InvestmentHouse Weekend Update:
investmenthouse.com
- Poor employment report fails to stall high volume gain.
- Job losses, non-government GDP smack of recession.
- DJ30 breakout follows Dow transports higher, fulfilling some Dow Theory bull market requirements.
- Subscriber Questions.
Market was set to rally.
From the action Friday it appeared as if the market was set to rally regardless of the news. A poor employment report barely budged futures, and when stocks opened there was only a brief look to the downside before the buying started. It started and never looked back. The stair-step surges in the first 2.5 hours were impressive as we saw volume ramping up well past Thursday levels earl on, particularly on Nasdaq. There was the usual midday slump which, in this case, was just a lateral move. That was followed by an afternoon rally that lacked the morning ballistic missile characteristics but managed to push the indexes to close at or very near the session highs.
Excellent volume and tremendous breadth led the way with small caps and techs leading the way. DJ30 broke over the 8522 level, following the Dow Transports higher. Nasdaq put plenty of cushion between it and the January high and is knocking at the door of the December high, the high point after breaking over the August 2002 high. At the same time the NYSE composite broke free and clear of the August/December/January down trendline that marked a descending triangle; the accumulation leading up to the move made that iffy resistance, and the strong volume on the break simply reiterated the buyside pressure that had built up from below.
Shorts start to cover recent positions as indexes clear stubborn resistance.
Success breeds more success, but it also raises the bar as the indexes then have to deal with the next resistance level in the downtrend. What do we mean? Breaking over resistance in DJ30, Nasdaq, and the NYSE Composite caused some shorts to cover. Remember we have said that short interest was rising even as the market rose. More and more were betting against the market. The put/call ratio was 0.85 just Thursday, well into the rally. Once the indexes start breaking resistance, shorts start to cover, and that adds to the upside pressure in addition to the actual buying for the longer term.
On the other hand, now Nasdaq is right below the December high, a point many have an eye on as the apex of the rally. Then DJ30 and SP500 still have to deal with their January, December and August highs because they have lagged all along. It is a struggle, but the market keeps telling us it is under accumulation.
Enjoying the benefits of listening to the market.
Each of you is to be congratulated. Most investors have followed an almost scripted path. They jumped into the market as it was peaking in the October 1999 to March 2000 race to the top, rode it down to oblivion, and finally gave up between the September 2001 lows to the October 2002 lows. Even as the market flashed another reversal and confirmation off the October low with leaders starting to jump higher, they stayed away. Even after the recent Nasdaq double bottom breakout and run that kept the rally not only alive but prosperous, they still stayed away. By listening to their guts instead of the market, they have missed out on some huge gains (several option plays have yielded gains in excess of 100% already) that are enjoyed when the market first starts that rebound.
You did not follow that herd. You made your own path. You watched the signposts in the market and reacted accordingly. You were in when most were still talking about how foolish the stock market �game� is, how it has worse odds than a Saturday night Tijuana dice game. You rode the bull, tricked the bear at its own game, and are willing to see if this young bull has more than just wobbly legs. All the while you are banking money, adding to those accounts that others only wistfully remember having.
Many bears claim this is a bear market rally. It may be. After all Barron�s this weekend will scream �The Bull is Back!� As we have said, you don�t know what the market is really doing in the long run until you look back and say �yep, that was the bottom.� What you do is move in when the market says buy and ride it like a bronco rider on Sunday afternoon trying to make enough money to cover the entry fee for next week�s rodeo. Even if this is a bear market rally, we have a number of stocks soaring past their original targets, and we are riding them like that cowpoke. While the bears short the market because they believe or feel it is going to roll over, we have followed the market cues and just take what it is giving us. It may roll over, but we will have moved up our stops on our gains already and bank a big profit even if it does. And you know what? If it does we will grab it by the neck and kick it all the way down.
THE ECONOMY
Jobs report indicative of recession levels.
