InvestmentHouse Weekend Update:
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- Market on hold ahead of another weekend of war.
- Unemployment holds steady as jobs shrink yet again.
- Another nervous, low volume session ahead of the weekend.
- Subscriber Questions.
Noncommittal trade ahead of another weekend.
It was Friday, and after the past two Mondays no one was willing to take any significant stance. Low volume trade dominated with breadth basically flat. Techs led on the big Wednesday move, and as usual, led in the selling, falling just under 1% on the session with semiconductors and software leading that index to the downside. This is an important point for the indexes as they approach the mid-March high; Nasdaq particularly as that point also matches the August 2002 high, the lower high it broke in the November rally. Friday the lower volume action maintained the market�s accumulation posture taken since the start of this rally.
The market had a lot of news to digest. SARS is spreading around the world but this week the number of cases reported in Hong Kong and other Chinese areas again declined. The reporting on this fact has been left-handed. One news report said that Hong Kong was the current world hotbed for SARS but then almost as an aside at the report�s end noted that reported cases in China, the origination point of SARS, had declined each of the past two weeks.
On the war front, one or more of the Hussein doubles were out giving a speech that had a possible reference to a post bunker bomb event and taking a PR stroll through Baghdad. With his paranoia and the knowledge that someone gave him up in the first night of the war, this would not appear to be the real Hussein. Does it matter? Not to the US forces, but to the Arab world it was Hussein, and that is all that really matters, double or not. No reason a double can�t run the country given the groundwork of terror Hussein has already established.
In addition there was the Iraq court jester out again Friday, threatening Iraq would use �unconventional� weapons against US forces at the Baghdad airport as early as that night. Nothing happened. Then there were discoveries of chemical agents (mustard, cyanide) in the Euphrates, a white powder, chemical warfare instruction manuals, and biological weapon traces in the northern Iraq terror camp that was bombed. Another suicide bombing. In short, a lot of the kind of news heard when a war is ongoing and the losing side gets a bit more desperate.
The market digested the news and ended traded in a very narrow intraday range: 22 points on Nasdaq, 4 points on SP500, and just 90 points on the Dow. Shorts covered some late as they could not take the market lower. On the other side, buyers had nowhere near the strength to take the market over near resistance. A push.
THE ECONOMY
Unemployment steady, but economy again loses more jobs than expected.
Still no jobs being created, but we knew that from the weekly jobless claims that keep trending higher. Unemployment held at 5.8%, but the jobless statistics are a grim headline to the economic weakness. Consider that private payrolls over the past 21 months have net losses, the longest such period since 1944 to 1946. Private payrolls have lost 2.5 million jobs since the March 2001 when the �short� recession began. Payrolls were down 108K, more than the 40K expected to be lost. February�s losses were revised further down, dropping 357K versus the 308K originally reported. Losses were across the board with services dropping 94K. Certainly much of this was due to the war uncertainty, but it continues the downward spiral.
How can the unemployment rate stay at 5.8% with jobless claims rising and continued job reductions? The labor pool is shrinking as workers leave the market. In other words more and more people are giving up on finding a job. In March the government pegged that number at 64K, moving the ranks of �discouraged� workers as the government calls them to 474K, up 144K from same time last year.
Average wages rose 0.1% (2 cents/hour), and that helps prop up spending to a mild degree. The workweek rose to 34.3 hours from 34.1 hours in February. That is a positive as it shows existing workers are being utilized more. Overtime fell, however, an indication that they are not being worked that hard. Moreover, the 34.3 hour week is well below levels needed to really cause an increased demand for workers.
What Congress should know and do about war and the economy but is afraid to act.
There is an obsession in DC among those against tax cuts (and who are also against any cuts in existing program budgets, as they say, in a time of war) with respect to the current deficit and the war. They argue that we cannot afford tax cuts because we have so many other items to pay for and tax revenues continue to decline.
