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trading strategy, money investment
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3/31/05 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: ANTP
Buy alerts: PIXR; ENER; LF; PSUN
Trailing stops: None issued
Stop alerts: HP
SUMMARY:
- Stocks slip lower on rising trade ahead of jobs report.
- Jobless claims jump ahead of jobs report.
- Spending rises, incomes fall as PCE hits Fed target for year.
- Chicago region optimistic about manufacturing but factory orders modest.
- Stocks try to play it low key ahead of jobs report but can't help but sell lower on rising trade.
- With quarter over, jobs report will set the pace and could provide opening for new money looking for a home in the new quarter.
Wednesday bounce stalls ahead of employment report.
Stocks tried to move higher early, but some mixed economic data before the bell and a half hour into trading kept it off balance ultimately sent it lower for the session. The primary concern was the PCE that has already hit the Fed's target year over year. The market may have overcome the mixed data that was still overall positive, but with Goldman talking about a 'super spike' in oil anywhere from $80 to over $100, investors had to deal with energy issues again in addition to the threat of inflation and the Fed's rate hiking response.
That along with the Friday jobs report was enough to keep stocks off balance. They made an afternoon attempt to rally but that choked off in the last hour as stocks resumed their overall trend of selling into the close. Not a rout, but definitely not the Wednesday sprint higher into the close. Indeed, volume was up as stocks slipped lower, continuing the habit of selling on stronger volume than it rises. Thursday was not a clear cut distribution session as stocks tried to rally but could not find the footing ahead of the jobs report, but it never pays to rationalize distribution. That is particularly true when the patterns are at points where they have to show something or continue the selling. The jobs report will give investors a sounding board as to where stocks go near term, but there is always that backdrop of energy and the Fed as seen again to a certain degree Thursday.
THE ECONOMY
'Super Surge' of oil predicted by Goldman Sachs.
We are not going to spend a lot of time on this as we have discussed oil since before the start of the year. It is one of the major factors facing the economy. Thursday GS said oil was going to go into a 'super spike' to $80 to $100/bbl due to supply and demand by 2007. The headlines left off the 2007 part and focused on the dollar amount. That helped spike oil stocks at the open after they were on the ropes Wednesday. Last time oils were in trouble they received help from the Saudis with the 'we will cut production if we think we need to' statement earlier in the year.
The first thing that comes to mind (at least ours) is that when you see extremely high or low predictions you are getting closer to some extreme. Oil is still demand driven with respect to the future even though current supplies are quite high, so we are not saying oil is going to crash to $25/bbl. If it does then that probably means something has turned quite wrong with the world economies. It does suggest that oil is ready to fade back toward the $45/bbl niche. Of course the last time oil was ready to roll over it found new life and ran to $46 from $40. From there it made the more recent hype spike to the upper 50's. Again, it got some life support Thursday that may help it avoid another drop near term, but when you see calls for $100/bbl through 2007, that is the same 'no end in sight' mindset that caught the energy industry by surprise when it collapsed in the 1980's.
Jobless claims waffling.
After three strong weeks near 300K, jobless claims have rebounded, rising to 350K versus the 320K expected and 330K the prior week. The problem that the jobs market is going to continue to face is large corporations still laying off employees. They are selling into the economic rally so to speak, still streamlining the workforce with the use of more technology with the profits over people strategy that has helped grow profits substantially.
Thus the employment data Friday may not be as great as originally thought but still probably good enough to keep most investors comfortable with the future economic growth. It will also convince many that the Fed is going to take it easier on the rate hiking. That will help short term, but it won't keep the Fed from hiking more.
Personal income lower, spending higher, personal consumption hitting Fed's target.
Case in point. Thursday it was reported that February personal income rose 0.3% versus the 0.4% gain expected. At the same time spending rose 0.5%, right as expected. More spending than earnings. Nothing new there, and despite what some where saying, according the Fed's wage driven inflation theory it is not inflationary. We don't believe it reflects the real world, but once more, for the time being the Fed is the real world for the economy.
On the other hand, the PCE (personal consumption expenditures) the Fed is in love with rose 0.2%, a bit lower than the 0.3% in January. Even with this drop, however, year over year it has hit the 1.7% level. That is the Fed's target for the PCE. That does not mean the Fed wanted it to get to that level; it means that when it gets to that level the Fed will feel that inflation is getting too rambunctious. That means its carefully worded statement last week takes on even more meaning as it will be ready to start clamping down on the 'runaway' consumer once more, using continued and more intensive rate hikes.
