InvestmentHouse Weekend Update
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- Indexes continue work at changing their character, finish week positive.
- CPI up, in line with expectations, but more layoffs announced.
- Large caps rally on volume, but Nasdaq needs SOX to break its down trendline.
Market shaken, not stirred, by Staten Island barge explosion.
The market again refused to sell off, continuing its lateral consolidation and then some as stocks posted solid gains with large caps moving on rising, above average volume to close the week with gains. It had a chance to sell on some news and it did when word of the barge explosion in Staten Island came in. The market is still jittery regarding war, terrorism, loud noises, etc. Despite bucking up a bit after the month-long steep downtrend, the market is still weak and is still subject to the latest headlines.
After the fears of terrorism died down the market received a boost from Defense Secretary Rumsfeld who stated that the soldiers in the Gulf were locked and loaded. The market took that as affirmation of Bush�s �sooner than later� remarks and rallied off the early morning low hit following the barge explosion. The move did not falter, and a brief and late pullback was met with a bounce back close to the session highs.
The DJ-30 and SP500 recaptured the 18 day MVA, the Nasdaq stalling just below the 50 day MVA. NYSE volume rose, Nasdaq volume fell. NYSE breadth was excellent. The indexes put on a good show of resilience. They have refused to sell off, trying to break the downtrend. Nasdaq helped lead the way to this point with the semiconductors plowing the new ground. They were not helping Friday, trading mostly flat. Without them the Nasdaq was an also ran. The chips helped get the market to this point, and they are going to have to contribute again if the market is going to make further headway.
THE ECONOMY
Consumer prices rise 0.3%, in line with expectations.
January prices we pay for goods and services rose as expected, the largest increase in 9 months. The core (less food and energy) rose 0.1% as energy prices were obviously higher. They are going to be even higher in the February report with gas prices really spiking the past week.
As we anticipated, however, the January number did not reflect the spike in producer prices. Businesses are still not passing them along in goods; services, yes. Not sure how long that can go on; it has been that way for a year, but raw materials prices are much stronger and something will have to give. Hopefully the economy will continue to improve and prices reflate as opposed to earnings continuing to take the brunt of higher costs and the economy sliding lower once again.
Layoffs continue.
The prior week saw jobless claims move back over 400K, a level economists tend to view as indicative of a problem in the job market and thus the economy. Duh. Still, after seeing the weekly numbers at least start to peak out over the past few months it is disappointing to see them start back up. Given the increase in announced layoffs once again, we suppose that is really no surprise. MU and Reuters announced 10% staff reductions early in the week, and on Friday Agilent said it would lay off 4000. The jobs picture certainly is not getting better right now, and it is not going to get better near term as businesses avoid making any decisions on spending and increased staffing.
Avoiding the self fulfilling prophecy.
This week we get the usual string of economic data. Of primary interest is the consumer confidence, durable orders, Q4 GDP, and the Chicago PMI. The economy has been slowing as we have indicated the past two weeks. Greenspan and others attribute it to Iraq. No doubt that is part of the problem as no one wants to commit money to projects or big purchases ahead of that event, but there are the other problems after Iraq, one of those being the fear of reprisal from terrorists. On top of that there is the ironic result that concerns about the war will impact business spending and that will impact the economy negatively and thus there is no new investment for fears of a slower economy. That is the self-fulfilling aspect of economic slowdowns: fear of certain results initiates the actions that bring about those results. That is why it is so important to stay the course and to continue the work on an economic package. It is not just for the results that come from a well thought out package, but also the fact that it keeps those self fulfilling actions from taking place.
THE MARKET
The market is kicking, trying to buck up and move out of the near term downtrend that started in January after the indexes either double topped or failed to make a new high (Nasdaq). Up to Friday, Nasdaq was leading the way higher, supported by improvements in the semiconductor sector. With that booster shot Nasdaq was the relative strength leader. Friday DJ30 and SP500 reversed their Thursday moves that looked as if they were resuming their downtrends. The latter rallied up over their 18 day MVA on rising volume and actually had enough spunk to make it look as if they could challenge the top of the near trading range or even make it to the 50 day MVA.
While they looked much better, it was not a follow through session. Breadth was great on the NYSE and NYSE volume was good enough. No index, however, rose over 2% or even 1.5% which is the bare minimum these days. Thus we cannot put too much faith in the move from a follow through that precedes every real upside move.
