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understanding the stock market, top stock pick
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7/12/05 Stock Split Report
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Stock Split Report Subscribers:
Jon Johnson is traveling again this week, once more visiting companies for investment opportunities. This week he is in the Austin area. The reports may be a bit abbreviated, but as always he is sending in his market commentary and play selections.
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: DIOD; BR
Trailing stops: IVGN; CNC
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
Seminar Series Sale!
The new seminar series is scheduled to be ready in July, and we are closing out the inventory on the current series CD's at fire sale prices. Save on the best technical analysis, stock splits, covered calls and options seminars and enhance your understanding of market and stock moves and learn straight forward strategies to put that understanding to work and make more money. A great bargain.
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Seminar Series Sale!
SUMMARY:
- Softer start, modest rally, but looking a bit tired after 4 upside sessions.
- Oil heads back up after its short breather, taking oil stocks with it.
- Market has a strange brew of sectors rising together.
- Small cap bulls are running on financial stations so time to beware?
Stocks continue to show resilience but a bit winded here.
After a softer open stocks came right back to post gains. No big move and no new breakout, but a good recovery after modestly lower open. A stronger market will show these softer opens and then the buyers will re-emerge. Case in point Tuesday.
It was not a great showing of strength, however, and that is not too surprising given this was the fourth consecutive upside session including the reversal session last Thursday. Stocks cannot rally non-stop, and with NASDAQ and SP500 both bumping into next resistance we can expect something of a breather here.
Specifically, NASDAQ came right up to the 2051 level that was an early December 2004 price top while SP500 ran right into none other than its March closing high at 1225. They could not hold the moves and faded some at the close even with NYSE volume rising to just above average. NASDAQ trade, after leading the market Monday, backed off and gave deference to NYSE on Tuesday. Still some decent volume, still some good upside moves, but given the rally and the resistance, stocks did not surge as they have in the prior sessions.
That is not a cause for alarm, particularly given the very decent volume on this recent rebound. It puts SP500 at an important juncture, however, one where it has to try and break up that prior high and potential double top. It is looking much healthier this time around with more volume and some better leadership. NASDAQ made its breakout and the small and mid-caps have surged again to new highs, burying their potential double tops. The large caps remain laggards, and as a final indication that the market has changed its character, a breakout over this level on some volume is a confirmation, albeit late, of the move that has started.
Before that, however, the market likely needs to take a modest breather. A really good rally from the last Thursday reversal was the start of a real character change, but as noted above, even that cannot produce unending upside gains. With SP500 knocking at the March high (the post-crash high), a modest pullback to roughly the June highs at 1220ish to 1210 would set that move up well. In short, all in all the move has been quite solid on some better (though still summertime) trade, there is real leadership in the small caps, mid-caps, and technology stocks, and a broad range of stocks are moving higher, not just energy. The underpinnings for an SP500 breakout are there as well, but it may take a few sessions to pause, catch its breath, and then continue the move.
THE MARKET
MARKET SENTIMENT
Sentiment remains at levels that would indicate a market top, but we must remember that sentiment is a secondary indicator. It can help confirm some weakening of the primary indicators of price & volume action and leadership, but it is not something to base investment decisions upon on its own.
VIX: 10.95; -0.33
VXN: 14.77; +1.2
VXO: 10.82; +0.15
Put/Call Ratio (CBOE): 0.78; -0.03
Bulls versus Bears:
Last week: A bit of improvement in the bulls/bears sentiment indications with both ends moving to levels that are just below those considered bearish. Last week they were clearly in the bearish indications and the market sold. That cleared out some of the bulls and upped the bears, but they are still right at the bearish threshold.
Bulls fell to 53.9% from 55.1%. That put them back at the level of three weeks back and ended the weekly gains at 7 weeks. Bulls bottomed in early May at 43.5%.
Bears rose to 21.4% from 19.1% the week before. That puts them over the 20% level considered bearish. Quite a drop from the 26.1% a few weeks back and the 30% reading in early May.
