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3/02/02 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERT SERVICE
PENN target hit alert issued (+$5.70 on 18 day MVA bounce).
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http://www.investmenthouse.com/alertdly.htm
SUMMARY:
- Good economic news finally has a lasting effect.
- S&P joins Dow in a follow through and breakout
- Nasdaq still cannot muster true strength
- The economic numbers that caused the surge: manufacturing recession over?
- Team Trades
Entire market finally responds to upbeat economic news.
The economic reports have been bearing out an improving economy. Indeed, the market has been bearing that out all along. First it was the Nasdaq off of the September bottom rallying on the strength of the war against terrorism (and the spending that was to go along with that war) and the promise of future stimulus to come. That did not materialize, and the Nasdaq started to back out the price gains. Remember, the tech stocks more than any other sector were suffering from massive overcapacity and the lack of investment. When it became clear that additional stimulus that would favor capital investment in tech equipment was in fact not coming, the techs lost their strength. There is still overcapacity in technology despite the economy-wide inventory reduction.
When the techs faltered, the older economy started to take in their money in a rotation. After all, as we reported back in August and early September, the economic recovery was showing itself before 9-11, and it was showing itself again in October and November. With the rate cuts and the added stimulus, the economy was going to recover even if not led by technology investment and even if it was not going to be a rip roaring recovery. We started looking at old economy stocks at that point such as BLL, LIZ, PG, BMS, BUD, DF, DRI, EAT, UPS, FDX, ITG, WTSLA, SWK, WMT, etc. while we played the Nasdaq to the downside. Economic recovery after all is recovery. Consumers will look to buy more goods, but they still want them at a discount. Boxes are needed to put new products in, and they have to be shipped. That works up an appetite; hence, restaurants and food makers have done well. Of course you want to wash it all down with some suds. And if you are stepping out more, you want to look good when you do. In short, the economy is recovering, and consumer goods, machinery, packaging, shipping, etc. are going to do better business. That means more profits and that means stock prices rise in anticipation.
Thursday saw a precursor to the economic recovery finally hitting manufacturing when the Chicago PMI came in much stronger than expected. The market was still pensive, however, and the gains did not hold. The Dow was spoiling to move higher, however, as it had already been pricing in a further economic recovery and was expecting continued good news. When Friday's ISM number bolted higher with new orders leading the way, the entire market bolted higher as well. Unlike prior sessions, the news was powerful enough for them to hold their gains as it became clearer the economic recovery is well underway.
S&P and the Dow breakout.
The Dow has been the leader ever since the Nasdaq abdicated that position in January. The S&P has been struggling, but it formed a nice double bottom on some solid support and Friday it broke out of that pattern on rising NYSE volume. It was a breakout from a nice pattern, and more, it was a follow through to the rally attempt that started two Fridays back when the index formed the second leg to the month-long double bottom pattern. Two good moves in one.
On top of that the Dow continued its leadership. It had formed a two-month cup and then a short handle below resistance at 10,300. That is good action right below prior resistance and heading into the teeth of the summer 2001 trading range. It posted a higher volume breakout Friday along with another follow through session to its earlier rally that started back in late January when it took over from the Nasdaq (which also was about the time the stimulus package was declared dead). The move pushed it to a post 9-11 high.
NYSE volume, the volume by which Dow and S&P are measured, was up again on the session. That continues the good action on the Dow and to a lesser extent the S&P, and is a very important element to any breakout or follow through. Also, the A/D line was solid at 2.4 to 1; that shows a broad rally not limited just to the big names. Institutions were buying stocks of all race, color and creed, and they have been doing it over several weeks. The NYSE A/D line has held up very well even in the selling earlier in the year.
Nasdaq has a powerful price rally, but it still lags.
The Nasdaq shot up 4.1% Friday, outpacing both the Dow and S&P in the price gain. That is the way it usually works when there is a rally: the ever hopeful pour money into the techs, looking for late 1999 again. Heck, NVLS said it would lose a penny less than originally thought and that it just might possibly be the bottom of the cycle. That is surely worthy of a $6 gain on the session. What has happened since the bear market started is that there are powerful upside price moves in techs that flameout fast as well. The rise off of the September bottom was the best thus far, but the impetus for that died out and so did the rally. Perhaps this new economic data means the recovery will occur in tech as well; thus far, even with the rally on Friday, the Nasdaq is not showing it.
Truthfully, the semiconductors were the bright spot for the techs. Running down the list of big name tech stocks, damn few rallied Friday on volume as strong as they sold on in the prior sessions. Take out the semiconductors, and you have a very shaky move. Moreover, an essential part of any strong move are important stocks in good patterns, i.e., without a lot of overhead supply to push them right back down when prior, disgruntled investors feel they can get even on their prior less fortunate purchases.
Even with the semiconductors the move was not as strong as the prices indicate. Volume was lower on the big move, unable to eclipse the previous session selling volume. The A/D line could not even put together a 2:1 advantage, the minimum on a follow through session (1.87 to 1). Money flowed into beaten down tech stocks, but there was no heavy institutional buying.
Friday did kill a bunch of short positions, but it also did not break many downtrends. Until we see those downtrends snapping on stronger volume we have to realize that the trend is still down for most techs. After such a big price move Friday, we will see how much power was really there this week. After the close Friday, ORCL used the big rally as its opportunity to announce it would not be able to live up to Larry Ellison's ego, that it would indeed miss this quarter's earnings. That quieted things a bit late, but not a whole lot; this week we will see what the index is really made of. It had every reason to rally hard Friday, but it could not show true strength. That showed a lot in itself.