In addition, Nasdaq fell from leadership. Again, it was the SOX that pulled it back to the pack. Much of the session SOX was negative and thus Nasdaq lagged. At the close it scratched out a small gain, but the SOX is butting up against its 50 day MVA as well as its short term downtrend that started in March (and is actually a continuation of the downtrend off the March 2002 peak). Looking at the market overall, the SOX has to break its downtrend for the market to advance further.
Seems hard to believe, but the SOX has to perform for this market to work. The last good rally out of the October low saw general recovery in stocks, but outside the handful of emerging leaders it was the semiconductor sector that made the strongest moves. They are the stocks that formed the intermediate �building patterns�, i.e., the initial bounce followed by lateral moves that managed to break resistance, test it, then power higher. The rest of the market outside the leaders already in good patterns simply turned back up out of their plunge lower and followed them up. Right now there are some chip stocks trying to form these building patterns (e.g., TXN, CYMI, VSEA), but they are in the minority. Many, many semiconductors are in the process of testing their downtrends just as the SOX is (e.g., INTC, MCHP, LLTC, KLAC). If they fail to break their downtrends or fail to continue to form up better, we believe the rally attempt will fail.
Market Sentiment
VIX: 34.14; -1.53
VXN: 46.1; -2.46
Put/Call Ratio (CBOE): 0.85; -0.01
Nasdaq
Very nice recovery after moving below the 10 day MVA early. Volume was slightly lower and still below average, however, as it rallied back up to test the 50 day MVA.
Stats: +17.79 points (+1.34%) to close at 1349.02
Volume: 1.333B (-0.38%). Volume was fractionally lower on the nice recovery, not offsetting the Thursday distribution session, but not caving in either.
Up Volume: 870M (+232M)
Down Volume: 440M (-233M)
A/D and Hi/Lo: Advancers led 1.69 to 1. Decent, but without the semiconductors helping out breadth was modest on a rather solid gain.
Previous Session: Advancers led 1.02 to 1
New Highs: 62 (+4)
New Lows: 69 (-7)
The Chart: (Click to view the chart)
Nasdaq tested below the 10 day MVA at 1323 and rallied back for the rest of the session, fighting off a mild last hour selling to close near the high. That move pushed it back to its exponential 50 day MVA on the close. The simple 50 day MVA is still immediately overhead at 1361 and the 200 day MVA at 1379. Nasdaq is poised to test those and even make a move to the top of the December consolidation range near 1400, but as noted above, it will have to have the help of the SOX. That means that index and many of the key semiconductor stocks will have to break their downtrends. They ran well in the recent bump higher, but they have to regroup and make the breakout to assist the techs in moving higher. It does not look like an immediate proposition even if techs and chips don�t turn immediately lower; more chip stocks need to form better intermediate patterns with further lateral moves.
S&P 500/NYSE
Recovered from the distribution session and turning lower into its downtrend with a nice, higher volume move back through the 18 day MVA.
Stats: +11.07 points (+1.32%) to close at 848.17
NYSE Volume: 1.357B (+15.28%). Solid jump in volume and back over average on the gain. That puts the rather mild Thursday distribution session pretty much behind it.
Up Volume: 984M (+598M)
Down Volume: 378M (-381M)
A/D and Hi/Lo: Advancers led 2.38 to 1. Excellent breadth. It was not just the large caps, and certainly follow through caliber.
Previous Session: Decliners led 1.14 to 1
New Highs: 60 (+36)
New Lows: 60 (-2)
The Chart: (Click to view the chart)
Recovered over both the 10 day MVA and 18 day MVA (840, 847) on a resumption of gains coming on rising, above average volume. A good reversal from what looked to be a resumption of the downtrend. On the high the large caps hit 852 and fell back; there is a resistance range from 850 to 860 from the late January consolidation. The move appears to confirm the large caps intend to try and break the interim downtrend from January. The key will be whether they can get any traction past 860 and the exponential 50 day MVA (869) or the simple 50 day MVA (879). If the SOX does not support the Nasdaq, however, all indexes will have a hard time making much more headway.
DJ30:
Very similar pattern to the SP500. The blue chips are moving laterally at 8000, trying to extend the move that started a week back after the bounce up from the month-long downtrend from the January high. It too recaptured the 18 day MVA (8013) on the close as volume moved solidly above average. It is moving into the teeth of the late January consolidation range from 8000 to 8150. As with the other indexes, it is acting as if it wants to break the shorter term downtrend and try a move up to the 50 day MVA (8223). It was a steep downtrend, and now it is bouncing higher to retest the next resistance. It is not as effected by the semiconductors, but we have seen how the Nasdaq has provided the lead up to this point in the bounce, and if Nasdaq does not get chip help its ability to lead is reduced. That pressures the other indexes.
