Investment House Weekend Summary:
Consolidation leads to solid bounce on above average NYSE volume.
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- S&P 500 leads the indexes in the next attempt at resistance.
- Producer prices low, production rising, and sentiment back to improving.
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Solid, bounce higher.
After Wednesday’s bigger point drop, the indexes quickly regained control Thursday, holding a tight range on continued low volume. That has been the hallmark of the indexes ever since they started higher from their tests of the run higher off of the September bottom: good price/volume action, rising on up sessions, falling on down sessions. That indicates that the majority of investors are buying and holding onto stocks. That is the healthiest signal for upside moves to come. Friday the indexes resumed the move higher on excellent, above average NYSE volume. That is precisely the move we were looking for.
S&P 500 leads higher.
The S&P 500 led the way with a 1.1% gain as the big cap financials, retailers and cyclicals had a very good day. Indeed, big cap to small cap, all stocks in those sectors performed well. After the consolidation, it was good to see the indexes turn right back to the business of getting it together for another shot at resistance.
And that somewhat sums Friday up. It was a nice move, one that we were looking for, but it did not break the near term resistance. Both the Dow and S&P 500 are very close to breaking out of their recent ranges and over important resistance. The Dow is trying to break above its summer 2001 consolidation range; the S&P is trying to clear those twin tops from December and January that could give it some room to run.
The price/volume action indicates continued accumulation, and thus the outlook for a near term break over those levels looks good, particularly given the continued improving economic numbers. It is still nip and tuck, and the gains are being scratched out as compared to the salad days of the lat 1990’s, but the improvement in the economy is there, and that is driving stock prices higher. Friday’s performance in the financial stocks (steadily improving the past three weeks), continued dominance of retailers, and the resumed upswing in cyclical issues, all stocks in economically sensitive sectors, is a continued sign that the economic recovery continues and the market is also ready to continue to price in further gains in stocks. The key, however, is still a break over near term resistance on continued strong volume. That will show buyers are overcoming the holders at those levels that are looking to sell and get out more or less even.
The continued drag on the market is the technology sector. After leading off of the September bottom on the belief that the economic recovery would be strong and thus bring new sales and life to the overstocked tech sectors, techs have suffered. The death of stimulus and then the watered down version ultimately passed hurt and then failed to stoke much tech investing. Companies have warned to the upside and the downside, and though tech spending is improving, it is still at very low levels and sectors such as telecom remain stagnant (LU’s and NOK’s recent warnings indicate continued weakness in telecom). Friday’s modest rally lacked some big name participants: EMLX, BRCD, BRCM, HWP, PMCS. DELL, CSCO, and SUNW did not hurt, but the did not help. These stocks did not stop the overall gain, but they continue to act as a drag as there is not much investor belief that they are going to stage strong earnings recoveries.
In sum, the non-tech sectors continue to improve and are looking for a breakout. The techs are following, but as a group do not have a lot of strength. The Nasdaq is dominated by the big names that are not expected to experience strong earnings growth in the near future. As stock prices are based upon future earnings expectations, they will most likely improve with the overall economic conditions (as discussed below, technology spending is improving). As far as dramatic improvements, however, that will be left to the smaller Nasdaq stocks that do not have the heavy weighting on the index. Thus the index can continue to lag without totally stymieing the move higher.
THE ECONOMY
Producer’s Prices hold the line.
Producer prices rose 0.2% in February, matching expectations. Still, that leaves a 2.7% drop year over year, the largest drop since 1950. Core prices (i.e., without food and energy) for February were flat from January, below the +0.1 expectations. Year over year they rose 0.5%. The only real indication of rising prices was the +1.5% in core crude prices (unrefined goods used to make products). Still, year over year crude prices fell 6.9%. There is still no sign of price problems.
Industrial production best in over two years.
Production rose for the second straight month to the best levels since June 2000. +0.4% (+0.2% expected) versus a 0.2% January gain (revised from a 0.1% loss). The primary driver was the increased government spending since 9-11. Household goods rose sharply: furniture, appliances and carpets to fill those homes that have been built and sold. Business equipment, however, the continued drag, fell again 0.4%, a 12% drop year over year. Staggering. Overall output fell 4.1% from February 2001.
