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money investment, investment help
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3/25/05 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: CHTT
Buy alerts: ANTP; WDC; AFFX; QCOM
Trailing stops: None issued
Stop alerts: HLEX
SUMMARY:
- Stocks bounce in relief, waffle on low volume, give the move back.
- New home sales surge in February, reversing big January decline.
- Durable goods ex-transportation fall, but early 2005 still strong.
- GE raises estimates and many view it as a positive. Isn't it?
- Inability to bounce leaves stocks in near term downtrend, but many leaders were starting to move Thursday.
- Many reasons to say economy to remain strong and this is just a temporary blip for market and not start of another downtrend. As always, market has to prove it.
Decent bounce bleeds away in the afternoon.
Stocks made a second attempt at a rebound Friday, and they suffered their second straight failure. Neither move had much salt, however, so it was not too difficult for it to fritter away the gains late in the session. At the end of the shortened week the market found itself at the bottom of the week's range, a familiar place after three consecutive weeks of downside.
Oil prices remained high even though they backed off from the top of their recent price spike. The week's focus, however, was on interest rates and the prospect of bigger rate hikes sooner after the Fed continued its 'measured pace' language but completely undermined it at once. Clever fellows. They set the stage for a 50 basis point hike at the next meeting without having to remove the safety net language from the prior statement. After the oil spike the prior few weeks, the prospect of faster and still open ended rate hikes on top of higher energy costs brought in more sellers. The selling abated at the end of the week, but even with fewer sellers stocks could not mount any significant bounce.
There was some decent news early Thursday that helped spark the bounce attempt. GE raised the lower end of its guidance range and said it would return to double digit growth. YHOO announced a share buyback, always good for a dusting of excitement. The news from the BP plant in Texas City was 95% operational capacity despite the sad death of 15 workers. That was enough, along with three weeks of prior selling, to get stocks up off the mat.
The big indices cleared some key resistance, tested and held. SP600 and SP400, however, could not move over the 50 day MA they just broke. Stocks still held up into the afternoon, but volume was running lower. As the afternoon session wore on stocks gave back a bit here and a bit there. By the last hour and one-half they were selling. In the last hour they were diving back to session lows, managing to close mixed. No upside volume meant no return of buyers. With the long weekend ahead the shorts covered in the oil market (driving up oil prices) and the traders and hedge fund longs in equities sold (driving down prices).
In sum a weak three weeks remained weak with a very tepid rebound attempt. With virtually no change you could say they are still ready to rebound from this selling; the two days of pausing and failed rebound attempts, however, let off some of the downside steam and let sellers reload a bit. Thus the market will have to show us if it is going to bounce. Odds are it will, but to this point it has punted a couple of points where it could have rebounded.
THE ECONOMY
New home sales surge in February after tanking in January.
New home sales leapt 9.4% in February, the largest gain since December 2000. That followed January's 8.6% thud in January, the largest drop since September 1981. Pundits were quick to point out the market is still strong ('white hot' as some called it), and they are right. There is still no shortage of buyers, no doubt fueled by the belief that interest rates are on the rise. Recall that this report was before the recent spike, i.e. while Greenspan was still wrestling with his 'conundrum.' With ads on the tube, the radio, and in the paper about higher rates, buyers were rushing to get in before the rates jumped. We have seen this before when the Fed started hiking; those that had been waiting for lower rates move in before rates get much higher.
That raises the question of sustainability (again). Prices jumped 9.6% in the month, the largest gain since February 1993. Prices have been on a relative rampage, another factor that is behind many of the housing bubble theorists out there. Turnover is 10%, much greater than the historical 5.2% level. Those suggest areas are getting overheated, and some geographic areas certainly are.
One thing we always watch in any market is volatility. When you start to see big swings between reporting periods after steady gains or losses, that is a sign that the trend is getting worn thin. It happens when stocks, commodities, gold or any other market move toward the end of a run. Volatility indicates the tug of war between buyers and sellers, between the forces in the market. One had been dominant and thus the steady trend. The dominant starts to lose its grip, the weaker strengthens, or a combination of both. That leads to the back and forth action. The trend can reassert itself or it can break down. Volatility is a clue, a warning flag that change is taking place.
