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us stock market, trend trading stock
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4/27/05 Stock Split Report Update
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Stock Split Report Subscribers:
Next full report issues Thursday.
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: TTC; CI
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 bounce right back on rising volume as oil prices dive.
- Durable post largest drop in 2.5 years.
- Oil shows second test of $50 in short order as inventories soar.
- Stocks rebound on weak economic data but not enough to change character.
- More economic data and earnings ahead as market tries to shift gears but finds tough going.
Volume up as stocks rebound from higher volume selling.
Just as last week when stocks recovered from higher volume selling with higher volume buying, Wednesday the major indices posted an upside session on stronger trade. It was not a great move with relatively modest gains, but once more stocks whipped right back to the upside on better trade. The bulls and bears are still fighting each other; this is no quiet consolidation you have before a breakout, but hard hitting yet to be decided bout. The bears are still in the lead as the indices continue their downtrends and remain below key resistance, but the upside is still alive as it again met higher volume selling with higher volume buying/short covering.
The news was definitely mixed. Earnings were mixed, guidance was mixed ('old economy' positive, technology disappointing), economic data was again weak, yet oil tumbled on supply. Stocks seemed to respond positively to some negative news (the durable goods report), or more properly the shorts covered in response to the early selling on more negative economic news. It appears that the bad news helped prompt some covering and a modest rally, aided by oil that fell over $2 on the higher inventories.
Basically the market is still in the throes of a bull versus bear fight where the bears are armed with a knife and the bulls have a plastic fork. The upside is scratching at breaking the downtrend, refusing to implode, but it has yet to find the strength to break higher. The volume on the upside is outpacing the downside trade of late, but that has to move into a breakout before it means a lot. It is hard to win a knife fight with a plastic utensil, but you can get a lucky stab in.
THE ECONOMY
Durables tank with business investment leading the way.
March felt weaker at the time and the economic data is bearing it out. Durable goods orders, typically volatile, fell 2.8%, the largest decline in 2.5 years. That bombed expectations of a 0.3% gain. The pain was amplified when February was revised to -0.2% from 0.3%. Take out planes, trains and automobiles and the drop was a tame 1% in comparison (+0.5% expected).
New orders hit its lowest level since June 2004 as non-defense spending ex-aircraft (a.k.a. business spending) plummeted 4.7%, a second straight down month (-2.6% in February). Machinery orders tanked 7.6%. On the other side, computers rose 2.2%, communications equipment rose 5.1%, and primary metals eased higher by 1%.
With any report, one month's data does not mean a whole lot. When the prior months are revised, in line with the current month, however, it starts to take on more significance. Thus with the February and March slowdown in business investment, something expected with the expiration of some nice investment incentives, the economy has hit a slow patch that will likely need oil to fall well below $50/bbl to really impact positively.
That does not speak well for the economy. It is still in decent shape with good growth, but the economists were revising their growth estimates lower based on these back to back declines in durable goods and in business investment. Business investment is what made the difference in the recovery; once incentives managed to induce businesses to start buying again the economy rebounded. If businesses are pulling back on investment even with strong profits and strong cash positions, we can either predict disaster or a slow patch. The latter is more likely: an expanding economy can have slow quarters even as it trends higher just as the market can suffer a few slow weeks to rest and consolidate even as it continues its trend.
Thus we are not jumping over the cliff on this news, but it is clear the higher energy prices are having their impact on consumer and business purchases. Moreover, the market has yet to make a definitive move back to the upside after this 2005 selling. The market looks down the road much further than last months' economic reports, and as noted above, it is still fighting it out near the lows of the year.
Oil, oil everywhere but no gasoline for your SUV.
Crude inventories surged 5.5M bbl when they were expected to rise 0.4M bbl. That was big. Oil inventories are at an 11 year high. Gasoline inventories, however, continued to decline, dropping 0.3M when expected to rise. At this time of the year a build of 1.2M bbl is 'normal.'
Why are gasoline inventories so low? Because despite all of the rhetoric about refineries producing at capacity, they are producing other products. The current refinery run rate is at 91.8%, and experts say another 4% could be squeezed into the system. That is great. Problem is, the profit margin on distillates, despite high gasoline prices, is better. That is siphoning off refining capacity as refiners naturally work the areas that bring the most gain. Thus the shortage of gasoline, a combination of perception and reality, continues. It will take oil prices down in the mid to lower fifties to put a dent in this.
