* * * *
1/05/02 Technical Traders Report
* * *
Technical Traders Report Subscribers:
MARKET ALERT SERVICE
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Indexes recover from early selling to post gains on continued strong volume.
- S&P makes a break over the 200 day MVA.
- Economic numbers continue to improve: services index expands further.
- Subscriber Questions
Indexes rally on more good news, but almost give it back.
More good news on EMC and INTC helped get things rolling, and the ISM (NAPM Services) added to the enthusiasm. The indexes all broke above the December highs. Then as we thought Thursday night, there were some sellers in the market. Some profit takers and some who no doubt believe that the indexes are simply overvalued and are doomed to fall. That was still the talk throughout the day: stocks priced to perfection, overvalued given the economy and its prospects.
Sellers came in and drove the Nasdaq and S&P 500 negative in the morning session. Then buyers came back in and started the climb higher. A reverse head and shoulders pattern formed and the buyers came back in and pushed the indexes higher. All but the S&P 600 (small cap issues) closed off of their session highs, but the comeback from selling was another example of the market's bullish action again reasserting itself.
Volume was again a highlight. NYSE volume was strong again, up 7.6% and Nasdaq volume remained strong, holding steady at 2.2 billion shares. After the lateral lower volume move through most of December, the market received some news it was ready to act on late in the week, and buyers again came back into the market.
S&P 500 making its move as well.
The big caps were the last to come to the party. The index lagged the Dow and the Nasdaq in breaking above the 200 day MVA, a key point of resistance and where many big investors make longer term, trend decisions. This means that the prices for the past 200 days (40 weeks) have been rising at a faster rate. The longer time period shows that there is some strength behind the move. Again, the big caps lagged the other two major indexes, and indeed were way behind the S&P small cap index that hit a new high, but they made this important move, and they made it on the second day of accumulation, i.e., buying of shares by the big names.
This also means not only that big money was buying, but a close over the 200 day MVA, particularly when it is tested and successfully holds, chases some more shorts out of their positions. They may not run to stocks long term just yet as they are not convinced the rally is for real (but were tired of taking losses on their short positions), but it helps keep the rally alive interim and it also bodes well longer term if the market continues to rise: those shorts will eventually turn to longs and add more money to the buyside.
Nasdaq approaching a 50 day MVA crossover of the 200 day MVA.
Using longer term moving averages as buy and sell signals, particularly the 200 day MVA, is sometimes waiting a bit too long to get into or out of the action. While they may not be the best timing devices in all situations, they do show good progress in how an index is recovering or caving in. Most certainly bulls would prefer to have the indexes and their stocks riding comfortably above the 200 day MVA as opposed to diving toward it or languishing beneath it. The fact that all three indexes have now crossed the 200 day MVA is a good signal fo the rally's strength.
Another signal of continued strength (sort of the next step when analyzing moving averages) is the 18 day MVA crossing over the 200 day MVA. We saw that lead to some nasty selling in the bear market beginning around election time in 2000 and continuing until just recently. Similarly, the 50 day MVA crossing below the 200 day MVA solidifies that downward bias.
The Nasdaq's 18 day MVA crossed above the 200 day MVA on the seventh trading session of December. It flattened its ascent while the index tested the 200 day MVA it had crossed 5 sessions earlier, but now is rising again. At the same time, the 50 day MVA has been on a collision course with the 200 day MVA. Again, when the crossover occurs this will not be a buy alert, but it will show us that the move is a solid one (along with the high volume we have seen), particularly when the move is tested and holds. It proves to provide a good support level when the index comes back to test its upside moves.
The Dow still has further to go, but its 18 day MVA is now close to crossing over the 200 day MVA. That will not be a guarantee of further upward movement, but bit by bit it shows that the index is gaining a solid foundation to build further gains.