Housing is an early cycle sector, and as noted earlier last week, this has been a long cycle that ran all the way through the recession. That makes it exceptionally long in tooth. Higher rates are only going to add to the decline. Think about it. Why is housing early cycle? Because pent up demand during the downturn is released when things start to look better and when rates are low. After that burst of buying desire is somewhat sated and rates are higher anyway. Once the second home boom is over and as rates continue higher the market will further plateau and fade.
Durable goods up, but not really.
Sometimes we wonder if it is worth reporting durable goods orders monthly. They are so volatile a quarterly report would be more useful. As it is, the volatility is such that it has made most immune to the monthly number. In February they increased 0.3%, the third rise in four months. That was easily above the 1.1% January drop, at least before you take out transportation. Remove aircraft orders and they fell 0.2%, the first drop ex-trans in three months.
Big drop from January's 0.9% gain and it looks as if the expiration of some important investment tax incentives at the end of 2004 is having an effect. Case in point: non-defense capital goods excluding aircraft (proxy for business investment) fell 2.1% after a 4.4% gain in January. Of course, for the first two months of 2005 rose 16% year over year. So, even with the decline from January to February, overall orders are still damn strong, even more so without all of the incentives available in 2004. Further, inventory to sales held a record low at 1.3 months. Those extra sales are soaking up the additional inventory, and thus despite the drop in February the trend is still higher.
GE raises pulls up the low end of its guidance, pledges double digit growth.
That had many economists or wannabes talking about how great that was for the US and world economies. The idea is that when a company as big and as diverse as GE can raise its guidance and say it will earn double digits, that is a good sign for the market. GE bolted higher by 23 cents on the news on lower, average volume. Clearly a market mover Thursday on this bold news.
The real story: GE raised the lower end of its guidance by a penny, keeping the top end of the range status quo. As for double digit growth, GE is going to dump several of its less prosperous units for $2.6B and expand into consumer and commercial finance, an area that is growing faster. So, there is no real surge in GE business, it is just refocusing from losers to winners. Nothing wrong with that; it makes sense. Just don't draw any grand conclusions that GE's business is soaring higher based on these actions.
Indeed, the area GE is going to expand is in Europe where it has been moving in recent years through acquisitions of consumer and commercial finance businesses there. Thus this is not really a story of US economic growth spurring GE's improved outlook, but a shift out of weak businesses into faster growing areas in Europe. If GE is moving more money overseas it is happening elsewhere as well.
GE is now, the Fed is the future.
We discussed at length Tuesday and Wednesday the Fed's impact on the future of the US economy. GE's news, even if it was tied to US operations, would still be the current environment. The Fed is raising rates and that will impact the future. How much it raises and how far it overshoots neutral will tell the story as to economic conditions in the future. If it gets too aggressive, the market will price that in ahead of any easily visible economic slowing.
This is just something to keep in mind as the Fed moves forward with its rate hiking. It is highly unlikely that this recent selling is the harbinger of a Fed that has already gone too far. ECRI's weekly leading index, a very good predictor of future economic activity, fell to 135.2, down from 135.8 the week before. Still, its annualized growth rate rose to 3.9%, the highest reading in 42 weeks (3.5% the prior week). That harkens back to a level in early 2004 when growth was still solid. Thus, the economic data is still strong, inflation is still picking up, and by all measures interest rates are still 150 basis points below neutral (six 25 BP hikes or three 50 BP hikes). Oil is doing some of the work for the Fed, so neutral may end up being lower than that. The market is simply reacting finally to the two major issues facing it this year. Oil was the first punch with this recent spike higher from $45/bbl (oil was up just over $1 Thursday to $54/bbl), and last week interest rates took over the worry duties and investors used them as another reason to sell stocks and bonds.
