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Email Version, Section 1, Tuesday 01-04-2005
PremierInvestor.net Newsletter Tuesday 01-04-2005
section 1 of 2
Copyright (c) 2005, All rights reserved.
Redistribution in any form is strictly prohibited.
The entire newsletter is best viewed in COURIER 10 for alignment
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In section one:
Market Wrap: Why Worry?
Watch List: Biotech, Software and more
Market Sentiment: Q4 Hangover
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MARKET WRAP (view in courier font for table alignment)
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01-04-2005 High Low Volume Adv/Dcl
DJIA 10630.78 - 98.70 10769.56 10605.15 2.13 bln 763/2420
NASDAQ 2107.86 - 44.30 2159.64 2100.56 2.73 bln 744/2414
S&P 100 566.77 - 5.56 574.49 565.51 Totals 1507/4834
S&P 500 1188.05 - 14.03 1205.84 1185.39
SOX 410.36 - 13.90 426.10 406.08
RUS 2000 628.54 - 11.90 643.05 627.89
DJ TRANS 3678.33 - 82.00 3768.51 3674.94
VIX 13.98 - 0.10 14.45 13.93
VXO (VIX-O)14.13 - 0.07 14.96 13.89
VXN 20.06 + 0.56 20.81 19.57
Total Volume 5,210M
Total UpVol 809M
Total DnVol 4,306M
Total Adv 1820
Total Dcl 5547
52wk Highs 142
52wk Lows 27
TRIN 1.68
NAZTRIN 1.34
PUT/CALL 0.77
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Market Wrap
===========
Why Worry?
by Jim Brown
We expected a drop this week and I have reported those
expectations in this commentary more than once. After
two days of decline the market pundits are suggesting
the market conditions have changed and the bears are
coming out of the woods to feast on fresh hamburger.
Who is right and has investing as we knew it changed
over the last week?
Dow Chart
Nasdaq Chart
SPX Chart
Russell Chart
In my opinion nothing has changed. The economy is still
struggling along and the multitude of worries mentioned
on stock TV this week are just a rehash of the worries
the bulls trampled over the last quarter. I will try to
touch on the majority of those worries but first the
economics of the day.
Chain Store sales fell back to mediocre at only a +0.2%
rate for the week ended Jan-1st. This is a very strong
shopping week and buyers failed to appear in droves but
the year over year number rose to +4.6%. Only a minor
increase week to week but strong gains over the prior
year. Retailers can now take their Rip Van Winkle nap
until next fall with only Valentines and Easter to
provide any waking excitement.
Factory Orders jumped only slightly more than expected
at +1.2% for November. All components rose slightly with
the majority of the gains probably related to last minute
pre-holiday shipping and a rebuild cycle beginning for
depleted year end inventories. No big excitement here.
Auto sales rebounded strongly in December with red tag
specials and higher than ever cash back programs. The
annualized rate jumped to 18.4 million from 16.4 million
in November. This turned out to be the fourth strongest
year on record. Light trucks jumped +10.1% but Japanese
makers Toyota, Honda and Nissan topped the leader board
with even higher double digit gains as they increased
their share of the market to greater than 40%. Hybrid
vehicles are selling faster than they can make them as
consumers try to avoid the high gas prices ahead.
Economics were just like they have been for the last
three months with mixed messages across all components.
The biggest economic bombshell today did not come from
an economic report but from the Fed minutes from the
December FOMC meeting. The Fed stated that the economy
was expected to continue its leisurely pace of recovery
and the recovery was seen to be firmly entrenched. They
cited labor markets as improving and this should continue
to support consumer spending.
The problems appeared in the interest rate outlook with
comments that the recent depreciation of the dollar,
elevated energy costs and the possibility of slowing
growth as factors that could increase the risk of inflation.
They still see the risks to be balanced between inflation
and deflation but they are now leaning toward inflation
ahead. They said the increase in inflation signals over
the last few months might be a warning sign that expectations
for low inflation were not as well founded as they had been
last summer. Fear is creeping into the Fed outlook and they
feel part of that creeping inflation is still being fueled
by excessive liquidity. In Fedspeak excessive liquidity
means interest rates are too low.
"Some participants believed that the prolonged period of
policy accommodation had generated a significant degree of
liquidity that might be contributing to signs of potentially
excessive risk-taking in financial markets evidenced by quite
narrow credit spreads, a pickup in initial public offerings,
an upturn in mergers and acquisition activity, and anecdotal
reports that speculative demands were becoming apparent in
the markets for single-family homes and condominiums."