Even with oil sloshing around all of the US ports, China is still using it by the tanker full. That (along with India's usage) is the nagging worry behind a lot of the starch in oil prices. Expectations continue that China's usage has to slow as its government tries to slow its economy some. For the second consecutive month, however, usage was up double digits; that is no slowdown unless usage had been expanding at triple digits.
Thus we could all bathe in oil, pour it over our cornflakes, wash the dog with it and still have plenty of oil on hand and yet prices would remain higher than supply would indicate. Talking with energy traders and supply analysts they say that historical comparisons of supply levels and price would put oil at least in the low forties, and that the perception of a shortage later in the year is propping prices higher for now.
Oil is making a second test of 50 in short order.
It was just a couple of weeks back that oil moved below 50 intraday. That was after the spike to 58/bbl over the past month. That undercut shot prices right back up to near 58 once more. In relatively short order, however, prices have come right back down and are approaching 50 once more.
Some anticipate another drop below 50 as a buying opportunity that will send prices right back up. They have shown much resilience and that could certainly happen. The quick return trip to 50, however, suggests that the upside is losing its momentum. Fifty bounced it higher, but it did not have any staying power and is quickly coming back. That action suggests a potential last hurrah for this round of price increases and that a real drop below 50 is ahead. It will be very telling if it falls further below 50, say about 48ish, and then rebounds but is unable to retake 50. That will set up a further drop.
THE MARKET
NYSE volume moved back above average as the large caps led the market higher. NASDAQ volume was stronger as well, but once more it showed weak overall trade. Higher volume selling, higher volume buying. As noted above, this is no consolidation but still a fight. If this action occurred after a long run as in early 2000, it would be screaming 'get out'. Instead it is occurring after four months of selling.
When you see this kind of volatility after runs higher or lower it indicates an attempted change, the 'change of seasons' discussed over the weekend. On the downside, however, it is not always as clear. Typically a consolidation ahead of a breakout shows quieter action with lower volume and a narrowing trading range. It kind of puts everyone to sleep. That is not always the case; there can be a violent sell off that flushes the system as well, setting up the move higher after most are scared out of the market.
What is likely happening here is an attempted change in direction, but it is still in the fighting stage. Both sides are able to put up rising volume sessions in their favor, and the action varies on a daily basis. The upside days are showing a bit more volume now so there is some leaning toward an upside resolution from the recent lateral move. It will have to prove it, however, because the indices are still in downtrends and below key resistance. If it can make the break higher we will likely then see on of the consolidation types: a quieter test of the recent lows or a nasty plunge. The former is typically more common though the latter are the ones most remember. For now we still have to see the resolution of the current volatile slugfest. The character is still negative, but the upside won't give in.
MARKET SENTIMENT
We talk of volatility in the market, but the volatility indices are not showing much of a rise commensurate with the up and down action day to day. That is one of the 'conundrums' of the current market: volatility is well below historical 'norms', down at levels from 1994, a period when the Fed was hiking rates as well. There is no real historical correlation between Fed hikes and lower volatility, but there is something important to take away from this look back.
In 1994 there were some volatility spikes similar to those seen this year, but levels were low overall. While many point to low volatility as an indication the market cannot rise (if you were looking at volatility to be an indicator you would want to see it in the forties or fifties), as seen in the years following 1994, the market went on to rally out of a volatility level many thought was too low to sustain a rally. Indeed volatility climbed steadily with the long rally until the market eventually rolled over in 2000. What we are seeing now looks to be the reverse: lower volatility readings but high volume intraday volatility as well. Again, that shows the potential for a season change in stocks, i.e. some more sustained upside after four months of selling.
VIX: 14.87; -0.04
VXN: 18.76; +0.08
VXO: 13.9; -0.36
Put/Call Ratio (CBOE): 1.06; +0.28
NASDAQ
Gapped lower once more but rebounded to post a modest, rising volume gain. Looks pretty puny as it did not change the trend, but this action could be quite important.
Stats: +2.99 points (+0.16%) to close at 1930.43
Volume: 1.826B (+5.46%). Volume was up again for the second time immediately following a distribution session. This is the opposite of an accumulation session getting slapped around the following session and it shows some strength building.
Up Volume: 873M (+573M)
Down Volume: 932M (-480M). Down volume still outpaced upside volume so we don't want to put too much into the rising volume session. Still need to see a volume break through the recent highs.
