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3/21/02 Investment House Daily
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MARKET ALERT SERVICE
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SUMMARY:
- Nasdaq changes hats, leads market reversal.
- Dow and S&P undercut support, but then reverse and rally.
- Late volume kick pushes stocks higher in the last hour as volume rises though still weak.
- Economic data splashes some cold water on fast recovery scenario.
- Subscriber Questions
Wednesday's selling triggers Thursday's buying.
Wednesday the Nasdaq led the way lower, the first of the big three indexes to undercut the recent support levels during this consolidation. Today it turned red twice early on, but then led the way higher, smashing back over 1850 and kicking it into high gear late in the day for a 2% gain on once again rising volume. After a quick distribution day Wednesday, the Nasdaq seemed to be shaking out some ready sellers, then turned higher to retake support and set also set itself up for a move over the next resistance level at 1875. After acting as if it was the leprosy poster child of late, the Nasdaq suddenly regained some of its old flash. The stronger volume recovery on the heels of its first distribution session in weeks was definitely a positive upside development.
NYSE stocks follow.
The Dow and S&P had their chance to lead to new post 9-11 heights. They hesitated, and the Nasdaq fell. Thursday they continued to fall, slicing through the bottoms of their trading ranges. It was the Nasdaq that brought the market back to its feet and got things rallying. Wednesday it was the Dow and S&P that were the reluctant followers. Role reversal.
Why? These indexes have performed on the backs of the cyclical stocks and other economically sensitive issues that tend to perform well in the early economic cycle before growth stocks overtake them when it is apparent that good economic times have returned. Today there was some mixed economic data. Specifically, the Philly Fed report came in almost 5 points lower that January's reading. Those early economic cycle stocks the Dow and S&P had been riding hiccupped on the possibility that the recovery might not resemble a speeding locomotive.
It was just a hiccup, however, as both the Dow and S&P turned right back up and recaptured the resistance they undercut. We were not too eager to pull the plug on these index plays, and today was one of those days where it worked best just letting the ride again. The Dow finished the session lower and the S&P barely higher, but the reversal on stronger volume showed buyers came right back in when they perceived an opportunity.
Afternoon volume surge is the difference.
Thursday buyers saw selling as an opportunity. With a little over an hour to go the buying started. We were watching the volume tick off every 5 minutes to gauge the strength. +25 million. +35 million. +40 million. +90 million. Volume growing as the indexes rally shows real buying. Overall volume was up on the move higher. That indicates that institutions were driving the late buying. Our brokers said institutional programs were moving in and buying stocks across the board. It helped reverse the poor A/D line a bit.
The return to accumulation immediately after a mild distribution session is an upside positive. Remember during the throes of the bear market that each rally attempt on rising volume was almost immediately met with a higher volume selloff? Sellers used any bounce as a whipping boy, selling the crud out of it, trying to set off another leg down. The tide has reversed somewhat. This time around investors used a couple of days of selling as an opportunity to move into stocks.
THE ECONOMY
Wednesday's fears of immediate rate hikes brought into doubt by Philly Fed and LEI.
The LEI, indicators that look 6 to 9 months down the road, came in flat after expectations of a 0.8% gain on the heels of January's 0.6% increase. After rising for three straight months, a flat reading is somewhat indicative that the recovery is not accelerating continually, but is still trying to get on track.
The Philly Fed report hit at noon eastern time, and it too was lower than expected. Manufacturing sentiment was 11.4, still an expansionary level, but well off the 18 expected and the 16.0 in January. The Dow and S&P took a plunge on that news, the Dow undercutting support at 10,400 and the S&P undercutting its 200 day MVA at 1145. Those cyclical stocks and other economically sensitive stocks that had been providing the push higher were sold as some investors shot first and thought later, taking money off the table.
It was strange logic given the action the past two sessions. Wednesday the selling was supposedly based on the Fed moving to a neutral bias and the specter of higher interest rates in the future. Thursday there was economic news that indicated the recovery was not going to be all up, up and away. That could mean the Fed, already concerned about the necessary arrival of final demand, would hold off on rate hikes. The result: sell either way.
Of course, that logic (illogic?) did not hold sway over the market for long. Once those sellers that were looking for any excuse to sell (the news did not really matter) finished unloading their shares, the market was ready to rally on what is still very solid economic news. That is exactly what it did Thursday afternoon.
CPI still tame for now.
