AMAT almost upends the apple cart, but indexes don't breakdown again.
investmenthouse.com
Futures were modestly on the rise after some better than expected early economic reports. Then AMAT stated its orders were going to fall 35% as opposed to the 25% drop-off first reported. After Intel announced much lower capital expenditures this was not totally unexpected, but when the news hits it always causes some hiccups.
Futures tanked, the indexes opened lower. They rallied on the Chicago PMI, but then that rally failed as well. Nasdaq hit 1303 on that drop, just over 1300 support, and that was enough to bounce it higher. From there the indexes rallied though Nasdaq formed an intraday head and shoulders that rolled over with 1.5 hours left. It looked as if it was going to sell off for good but buyers stepped in and pushed all indexes back up. Nasdaq closed slightly lower on rising volume, the Dow and SP500 positive on lower volume.
The ability to recover was a plus for the upside, as was the strong expansion in the NYSE A/D line; it has been heading lower for the past week. All in all the indexes caught some buyers as the DJ-30 and SP500 broke support, managing to rally back and prevent a total breakdown.
THE ECONOMY
Personal income and spending rise.
It was no surge, just the continued slow improvement seen in most economic sectors. Personal income rose 0.4% versus 0.2% expected and 0.3% in November. Spending rose 0.9% versus 0.7% expected and 0.4% prior. Despite the 1% growth in retail sales as measured by dollars spent (discounts and deflation really were the culprits to the drop in the sales figures; the same or more �stuff� was bought, but it was cheaper), spending is showing very healthy growth.
Chicago manufacturing continues to expand at a faster pace.
Chicago is important because it is viewed as a national proxy and gives a preview of the national report next week. At 56.0 it is not setting any expansion records, but it beat 53.0 expectations and December�s 51.7. The report had a petty decent mix of sub-indexes that again basically reflect the economy�s expansion. New orders, one of the keys for future growth, showed improvement to 58.0 from 56.0. That is off the 60+ reading seen earlier in the year, but perhaps indicative that manufacturing is working out of Mr. Greenspan�s soft patch. Prices paid plummeted to 54.2 from 61.8; you cannot blame energy costs for the drop so you have to look at the overall deflationary environment with everything outside of services. Finally, employment limped in at 45.6, down from December�s 48.1 as manufacturing continues in a downsizing mode.
Michigan sentiment falls to a 9-year low.
The northern survey mirrored the Conference Board out last week, dropping to 82.4 from 83.7 in December. Expectations were for 83.5. This is nothing unexpected as consumers see there is still no job creation, companies are still foggy about the future, and there is war to come on top of everything else. If war comes soon and goes well, or if Hussein leaves of his own accord, that will immediately help sentiment. Until then there are too many clouds on the horizon for consumers to start thinking happy thoughts.
THE MARKET
The market was on the verge of a major problem with the AMAT warning scuttling the futures and sending the indexes to another new low for the year. It managed to catch a bid and rally back. Some floor traders called it some month-end reallocations that salvaged the market. One of the things that really helped stem the tide was a dollar rally. It has been in a flat drop for two months. It tried to bottom out Wednesday and it managed to rally and put forth its best showing in just about a month.
What does that mean for U.S. stocks? Stocks started to slide as the dollar started this 2-month drop. What is the relationship? We hear that there has been a bunch of European institutional selling (primarily insurance companies) based on the falling dollar. Basically, they were forced to sell U.S. securities as the dollar fell because they had to maintain their reserves. Dollar falls, more selling. Vicious cycle. It caught some buyside interest the past three sessions, and stocks started trying to firm up as it did. The dollar is still in a major downtrend, however. It has rallied up to the 10 day MVA after trying to break through Friday. As we know, that is typical in a downtrend: falling, falling, falling, test the short term MVA, falling, falling. . . If the dollar can continue to rally back some then at least the foreign selling will slow down. That in turn takes some pressure off the market.
Evidence of this? JNJ was up $2+; PG up $1+; GE up on strong volume. This is evidence, not proof. Stocks have been under a lot of pressure, i.e., selling. There are shorts selling again. When the indexes cannot break and hold lower after a significant ride lower, shorts start covering. There is some snowball and we see higher volume bounces. The difference Friday was NYSE breadth at nearly 2.5:1; it has not seen that breadth in weeks. Real buying, end of month reallocation, or what?
With the downtrend still so fresh, even a rebound such as that seen Friday has no credibility. The SP-500 rallied back on lighter volume. Nasdaq may have given a reversal off of support on rising volume, but the action is hardly signifying a reversal. There are very, very few stocks making breakout moves and fewer and fewer solid patterns. The dollar is rallying on some solidarity in Europe with the U.S. That can continue and stymie further foreign selling and give some more rebound power to those beaten up large caps. For now this is not even a very good attempt at a rebound, and a lot of damage was done over the past three weeks as the indexes blew through their trading range bottoms. Now they are playing footsy with the next support levels, cracking them intraday.