A/D and Hi/Lo: Decliners led 1.24 to 1. Not the definition of strength when an upside session shows negative breadth. That is an indication of more short covering in the big names than of any longer term buying in the index in general.
Previous Session: Decliners led 2.32 to 1
New Highs: 27 (-9)
New Lows: 203 (+52). New lows also rising as the index recovers for a gain. Another indication the action was limited mostly to a few stocks as opposed to the overall index.
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Volume was up on the move higher following the distribution session, but that is a stepping stone. The fight between buyers and sellers is still on, and as the breadth indicates, a lot of the action was still short covering. Nothing wrong with that, but downtrends are punctuated with short covering that takes an index back up to its resistance. In this case that would be the 18 day EMA (1956), and the Wednesday action did not even make it to the 10 day EMA (1942). In short, NASDAQ remains in a downtrend below its 18 day EMA, and it is going to have to put this higher volume upside session to use and show a break above that level and the recent highs (1963) where it made a lower high. It has to break the trend and Wednesday did not do that. It was a possible start when combined with last week's accumulation session, but it is far from definitive.
NASDAQ 100 gained 0.2% as well as it managed a modest gain that failed to change the current downtrend. It has settled into something of a lateral move the past two weeks, holding over 1400 on the lows but below the 18 day EMA (1444) and 1450 at the top of the range. It has to do some serious upside breaking through those levels to start shifting the trend.
SOX closed lower on the session but it did make a comeback from the lows where it held at 383, well above the 380 bottom of its trading range. It is moving somewhat laterally as well the past two weeks, trying to put together enough of a lateral move to make a play for a break higher. Near resistance is 397 with the 18 day EMA. Showing some signs of life, but no more than the other indices, and it is still going to have to show the break higher to start reversing this break lower from the head and shoulders base.
SP500/NYSE
One of the market leaders Wednesday, but that was not saying a tremendous amount. above average volume as it cleared the pock-marked 200 day SMA and heads back toward the neckline.
Stats: +4.64 points (+0.4%) to close at 1156.38
NYSE Volume: 1.688B (+8.03%). Back above average on the rebound as large caps met selling with buying. The upside volume is stronger of late, and SP500 is setting up for another attempt at the neckline of its head and shoulders pattern breakdown. Very good action when coupled with last week's strong upside volume session.
Up Volume: 1.107B (+697M)
Down Volume: 1.005B (-524M). As with NASDAQ, neck and neck on the up and down volume.
A/D and Hi/Lo: Advancers led 1.16 to 1. The weaker small and mid-caps held breadth lower.
Previous Session: Decliners led 2.08 to 1
New Highs: 41 (+6)
New Lows: 124 (+40)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Rallied back through the 200 day SMA (1155), an important level that is the consistency of cottage cheese right now given the continuous moves back and forth through it. The key for the index is using the upside volume as the starting point and then breaking through the neckline (1164) and 18 day EMA (1163) on continued strong trade. The SP500 is in the best position to perform such a move as it made a higher low Wednesday and showed good volume doing so. It is still in the downtrend below the 18 day EMA, but it is building some strength and we cannot ignore that. Its character is trying to change but it has not until it breaks that trend and makes it stick. Again, it is showing a bit more strength as it tries to build toward another attempt at key resistance.
The small caps continue to struggle, slicing through the 200 day SMA (306) Wednesday but then rebounding to close above that level and show a doji on the candlestick chart. That may signal the small caps are finally done playing footsy with this level, but as with the other indices, it has to show a strong move through the 18 day EMA (313) to really start breaking up the downtrend. Even then it will still be a hard fight.
DJ30
The market leader with its 0.5% gain. The large caps reached lower and then rebounded on the falling oil prices. Modest overall gain and volume was even lower and still below average as DJ30 stalled at the 10 day EMA (10,208). In short, it lead in percentage gain alone; its pattern is still weak and its volume is the same.
Stats: +47.67 points (+0.47%) to close at 10198.8
Volume: 248 million shares Wednesday versus 255 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
GDP and the chain deflator are out tomorrow, but this could be a case where the news is already factored in, namely a weaker number now that the March data has come in weaker. The market has been building this in, so if there is decent news stocks could find the resolve to try a break above resistance, particularly SP500.
