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money investment, day trading
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4/03/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: ADTN; DO (took some interim gain)
Buy alerts: BTU; GRMN; FORM; INFA
Trailing stops: FFIV; ALNY
Stop alerts: VAS
SUMMARY:
- Quarter starts strong but gains frittered away
- ISM slows its expansion, following earlier regional softness.
- Higher prices and the Fed.
- February construction spending increase led by private sector.
- With end of quarter & start of quarter under its belt, market set to try again.
Early start fizzles.
Merger activity is projected to match or surpass the 2000 levels, and Monday that helped stir the upside pot early with futures stronger and stocks jumping higher out of the gate. The increase in merger activity to 2000 levels is just one of the contrary indicators we are watching even as the indices move to post-2002 highs and the economy appears to expand. CEO's, Federal Reserve officials, and the crowd consisting of retail and some institutional investors all tend to get it wrong at the turns. This is not an immediate issue, just one we are keeping in mind as the indices move to new highs. As long as we get leadership and good price/volume action those remain on the back burner.
The national ISM (manufacturing report) was a bit weaker than expected, and after a brief pause, that helped spur the early gains higher. When SP500 ran into its March highs mid-morning, however, once more that slammed the gate on the upside. With SP500 lagging well back of the pack, when the large caps stalled at old resistance, the entire NYSE started to peel back.
The techs were strong early on as well, but they too peaked out when the SP500 ran into resistance. SOX rallied to the 50 day EMA, giving the market much needed support, but other than a few leaders, it faded as well after again hitting that resistance in a move very reminiscent of Thursday.
Volume climbed above average on NYSE for the first time in two weeks as SP500 hit resistance and reversed to close just fractionally higher, giving back 11 points off the high. NASDAQ gave back 20 points from its high on rising volume, but its trade remained below average, not bad after that strong breakout volume last week. Higher volume reversals as seen on SP500 are not good action though SP500 did managed a positive close. SP500 has shown three such sessions in the past three weeks though the prior reversals were on below average volume. Breadth was negative despite the scattered gains. Reversals from the highs, a bit higher volume, negative breadth. Not a great start to the week or the quarter.
On the other hand, there were no breakdowns in the indices, just some more work in the ranges that set up this year. The indices are still at the top end and still very much in the hunt for new breakouts following NASDAQ joining the crowed last week. SOX remains a drag in the market as it languishes down below the 50 day EMA. Oil prices and the Fed continue to hang over the market as well, but what is new? There was some shuffling on Friday and some more on Monday. The reversal leaves a sour taste, but bigger picture the indices, sans SOX as noted, remain in decent shape.
THE ECONOMY
National manufacturing expands at a slower pace in March.
Expectations were for a rise to 57.4 from February's 56.7 reading. Instead the ISM slipped to 55.2 as some of the regional weakness to start the year filters through to the national level. That still shows expansion and continues the three years (34 months) of gains after flirting with a dip below 50 back in May 2005 as the manufacturing sector slid toward flat. Since then, however, industry has rebounded, trading roughly in a range from 54 to 58 with March right in that range. That keeps manufacturing in a solid expansion mode.
As would be expected with an overall dip, the sub-indices were lower as well. New orders came off a year/year high but held in the high 50's. Production also logged an upper-50 reading, holding steady with February. Employment was down as well, coming in at 52.50; expansive but not keeping pace with the overall gains. Productivity is the buzzword you hear whenever you talk to any manufacturing company about mediocre employment data. They prefer using that over 'outsourcing.' Much more PC in an election year.
Manufacturing prices are higher but that is not necessarily a horrible thing. Not great, but not horrible.
About the only thing that wasn't down were prices. They jumped up to 66.5 from 62.5 with the usual suspects leading the way, e.g. energy and to an increasing extent, metals. Manufacturers also noted just general price increases in raw materials of most any type. As long as demand is the catalyst as opposed to excess liquidity, higher prices are not necessarily the bad thing they were in the 1970's.
Those prices were driven by panic over oil costs and embargo threats and a huge surge in liquidity as the Fed and other central banks tried to print their way out of any potential slowing impact of spiking energy costs. Unfortunately that was a gross miscalculation as inflation exploded. Ah, I remember those days of 20+% interest rates, 'misery' indices, and the general notion that the US had passed its prime and was no longer an economic power. The latter was one reason most economists were confounded: how could there be runaway inflation as the US suffered through a seemingly endless malaise with high unemployment rate and low output? To say the least, the Phillips Curve boys were at their wits end. Then Reagan came along and cut taxes with resulting explosive economic growth and employment. Those poor Phillips Curve followers almost committed hari kari; too bad they didn't burn all of their texts and papers at the time as we might be free of their misguided influence today where every time we achieve a bit of prosperity they clamor to clamp down on the runaway consumer, etc. You know the story; we heard it all in 1999 and 2000. Golly, we are even hearing it again today now that we have dragged ourselves out of the rubble of the 2000 collapse.