At best the first hikes are just starting to impact the economy, yet the Fed is starting to chafe because things are not working fast enough. To slow things quickly it will have to really ratchet up the intensity of the hikes and drain off the money supply more. Then the rate hikes start to hit and there is a pile-up. That is what happened in 2000 and in many other instances in the history of this fine institution. This is exactly our worry we voiced to start the year as this is the other major factor impacting the market this year. With the Fed saying it is just getting ready to really start the rate hikes and with no end in sight, that is bad medicine for the market, keeping it in a struggle to advance in a sustained manner.
There are a lot of economic bulls out there touting the economy. Hey, it is no shrinking violet at all. 3.8% GDP is solid, 4.4% year over year. It is expected to fall to 4% in 2005. Its not caviar, but it also isn't chopped liver. There is also a hint of weakening in the economy in the face of the higher oil prices. Housing is solid but it has already started to plateau. The consumer is strong but gas prices are going to top $3/bbl this summer and prices are going to rise; the most recent business survey says that over 50% are starting to pass along their higher costs to consumers. Those are going to impact the consumer in the summer and fall.
It will be up to business, and it is still expanding, to keep things going. The Chicago PMI Thursday shot higher to 69.2 from 62.7, much better than the 60.5 expected. Employment jumped to 66.0 from 57.7, prices paid eased to 68.2 from 70.1, and new orders jumped to 76.7 from 68.5. Factory orders, however, slipped in February and January. February saw a 0.2% gain, but well off the 0.5% expected. January was revised lower to no gain from the 0.2% bump previously reported. Non-defense capital goods ex-aircraft fell 1.7% after a 4.4% January gain. That makes two down months in the last three as the expiration of some of the tax incentives is indeed impacting business investment. Non-durable orders fell 0.2% from +1.4% in January. There are signs of slowing in the business side as well, though they are at the very early stages and may just be a blip. Business could turn out just fine, but a one-sided economy as seen in 2000 through early 2003, is not the best economic world.
THE MARKET
Thursday gave a bit to both sides of the fence. The market lost ground and it did so on rising volume as stocks suffered some more distribution. The losses were minimal, however, and the mid-caps were actually higher. With NASDAQ and SP500 holding over near support and losing very little ground, the higher volume was not necessarily a bad indication. It was not necessarily a good indication either and thus the market has not changed its character. It was basically holding steady ahead of the jobs report.
We note that the small and mid-caps were the leaders though they are still below their 50 day EMA. Part of that leadership was the recovery of some of the small oil and gas stocks that had been in a slide of late. Their recovery off the Wednesday lows and modest rally Thursday on the Goldman 'super spike' story helped keep breadth positive on NYSE as the small and mid-cap indices are populated by a lot of small energy stocks. So, breadth was not bad but there was a reason: recovery of energy stocks as oil reversed its losses and closed over a dollar higher.
Thus stocks are not in bad shape heading into the jobs report, but they are not in great shape either. Wednesday did not reverse the negative character as stocks rallied on lower volume. Thursday did not help as stocks sold on higher volume; those that rose did so because oil was up and the energy stocks recovered. The market basically held its position and its character, leaving still in the game for an upside follow through to the Wednesday reversal at some point next week. That would show buyers are returning to the market. Of course we would need to see strong volume and breadth on the move.
That is getting ahead of the story. Stocks still have to get through Friday, though Friday's after this quarter end typically are decent moves. The market has yet to change its stripes, and a low volume bounce Friday keeps it alive for a follow through next week, but it also sets it up for further downside. Some leadership appeared again Thursday, but thus far there has been nothing to change the downside character.
Market Sentiment
Bulls versus Bears: Bears continued their climb higher the past week, clocking in at 28%, up but just a fraction of a point as opposed to their big jump the week before. That puts them significantly above the 20% level that is considered bearish, but still well below the 50% reading that is a real bullish indication. Bulls were lower once more, falling to 51.6%. That is below the 55% bearish level as well, but as with the bears, the drop was modest. Still trending lower toward the bears, but they are still 23.6 points apart. In late August 2004 bulls hit 40% and bears hit 30% and that was enough to help trigger the move to the end of the year. This would indicate there is still more work to do for this indicator.
