InvestmentHouse Weekend Update:
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- Early test of the 200 day MVA resistance quickly flops.
- March retail sales stronger than expected, stronger than retail stores alone.
- A week of reversals from the high as market is not yet buying into the war providing a sustained economic surge.
- Subscriber Questions.
Market finishes the week as it started: squandering rally attempts.
An early rally attempt failed yet again as SP500 and DJ30 tapped the 200 day MVA early and then ran out of gas. A quick drop to the 18 day MVA continued the bearish intraday activity of early rallies followed by closes at the low. Low volume, dead flat A/D line, no action. This pattern started Monday when the market surged as US troops rolled into Baghdad with relative ease. A massive gain was handed right back on rising volume as the big money used the rally to unload some stock positions. We viewed Monday as a significant session and not in a positive light for the rally. Higher volume reversals at resistance levels are not good indications for further upside as they tend to set the upside range for a move.
That move was followed by another mild distribution session Wednesday, and a modest and low volume bounce Thursday. Friday was very low volume, but the price/volume action overall has worsened. It is not sharply distributive, but it shows erosion of the solid accumulation during the strong rally. In the end it was all the indexes could do to hold the lows of the week. That kept them in decent shape to make higher lows in the current 4-week lateral move, but the double top and the start of eroding price/volume action has put cracks in what was has been a nice rally.
Again, the fact that it was unable to capitalize on the good news when it was clear the war was basically over was telling. There is still a significant force in the market that is concerned about the economy even after the Iraq war winds down and the post-war �surge� it brings. There is some pent up demand to be sure, and the March retail figures were not bad, but the market is showing significant doubt that Greenspan�s �wait and see what the war brings� strategy was good for the economy. The market has not given a complete thumbs down, but the failed intraday rallies all week demonstrate that some big money is taking at least some cash off the table.
THE ECONOMY
March retail sales deliver a pleasant 2.1% gain, the largest surge since October 2001.
The private retail sales reports were much less upbeat, showing an overall decline in March retail sales. The government report even showed a 1.1% gain excluding autos. What we have to remember is that the government report includes everything, including energy. Energy prices have risen, and because sales are measured in dollars and not units, the rising cost of energy inflates the overall retail sales figures but actually detracts from the economy. More money is spent on energy (gasoline, oil for electricity) than other items. The gasoline producers make more money, but the rest of the economy suffers because of it. We like to think of it in terms of title insurance in Texas. The government requires it supposedly to protect buyers from title failure. The policies, however, are allowed to except out all of the real threats to your title making the policy basically worthless. The only benefactors are the title companies and the lawyers they employ that write the worthless pieces of paper. Everyone pays but only a small part of the market benefits. Isn�t government regulation a great thing? Looking at our government today we never wonder why the Constitution drafters feared too much government.
What the private reports consider are what we all think of when we think of retail sales: sales at retail stores that sell consumer goods, not fuel and not the whole market of goods. They also focus on same store sales, sales that are not as robust as sales at new stores that are less than one year old. That is the disparity between the two. Reality lies somewhere between the -0.2% BTM/USW surveyed and the 1.1% government core rate, probably closer to the -0.2% number. Perhaps that explains why the market did not hold any gains that it built into the futures market when the retail numbers were released.
Michigan sentiment on the rise.
Private polls have shown a substantial sentiment increase the past few weeks with the war in Iraq getting underway and proceeding very well. 83.2 versus 77.6 in March and an expected 78.1. This was another positive indication that the economy weathered March to April war period much better than anticipated, but sentiment always goes up when the US goes to war or has to come together in a crisis. Current conditions were up to 94.8 from 90 while future expectations moved to 75.7 from 69.6. Solid gains may help spring some more purchasing.
Producer prices higher than expected.
1.5% gain in March on the heels of a 1% gain in February and 0.4% expected. The core was up 0.7% when it was expected to be flat. The core takes out food and energy. Energy prices obviously had their impact, but the core was still much higher than expected. We have talked the past two months regarding rising producer prices, prices that have potentially good and bad aspects. Good in that a bit of re-inflation in the economy shows possible rising economic strength. Possible. Bad in that if the economy remains flat as many indications suggest, it raises the possibility of stagflation, that 1970�s plague that saw rising prices without any rise in economic output. That put the country in a malaise it took 8 years and a massive economic package to break out from.
Commodities, a big part of producer prices, have stabilized after a plunge in March. That was somewhat of a relief. We saw the rise in commodities prices as very suggestive of stagflation as commodities rose all through the 1970�s without any economic growth. That was happening all through 2002 and even this year even though the economy was slowing down. Commodities are very economically sensitive; they rise sharply or fall sharply based on economic expectations. The 2002 rise was positive as it looked as if it was forecasting economic expansion. But they kept rising as the economy slowed again. We looked at money supply increases by the Fed but also determines that banks were not lending much of that money for fear of Fed retribution for risky loans (a paradox the Fed did not seem to mind). Instead the banks put the money into an area that was going up (gold, oil rising), i.e., commodities. Just as in 1999 when banks invested all of that unneeded Y2K money the Fed pumped into the system in the stock market, they were putting it into the commodities market. They started shifting out of commodities at the tail end of February when commodities peaked ahead of the war. They pulled the money and commodities started to fall as the stock market started to rise. The stock market and commodities both predict economic direction and generally move together unless something such as stagflation is taking hold or there is monetary manipulation at hand. It looks to be more of the latter. So, perhaps the rise in the PPI indicates a stabilizing economy.