That is why right now a lot of people like to call current price increases inflation. As we have discussed many times, however, not all price increases are inflation. Demand can spur higher prices even if supply is strong and meeting all demand. Inflation starts if there is too much liquidity and prices run higher than they would at the current demand and supply levels and a lower money supply level. With China and India emerging and Japan recovering (so we hear), there is healthy demand. From what Exxon and other oil companies tell us, there is plenty of oil in the world right now and other materials are not in short supply, just enjoying the first global economic recovery in decades.
Of course, there is no textbook that says if demand equals 'x' and supply equals 'y' then money supply should be 'z.' Indeed, if it was in a text it would probably be wrong; many textbooks still discuss the Phillips Curve as if was the only theory to explain pricing in any economy. Thus, that is what we pay central bankers for. That is why Greenspan will yank down $100K or more per appearance on the lecture circuit. It is only fair, however. The guy is in his seventies and has to line his nest after spending way too much time in the public sector.
Thus some price climb is not a bad thing. It shows healthy demand. As long as supply remains strong the economy typically always performs well without serious inflation pressure. The issue right now is just how much liquidity is out there and if these modest price increases become big increases. The PCE deflator jumped in Q4 to 2.4% year/year and that had the Fed officials hyperventilating down in the basement of the Federal Reserve. As discussed last week, however, January and February were tame yet again, indicating the Q4 rise was tightly bound to the shortages created in Katrina's and Rita's aftermath. Hopefully Bernanke is indeed a breath of fresh air, new blood, etc. that will look beyond the knee-jerk reactions to the raw number, see the bigger picture, and not jack rates up too high or drain the money supply too low. Since we didn't give you an April Fool's joke in the weekend report, consider that last sentence as one from us. Hopefully the joke will be on us.
February construction spending doubles expectations.
The 0.8% reading was double the 0.4% expected as private spending posted strong gains. Overall construction rose to another record as did residential construction that jumped 1.3%. Private construction spending surged as well, rising 1.2% as lodging, office, health care, recreational, religious and power facilities all posted gains. That easily offset declines in commercial, communication, and manufacturing construction outlays.
Great to see the continuing health in construction, though with the Fed on the inflation hunt and wanting to see real slowing in the economy, this kind of data only prolongs the pain and keeps us running the risk the Fed will, as is typical, go too far. Bernanke knows the problems of slowing housing construction and how it impacts the economy the year following the slowdown, but he also has said commercial spending is more than offsetting any slowdown in housing construction.
That 'I know what the problem is but it is different this time' approach is one taken with the yield curve in 2005 and 2006 by Bernanke and his predecessor. Somehow it just doesn't make anyone feel all that comfortable that the Fed has continued economic prosperity for all of us as its primary goal. After all, we heard this same story in 1999 and 2000 from Greenspan as he deftly guided us into the sharpest decline in economic output since the Great Depression. This 'I am right this time even if I was wrong last time' story is just not creating much comfort. To this point, however, it has not wrecked the market, so what the hell do we know? As we always say (and stole from Jiminy Cricket), always let the market be your guide.
THE MARKET
MARKET SENTIMENT
VIX: 11.57; +0.18
VXN: 16.52; +0.21
VXO: 10.93; -0.19
Put/Call Ratio (CBOE): 0.68; -0.15
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: -3.05 points (-0.13%) to close at 2336.74
Volume: 2.042B (+2.83%). Volume bumped higher as NASDAQ reversed, but it remained below average following the strong upside volume breakout last Wednesday. We are not getting bent out of shape about this.
Up Volume: 779M (+29M)
Down Volume: 1.205B (+15M)
A/D and Hi/Lo: Decliners led 1.72 to 1. Pretty weak breadth all session as the large caps were the definite tech leaders. A lot of medical and healthcare stocks were down, and that helped drag NASDAQ back a bit.
Previous Session: Advancers led 1.59 to 1
New Highs: 261 (+16)
New Lows: 29 (+5)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
Gapped higher to a new post-2002 high (most every move higher now is) but could not hold the gain, closing 3 points above the January high and the breakout point. Volume rose but was below average, and as noted, we are not going to let that jangle the nerves any. NASDAQ made a good breakout and started the new quarter with a bounce and reversal. No high volume dumping, just quarter-beginning shuffling.
SOX (+1.11%) still has its issues, trying the 50 day EMA (511.76) on the high and then fading back once more similar to Thursday. On the other hand it continues its three week lateral move at some support at 500 after the harsh early March drop from the range high at 550. Not ready to call SOX dead at this point; its problem is it is weighted by a bunch of big sluggards that are not the leaders in the semiconductors at this stage. For that see WFR, FSL, NVDA, FORM and friends. They are still moving up and SOX is not rolling lower just yet. If NASDAQ holds its breakout and resumes the move, it will likely drag this anchor with it a ways.