The bottom line for the report was a significant fear that
the Fed was losing control and could begin to ramp up the
rate hike cycle with more aggressive hikes. The Fed believes
that energy prices will remain low, a point I would argue is
in error, global growth will continue and trade deficits will
diminish due to the drop in the dollar. In general they are
nearly united in their view that the Goldilocks economy is
returning with the exception of a greater risk for inflation.
Where the Fed minutes should have painted a positive outlook
for investors given the Fed's rose colored glasses it also
shattered that outlook with worries that rates were going
higher soon. There had been a near unanimous view that the
Fed would pause at the February meeting and take a longer
view of the economic picture before making any new changes.
After today's report the current 2.25% rate has now been
speculated to rise to as much as 4.25% by year's end. This
would mean at least one hike greater than 25 points or no
passes at any of the eight meetings scheduled for 2005.
This sudden change from a no more hike sentiment to a full
and possibly aggressive hike scenario knocked the wind out
of the market this afternoon. The yield on the ten-year
treasury spiked to 4.3% and the equity markets imploded.
The Dow dropped -100 points on the 2:PM news to 10605 and
barely rebounded to close at 10632. The Nasdaq dropped
another -21 points on top of an already steep decline to
-59 off the highs at 2100. The Nasdaq only managed a very
weak +9 point bounce into the close. It was the worst day
for the Nasdaq in five months.
Also helping the decline was a downgrade on AMZN to sell
at Smith Barney. Despite very strong sales this year the
analyst thinks other online firms are eating away at AMZN
market share and will continue to do so. Brick and mortar
retailers are reporting a much faster ramp in acceptance
of their online sites and the online retail space is
becoming more crowded. AMZN dropped -2.38 on the news
and took all the other Internet stocks with it. GOOG
fell -8.21 from its all time high reached just yesterday.
Another crowd favorite also took a major hit of -1.83 or
-14.8% after acknowledging accounting improprieties. The
company, Krispy Kreme Doughnuts, admitted it had padded
sales, double shipped, disguised problems at certain
stores and misreported earnings. The stock dropped to $10
but my question is why not $1? This company appears to
have committed multiple counts of fraud and could be
delisted very soon. Looks like the public still has a
sweet tooth for KKD. Maybe they should go back and look
up Boston Chicken, BOST. All the shareholders got greased
when BOST finally imploded after years of being the darling
of Wall Street.
Depending on which sentiment indicator you want to use the
2005 year is not off to a good start. Today was the last
day of the typical Santa Rally period following Christmas.
Needless to say the Dow or any of the indexes for that
matter did not see a visit from Santa. The Dow lost -200
points during the period after the Dec-23rd close. The
Nasdaq lost -53 points, Russell -22, -28 from its high
and the SOX -17 (-4%). If you were counting on Santa for
your sentiment then the Santa adage is running through
your mind tonight. When Santa fails to call bears will
come to Broad and Wall. It would appear on the surface
the door is open and the red carpet rolled out for their
arrival.
The other market barometers include the first five days
scenario. Theoretically the first five days of January
are supposed to predict the direction of the market for
the year. Not looking good for that one. Then there is
the January barometer, as January goes so goes the year.
None of these predictors of market direction have very
good records but they are all consistently prove more
often right than wrong. Bah humbug!
We knew the market was going to sell off once the calendar
rolled over. We talked about it in this space several times.
When the indexes rally as they did in the fourth quarter
the money managers are just holding their breath hoping
to get to the new year before everybody pulls the rip
cord on their profit parachute. Remember this table from
last Thursday?
Index Low 12/30 Gain
Dow 9708 10800 +11.2% from October low
Nasd 1899 2178 +14.6% from October low
$SPX 1090 1213 +11.2% from October low
Nasd 1750 2178 +24.4% from August low
TRAN 2959 3807 +28.6% from August low
$RUT 516 653 +26% from August low
UTIL 260 336 +29.2% from May low
Since August the Russell was up +26%, the Nasdaq +24%.
There were huge amounts of profit to be taken and the
managers are doing that this week.
Whenever the market takes a sudden and unexpected (by
the uninformed) drop the talking heads on TV scramble
to find the reason. Today we were told it was weakness
in China, unemployment in Germany, spiking oil prices,
sudden inflation fears and last but not least new Fed
fears.
Obviously it was not oil since it fell over -$2 on Monday
and the market still tanked. Today it rebounded to erase
those losses but is still trading in exactly the same
range it has been trading for the last five weeks. Today
the oil worry is only smoke. It will eventually bite us
but not today.
The Fed outlook was blamed but there was really nothing
in the outlook that was different than any prior outlook.