Market Sentiment
VIX: 35.78; -0.59
VXN: 46.81; +0.59. Ran to 48.14 on the high and still closed at a new closing high since the early January trough.
Put/Call Ratio (CBOE): 0.84; -0.03. Still staying at the high end of the range. Some of the activity could still be both buying and selling for some covering.
Nasdaq
Gapped lower on the AMAT news but managed to hold support at 1300 and rally back some.
Stats: -1.44 points (-0.11%) to close at 1320.91
Volume: 1.585B (+9.66%). Volume climbed on a loss, but given the rebound, not that serious a transgression.
Up Volume: 610M (+334M)
Down Volume: 934M (-222M). Despite the comeback, there was more downside action.
A/D and Hi/Lo: Advancers led 1.37 to 1. Managed to turn positive even with the selling, but still weak.
Previous Session: Decliners led 2.12 to 1
New Highs: 42 (-3)
New Lows: 89 (+20). New lows jumping again even as the index moved off the low.
The Chart: (Click to view the chart)
Nasdaq gapped lower, bounced, then came back for the moment of truth, the test of the last support at 1300. We call it last support because if it goes below that there is major work to be done for it to recover. There is some support at 1250 and some prior lows at 1200; at those levels it is totally broken down. At 1300 it has a chance at recovering.
Some seem to feel that Friday was a reversal off support with volume running higher and Nasdaq closing near the high. It was a good recovery, but it did not do a lot to turn the downtrend. Indeed, Nasdaq closed right at the prior level of support at 1320, a level it will have to break just to start. After bouncing to a new low for the year it may trigger a short covering move up to the 10 day MVA at 1350 as that is something that occurs after a break to a new session low during continuing downtrends. There is nothing to change the character of the downtrend, however.
S&P 500/NYSE
Hit a new low for the year and managed to climb back above support at 850. Managed to hang on.
Stats: +11.09 points (+1.31%) to close at 855.7
NYSE Volume: 1.509B (-0.8%). Volume faded on the recovery and move higher. above average volume, but no power on the move even if there was reallocation and short covering.
Up Volume: 1.112B (+828M)
Down Volume: 391M (-819M)
A/D and Hi/Lo: Advancers led 2.51 to 1. This is the best upside A/D action in weeks. It helps, but the A/D line is still trending lower.
Previous Session: Decliners led 2.03 to 1
New Highs: 52 (+6)
New Lows: 53 (-11)
The Chart: (Click to view the chart)
Gapped even lower below 850 but was able to rally back. It was in a tailspin late in the session, heading lower fast but then bounced right off of 850 like a tennis ball. That salvaged the session and left the large caps in position to fight another day to hold support at 850. It managed to hold that level roughly all week, not giving in to another leg lower. Again it might try another rally up to test the bottom of the range at 875 given it is not rolling over further and given that there was some bid put to big name stocks as the dollar recovered. The dollar has hurt and it may start helping once there is some further clarity regarding the Iraq situation, war, abdication, or otherwise.
DJ30:
Gapped to a new year low as with the other indexes, then mounted the rally back over 8000. Late session selling was sharp until it too found support right at 8000 where buyers came back in. There was some buying ongoing in Dow stocks as volumes increased in several issues as the rallied off their recent lows. There was also short covering as the early selling could not take the index lower. The Dow could bounce up to the 10 day MVA at 8195, but as with the other indexes, Friday�s move did not chance the character of the downtrend.
Stats: +108.68 points (+1.37%) to close at 8053.81
Volume: 1.509B (-0.8%)
The Chart: (Click to view the chart)
THIS WEEK
There is the expected speculation the Columbia accident could have been a terrorist act given the Israeli astronaut on board, but the odds of such actions given the when and where are extremely remote from those in NASA we have talked with. There could be lingering doubts to start the week. Certainly there will be some emotional hangover as the market starts the week as the U.S., Israel, and the world once again must absorb a blow and move forward. That is never an immediate process and the market is going to have additional drag on it simply because it opens up another can of unknown. The momentum shown Friday just received a big setback because of this.
As for specific stocks that will be hit as what happened with Challenger and its o-rings, while this is all too early and new to tell, after 28 missions on this craft this does not seem to be something that will devastate any particular company. Our totally unprofessional analysis points to some kind of random event or some stress point being reached. We look for more of a drag on the general market based on the setback to the country, another in a long string over the past few years. That may be hard enough for the market to overcome right of the bat this week.
Busy, busy week, the highlight of which will be the Colin Powell meeting with allies to provide additional intelligence regarding Iraq. This is the end game here. Once we provide some of this intelligence, it will get out what it is, and Iraq will shut down the source. That is why there is not going to be much time elapsed between the showing of the data and the attack. We have the troops present and ready, and we cannot let our intelligence grow stale as that endangers troops and the mission success. There will be an agreed upon period the allies will have to join us and say so to the U.N. After that we are going with our current allies, and those number at least 8 European countries as evidenced in this week�s WSJ.
