InvestmentHouse Weekend Update:
investmenthouse.com
- Market rebounds from distribution with techs and chips leading again.
- Jobless claims rise again, Philly manufacturing sinks further.
- Market recovers but faces the same challenge.
- Breakout ahead or will the market get �tired� of earnings.
- Subscriber Questions.
Techs provide the strength as earnings provide more upside fuel.
After a very poor Wednesday session where stocks reversed on high volume at resistance yet again (third time in 2 weeks), stocks posted solid gains across the board. Once again tech led the way, this time able to hold the gains prompted by some more solid earnings news. That was somewhat remarkable in itself as Nasdaq ran right up to the prior resistance and did not back down. Earnings have been better thus far with 65% reporting sequential earnings growth for the past three quarters. Believe it or not, that is a level that is more characteristic of a bull market. Earnings expansion is the key to the stock market. If earnings overall are showing sequential growth, that justifies increasing stock prices. The big issue, however, is how much of a price rise. That is another key component and it is tied to future economic strength. There is some economic improvement, but the question is whether it is powerful enough to drive stocks hard or just have them meander along.
Volume was up on Nasdaq, down on NYSE. It was expiration Thursday (no trading on Good Friday), and that helped explain some of the volume. That leaves issues as to just how strong the Nasdaq move was. We do note that breadth was solid and many leaders were moving up on strong volume. Indeed, some that just stumbled on stronger volume jumped right back up on even stronger trade. Some of the volume had to do with expiration, some was just buying, particularly with respect to the leader stocks as opposed to the household names that are not exactly in position to lead to new highs.
Even with the strong moves, we were very concerned about jumping aggressively into a lot of new positions. The indexes are still in their ranges. Nasdaq is right back to banging its head against the top of its range, maintaining its higher low and looking for a breakout. Given that it was expiration Friday (up Fridays can lead to down Mondays), that the indexes have been distributing some, and that Nasdaq was still only at the top of its range that had pushed it back repeatedly, we were not ready to load the boat. If it breaks higher on volume, there will be plenty of opportunities to buy stocks and make a bunch of money. We have a lot of outstanding winners working for us right now. We may have been overly cautious, but there was no rush.
THE ECONOMY
Weekly jobless claims on the rise yet again.
After dipping to 412K the prior week (revised up from 405K), jobless claims ballooned again to 442K, well above the 410K expected. With continuing announcements of corporate layoffs, it is absolutely no surprise that jobless claims are not improving. A big chunk of the increase involved auto plant temporary closures, but what caused the closures? Lack of need. The fixation on the employment numbers is understandable but meaningless given the continued slow pace of economic activity. Companies never hire until existing staff simply cannot keep up and threaten to mutiny. With the average workweek still at levels historically indicating stagnant hiring, with overtime hours indicating the same historical slack, there is no need for new hires. The economy has to get better and stay better for quite some time with no Greenspan �soft patches� seen last fall and this spring, no war slowdowns, or any of the other multitude of reasons to put off hiring that arise when the economy is shaky.
Philly Fed falls further than expected, but that was expected.
That only makes sense in the world of economic reporting. Think back to 1999 with the �whisper� number for earnings. Talk about a sign things were coming unraveled. There were expectations and then there were expectations, wink, wink. Thus when the New York (or Empire State) regional PMI came in 15 points worse than expected, the Philly forecast was immediately changed. Investors were worried it would be worse than it was. Expectations were for -6.5 (originally) and when it came in at �only� -8.8 versus -8.0 in March that was a positive. The �whisper� number was lower. Hey, it beat the whisper. Buy, buy, buy, baby!
Actually, the number was terrible, but it did mostly reflect the war before US troops took Baghdad. Remember, this is manufacturing version of consumer confidence; it is a popularity contest, not hard and fast data. New orders fell to -11.2 from -4.3. Employment fell further below the zero line (-12.5), no surprise there. As with most confidence reports of late, the future remained solid at 45.8. All in all, the report showed things were getting worse ahead of the war. Again, a no brainer.
In sum, the economy has deteriorated, something we all knew ahead of the war and during the first two weeks when it was clear according to that military genius Peter Arnet that the US war plan had failed, during the lead in and early part of the war. There has been some recovery and consumer confidence has surged. It won�t be enough and the economy needs serious stimulus. Hate to sound like a broken record, but the more stimulus the better. As we have noted before, at this point we would prefer to worry about some inflation as opposed to worrying about following Japan.