Stats: +103.15 points (+1.3%) to close at 8018.11
Volume: 1.357B (+15.28%)
The Chart: (Click to view the chart)
THIS WEEK
The market exhibited some strength Friday when it was on the verge of giving back in to the downtrend. It is showing signs it wants to break out of the near term downtrend, but it also is not showing real power. It has made many attempts to rally during downtrends, many that resemble the current attempt. Volume is up but is not what you would consider strong, not a level that would suggest the big money is buying into stocks. On top of that there are not a wad of stocks in good patterns with good earnings credentials that are breaking out as well. A few made some good upside moves Friday that were worth a look, but strong moves see many such stocks breaking higher.
While this move still looks as if it is going to try a run higher for another 2 or so sessions to test the next highest resistance, unless there is a surge of buying volume that looks to be as far as it will go. Steep downtrend from January using the 10 day MVA as resistance to keep it in check. It is now coming up for air. Again, if nothing happens to set off a buying binge (entering into Iraq and showing early success?) that move will most likely fail at that resistance. We see enough action to take it higher near term, but not further.
With that we will continue to let downside plays develop on a move higher, being patient with them to let them set up. We will also take advantage of those upside plays showing the kind of strength that can log a nice return for us in this move and even hold after the rest of the market caps out. As we have seen there are stocks that are still moving up even as the rest of the market moves down. Friday there were a few starting those moves.
Over the past two days a few of us here have had the feeling that there is going to be an attack on Iraq before anyone suspects it. It was rather interesting how we all derived that feeling independently and then blurted it out when we discussed the market condition Friday. There is no real science behind it, just more of a logistical issue. Bush firmly believe Hussein won�t change and does not want to give him until the fall when weather again cools to work some deal to strike at the U.S. Bush wants to systematically deal with the terror threats to the U.S. and Iraq is one of the steps he will deal with then move on. He does not want to wait and feels he cannot afford to wait and still provide the security he wants for the nation as well as get it back on track economically. The talk of a second resolution throws some water on this, but I have a feeling we will see Bush distance himself from that idea soon when it is clear the resolution will be another �you better stop someday or else� message.
External influences such as that make planning investments much more difficult. Still, planning on such events occurring or not is impossible. We look at what the market is telling us and we look at the plays that give the highest percentage of winning. We are more conservative, narrowing the number of plays we are entering. If we don�t like the way a stock is moving on a potential play we don�t enter. Basically we are looking for near perfect scenarios to get in on something like when I used to play baseball: when batting and the count was 3 balls and 1 strike the coach always said to �make it be your pitch.� In other words, in this market a play needs to be just the one we want to get us to bite. With all of the external stories bouncing the market up and down this mindset helps stay away from the chaff.
Support and Resistance
Nasdaq: Closed at 1349.02
- Resistance: Exponential 50 day MVA (1348) and simple 50 day MVA (1361). 1357, the 1998 bear market low. The 200 day MVA (1379)
- Support: The 18 day MVA (1326). The 10 day MVA at 1323 and price support at 1300. 1250 after that is another point where some lows have held.
S&P 500: Closed at 848.17
- Resistance: The 18 day MVA (847) has not been totally cleared. Price resistance at 850 to 860. The bottom of the October consolidation range at 875. The exponential 50 day MVA (869), simple at 879.
- Support: The 10 day MVA (840). The September 2000/May 2001 downtrend line at 810. After that 800.
Dow: Closed at 8018.11
- Resistance: 8000 and the 18 day MVA (8013) are not totally broken. A range of resistance here at 8000 to 8150 from the late January lateral move. Then 8250, the bottom of the October consolidation range.
- Support: The 10 day MVA (7955). Soft support at 7750, then 7500.
Economic Calendar
2-24-03
- Treasury budget, January (2:00): $10.0B expected, $43.7B December.
2-25-03
- Existing home sales, January (10:00): 5.80M expected, 5.86M December.
- Consumer confidence, February (10:00): 77.0 expected, 79.0 January.
2-27-03
- Durable goods orders, January (8:30): 1.0% expected, -0.2% December.
- Initial jobless claims (8:30): 392K expected, 402K prior.
- New home sales, January (10:00): 1.045M expected, 1.082M prior.
2-28-03
- GDP preliminary, Q4 (8:30): 1.1% expected, 0.7% Q3.
- Michigan sentiment, February (9:45): 79.2 expected, 79.2 January.
- Chicago PMI, February (10:00): 52.6 expected, 56.0 January.
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