April unemployment rose to 6% while non-farm payrolls fell a less than expected 48K (-58K expected). The market took it in stride and we will discuss that in a minute. What is striking is that over the past three months the economy has lost over 500K non-farm jobs. That is a traditional recessionary level. Worse, the average workweek fell to 34.0 from 34.3. The weekly jobs numbers are telling us layoffs continue and the monthly jobs reports are telling us that companies are using those left at work less. That is not indicative of any improvement in business, though it is looking in the rearview mirror.
Jobs are lagging, but let�s look at some other indications. GDP has been growing the past three quarters between 1.5% and 3%. Not great but not a recession by textbook definitions. The government side of the equation dominates GDP, however, and that does do not grow an economy long term. The government taking dollars from the economy via taxes slows the economy because that money is not there for investment where it is needed. When the government spends those dollars some of that goes back into the economy, but even the socialists know it is not even close to a dollar for dollar exchange. Thus government spending is not really a good thing to see, particularly in terms of growing an economy.
Take out the government spending and you have private GDP growing by just 0.7% if that much. There is no way that is going to sustain businesses. It takes 3% GDP growth before jobs are created. It is not close at this point.
Recession as the market bottoms?
We talked about this in February when oil prices were spiking. We noted that oil prices had risen enough over the prior 12 months to cause a recession. Add to that the war slowdown and the already pathetic private GDP growth, and we could see the economic picture actually worsen this quarter to negative levels. When we were doing a story for Bottom Line Personal in February we told the reporter there that energy prices had hit a point where a recession was quite likely, or at least a quarter of negative growth. If we were wrong we agreed to fly to New York and enjoy a big steak dinner with the reporter. Thus far we don�t see any significant change in the economic picture to change that. Energy prices have improved, but the damage may have been done. There has been renewed optimism after the war, but business sentiment has not improved. It could get worse before it gets better.
Is that horrible? Depends upon what you are looking at. Bush won�t like it, but he already knows there is trouble because he has some pretty good advisors who see the same things. That is why they want fundamental changes in the tax structure to remove impediments to capital investment. Others that don�t see the light or understand economic cause and effect fret over $200B over 10 years (the difference between the House and Senate tax bill versions) when they are going to spend $27 trillion in tax revenues taken in during that same 10 year period. Talk about money grubbing at its finest. They have $27T expected to spend and they want that other $200B and are willing to further stomp on the economy to do it.
From an investor�s perspective, it may not be that bad. We have discussed the 1991 scenario before. The US had a quick Iraq war, but the economy was in trouble. Consumers stopped buying while watching the war, and that only exacerbated the slowdown. As it became clear the war was going to actually occur, the market shot higher, ending its downtrend. The economy continued down and did not have a recession until after the market bottomed.
The market looks ahead always. It looked ahead in early 2000 and rolled over even when economists were still slathering kisses all over Greenspan�s ring, overusing the descriptive phrase �white hot economy� as much as sports commentators overuse the term �superstar.� Just as in 1991, once it became clear the U.S. was going to war, the market started to rally and it has continued to do so even as economic news continues to slide. Thus as an investor, the current decline in economic numbers is not necessarily the harbinger of bad market tidings. Eventually the economic numbers will have to turn to support the advance and future advances, but the market always leads the move. Unlike those saying 6 to 9 months back that �this time� the market was going to wait for the economic news to improve before rallying, the market has behaved as it typically does.
THE MARKET
Stocks did not wait for next week to make the move higher and break the indexes out of their newly formed handles. Shaking off bad news is a hallmark of a strong market and also another indication that the market looks down the road past the current economic climate when determining stock prices. In any event stocks rallied on a strong volume surge, particularly in Nasdaq, with DJ30 breaking resistance and small caps actually leading higher. As we have stated, it is a good sign to see small caps start moving higher with authority as they tend to outperform when economic recovery is nearing.
DJ30 makes an important move.