The Fed monetizes the bond market in an attempt to prop up the consumer.
While much of the debate regarding the Fed (other than just how bad a screw up it made in jacking up interest rates at precisely the wrong time; at least in that respect it is being historically consistent) focuses on whether it will lower or raise rates and when, the Fed has been quite busy on another front in its efforts to salvage that which it savaged.
The Fed has other weapons than interest rates, something it noted to the �out of ammunition� crowd when it reduced rates 50 basis points in the last round of cuts. The Fed has noted an uptick in interest rates and the impact that is having on mortgage applications. The Fed is alarmed by that. Recall that about a year ago we said the Fed had cut rates and was in a race with time, hoping that business investment would pick up before consumers ran out of gas under the burden of debt. It pushed them down also to keep the housing sector strong even as consumers were not so strong.
Sensing that the clock is winding down as far as consumer strength, the Fed has embarked on a new front. It is buying treasuries and buying them in large quantities. That has the effect of holding rates down. The relationship is inverse: when treasuries rally (when they are being bought), their yield (interest rate) falls. What the Fed is doing is printing money to buy treasuries and thus keep rates down so that the consumer recovery doesn�t stall even before it starts. Again, the Fed is trying desperately to buy more time for the economy (and Greenspan�s legacy) by keeping consumers spending until businesses start doing the same.
That can be very good for stocks, and it can be a very dangerous game as well. Good for stocks because the Fed is pulling out the stops to beat deflation and to get the economy back up and running. It is not about to raise interest rates as some speculate when it is buying treasuries to keep rates down so consumers will continue to consume. That interest rate stance is bullish in itself; the fact that the Fed is going to extremes to get the economy to run is bullish as well. The Fed is on the gas pedal hard, but the same question is there: does the Fed have enough horsepower?
Before we go there, the flip side of this bond market plan can be risky. Interest rates have been trying to rise on their own even with the Fed maintaining the lowest Fed Funds rate in 40 years. In buying treasuries, the Fed is artificially pushing down on rates. It is buying treasuries basically with new money it is pumping into the market. More dollars acts as stimulus, but it is also inflationary if there is no boom in production by business. The definition of inflation is more dollars chasing a finite amount of goods. Production must increase or this is very inflationary: more dollars chasing the same goods and then the artificially lower rates by virtue of the Fed�s actions. If it does not work, if the business side of the economy does not charge ahead soon, there is the very real threat of stagflation: interest rates soaring, no new jobs, no business activity, prices jumping, and consumers no longer buying. Hello 1970�s. Any wonder they are running �The Making of Saturday Night Fever� on cable lately? I shudder to think that those bad economic times spawned disco. What new hellish form of music is waiting to arise from another such period?
Can the Fed succeed in its plan? Given time anything can happen. With the Baby Boomers on the cusp of retirement with no savings plans, many will be looking to Social Security to provide them retirement. Somewhere along the line SS went from a little stipend to help out in the golden years to a subsistence income. There are so many straws in the �trust fund� there is no way it can be funded. The only time it is �safe� is when the economy is surging. Once times turn sour and tax revenues fall, it goes into the red. People are living on average 12 years longer than they were when it was instituted. Children living abroad of citizens who have not set foot in the US in over 20 years and have not contributed to SS during that time are collecting social security benefits when that parent dies. As it stands it won�t work, and without a strong economy, it is ready to collapse.
That picture indicates that SS won�t be able to help. There is not enough time and the Fed has not been able to generate the necessary economic activity. The Fed, however, has resisted any talk of fiscal stimulus. Why? Given Greenspan�s ego and his desire to be remembered as the greatest Fed chief, he wants history to show it was his handling of monetary policy that staved off massive inflation, softened the market crash, mitigated the recession, and then brought about a roaring recovery. It would take the best Colombian cocaine mixed with vast amounts of tequila to ever view the events of the past 4 years in that light, but that is what Greenspan wants. If there is fiscal stimulus, it blemishes his �I did it my way� legacy; he losses some control.