The reason tax revenue is declining is because companies are making less or going out of business altogether (no blood from the turnip) and millions of one-time workers are now unemployed. If you make less or make nothing at all, you are going to be paying less in taxes. That is what happens in recessions: businesses layoff workers and close their doors. Tax revenues fall. Those harping on budgets play both sides of the fence. They treat the US budget like a household budget: if you make less you should not go out and buy non-essential things. True, but they only apply that to the taxpayers. We are considered the non-essential items, i.e., tax cuts should not be granted because there is not enough money in the treasury. Of course on the other side they refuse to cut any existing spending. Their argument is not logically consistent. If tax cuts are spending, tax dollars actually collected and spent are even more concrete spending. Why is one more important than other when it comes to budget cutting, particularly when some of the items getting the collected tax dollars are the Cowgirl Hall of Fame, welfare fraud, INS assistance fraud, Rock and Roll Hall of Fame grants, Grammy Foundation grants, new $175K office digs for Senator Byrd because �he wanted them,� and on, and on, and on? Those expenditures are NOT going to grow the economy.
That is where their argument falls apart. There is no dollar for dollar effect as these congressmen think. Unlike a household where one dollar spent is gone, the government can change regulations to encourage investment or spending in other areas, and make up that dollar. The primary way of doing that is to encourage more investment that will grow the economy and thus increase taxable revenues for both businesses and individuals. You cannot just keep pinching dollars (particularly those that GROW the economy) and get an increase in economic activity. More money is going out than coming in. What you do is cut existing spending and encourage economic investment. In the current economy the area where investment is needed in businesses; there has been no business investment for three years.
If you are in a recession and the economy continues to shrink, then how do you pay for war? You grow the economy as was done in the early 1980�s. The US was in the cold war and was also in a terrible recession in a continued hangover from the 1970�s. Reagan wanted to get rid of the USSR so the US could enjoy prosperity in peace. He knew if he unleashed the American economy we could outspend the communist-based Soviet economy. He cut taxes across the board, cut capital gains taxes, provided incentives to invest in US business with investment tax credits and accelerated depreciation. The latter had specific time frames to take advantage of: use it or lose it. The income tax cuts had no time limit. The result was a booming investment in the US, and that triggered the technology revolution with new businesses and jobs springing up.
Revenues surged, tax and otherwise. We outspent the USSR into economic ruin in the arms race as planned, but Congress spent $1.35 for every $1 in tax revenues. There were no cuts in other spending and thus massive deficits. Those opposed to tax cuts as a means to increase economic output point to those deficits. But no matter how strong the economy is, you cannot spend more than you take in year after year after year. When the USSR fell, no more need to spend so much on defense. That money suddenly became available and voila, instant surpluses once we got over the hump of the deficit spending. Congress and the states did not slow spending, however, and now that we are back in a planned recession, that overspending is hurting us. Congress cannot wean itself from its overspending diet. It is so greedy in its desire to spend funds that it cannot see what brought in all of the money in the first place. They are so loathe to give up any tax dollar that they close their eyes to what has historically worked to fix the economy and get tax revenues back up.
We need to be able to pay for the war and the cost of the new terror threat. We cannot do that by fearfully guarding a shrinking pool of dollars as the economy continues to decline. If we continue reversing the strong moves made early on to fight the recession we are going to follow Japan. There will be less and less tax revenue to pay for aging boomers and a social security system designed to provide benefits IF you lived 3 years past the expected average lifetime back in the 1960�s (that was 62; now we live to 74). Simple mathematics tells you it won�t work. The pool will run dry. You have to grow the economy to get more tax dollars in. That means spending money to make money. The way you make money in an economy? Grow it. That is how we paid for the Cold War and we won it because we had the resolve to do it. That is the only way we can win the new war of the millennium, the terror war and the actions against those regimes that support and promote terror. That is why we need to educate our leaders as to what works and refuse to take no for an answer. The facts are there, they need to hear from us about them.
THE MARKET
Investors were nervous ahead of the weekend, and that led to a noncommittal session. Earnings warnings started taking a toll on techs with software stocks hurt for the second straight session. Nasdaq managed to hold the 10 day MVA on the low on lower, below average volume. DJ30 and SP500 posted slight gains on low volume, holding just below the 200 day MVA.