As seen with the retail sales, however, the stock market is not buying into it wholeheartedly just yet. It did not help that the enlightened senate has refused to accept a real stimulus package to help the economy, preferring to pinch pennies and hope for recovery at some point than take aggressive action to fix what the government broke (or its delegated agent) when the Fed jacked interest rates up and stalled the economic prosperity in its snipe hunt for inflation. But I digress. Suffice it to say that the market has been less than impressed with the handling of the economic package.
THE MARKET
The market had its chances all week to make a move on the war. It didn�t refuse to do so, it just failed its attempts, getting turned back at the 200 day MVA each try or on the Monday rally, higher resistance. Friday the market had another chance with some much better than expected retail sales, but it gave it all back once again.
During the week the indexes managed to make a lower closing high below the March peak, a negative, but they also managed to hold comfortably above the bottom of the 4-week trading range that has developed, particularly after the second top hit Monday. The indexes finished more or less in the middle of that range, able to make a higher low here and again move on resistance, or tank to the bottom of the range or lower and giving up most of the upside momentum in the rally.
As it stands the market is still in a confirmed rally with leaders mostly still holding their gains, but showing signs of wear and tear with the Monday reversal and the Wednesday distribution session. There is no heavy selling, but the market has set up some hurdles for itself by forming that double top and failing at key resistance. On the flip side, financial stocks, a key to upside markets, are holding their gains rather well. Given the low volume, dull as butter Friday action, we decided to let our winners continue to run, and perhaps give us another good upside this coming week. The market has turned from strength overall in the rally to strength in particular stocks. Let the winners run, cut the losers fast.
Market Sentiment
VIX: 28.27; -0.69
VXN: 39.62; -0.71
Put/Call Ratio (CBOE): 0.79; -0.14. The mild selling did not bring out any more put buyers, most on either side of the ledger preferring to sit out the action.
Nasdaq
Led by the SOX (-1.5%), techs turned in the worst performance of the session, closing yet again on the 50 day MVA.
Stats: -6.76 points (-0.5%) to close at 1358.85
Volume: 1.232B (-2.22%). No distribution as Nasdaq sold back down to the 50 day MVA.
Up Volume: 534M (-284M)
Down Volume: 670M (+311M). Evenly matched on a slow session.
A/D and Hi/Lo: Decliners led 1.11 to 1. Ditto.
Previous Session: Advancers led 1.07 to 1
New Highs: 86 (+16)
New Lows: 44 (+5)
The Chart: (Click to view the chart)
Gapped higher and then did what it did all week long on gaps higher; it sold back down for a loss. For the second time in three sessions it closed at the 200 day MVA (1337), rallying some off of 1350 to manage that close. Volume remained below average, the fourth straight low volume session after the above average volume reversal Monday. Again it is at the point where it needs to make a higher low to keep any momentum in the rally alive. About all it did to finish the week out after the Wednesday distribution was to hold up for an attempted regroup and again try resistance that is at 1400 and 1425. It really cannot afford to dip below 1350 as the range lows are at 1336. It has not tipped its hand yet, and is still subject to world events such as trouble with Syria in addition to the overall economic concerns. It will need some help from the earnings reports this week, but it is definitely in position to make another run at resistance.
S&P 500/NYSE
Ran to the 200 day MVA and then ran away from that level like a scalded dog yet again.
Stats: +0.04 points (0%) to close at 868.3
NYSE Volume: 1.116B (-9.17%). Very low, below average volume as there were no buyers or sellers in any number.
Up Volume: 545M (-198M)
Down Volume: 564M (+72M). Downside by a nose.
A/D and Hi/Lo: Advancers led 1 to 1. Advancers led by 1 share. One measly share. Hey, advancers won on a down day; stop the presses, it is a positive! Okay, okay. We were just trying to sensationalize the action given the inaction much like the Baghdad reporters sensationalizing the looting that will burn itself out (pun intended) in a day or two.
Previous Session: Advancers led 1.39 to 1
New Highs: 69 (+2)
New Lows: 26 (+1)
The Chart: (Click to view the chart)
The large caps were moving, right up to the 200 day MVA (882) on the high, even crossing that resistance. Then they reversed and sold quickly. After that they just stayed down all session as if waiting for concrete to set up. Managed to again hold the 18 day MVA on the close just as on Wednesday. That keeps it easily above the 50 day MVA (861), roughly the midpoint in the month-long trading range. It has the March high (895.90) and of course the 200 day MVA (882) to take out.
