- Solid session Friday as market closes a good week, turning the tables on distribution. - Durable goods orders surge, economy roars after a �lull.� - Base building continues with a solid reversal of the distribution. - Subscriber Questions.
Stocks fight early selling attempt, finish week with steady gain.
Interest rate woes continued to hound the market early in the week, and investors dumped bonds and stocks as they struggled with the prospect of the Fed embarking on another rate hike binge. That led to continued distribution Tuesday as the indexes turned sharply lower at key support. Investors immediately responded, however, buying back into stocks that were just sold, and doing so with more vigor than the selling. Fight fire with a bigger fire; that is one way to handle distribution.
Investors started focusing on the benefits of a strong economy and its effect on earnings. Investors started focusing on the strong crop of current earnings and the guidance, helped by the likes of EBAY, MOT, QCOM, CAT, and even MSFT, the latter finally making a contribution to DJ30 after 4 years of abysmal languishing. That brought them back in the market and put together back to back accumulation sessions on the strongest string of volume gains since the 2003 rally peaked in January.
Those volume gains pushed the indexes back above the 50 day EMA, reversing a dive that looked ready to take NASDAQ down to the 200 day SMA. Instead NASDAQ and SP500 reversed back over the 50 day on volume and preserving the formulation of their reverse head and shoulders bases and adding to the continuing accumulation.
THE ECONOMY
March durable goods orders surge, February too.
Expectations were for a again but nowhere near the 3.4% reported (0.7% expected). February was strong as originally reported, but the revision was huge, up to 3.8% from 2.5%. Strength was across the board. Transportation +3.6%, vehicles +3.6%. Non-defense capital spending rose 2.4% versus 2.8% in February. That shows there is still solid business investment. It was not in tech equipment, however, but in �old economy� areas such as machinery, manufacturing, etc. Many are still anticipating a further tech replacement cycle, so the pause in computer buying is not that alarming. Remember, buying surges and ebbs with money going to different areas of need month to month just as we have seen with consumer spending where one month autos are huge, the next soft, all the while consumption remaining solid.
The future looks bright as well. New orders rose 0.8% for the second consecutive month, once again topping shipments. That pushed the inventory to shipment ration to 1.36, a new low. Low inventories plus increased backlogs equal even more manufacturing activity in the future. That is great but the Fed, the President, and Congress have to be careful.
Have to be careful here.
We have discussed the need to let capital flow where it is needed in order to prevent bottlenecks, imbalances, or other euphemisms for inefficient resource application. Too much regulation in the form of subsidies, high tax burdens, regulations that try to micromanage how business spends, and high monetary costs are exactly what lead to �imbalances� that can lead to inflation because supply is fettered from meeting demand.
This is exacerbated by business holding off making key investments at the early stages of recovery (remember, consumer demand remained constant during the recession). The first round of tax cuts failed to deliver any significant business investment incentives, but included, due to bipartisan congressional demand, tax rebates that have a poor history of stimulating anything. As one advisor put it, you couldn�t have stimulated a dog with that first round of tax cuts. Thus demand, already solid, got the jump on supply, and ever since supply has had to play catch up. As we have seen, that did not start in earnest until early fall 2003 though there were signs of recovery as early as late 2002, but it sure was fitful.
The point: First, the Fed is ready to raise rates, something it needs to do, but it has to be careful not to get in front of the natural rise of rates as the economy expands. Money supply is an overlooked factor in the shadow of rate hikes. We cannot forget in the focus on rates that the money has to be there regardless of how low rates are. That was evident during the first two-thirds or rates cuts where the Fed refused to get ahead of real rates and still would not put the wood to the money supply. That came very late in the game and when the last round of tax cuts hit, there was finally money there to take advantage of. The Fed needs to be very careful and not start choking off money when the supply side still has to catch up and get ahead of demand.
