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money investment, financial investment
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3/17/05 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: CHTT; LCAV; VLO; USU
Trailing stops: COH
Stop alerts: COH; MDY
SUMMARY:
- Stocks rebound ever so slightly on declining volume.
- Leading economic indicators recover, show continuing expansion.
- Volatile Philly Fed slows more than expected.
- Jobless claims remain low.
- Foreign investors still buying into the US on economic growth, weaker dollar, supporting US consumption of their goods, and outlook for long term change.
- Weak test of 50 day SMA by SP500 does not hold much promise.
- Volume backs off as most of expiration activity winds down. SP500 reshuffles on Friday, however, and volume and volatility will rise, skewing the results.
Not much upside relief after two hard days of selling.
Stocks sold a bit lower Thursday with SP500 tapping at 1185 support once more in a bit of follow through to the Wednesday and Thursday selling. From there it managed a rebound, but it was not much of a move. Volume was lower, and SP500 had two tries at the 50 day SMA (1195), both of them failing. Stocks finished modestly higher overall, but outside of a few solid moves scattered across the market things remained weak heading into expiration.
It was not for lack of decent news. Good earnings, some M&A activity, and pretty solid continuing economic data. The market tried to bounce but there was no support. Volume was lower, breadth was modest, and the bounce stalled at resistance. It then faded some into the close though it held the gains. All in all a weak session that made the financial anchors feel better but did nothing to change the recent break lower on volume.
THE ECONOMY
Leading indicators rise for third time in four months.
The 0.1% February gain was in line with expectations, following the only down month (January at -0.3%) in the last four. Five of the ten indicators rose, four fell, and one held steady. Thus the modest gain.
The Conference Board said the data indicated the expansion was still solid and would remain solid through the spring. The Board was somewhat surprised that higher energy prices and a weakening dollar had yet to show any impact on the expansion though the negative January reading and modest February improvement suggest the economic activity is slowing.
To us that would indicate there is some impact from oil. The trend does remain up, and the resumption of positive indicators after a sizeable dip in January is a strong positive: solid snapbacks from an out of trend reading indicate continuing strength in an existing trend. Thus we don't want to focus too much on the January data point that was out of line with the trend, but we see some flattening of the expansion and that most likely is the early signs of drag from high gasoline and heating oil prices.
ECRI sees no slowdown.
The Economic Cycle Research Institute (ECRI) chief says that oil is not slowing the economy even near $60/bbl. Indeed, his indicators show the expansion is accelerating. The reason he says is because of where we are in the recovery cycle. We are not early in the cycle when sharply rising prices could stifle nascent recovery attempts, and we are not at the tail end of the cycle where economic activity is already slowing and thus susceptible to rising prices. No, we are still in the 'pre-mid' stages of the recovery where it is past the weaker beginnings and growth is well entrenched with plenty of corporate spending. That allows the economy to make its own wake.
ECRI does not show any slowdown as noted. Its indicators, generally a little more accurate and a little 'faster' than the Conference Board's LEI, have been and continue to expand nicely. ECRI has not released its weekly figures yet, but the interview with its head told the story: continuing expansion in the leading indicators, showing no slowdown at all and indeed an accelerating expansion.
Philly Fed splashes some cold water on growth prospects.
The Philadelphia Federal Reserve month manufacturing report for March was much weaker than expected. 11.4 was below the 20.0 expected and February's 23.9 reading. Sliced more than half in one month. This is a very volatile indicator, but the 12.5 point drop puts the index at its lowest level since July 2003.
New orders hit a 2005 high (13.2), but that is lower than the late 2004 readings in the twenties. The report blamed the expiration of some of the 2004 tax incentives for the drop. Oil prices certainly are not helping that either. Employment and shipments fell as well. Notably, prices paid, after a sharp acceleration, are slowing their growth. They are not falling but they rate of expansion has dropped sharply.
With the Philly Fed it is important to know that the sub-indices are independent. That means the overall reading can be very misleading and it is thus necessary to look at the underlying components. They remain in much better shape than the overall reading. Why is it calculated like this? Why doe the Fed refuse to speak English? Why do lawyers create a language no one else understands? Control for one, laziness for another. Overall the sub-indicators continue to show expansion but at a slower pace than in 2004.
Jobless claims fall but not as much as expected.
The 318K reading was more than the 315K expected but much lower than the prior 328K (revised from 327K). Initial claims, however, have backed away from the 300K level tapped at three and four weeks back. The 4-week average rose to 316,500 from 312,750, still a very solid reading.