THE ECONOMY: economic reports not hurting the action
Friday once again saw some positive economic numbers. The employment report was hailed as good news, but what some call good news others see as not so bright and vice versa. To us it showed things were on track as we have been seeing since last summer. The bigger news for us was the ISM (formerly NAPM) Services report that showed a very healthy jump for December, much better than expected and much better than the prior solid month.
The NAPM: it was expected to come in anywhere from 48 to 50 based on who you looked to. The actual result: 54.2, much better than November's very nice 51.3 reading. That means the services sector was expanding (not just slowing the contraction) for two months in a row. It flashed a 50+ reading back in August before the 9-11 attack through it in reverse for a couple of months. We were seeing the overall NAPM improving as well until 9-11. It is back to showing new orders greater than 50 once again, and it is simply a matter of rather short time before it kicks out a 50+ reading of its own; that will show the manufacturing sector expanding once again.
Employment report again exhibits good and bad readings.
The non-farm payroll loss was 124K, better than the -155K expected and the prior 371K loss for November. That had many analysts crowing about the recovery. What is troubling about how 'healthy' the number was is the types of jobs created and lost. Government added 63,000 jobs, and overall the areas gaining jobs were not in business sectors. Private business is the true sign of economic recovery; the government can spend to add jobs at anytime without the economy recovering. It is when private business starts to add the most jobs to the economy that we are more certain of the economic turn at hand. It is not at that point yet, and that kept us from crowing about the report.
Still, the pace of job losses has to slow before there can be recovery, and this report indicates that as the weekly jobless claims figures have been forecasting. Yes, overall unemployment rose from 5.6% to 5.8%, but that was expected. This is a lagging indicator as shown by the overtime hours. Jobs were still being lost, but overtime was up 0.2 hours to 3.7 hours per week. That is classic: after laying off workers (something business is loathe to do and takes a while to finally put into action) business is slow to hire them back until it is certain the cost of finding and training new hires will not be tossed out the window if things just slow back down. Rising overtime is an indication that current workers are being used more to take on the beginning increases in business activity.
Earnings higher. This is another one of those items that was received as bad news because many still believe that old Fed fairy tale it was spinning when it was groping for reasons to raise interest rates and coming up with its 'new' indicators that were nothing more than signs of prosperity. Back when the Fed was trying to spin its inflation story, one of the new indicators it looked at as signaling inflation were rising wages. The theory was that rising wages led to more money chasing goods, and that would lead to inflation. First, that is bogus; history has yet to show a situation where higher wages led to inflation in economy. Second, you have to have a shortage of goods for that scenario to even come remotely close to occurring: MORE dollars chasing FEWER goods. Remember, however, the supply side of the economy was cranking out goods to meet all demand so the equation was balanced; there was no pressure. How do we know? Because prices were FALLING; business leader after business leader repeatedly stated he or she had no pricing power. Moreover, industrial capacity was still well below bottleneck levels. There was absolutely no pressure on supply UNTIL the Fed raised rates and killed off domestic capital investment. That shot the demand = supply equation all to hell, and we have been living the results of it ever since. If the economy had not fallen off the table we most certainly would have had inflation: there would have been continued consumer demand but the supply side of the economy was dormant (manufacturing has been in a 15-month recession); there would have been more dollars chasing fewer goods at that point, and that is the inflation recipe.
What the higher earnings show us is really something positive, not inflationary now that the economy has tanked. With the economy down, the problem we have is consumer spending and corporate investment. If consumers are making a bit more money, they have more disposable income. That in turn leads to more buying which will eventually help the business side. The danger: too rapid a return in consumer confidence before the business side gets cranked up to handle the demand just as outlined above. That is why a stimulus package that gives some money to consumers and tax incentives to business works best: business has incentive to buy new equipment (if given a tax credit or accelerated depreciation, history and common accounting show that businesses will react logically and buy new equipment as it pays them to do so), that moves inventory and requires workers to come in and replace those goods sold to other businesses; new workers means more confidence and more wages out there to spend on more goods; money in the pocket of consumers adds to the demand cycle and we emerge with both sides of the economy in good shape. You have to have that balance or it does not work; that is nature: balance. Our politician leaders need to focus on that and not on getting re-elected.