THE ECONOMY
It was a big week for economic reports, and it saved the best for last. ISM, personal spending and income, and construction all were well beyond expectations.
ISM is smoking. After 18 months of readings less than 50 (denoting a manufacturing recession), the manufacturing sector finally showed signs of expansion. It was expected to do so, but the 54.7 reading was well in advance of the 51.0 expected. More dramatically, the new orders component, a leading indicator, leaped to 62.8 from 55.3 prior. New orders mean more goods sold and the hope that more production is required and thus more jobs created.
This is truly good news, and it is the logical progression of the economic recovery. It is proof that the recovery is ongoing. Is it proof that the recovery will be a strong one? As discussed Thursday, inventory reduction has moved things back to 1999 pre-boom levels; thus, the pickup in the manufacturing sentiment coincides with a return to a more normal pace of production. With the continued strength in the consumer and housing throughout the recession, that still means we most likely will not get that big surge in buying that usually accompanies a pullout from a recession. They are saying this is the weakest recession in recent history, helped by the tax cuts and the post 9-11 defense and security spending boom. Could the weakest recession in recent times also mean the weakest recovery in recent times?
Don't get us wrong. We are thrilled that the economy is showing signs of perking up. Back when most were crying in their beer about the economy we were writing about how things were starting to turn positive. As tragic as 9-11 was, we wrote that economic upturn and bull markets often spring from tragedy. The stones were in place and the government was doing the right things. That has led to this recovery thus far. Unfortunately, everyone is all of the sudden cocky that things will just take care of themselves.
As we said before, an increase in the pulse does not make a sick patient jump out of bed. There is a disconnect between what the government is reporting in the ISM (which is really a sentiment report, not a hard numbers report) and what many CEO's are saying. At the recent CEO conference, most CEO's said they were not going to increase capital spending or hire more people. Again, CEO's tend to maintain pessimistic views after a recovery starts just as government reports can paint the tape to a certain extent. This sentiment, however, does fit with an analysis of the inventory reduction and the real inventory levels: if inventories have been reduced but only down to pre-boom levels, we are looking at 'normal' production levels. That does not portent a huge jump in production and a ripping recovery.
Other than the obvious plus of just keeping those currently on the job working and thus avoiding more layoffs, there is another plus to the manufacturing pickup. It comes at a time that consumer demand is starting to wane and, we fear, a slowdown in the housing market that is around the corner. Perhaps the manufacturing increase can pick up the slack while the consumer takes a breather. Unfortunately, the consumer cannot take too long a breather or else there won't be a need for that manufacturing increase, etc., etc. The point: it is all part of the circle of the economy (sorry Lion King); all of it needs to be working for the whole thing to survive. Again, capital spending incentives would be the thing that really cements the deal given the weak recovery that is in the cards.
Personal income and spending up, but not because wages are up. Personal income exceeded expectations, rising 0.4% versus expectations of +0.1%. Spending matched the increase in income, and December spending was revised upward to flat from -0.2%. Increased spending in January helps bolster Q1 GDP, and it looks as if the consumer was not as dormant as some were saying; but, we knew that at the time. Income increases were not due to wage increases. They were the result of insurance payments and good old tax cuts. Seems tax cuts do have an impact on income despite what some say, and they are certainly not hurting spending.
Michigan sentiment falls. Following the Conference Board's report, Michigan sentiment was revised down again for February to 90.7 from 93 in January and 91.0 expected. Before getting in an uproar on this (which most did not seem to do anyway), it is normal for sentiment to track the Nasdaq. With the Nasdaq being down 10% in February, a fall in sentiment is not unexpected.
Miscellaneous. The commodities index peaked in January with the Nasdaq, but made a recovery with the Dow in February. Friday's economic reports sent it screaming higher. Commodities are very sensitive to economic data, but they have been the most confused index, seeming to follow rather than lead or forecast. They are at a critical level, approaching the 200 day MVA at 197.
Credit Suisse First Boston cuts workforce. Back in December and January many of the big brokerages and investment houses announced layoffs. They are usually very good about hitting the bottom of the market when they do. CSFB's announcement is almost welcome news as the Dow and S&P now appear to have finished with their tests of the September bottom and are ready to move higher.
THE MARKET
The S&P 500 gave support to the Dow's earlier follow through with a follow through session of its own along with that breakout over resistance. We wish we were saying the same thing about the Nasdaq, but it just could not draw the buying strength despite the big price gains. The move did not change the downtrend, but it could lead to its own follow through this week. Has to get institutional buying going.
VIX: 22.13; -1.00. Still at rock bottom, but you cannot argue with good price/volume action on the S&P.
VXN: 41.94; -4.25. The lowest Nasdaq 100 volatility since August 2000, undercutting the 42.14 reading in February this year. Indicating continued complacency, but if the price/volume action improves this week we have to go with that primary indicator.
Put/Call Ratio (CBOE): 0.66; -0.17. Big drop, but there was a big rally underway Friday. The ratio has hung around in the upward range since January, and it topped 1.0 on the close twice. That is an indication of the potential for a move higher. Even at this level it is still well ahead of a complacent reading at 0.4.
End Part 1 of 3
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