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us stock market, trend trading stock
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4/12/05 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: DGX; UNH; TTC
Trailing stops: 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. You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- Stocks sell further on trade deficit then rebound sharply on FOMC minutes.
- Three reports dominate market action: trade deficit, FOMC minutes, asbestos bill.
- Solid move in trading range starts to shift bias of action even as stocks face the same old problems.
- Catalysts thus far coming from outside earnings but they too could help the market.
Early selling reverses for best upside move in weeks.
Stocks continued the selling into the third session, whipped on by the record trade deficit that topped expectations (it was expected to only be the second largest ever, not the largest). The problem with the trade deficit is not really the deficit, it is the perception that something drastic has to be done and that the Fed is thinking of handling this with higher interest rates. Greenspan touched on that last Thanksgiving in a conference of central bankers when he intimated that higher interest rates would help attract more investment capital to help support the deficit; not a fix, but something to keep funds coming to the US through the lure of higher interest rates. You can see how convoluted, how many tentacles these issues have.
You can also see how much the market fears the Fed. It is similar to how much a taxpayer fears the IRS. Both seem to be into everything now. Greenspan has moved from controlling prices to pushing social security reform, commenting on how we should handle energy, and most recently why Fannie Mae and friends need to be reigned in. They may be laudable goals, but they are hardly the purview of the Fed and its chairman. Thus instead of hearings in front of Congress discussing monetary policy we have hearings asking Greenspan's gut feelings on social programs and budgeting that are Congress' realm. What will happen next year when Greenspan retires? Where will Congress turn? Will it have to actually do thinking for itself? Heaven forbid.
So the trade gap had stocks selling for the third day and doing so on stronger volume. Didn't seem to matter that oil was down almost $2/bbl, hitting near $51. Stocks kept selling until they hit the bottom of the recent range, and that was right at the time the FOMC minutes came out with what many considered a more neutral stance toward faster rate hikes. Yes it somewhat indicated that but it also talked a lot more about inflation threats. It was a mixed message and the Fed decided to hold the line at 25 BP. The market took it as a positive because the market was fearing much worse such as a discussion of removing measured pace and tough talk about quickening the pace of rate hikes. It did not emerge and investors bought on the news.
Stocks jumped straight up off the bottom of the ranges and rallied to close at the highs near the top of the recent lateral consolidation range. Volume remained solid as stocks recovered, moving back above average on both NASDAQ and NYSE. Good reversal action, and volume did pick up late as the volume reading just before the close were well off the final totals. Breadth was poor and the price gains were limited; it was not a follow through session. It was a good move in the trading range, showing some accumulation and helping it transition from the distribution in March. Not great, but not a negative. It was a continued move in improving the market consolidation underway, a necessary and solid step in the right direction.
THE ECONOMY
Trade gap hits record, spooks investors already wary of the Fed.
As discussed above, the Fed hinted in late 2004 it might use interest rates to make the US a more desirable investment destination and thus help finance a widening trade gap. Of course he backed off of that hinting and winking in February when he told Congress that the trade deficit would take care of itself through market forces, i.e. a falling dollar making US goods more desirable and foreign goods less so for US consumers.
Even with Greenspan changing his stance, the market was still very uncomfortable with a record $61B deficit, larger than the $59B expected and the prior record at $59.4B in November. That had investors, already worried about the Fed's last statement and talk of a faster pace of rate hikes, selling first even with the FOMC minutes later that day.
The trade gap is one of those issues that seems to make intuitive sense: if a country gets too extended in debt to others at some point it becomes a credit risk and they no longer want to fund that debt. There has been talk of Japan and Korea looking elsewhere, but they have not faltered at all in their investment in the US. Their economies are in large part geared to feed the US consumer goods, and if the US dollar crashes because they move elsewhere, they are at least shooting their economies in the foot. Many say at some point they will turn away, but no one knows what that point is, and each treasury funding seems to go very well.
We have to worry about the trade gap because so many worry about the trade gap. During the rest of Greenspan's reign, however, we don't because Greenspan took the issue off the table when he stated his belief that it would heal itself without any significant shocks to the system.
Fed appears to turn toward the doves. Could it be getting it right? Nah.
We were hawkish, at least with respect to our views on what the Fed would do. The FOMC minutes released Tuesday had many viewing the Fed as turning dovish. There was some balance in the minutes, much more than we expected, as the Fed said there was no need to move at more than a measured pace for now. The Fed expects total inflation to decline and any rise in the core is expected to be moderate. Moreover, unit labor costs are being held down by modest wage growth. Those definitely do not sound like words the Fed is going to use to bootstrap a 50 basis point hike at the next meeting.