The DJ30 breakout over 8522 was a technical move of significance. It is still off the January, December and August highs, but it finally broke over near resistance in its triangle. That has two effects. First, it causes shorts to cover positions and adds fuel to the upside along with the institutional buying. Second, it follows the DJ20 (Dow Transports) higher, making a new high over a prior high, the first time it has done so in this current leg to the downtrend that started when the August 2002 high failed. Dow Theory in general says the industrials (DJ30) and transports (DJ20) need to confirm each other. The transports have already made a higher high, and Friday it broke to a new high for the year. The Dow�s move over the 8522 high helps confirm that move to a certain extent. When DJ30 can make a new high for the year and hold, the future for Dow stocks looks better.
The neat thing is, DJ30 is lagging. Nasdaq has made a new high for the year, the SP600 (small caps) made a new high for the year, and the SP500 is just a stones throw. And in those indexes, the leaders are well beyond new highs for the year, most at new multi-year highs. That is another reason why we always scoffed somewhat at the idea that stocks are in a bear market until they reach the prior highs. By watching what the market is showing, you can make some hefty percentage gains as stocks breakout and run higher. The leaders always enjoy strong percentage moves versus the indexes. Once again that is happening right now.
Leaders shoot higher again.
Leadership is the key. Friday the leaders were out in force along with most other stocks (3:1 breadth will do that). Volume moves were the norm. Isn�t it nice to be sitting in some of these stocks for a few days, weeks or even months, enjoying nice gains already, and then seeing them shoot higher as new waves of investors finally join the market? Again, that is the benefit of paying attention to the market cues. Friday there were breakouts from individual stocks, breakouts on the indexes, and continued strong advances from the leadership.
Where is the top?
All along we have said that Nasdaq 1522 looked like a point where the market would need a longer rest. For awhile last week it looked as if it might not get that far. Friday we heard many commentators talking about that December high as well or talking about the end of May being a point where they would take gains. That is okay; you need to look ahead and see the lay of the land. We have been doing the same simply because if you work through the various scenarios and possibilities you are ready and know how to act when they are presented. In short, you don�t sit there and scratch your head wondering what is up because you already know what the market is showing you accumulation and leader-wise, you know where the resistance points are, and you know how you will react when the scenarios start to play out.
We will watch how the market reacts to those levels. Sellers will try their hand there as the did recently at Nasdaq January highs and DJ30 March highs. Another consolidation after a move up to or above the December Nasdaq highs as a result would not be out of question. This breakout from the handles on Nasdaq and SP500 could easily propel the indexes higher near term before that consolidation starts. The key will, as always, be how the leaders react and whether the big money starts to exit.
Market Sentiment
VIX: 23.61; -0.89
VXN: 32.36; -0.13
Put/Call Ratio (CBOE): 0.72; -0.13. The ratio remains high even as the market rallies. Ralph Bloch stated today that the put/call ratio he tracks hit its highest point since August 2001. This is a contrary indicator, but as we noted Thursday night, the sentiment indicators are mixed, and as secondary indicators they take a back seat to accumulation/distribution and leadership.
Nasdaq
Nasdaq broke to a new closing high since the October bottom, moving on a strong volume breakout and just missing its December intraday high.
Stats: +30.32 points (+2.06%) to close at 1502.88
Volume: 1.843B (+25.95%). Strongest volume since the March high as Nasdaq blasted off the low and rallied sharply.
Up Volume: 1.586B (+597M)
Down Volume: 243M (-204M)
A/D and Hi/Lo: Advancers led 2.51 to 1. Excellent breadth. Downside breadth never expanded during the consolidation, showing a market more intent on maintaining its gains.