The Fed is pulling out the stops. A businessman won�t, however, go out and buy new equipment if business is not there just because rates are still low. They have been low for two years. There has to be an inducement to buy; if you don�t take advantage of the plan you will squander some of your money. That is where investment tax credits come in. They induce you to buy because instead of paying the tax and getting nothing, you take the money you would have paid the government and buy something you can use. You lose out if you don�t do it. Multiply that by hundreds of thousands of businesses and you have a huge economic impact on the business side of the economy. Production surges to match that demand and increased money supply the Fed is pumping into the system. You set off an investment boom and you avoid inflation in doing so. It worked in the early 1980�s, in the early 1960�s, and even back when Coolidge was President. Call your senators and demand they get on board because the Fed is setting up another disaster if Congress does not pass a strong economic plan phased in right away and in a large amount (the $353B is not going to do it).
THE MARKET
The move was broad, the gains were held, and there was some stronger Nasdaq volume. On the face it was good action. Even if you dug a bit deeper there was still some good action. The rally was also needed after the Wednesday higher volume selling; in that respect it was a positive. Still, there are the same problems to face.
The most important is that near term resistance. Nasdaq rallied right up to the August 2002 high, the first high that it broke, ending the long string of lower and lower highs. That level also marks the top of the recent double top. The surge up on volume was good after the Wednesday gap and tank below that resistance, but it has still not been broken. Frankly with it being option expiration day and the distribution we have seen, we were not all that eager to jump into stocks that rallied for three days just as Nasdaq made it back to key resistance. Hate to say it, but we adopted more of a �wait and see� approach of Greenspan. It was thus probably the wrong move.
There was also the mixed volume. Nasdaq was up well above average, an indication of some accumulation. NYSE volume was lower, however. Volume was higher because of options expiration and position squaring as a result. Even with that, however, NYSE volume was lower. Perhaps it did all of its shuffling Wednesday, but given Nasdaq volume that is a hard position to sell. The NYSE action did not remove the distribution sessions nor change the character of the market that has been lately showing the bearish up early, down late action. In short, Friday did not change the character one way or the other, and we still have to acknowledge the distribution and the ambivalent price/volume action.
Finally, Mondays following gains on expiration Friday are typically down. That is a general rule, and general rules are often broken rules. Given the proximity to Nasdaq resistance and the other indexes still in their ranges, we were willing to, well, wait and see.
There are several positives, however. The price patterns in the indexes improved dramatically with the Thursday action. Nasdaq to the SP400 have put together short ascending triangles, i.e., higher and higher lows with a constant top that keeps being tested. Think of it as being squeezed from below as stocks keep rising, ready to blow the lid off.
Then there is the litmus test of all rallies: how did the leaders perform? Some of the leaders that were knocked back Wednesday were rallying on even stronger volume Thursday. The leaders were again racing ahead and racing ahead on volume. When a market is driven by what you would term expiration volume as discussed above, it is usually the big stocks moving on volume as those are the ones institutions spend a lot of time shuffling in and out of when they are trading them (as opposed to long term buying) as they have in the bear market. The Thursday volume in leaders was solid. When leader run on volume that is accumulation volume, not just position squaring. Many, many of our stocks that have already hit their first or second buy points were rallying higher, and we were letting them run still. When the leaders are seriously leading, it is hard to get too anxious about the action. Indeed, you would tend to tip the scale in favor of the positive action when they are performing well.
In sum, we liked the Thursday action as it worked toward rectifying the deteriorating price/volume action and it kept the upward bias in place. It did not completely wipe away the distributive action creeping in, and there is immediate overhead resistance even after stocks have run well the past week. We continue to look at upside positions and took some Friday, but with many winners working for us, we can let Nasdaq show whether it has the right stuff here at resistance. The leaders were indicating this, but as we said before, if it does breakout, there will be many opportunities to make money as this would be an important breakout.
Market Sentiment
See the �Subscriber Question� and its further discussion of volatility indications in the market.
VIX: 24.59; -1.5
VXN: 35.88; -1.17
Put/Call Ratio (CBOE): 0.52; -0.13
Nasdaq
Leading the market again, sporting strong volume on across the board with Nasdaq stocks. At the cusp of a breakout, and we are not ready to bet against it but at this point we want to see the move.
Stats: +30.78 points (+2.21%) to close at 1425.5
Volume: 1.624B (+6.08%). Stronger, above average volume on the return to the August and March high resistance levels. It will have to prove it was real accumulation buying and not just related to options expiration.
Up Volume: 1.299B (+406M)
Down Volume: 310M (-290M). All buyers.