This language led some to say that the Fed was closer to being done than not. Bill Gross said the Fed was not going to raise 50 BP this year, that 3.5% would be the cap on these rate hikes, and the Fed would get to that level this year. If that is the case that is the 'end in sight' type of news that the market needs to look past the rate hikes and rally in anticipation of the time after the Fed has stopped hiking.
On the other hand the Fed talked quite a bit about inflation, much more than it has in any other statement or minutes. The discussion centered around whether a 25 BP or 50 BP hike was needed. While it may have concluded for the prior meeting that it did not need a faster pace at that time, that statement also laid the groundwork for removing the 'measured pace' as it undermined that phrase with the rest of the statement.
The result is that the Fed is still on track to continue raising rates and it is going to do so until it gets somewhere from 3.5% (the low end in our view) to 4.5%. If it sees more economic strength it will be inclined to raise at a 50 BP clip.
Right now, however, the Fed seems to be at least aware that the economy is not gangbusters and that oil will have an impact. At least that is one possible reading from the minutes, but it is not what various Fed governors have been saying of late. The statement came before the recent statements were made. We are hardly convinced the Fed is convinced that oil is a tax and that the economy is slowing. That would take common sense in the first place, something the Fed has not shown in its previous rate hiking. It would also mean the Fed is not target driven, something else it has failed to show in its prior rate hikes. In short, the minutes talk a good game, indicating the Fed is aware of the pressures on the economy and that it does not need to cram rate hikes upon it just because it has a gut about where rates should be. Since that meeting, however, there have been those more hawkish speeches about rate hikes.
Thus while the market was happy for the day as a result of the minutes, it is not clear at all that the Fed has gone soft. Indeed, IF the Fed feels that the market misinterpreted its statement you can bet they will be back on the campaign trail telling us just that. They were just out on the circuit telling us that bigger hikes were likely; if the market doesn't get it we could see them fan out again next week to set the record straight.
The thing is, there are signs of weakness in the economy as discussed over the weekend and on Monday, and you would love to see that the Fed was aware of this given its penchant for ignoring these signs when it has its mind set on getting rates to a certain level. Maybe this is the compassionately conservative Fed that talks of a thousand points of economic light, etc. but then goes about its business as usual just as the current administration. Whatever this is, we don't see it as a repudiation of the statements made since the meeting as those statements were fresh news versus the minutes being old news. Thus we don't expect much change from the Fed and indeed expect to see some out on the campaign trail again getting us ready for faster hikes.
Asbestos liability bill provides a real boost.
One of the less discussed reasons for the rally was the breakup of a logjam regarding asbestos liability. A hot and cold issue in Congress, everyone seemed to think something needed to be done, but as always the issue was how to get there. Wednesday the senate minority leader indicated that he saw no impediment to getting a bill passed this session.
That sent those stocks with potential asbestos litigation exposure, e.g. OI, soaring. There were 20% and 30% moves off the intraday lows on the news. While it is limited to a relatively finite group of companies, the implications are a positive as they are viewed as pro growth moves by the Congress, clearing up a sticking point for a sector of the economy and allowing everyone to move down the road. This kind of action from Congress helps bring more money into the market as opposed to the typical congressional acts that regulate or tax something and thus push money away. Again, this had much to do with the strength of the upside move in the afternoon and helped stocks hold the gains that started after the FOMC minutes were released.
THE MARKET
The Tuesday move was no follow through as the gains were not strong enough and breadth was still modest, reversal session or no. Volume showed some backbone all session: higher when stocks were selling, higher when they rebounded in the afternoon. You could call this a follow through to the rebound that started two Wednesdays back, but it would be classified as a weaker one and thus prone to be shorter and provide less dramatic moves.
It may not have been a quality follow through but it was a quality move in the recent trading range. The indices have moved from distribution, to neutral, to now showing some accumulation with the Tuesday run higher on rising, slightly above average trade. This is improvement, and it could lead to a real upside breakout. The intraday action was solid, the overall action has been improving, and the market received a catalyst not from earnings but from one of the major issues confronting the market this year, i.e. the Fed and interest rate hikes.
It did not hurt at all that oil prices were lower by almost $2 early in the session, approaching $51/bbl. It rebounded some but still closed at $51.86, down 1.85/bbl. That is moving in the right direction, and a break below 50 would be a bit psychological boost. Thus while the recent drop has been pretty hard the past week, it will likely slow as it nears 50, even trying to bounce before it seriously attempts to fall through that point. It still has to get to the low forties to rally make a difference for prices this summer; at that point gasoline prices would see some relief even if that refining capacity remains steady. Just as at some point the economy balks at higher energy prices, at some lower point prices tied to oil will crack as well. That point is likely around $42/bbl and a slip to $38/bbl would be huge. It is not likely to happen, and that is why it would be so huge.