Second, there is talk about removing incentives to stimulate the economy because they are no longer needed. That is incredibly ironic because it is coming from some who have claimed, in the face of irrefutable economic growth, that the economy is still in the crapper. The key to recovering from recession and avoiding the next one is to keep businesses investing, consumers consuming, and to cut spending. In other words, you recover from recession and keep deficits under control by growing the economy and reducing government spending. A good environment has been created for the economy, and it should not be yanked away. Don�t know about you, but regardless of who says it, I am tired of hearing how hard workers from all socioeconomic levels (there are few �idle� rich, idle middle class or idle lower class workers) have to pay more or sacrifice more after three years of a nasty economic and market plunge before the government verifies it has reduced waste and fraud in the administration of its programs to less than 5%. Don�t talk to me about how deficits require tax hikes until the feds can assure us our tax dollars are no longer being wasted, not just in the building of rain forests in the desert under the transportation bill, but reducing the rampant fraud in the administration of aid programs. If it would do that there would be no need for taxes as high as they are. As that has virtually no chance of occurring, the next best thing is to keep incentives alive for businesses to invest in business and take chances and consumers to consume.
THE MARKET
Friday was not especially scintillating action, but it was positive. Volume backed off but was still solid on NASDAQ. Sellers tried to take stocks lower but the market came back and steadily drifted higher to the close. In short, volume lagged but the intraday action was again positive.
The advance was led by NASDAQ and SOX. The advance was narrow as breadth remained negative on NASDAQ and NYSE. With the MSFT earnings, it was a day for large cap technology stocks such as INTC, AMAT, and DELL to post gains. Not great action but after two strong accumulation sessions that reversed earlier distribution the market gave us more than we expected with the solid intraday action, i.e., low to high.
Some call this a trading range, some say it is going nowhere, some say it is a repeat of 1994 when the Fed went nuts with its rate hikes and nearly drove the economy into another recession just as it emerged from one. The complaints about the current action are different from early 2003, but the theme is the same, basically that the market is struggling to continue the advance in the face of a long run, higher interest rates, and the belief that earnings growth cannot continue.
The market itself is what we look at to tell us what is going on, and as noted Thursday, the action to end the week maintained the reverse head and shoulders patterns on NASDAQ and SP500. SOX continues to languish below the 50 day EMA, but it held the 200 day SMA and is attempting a bounce. That action mirrors many semiconductor stocks and other large caps that are attempting to form double bottoms. These have been laggards and that they are now trying to form up their own bases is a good sign though hardly determinative.
Accumulation in the current patterns has been aided by the solid volume turn to close the week. NASDAQ is showing solid 4 to 1 accumulation, SP500 is 3 to 1. We said Tuesday that price/volume action had to improve, and the volume surge to the upside did just that and has put a nice positive spin on the base building.
Gapped higher and held the gains on lower though solid volume, closing just below some modest resistance at 2050.
Stats: +16.86 points (+0.83%) to close at 2049.77 Volume: 1.954B (-9.8%). Volume dropped off but remained above average. As noted Thursday, the upside volume was significantly stronger than the distribution sessions, indicating the buyers came in with more force.
Up Volume: 1.227B (-317M) Down Volume: 678M (+85M)
A/D and Hi/Lo: Decliners led 1.16 to 1. It was a large cap tech day and thus the weak breadth. Previous Session: Advancers led 1.93 to 1
New Highs: 116 (-27) New Lows: 19 (-12)
The Chart: (Click to view the chart)
Gapped higher and filled the gap intraday before rebounding to the close. NASDAQ maintained its reverse head and shoulders base. There is some resistance at 2050, but from here to 2080 (April high and the breakout point) it is going to encounter overhead. That may require it to take another week or two to find that level test back some and then try a breakout. SOX is a bit different but trying to form the second leg of a double bottom off of the 200 day SMA (476.33). SOX sold off harder but is now trying to find its bottom and form an accumulation pattern as well.
S&P 500/NYSE
Went nowhere Friday, and all in all, that was not bad given the prior two sessions.