SP500/NYSE
Stats: +2.99 points (+0.23%) to close at 1297.81
NYSE Volume: 1.695B (+5.56%). Volume moved up above average for the first time in two weeks and it did it as SP500 tested near resistance and peeled back once more. Compared to NASDAQ, this is much more akin to a reversal session. SP500 has done this before and held the line, but this is one scenario where practice does not make perfect, particularly with the small caps selling nearly all session.
A/D and Hi/Lo: Decliners led 1.07 to 1. Negative breadth even as SP500 posted a gain. The small caps were under pressure and that kept breadth flat at best.
Previous Session: Advancers led 1.1 to 1
New Highs: 278 (+114)
New Lows: 57 (+18)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 tried 1311 once more and once more failed. It showed higher volume, this time above average, so the rollover is a bit more nefarious. As noted, this is not one scenario where you keep getting do-overs. This run up followed by selling tends to erode the foundation, particularly if volume continues to climb. On the other hand, it once more neatly held the 18 day EMA (1296), easily keeping SP500 in the recent range and holding above the February highs (1294-95). That keeps the breakout alive just as NASDAQ. It was not a great day for SP500, but after it was rebalanced Friday it is not surprising there is some more positioning to start the quarter. The key now is to hold this general area and continue the breakout.
SP600 (-0.63%) lagged all day as some money was taken out of small caps. They have been pronounced dead so many times it is easy to say 'look, they are rolling over.' That can always happen, but we also have to look at the nice trend higher, its move over the trendline and the 10 day EMA (390), and the fact that the lat run took it up 27 points, no small potatoes for one run. It is thus due some softness for a bit. It can come back to the 18 day EMA (386.89; closed at 392.34) or more and maintain its uptrend.
DJ30
DJ30 raced higher to 11,247 along with SP500, but it too gave most of the move back by the close. Finished positive, basically a moral victory. The more important fact is that it too held its breakout and its volume was lower and back below average.
Stats: +35.62 points (+0.32%) to close at 11144.94
Volume: 278M shares Monday versus 317M shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
ISM services is the only scheduled economic report (10ET), but we have a feeling we are going to get more and more Fed-speak now the meeting is in the bag and the Fed tries to put the Bernanke spin on inflation and rates. As noted, right now the Fed Funds Futures contract is interpreting what has been said thus far as a move to 5.25% at the June meeting. Still a long way out and so much can happen up to that point; it is really accurate two weeks out, but then again, who isn't?
The other unscheduled but scheduled news will be the earnings warnings, both upside and downside. The good thing is companies have a lot of money, but the market only worries about whether they will have even more down the road. The really good thing is that the market has not run crazily higher in anticipation. Sure NASDAQ, SP500, DJ30 and SP600 broke out, but of the group only SP600 is really ready for a pullback. The others have consolidated, set up the breakouts, and in the case of SP500 and DJ30, have tested them and are ready to go. That means there is room for upside as good news comes out and with the overall good patterns holding up, unless there are some really unexpectedly bad warnings they can weather some negative news decently.
Tomorrow will be a good test for this move after SP500 tried resistance again and failed again. That is the biggest concern right now, i.e. the repeated attempts at the break higher and the repeated failures, this one with more volume. So far it is still holding the breakout, and with NASDAQ making its break on strong volume last week there is some substance to the move, or at least it is trying to get it. A solid rebound on strong volume by SP500 would start locking in some more upside.
Support and Resistance
NASDAQ: Closed at 2336.74
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 2322
The 18 day EMA at 2312
The 50 day EMA at 2288
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 1297.81
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:
1297.57 is the recent February high.
The 18 day EMA at 1296.51
The January high at 1295
The 50 day EMA at 1286.42
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 11,144.94
Resistance:
11,159 is the February high.
The 18 day EMA at 11,168
11,176 - 11,186 from April 2000
The 10 day EMA at 11,180
The recent March highs at 11,329 to 11,335
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 11,062
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): 55.2% actual versus 57.4% expected, 56.7% prior
Construction spending, February (10:00): 0.8% actual versus 0.5% expected, 0.4% prior (revised from 0.2%).
April 4
ISM Services, March (10:00): 59.0% expected, 60.1% prior
April 5
Initial jobless claims (8:30): 305K expected, 302K prior
April 6
Non-Farm payrolls, March (8:30): 190K 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): 0.5% expected, 0.1% prior
Consumer credit, February (3:00): $3.0B expected, $3.9B prior
End part 1 of 3
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money investment
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