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us stock market, trend trading stock
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4/01/06 Investment House Alerts Report
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IH Alert Subscribers:
PART 3 containing new plays will be forwarded later today.
MARKET ALERTS:
Target hit alerts: CTXS
Buy alerts: PALM; TOMO; DRIV; RMD
Trailing stops: None issued
Stop alerts: None issued
SUMMARY:
- Stocks coast quietly out of the week and quarter.
- January and February PCE tame, indicating Q4 jump was indeed storm related.
- Michigan sentiment jumps past expectations
- Chicago manufacturing jumps and factory orders making a comeback.
- Market set up nicely for the new quarter.
Quiet end to the quarter leaves stocks set up well.
It had the potential to be a wild session what with the end of the quarter and GOOG's addition to the SP500 to officially start after the close. GOOG's market cap is so high that all other stocks in the SP500 would undergo at least some selling as index funds make room for GOOG and to reflect the percentage makeup of the index. Thus a stock could be in great shape, but its status as an SP500 member would subject it to selling pressure simply because a mega cap stock was being added to the index.
Thus SP500 lagged all session, struggling to hold positive (it did not) as its stocks suffered continued selling pressure all session. It was not, however, a wild session. Indeed it was a rather boring session with all but the mid and small cap indices closing lower. No major losses, mind you, just modest trading that took a late dip or otherwise NASDAQ would have closed positive.
The session started out decently. The market struggled Thursday after the Q4 core PCE was revised higher to 2.4% from 2.1%. Inflation, famine and pestilence were sure to be on the horizon and the market stumbled around once more. Friday the February core PCE fell back to 1.8%, well within the Fed's 'comfort zone.' That news buoyed stocks and they opened higher. Then the Michigan sentiment report jumped past expectations and the Chicago manufacturing support did the same. That offset the early optimism. That along with continued high oil prices (though lower after Iran said oil was not a weapon and Nigeria tensions eased) and rising bond yields put the kibosh on the move, and after the stronger start stocks wandered lower and lower all session.
Volume fell on NASDAQ and was basically flat on NYSE, the latter obviously pushed higher by the SP500 rebalance activity. Breadth was flat on NYSE and decent on NASDAQ (3:2). The indices mostly held their recent range with NASDAQ holding onto its Wednesday high volume breakout. Basically it was more good action to end the week, month and quarter, leaving the market set up nicely for the start of the new quarter and earnings season, not too high and well rested to move forward.
Quarter was the best in years but the action was very choppy.
If you listen to some of the financial stations you would have thought Q1 was the best investor quarter since late 1999. If you talk to a lot seasoned traders and managers, however, Q1 was tough. Sure stocks such as BRCM and MRVL made it easy at the start with big earnings helping drive them skyward. Unfortunately for them, that was the end of the move. Yes we have had some great movers the entire quarter, but many stocks rode a roller coaster for the quarter as the indices moved up and down until SP500 and DJ30 finally put together a breakout in early March.
It did not help that the action was suspect at times with distribution and then a low volume rally and breakout by the NYSE indices. As noted, that occurred later in the quarter, after the choppy action preceding it.
In any event, the indices held up and NASDAQ even delivered a strong breakout once more. We say once more because this is a continuation of NASDAQ's mid-November breakout from a two-year ascending triangle that formed after the strong 2003 surge that followed the October 2002 bottom. That was a 72% run (1250 to 2153) in 10 months (March 2003 to early 2004) in anticipation of the strong economic gains, and NASDAQ needed to consolidate that move. It took almost two years, but it made the base and delivered the breakout in Q4, even after the Gulf storms and their economic impact. After a choppy period to consolidate that breakout, NASDAQ is making its next breakout. As history tells us, that is a good sign for the market overall.
Thus the quarter may have been choppy and frustrating at times, but it appears to have delivered the goods right at the end when NASDAQ made its high volume move. That helped corroborate SP500's and SP600's low volume breakouts, and indeed leaves the market in good shape heading into the new quarter. Now we need to see NYSE deliver on some upside volume was well. As always, it is just a pretty picture until it shows us the move. NASDAQ did its part, and an SP500 rebound from this test on some serious trade would be quite nice. Of course this market hates to deliver the obvious and as usual, we learn to live with it.
THE ECONOMY
Q4 GDP says PCE is up while January and February say it is no threat. What the PCE is going on?