Capacity utilization rises for first time in 2 years.
Factory use rose 0.3% to 74.8 (74.4 expected) in February. 24 months of declines finally starting to turn over. Add to that January was revised to a +0.3% reading as well. Two months of gains after two years of declines is obviously significant. It lends credence to the ISM readings showing manufacturing activity on the rise.
Note that the numbers are still well below 80, a level that economists use as a rule of thumb to gauge whether manufacturing could be reaching a bottleneck that could cause imbalances, i.e., potentially inflationary. With slack capacity there remains no pricing power; thus PPI should remain low. What should also be noted: during the boom capacity was slightly over 78 at its highest. Supply was meeting demand and there was no risk of inflation based overcapacity. With continued strong productivity, capacity utilization should remain at comfortable levels. That is, as long as supply continues to improve. It will need continued low rates to do so.
What about technology output and capacity?
High tech production rose 1.2% for February. Still, year over year it was down 10%. A nice gain, however. Most of the gain was based on a upgrading current systems. Technology production capacity utilization stood at 60% of capacity. It is stabilizing, that is, not falling as steeply, but spending increases are still less than the overall trend in the economy. Some are saying at best technology production will catch up to the 2000 peak level in Q3 of 2003. Telecom remains the worst sector with a 40% decrease in new orders in 2001. Again, technology will overall remain slower than the rest of the economy with some sectors lagging even further.
Michigan sentiment jumps back.
This measure of consumer confidence rose to 95.0 from an intermediate February reading of 90.7. Expectations were for a reading near 93. Current expectations and future expectations sub-indexes rose as well. The consumer has a lot of work to do, and staunch confidence as a result of improving economic numbers and stock market gains helps.
THE MARKET
We described the Dow and S&P as crouching on Thursday, ready to spring higher. After a slow start Friday, they started to do that. Both bounced up on sharply higher volume, the S&P leading the way on a bounce from support at 1150. They have not cleared the top of the consolidations, but the strong volume and good price/volume action throughout the rally and consolidation shows buyers were accumulating stock, and that bodes well for the breakout. The Nasdaq was dragged reluctantly even as many big names sold off. ORCL was a drag, but once again its woes did not doom the index. Now we look for the breakout by the Dow and S&P this week, and we will see if the Nasdaq can follow and clear its March high that marks some significant resistance in the form of the top of the November consolidation range.
VIX: 20.77; -1.25. Threatening to undercut 20 for the first time in a well over a year. Still, volatility has done little to stop the move higher as it has remained at low levels for several weeks. With price/volume action remaining positive, we defer to it.
VXN: 40.26; -2.07. Falling as well with its first stronger move in two weeks. It is at low levels, but not at the 35 levels it has been at in the past as the Nasdaq made rallies higher.
Put/Call Ratio (CBOE): 0.64; -0.20. Sharp drop after moving to 0.90 last Wednesday. The higher level appeared indeed to trigger some buying, and even with the drop it is still well above the 0.40 level that is considered complacent and can cause trouble for rallies. The Nasdaq still has a solid move to make even to get back up to the recent high, so we will keep an eye on this reading as the indexes attempt to move further this week.
Nasdaq
A tough week, down over 2%, but Friday breathed a bit of life into the index. It held at the absolute bottom of where it could and still keep the rally looking somewhat healthy and then rose on increased (though not strong) volume. Using our Thursday night working, it was more dragged up than rallying on its own.
Stats: +14.16 (+0.8%) to close at 1868.30.
Volume: 1.697 billion (+13.5%). Volume rallied on the session, the highest since Tuesday when the index sold down. It was good to see the gain, as that maintains the positive price/volume action. We note, however, that Friday’s volume was still below average and less than Tuesday’s volume when the index lost ground. It needs to improve as it bounces to keep up with the NYSE stocks.
Up volume: 845 million
Down volume: 821 million. Buyers took over from the sellers, but it was not a strong day. As noted upside volume needs to build.