Market Sentiment
VIX: 11.3; -0.68
VXN: 16.24; -0.66
VXO: 11.64; -0.95
Put/Call Ratio (CBOE): 1.18; +0.16. Put activity jumped as stocks sold and then rebounded. Buying on the fall and selling them on the way back up.
NASDAQ
A reach to the bottom of the recent trading range and then rebounds for a positive close on a flip/flop in volume.
Stats: +13.28 points (+0.67%) to close at 2005.4
Volume: 1.949B (+39.98%). After year lows for trade Monday, volume shot back above average. It was higher on the selling and it was also higher on the afternoon rebound. Higher volume reversals are good indications, particularly when they occur off of support such as the bottom of the current trading range. It shows that the buyers stepped in at that support and drove stocks back up to close.
Up Volume: 1.343B (+810M)
Down Volume: 578M (-255M)
A/D and Hi/Lo: Advancers led 1.21 to 1. Yes it was a reversal so breadth would lag, but it was still puny breadth, hardly what you would need on a follow through session to the Wednesday turnaround two weeks ac.
Previous Session: Decliners led 1.85 to 1
New Highs: 30 (+5)
New Lows: 141 (+37)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Hit the bottom of the trading range at 1970 for the third time since the range began in late March and then shot higher for a 35 point reversal. It cleared 2000 but is still below the 18 day EMA (2006) after moving just past that level in the last hour. It remains in the current trading range, but the volume has been in transition from distribution to equilibrium, and now this move puts a marker in the accumulation column. It does not change the character of the index in its current consolidation; it is a continuation of that consolidation and a positive development for upside moves. It will likely still have to work on the consolidation before it is ready to make a serious run at the 50 day EMA (2030). In short it was part of a continuing basing process that is trying to hold the 200 day SMA (1993) and set up the next move. Not a bad session at all in that light.
NASDAQ 100 matched overall NASDAQ in the gains and move over the 200 day SMA as it continues in the recent range. It was not a large cap versus small cap move as far as techs were concerned. Indeed breadth was so tame it was more of a large cap move.
SOX lagged all session, ripping below 410 intraday, falling to 403 on the low. It then reversed sharply to close above that support as well as the 200 day SMA (411.57). That kept it in the lateral consolidation above 410 though it remains at the lower end of the range.
SP500/NYSE
Breached 1175 intraday but reversed to post a solid gain on rising volume, just missing taking out the 50 day EMA.
Stats: +6.55 points (+0.55%) to close at 1187.76
NYSE Volume: 1.584B (+29.59%). After that low volume Monday the gains look huge. In reality it got volume back to average after a week long hiatus. That made it look like a bold move higher. It was a good reversal that shows some accumulation to go along with the modest accumulation session last Thursday. A turn for the better in the price/volume action continues.
Up Volume: 1.264B (+627M)
Down Volume: 707M (-176M)
A/D and Hi/Lo: Advancers led 1.75 to 1. By the end of the session the small caps had turned from laggards to leaders and helped pace a better breadth reading. Still on the squeamish side for a strong follow through session.
Previous Session: Decliners led 1.3 to 1
New Highs: 63 (+14)
New Lows: 89 (+13)
The Chart: http://www.investmenthouse.com/cd/^spx.html
As with NASDAQ, a reach down toward the bottom of the range, piercing 1175 support on the low but then shooting back higher to close just below the 50 day EMA (1188). It cleared that level in the last hour but faded just before the close. It is just off the recent highs at 1192 hit last week as it rallied and then reversed. It has come right back, though it took a major catalyst to turn the morning selling that was knifing the index lower. It is over the up trendline (1185) as well, though it has traded all around that level the past three weeks. It still needs to provide a clean breakaway move to the upside, clearing the 50 day SMA (1194.35) as a start. The pattern is still toppy with a lot of overhead resistance at 1200, 1212, and 1217 before it even gets to the March high. It was weak and diving lower before the reversal as the head and shoulder pattern was close to being consummated. A good recovery as it too works on the transition, but it also has that toppy pattern to deal with.
The small cap SP500 reached to the trading range lows and then rebounded as well, posting the best percentage gain of the indices. It is still below the 50 day EMA (323.02) and is still in the right shoulder of a head and shoulders base. It has to clear 325 easily to start breaking the pattern up; it too has a lot of overhead resistance.