NASDAQ
Stats: +7.72 points (+0.36%) to close at 2143.15
Volume: 1.658B (-7.81%). After posting its first above average volume session in several weeks Monday, NASDAQ rallied once more but volume backed off, once more to below average levels. This is a possible indication the move is growing a bit tired after this move higher. This does not mean it is going to roll over at all, just take a well deserved breather after its breakout.
Up Volume: 1.035B (-452M)
Down Volume: 601M (+317M)
A/D and Hi/Lo: Advancers led 1.07 to 1
Previous Session: Advancers led 2.32 to 1
New Highs: 196 (-70)
New Lows: 20 (+3)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ rallied to the early December 2004 high (and January 2004 high) and then backed off some on that lower, below average volume. A solid 100 point surge from the Thursday low and it needs a break. The best action would be for NASDAQ to ease back slightly, basically moving laterally and holding onto its gains. A stingy index is the best index. NASDAQ still has to take out this level and then the post-crash high (2178.34 closing, 2192 intraday) to really break new ground, but it is shooting them down one at a time as techs show leadership as the energy stocks rested after their surge.
SOX is not stopping at all. It blew right through 450 the past two sessions, making a new closing and intraday high since late 2004, breaking out of that trading range. This was a key move, covering NASDAQ's back after the tech index joined the small caps, mid-caps and energy stocks in their breakouts. Another major index has joined the breakout group.
SP500/NYSE
Stats: +2.77 points (+0.23%) to close at 1222.21
NYSE Volume: 1.452B (+3.61%). NYSE volume moved higher and slightly above average as the large caps tested next resistance and the small and mid-caps showed dojis on their candlestick charts. Good volume but a bit of churn in the leading small and mid-cap indexes.
Up Volume: 1.18B (-256M)
Down Volume: 724M (+327M)
A/D and Hi/Lo: Advancers led 1.36 to 1. With the small and mid-caps holding steady breadth was modest.
Previous Session: Advancers led 2.52 to 1
New Highs: 399 (-104). Dropped off but still a pretty good reading.
New Lows: 23 (+4)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 has cleared the June highs with some good volume, rallying to the March closing high at 1225. That puts it right at the breakout point from its 6.5 month reverse head and shoulders pattern. After a 42 point move off of the Thursday low (1183.55), however, it is likely ready for a bit of a pause just as NASDAQ. A modest pullback that holds the move over the next few session sets up the breakout attempt.
After leading the market higher the past two weeks SP600 showed a doji Tuesday, an indication of a peak in the current move. Given the run this is not surprising; a surge to a new high as part of a breakout typically leads to a test. The small caps are a bit extended and need to take a breather before extending the move. The index typically drops 6 or so points before resuming the move. That puts it near the 10 day EMA (340.60).
DJ30
The Dow showed a doji of its own on higher but continued below average volume. It cleared the 200 day SMA (10,453) in the rebound rally and now it looks ready to test that move. If it can hold the 200 day and resume the move it too might eventually lend some support to the SP400, SP600, NASDAQ and now SOX breakouts.
Stats: -5.83 points (-0.06%) to close at 10513.89
Volume: 233 million shares Tuesday versus 225 million shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Oil was up Tuesday on word that about 67% of Gulf production was still off line after Cindy and Dennis blew through and one of the biggest rigs for a large field was listing 20 to 30 degrees; if it goes under the expected future production from the Gulf will have to be written down near term. Oil finished the day back over $60 ($60.62, +1.70).
Stocks did not seem to mind much, recovering from a softer open to post gains. After a pullback from the recent surge, energy stocks were back to posting nice gains as anticipated. Money continues to move into various sectors and rotate around the market as stocks are currently under accumulation once more. There is a pretty diverse group of stocks that are all moving higher together (oil, retail, builders, materials, technology), groups that are usually at odds with one another. If energy is high, then energy stocks are up but technology and retail stocks are lower. Right now they are all moving higher together. If you buy into the market forecasting the economy, that speaks to much stronger underpinnings to the economy than the data suggests. Stocks started to rally when things looked pretty ugly back in late April, and rallies are usually born out of turmoil. This one was no different.
Even with this good move, however, the market can get overbought and need a rest. As discussed above we are looking for that to occur over the next several sessions given the tired look Tuesday and the candlestick patterns on SP400 and SP600, the leaders in the rally. It is interesting but not coincidental that the energy stocks rebounded from their rest at the same time the other sectors look ready to take a breather. Again we want to see the indices stingy with their gains and that is what we expect given the improved upside here.
