FACTORY ORDERS POWER THE DOW -- BOEING BENEFITS FROM AIRCRAFT ORDERS -- TELECOM HOLDRS REMAIN STRONG -- VERIZON BREAKS RESISTANCE -- SPRINT NEXTEL FORMS CUP-WITH-HANDLE -- TIME WARNER HAS SECOND THOUGHTS -- SMALL CAPS STILL LAGGING
FACTORY ORDERS LIFT THE DOW ... Today's Market Message was written by Arthur Hill. John Murphy will be back tomorrow. - Editor
The commerce department reported a strong increase in factory orders today and this bullish news propelled the Dow Industrials to a new all time high. Factory orders rose 3.1% in March and this was above exceptions for a 2.2% increase. This bullish economic news follows a strong report on manufacturing from the Institute for Supply Management on Tuesday. The ISM Manufacturing index rose to 54.7 in April, the highest reading in 11 months. That's good news for the market and the market acted accordingly.
The Dow moved above 13200 and hit another all time high on Wednesday. The Average is getting overbought after a 1000+ point advance in less than two months, but the move shows no signs of letting up. The chart shows the Commodity Channel Index and this momentum indicator moved into overbought territory in early April (>100). The Dow is considered both overbought AND strong as long as CCI remains above +100. A move back below +100 would show less strength in the uptrend, but I prefer the centerline to identify trend direction. The trend is up as long as CCI holds in positive territory and the trend is down as long as CCI holds in negative territory. This current uptrend started in late March and will remain in force as long as CCI stays positive.
Chart 1
BOEING CONFIRMS STRENGTH IN AIRCRAFT ORDERS ... Orders for aircraft were especially strong in the factory orders report and this explains the recent 52-week high and breakout in Boeing (BA) a Dow component. The stock surged above resistance at 92 in mid April and this breakout is holding. Notice that the breakout occurred well before this bullish report on aircraft orders. The stock has since consolidated as broken resistance turns into support at 92. A move back below 92 would be negative, but I still see a lot of support around 90 and the bulls are in good shape as long as this support area holds.
Chart 2
THE TELECOM HOLDRS REMAINS A MARKET LEADER ... The Telecom HOLDRS (TTH) has been leading the market over the last few months and continues to show good relative strength. The ETF held up better than the S&P 500 in March by remaining above its January low. The S&P 500, in contrast, broke below its January low in early March. TTH then broke above its late February high the third week of March and the S&P 500 did not break its February high until mid April. Again, the Telecom HOLDRS (TTH) showed relative strength by breaking out well before the S&P 500. TTH is currently getting overbought, but the overall trend remains up and there are no signs of weakness. Broken resistance and the 50-day moving average mark support around 36.5-37 and a pullback to this area could offer another chance to partake in the uptrend.
Chart 3
VERIZON HITS 52-WEEK HIGH... Verizon (VZ) contributed to strength in both the Telecom HOLDRS (TTH) and the Dow Industrials with a big move today. The stock opened strong and surged above resistance at 38.5 with big volume. The pattern over the last three months looks like an inverse head-and-shoulders and the neckline breakout signals a continuation higher. In addition, volume confirms this breakout and VZ shows excellent relative strength.
Chart 4
SPRINT NEXTEL CHALLENGES RESISTANCE... Sprint Nextel (S) surged over 3% today and helped power the Telecom HOLDRS (TTH). The stock broke to a new high in late April and then consolidated the last two weeks. The stock was up sharply on Wednesday and is making another bid to clear the resistance zone around 20.5. The pattern at work looks like a cup-with-handle. The January low formed the bottom of the cup, the late March low formed the handle and rim resistance resides around 20.5. A move above 21 would forge a clear breakout and open the door to higher prices in the weeks ahead.
Chart 5
TIME WARNER GETS COLD FEET... Time Warner (TWX) is not part of the traditional telecom group, but the company competes with the big telcos and its shares were up sharply. The stock surged above its 50-day moving average in early April and then consolidation the last four weeks. The consolidation looks like a falling flag and the 50-day moving average turned from resistance to support. TWX surged above flag resistance earlier today, but investors got cold feet and sellers pushed prices back in the afternoon. Even though the breakout attempt was valiant, it fell short by the close and closing prices are important. The inability to close strong shows hesitancy and I would look for further confirmation with a close above 21.5 before putting my faith in the bulls.
Chart 6
THOSE NAGGING AND LAGGING SMALL CAPS... Even though the Dow is trading at all time highs and the S&P 500 is trading at multi-year highs, the Russell 2000 continues having trouble with resistance around 830. Thinking in terms of Dow Theory, I view this as a non-confirmation. A bull signal is triggered or renewed when both the Dow Industrials AND the Dow Transports move to new highs. Failure by one results in a non-confirmation and this questions underlying strength. The Dow and the S&P 500 cleared resistance with relative ease, but the Russell 2000 cannot stay above its February high and small-caps are lagging. Technically, the index did close above its February high in April. Realistically, the index has some issues with this level and small-caps are not confirming strength in large-caps. The Russell 2000 represents 2000 stocks and it would be nice to have them on board to confirm the bull.
Chart 7