It is really rather simple, but in the market things tend to get jumbled in the short term. That causes overreactions and jumbles the picture even more. While the Q1 PCE (the Fed's favorite measure of the prices consumers have to pay for goods) jumped to 2.4%, as discussed Thursday, there was a direct cause for that: the Gulf storms had more immediate impact than widely believed. Basically much of the southeastern US was shut down to manufacture and flow of goods (e.g., several ports were offline) and that skewed demand past supply in the rest of the nation.
When supply and demand get thrown out of balance and you have excess liquidity, that is when you get inflation. That is so basic, yet it is so misunderstood or forgotten in the heat of the moment. If supply is not curtailed, demand can run rampant and yet inflation appears only in the Federal Reserve's dreams. Businesses go where the money is, and if there is demand it will allocate the resources necessary to meet that demand. Indeed, business will create its own demand when it comes up with things such as the personal computer or iPods and downloadable songs.
After the Gulf storms, supply was curtailed but demand remained relatively strong. Thus the spike in the cost of goods and services consumers desired. Four months later, in January 2006, the balance had been restored and the core PCE faded to a 1.8% growth level. The February data released Friday corroborated the January fade. The trend again looks positive barring some outside influence again or the Fed choking off the funds needed by the supply side in order to meet demand.
That is one of the ironies of Fed action. In 1999 and 2000 the Greenspan was targeting the 'runaway consumer' and thus raising short term interest rates. In reality the Fed's actions impacted businesses, i.e. the supply side, much more as the Fed raised the cost of investment capital to prohibitive levels relative to where the economy was at the time. Further, the Fed drained the money supply dry; even if you wanted to borrow at the higher rates there was no money to borrow. On top of that the federal budget surpluses caused by too high of tax rates that bled much needed real money (it was in the pocket until it was taxed away) from the economy. Venture capital dried up. Without the capital needed to keep up investment in economic growth the supply side went dormant. The only thing that kept inflation from exploding was the precipitous plunge in GDP growth as the economy shut down by the end of 2000 in one of the fastest drops since the Great Depression.
Sentiment continues to improve.
Earlier in the month the Conference Board reported a surprise jump in confidence, rising to 107.2 from 102.7 in February and well above forecasts. Friday the final March sentiment reading from the University of Michigan showed a solid 88.9 reading, topping the 86.7 February final and expectations of 87.0. Current conditions jumped to 109 from 105. Expectations rose to 76 from 74.5 (74.8 expected).
The gains were attributed to some supposed flattening in energy prices as well as gains in employment. The former is obviously not the case now with both oil and gasoline surging past their prior levels. As for employment, jobs are being created faster, but it is also the perception of the market by the consumer. Recall that all of the sudden it was a given that the economy was strong and creating jobs. This was after 3 years of badmouthing the level of job creation. Workers now view the job market as better off given all of the positive press, and thus the positive indications in the sentiment reports.
All of this simply means that consumer confidence as measured by most surveys is easily strong enough to support continued consumption. The real threat we see immediately ahead is the rise in gasoline prices. While the March jump in Michigan sentiment was partially attributed 'flattening' energy prices, they jumped at the end of the month and gasoline rose. The gasoline rise was mostly attributable to the required changes in blends, but we are close to the storm season, and any threat will send prices even higher. Once more we see the choke point at $3/gallon as we anticipated late last summer. Sure enough when prices hit $3 demand dropped off. The economy is in for a real test this summer as prices flirt with and surpass $3/gallon once more.
THE MARKET
MARKET SENTIMENT
VIX: 11.39; -0.18. VIX has returned close to levels hit in July 2005 that led to a pullback in the SP500. It was just a pullback, however, in a continued uptrend. In December when it hit roughly the same level it stalled the move, but then the market rallied to start the year. Thus this level does not necessarily imply a fade in SP500.
VXN: 16.31; +0.17
VXO: 11.12; +0.24
Put/Call Ratio (CBOE): 0.83; 0
Bulls versus Bears:
Bulls: 46.7%. Edging higher last week after a sharp jump to 46.3% from 42.3% the week before. Down from 60.4% at the start of 2006, the fall was hard in February, and is now leveling off (48.9% to 45.3% to 42.6% to 42.3% to 43.6%). It has undercut the two prior lows that helped spark rallies in May and October.
