Strong book to bill and rising confidence spur late session gains.
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- Dow set to test recent highs along with smaller indexes, but Nasdaq and S&P 500 have a tough climb.
- Dollar tumbling on continued talk of stronger Japan.
Buyers again enter the market on a dip.
Friday it appeared the indexes were going to settle into another consolidation session. Good news from the strong semiconductor book to bill report, improving Dell results, and consumer sentiment higher than economist expectations moved the indexes up sharply. Then the effects of a very strong upside week took over and dragged prices negative. It looked like a lower volume consolidation session. Then buyers came back in during the last hour, pushing all indexes higher on a modest volume increase.
It is appropriate that the indexes finished a strong week with some bullish action. It was the best week for the major indexes in over two months, delivering a high volume and broad follow through to the big short covering rally two Wednesdays back. It was clear that the big Wednesday rally was short covering, and that is how most rally attempts start. This one was different than prior attempts, however, in that there was follow through on Tuesday. That follow through demonstrated that institutions were following up the short covering rally with some real buying with the Nasdaq scoring the largest gains.
The problems we have pointed out. Lack of good patterns to lead in the Nasdaq, continuing overhead supply that will keep selling pressure on the Nasdaq and the large cap S&P 500, and questionable recovery timetable in technology investment. The Nasdaq can really move when investors get behind it as we have seen it lead the market in percentage gains. There is a chance it can perform as the Dow in 1933; perhaps it has tested the lows and can continue to rebuild patterns as it works its way higher and builds a base to clear that overhead supply. Right now it has a lot going against it, but we are willing to take advantage of some large cap tech stocks that can provide us nice gains in the short term. That is the point; short term. We don’t see many of these stocks providing long term investment opportunities now.
The market does not necessarily go as the Nasdaq goes.
Our concerns about the Nasdaq run deep, but as we have seen, the Nasdaq is not the entire market. Small and mid-caps continue to outperform the overall market though showing some strain over the past three weeks. The Dow is also performing better, looking as if it will test its March highs at 10,600 to 10,700. Their performance is most likely one of the reasons we have not seen sentiment indicators spike higher as the selling gained momentum two weeks back.
These indexes should outperform the Nasdaq as the techs continue to try and rebuild. The Dow does seem intent on testing the March high at 10,679. From there the story changes as it has a tremendous shelf of resistance up to 11,500. Still, in a recovering economy the ‘old economy’ stocks on the Dow and populating the small and mid-cap indexes should continue to work higher. Many of these stocks were not participants in the massive rally that preceded the Nasdaq collapse. There is not massive institutional holdings on many of these stocks. Thus they don’t have the massive urge to dump by the institutions as we have seen with the likes of WCOM and ORCL.
Thus these indexes can show improvement without the Nasdaq keeping pace, though a unified market has definite advantages. The Nasdaq still is in a downtrend facing massive overhead supply. The large caps are also facing a downtrend and have equal overhead supply. Given their patterns we cannot look to count on those indexes for sustained leadership but look to the leaders within. There are many stocks that are outperforming these two indexes, and with the recent action they look ready to provide some more upside leadership to resistance.
THE ECONOMY
Confidence moves higher.
Expectations were for another solid showing at 93, but Michigan pollsters were finding positive vibes with a 96.0 reading. After waffling for a couple of months, consumers showed their stripes again even with a declining market the past two months. Apparently prospects of a continually improving economy carry more weight right now. Could it be that consumers are finally getting over the stock market? Now that would indeed be a watershed: going from a period where everyone was in the market and stocks being the topic of every dinner or lunch conversation to a point where the average person is more concerned about the economic future and their jobs than the stock market. Maybe, just maybe, the market is getting to the point where the average person in the U.S. has just given up on it. That would be about the time for the market to start to rally, i.e., just as the sellers have left and the economy is on its way to recovery.
Book to bill at 1.20.
This measures the orders booked versus actual shipments. They were up the prior month more than expected, and this gain was the best showing since August 2000 when the semiconductors started their biggest slide into the bear market. This was very good news, but it was unable to give semiconductor stocks much help as KLIC, a chip equipment maker, stated that Q3 sales would be at the low end of the range or about $5 million less than analysts had wanted. Cold water on a potential strong rally in the chip stocks, but the trend now appears to be up for the chips. It may not be a blowout race higher, but this is the leading technology sector when a recovery begins. It is starting to turn back up; when bookings of orders outpace deliveries, that is the start of a buildup.
Dollar continues to tank.
Two months back we reported on the dollar breaking its uptrend. A month ago we reported it was breaking its 200 day MVA. The recent attempt to rally in May rolled over and died late last week as the Japan news crescendos. More talk of the end of the latest Japanese recession spiked the yen against the dollar. The euro moved up as well, but not as strong.