Sentiment is not suggesting a lot of depth to the move, but as noted above, sentiment is a secondary indicator and is not one that you base decisions upon by itself. As long as price/volume action and leadership remains solid that suggests the move still has legs. One thing that is disturbing, however, is the new found love for small caps expressed on the financial stations. For the past year or more small caps have been maligned in favor of large caps. Of course small caps rallied higher and higher while large caps languished. With the small and mid-cap indices moving to new all-time highs ahead of the rest of the market, there are many pundits on the tube lavishing praise on small caps and saying they have at least two more years of leadership ahead.
Hate to hear that. It is something of a contrary indicator when everyone starts to jump on board. It is not a signal that the end is here; sentiment is a poor gauge for timing. It tells you when things are getting overdone, but they can be overdone for a long time before the end hits. Thus we may not like hearing it, but that does not mean the move is over now that it is being recognized. We will continue to look for opportunity in these leaders until they start to show serious distribution and leadership breakdowns.
The economic data and earnings will continue to pick up pace, and we expect stocks to test the recent move before continuing much higher. There are still stocks in buying position, but after this rally we want to see solid moves from stocks that are not extended as of yet. After that we will be looking for pullbacks over the next few sessions to test near support and then resume their moves. When we see them hold and start higher that is when we will once again start moving in heavier.
Support and Resistance
NASDAQ: Closed at 2143.15
Resistance:
2151, the early December closing high and highs from January 2004.
2163, the mid-December closing high.
2178 is the January closing high.
2191.60, the January intraday high.
Support:
2100 was key resistance point, and a successful test sets it up as support.
The 10 day EMA at 2098
2075 to 2078
2051 from February, March price points.
The 50 day EMA at 2058
Early April high at 2021, February lows at 2023.
The April high at 2022 was the higher high point.
The 200 day SMA at 2038
S&P 500: Closed at 1222.21
Resistance:
The March 2005 closing high at 1225.
The March 2005 high at 1229.11
Support:
The June high at 1220
December high at 1217
The February intraday high at 1212.
The 10 day EMA at 1208
1200 is some support
1196, the mid-January high and the early December peak in the left shoulder.
The April high at 1194
The 50 day EMA at 1196
The early May high at 1178
1175 second high in that double top that spanned late 2001 and early 2002
The 200 day SMA at 1178
Dow: Closed at 10,513.89
Resistance:
The April high at 10,557
Price consolidation at 10,600
10,754 is the February high
10,868 is the December 2005 high.
10,985 is the March high
Support:
The 200 day SMA at 10,453
The May high at 10,406
10,400, the bottom of the November/December range
The recent April highs at 10,264
10,065 from March 2004 lows.
10,000 the recent 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.
July 13
Export Prices ex-ag., June (08:30): -0.4% prior
Import Prices ex-oil, June (08:30): -0.3% prior
Trade Balance, May (08:30): -$57.0B expected and -$57.0B prior
Treasury Budget, June (14:00): $28.0B expected and $19.1B prior
July 14
Retail Sales, June (08:30): 0.9% expected and -0.5% prior
Retail Sales ex-auto, June (08:30): 0.5% expected and -0.2% prior
CPI, June (08:30): 0.3% expected and -0.1% prior
Core CPI, June (08:30): 0.2% expected and 0.1% prior
Initial Jobless Claims, 07/09 (08:30): 322K expected versus 319K prior
July 15
NY Empire State Index, July (08:30): 9.0 expected and 11.6 prior
Business Inventories, May (08:30): 0.4% expected and 0.3% prior
PPI, June (08:30): 0.4% expected and -0.6% prior
Core PPI, June (08:30): 0.1% expected and 0.1% prior
Industrial Production, June (09:15): 0.4% expected and 0.4% prior
Capacity Utilization, June (09:15): 79.6% expected and 79.4% prior
Michigan Sentiment-Preliminary., July (09:45): 94.5 expected and 96.0 prior
End part 1 of 3
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understanding the stock market
top stock pick
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