Bears: 28.3%. Bears fell from 30.5% the prior week as the aftermath of the rally. A sharp drop from 33% the prior week. Continues the dramatic turn from the steady rise from right at 20% on this leg. The progression: 33% from 31.3% from 30.8% from 29.5% from 27.7% from 25.5%. Again, it started this move just above 20%, the threshold level. Above 20% is considered better while below 20% is considered bearish for the market. Bears surpassed the readings from the two prior market bottoms in May and October 2005 (30% and 29.2%, respectively).
NASDAQ
Stats: -1.03 points (-0.04%) to close at 2339.79
Volume: 1.985B (-10.12%). Volume faded below average after moving back above that level with a sharp surge on Wednesday that broke the index above its January high. NASDAQ trade was shaky as the index reversed twice on volume when it rallied near that high. It recovered and delivered the strong volume breakout Wednesday. This was the volume the NYSE indices lacked on their moves, and it helps corroborate their earlier breakouts.
Up Volume: 750M (-449M)
Down Volume: 1.19B (+211M)
A/D and Hi/Lo: Advancers led 1.59 to 1. Not bad at all given NASDAQ and SOX both fell on the Friday session. Breadth has turned markedly better.
Previous Session: Advancers led 1 to 1
New Highs: 245 (+10)
New Lows: 24 (-4)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ gave back a modest 8 point gain to close a whisker lower. Volume fell back as it did, just the kind of price/volume action you want to see, particularly after a strong breakout move. The lower volume on the pullback shows few sellers, not bad given the end of quarter Friday. NASDAQ gave us the strong volume breakout move Wednesday, and that was on the heels of the FOMC meeting that was met with trepidation and selling Tuesday afternoon. NASDAQ met that head on with a strong breakout move. This test continues to hold above the January high (2333), leaving NASDAQ in solid position to continue the breakout this coming week.
SOX (-1.16%) was the one index that looked similar to refried beans. After tapping the 50 day EMA (512.04) on the Thursday high and then fading back below the 18 day EMA (505.64) on the close, SOX simply faded away Friday. It is still holding some support at the 500ish level, the level it has held the past three weeks as SOX tries to consolidate after the early March plunge. It looks weak but we will see if it can hold and deliver some support this week, particularly as NASDAQ tries to extend its gain. SOX has to make the move through the 50 day EMA to make any serious effort at aiding the upside move.
SP500/NYSE
Stats: -5.43 points (-0.42%) to close at 1294.82
NYSE Volume: 1.606B (+0.2%). Volume was fractionally higher Friday after rising Thursday as well when SP500 tried the recent resistance but faded. With the SP500 rebalance, that rise in volume on a couple of downside sessions is not that critical. Trade remained below average so there was no huge upsurge in downside trade. SP500 did suffer some distribution on Tuesday as volume jumped higher for the first time in a week. Overall volume remained rather well contained, and again, the late week volume was part of the SP500 rebalance where 499 of the SP500 stocks were sold in favor of purchases of GOOG.
A/D and Hi/Lo: Advancers led 1.1 to 1. Breadth was strong early in the week and then backed off. Not bad action.
Previous Session: Decliners led 1.3 to 1
New Highs: 164 (-94). Need to see this ramp up as SP500 rebounds. SP400 and SP600 both advanced to all-time highs once again, but new highs continue to lag.
New Lows: 39 (-15)
The Chart: http://investmenthouse.com/cd/^gspc.html
Only a modest rally attempt Friday as SP500 was undermined each time it attempted to move higher. Constant turnover as the index was rebalanced, but overall volume was quite tame all things considered. Thursday SP500 made a run at 1311, the resistance point on the breakout move. It continues to test that move and holding roughly at the January and February highs (1294-95) that it broke over on this last breakout move. Looking for the index to hold the line at this support and move higher with NASDAQ if the NYSE can just get some decent upside volume.
What more can we say about SP600 (+0.41%) that we haven't said already this week. New all-time high, led the market, still above its upper channel line of its more recent 6 month uptrend. SP600 moved above its upper channel line (390.5) to start the week and never came back. Moves above the channel are always risky, particularly when the run upward in the channel is 5 months, but SP600 keeps showing strength when the others have their 'days.'
DJ30
After leading higher in the early March breakout move, DJ30 is selling harder than SP500. It undercut the top of the February peak (11,137), but is still in the range of peaks from that time (11,097 is the lower one). Volume jumped Friday, but we are not too wrapped up by that given the end of the quarter and the rebalance. Needs to hold near this peak, perhaps the 50 day EMA (11,059).