The optimistic analysts had convinced themselves into
believing their own dreams that the Fed was done. The
Fed has never even hinted that it might pause. Every
comment has always been "accommodation will continue
to be removed at a measured pace." No change there.
Some analysts blamed the drop on a lack of fund flows.
The $31B of expected money had failed to appear. This
is also smoke. The money does not appear the first
two days of the year. The majority appears over the
second and third weeks of January. TrimTabs said today
they were still expecting $2.5B to $3B PER DAY over the
next two weeks. No change there.
Are you starting to get the picture? Nothing has changed
and the current drop is just profit taking. Even Ralph
Acampora came out again today and affirmed his Dow 13K
forecast. Nobody expects a blowout market but they do
expect the markets to move higher over the next two
quarters.
Where to from here? The Nasdaq has been literally slammed
as funds took profit in techs. The index dropped back to
2100 today and decent support. It could stop there or it
could drop all the way back to 2050 but it will stop.
When the rebound starts it is likely to be sharp and on
very strong volume. Be prepared.
The volume today was very strong and weighted heavily to
the downside. On the NYSE the down volume was 9:1 over
up volume with over 2B shares traded. Despite the beating
on the Nasdaq the down volume was only 4:1 over up volume.
The NYSE volume was drastically stronger because the
majority of energy stocks are on the NYSE. Of the 350
energy stocks I cover in my Oil Crisis Report there are
only 36 listed on the Nasdaq. When you think about which
sector had the biggest gains the last six months it all
makes sense. The funds are taking profits in energy and
tech. Crude was up nearly +$2 today but energy stocks
were down. This is clearly a buying opportunity in the
making.
For the rest of the week I would look for a bounce but
possible not before even deeper support levels are tested.
SPX 1175-1180, Nasdaq 2050 and Dow 10450 would be my worst
case support levels. I believe we will bounce before then
but these corrections nearly always get overdone as traders
react to the negative news in the press. The Nasdaq normally
corrects about -5% in January and even if you count from
Monday's high of 2191 to today's close at 2109 it is only
-3.7%. There could be some weakness remaining but once the
selling stops don't try to short the bounce. Managers will
not be under any pressure to buy until the real money flows
hit next week but they are generating a lot of cash from
these two days of selling. If somebody steps on the trip
wire we could change directions very quickly. Watch the
up volume. If we get a reversal in the volume from 9:1
negative to 4:1 or 5:1 positive then we have seen the
bottom.
Pick your entry targets now. If you have no target you
will probably miss the bulls eye.
Jim Brown
Editor
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WATCH LIST
==================================================================
The PremierInvestor.net watch list is not designed to be read
as full fledged stock picks. Rather we would prefer to offer
it as an extra tool in today's investor toolbox. Think of it
as a radar screen with your own radar operator pointing out
interesting developments, technical patterns or potential plays
that you may or may not have seen on your own. Due to time
constraints we do glance at the news but rarely do we have
time to fully read pertinent news stories, due background
research and other necessary screens that investors should do
before making a decision. A common exercise is to read the
entry, glance at the sector and other stocks in that industry
and then compare what's happening in the stock to what's
happening in the broader market indices. We hope you enjoy
the Watch List and that it proves to be a useful tool for your
own trading success.
STOCKS WORTH WATCHING
---------------------------------
Chiron Corp - CHIR - close: 34.68 change: +1.67
WHAT TO WATCH: If you're looking for a bullish candidate amid the
market pull back then check out CHIR. This stock added five
percent on big volume following an upgrade to "buy" this morning.
Bulls might want to use a trigger over the $35 level as an entry
point with a target in the $38-40 range.
---
BEA Systems - BEAS - close: 8.64 change: -0.15
WHAT TO WATCH: BEAS has been challenging higher for months but
after December's big failed rally near $9.75 the stock has been
consolidating lower. Now BEAS is testing major support at the
bottom of its rising channel near $8.50 and its 200-dma. A
breakdown here could lead to a significant retracement.
---
Internet Security - ISSX - close: 21.39 change: -1.33
WHAT TO WATCH: Investors have been taking profits this week from
their Q4 winners and ISSX certainly qualifies. The stock surged
from $13 in August to almost $26 in early December. Now shares
are breaking support at the 50-dma and the $22 mark. We would
watch the $20 level, which should be round-number support. A
bounce from $20 and aggressive bulls may want to consider longs.
a breakdown under $20 and bears may want to consider a momentum
play.
-----------------------------------
RADAR SCREEN - more stocks to watch
-----------------------------------
PWER $8.42 -0.23 - PWER has broken major support at its 50-dma
and its simple and exponential 200-dma's near the $8.50-9.00
range.
