As seen in 2000, this can be very dangerous for the economy and thus stocks ahead of the economy. This is not always a real problem, however. In early 2004 money supply contracted sharply as well and the economy kept going. We do note, however, that it hit that 'slow patch' in the summer, and that was in part a direct result of that drop in money supply. We always get really anxious when the Fed is hiking rates and lower money supply. That makes the search for 'neutral' much more treacherous because it is not just a factor of rates. Again, rates can be very high but if there is a lot of money available it can still get into the economy. Conversely, rates can be very low, but if there is no money, there is nothing to borrow and put to work.
THE MARKET
Stocks posted impressive point gains and intraday action once more Friday, continuing the upside move for the third consecutive session. That alone should be worth something after getting blistered on Tuesday on high volume.
There was also continued leadership Friday. Energy, metals, materials, and home builders all surged yet again, and they did on huge volume. These have been leaders for an extended period, and when you see them surging so dramatically that gives you some pause. Ballistic missiles tend to fall back when they run out of fuel. Fortunately the market has leadership outside of these areas. Transportation, chemicals, machinery, software, medical equipment are also posting good breakouts from good patterns. They are following energy and friends, providing another wave of support for the move higher. If tech can pull its act together it could provide another layer of breakouts down the road when these groups are needing a blow.
To get there, however, the overall market will have to show more power. Leadership is key, but market strength is also key. The market has shown minor accumulation in early February before the hard distribution a week back. It is again showing some minor accumulation to end this week. Those are good signs: leadership, some decent price/volume action, and the ability to come back from bad news. It just lacks the power on the upside to show buyers have wrested control from the sellers. That may come this week as we look for a follow through session.
Market Sentiment
Bulls versus Bears: Bulls fell to 54.1, just below the 55% level that marks extreme bullishness and turns to bearish results for the market: when everyone thinks the market is going higher who is left to drive it higher? Bears rose to 21.4%, just over the 20% level that is considered bearish. Same logic: if no one is bearish there is plenty of money already in the market.
That said, there is a lot of hesitation about this market. We feel it ourselves because it is simply not showing the internal strength to provide a strong sustained breakout. There has been enough weakness to make you take pause. That is a primary reason we watch leaders in good patterns and move in when they make their moves. It requires being ready to pull the rip cord if things turn sour and the selling resumes.
VIX: 11.49; -0.08
VXN: 17.34; -0.27
VXO: 11.27; -0.03
Put/Call Ratio (CBOE): 0.81; -0.18
NASDAQ
Another rebound to end the week, its second good price move in a row. Very low volume and still below the 50 day EMA. Lots of work to do.
Stats: +13.7 points (+0.67%) to close at 2065.4
Volume: 1.785B (-13.42%). Major drop off in trade as NASDAQ continues to have a hard time attracting a lot of big money. Some accumulation Thursday but nothing on Friday. The distribution was not as severe as on NYSE, however, so NASDAQ appears to be working on its base in decent fashion.
Up Volume: 968M (-453M)
Down Volume: 766M (+150M)
A/D and Hi/Lo: Advancers led 1.87 to 1. Again rather anemic breadth to match the rather anemic overall action.
Previous Session: Advancers led 1.57 to 1
New Highs: 124 (+40)
New Lows: 40 (-25)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ put in its second consecutive decent point gain to close out the week, recapturing the losses and closing the week positive. After all the struggles to start the week it recovered. There was some distribution, there was some accumulation. Neither was really strong, especially when compared to the action on NYSE. NASDAQ continues its work on piecing together a base; this one is taking the shape of a double bottom as we noted before. It is still below the 50 day EMA (2071) and the hump of the pattern at 2100. it has work to do, but as noted, the price/volume action has been rather mixed and not too extreme. As of Friday, accumulation was 2 to 1.
Similar action on the NASDAQ 100 as it too works on the early stages of a potential double bottom pattern, rallying toward, but not yet hitting, its 50 day EMA (1534). Once again the large cap techs lagged the overall index, but not by much (0.7% to 0.6%).
SOX broke over the prior February closing high (439.24) as it continued its excellent bounce off the 200 day SMA (418.63) test. It is forming a reverse head and shoulders pattern with the last resistance at 450. Very nice accumulation pattern.
SP500/NYSE
Nice break over the prior February closing highs, managing some stronger, above average volume as it did.
Stats: +11.17 points (+0.93%) to close at 1211.37
NYSE Volume: 1.523B (+0.37%). It was not much of a volume gain, but as with Thursday, it was a modest accumulation with much less strength than the prior distribution. Unlike NASDAQ, which is actually showing decent basing action, NYSE volume is more pronounced. February volume has been lower overall, but the distribution (price losses on rising volume) and accumulation sessions (price gains on rising volume) are more pronounced. Distribution sessions are still the stronger, and SP500 will have to show a strong upside session this week.
Up Volume: 1.208B (+126M)
Down Volume: 302M (-99M)
A/D and Hi/Lo: Advancers led 3.38 to 1. Excellent breadth as the small and mid-caps broke to new all-time closing highs. The mid-caps made a new all-time high period. This is a great improvement, much better than even the downside breadth on the distribution sessions. Some very strong volume to go with it this week would be some excellent confirmation.