Previous Session: Advancers led 1.19 to 1
New Highs: 209 (+55)
New Lows: 16 (-5)
The Chart: (Click to view the chart)
Nasdaq was nudged from the top spot by the SP600, but it still put on a show. It put some mileage between it and the January high (1467), cleared the December closing high (1484.78), and has its sights set on the December intraday high at 1522. The move broke it out of the handle to the cup that had formed in 2003, and the high volume move has the potential to carry the index past 1522 before it starts to consolidate the move. This December high is the focus of many, and it is also the point where the May 2001/January 2002 down trendline now tracks (roughly 1510). Hate to say it, but another key point for Nasdaq. It continues to show good accumulation and the breakout was strong. Sellers will take a run at it; many of the buyers have said in the past that they would look to take some gains at this level. The accumulation has been strong and the leaders as well. Once again, however, it is the old �what have you done lately for me� time.
S&P 500/NYSE
Broke out of its cup with handle on strong though now blowout volume. Edging close to that January high.
Stats: +13.78 points (+1.5%) to close at 930.08
NYSE Volume: 1.542B (+11.9%). Solid increase in above average volume though not as strong as it has been recently.
Up Volume: 1.284B (+633M)
Down Volume: 237M (-492M)
A/D and Hi/Lo: Advancers led 3.36 to 1. Outstanding breadth as the small caps are showing their muscle.
Previous Session: Advancers led 1.09 to 1
New Highs: 180 (+49)
New Lows: 4 (-6)
The Chart: (Click to view the chart)
Breakout of the cup with handle that formed this year, moving solidly over the longer term down trendline (September 2000/March 2002) and attacking the January high (935). This is where it all bunches up for the large caps as there is a series of peaks with a closing high in November of 938.87. Now that high along with the January high were part of a trendline formed in conjunction with the August 2002 high. SP500 has broken that down trendline as well. This breakout gives the large caps some power to take out the closing highs through December. The December intraday high (954.28), backed up by the August 2002 high (965) are going to be tough, however.
DJ30:
Breakout from the ascending triangle, pushing over the March high at 8522. This finally puts this resistance to bed from the look of it, and now the blue chips have a path to the November (8800), January (8870), and December (8931 closing, 9043 intraday) highs. As DJ30 has lagged, it may not make it that high before the overall market starts its next consolidation, but this move in conjunction with the DJ20 (transports) hitting a new high for the year is much needed for the overall foundation of the rally.
Stats: +128.43 points (+1.52%) to close at 8582.68
Volume: 1.542B (+11.9%)
The Chart: (Click to view the chart)
THIS WEEK
The big action this week is the FOMC meeting on Tuesday. It is a one-day meeting, and while the Fed Funds Futures contract is showing a decent chance of a 25 basis point cut, we would be surprised if the Fed cut rates with the war victory wave and the market looking better. This is particularly true with the Fed�s moves in the bond market where it is still buying bonds to keep rates from climbing. That does not mean the failure to cut is the right move; the economy needs easy money. It has not had easy money even when the Fed was lowering rates because the Fed was still restricting many banks and the loans they could make. Thus some banks could not lend to small businesses and others might have wanted to but they were afraid to do so given the Fed looking hard over their shoulder and the lackluster business climate. Money, money everywhere but none of it fit to lend. That seriously impaired any economic recovery attempt, and the effects are still lingering
Thus without any rate change from the Fed what can be expected? A strong Friday often leads to a weaker Monday. The breakout could be tested, sellers could try to jump on the move immediately before Nasdaq actually makes it to the December high. We really expect the sellers to make a run at the market again given the significant resistance ahead as well as the recent uptick in short interest once more. Many are betting the market cannot make it higher, and when they start to sell the market feels it regardless of whether the sellers are ultimately successful. That is what causes that choppy action when the indexes hit resistance and bounce around; the buyers and the sellers are at work with no clear advantage to either. As long as the selling volume does not start putting together a string or series of higher volume downside days, consolidations are a good way to get rid of the excess supply in the market after a run drives prices higher.