PVN $16.14 -0.21 - The long-term uptrend for PVN is still very
much intact but the stock is working on a new double-top pattern
with the peaks in November and January at $17.00 resistance.
PFE $26.45 +0.00 - PFE has rallied back to resistance at its
descending 50-dma following December's gap down. Now the bounce
appears to be failing. Look for a drop under $26.00.
KVHI $11.14 +1.20 - KVHI soared more than 12 percent on huge
volume this Tuesday to breakout over resistance at $10.50 and its
200-dma.
NGPS $35.91 -10.89 - Ouch! NGPS fell more than 23 percent on
massive volume as its rocket-like trajectory comes to an end.
===============================
Market Sentiment
===============================
Q4 Hangover
- J. Brown
I've got one word for the first two trading days of 2005 - yuck!
Market pundits blame it on profit taking after the very strong
fourth quarter rally. Correct or not the market technicals have
been very bearish both Monday and Tuesday. Today declining
stocks outnumbered advancers about 11-to-3 on the NYSE and more
than 3-to-1 on the NASDAQ. New highs have evaporated and down
volume outweighed up volume by 9-to-1 on the NYSE and more than
4-to-1 on the NASDAQ. Yucky seems like an appropriate
description.
The talking heads on TV pointed out that last quarter's winners
seem to be this week's losers as investors do some profit taking.
Yet one guest on CNBC today was more encouraging. Biderman from
TrimTabs, who watches mutual fund money inflows and outflows,
said almost all the new money coming into the market this week
(about $1 billion a day) has been going into global equity funds.
He suggested that investors were putting money to work overseas
to avoid the continuing decline in the U.S. dollar. He went on
to say that if inflows into foreign funds have reached these
heights that it could be a top. Thus the U.S. dollar could
turnaround soon and U.S. stocks are likely to do well in the
second half of January. He went on to remind viewers that there
is a lot of money on the sidelines and January, a seasonally
bullish time of year for stocks, could see some $60 billion in
inflows for the month.
Let's hope he's right. Normally the first two trading days of
January are bullish as part of the seven-day post-Christmas
rally. Plus, the first five days of January tend to be bullish
due to the new inflow of money into retirement accounts but if
all this money is going into global funds then the early January
barometer (the first five days) could turn bearish. As I
mentioned last week some traders look at the first five days of
January as an early barometer for the month. Let's hope stocks
rebound soon.
-----------------------------------------------------------------
Market Averages
DJIA ($INDU)
52-week High: 10868
52-week Low : 9708
Current : 10630
Moving Averages:
(Simple)
10-dma: 10780
50-dma: 10489
200-dma: 10264
S&P 500 ($SPX)
52-week High: 1216
52-week Low : 1060
Current : 1188
Moving Averages:
(Simple)
10-dma: 1207
50-dma: 1178
200-dma: 1129
Nasdaq-100 ($NDX)
52-week High: 1635
52-week Low : 1301
Current : 1571
Moving Averages:
(Simple)
10-dma: 1611
50-dma: 1568
200-dma: 1461
-----------------------------------------------------------------
CBOE Market Volatility Index (VIX) = 13.98 -0.10
CBOE Mkt Volatility old VIX (VXO) = 14.13 -0.07
Nasdaq Volatility Index (VXN) = 20.06 +0.56
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Put/Call Ratio Call Volume Put Volume
Total 0.78 1,071,868 831,280
Equity Only 0.60 823,299 494,997
OEX 0.99 33,587 33,327
QQQQ 2.33 53,555 124,869
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Bullish Percent Data
Current Change Status
NYSE 76.2 - 1 Bear Correction
NASDAQ-100 80.0 + 0 Bull Confirmed
Dow Indust. 73.3 + 0 Bull Confirmed
S&P 500 77.2 - 1 Bull Confirmed
S&P 100 78.0 + 0 Bull Confirmed
Bullish percent measures the number of stocks in an index
currently trading on a buy signal on their point and figure
chart. Readings above 70 are considered overbought, and readings
below 30 are considered oversold.
Bull Confirmed - Aggressively long
Bull Alert - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert - Take defensive action if long
Bear Confirmed - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend
-----------------------------------------------------------------
5-dma: 1.44
10-dma: 1.04
21-dma: 1.07
55-dma: 1.01
Extreme readings above 1.5 are bullish, and readings below .85
are bearish. These signals don't occur often and tend be early,
but when they do, they can signal significant market turning
points.