Previous Session: Advancers led 2.15 to 1
New Highs: 351 (+154). New highs are getting there as they should with SP600 and SP400 at new highs and SP500 knocking at the door. Another very positive development in the 'internals.'
New Lows: 22 (-12)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Third consecutive gain for the large caps, the last two on modest accumulation. It reversed the Tuesday sell off, recaptured all of that loss, and closed positive for the week. A wild ride, but positive developments as seen in the internals. Volume is still not where it needs to be to really change the character, but a follow through would get it there. It has reformed its cup with handle base, and while more volatile than you would like, it has been resilient. Accumulation in the 8 week pattern is positive at 3:2.
SP600 posted a new all-time closing high Friday as it continued its move off the 50 day EMA (321.14) test that started with the Tuesday sell off. Talk about snatching victory from defeat. It could use one really strong volume session as it hits an all-time high.
DJ30
DJ30 posted its own 2005 closing high as it too rallied sharply off the 50 day EMA (10,629). Volume continued to shrink, however, falling further below average on the move. Not much power here and DJ30 could benefit from an overall follow through in SP500. The lack of volume is precarious; fortunately SP500 is at least showing modest accumulation. Its next goal, besides getting some stronger trade, is 10,868, the current post-crash high.
Stats: +92.81 points (+0.86%) to close at 10841.6
Volume: 247 million shares Friday versus 257 million shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THIS WEEK
We have talked frequently about the need for a follow through this week. After severe selling Tuesday, stocks reversed Wednesday on the relief that CPI was not similar to PPI. That reversal following the selling sets up what can be a real positive for the market, i.e. the follow through. That is a strong price move coupled with strong breadth and rising volume. Friday would qualify but volume was not really powerful and it was early. You want to see a follow through about a week later (counting the reversal session) as that shows the buyers have come back yet again even after stocks have already rallied. In short, they are still wanting to buy at these higher levels and it is not just part of the same turn that started the rally attempt.
The surge Thursday and Friday may very well lead to some softness again to start the new week. There is certainly plenty of economic data to digest: personal income and spending, ISM, and the jobs report. Frankly we were hoping Friday might be quiet and set up a follow through Monday or Tuesday. Now that might be put off; of course stocks may just continue on higher. It is dealing from a much better position but it has not overwhelmed the sellers yet.
Until it shows us a good follow through we will remain defensive with current positions, not really giving them much leeway. This rally back from hard selling was impressive and many moves from our stocks have been the same. As noted before, that is why we keep looking for strong patterns, and when they show us the moves we start accumulating some shares. If we get eh breakout this week they will be in great shape.
Again we have to be careful. The move was impressive, coming back from the brink, but it was not powerful. The market has not shaken off the sellers' yoke yet and it could turn with a selling surge. We have to be careful of softness early in the week that is just a response to three upside sessions on SP500. We will be watching overall volume as well as individual volume in leaders. That will tell the story of any selling as we wait for stocks to really give us a strong upside session. Maybe they will just continue higher; at some point that will indicate the sellers are trumped for now. For now we keep some defense alive as we let our plays run higher.
Support and Resistance
NASDAQ: Closed at 2065.40
Resistance:
2066 to 2070, the bottom of the January lateral move.
The 50 day EMA at 2071
The 50 day SMA at 2091
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 is stronger
2047, the June high is minor support.
2023, an early October 2004 peak.
2000
The 200 day SMA at 1984
S&P 500: Closed at 1211.37
Resistance:
Q1 1999 lows at 1215
December high at 1218.
October 1999 low at 1233
Q2 2001 peak at 1310.
Support:
1200 acted as resistance before.
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 1141.84
Dow: Closed at 10, 841.60
Resistance:
10,868 from the December 2004 high.
10,975 - 11,000 from Q4 2000, Q1 2001
11,350 from the May 2001 highs
Support:
10,754 is the February high
The 50 day SMA at 10,658
The 50 day EMA at 10,629
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 10,317
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
February 28
Personal Income, January (08:30): -2.6% expected and 3.7% prior
Personal Spending, January (08:30): 0.1% expected and 0.8% prior
Chicago PMI, February (10:00): 60.0 expected and 62.4 prior
New Home Sales, January (10:00): 1125K expected and 1098K prior
March 01
Auto Sales, February: 5.5M expected and 5.4M prior
Truck Sales, February: 7.9M expected and 7.6M prior
Construction Spending, January (10:00): 0.6% expected and 1.1% prior
ISM Index, February (10:00): 57.0 expected and 56.4 prior
March 03
Productivity-Rev., Q4 (08:30): 1.3% expected and 0.8% prior
Initial Jobless Claims, 02/26 (08:30): 312K prior
ISM Services, February (10:00): 60.0 expected and 59.2 prior
March 04
Non-farm Payrolls, February (08:30): 225K expected and 146K prior
Unemployment Rate, February (08:30): 5.3% expected and 5.2% prior
Hourly Earnings, February (08:30): 0.3% expected and 0.2% prior
Average Workweek, February (08:30): 33.8 expected and 33.7 prior
Michigan Sentiment-Rev., February (09:45): 94.9 expected and 94.2 prior
Factory Orders, January (10:00): 0.3% expected and 0.3% prior
End part 1 of 3
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