The dollar should be strong. The U.S. economy, the strongest in the world, is improving. Regardless of what Japan is saying, it will not catch the U.S.; the U.S. kept the world from the abyss, it hurt the world when it had this recession, but now the U.S. with its voracious consumers is coming back. Strong productivity foretells higher GDP. Crisis in the Middle East should make more investors worldwide want to hold dollars.
There does come a point, however, where foreign markets can look more attractive. The thing the U.S. had and has going for it is the strong economy; the dollar acted as the currency of last resort. Now that Korea is doing much better, there is promise that other countries will as well. The big fear for the U.S. is that foreign investors holding a lot of dollars decide they have too much dollar exposure given recovering economies elsewhere and want to dump the dollar for investments elsewhere. That requires that they sell dollars and obtain the currency of the country they want to invest in. More dollars on the market (increased supply) means a weaker dollar. It feeds on itself.
This is one reason the U.S. really needs a recovering economy. This is one reason all of the talk about a weak recovery from the Fed and most everyone else is actually hurting the dollar. Instead of a recovering economy helping the dollar, it is hurting it because everyone is saying the recovery is not going to be very strong. You be the foreign investor. Yes, the U.S. is recovering, but it is not going to really jump according to its own experts. What about South Korea? What about Russia? What about even Japan? They may not be as strong as the old standby, but they could provide a greater advance in a shorter time period. We said it before, but even as Secretary O’Neill espouses a strong dollar policy in clear words, the Fed continually talks of a weak recovery and the administration embarks on protectionist policies on steel and lumber. These are not the policies that usually work to strengthen an economy; leading economies lead by strength, not by building up walls.
THE MARKET
The rally week and follow through were welcome. The indexes made higher lows and then followed through on the rally attempt. Definitely better action after the prior two months and in fact most of 2002. The Nasdaq and S&P 500, however, are still in downtrends and are going to be hard pressed to continue the move given the lack of accumulation in those indexes. It is improving, but there is massive overhead supply. They will most likely need more basing time at a minimum, i.e., moving higher, selling back and laterally, then attempting another rally. The holders of those stocks have to be finally shaken out and their steep downtrends indicate this has not been accomplished yet. The Dow is in significantly better shape though it too still is dealing with a longer term downtrend and a long, thick band of overhead supply.
While there has been follow through and a continually improving economy, the lack of accumulation at this point in the techs and large caps makes any sustained rally suspect. The Dow looks good up to the recent highs, and while we invest into this rally when opportunity presents itself we are viewing it as an Arms rally as discussed a few weeks back: a tradable rally, but one that could run out of steam at the resistance levels.
Put/Call Ratio (CBOE): 0.72; -0.14. Falling as the indexes move up as it is supposed to do. Staying at the high end of the range, but as we saw in the recent downtrend that did not stop the slide.
Nasdaq
Managed to pull out a late rally on slightly rising volume, but it showed a doji right at the 50 day MVA. After a good run from the higher low it made 5 sessions back the Nasdaq looks ready to consolidate on a pullback. Thus far the action has been positive, but this week will be its first test on this move.
Stats: +10.95 (+0.6%) to close at 1741.39
Volume: 1.646 billion (+0.2%). A very slight gain in volume on a slight gain in the index. This is technically good action, but a rather inconsequential volume session other than once again it avoided reversing on higher volume.
Up volume: 1.054 billion (+4 million)
Down volume: 532 million (-28 million). Virtually no change in up to down volume.
A/D and Hi/Lo: After trailing all session advancing issues overtook decliners late for a modest 1.18 to 1 gain (decliners led 1.22 to 1 Thursday). Nothing major happened Friday in the broader Nasdaq.
New highs: 149 (+1)
New lows: 45 (-33)
The Chart: (Click to view the chart)
Tried to sell off early but a late round of buyers pushed the index to the 50 day MVA (1743.37). Though bullish to see buyers come in late, it was a modest move, unable to take out Wednesday’s intraday high (1759.33). It closed with a doji (an indicator of momentum change), and as it was unable for the second session of the week to take out the 50 day MVA and 1750, it looks as if it needs a breather. Again we note the best place to hold is at 1700, the point of the February low. Decent support there, modest pullback, and a good point for another higher low if the index is going to try to take out the January to March down trendline at 1785 and the 200 day MVA at 1821.23.
Dow/NYSE
Turned a loser into a nice session on rising, average volume as it cleared the January/September 2000 down trendline. It looks ready to test the March high at 10,679.
Stats: +63.87 (+0.6%) to close at 10,353.08
NYSE Volume: 1.284 billion (+1.4%). Rising, average volume on the move higher after two days rest. This is solid action.