-----------------------------------------------------------------
Market Internals
-NYSE- -NASDAQ-
Advancers 636 741
Decliners 2221 2340
New Highs 53 57
New Lows 15 12
Up Volume 228M 530M
Down Vol. 1853M 2175M
Total Vol. 2146M 2718M
M = millions
-----------------------------------------------------------------
Commitments Of Traders Report: 12/21/04
Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the
Chicago Mercantile Exchange and Chicago Board of Trade. COT data
can be found at www.cftc.gov.
Small specs are the general trading public with commercials being
financial institutions. Commercials are historically on the
correct side of future trend changes while small specs tend
to be wrong.
S&P 500
Commercial traders are growing more bearish while small traders
are naturally moving the other direction and growing more
bullish.
Commercials Long Short Net % Of OI
11/30/04 462,394 491,813 (29,419) (3.0%)
12/07/04 450,072 498,057 (47,985) (5.0%)
12/14/04 502,471 540,494 (38,023) (3.6%)
12/21/04 455,238 502,538 (47,300) (4.9%)
Most bearish reading of the year: (111,956) - 3/06/02
Most bullish reading of the year: 23,977 - 12/09/03
Small Traders Long Short Net % of OI
11/30/04 176,031 148,876 27,155 8.3%
12/07/04 187,707 135,776 51,931 16.0%
12/14/04 201,428 164,111 37,371 10.2%
12/21/04 157,015 106,205 50,810 19.2%
Most bearish reading of the year: (1,657)- 5/27/03
Most bullish reading of the year: 114,510 - 3/26/02
E-MINI S&P 500
There has been a dramatic reduction in open positions for
both longs and shorts for both the commercial traders and
small traders. The net result has produced an increase
in bearishness for professionals and an increase in bullishness
for small traders.
Commercials Long Short Net % Of OI
11/30/04 439,074 855,440 (416,366) (32.2%)
12/07/04 470,553 805,234 (334,681) (26.2%)
12/14/04 556,980 899,616 (342,636) (23.5%)
12/21/04 279,694 554,818 (275,124) (32.9%)
Most bearish reading of the year: (436,367) - 11/23/04
Most bullish reading of the year: 133,299 - 09/02/03
Small Traders Long Short Net % of OI
11/30/04 386,665 67,926 318,739 70.1%
12/07/04 311,838 66,496 245,342 64.8%
12/14/04 398,915 137,598 261,317 48.7%
12/21/04 227,047 66,140 160,907 54.8%
Most bearish reading of the year: (77,385) - 09/02/03
Most bullish reading of the year: 449,310 - 06/10/03
NASDAQ-100
Hmm... we are seeing a dramatic reversal for both commercial
and small traders. Commercials have significantly cut their
long positions reversing their bullishness into bearishness
for the NDX. Small traders have drastically reduced their
short positions to flip-flop them from net bearish to net
bullish.
Commercials Long Short Net % of OI
11/30/04 56,629 30,571 26,058 29.8%
12/07/04 57,621 34,313 23,308 25.4%
12/14/04 73,554 50,286 23,268 18.7%
12/21/04 30,614 45,158 (14,544) (19.1%)
Most bearish reading of the year: (21,858) - 08/26/03
Most bullish reading of the year: 26,058 - 11/30/04
Small Traders Long Short Net % of OI
11/23/04 11,153 39,712 (28,559) (56.1%)
11/30/04 9,902 44,779 (34,877) (63.7%)
12/07/04 15,489 49,064 (33,575) (52.0%)
12/14/04 26,781 58,159 (31,378) (36.9%)
12/21/04 20,840 9,109 11,731 39.1%
Most bearish reading of the year: (34,877) - 11/30/04
Most bullish reading of the year: 19,088 - 01/21/02
DOW JONES INDUSTRIAL
Commercial traders have suddenly become a lot more bearish
on the Dow Industrials. Meanwhile small traders have
significantly cut their positions on both sides of the trade.
Commercials Long Short Net % of OI
11/30/04 22,622 25,411 (2,789) (5.8%)
12/07/04 25,523 27,351 (1,828) (3.4%)
12/14/04 36,960 38,566 (1,606) (2.1%)
12/21/04 24,850 31,920 (7,070) (12.4%)
Most bearish reading of the year: (8,322) - 1/16/01
Most bullish reading of the year: 15,135 - 10/16/01
Small Traders Long Short Net % of OI
11/30/04 5,739 8,536 (2,797) (19.6%)
12/07/04 5,274 9,507 (4,233) (28.6%)
12/14/04 13,445 19,089 (5,644) (17.3%)
12/21/04 5,637 6,961 (1,324) (10.5%)
Most bearish reading of the year: (12,106) - 3/09/04
Most bullish reading of the year: 8,523 - 8/26/03
=================================================================
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