THE MARKET
We issued an alert early Thursday stating that the session could be definitive for the market. Friday the S&P crossed its 200 day MVA on stronger volume. Even though it is still lagging the other indexes and well behind the S&P 600 that ran to a new high, we have noted that the big caps could lag relative to other stocks but still continue to climb. That is what is happening right now.
Secondary indicators: Volatility and the put/call ratio are sentiment indicators. They are thus contrary indicators (typically moving inversely with the market) and are most useful at extreme levels. They take a back seat to price and volume, but they can give us a heads up or a caution flag so to speak ahead of time. That is why we keep an eye on them.
VIX: 22.02; -0.81. Volatility continues to fall as the big caps make their way higher, clearing the 200 day MVA. At the summertime doldrums levels, but again, the real key is to follow the money when it is moving in and out. Right now it appears to be moving in again despite the lower volatility.
VXN: 46.86; -0.21. Falling, but Friday's up and down action kept it from dropping hard. Still holding just inside the July 2001 consolidation level (47.50) and still above the closing low in June (43.96). This is a level that reflects some complacency, but again, this is a secondary indicator that takes a back seat when price/volume action is strong.
Put/Call Ratio (CBOE): 0.67; -0.01. Holding relatively steady on the action. No doubt the up and down action contributed to the ratio holding up even though the indexes posted gains. As we noted Thursday, this ratio has been the foil to lower the volatility indications. The two have been at odds for quite some time, and the market has continued its general uptrend.
Nasdaq
The Nasdaq posted a modest gain on continued strong volume. The biggest drag was the semiconductor sector even with the second day of good news on INTC. The SOX ran up to its down trendline formed by the May and June tops, turned back, and finished flat with a doji. The Nasdaq and many of the big tech names exhibited the same action: gapping higher, testing lower, and finished with smaller gains or even losses. It leaves a bit of a question mark about Thursday's strong move, but we temper that with it being Friday and the index's ability to recover in the afternoon on strong volume. Nothing is easy in this market.
Stats: +15.11 points (+0.7%) to close at 2056.38.
Volume: 2.205 billion shares (+0.1%). Volume remained above average and edged higher on the second session of buying. Volume was running ahead of Thursday's action all day, though selling volume early was where the volume jumped ahead over Thursday. Still good volume on an upside session, something not seen in a while.
Up volume: 1.478 billion
Down volume: 690 million. With the early selling, downside volume put in a stronger showing for the session.
A/D and Hi/Lo: Advancers led 1.47 to 1 (3:2), backing off from the 1.7 to 1 ratio Thursday. Not as powerful a move.
New highs: 153 (+46)
New lows: 13 (+1). New lows have been holding in a very tight range at very low levels. Good action.
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq was a ball of fire out of the gate, but had to fully retest the move before buyers brought prices back up. It was a gap up, a run to the up trendline that it broke two weeks ago (now at 2090), and then settling back down to close above the December closing high (2054.27) but below the December intraday high (2065.69). The candlestick pattern was a very tight doji (opened at 2061.83 and closed at 2059.38); that shows the buyers were in front, the sellers caught them and pushed them down, but the buyers recovered in the end. Doji's can signal changes in direction. After three up sessions and given that the doji coincides with the December high, one could conclude the Nasdaq had some selling to do. Indeed, given that the next trading session is a Monday, we could see some weakness first as the techs attempt to test the move late in the week before turning back higher. Indeed, but for the strong volume and upside action Thursday and good volume on Friday's gains, we would be more concerned about this pattern as a potential double top. Again, however, we like the volume action we saw on the gains and breakouts, and while there may be a test of this move early in the week, it looks as if the Nasdaq is ready to try higher if it can break away from that December high.
End Part 1 of 3
|