DJ30
Reached all the way to the 200 day SMA again on the low, undercut it, then reversed almost 150 points to the close. It tapped at the 18 day EMA (10,522) on the high just as it did last week, fading back slightly to close. Still in the lateral move over the 200 day SMA and showing improving price/volume action as it does. A toppy pattern that is trying to work laterally and get rid of the overhead supply as it sets up a short double bottom pattern that past three weeks.
Stats: +59.41 points (+0.57%) to close at 10507.97
Volume: 267 million shares Tuesday versus 192 million shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Those were indeed heavy hitting economic reports Tuesday, driving the market in both directions. We have a feeling that the Fed minutes were somewhat misinterpreted and that the Fed will be out over the next few weeks clarifying where it stands, particularly with the next Fed meeting in early May.
The reports do not stop as retail sales are out Wednesday before the open, more important news as we try to ascertain what impact higher energy prices have on the consumer. Of course the data is stale by the time it hits, but oil prices were not low in March so there is value in the report.
Tuesday investors showed they were ready to buy (and shorts were ready to cover) on some positive news about the Fed and future interest rates hikes. As noted, we are not convinced this was the Fed's intention with its minutes, particularly given the statements subsequent to the last meeting. Thus we have to be cognizant that there may be some vinegar mixed into the story over the next couple of weeks. We also have to note that strong upside sessions have not led to continued upside moves of late. Of course that is part of the basing process as stocks bounce around in the range.
With price/volume action improving inside the base, however, the market continues the attempt to transition from distribution to neutral to accumulation and eventually make the break higher. It is doing that as it tries to work past the overhead supply, so it is closer to the move than it was. It still appears to be too early to try a serious upside move, but when you look at late January stocks were in a similar pattern and then rallied through February to the early March peak.
We thus keep looking at the leaders that have made good pullbacks or tests and set up the next move higher. They were doing that Tuesday with the early drop and rally back. Those leaders provide some of the better vehicles to ride any move higher. At the same time we also continue to look at the weaker stocks that used the rebound to move up in their downtrends and set up their next move, that is, back to the downside as they continue their trend lower. The action has improved toward the upside, but Tuesday was no breakout or follow through session. Still time to be patient and look at those few stocks that are positioned to give us the next move, up or down. Patience and then act when we see the move. It is not yet a market you can just buy into generally. Let the stocks set up and let them show us the moves.
Support and Resistance
NASDAQ: Closed at 2005.40
Resistance:
The 18 day EMA at 2006.
The 50 day EMA at 2031
The 50 day SMA at 2040
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 is still loose support.
Early October high at 1971.
Late 2003 highs from 1960 to 1970.
1954 from October as well.
1921 at the September 2004 highs.
S&P 500: Closed at 1187.76
Resistance:
1185, the top of the November consolidation range.
The 50 day EMA at 1189
The 50 day SMA 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:
March 2003 up trendline at 1185
1175 second high in that double top that spanned late 2001 and early 2002 is being boxed around of late.
1163 is minor support.
1154-1157 tops from early 2004.
The 200 day SMA at 1153
Dow: Closed at 10,507.97
Resistance:
The 18 day EMA at 10,522
The 50 day EMA at 10,593
Price consolidation at 10,600
The 50 day SMA at 10,660
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 10,381
September high at 10,342.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
April 12
Trade Balance, Feb (08:30): -$61.0B actual versus -$59.0B expected and -$58.5 prior (revised from -$58.3B)
FOMC Minutes, March 22 (2:00)
Treasury Budget, March (14:00): -$71.2B actual versus -$69.8B expected and -$72.7B prior (revised from -$72.9B)
April 13
Retail Sales, March (08:30): 0.8% expected and 0.5% prior
Retail Sales ex-auto, March (08:30): 0.5% expected and 0.4% prior
April 14
Initial Jobless Claims, 04/09 (08:30): 330K expected and 334K prior
Business Inventories, Feb (08:30): 0.5% expected and 0.9% prior
April 15
Export Prices ex-ag., March (08:30): 0.1% prior
Import Prices ex-oil, March (08:30): 0.2% prior
NY Empire State Index, April (08:30): 18.0 expected and 19.60 prior
Industrial Production, March (09:15): 0.3% expected and 0.3% prior
Capacity Utilization, March (09:15): 79.6% expected and 79.4% prior
Michigan Sentiment-Prelim., April (09:45): 91.7 expected and 92.6 prior
End part 1 of 3
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