A/D and Hi/Lo: Advancers led 2.14 to 1. Best A/D breadth in two weeks, a nice return to the power seen in the rally off the March low.
Previous Session: Decliners led 1.18 to 1
New Highs: 97 (-10)
New Lows: 26 (-4)
The Chart: (Click to view the chart)
The earnings apparently had more impact than we expected as Nasdaq caught fire and rallied hard into the close. Chip stocks were the real leader with AMAT, ALTR, KLAC, INTC leading the way. The SOX is fast approaching its March high (337; closed at 317.90). As the chips play a huge role in Nasdaq direction, how they respond at this resistance will affect Nasdaq performance.
As for Nasdaq itself, it has immediately reversed from its failed third try at 1430 resistance, keeping that positive higher low made 4 sessions back in tact. This has turned the pattern to a short ascending triangle and has broken over the recent down trendline formed by the November and January highs. Positive move but it still has to break the immediate resistance. Many key stocks have already made strong moves up to this level and they will need a further influx of buying to continue the move. Even with a breakout over 1430 we will be watching to see how that is treated by sellers given the run up to that level by many key stocks.
S&P 500/NYSE
Good recovery off the 200 day MVA, setting up another attempt at the recent highs.
Stats: +13.67 points (+1.55%) to close at 893.58
NYSE Volume: 1.374B (-12.28%). Above average volume, but it was lower than the Wednesday selling. Disappointing it could not match Nasdaq in a nice volume surge.
Up Volume: 1.155B (+655M)
Down Volume: 208M (-829M)
A/D and Hi/Lo: Advancers led 2.84 to 1. Excellent breadth as stocks of all shapes and sizes were running.
Previous Session: Decliners led 1.2 to 1
New Highs: 109 (-18)
New Lows: 20 (-6)
The Chart: (Click to view the chart)
Moving up right off the 200 and 10 day MVA (880) after falling back to that level on the Wednesday distribution. If it holds it is another higher low, and it has helped solidify the ascending triangle discussed in the Wednesday report. It needed a quick turn and it got it. Now it needs to make the breakout from the immediate resistance (904 is the April high) and then take out 911. That marks the late July top and also the August/December/January down trendline. That gets the ball rolling toward making a serious higher high (though beating the prior April high would do that) with a move over the January high at 935.05. There is tremendous overhead supply near at hand, and the large caps have to rectify the distribution and start the strong accumulation pattern again. It will take some leadership from Nasdaq as that index is knocking at the door at the top of its range already.
DJ30:
The blue chips did not have the same pop as the rest of the market, but after a test of the 18 day MVA on the low (8235) they managed a solid, steady comeback and leaned into the tape to close above the 200 day MVA (8329). Good to see the recovery, but volume was the lowest of the past three sessions, coming in below average. The Dow was the reluctant index all session, following the others higher. Nonetheless it followed well, making a potential higher low at the 18 day MVA once again, building that pressure from below. Price/volume action needs to improve, but if Nasdaq and SP500 make the break DJ30 will most likely follow. 8522 is the next key point to beat.
Stats: +80.04 points (+0.97%) to close at 8337.65
Volume: 1.374B (-12.28%)
The Chart: (Click to view the chart)
THIS WEEK
There is the usual tug of war ongoing at a resistance point. This is a former high where some bought in the past and are looking to get out. Others use it as a chance to try and make some money on the downside, selling short and betting the buyside interest is not strong enough to make the break higher. The emergence of some distribution and the higher opens, lower close action demonstrate the that battle between buyers and sellers. We can call this pretty typical action in a long downtrend that is losing some of its grip, but it is action that is keeping us very wary. The move off the March low was strong, but at each resistance level it has to overcome those looking to sell. Once again the market is at an inflection point as Nasdaq tests the top of its recent range.
Stocks overall appear to respond well to good earnings even taking in the Wednesday reversal. If the earnings are good and the future decent the stock is rewarded. Is this a new trend or is it a fad? Oftentimes you see the first earnings that are positive drive the market higher; in this case you could almost say higher in relief earnings were not declining. After many stocks surged higher for three sessions on earnings news they will need a rest. Worst action for the upside would be a Monday reversal on volume yet again. We are also going to be wary of a quick breakout; we want to see what the sellers try to do with that move.