The market is at a stage that it technically has some work to do. The indexes are right at the March highs, and they have not had much success in recent history clearing former highs (December and January most recently). Nasdaq is at its August high as well, the high that it broke to snap the string of continuing lower highs. DJ30 and SP500 have yet to do that, and they have a lot of work ahead of them to get there. Doesn�t mean they won�t do it, but this is one point where the market will either earn some stripes or be reduced in rank once again (though at this point there aren�t that many lower ranks we can think of).
On the market�s side is the accumulative action since the rally started. Volume on up sessions has been up while volume on down sessions has been lower with Monday being the one exception. What that tells us is there are more buyers in the market overall than sellers. The big money is what moves the market. When stocks rise on greater volume than they sell, that shows the big money is accumulating stocks. Add to that the generally positive accumulation pattern in the DJ30 (reverse head and shoulders) and the stronger accumulative action in Nasdaq. Those set good bases to build off of. Then there are the leadership stocks that continue their good accumulation patterns, breaking out and running higher. Those are the attributes of a continuing rally, and as a market watcher, you have to follow what the market is showing you.
Given the downtrend, each significant resistance point brings on some anxiety. Our job is to fight the anxiety and react according to what the market shows us. Right now it is showing continued accumulation even in the face of a war and continuing economic deterioration. That causes considerable consternation among many in the investment community, but we need to invest with our heads, i.e., what the market is showing us, not our gut feelings. There are a few scattered breakdowns here and there, but that occurs in any market. Most solid stocks in good patterns continue to perform well. We watch with the usual amount of skepticism, but let the market action direct our moves.
Market Sentiment
VIX: 32.8; +0.46
VXN: 42.85; +0.76
Put/Call Ratio (CBOE): 0.76; -0.07
Nasdaq
Nasdaq tried another gap higher but in less than bullish action it sold back most of the session and closed near the low. It took the brunt of the selling but it was on lower volume.
Stats: -13.07 points (-0.94%) to close at 1383.51
Volume: 1.367B (-6.53%). Lower, below average volume on the down session, continuing the overall good price/volume action in the rally. On down sessions are there are of course more sellers: stocks go down because more want to sell them than buy them. The lower volume relative to the up session volume, however, shows that there are fewer sellers than buyers in the market. That indicates the big money is accumulating stock, not selling stock.
Up Volume: 446M (-393M)
Down Volume: 899M (+353M)
A/D and Hi/Lo: Decliners led 1.2 to 1. Very modest declines continue, indicating that the downside action is rather limited to the larger cap stocks that make up most of the index.
Previous Session: Decliners led 1.04 to 1
New Highs: 90 (-22)
New Lows: 36 (-1)
The Chart: (Click to view the chart)
Nasdaq turned lower once again at the March high (1425) and the August high (1426). Resistance runs from 1420 to 1426 near term. That is the key level to beat. Friday Nasdaq held the 10 day MVA on the low (1379.22) and rebounded slightly. There is some price support as well at that 1375 level. Nasdaq definitely needs to avoid another Monday sell off and make a higher low here at 1375 or the 18 day MVA (1370) to have a real run at making a higher high over the August and March highs. Again, that is a key move at this point.
S&P 500/NYSE
The large caps traded mostly positive all session, holding support at 875, but unable to move over the 200 day MVA.
Stats: +2.4 points (+0.27%) to close at 878.85
NYSE Volume: 1.226B (-8.21%). Continued lower, below average volume as the large caps hold flat, consolidating the big Wednesday move.
Up Volume: 657M (+140M)
Down Volume: 572M (-241M)
A/D and Hi/Lo: Advancers led 1.21 to 1. Breadth remained modest Thursday and Friday after Wednesday�s broad advance. Just further evidence of the nervous trade.
Previous Session: Decliners led 1.23 to 1
New Highs: 61 (-16)
New Lows: 19 (+3)
The Chart: (Click to view the chart)
SP500 traded near the 200 day MVA (885) on the high, but never really threatened that level. The real fight during the session was at 875 support as the large caps traded below that level on the low (874.23) but never seriously threatened a serious breach. The 10 day MVA (868) is close as are the 18 and 50 day MVA (862 and 859 respectively). The index may test a bit lower toward those levels, but it needs to hold above them to set the stage for a move over the 200 day and the March high (895.90). A continued series of resistance after that from 905 to 925.