Indeed, jobless claims have held below 350K for 9 weeks. That indicates an improving job market, but not a gangbuster. Obviously that has been reflected in the non-farm payroll count that shows growth but no explosive growth. With large companies still cutting costs and looking for returns, profits and productivity come before new people. All of that gee-whiz gadgetry envisioned and created in the 1990's is now being put to use by those that are in other industries. They are reaping the benefits of that productivity and profits, aided by a business cycle recovery. It is working for them now, and they are loathe change what is working for now. They can add a lot of technology and productivity enhancing equipment and just a few more bodies to operate it. That helps the bottom line and that is the focus.
Productivity over people still reigns.
Thus we see the continued demand for capital goods to start 2005 despite the expiration of some of the capital investment tax incentives at the end of 2004 and despite what the Philly Fed report shows. We were expecting some capital investment drop off, but this productivity to profits relationship has become very engrained in US business, and that is driving the strong capital buying. It is hard to complain about that, however, because it increases the ability to compete worldwide, making the US more attractive to foreign investors.
That ultimately creates good jobs in the economic growth areas, and thus our standard of living. It is that cycle of 'creative destruction' referred to in textbooks. The transition is painful as it was in the late 1970's and early 1980's, but the benefits can be huge as seen in the rest of the 1980's and up to 2000. If there is continued incentive to make capital investments in the US from home and abroad, that bodes well for our future.
No shortage of investors willing to bet on the US.
As seen Tuesday, there is no shortage of willing US investors right now even if many US investors are looking overseas. A lot more money is looking from other shores at the US despite the trade gap and federal deficit. Why? Because 4% growth tops what most anyplace else in the world will produce. Moreover, despite claims that serious entitlement reform is washed up, the progress made this far is impressive with respect to areas considered untouchable just a couple of years ago. Democrats have moved from 'there is no problem' to 'okay lets really talk about how to save the system.' That despite nothing but negative coverage in the three weeks it took to make that transition. Well camouflaged by the media coverage, but the change is taking place making it more likely that some meeting in the middle takes place.
Frankly we would rather there be a real fix that weans the US populace off the government and into real savings over the next 50 years. That would take great strain off the taxpayer and thus the economy and allow the kind of capital investment needed to produce the standard of living we expect to have and are promised by social security, etc. It is easy to say that the government should provide everything to everybody. Everyone wants all people to succeed, have the necessities of life, etc. The issue is how we get there and what is the most cost effective, sustainable and constitutional methodology. The world history is filled with failed and failing forms of central governments that tried to provide too much. Rome collapsed internally from the strain. The former Marxist countries are running to free markets and fair taxation schemes as they flee their failed systems. We can structure a safe, strong retirement system that harnesses the power of our economic system as opposed to relying on a wealth transfer scheme that even its own early supporters called a Ponzi scheme. We can use our economic system to create future wealth and increase our standard of living at the same time. I am not too sure why anyone would oppose that. Sure there is fear with any change, but when change is necessary as it is now, we should discuss it and not threaten to take all of our marbles and go home because you don't like an idea. That is childish, not even child-like with its connotations of innocence.
In sum, the foreign investors see progress being made not only in the mere fact this change is being discussed but that ideals are in the process of changing. Those are huge undercurrents and the foreign investors typically don't miss a beat. If we can free ourselves of trillions in future liabilities by using economic growth strategies that will only strength our future, man, who would not want to be on that?
National Association of Realtors says speculation exists, it is risky, but it is not widespread. Do foreign buyers give any insight?
The admission by NAR that there was some speculation in a few markets was rather earth shaking given it has pretty strenuously denied speculation exists in the real estate market. Some took that as an indication that there is much more speculative activity, e.g., 'flipping' (and we are not talking about flipping for bass), taking place. We have heard of a few markets in Florida and California where people held two closings in one day, one as a buyer and the other as a seller.
It was all the talk among many traders (well not all of the talk, but it was mentioned by all we talked to) though we tend to believe it is in very limited areas. What is interesting is the influx of foreign buyers to the US seeking real assets given the relative weakness of the dollar compared to the past twenty years. Recall the early 1980's when Japanese investors were buying US real estate from raw land to glass and steel skyscrapers. They moved in at the same time there was a lot of speculative activity in California, New York, Florida, central Texas (flipping goat pasture to Californians for huge dollars). Japanese money helped make things a bit hotter.
As it turns out, that foreign money was entering the market just ahead of the peak. Markets are fascinating in how they repeat the same action over and over. Most ignore the first two-thirds of any move, then pile in during the last stages. They get burned, leave the market, and don't even consider it until the next cycle is about two-thirds over and they hear so much about it they have to get back in. Same story, different chapter. We could very well see the real estate market hit a peak, but it would have to get a lot hotter than it is now.
THE MARKET
After two sessions of hard selling stocks managed to rebound but it was the meekest of bounces. SP500 tapped toward the 50 day SMA but made no attempt to pass that level. If it had the volume would have been too low to effect a meaningful move. The Thursday action was a relief bounce and it was unable to provide much relief at that.