If we sound a bit cautious, we are. There are many leaders moving well and we are letting them run. They are not islands, however, and the indexes will have to breakout of their ranges if the leaders are going to be able to take it to the next level. There is no longer clear market-wide accumulation; even Thursday�s strong move was mixed as Nasdaq rallied on strong volume but NYSE and DJ30 showed lighter volume. A strong breakout is needed, but even then we will need to let some of these stocks that have run hard the past three sessions take a rest. A test of the breakout that holds would be the opportune point to start more serious accumulation.
As usual, we won�t turn away from stocks in leadership position that are showing great accumulation and a breakout from their base. Those are the safest positions to take as they are not extended and have the support from the accumulation; they are less likely to be jerked back and forth in a test of a market breakout. If the next breakout attempt fails we will also be looking downside on those stocks poised to fall, and there are those out there.
Support and Resistance
Nasdaq: Closed at 1425.50
- Resistance: The March and August highs (1426 and 1427). The January high (1467). The December high (1521).
- Support: 1400 is some support. The 18 day MVA (1381). The exponential 50 day MVA (1364) and 1357, the 1998 bear market low. The simple 50 day MVA (1346). The 200 day MVA (1337). The January 2002/January 2003 down trendline at 1308.
S&P 500: Closed at 893.58
- Resistance: Recent highs at 896 and 905 (March and April). Price tops at 911 (July) and 925 to 935 (November and January peaks).
- Support: 200 day MVA (880). The bottom of the October consolidation range at 875 down to 868, the top of the January trading range. The 18 day MVA (874) and the exponential 50 day MVA (865). 850, the bottom of the January trading range. The simple 50 day MVA (851). Price support at 825.
Dow: Closed at 8337.65
- Resistance: 200 day MVA (8329) is not totally broken. 8522 and 8520, the March and April twin peaks. November and January highs (8800, 8870). December high (9044).
- Support: 8250, the bottom of the October consolidation range and other index lows is some resistance. The 18 day MVA (8235). The top of the January range at 8160. The exponential 50 day MVA (8160). The simple 50 day MVA (8025). Price support at 8000 (bottom of January trading range) and then again at 7750.
Economic Calendar
4-21-03
- Leading economic indicators, March (10:00): -0.1% expected, -0.4% February.
4-24-03
- Durable goods orders, March (8:30): -1.0% expected, -1.6% February.
- Initial jobless claims (8:30): 425K expected, 442K prior.
4-25-03
- Advance Q1 GDP (8:30): 1.9% expected, 1.4% Q4
- Michigan sentiment, revised (9:45): 84.0 expected, 83.2 prior.
- Existing home sales, March (10:00): 5.70M expected (annualized), 5.84M February.
- New home sales, March (10:00): 900K expected, 854K February.
SUBSCRIBERS� CHOICE
Q: The VIX has been really dropping recently (in the mid 20's now), but stocks overall have not been rising. Is this an aberration? Have there been any historical similarities in the past? And if so, what were the corresponding results of this pattern?
A: Volatility moves inversely to stock prices in the general situation. In other words as stocks rise, volatility falls and vice versa. As with most sentiment indicators, extremes are the key simply because it is very difficult to quantify feelings. Things simply have to get extreme enough to suggest a change. With volatility there is a general rule of below 20 it is low, above 30 it is high. That is very general. At times the indexes set up a correlation where they move in an inverse range, and it is predictable enough to actually time trades off of. That is not the case now as best we can tell. What we have learned over the years, and in studying historical trends is that high volatility marks both tops AND bottoms. Think of it as changing seasons: when the weather changes, storms occur as the competing forces of the ending season and the new season fight it out. Then the next season takes over and things calm down. Thus while volatility has been falling it comes on the heels of some spikes in the second half of 2002 and to a lesser extent earlier this year. Higher volatility fading as the market changes direction. Volatility also spiked in 2000 as the market topped. Spiking volatility at a top as well as a bottom.
As for the current situation, this has happened historically during the period the VIX has been tracked. A very interesting example is in late 1990 to the end of 1993. During that period the VIX showed a spike late in 1990 as the SP500 dipped. After that spike the market recovered. The VIX started a deep plunge as the index started a sustained run. Recall that was . . . the Gulf War. The VIX plummeted all during that market rally with the occasional spike higher when the market dipped. During that period the VIX dropped all the way down to 9.50 or so. Then in the 1998 bear market volatility spiked higher, then as the market started its run the VIX plunged again as the market rallied. VIX fell from 60 to 17 over the next year. |