DJ30:
The Dow and SP500 are moving something in the same pattern. DJ30 is just below the 200 day MVA (8370), holding some modest support at 8250 on the low. Lower volume consolidation of the strong move up off the simple 50 day MVA right at 8000 starting Tuesday. We would like to see DJ30 hold the 10 day or 18 day MVA (8189, 8133) to set up the move over the 200 day MVA and the March high (8422) and the October high (8547).
The Dow continues in its 8.5 month reverse head and shoulders accumulation pattern that many point to as a positive development. That is good, but the current accumulation count is 7 to 7. Better than what it has been in any other 8.5 month pattern in a long while, but still undecided. The recent action is much better of course with the move off the March low to this point showing a solid 3 to 1 positive accumulation.
Stats: +36.77 points (+0.45%) to close at 8277.15
Volume: 1.226B (-8.21%)
The Chart: (Click to view the chart)
THIS WEEK
Economic issues will take more and more precedence as the war appears to be nearing a more climactic ending. Until that becomes clearer the war ebb and flow will still take precedence. Near term the war is what keeps people on edge. With the potential use of chemical weapons on troops or more likely on the Iraqi civilians, the market remains on edge. With world sentiment opposed to the US action either for ethnic or other reasons the market remains on edge. The market has shown, however, that when those anxieties are relieved the upside strength is there.
By Friday there may be some clearer picture, maybe not. That day March retail sales are released as well as April Michigan sentiment. Those will be closely watched to see the if the war has continued to impact consumer actions and feelings or if the consumer is bucking up.
The big fear over the weekend is that something negative will occur and there is another Monday drop. That is what kept the strength out of attempted moves at resistance. There is also uncertainty, however, as to the upside. If something good happens over the weekend from the US perspective the market has shown the ability to roar higher. That had some shorts coming into the market in the last hour, covering positions and pushing stocks up in the last 20 minutes. Thus far the forays into Baghdad have been successful, but the weekend is young.
Our game plan has not changed. Despite all of the potentially negative war news and poor economy, the market shows continued resilience and accumulation. We continue to look for those stocks forming good patterns with good accumulation, the leaders that can continue to make us money.
Support and Resistance
Nasdaq: Closed at 1383.51
- Resistance: The early November, March and early November highs (1420, 1426, and 1427, respectively). The January high (1467). The December high (1521).
- Support: The 10 day MVA (1377) and price support at 1375. The 18 day MVA (1369) and 1357, the 1998 bear market low. The exponential 50 day MVA (1355). The 200 day MVA (1339) and the simple 50 day MVA (1336). The January 2002/January 2003 down trendline at 1327.
S&P 500: Closed at 878.85
- Resistance: 200 day MVA (885). Then price tops at 911 (July) and 925 to 935 (November and January peaks).
- Support: The bottom of the October consolidation range at 875. 868, the top of the January trading range. The 18 day MVA (862) and the exponential 50 day MVA (859). 850, the bottom of the January trading range, is trying to hold. The simple 50 day MVA (846). Price support at 825.
Dow: Closed at 8277.15
- Resistance: 200 day MVA (8370). November and January highs (8800, 8870). December high (9044).
- Support: 8250, the bottom of the October consolidation range and other index lows is some support but is fairly porous. The 10 day MVA (8188). The top of the January range at 8160. The 18 day MVA (8133) and the exponential 50 day MVA (8104). The simple 50 day MVA (7982). Price support at 8000 (bottom of January trading range) and then again at 7750.
Economic Calendar
4-7-03
- Consumer credit, February (2:00): $2.5B expected, $13.2B January.
4-8-03
- Wholesale inventories, February (10:00): 0.0% expected, -0.1% January.
4-10-03
- Trade Balance, February (8:30): -$42.4B expected, -$41.1B January.
- Initial jobless claims (8:30): 430K expected, 445K prior.
4-11-03
- PPI, March (8:30): 0.4% expected, 1.0% February.
- Core PPI (8:30): 0.0% expected, -0.5% February.
- Retail sales, March (8:30): 0.2% expected, -1.6% February.
- Retail sales ex-autos: 0.3% expected, -1.0% February.