The overall number came in +0.2%, right in line with expectations. The core rose 0.3% versus 0.2% expectations. That puts the overall number at +1.1% year over year, a very paltry rise and not even near inflationary. The core rose 2.4% year over year. That is a bit more concerning, but it ahs also been at a 2.4% year over year rate for 6 or more months. Economists and the Fed look for acceleration in numbers; static numbers, i.e., no relative change, do not worry them that much.
While the numbers show no inflation right now (and we do not think they will in the future), we can bet that inflation fears will be ignited a bit next month. The reason: energy prices in today's CPI were down 0.8%. Since then we know energy prices have risen, and thus the core will rise even more. That was overlooked today by commentators, but it is there as clear as can be and it will show up in next month's report.
Jobless claims fall 12,000.
More than expected, jobless claims fell to 371K when 375K were expected. The prior week was revised higher to 383K (from 377K), and that is what fueled the rise in the 4-week average. Continuing claims rose again, a sign that those looking for jobs are not finding them right away. It also, however, has something to do with an improving jobs market. More people are staying in the hunt for a job and not giving up given the signs of economic recovery. That is the same reason unemployment numbers will rise over the next couple of months: more laid off workers re-entering the job hunt market. It is not something to be feared, but just how an economy works through a downturn.
THE MARKET
A shakeout to the downside and the S&P and Dow followed the Nasdaq in undercutting their support. The indexes then rebounded on volume that was higher overall and that accelerated as the last hour passed. Buyers came back to the market. Not pretty, but not bad.
VIX: 19.98; -0.75. Wild swing in the market and volatility falls. As we have been discussing with the VXN, volatility as an indicator right now is less than accurate as the usual correlation is not working.
VXN: 36.98; -1.18. Nasdaq volatility continues to head further into lows that predate the actual establishment of the VXN. As with the VIX, these are useful gauges much of the time, but now they are not providing any insight.
Put/Call Ratio (CBOE): 0.70; -0.23. After surging to 0.93 on Wednesday's selling, the ratio fell on today's buying. As noted Wednesday, readings of 0.88 and higher have triggered upside moves in the indexes. Looks as if it started today.
Nasdaq
The techs and their poor patterns turned on a dime after Wednesday's selling, wasting little time in staging a solid, higher volume rally (still below average, however). That helped splash water on the distribution session. AMAT's split announcement after the close had the semiconductors moving sharply higher even with MU's less than cheery earnings announcement.
Stats: +35.96 (+2.0%) to close at 1868.83.
Volume: 1.601 billion (+3.3%). Volume was still below average, but it continued the climb higher as it surged in the last hour on the buying that pushed the index higher. The rising volume washes away most of Wednesday's distribution though the index still needs help from its leaders. It was an interesting study of volume this afternoon: on each 5-minute interval that the index rose, volume expanded above the prior 5 minutes. When it paused, volume fell back. That is classic action on an intraday level as well.
Up volume: 1.275 billion. A complete reversal from Wednesday.
Down volume: 300 million
A/D and Hi/Lo: Decliners one-day lead ended with a 1.60 to 1 advancing issue lead (decliners led 1.57 to 1 Wednesday). We noted that advancing issues could not top that 1.57 to 1 ratio on their move up, but they did it today.
New highs: 149 (+21)
New lows: 25 (-4)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Twice the Nasdaq tested 1826 on the low and then simply moved higher. It broke over former support at 1850 around 2:00 CT, paused for 15 minutes, then resumed its climb. It closed just off the high (1870.16), clearing the exponential 50 day MVA (1865.70) and setting up a run at resistance at 1875 and the 200 day MVA (1889.46). There is even a new short term down trendline at 1900 connecting the January top and the March high. It is not a great pattern, reflecting the patterns of its major components. The buyers were there today and on a bit better volume. It was good to see it recover, but volume was still well below average, and the same problems nagging it before today have not vanished. What it must do is put together a move here that takes out 1900 and the March high (1930 closing; 1946 intraday) on above average volume. Given the condition of its major stocks, the odds would seem against it continuing to lead. AMAT and KLAC, two important stocks in an important sector, however, look better and were moving well on the AMAT split news.
Dow/NYSE
A big test lower below the 10,400 support level reversed intraday and almost erased the session losses. Technically a distribution session, but the volume increased on the NYSE during the rally back up. The move kept it hanging onto its consolidation range.
Stats: -21.73 (-0.2%) to close at 10,479.84.
NYSE Volume: 1.314 billion (+0.7%). Edging ever so slightly higher, but it was the late burst of buying that sent the volume over Wednesday's levels. We really did not think volume was going to make it, but the surge in the last several minutes was impressive as buyers jumped back into stocks that were sold earlier.