After four months of basically selling lower there are hints stocks are trying to find the strength to turn higher and challenge the downtrend. Earnings have been disappointing and the market has been roughed up further on the results (it has already sold off most of 2005). The economic data has been disappointing and GDP may finally be the turning point if it disappoints (though March data will not all be in there; thus it could be higher than whispered or feared with downside revisions ahead as the March data comes in). At the same time oil is coming back to $50, and we have a pretty good suspicion that this time it is going below 50 and won't rebound right back up.
Those are positives for the market if you look at it from both a 'bad news is good news' perspective and good news is really good news in other aspects (e.g., oil). The market is trying to show some strength the past week despite the continuation of the downtrend. In short, there are hints of a change trying to take root. At this point, however, they are jut hints, and the market will have to show us more.
How? By seeing some leaders break higher from good patterns on good volume as the indices move higher and through that near resistance on solid trade themselves. That was one of the problems Wednesday: some price moves but no volume to go with it. Many solid stocks remain set up to move higher, however, and even though they did not do so Wednesday, after all this selling the fact that the are still poised to rise dovetails nicely with the indices showing better price/volume action.
It will have to show the move. The indices are in downtrends and one upside day is likely to be met with another downside day since the downtrend remains in place. The leaders will give us an idea of the move is ready, and the indices will confirm it with SP500 and NASDAQ providing follow through sessions to last week's new rebound attempt. We will continue to look at leaders making the move ahead of the market, but that has to be tempered until the indices can finally show a strong volume break higher.
Support and Resistance
NASDAQ: Closed at 1930.43
Resistance:
1950 (top of October to December 2003 consolidation)
The 18 day EMA at 1956 stalled it Tuesday.
Late 2003 highs from 1960 to 1970 and the March/April consolidation low at 1974
Early October high at 1971 and the March low at 1973.
The 200 day SMA at 1990
The 50 day EMA at 1997 and the 50 day SMA at 2009.
Support:
1904 is the April low.
1900 from October 2004, March 2004, October to December 2003 (consolidation range bottom) held on this last test.
1876 from the May 2004 low and November 2003 low.
1860 from the late September 2004 low.
S&P 500: Closed at 1156.38
Resistance:
The 18 day EMA at 1163
1164 is the January/March neckline to the head and shoulders pattern.
1175 second high in that double top that spanned late 2001 and early 2002 is trying to hold
The 50 day EMA at 1176
The 50 day SMA at 1185
March 2003 up trendline at 1193
1196, the mid-January high and the early December peak in the left shoulder.
1200
Support:
The 200 day SMA at 1155 is Swiss cheese.
1137 the recent April low.
1137 the August 2003/August 2004 up trendline
1129 to 1125
1100 to 1095
Dow: Closed at 10,198.80
Resistance:
Some price resistance at 10,250
The 18 day EMA at 10,275
The 200 day SMA at 10,375
10,400, the bottom of the November/December range
The 50 day EMA at 10,444
Price consolidation at 10,600
10,754 is the February high
Support:
10,000 the recent lows.
10,065 from March 2004 lows.
9988 from September 2004.
9933 to 9900
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
April 25
Existing Home Sales, March (10:00): 6.89M actual versus 6.80M expected and 6.82M prior (revised from 6.79M)
April 26
Consumer Confidence, April (10:00): 97.7 actual versus 98.0 expected and 103.0 prior (revised from 102.4)
New Home Sales, March (10:00): 1431K actual versus 1190K expected and 1275K prior (revised from 1226K)
April 27
Durable Orders, March (08:30): -2.8% actual versus 0.3% expected and -0.2% prior (revised from 0.3%)
April 28
GDP-Adv., Q1 (08:30): 3.5% expected and 3.8% prior
Chain Deflator-Adv., Q1 (08:30): 2.1% expected and 2.3% prior
Initial Jobless Claims, 04/23 (08:30): 320K expected and 296K prior
Help-Wanted Index, March (10:00): 41 expected and 41 prior
April 29
Employment Cost Index, Q1 (08:30): 1.0% expected and 0.7% prior
Personal Income, March (08:30): 0.4% expected and 0.3% prior
Personal Spending, March (08:30): 0.4% expected and 0.5% prior
Michigan Sentiment-Rev., April (09:45): 88.9 expected and 88.7 prior
Chicago PMI, April (10:00): 62.5 expected and 69.2 prior
End part 1 of 2
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