- Michigan sentiment, April prelim (9:45): 77.6 expected, 77.6 March.
SUBSCRIBER QUESTIONS
Q: You seem very optimistic about this "bear market rally" continuing toward the 8/02 high. What I'm seeing is a double top formation in progress (first hump peaked two weeks ago), with the second SP500 hump topping out at around 900, perhaps as early as tomorrow (Thursday 4/3). [Other market analysts] see the Dow going to the 6000s by year end. Near term they also see a temporary rally, but also warning of the possible double top that may be forming now. The way the day to day war news has been affecting this market, he rightly states that any piece of bad news on the war can change things very quickly. My point is, you see this in technical terms as a rally, but all I see is a market totally dependent upon and getting jerked around by war news. That makes me a little nervous about the money I have in the market now, as well as positions I'm waiting to enter. Can you clarify why you think the near term trend is so bullish?
A: It could very well be a double top forming. We won�t know it unless the market rolls over and sells on strong volume. That is the problem with all patterns: they can set up beautifully and then never complete. Thus far there has been one session where down volume really rose when the market sold. That indicates that the big money is still accumulating stocks as opposed to selling them. Leading stocks (and I am not talking about MSFT and the old leaders that are still in downtrends), the stocks that are in good accumulation patterns, continue to hold up and move higher on strong volume. Some stocks are taking hits on downgrades, and that shows also that you are correct that there is still a big �news effect� on the market. The question is, while we all know there are problems in the market and with the economy, the market is not yet showing that bad news is going to win out. Remember, the market never waits for the news to get rosy and wonderful before it starts its move. As we have said several times over the past few weeks, rallies start in what seem to be the worst of times. Many strong runs have started when the economics were still heading down into a recession. Remember also that in the start of every significant upside move out of a long downtrend that most pundits felt things were not going to get any better but were just going to get worse. Looking at the long term downtrends their interpretations were not wrong. It is just that the downtrend had run its course and the shift came. We are history nuts, and each time the market turned for a major move higher after a downtrend, the majority of the pundits were predicting much worse things ahead for the market simply because it was still in its downtrend and the economic picture still looked crappy (e.g., 1973-1974, and more recently in 1991 when the market rallied before the official recession even began).
The point is while we agree that the market is still in a downtrend overall, this rally has shown the attributes the major market bottoms in the past have shown. That does not mean it is the bottom; rallies can always fail in the teeth of the downtrend as each one in this downtrend has failed. The fact is, just as you don�t know if a technical pattern such as that double top will succeed, you don�t know if the rally will succeed. You have to go with what the market is showing you. Again, the market is in an accumulation phase right now, not showing distribution. Bad news could change that, but two bad Mondays where the news was bad (or at least perceived as bad) did not derail the move up. If this does move higher, we are well positioned. If it craps out we will exit quickly. We are already banking good gains; we took some gains Thursday and we still have several positions that are trading well beyond their original target points. It is prudent to take some gains, particularly on option positions where time is a key factor. If we succumbed to our fears about the economy and the overall downtrend and did nothing, we would have made nothing. We have taken a few losses but we have kept them small. We have taken some very nice 100%+ gains on options during this recent rally. If we ignored the market action we would not be taking those gains. There were so many bears that tried to short the market during 1998 and 1999 because they felt it had to go down. Yes, but it was not until March and April 2000 until the market started distributing heavily and broke its trendline that it said it was going down. Do you miss out on the move up, cursing the action?
We are firm believers that you look at the market to make your decisions. You temper it with an understanding of the economy and the big trends, and you are thus ready to exit if the big money starts to exit, shown by leading stocks breaking down on volume, indexes churning on high volume, etc. It is right to always be cautious and skeptical, but emotions get you into positions at the wrong time and out of positions at the wrong time. Each day we sit down, clear the boards, and then discuss what the market showed us that day, stripping out the emotion the best we can. The market is the final arbiter of what we do. While it is still in a downtrend, the current action is showing accumulation with strong stocks moving higher. We are making money on this move, but if it changes we will take our gains and then look the other way if the market breaks down and fails a test the breakdown.
I think that once the war is over the economy takes center stage along with the upcoming election year.
RtS |
