- Modest reflex bounce keeps indexes in trading range. - Preliminary sentiment still upbeat but below expectations, tech companies pushing hard to close the quarter positive. - Selling eases off but the leading tech and small caps continue to trail. - Subscriber Questions.
Microsoft helps spark a low volume bounce off of support.
MSFT guidance was solid and unexpected, but even with this giant tech stock promising better times tech stocks could barely throw off the yoke recent selling as they struggled to get back to flat. It was not until late afternoon they turned solidly positive and they still gave back a 8 points form the high in the last hour. The cyclical stocks such as CAT and MMM were driving the action with stronger volume upside moves as once again the �other� large cap indexes (DJ30, SP500) posted the best gains. Unlike Thursday, however, the mid-caps were right in the mix as well, posting gains on par with the large caps.
Despite the solid upside gains, the action was on substantially lower volume for any session and this was a triple witch where volume typically runs a bit higher. NYSE breadth was a solid 2:1, but Nasdaq was stumbling along at 1.4:1. That makes this action simply a reflex bounce up off support in relief of the heavy price selling Wednesday and especially Thursday. In other words it was not a point where buyers flooded the market in great numbers and overwhelmed the sellers. There were fewer buyers Friday than sellers on Thursday. The market did what it needed to do, i.e., hold above near support and bounce up after testing that support Thursday. It did not, however, signal an overall move back up in stocks is starting. Even with that, however, there are many, many stocks in very good position to move higher as they have set up good patterns during this last month of up and down action.
THE ECONOMY
Sentiment rises, but better economic news cannot lift extended stocks.
The market received some good regional manufacturing news from New York and Philadelphia that the market could not capitalize on. Michigan�s preliminary report Friday (all 200 of them) were more upbeat than in June (90.3 versus 89.7), but below the 91.0 reading expected. Still a very nice boost in confidence that was foreshadowed by some other private sentiment polls (e.g., IBD) that showed confidence remained upbeat. It was a week where investors looked to the immediate news, i.e., earnings, as opposed to the longer term picture as they have been all year. After a 150 point Nasdaq spurt right up to the doorstep of earnings stocks could not meet near term expectations and thus have been sold, particularly the leading tech and small cap stocks.
Economy is improving. Just listen to the politicians.
We are becoming more sanguine on the economic outlook though that is similar to saying a 25 point improvement in cholesterol levels from a reading of 400 is a good sign; there is some improvement, but a major problem still exists. Besides the sharply improving ISM services and the regional manufacturing reports that are picking up a lot of steam there is the politician meter. It has become vogue the past month or so (the timing coinciding with increasing 2004 campaigning) to point to the slow economy, the baby boom generation retiring in 10 years or so, and the deficits we have to have to get the economy growing again and conclude that we are in big trouble ahead. You cannot swing a dead cat without hitting a campaigning politician predicting dire events from the current �failed policies.� Of course these are the same failed policies that were enacted in the early 1980�s that led to the huge technological and economic boom over the next 20 years. Heck, last week Congress was even berating Greenspan for the economic conditions we have suffered through the past three years, finally questioning him on his policies.
All we can say is where were you in 1999 when he started this insane snipe hunt for inflation that did not really exist but was such a horrific threat to us all? As usual, the threat was from an overactive Fed that had enough arrogance to think it could fine tune an economy and bend it to its will. We were screaming at the time that the Fed was embarking on a course that would stall the economy and crash the market just in time for the baby boomers to retire.
The baby boomers have been the growth mechanism for the US, powering higher every market they touch as they age. When they retire and die off, there won�t be that big demographic powerhouse to consume and innovate. Just look at Japan: while the U.S made babies after WWII, Japan encountered a population gap as so many young men and boys were lost. Unlike the US, Japan has suffered in deflation and recession for 12 years because it does not have the big population of consumers in their prime earning and buying years to pull the country out of depression. Thus, when we should have been putting the pedal to the floor to increase our technological lead over the world and thus insure that the world would come to us for their needs and be our consumers after the baby boomers grayed, we were purposefully hobbling our economy. Of course the results, as we predicted, were, well, predictable: the Fed overshot the mark as it always does, and crashed the economy at a very vulnerable time period. The Fed conceivably doomed the U.S. to a second rate status over the next 50 years as it has given countries such as China with burgeoning populations and growing capitalism an open door to walk through while we struggle with an aging population.