Up volume: 740 million (+126 million)
Down volume: 474 million (-133 million). Solid increase in up volume and corresponding decrease in down volume. A good session.
A/D and Hi/Lo: Advancers took back the lead at 1.22 to 1, a flip flop from Thursday when decliners led 1.22 to 1. Decliners were leading the way early until the late session rally.
New highs: 118 (-4)
New lows: 38 (-11)
The Chart: (Click to view the chart)
A significant and bullish move on rising volume that cleared the January/September 2000 down trendline. This move coming off the minor double bottom at 9811 and the subsequent higher low speak to a test of the March high at 10,679. At this juncture that is about all that can be said for the rally as that will land it right in the bottom of the 1999 to 2001 trading range, a massive, massive level of overhead supply and resistance. For now we look to play the move to that point and evaluate from there.
S&P 500:
The S&P 500 led for the second straight session. The large caps joined the Dow in the move higher Friday, clearing 1100 and the 50 day MVA (1103.87) on the move. Nice move, and the close over 1100 on stronger volume indicates a test of the next resistance at 1125 (200 day MVA at 1121.05), possibly 1150. Before 1150 it has the September 2000/March 2002 down trendline at 1130. That is the last significant down trendline it has to tackle, but it is significant, enough to stall out a move in an index that has a lot of overhead supply.
Stats: +8.36 (+0.8%) to close at 1106.59
Volume: NYSE volume climbed to 1.284 billion (+1.4%), average volume, on the move over 1100. That is good volume on such a move. Some from options expiration, but still solid.
The Chart: (Click to view the chart)
THIS WEEK
The market put in a good week. The Dow and S&P 500 look to try higher resistance. The Nasdaq is showing signs of topping after its strong run, needing to consolidate toward 1700. How the Nasdaq holds up on a test of the move higher and how the Dow and S&P 500 handle near term resistance will tell us much more about the rally attempt. For now the momentum is upside, but momentum in this market can dissipate quickly when serious resistance is encountered. The Dow is heading toward that resistance as is the S&P 500.
Economic reports are again in the news. Monday the leading indicators are out, and they look 6 months down the road. They are expected to fall slightly from the recent string of gains. Wednesday durable goods orders are out, followed by Q1 GDP (second iteration) Friday.
We anticipate the Dow and the S&P 500 to try the next levels of resistance, the Dow at 10,600 and the S&P at 1125, possibly a bit higher toward 1150. We are looking to play those two indexes higher along with continuing to move into stocks in accumulation patterns that are making the move higher. As the market is still not showing it is ready for large numbers of sustained breakouts, we are keeping our targets somewhat conservative on many plays, though we are willing to let some of the stronger patterns and stocks run.
Support and Resistance
Nasdaq: Closed at 1741.39
- Resistance: 1750 and the 50 day MVA (1743.37) are the immediate overhead resistance and held again Friday. The simple 50 day MVA (1765.17) backs them up. The January/March 2002 down trendline is now at 1785 and the 200 day MVA at 1821.23.
- Support: 1700 is some support (recent lows and highs) and where we want it to hold. The second March down trendline is just below 1700. Some support from 1600 to 1620 from the October consolidation. 1550 to 1560 are the October lows and could try to hold. Then 1500. After that is the September low at 1387.06.
S&P 500: Closed at 1106.59
- Resistance: Cleared resistance at 1100, and now has to deal with the 200 day MVA (1121.05) and price consolidations at 1125. The September 2000/March 2002 down trendline is at 1130.
- Support: February lows at 1074. The October lows at 1050 are the last price consolidation level before the September low. There is possible support at 1000, but it is not much. The September low is 944.75.
Dow: Closed at 10,353.08
- Resistance: Cleared 10,300, and now has to deal with 10,400, the level that has acted as the barrier to the upper half of the March trading range. The top of the June, July, and August 2001 trading range at 10,600 (10,679 intraday high) marks the top half of the March trading range.
- Support: 10,250 is minor support. 10,100 is more substantial. Then the 200 day MVA (9906.24). After that two lows at 9811. Then 9500 to 9600 in the shelf of support from 9500 to 10,100.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
5-20-02
- Leading Indicators, April (10:00): -0.1% versus -0.1% prior
- Treasury Budget, April (2:00): $72.5B versus $189.8B prior
5-23-02
- Durable Orders, April (8:30): 0.4% versus -0.5% prior
- Initial Claims, 5/18 (8:30): NA versus 418K prior
5-24-02
- GDP-Prel., Q1 (8:30): 5.8% versus 5.8% prior
- Chain Deflator-Prel., Q1 (8:30): 0.8% versus 0.8% prior
- New Home Sales, April (10:00): 883K versus 878K
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