Stats: +0.67 points (+0.06%) to close at 1140.6 NYSE Volume: 1.393B (-23.53%). Significant drop off in volume, falling below average after two strong accumulation sessions. The price/volume action has improved significantly the past two weeks as the overall accumulation indicates.
Up Volume: 544M (-920M) Down Volume: 817M (+461M)
A/D and Hi/Lo: Decliners led 1.89 to 1. Very narrow advance. Previous Session: Advancers led 2.99 to 1
New Highs: 105 (-77) New Lows: 158 (+64)
The Chart: (Click to view the chart)
SP500 went nowhere Friday, but the strong accumulation Wednesday and Thursday helped hold it in the reverse head and shoulders base that has formed up since the index topped January to March. Never much of a correction as far as depth, but the lateral move has been positive as the accumulation indicates. Looks as if it is going to make that advance toward 1160 and the breakout point. From there we want it to pause, drift laterally and lower, then make the breakout. For now it looks positive, but we have to let it finish building the patterns.
DJ30
Another big volume session but it was due to some hefty volume on MSFT with its strong volume. Its pattern is still rather ambiguous, i.e., not as well defined as NASDAQ and SP500. It recovered the 50 day EMA (10,394) Thursday, tapped it on the Friday low and rebounded to close near the high. It has immediate resistance at 10,500 to 10,570, but from here to the February high (10,753) there is a lot of overhead supply. Again, we still believe DJ30 will be a follower of the other indexes here.
Stats: +11.64 points (+0.11%) to close at 10472.84 Volume: 277 million Friday versus 266 million Thursday.
The Chart: (Click to view the chart)
THIS WEEK
Earnings reports peaked last week but they will remain strong this week along with a bevy of economic data as a prelude to the jobs report the following Friday. The interest rate fear raised its head again some early Friday as the futures ticked back on the strong durable goods report; the market is starting to savor the earnings and economic data, but it is not ready to make a clean breakout. The base is not yet completed, and the large cap techs still have work to do on their attempted double bottoms. A breakout still appears to require more a few more weeks of work, but the market pulled this accumulation out of the hat when it looked as if it was going down to test the March lows.
A two week move up to the breakout point and drift back would leave the market in a good position for the April jobs report two Fridays hence. It was the April report where we were looking for the breakout number, but it moved it up a month. We don�t expect 308K in April but a 200K to 300K number once more is not out of line. We have talked with many staffing companies as well as the talent out there and we are starting to hear that companies are out cherry picking. That means they are going out and making offers to the people they really want to get, the people they consider the best. That is often the first sign of a real hiring initiative as companies get those they want to head their new projects, divisions, etc. They get them on board and then they build out the section, team, etc. That is another positive for the job market.
The question is whether a strong jobs report will provide the action the March report did. Interest rate fears have arisen in the intervening period, and another very strong report could resurrect that anxiety and would prompt some to say the Fed would raise in June as opposed to waiting. No. The Fed wants to see 3 strong months of job gains before it will hike. That puts the first hike in August, but the market will be quite concerned if the jobs report is knockout again.
The best action is a more or less lateral move up to that point to price in the jobs report and interest rate worries, letting the market stew and prepare for a breakout. Continuing strength in the economy as well as a steady, restrained Fed and a continuing positive growth environment for the economy will win out for higher stocks.
There was a lot of price movement last week, particularly Thursday, but that day was a recovery session and did not provide a plethora of breakouts. Stocks are still recovering from that distribution, setting up for the next move. We anticipate that will continue this week as they set up with the market for the breakout.
Support and Resistance
NASDAQ: Closed at 2049.77 - Resistance: 2050 represents some prior price points. Breakout from the pattern is 2080. 2089 is the February closing high. 2112 is the early January high. 2154 is the January high. - Support: The exponential 50 day MA (2013), the simple 50 day MA (2010). 1990 to 2000, the top of the late 2003 base. Some prices from the March consolidation attempt (1943). The 200 day MA (1927). Mixed tops and bottoms at 1900. The March low (1896).