Thus we come to last week and Congress chastising Greenspan. Again, where were they back in 1999 when we were screaming about how the die of this economic disaster was being cast? They all had brown noses and chapped lips from the rear-end kissing they were doing each time Greenspan spoke before Congress. He could do no wrong, he was an economic genius (don�t forget he did come up with the �WIN� buttons in 1974), he was, after all, the maestro. As usual, Congress caught on much too late and they are now fighting the last war and wringing their hands over deficits, something we are destined to have as long as the economy suffers. A little deficit now to grow the economy is small price to pay. It worked in the early 1960�s and again in the 1980�s. It will work now, but not with the same results as the population ages.
Thus, now that the politicians recognize the big picture, now that they finally see the inevitable outcome to the flawed decision process that started in 1998, they are acting as usual, i.e., as did Pavlov�s salivating dogs. They don�t anticipate problems, but react to them when they are so apparent first graders are discussing them in social studies. Thus the responses will be untimely and aimed at the wrong place. If not, why was there such a massive struggle to pass business stimulus versus consumer stimulus in the tax package when it was the business side of the economy that was broken? Because Congress again often fails to see the big picture. Despite that some real business stimulus was passed and it will work to a certain degree. There will be growth in excess of 3% in Q3 and Q4 in our opinion.
THE MARKET
The market bounced on low volume Friday, doing what it had to do to continue the more or less lateral consolidation of the most recent move higher. DJ30 and SP500 have been consolidating for the past month; they were lagging the Nasdaq and SP600, but now appear to be ahead of the times in working through a much needed consolidation. Indeed now many of their components are breaking higher on volume after lagging the rest of the market. Rotation can be a very good thing for the stock market: money stays in the market but shifts its emphasis. The great thing is that the leaders come roaring back after the consolidation as did SINA, SOHU and friends Friday (though that was hardly a consolidation).
At this juncture it would be best for the market to continue to consolidate for several weeks. Sounds boring but with Nasdaq still 20% over its 200 day MVA, and a sideways move for a month or so would allow the 200 day to come up and provide a nice foundation for the next move higher. That would be best, but this market has not waited for the best case scenario as each near term pullback was met with buying. Nasdaq is sitting on its 18 day MVA with a doji and several leaders were up and on volume as well. They have been early leaders in the rebounds. Moreover, SP500 and DJ30 have already moved through consolidations the past 5 weeks and are showing some strong individual moves.
All in all Friday was not a signal of buyers running back into stocks wholesale as volume was lower overall. They were moving into some older economy stocks and some of the tech leaders thus far. Those numbers were rather few. The market still has some correcting and consolidating to do to set up a better foundation and we think it will continue some of this action. If volume surges this week again and more leaders start popping up off their near support on volume, however, the market could be in for a further run, again putting off the necessary longer, and the higher it goes, steeper, correction.
Market Sentiment
Volatility edged higher on the selling only to fall right back on the Friday bounce. Volatility has been hanging around at low levels for months as the market moved higher. It is at levels that could suggest topping in the market either interim or longer, but it is historically a bad forecaster as far as timing. Moreover, volatility has been lower in years gone by and the market just kept on marching higher. We continue to watch it, but as it stays at low levels regardless of market action, it provides no near term insight.
VIX: 21.36; -1.46 VXN: 33.41; -2.06
Put/Call Ratio (CBOE): 0.61; -0.28. The ratio hit 0.89 Thursday, getting close to the level that has sparked past rallies. It fell right back on the Friday move. Typically there are 2 to 3 days of higher levels to spark the longer rallies.
Nasdaq
A 68 point drop from the Monday high after techs started the week with a gap higher, finishing the week with a tight doji on the 18 day MVA and some early leaders rallying. Uh oh. Another bounce higher without rest again?