Stats: -41.38 points (-0.37%) to close at 11109.32
Volume: 317M shares Friday versus 277M shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
MONDAY
New quarter to start the week. The first quarter of 2006 started with a bang, but that is not always the norm. Before that July was up while October was lower. The first session of a new month has been up for several months as new money is put to work, but that has been no indicator after that session.
We do like the NASDAQ breakout midweek even in the face of higher oil prices, higher bond yields, and renewed fear of the Fed. It made that move immediately after the FOMC announcement session, taking the Fed, energy, and rates into account. Buyers entered nonetheless and drove NASDAQ to a volume breakout. Now it is up to SP500 to re-engage and join it in the upside move.
Loads of economic data on the calendar, culminating with the March jobs report Friday. At the same time earnings warnings are going to pick up the pace. Before last week they were running a bit lighter but they pulled up during the week to be roughly in line if not a bit worse than the prior two quarters. There will also be more Fed-speak. It started almost immediately after the FOMC meeting as voting and non-voting members started talking.
That is plenty for the market to chew on, but it has had plenty to chew on for months and yet SP500 broke to new post-2002 highs, SP600 and SP400 hit new all-time highs again, and NASDAQ broke to another new post-2002 high itself. The move has lacked some attributes we like to see, namely stronger volume on the breakouts; SP500 lacked it, NASDAQ had it. New highs are weak as well even when SP500, SP600, SP400 and NASDAQ broke out. Those are continuing issues showing less full commitment to the upside move, but we really like the strong NASDAQ breakout; that answers a lot of questions.
With this background we are going to continue looking at leaders that are set up to move higher for us. Sounds like a broken record but as the market moves higher different waves move up and when they provide opportunity we are going to move in as we have been even during the choppy quarter.
Support and Resistance
NASDAQ: Closed at 2339.79
Resistance:
2477 is the January 1999 peak
2493 is the February 1999 peak
2523 from the December 2000 low
3015 is the December 2000 peak and the October 2000 low
Support:
The January high at 2333
2328 from the May 2001 peak
The recent high at 2325
The 10 day EMA at 2319
The 18 day EMA at 2309
The 50 day EMA at 2289
2288 from December 2000 low.
2278 is December 2005 intraday high.
2273 is December 2005 closing high.
A minor peak at 2249
2240 is closing low in recent range.
2218 from August 2005 peak
S&P 500: Closed at 1294.83
Resistance:
1311 is the March intraday resistance on this move.
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the February 2002 low at 1360.
1371 to 1373 is the December 2000 peak and the January 2001 peak
Support:
The 10 day EMA at 1298.65
1297.57 is the recent February high.
The 18 day EMA at 1296
The January high at 1295
The 50 day EMA at 1286
The late January peak at 1285
The December highs at 1275 (intraday) and 1273 (closing)
1264 from the December 2000 lows
1254 is the February low
1248 to 1250 is the bottom of the November/December 2005 range
Dow: Closed at 11,109.32
Resistance:
11,159 is the February high.
The 18 day EMA at 11,170
11,176 - 11,186 from April 2000
The 10 day EMA at 11,188
11,350 from the May 2001 peak.
11,401 from the September 2000 peak.
11,425 from April 2000 peak
Support:
11097 is the last peak from the February top.
The 50 day EMA at 11,059
11,044 is the January high.
10,985 is the March 2005 intraday high
10,965 from Q4 2000 and November/December 2005
10,931 is the November 2005 high
10,890 is the December 2005 closing high.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
April 3
ISM, March (10:00): 57.4% expected, 56.7% prior
Construction spending, February (10:00): 0.5% expected, 0.2% prior
April 4
ISM Services, March (10:00): 59.0% expected, 60.1% prior
April 5
Initial jobless claims (8:30): 303K expected, 302K prior
April 6
Non-Farm payrolls, March (8:30): 196K expected, 243K prior
Unemployment rate, March (8:30): 4.8% expected, 4.8% prior
Average hourly earnings (8:30): 0.3% expected, 0.3% prior
Average workweek (8:30): 33.8 hours expected, 33.7 hours prior
Wholesale inventories, February (10:00): 0.4% expected, 0.1% prior
Consumer credit, February (3:00): $3.4B expected, $3.9B prior
End part 1 of 3
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