Perhaps the market knows this and is edging higher in anticipation. Maybe. There are also several important economic reports this week. Monday is the ISM, Tuesday factory orders, Wednesday ISM services, Thursday Q4 productivity, and Friday the ever popular unemployment report. Now if those are positive and if there are favorable responses to the Powell meeting by Thursday, that could start a fire under the market.
As we discussed last week, there has been a lot of selling ahead of the war based on the war and its impact on some improving though wobbly economic reports. The market has factored in a lot of that downside the past three weeks. If it holds more or less steady ahead of the Powell meeting through the end of the week, the start of hostilities could see a quick knee-jerk lower intraday, and then the start of a war rally. If Hussein decides to leave after more countries come on board the coalition after the Powell meeting, the market will pop higher like a cork. The unknowns regarding war has kept companies and consumers from making expenditures. That will be one obstacle gone.
Not all obstacles will be gone, however. It is not only the war, but the economic recovery. The U.S. is coming out of a major rush higher that was purposefully and with great lack of foresight was popped. It has put our future as the world economic and technological power at risk; could be in 20 years China and India will be at a minimum vying with us for that spot. We wrote on this extensively in 1999 and 2000 as we warned of squandering our lead by intentionally crippling our economic boom. What is done is done, however. Now the government needs to step in with a strong, short and long range economic package to get the economy up and running and then ensure that we have the prolific growth the tax reform package of 1981 produced.
With that in mind, the market may rush higher on the start of the war or Hussein�s departure (Saudi Arabia is attempting to arrange this right now), but after the initial euphoria, it has to face the problems of the slow economy and the fact that businesses and individuals will be reluctant to spend any money until they know what tax package is going to pass so they know how to best and most efficiently spend their scarce dollars. That means the economy won�t get any burst of activity until summer at best. The market may rally first and then have to pull back. It should, however, start to make its move even before the economic activity picks up, however. That is how it worked in the prior war: the economy was still in trouble and indeed fell into further trouble during the war as consumers stayed home and watched war highlights as opposed to seeing movies, going out to eat, to shop, etc. The market, however, took off.
That is a long way of saying there is an awful lot ahead of us. Right now the market is in a downtrend and we did not see the Friday action as a change of character: a gap to a new year low resulted in a bounce back, something common in a downtrend. Moreover, now there is the emotional drag from the Columbia. Ahead of the Powell meeting we do not see much any real change in market character as it continues to bounce down the short term MVA. We were looking for a possible bounce up to test the short term MVA, but the downtrend is well intact and the Columbia disaster adds weight on that downtrend. Thus we are going to continue to look for downside opportunities, starting new positions and adding to existing positions when we get a good entry point along with the few good upside plays. We will be wary of later in the week and a possible rise after the Powell meeting.
Support and Resistance
Nasdaq: Closed at 1320.91
- Resistance: Price resistance at 1327 from the late December low. July, August, and September interim highs at 1345. 1357, the 1998 bear market low. 10 day MVA (1352) and the 18 day MVA (1367). Exponential 50 day MVA (1376) and the simple 50 day MVA (1398). The 200 day MVA (1405). The August high at 1427. Price resistance at 1500. 1574, the May low, is next.
- Support: 1300 held on the Friday low. 1250 after that is another point where some lows have held.
S&P 500: Closed at 855.70
- Resistance: 850 to 855 (the October 1997 and Q2 1998 lows). The bottom of the October consolidation range at 875. The exponential 50 day MVA (892). The simple 50 day MVA (902). The July, August and September interim highs at 909 to 911. The early November high at 925.66.
- Support: The September 2000/May 2001 downtrend line at 826.
Dow: Closed at 8053.81
- Resistance: The 10 day MVA (8195). 8250, the bottom of the October consolidation range. The 18 day MVA, the other short term MVA (8316). The exponential 50 day MVA (8443). The simple 50 day MVA (8542). The late July and early September interim high at 8726 to 8762.14 (8745 closing).
- Support: 8000 held again Friday after an intraday test lower. Soft support at 7750, then some at 7500.
Economic Calendar
2-03-03
- ISM, January (10:00): 53.0 expected, 55.2 December.
- Construction spending, December (10:00): 0.3% expected, 0.3% prior.
2-04-03
- Factory orders, December (10:00): 0.3% expected, 0.8% November.
2-05-03
- ISM services, January (10:00): 54.0 expected, 54.2 December.
2-06-03
- Intial jobless claims (8:30): 390K expected, 397K prior.
- Q4 Productivity, preliminary (8:30): 0.7% expected, 5.1% Q3
2-07-03
- Non-farm payrolls, January (8:30): 63K expected, -101K December.
- Unemployment rate, January (8:30): 6.0% expected, 6.0% December.
- Hourly earnings, January (8:30): 0.3% expected, 0.3% December.
- Average workweek: 34.2 expected, 34.1 December.
- Wholesale inventories, December (10:00): 0.2% expected, 0.2% prior.
- Consumer credit, December (2:00): $3.0B expected, -$2.2B November. |