VIX: 14.02; +0.38. There is still work to do on volatility as well. It is not near levels that would be considered extreme or that would produce an interim bounce of nay significance.
VXN: 17.65; +0.29
VXO: 13.62; +0.32
Put/Call Ratio (CBOE): 0.73; -0.1
NASDAQ
Techs closed lower, but where able to rise from a test of the 200 day SMA intraday. Volume was up as they held support and traded in a narrow range, and that is not necessarily a negative.
Stats: -6.44 points (-0.32%) to close at 1999.23
Volume: 1.837B (+3.05%). Volume was up on a loss, technically distribution. As it held the 200 day SMA in a narrow range, we don't want to read too much into it. We also, however, don't want to read in hope when it is not there. We note NASDAQ could not muster stronger volume when it rallied Wednesday, a telltale sign of its continued lack of strength.
Up Volume: 734M (-706M)
Down Volume: 1.021B (+800M)
A/D and Hi/Lo: Decliners led 1.02 to 1. Flat on a down session. Not bad, not great.
Previous Session: Advancers led 2.24 to 1
New Highs: 50 (+17)
New Lows: 96 (+7)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Holding over the 200 day SMA (1993), tapping that level on the low and rebounding some on the close. Higher volume in a narrow range over support can be a positive even if the session shows negative prices. It is still below the January low (2008.70), but it has set up the possibility of a double bottom with the undercut of that level. Once more you don't want to read into a pattern what is not there. The double bottom is a possibility; there is still significant overhead resistance before it even gets back up the breakout point near 2100. Namely the 50 day EMA (2042).
NASDAQ 100 is hanging onto the 200 day SMA (1482.59), falling aback to that level and holding on rising though still below average volume. Same pattern as NASDAQ. QQQQ is still struggling below the 200 day SMA, but it fell Thursday on lower volume. It still looks quite weak here, however, and may lead the rest of the techs lower.
SOX sold back modestly but held easily above the 200 day SMA (413) after turning back below the 50 day EMA (421.31). As noted, it is in better shape than its friends.
SP500/NYSE
Marginal loss as volume was higher again and still above average volume as the index held just over its March 2003 up trendline. It is in position, but can move either way from this ledge it is sitting on.
Stats: -0.82 points (-0.07%) to close at 1180.59
NYSE Volume: 1.829B (+7.13%). Above average volume for the third consecutive session. Tuesday it was higher on a dive lower. Wednesday it backed off on a rebound. Thursday it rose again as the index churned after the bounce. That can mean it is ready to continue the move, but as of yet the price/volume action has not shifted gears to bullish.
Up Volume: 1.182B (-590M)
Down Volume: 1.009B (+667M)
A/D and Hi/Lo: Advancers led 1.59 to 1. Thanks to mid-cap and small cap strength breadth was positive.
Previous Session: Advancers led 3.24 to 1
New Highs: 45 (+19)
New Lows: 40 (-12)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Showed a doji as it sat on top of the March 2003 up trendline (1179.50) and the January lows. Holding that up trendline and the prior low was good to see, but it remains in a steep decline from the March peak and price/volume action has not shifted into accumulation mode. It could get news it likes and rally up to the 50 day SMA (1193) and even 1200, but that will be the point it is challenged on this rebound attempt, particularly if it does not get the volume it needs to the upside.
Not a very impressive session for the SP600 though it was just fractionally lower. After the Wednesday sharp recovery it is still below the 50 day EMA (323.93), showing a doji at the 10 day EMA (322.22) Thursday. It has pulled the rabbit out of the hat before, so we won't be too surprised if it rallies through the 50 day here. Okay, we will be surprised; if energy stocks continue to recover, however, it can at least challenge that level. Otherwise it still looks quite precarious here.
The mid-cap SP400 managed to move through its 50 day EMA (657.92) Thursday on the rising NYSE volume. It still has hurdles of its own, but the recovery of the small oil and gas stocks helped it right back up after the 50 day MA breach.
DJ30
Quiet day for the blue chips, stalling out on low volume at the 10 day EMA (10,533) and fading modestly. DJ30 is attempting to keep alive over the 200 day SMA (10,378) as it tests that support as well as the January lows. It is in good position to bounce toward the 50 day EMA (10,639), but from there whence? Its pattern is a broadening top, and unless it, along with the rest of the market, shows strong gains on solid volume, a bounce from here basically sets up more downside to follow.