THE MARKET
The large caps spent the last two days of the week trying to bounce but could only wallow around. The smaller caps, the last holdouts above the 50 day EMA, gave in on Wednesday, and Thursday they could not make the recovery. The leading indices are now struggling with the large caps below key support, as of yet unable to make any real relief bounce from the recent failed breakout and subsequent trend lower.
SP500 remains struggling at the up trendline off the March 2003 low that was the test of the late 2002 bottom. NASDAQ bounced off that level in late February, but then sliced through it seven sessions back; it breached this trendline in August, spent six days falling through it, and then rebounded sharply. It is at the 200 day SMA now and that is a great point to launch another upside move.
There is some promise of at least an upside relief bounce still to come, but as of yet no broad buying interest has emerged. Indeed, the small and mid-caps drop through the 50 day MA last week was simply a further confirmation of the selling pressure that has the market underfoot right now. SP500 and DJ30 have toppy patterns. Still, there were leader stocks moving higher Thursday, and unlike the market overall, they were holding their gains on good volume into the close. As noted earlier in the week, they start to move first and then the market follows. With SP500 and DJ30 struggling, it looks as if it is going to be up to NASDAQ to finish its base and provide some leadership. It lagged the breakout attempt earlier, working on its base as other indices rallied. It has sold, but it is also still in its 2005 base. Here at the 200 day SMA it very well could start to work up the right side of its pattern.
Market Sentiment
Bulls versus Bears: Bullish advisors fell to 53.6%, down about a point from the prior week, still hovering near the bearish level of 55%. Bears climbed to 27.8%, the best spike in quite some time, surging over 4 points from the prior week and easily above the 20% bearish level. For reference, last September bulls were only at 30% when the market found bottom and rallied 120 points on SP500. Bulls were at 40% at that time, however. That shows there is most likely still some work to be done before the market is serious about a good recovery move.
VIX: 13.42; -0.64
VXN: 17.15; -0.53
VXO: 12.88; -0.51
Put/Call Ratio (CBOE): 0.78; -0.05. Dropped off the high pace of late, but the ratio has topped 1.0 on the close 5 times during the selling. That often indicates a near term bounce is setting up. Wednesday and Thursday were pretty lame attempts.
NASDAQ
Put together a decent move, clearing 2000 resistance, but by the close it was back below that level and the 200 day SMA. Trying to set a bottom here to rebound.
Stats: +0.84 points (+0.04%) to close at 1991.06
Volume: 1.714B (-5.06%). Even lower trade Thursday as volume held below average for the entire week. Only one distribution session (Tuesday) as volume has remained under control. During the last two months of the base volume has been mostly below average, very good basing action. Even during the recent dump lower only one session cracked above average.
Up Volume: 951M (-117M)
Down Volume: 732M (+62M)
A/D and Hi/Lo: Advancers led 1.16 to 1. From 2:1 during the height of the run to peanuts by the close. Decliners still stronger on the down sessions.
Previous Session: Decliners led 1.96 to 1
New Highs: 41 (+12)
New Lows: 79 (-27)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ remains in its two week trend lower, hitting a new low in its base last week. You could argue that it broke the base, but other than that one day volume spike the prior Friday on expiration and SP500 rebalancing, volume has been below average and contained. That is basing action. Even last week when it broke the 200 day SMA (1993) it still is holding up fairly well as it did not roll over and tank. Instead it is trying to bounce. A weak, pathetic attempt, but it is not caving in yet. If oil continues to soften this week, the interest rate buzz will also become relatively old news. That will give the index another window to bounce. Not expecting anything major that takes it out of its base, but a decent move toward the 50 day EMA (2050).
NASDAQ 100 also struggles below its 200 day SMA (1482) and making a lower low in its base. It too is still holding near the 200 day, taking potshots at it on low volume.
SOX rebounded above its 200 day SMA (414.77) on the Thursday close after running toward the 50 day EMA (422) on the high. It has dipped a bit too low to still be in the 17 week base. Not at total breakdown, and indeed SOX led the market the last two days of the week though that is hardly saying much. The big hurdle for it this week will be the 50 day EMA (422.29). It could do that pretty easily if there is any upside at all.