DJ30:
Same action, different set of stocks (sort of). The blue chips rallied toward the 200 day MVA (8345) in the very early going, but reversed as fast as they rose, giving back 134 points from high to close. A familiar story for the week and a sign that sellers have a slight advantage. Not much. The Dow did not sell much as it kept trying to break higher. There were just enough sellers into strength to keep the index from making headway. It managed to hold in the middle of the range (8500 to 8000), tapping the 18 day MVA on the low (8180) and managing to close just over the 10 day MVA (8217). That is where we want it to hold to make a higher low and try the 200 day MVA and then 8500. Its double top at 8500 sets the bar high and the Dow has a tough upside road.
Stats: -17.92 points (-0.22%) to close at 8203.41
Volume: 1.116B (-9.17%)
The Chart: (Click to view the chart)
THIS WEEK
Still a lot of possibilities in the war with Tikrit yet to be taken and the issues with Syria building regarding safe harbor for Iraqi leaders and military as well as Iraqi weapons of mass destruction. That is another potential market impediment along with the continued revelations regarding just who has been assisting the former Iraqi regime under the table of the UN resolutions and sanctions. Everyone is quick to point out US self interests and past policies in the region and then tried to use the UN to keep their dealings hidden. No one, not those within the Middle East or those outside the Middle East are dealing with clean hands. If you point the finger you are likely as not to get it pointed back at you.
That is always a backdrop of uncertainty on the market, and that along with issues regarding the economy is starting to act as a governor on the market action as seen last week when it could not maintain its gains. For right now the market has become more of a market of stocks. There is still underlying strength in the rally as the distribution sessions have been few, but until the market posts another solid rally on volume, it is a matter of whether leaders continue to hold up and move higher. The leaders mostly held up Friday, giving back a bit on lower volume. That kept us in them even as they hit their targets; as long as they maintain their uptrends and are showing good price/volume action.
Support and Resistance
Nasdaq: Closed at 1358.85
- Resistance: The 18 day MVA (1369). 1400 is some new resistance. The early November, March and early November highs (1420, 1426, and 1427, respectively). The January high (1467). The December high (1521).
- Support: The exponential 50 day MVA (1358) and 1357, the 1998 bear market low. The 200 day MVA (1337) and the simple 50 day MVA (1339). The January 2002/January 2003 down trendline at 1318.
S&P 500: Closed at 868.30
- Resistance: 868, the top of the January trading range. The bottom of the October consolidation range at 875. 200 day MVA (882). Then price tops at 911 (July) and 925 to 935 (November and January peaks).
- Support: The 18 day MVA (867) and the exponential 50 day MVA (861). 850, the bottom of the January trading range. The simple 50 day MVA (848). Price support at 825.
Dow: Closed at 8203.41
- Resistance: 8250, the bottom of the October consolidation range and other index lows is some resistance. 200 day MVA (8345). November and January highs (8800, 8870). December high (9044).
- Support: The 18 day MVA (8178). The top of the January range at 8160. The exponential 50 day MVA (8129). The simple 50 day MVA (8001). Price support at 8000 (bottom of January trading range) and then again at 7750.
Economic Calendar
4-14-03
- Business inventories, February (8:30): 0.2% expected, 0.2% January.
4-15-03
- Industrial production, March (9:15): -0.2% expected, 0.1% February.
- Capacity utilization, March (9:15): 75.4% expected, 75.6% February.
4-16-03
- Housing starts, March (8:30): 1.685M expected, 1.622M prior
- Building permits, March (8:30): 1.725M expected, 1.811M February
- CPI, March (8:30): 0.4% expected, 0.5% February.
- CPI core (8:30): 0.2% expected, 0.2% February.
4-17-03
- Initial jobless claims (8:30): 420K expected, 405K prior.
- Philly Fed, April (12:00): -6.5 expected, -8.0 March.
SUBSCRIBER QUESTIONS
Q: You've discussed simple & exponential moving averages in the past....but it's still VERY confusing to me as to which ones I should look at from a technical point of view. Especially noticeable is the huge difference I've noticed in the 200 MVA simple versus exponential on a stock. When one looks at the chart, I sometimes don't know which one I should use. A glaring example is INTC: as I write, the simple 200 MVA is 17.07, but the exponential 200 MVA is 18.66 ...If one were to attempt to trade this, INTC @ 16.88 is close to the simple, but a HUGE distance away from the exponential. Very confusing!
A: Good question. In general we look at what is working in the current market to determine whether we use the exponential or simple moving averages. In the very active trading in the long bull run we looked primarily at the exponential MVA on the 10, 18 and 50 day MVA. On the 200 day MVA we always use the simple MVA, at least as long as that is what the big money is using. That last point is the key: what is the big money using because it is the big money that controls the movement of a stock, particularly one such as INTC that has such a huge float. With an average daily volume of roughly 55 million shares, you know the big boys are the ones trading these shares, not you, me, and grandma trading 1000 or so shares at a time. Thus we look at what moving averages are working for that stock, i.e., what MVA the big money is using.
For the short term 10 and 18 day MVA they are still using exponential moving averages. For the 50 day MVA it is a closer call; mostly it is still the exponential 50 day MVA, but with INTC for instance, it is currently using the simple 50 day MVA as potential support. The 50 day MVA is thus showing some fluctuation. We are still looking at the exponential MVA primarily, but we track the simple 50 day as well. |