A/D and Hi/Lo: Advancing issues held steady at 1.25 to 1. Thursday was a down session; would have preferred to see improvement on an up session.
New highs: 155 (+25). Good surge higher on a down session.
New lows: 32 (+1).
The Chart: (Click to view the chart)
The Nasdaq undercut its last support at 1850 on the low (1845.93), but then reversed and rose on slightly rising volume. On the high (1871.39) it tested resistance at 1875. That is the next important level, but the 200 day MVA (1896.13) and the top of the November trading range (1934 to 1941) are both very significant as well. The Nasdaq continues to have significant resistance ahead. It broke both 1875 and the 200 day MVA earlier in the month but promptly sold below them. There was not tech dumping on the selling, and that gives it a good chance of reclaiming those levels, particularly if the Dow and S&P continue to perform well. It most likely will not be easy with the poor patterns in the Nasdaq leaders; 1941 will be difficult once again.
Dow/NYSE
A nice point gain, closing at the top of the session range. The key was the volume; it jumped back to above average levels. Some of that may have been due to options expiration, but there was buying ongoing Friday. Now we look for a breakout over the summer 2001 trading range top (10,670) on rising volume to send up on its next leg.
Stats: +90.09 (+0.9%) to close at 10,607.23.
NYSE Volume: 1.493 billion (+24.8%). A surge in volume brought it back over its 50 day average as buyers moved into big cyclical, retail, and financial stocks. LU backed off to a mere 52 million, so it was not a factor in the gain. There was some action based on options expiration, but there was real buying taking place.
Up volume: 1.061 billion. More than doubled to the upside.
Down volume: 411 million. Upside action really took off as downside volume fell 200 million.
A/D and Hi/Lo: NYSE advancers increased their lead to 1.46 to 1 (1.25 to 1 Thursday). Good to see a gain, but as it breaks the top of the trading range we want to see it turn back closer to 2 to 1 again as it did on the rally up to this consolidation.
New highs: 195 (+57)
New lows: 24 (+4)
The Chart: (Click to view the chart)
Thursday’s tight range on low volume unleashed some buying Friday, pushing the index toward the top of the 2001 summertime trading range (10,670 intraday). That has marked the top of the consolidation that past two weeks. Friday’s volume surge is a good sign it will be able to take this level out this week and look toward 10,800 and 11,000. It has continued to surprise many, but the price pattern has continued to show accumulation in the index and the older economy stocks. Now we see if it can breakout of the range on strong volume.
S&P 500:
The big cap index led the way higher Friday even without the help of many tech big names. Thursday’s tight trading range above support was a continuation of that good consolidation, setting up Friday’s move. ORCL and tech concerns were a drag early in the session as we thought, but the action looked to good to collapse. It is now ready to try the December and January double tops at 1173 and 1176. As with the Dow, it needs to make the break on strong volume to make the move. Then it has to take out some minor resistance at 1183 as it works its way through the summer 2001 consolidation range with a top at 1240.
Stats: +13.12 (+1.1%) to close at 1166.16.
Volume: NYSE volume jumped back above average on the move to 1.493 billion (+24.8%).
The Chart: (Click to view the chart)
THIS WEEK
Friday’s move caught some by surprise, and we will probably see more negative analyst comments based on valuation after many stocks made more good moves. Now the indexes have still not broken out of the trading ranges, and that test remains this week. The analyst comments may provide some drag, but they did not stop the continued consolidation last week as there was no dumping and Friday saw accumulation.
More important will be the FOMC meeting on Tuesday. We anticipate that the Fed will leave interest rates steady but will start the job of getting the market prepped for the time when interest rates will be raised. Whether that will be a bias change is questionable. Greenspan told Congress the recovery was underway, but he also said in that testimony and in last week’s speech that the recovery would not be as strong as in past recessions. Thus we doubt a bias shift to neutral but there will be statements to the effect that the recovery is underway and there is less downside risk. At most a neutral bias, but the economic reports and Greenspan’s own analysis would fly in the face of an equal weighting between backsliding and a more robust recovery. In any event, we think expectations are for a shift to neutral bias. Anything less than that will be a pleasant surprise for the market.