S&P 500: Closed at 1140.60 - Resistance: The January high (1155). Next is 1159 (February highs) and 1160 to 1175 the highs in that double top that spanned late 2001, early 2002. - Support: The exponential 50 day MA (1128) and the simple 50 day MA (1133). 1125 represents some price points. 1106 is a May 2002 top and represents some early 2001 lows. 1096 to 1100, then the March low (1087). 1075 to 1070 from the December consolidation.
Dow: Closed at 10,472.84 - Resistance: 10,570 is the April high. Price consolidation at 10,600 level. September/November up trendline (10,675). 10,747 is the February high. - Support: The exponential 50 day MA (10,394) and simple 50 day MA (10,428). 10,000 to 9900-9850. The 200 day SMA (9942). 9859-9855.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the �Economy� section.
4-26-04 - New home sales, March (10:00): 1.168M expected, 1.163M February.
4-27-04 - Consumer Confidence, April (10:00): 88.3 expected, 88.3 March. - Existing home sales, March (10:00): 6.2M expected, 6.12M February.
4-30-04 - Personal income, March (8:30): 0.4% expected, 0.4% February. - Personal spending, March (8:30): 0.7% expected, 0.2% February - Michigan sentiment revised (9:45): 94.0 expected, 93.2 prior. - Chicago PMI, April (10:00): 60.3 expected, 57.6 March
SUBSCRIBER QUESTIONS
Q: In attempting to determine support via the moving average or exponential moving average what time frame is used by most fund managers? One year, six months, three months etc. How should the individual investor determine which MVA to use?
A: What moving averages fund managers use can change over time and from stock to stock. As we like to move with the big money and anticipate its moves as well, we observe when they move into stocks and adapt accordingly. You are on the right track in wanting to know what the big money is looking at so you can look at the same thing and be ready for the moves when they occur. The shorter term moving averages range from 10 to 18 days (exponential), longer term are over 50 and 200 days (the former usually exponential though sometimes simple, the latter simple).
Moving averages are important support and resistance indicators in technical analysis, and the degree to which one is used over another often depends on what the market is showing. When a stock is moving up in a rally the 10 and 18 day moving averages often act as support and will propel a stock back up as it pulls back to that level. When the selling gets more intense, a strong stock will use its 50 day moving average as support. If a stock has been using a particular moving average as support and the stock falls through it that is a break of its pattern, and is a caution flag. When a stock breaks its 50 day moving average on strong volume, that is another caution flag as the 50 day moving average is a critical level for stocks that are trying to keep moving up. If a typically strong stock happens to break its 50 day moving average support, we will usually give it a day to recover if we are still holding it at that point.
Other important support and resistance levels include trend lines, which are similar to moving averages. They are formed by the line connecting the lows of a stock moving up (an up trendline) or the highs of a stock moving down (a down trend line). The more times a stock hits a particular trend line, the more faith we have that the line will act as support (or in the case of a down trend line, as resistance). Similar to trend lines are upper channel lines, which connect the highs of a stock moving up. If in an uptrend a stock breaks above its upper channel line on high volume, that�s a sign it is likely in for a correction soon.
Support is also formed the longer a stock stays at a particular level. Whenever a stock hits a particular level, imagine that it puts a groove in that level. Every time it touches that same level, it makes a little bit deeper groove. Picture a stock moving sideways day after day. It moves up off of that level with some pretty big moves, but then the market sells. As the stock slides back down the backside of the hill it built on the move up, it skims over the levels it never closed at. When it hits one of those �grooved� areas where the stock spent a lot of time, it tends to fall into that �grooved� area and that stops the slide. Old tops in such a grooved area are usually the strongest support, but the lows in the grooved range can also hold. If the selling is intense, it may push the stock right past the grooved area-the longer a stock stays at a level, the stronger the support.
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