That leaves the question of whether we continue to buy into the move at this point or sit back with many good positions. We have several accounts holding different positions in many stocks, but not too many stocks in any particular account. That makes it easier to manage more stocks. Do we add or not? The market answers that question. Friday the market showed a strong move once again. Many stocks are well into their runs, but the market also moves in waves. There are stocks still just emerging from good patterns as money moves to new areas of the market. While the market has moved well and is approaching yet again important resistance, we still react to the moves the market is showing. While we may suspect some resistance at the Nasdaq December high, given the solid price/volume action, accumulation, and leadership, no one can say the move will run into a dead end there. We definitely do not want to chase extended stocks that will easily fall back in some selling attempts; those are a recipe for trouble on any strong move regardless of where next resistance is. Instead we focus on leaders that have pulled back (there were a handful that were moving higher ahead of the rest of the market that are making a pullback still) and those next wave stocks that are just now completing their bases.
Support and Resistance
Nasdaq: Closed at 1502.88
- Resistance: The August 2001/January 2002 down trendline (1510). The December intraday high (1522). 1575, May 2002 closing lows.
- Support: The January high (1467). The 10 day MVA at 1458. The 18 day MVA (1438). The March and August highs (1426 and 1427). 1400 is some price support. The exponential 50 day MVA (1397).
S&P 500: Closed at 930.08
- Resistance: 935 (November and January peaks). 954 (December intraday high).
- Support: September 2000/March 2002 down trendline (911). Price tops at 911 (July). The 10 day MVA (912). March and April highs (896 and 905). The 50 day MVA (881) and the 200 day MVA (879). The bottom of the October consolidation range at 875 down to 868, the top of the January trading range.
Dow: Closed at 8582.68
- Resistance: November and January highs (8800, 8870). December high (9044).
- Support: 8522 and 8520, the March and April twin peaks. The 10 day MVA (8453). The 18 day MVA (8392). The 200 day MVA (8308). 8250, the bottom of the October consolidation range and other index lows is some support.
Economic Calendar
5-5-03
- ISM Services, April (10:00): 50.0 expected, 47.9 March.
5-6-03
- FOMC meeting results (2:15)
5-7-03
- Wholesale inventories, March (10:00): 0.1% expected, 0.3% February.
- Consumer Credit, March (3:00): $4B expected, $1.5B February.
5-8-03
- Initial jobless claims (8:30): 440K expected, 448K prior.
- FOMC prior meeting minutes (2:00)
SUBSCRIBER QUESTIONS
Q: Like everyone else I am worried about a correction in the near future. My latest source of concern is the Nasdaq Composite Bullish Percent Index ($bpcompq). The reading has reached 50 which is said to be a sell indicator and in fact it seldom moves very far over 50. Should this be considered a caution going forward?
A: Yes the sentiment indicators are starting to show more bullishness, and that is a concern. We keep an eye on the bulls/bears readings. They are still within our limits for trouble (55% on the bulls, 20% on the bears). Why are these a concern? Well, if everyone is bullish then there is no more fresh money to come into the market. The ammunition is gone. Tonight on Kudlow and Cramer it was a bull fest. Barron�s headlines are screaming the bull is back. Things are getting heated and that keeps us watching the actual price/volume indications and the leadership even more closely. They will tell when a problem develops. Think of them as those signs on the road that warn �bridge may ice in cold weather.� It may happen if it gets cold enough. You proceed with caution, and if you see ice, you take appropriate action. The sentiment indicators are getting closer to a point where we will need to be very careful.
Another thing to consider. Most retail investors are still sitting out. Moreover, there is still a few trillion dollars sitting in money market accounts with the owners still having too fresh of memories of plunging stock prices to risk putting it back to work. That is fuel. If the market continues to move, more and more of that will be put into the market, and fund managers will have to put it to work. That is one difference between bull runs that are long in the tooth versus baby bulls (calves?) just starting out. Many feel it is still too risky to be in the market right after that run (commercials still play this up), and that is a lot of wood lying around the campground to put in the camp fire. |