Stats: +10.48 points (+0.62%) to close at 1708.5 Volume: 1.606B (-16.23%). Volume backed off to below average on the bounce, one of the definite attributes of a relief bounce from the selling.
Up Volume: 1.033B (+858M) Down Volume: 559M (-1.17B)
A/D and Hi/Lo: Advancers led 1.42 to 1. Very modest upside action as the smaller issues were not participating with the usual vigor. Pale in comparison to the Thursday drop. Previous Session: Decliners led 3.89 to 1
New Highs: 106 (-11) New Lows: 11 (+1)
The Chart: (Click to view the chart)
Unlike the other large cap indexes Nasdaq ran hard right into earnings. It tried another breakout early lat week but failed and fell back to the 18 day MVA to close the week. The drop was on lower volume, indicating no distribution, i.e., the big money was not dumping the shares they have been buying on the move higher. At 20% over its 200 day MVA Nasdaq could use a nice lateral move here at near support from the 18 day and 1700; any further upside here has some associated risk from simply being extended. Nonetheless Nasdaq is set up to bounce from the 18 day MVA yet again after tapping at the June intraday highs (1685) on the Friday low. While we are cautious of a further upside move, if the leaders and other strong stocks that have made recent pullbacks rally back on volume and overall volume rises, we will take selective upside positions understanding the associated risk. With SOX also showing a hammer doji after tapping at the 50 day MVA on the low and rallying back hard, Nasdaq can provide yet another bounce here.
S&P 500/NYSE
The large caps continue to work laterally over near support, coming off a test of that level Thursday.
Stats: +11.59 points (+1.2%) to close at 993.32 NYSE Volume: 1.35B (-18.28%). Volume dropped to well below average on the move off the 50 day MVA test from Thursday. After two rising volume selling sessions large caps jumped on lower volume. Again not the best price/volume action.
Up Volume: 1.099B (+761M) Down Volume: 254M (-1.049B)
A/D and Hi/Lo: Advancers led 2.1 to 1. Nice breadth as mid-caps joined as well, but well off the distribution session breadth. Previous Session: Decliners led 3.31 to 1
New Highs: 61 (+16) New Lows: 15 (-10)
The Chart: (Click to view the chart)
Thursday the large caps tested at the 50 day MVA (971) on the Thursday low (978.60). Friday the large caps rebounded on lower, below average volume, returning to the short term MVA (992 is the 18 day MVA, 933 is the 10 day MVA). SP500 is moving in a tight range between 975 and 1015, a good looking lateral move but for the poorer price/volume action the past week (down on rising volume, up on lower volume). Even with that it managed to hold near support in the range.
DJ30:
Stats: +137.33 points (+1.52%) to close at 9188.15 Volume: 1.35B (-18.28%)
The Chart: (Click to view the chart)
With stocks such as CAT and MMM in the lead the blue chips posted the best gain on the session, moving off the Thursday test of 9000 on the low. The Dow is also in a very tight range the past 5 weeks with 9000 on the low and 9250 to 9350 on the high. Price/volume action could be better as well, but there has been no heavy distribution coupled with strong price losses, just the narrow trading inside the range. That indicates there are as many willing buyers to pick up the shares the sellers are getting rid of. Higher volume with little point loss is a decent technical indication.
THIS WEEK
Not a lot of economic data hitting the street this week though the leading economic indicators will be interesting. After posting a 1% gain in May they are expected to fall back to near stagnant for June. Perhaps. The rising market most of the month, strong housing numbers, and rising retail sales speak of better than expected results. The LEI is not as closely followed as it used to be but we still like to look at this one.