It is expiration week and that tends to skew the action, but as noted Wednesday, the volume break below the 50 day EMA on SP500 is not something that is simply explained away by expiration week volatility. One strong reason is that the market tried a breakout earlier and failed that move leading into this week. Thus it had already shown its stripes moving into expiration week. The action this week mainly just amplified some of the weakness already showing up ahead of time.
The late fade does not hold out much positive for Friday, but Friday is going to be even more atypical as the SP500 is rebalanced and there will be money moving out of stocks and into other stocks. That will really ratchet up volume, most likely right before the close as buy on close orders are placed to move out of the stocks leaving the index or having their weighting changed and into others added and having their weighting increased.
Market Sentiment
VIX: 13.29; -0.2
VXN: 18.46; -0.55
VXO: 13.51; -0.34
Put/Call Ratio (CBOE): 1.07; +0.02. Another close above 1.00, the fourth in the past two weeks. Lots of option activity associated with expiration but also before that as well. It has been enough to drive stocks higher in 2004, but this far stocks continue to erode even as the put activity rises to strong levels.
NASDAQ
NASDAQ showed a tight doji just above the January 2005 bottom of the current base as volume backed way off. Still in the pattern but still ahs a lot of work to do.
Stats: +0.67 points (+0.03%) to close at 2016.42
Volume: 1.771B (-11.56%). After a higher, average volume selling session Wednesday, volume dropped sharply as NASDAQ continued to hold its current base. This is where it is going to have to make its stand in its base as it continues its attempt to further consolidate and try another upside move. It used most of 2004 basing, and now it has spent nearly the first quarter of 2005 doing the same.
Up Volume: 855M (+448M)
Down Volume: 897M (-670M)
A/D and Hi/Lo: Decliners led 1 to 1. Unable to generate any widespread gains.
Previous Session: Decliners led 1.81 to 1
New Highs: 48 (+10)
New Lows: 88 (-3)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ remains in its base and quite weak, as it was unable to make a higher low near the 50 day EMA (2062) last week before cascading toward the bottom of its 11 week base. It is holding above the January low (2008) but has made a lower low below the late February low. In short, it is basically starting anew in the base, trying to hold the low and above the 200 day SMA (1992). The doji Thursday indicates it may try another bounce higher in the base, but that remains to be seen and we may not get a clear picture Friday given expiration and the SP500 reshuffle.
NASDAQ 100 showed a doji as well, but it is at the 200 day SMA (1482) already, having fallen to the bottom of its base. If it is going to bounce this is where it needs to make its move. After 8 sessions of trending lower it is ready to bounce.
Another day at the 200 day SMA (416.36) for SOX, showing a hammer doji at that level. That can indicate a bounce, and SOX has been under pressure the past week as well. As noted Wednesday, this is the point SOX has to make its move.
SP500/NYSE
Large caps posted a modest gain but well off the 50 day SMA after making a couple of taps at that level intraday.
Stats: +2.14 points (+0.18%) to close at 1190.21
NYSE Volume: 1.581B (-4.31%). Volume fell back to average Thursday as the large caps and small caps posted modest gains off the Tuesday and Wednesday selling. Decent trade but clearly lower than the selling volume heading leading into Thursday. NYSE has moved from some pretty decent price/volume action leading into the first part of the month into poor price/volume action the past week.
Up Volume: 900M (+471M)
Down Volume: 636M (-563M)
A/D and Hi/Lo: Advancers led 1.39 to 1. Small caps helped keep this from being a very weak breadth session, but in any case it was much weaker to the upside than downside breadth was Wednesday.
Previous Session: Decliners led 2.61 to 1
New Highs: 61 (+12)
New Lows: 79 (+15)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 posted a modest bounce with two weak attempts at the 50 day SMA (1195), fading back from both attempts. After the March peak and rollover, SP500 is again working on another head and shoulders pattern, this one starting in February with that rally and fade, then the March peak forming the head. SP500 is now back at the neckline at the late February low (1184), and this is where you would expect it to bounce to form the right shoulder with a bounce up to 1212 (You can take a bigger view of a H&S pattern from the December high at 1218. That would put the neckline much lower at 1163). The positive short term is it gets SP500 bouncing higher from here if the smaller pattern holds. The negative is that if it does form that pattern there is a lot more downside ahead. Of course we all know from recent history that this pattern has to form and breakdown to show it is for real. It often sets up but often does not come to pass. In any event, SP500 is in a weak position and in need of a rebound to keep from an out and out collapse. If SP500 can put together a further upside bounce from here without generating more volume, that bounce is one to use to sell into.
The small cap SP600 posted one of the better gains (0.3%) and managed to move off the 50 day EMA (324.94) after tapping that level on the low. It is still in position to make a higher low here at the 50 day EMA, and if it does rebound it needs to clear 331.70 to get past those February peaks.