Stats: -37.17 points (-0.35%) to close at 10503.76
Volume: 259 million shares Thursday versus 276 million shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Jobs and national manufacturing will top the agenda Friday . . . along with oil and the Fed. Every piece of data is viewed through those two prisms. So there will be further comment on how the Fed will react to the data and how oil prices will impact the entire picture. It is no secret to us that the Fed will continue to raise rates and do so faster in the near future regardless of what the employment data says. The Fed has made up its mind on inflation, and it has taken out the broadsword to try to hack it back.
That is the background to all the other data. Let's face it. The economic data, even if it is weakening, won't fall enough to sway the Fed from continuing to take on inflation. That was the case in 1999 and 2000 as the Fed tightened into a weakening economy. This time around there really is inflation to deal with as this recovery started on too much demand and not enough supply. That may finally be rectified as the consumer slows into the summer with $3/gallon gasoline and producers passing prices on to consumers.
Nearer term the market may find something it likes in the jobs data and continue the Wednesday bounce as new money comes back in to start the new quarter. The session following the end of Q1 tends to be higher based on that new money needing somewhere to go. The jobs data could sway that, but if it hits the number it will be considered just right, and if it misses by a bit that won't hurt either. Basically the market has bounced on low volume after three weeks of tough selling, and it is at a point where it can bounce a bit more or go ahead and give up the Wednesday move. It is due more upside on a relief move though we don't expect any continued move to show any volume. That would not change the market's negative character and would work to set up the next downside move.
Thus we will continue to be selective on the upside and watch for some downside to set up if a move higher cannot attract volume. There is a chance it can get some volume with the jobs report and the beginning of a new quarter. Thus it is a time to be patient and let the market show more of its hand here at a juncture where it has to make a move or remain status quo, i.e. its current trend lower.
Support and Resistance
NASDAQ: Closed at 1999.23
Resistance:
The 18 day EMA at 2015.
The 50 day EMA at 2042
The 50 day SMA at 2045
2050-54, prior resistance and the June high is stronger
2066 to 2070, the bottom of the January lateral move.
2100 from February and March.
January high at 2154 (early 2004 high)
Support:
The 200 day SMA at 1993.
Early October high at 1971.
Late 2003 highs from 1960 to 1970.
1921 at the September 2004 highs.
S&P 500: Closed at 1180.58
Resistance:
1185, the top of the November consolidation range.
The 50 day SMA at 1193 and the 50 day EMA at 1191.
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:
March 2003 up trendline at 1179.50
1175 second high in that double top that spanned late 2001.
1163 is minor support.
1154-1157 tops from early 2004.
The 200 day SMA at 1151
Dow: Closed at 10,503.76
Resistance:
The 10 day EMA at 10,533
Price consolidation at 10,600 level is a key level.
The 50 day SMA at 10,657
The 50 day EMA at 10,640
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 10,378
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): 102.4 actual and 103.0 expected and 104.4 prior (revised from 104.0).
March 30
GDP-Final, Q4 (08:30): 3.8% actual and 4.0% expected and 3.8% prior
Chain Deflator-Final, Q4 (08:30): 2.3% actual versus 2.1% expected and 2.1% prior
March 31
Initial Jobless Claims, 03/26 (08:30): 350K actual versus 320K expected and 330K prior (revised from 324K)
Personal Income, February (08:30): 0.3% actual versus 0.4% expected and -2.5% prior (revised from -2.3%)
Personal Spending, February (08:30): 0.5% actual versus 0.5% expected and 0.1% prior
Chicago PMI, March (10:00): 69.2 actual versus 60.5 expected and 62.7 prior
Help-Wanted Index, February (10:00): 41 actual versus 41 expected and 41 prior
Factory Orders, February (10:00): 0.2% actual versus 0.5% expected and 0.0% prior (revised from 0.2%)
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): 220K 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): 33.7 expected and 33.7 prior
Michigan Sentiment-Rev., March (09:45): 92.5 expected and 92.9 prior
Construction Spending, February (10:00): 0.6% expected and 0.7% prior
ISM Index, March (10:00): 54.9 expected and 55.3 prior
End part 1 of 3
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trading strategy
money investment
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