The main issue facing the market will be upcoming earnings and warnings preceding that. There are two weeks left in the quarter, and many companies will be entering their quiet time after this week. Thus we will more than likely see some dirty laundry aired this week, and no doubt some will be in technology. The economic numbers are showing economic improvement, and there is a pickup in technology orders. Still, as noted above, they are lagging the rest of the economy. The market will face some more obstacles from tech warnings. The NYSE stocks, non-tech Nasdaq stocks, and smaller tech stocks are attracting the most investment dollars and they will attempt to lead the market higher this week and on into earnings season.
We expect further upside action in anticipation of the Fed meeting on Tuesday. It is a one-day meeting and we will know the results Tuesday afternoon. That gives the Dow and S&P ample time to break near resistance, and then we see how they react to the Fed news. May get a test and then a move up from there. That would be the strongest action and given the price/volume action, what we anticipate barring any unforeseen news.
That leaves us looking predominantly at upside positions in the leading sectors. There are also some tech bounce positions we started on Friday that we view as more short term; the opportunity was setting up as we saw Thursday, and we took advantage of the moves. Those we will not hang around long, but will take money off the table when the targets are hit. We did not set targets too high on these; we were looking to take the bounce to resistance and take the profit. There is some downside action and we are also going to let some more covered calls set up and play as some positions pullback after strong moves.
The market continues to rally, consolidate, and then rally as economic numbers continue to improve. It is a tough climb when the predictions are for a less robust recovery. But, the continued concern about the recovery keeps investors uncertain, and that helps keep the market moving higher. Look at the put/call ratio last week: when Wednesday hit with some bigger price selling but still on light volume, the ratio jumped to 0.90; that indicates there is still anxiety out there anytime the market is not moving higher. There is also a lot of money on the sidelines and that keeps being dragged in as stocks continue to improve. That is a constant source of fuel for the rally.
Support and Resistance
Nasdaq: Closed at 1868.30.
- Resistance: 1875 is the bottom of the November consolidation. The 200 day MVA (1896.13). The top of the November consolidation at 1934 to 1941. After that is 1980 (the December gap up point) and some minor resistance at 2000. Then the January top at 2098.88.
- Support: 1850 was able to hold as support last week. After that, it is pretty sparse down to 1800 to 1775.
S&P 500: Closed at 1166.16
- Resistance: The December high (1173.62) and the January high (1176.97). That point also marks roughly the lows of summer 2001 consolidation that runs up to 1240. Before that point there is some resistance at 1183 from March 2000.
- Support: 1150 and the 200 day MVA (1146.94). After that, 1125 is the hump in the double bottom, and the simple 50 day MVA (1128.52) and exponential 50 day MVA (1131.27) are converging. 1100 has acted as support as well.
Dow: Closed at 10,607.23
- Resistance: The top of the June, July, and August 2001 trading range at 10,600 (10,679 intraday high), is still in the way. 10,800 represents some resistance. That is followed by resistance at 11,000 on its way to the May 2001 high at 11,345.72.
- Support: 10,400 held as support during this consolidation. That is followed by the January high at 10,300. Then the 200 day MVA (10,006.84) and 10,000.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
3-19-02
- Trade Balance, January (8:30): -$26.9B versus -$25.3B%
- FOMC Meeting (2:15): Results announced
3-20-02
- Housing Starts, February (8:30): 1.63M versus 1.678M prior.
- Building Permits, February (8:30): 1.65M versus 1.706M prior.
- Treasury Budget, February (2:00): -61.0B versus -$48.2B prior.
3-21-02
- Initial Claims, 3/16 (8:30): 377K versus 377K prior.
- CPI, February (8:30): 0.2% versus 0.2% prior.
- Core CPI, February (8:30): 0.2% versus 0.2% prior.
- Leading Indicators, February (10:00): 0.3% versus 0.6% prior.
- Philadelphia Fed, March (12:00): 17.8 versus 16.0 prior.
- FOMC Minutes, 1/30 (2:00) |