SP500/NYSE
Another gain tossed away by the close, but showing a hammer doji on low trade. It is trying to hold the up trendline, but it is in a lousy pattern.
Stats: -1.11 points (-0.09%) to close at 1171.42
NYSE Volume: 1.312B (-27.31%). After a strong volume session Wednesday where SP500 spun its wheels and SP600 tanked, volume fell well below volume as the big money went home early. Just one day of distribution as well last week. Wednesday was interesting. SP500 held its ground after three weeks of selling, holding in a tight range on strong trade. That often indicates that the momentum is shifting: lots of volume but the index is no longer being pushed lower. That means there are as many buyers coming in to buy as sellers are selling; after sellers led on the way down the buyers are emerging now in strong numbers matching the sellers.
Up Volume: 980M (+226M)
Down Volume: 723M (-736M)
A/D and Hi/Lo: Advancers led 1.48 to 1. From well above 2:1 intraday to mediocre breadth on the close.
Previous Session: Decliners led 3.55 to 1
New Highs: 32 (+20)
New Lows: 57 (-88)
The Chart: http://www.investmenthouse.com/cd/^spx.html
After the high volume doji Wednesday, SP500 showed a hammer doji Thursday, both just below the March 2003 up trendline (1177). Still below that level and still a more toppish pattern after the failed breakout, but still showing signs it wants to bounce after the sharp downdraft. Of course it showed two dojis a week back and proceeded to sell further. Key point for it here and still expecting another bounce attempt near this level.
The small cap SP600 rallied up toward the 50 day SMA (324.25) and then peeled back to the close. It held a gain and was the second strongest mover of the session, but it ended up with little to show for it. It is at some support at 320, the late February low. It was the last to break lower, and if the oil and gas stocks continue to sell it will still struggle. If the rest of the market posts a much needed bounce, however, it will likely overcome the drag of those energy stocks.
DJ30
The blue chips showed their own hammer doji Thursday on lower, below average volume. The index is above the 200 day SMA (10,376) and the January low (10,368). A slightly broadening top, but could very well rebound here and continue the trading range between 10,400 and 10,800.
Stats: -13.15 points (-0.13%) to close at 10442.87
Volume: 238 million shares Thursday versus 326 million shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
MONDAY
Big week of economic data from confidence to personal income and spending to the ISM to jobs. That fills the void left by the Fed and ahead of the start of the first quarter earnings parade. It also gives the market something to fixate on other than what the Fed is or isn't going to do. The Fed will still be there, but the data may inject a bit of confidence that will allow a rebound from this selling.
Stocks closed the week trying to bounce but ran in place as if some cartoon character. This economic data will likely show continued strength in an economy that has indeed defied sharply rising energy prices and 7 Fed rate hikes. As noted before, this selling is likely just the market realizing what faces it this year, i.e. high oil prices and higher interest rates from a hiking Fed. The selling started before a lot of the hype hit and definitely before the Fed meeting and language change; again, just the market looking down the road a bit. The market is likely to act this way until it gets a handle on what the Fed has done to the economy, i.e. struggling to make advances and struggling to hold onto them. As of yet the Fed has not done damage, at least not through too many rate hikes; inflation got a bit out of hand with the demand led recovery and the Fed's extreme caution in cutting off the recovery before it became well rooted. If there is any damage at this point that would be it (too slow to move rates up).
With the fed funds rate still significantly below neutral, the economy still has expansion ahead as opposed to peaking right here. Thus we still believe that the market can recover from this selling, especially in the couple of weeks ahead of earnings that are fast approaching. By recovery, well that means a rebound move at this juncture given that SP500 and DJ30 have pretty much junked their patterns with this failed breakout and slide lower. Indeed, until the market shows otherwise, any bounce is just a relief move as the indices rebuild their patterns. For instance, NASDAQ has been basing while the other indices were breaking out, and NASDAQ is still doing so. It needs to build the right side of its pattern, however, and a bounce will help do that. It will still have to test back after that move, etc. In short, there is still quite a bit of work to do.