DJ30
As with other large cap indices, DJ30 showed a doji on the candlestick chart, indicating a potential rebound from the late February low (10,610). It is virtually the same pattern as SP500, holding below the 50 day EMA (10,700) that is the neckline of a smaller head and shoulders trying to form since mid-February. As with SP500 there is also a larger pattern at work. Either way DJ30 has a lot of work to do to rescue itself from the broadening top forming of late, combined with the drop below the 50 day EMA. As with SP500 we note that one of these patterns formed from November to late January, and that yielded the 6 week rally to the early March peak. As with SP500 and NASDAQ, it needs to rebound here. Volume was lower on the modest loss Thursday as it tried to stem the two week slide lower.
Stats: -6.72 points (-0.06%) to close at 10626.35
Volume: 227 million shares Thursday versus 278 million shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Import and export prices and Michigan sentiment are the scheduled economic events ahead of next week's FOMC meeting. They will be pushed into the background with expiration and the SP500 re-weighting. There will be movement early and then a lot late. Volume will surge on the close as the buy on close orders are filled as the bell rings. That will make Friday a difficult session to judge. Unless there is a clear upside or downside break ahead of the close that persists up to the final buy on close activity, discerning the implications of Friday will be somewhat of an effort in futility.
Ahead of Friday the market is in a much weaker position than it started on Monday. Volume rallied Tuesday and Wednesday as is typical now in expiration weeks, and it was involved with sell offs in the indices on those days. That has the overall market on the ropes, but at points after over a week of selling there is some indication a bounce may be attempted. We don't like to read too much into dojis on the indices because they are not as true a reading as with individual stocks, but after this amount of selling and with the indices resting on the late February lows it is a logical point to try and rebound.
Lots of overhead resistance for all of the indices, and if a rebound takes hold the next few sessions but volume does not move higher with it, that will be one to sell into when it falters. Of course the rallies in this market the past 5 months have come on basically low volume, so we let it run if it will, but if it falters and volume has not notably improved, better to play it safe overall. Friday is going to be a hard read as noted, but we would not be surprised to see another upside attempt off of the recent hard selling.
Support and Resistance
NASDAQ: Closed at 2016.42
Resistance:
The 18 day EMA at 2050.
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 2063
The 50 day SMA at 2063
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:
2000
The 200 day SMA at 1992
S&P 500: Closed at 1190.21
Resistance:
The 50 day SMA at 1195 and the 50 day EMA at 1197.
1196, the mid-January high and the early December peak in the left shoulder.
1200
Q1 1999 lows at 1215
December high at 1218.
October 1999 low at 1233
May 2001 interim peak at 1266.
Q2 2001 peak at 1310.
Support:
1185, the top of the November consolidation range.
1175 second high in that double top that spanned late 2001.
1163 is minor support.
Dow: Closed at 10,633.07
Resistance:
The 50 day SMA at 10,674
The 50 day EMA at 10,701
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:
Price consolidation at 10,600 level is a key level.
10,500 is some support.
10,400, the bottom of the November/December range
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
March 15
NY Empire State Index, March (08:30): 19.60 actual versus 19.9 expected and 19.19 prior
Retail Sales, February (08:30): 0.5% actual versus 0.6% expected and 0.3% prior (revised from -0.3%)
Retail Sales ex-auto, February (08:30): 0.4% actual versus 0.8% expected and 1.0% prior (revised from 0.6%)
Business Inventories, January (10:00): 0.9% actual versus 0.9% expected and 0.2% prior
March 16
Current Account, Q4 (08:30): -$187.9B actual versus -$183.0B expected and -$165.9B prior (revised from -$164.7B)
Housing Starts, February (08:30): 2195K actual versus 2030K expected and 2183K prior (revised from 2159K)
Building Permits, February (08:30): 2074K actual versus 2070K expected and 2132K prior
Industrial Production, February (09:15): 0.3% actual versus 0.4% expected and 0.1% prior
Capacity Utilization, February (09:15): 79.4% actual versus 79.2% expected and 79.2% prior (revised from 79.0%)
March 17
Initial Jobless Claims, 03/12 (08:30): 318K actual versus 315K expected and 328K prior (revised from 327K)
Leading Economic Indicators, February (10:00): 0.1% actual versus 0.1% expected and -0.3% prior
Philadelphia Fed, March (12:00): 11.4 actual versus 20.0 expected and 23.9 prior
March 18
Export Prices ex-ag., February (08:30): 0.7% prior
Import Prices ex-oil, February (08:30): 0.2% prior
Michigan Sentiment-Preliminary, March (09:45): 94.9 expected and 94.1 prior
End part 1 of 3
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money investment
financial investment
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