Earnings will really start pouring in this week. As noted, the market is focused on short term news right now and in doing so it is consolidating the run higher as the results, while better, are not suggestive of a roaring economy. There is still tremendous pressure for companies, however, to show growth. Take Dell. We have been taking advantage of the tax incentives and upgrading our computing equipment. An extra battery was left out of one order. While on the telephone to get it re-ordered we were asked if there was anything else we could need and were told that whatever it was we would get 15% off plus free 2-day shipping. When we pushed to see how far they would go we were able to get 20% off some new LCD monitors after it was okayed with the supervisor. Dell is trying very hard to make the quarter. Whether this means it is struggling to meet it or is just pushing hard to show it has upped its market share is not clear. The latter seems likely giving the willingness to discount new and refurbished equipment.
We want the market to consolidate more, moving laterally as DJ30 and SP500 have done the past month. Nasdaq needs a good consolidation, but the other large cap indexes are already there, and as summer grows old and money continues to move into the market, another jump higher is not out of the question before late August and September take over. As noted, Nasdaq is at the 18 day MVA with some of its leading stocks up on volume, SOX tested the 50 day MVA on the low and recovered furiously, and other parts of the market showed excellent action Friday (e.g., cyclical stocks). Techs and small caps ran up ahead of earnings, sold back on the fact of the first earnings the past 2 weeks, and is set for a bounce yet again. Many stocks have set up good patterns to move up and out of, so even if Nasdaq may still be extended, many other areas have stocks ready to go.
The key is whether the bounce has volume to it or if it is just a move up in the range. We suspect that even if the overall market lacks volume punch on a bounce certain leading stocks will again attract a disproportionate level of trade. We are going to be very careful in what we move into, looking at the good patterns and then the best movers from the group. The market needs to consolidate here and it is working on that, but if the rally starts on volume we will go with it, but we will not be buying wantonly because of the market extension at this point. If it were to consolidate for a few more weeks and then rallies, that would be a different story as stocks would have set up new bases, would have plenty of rest, and there would be more room to run with the 200 day MVA rising higher.
Economic Calendar
7-21-03 - Leading economic indicators, June (10:00): 0.1% expected, 1.0% May.
7-24-03 - Intial jobless claims (8:30):
7-25-03 - Durable goods orders, June (8:30): 1.0% expected, -0.4% May. - Existing home sales, June (10:00): 5.99M expected, 5.92M May. - New home sales, June (10:00): 1.135M expected, 1.157M May.
SUBSCRIBER QUESTIONS
Q: How do you choose your target prices? So many of them seem to be right on target, pardon the pun. That question seems to stump me every time. I have found many stocks setup to move but never know where to set my target price.
A: First we look at market conditions. Is the market uptrending or downtrending, is the trend strong or modest? If we are playing upside in an uptrending market ourtargets will be different from an upside play in an overall downtrend. In the latter case we will shorten our initial targets simply because good moves attract short sellers.
We also look at the type of play we are looking at, i.e., is it a short term trade or are we looking to let it run as far as we can. In most cases we will let the stock continue to run as long as it keeps showing good action and is making enough gain relative to other plays we could be investing in (the opportunity cost factor), but there are some we enter strictly to take the short gain, something we do on the Technical Trader Report.
Then there are the factors particular stock. How far are its typical moves on each run (up or down)? Where is resistance or support (e.g., prior tops, upper channel, overhead suppy)?
We factor all of that in to set the target. Typically, if the marekt is trending higher and stocks are moving well, a breakout stock can move 15% to 20% before it takes a first rest. That is a general rule of thumb and it depends on the other factors above including just how expensive it is. It takes a lot less to drive a $5 stock with average volume of 200K 20% than a $65 stock with average trade of 20M. If a stock makes a fast 20% move on the breakout from a good pattern, it can potentially be a bigger winner. That is why we often use that 20% level as a litmus test or a first target if there are no other resistance areas or we feel the stock is strong enough that it should plow right through existing resistance.
From there we can take some partial profit. With options we often will do that because time is working against us, and if the stock comes back to test after the strong move (as is often the case) we lose not only value in our options but time as well. That makes it harder for the option to get back up to where it was on the first run. We can take a partial and let the rest run. Many stocks on the report now have hit the initial target where we took some gain, and then we let the run from there, looking for the next entry point as long as the stock remains solid.
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