We will look to play any bounce higher with the best vehicles to make us money near term. Some of the indices such as the DJ30 could actually provide some upside. As always we are looking at strong stocks that have made their pullback to support during the selling, testing a breakout or consolidating a gain. Those have attracted the money on their moves higher, and nice orderly pullbacks to support show the money is not abandoning them. As noted, some of these stocks started higher Thursday and did not give their gains back. Showing strength in the selling usually translates to strong moves when the market rebounds. Our style focuses on leaders, and even after this pullback many are still in excellent shape to rebound.
We want the market to show the move, and we note that Wednesday and Thursday it tried but could not do it. That relieved some of the selling pressure without any real move higher. Thus if the buyers fail to show the selling could resume. Thus some choice downside plays are in order; if the market hiccups and rolls over again they can provide some fast gain. The market struggles upside, but when it decides to sell the moves often come quickly.
Support and Resistance
NASDAQ: Closed at 1991.06
Resistance:
The 200 day SMA at 1993
2000
The 10 day EMA at 2012 and the 18 day EMA at 2027 are the near term obstacles as the index bounces.
2050-54, prior resistance and the June high is stronger
The 50 day EMA at 2051
The 50 day SMA at 2054
2066 to 2070, the bottom of the January lateral move.
2100 from February and March.
January high at 2154 (early 2004 high)
Support:
Early October high at 1971.
Late 2003 highs from 1960 to 1970.
S&P 500: Closed at 1171.42
Resistance:
1175 second high in that double top that spanned late 2001.
March 2003 up trendline at 1177.
1185, the top of the November consolidation range.
The 50 day SMA at 1194 and the 50 day EMA at 1194.
1196, the mid-January high and the early December peak in the left shoulder.
1200
Q1 1999 lows at 1215
December high at 1218.
Support:
1163 is minor support.
1154-1157 tops from early 2004.
The 200 day SMA at 1150
Dow: Closed at 10,442.87
Resistance:
The 10 day EMA at 10,588.
Price consolidation at 10,600 level is a key level.
The 50 day SMA at 10,666
The 50 day EMA at 10,666
10,754 is the February high
10,868 from the December 2004 high.
10,975 - 11,000 from Q4 2000, Q1 2001
Support:
10,400, the bottom of the November/December range
The 200 day SMA at 10,376
September high at 10,342.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
March 29
Consumer Confidence, March (10:00): 103.4 expected and 104.0 prior
March 30
GDP-Final, Q4 (08:30): 4.0% expected and 3.8% prior
Chain Deflator-Final, Q4 (08:30): 2.1% expected and 2.1% prior
March 31
Initial Jobless Claims, 03/26 (08:30): 324K prior
Personal Income, February (08:30): 0.4% expected and -2.3% prior
Personal Spending, February (08:30): 0.5% expected and 0.0% prior
Chicago PMI, March (10:00): 60.5 expected and 62.7 prior
Help-Wanted Index, February (10:00): 41 expected and 41 prior
Factory Orders, February (10:00): 0.8% expected and 0.2% prior
Apr 01
Auto Sales, March (00:00): 5.4M expected and 5.3M prior
Truck Sales, March (00:00): 7.8M expected and 7.6M prior
Non-farm Payrolls, March (08:30): 225K expected and 262K prior
Unemployment Rate, March (08:30): 5.3% expected and 5.4% prior
Hourly Earnings, March (08:30): 0.2% expected and 0.0% prior
Average Workweek, March (08:30): 33.8 expected and 33.7 prior
Michigan Sentiment-Rev., March (09:45): 92.9 expected and 92.9 prior
Construction Spending, February (10:00): 0.6% expected and 0.7% prior
ISM Index, March (10:00): 55.0 expected and 55.3 prior
End part 1 of 3
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