Up volume: 698 million
Down volume: 617 million. It was not a runaway upside afternoon. The index had a long way to go to recover.
A/D and Hi/Lo: NYSE advancers retook the lead at 1.11 to 1, but that was well, well off of the 2.11 to 1 thumping they took Wednesday. Again, however, the line was decidedly negative before the reversal, so the fact that it closed positive was a feat.
New highs: 143 (-3)
New lows: 63 (+16)
The Chart: http://www.investmenthouse.com/cd/$indu.html
Broke below the 10,400 bottom of the trading range on the Philly Fed news, but rallied 125 points to erase most of the deficit. When a stock or index reverses and closed well into the upper end of the session's trading range, even if volume was higher and it closed slightly lower, we don't get too worked up about volume being a bit higher on a slightly lower close. Why? The action shows that when the index traded down near that support (actually broke it), buyers saw it as an opportunity and rushed into stocks sending the index right back up over support. That shows investors are still in an accumulation mode and acted on a perceived opportunity to buy stocks for a further move up. The action was more than you would want (a quiet consolidation and then a breakout to the upside would be stronger), but the recovery was real. It still has to find the strength and volume to breakout over 10,679.
S&P 500:
The big caps also had their moment of truth Thursday, testing the 200 day MVA and then plunging through it on the Philly Fed release. They too recovered, not only retaking the 200 day MVA (1144.71) but also 1150; both key levels. As with the Dow, the recovery put it right back into its recent trading range as buyers rushed in to pick up stocks when they saw an opportunity. When we say buyers, we refer to institutions; as we said earlier, our brokers were aware of program trades kicking in and the volume increases we were seeing could only be institutions. Unlike the Dow, the buying pushed the index into positive territory; the reversal, the higher volume, the positive close all point to serious buying. A good recovery, but now it needs to follow through with a breakout over 1175.
Stats: +1.74 points (+0.2%) to close at 1153.59.
Volume: NYSE volume rose on the reversal, climbing slightly to 1.314 billion (+0.7%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
No scheduled economic news out Friday. Earnings after hours were not stirring things to the upside as MU disappointed, SLR missed, and NKE beat but said coming revenues would be a bit lower than expectations. After all of that AMAT announced a split and that had things picking up once again.
A good reversal by the two indexes that were leading the way higher. It looks like a shakeout of sellers ahead of a move higher. The question is whether the Nasdaq can continue what it showed today. As noted, earnings were not that impressive after hours, and after all of the talk about a much better than expected economy, investors now need to see that converted. Earnings warnings are slowing while upside alerts are rising (though warnings are still in the lead). Change is taking place, but the rate of change will have to match expectations. Nasdaq patterns are not showing this yet; it needs to show some big volume moves higher. For that matter, the Dow and S&P need to do the same.
That may be a problem tomorrow. Volume has been light the past week. Next week is the week before Easter, and many on Wall Street (e.g., money managers) tend to take the week preceding Easter off. If the big money is not there to buy, volume won't be there.
The past couple of sessions we have been doing a lot of watching, opening some positions, managing others, leaving others alone. We are doing our best to exercise patience right now as the indexes work further through the Dow and S&P consolidation ranges and the Nasdaq tries to figure out what it wants to do. We are being patient; the market tends to surprise everyone with big volume sessions when it least expects it. There have been more than a few high volume Fridays when most everyone figured a quiet session was coming. On balance, the overall market is still showing upside potential, and we are looking for the next big move up to put the majority of our trading capital to work.
Support and Resistance
Nasdaq: Closed at 1868.83.
Resistance: 1875, the bottom of the November consolidation. The 200 day MVA (1899.46) is next and what stopped the recent rally attempt. The top of the November consolidation at 1934 to 1941. After that is 1980 (the December gap up point) and some minor resistance at 2000. Then the January top at 2098.88.
Support: 1850, just recaptured today is some support. 1840, the early November gap up point was no help. After that, it is pretty sparse down to 1800 to 1775.
S&P 500: Closed at 1153.59
Resistance: The December high (1173.62) and the January high (1176.97). That point also marks roughly the lows of summer 2001 consolidation that runs up to 1240. Before that point there is some resistance at 1183 from March 2000.
Support: 1150 and the 200 day MVA (1144.71). After that, 1125 is the hump in the double bottom, and the simple 50 day MVA (1128.08) and exponential 50 day MVA (1135.53) are converging. 1100 has acted as support as well.
Dow: Closed at 10,479.84
Resistance: The top of the June, July, and August 2001 trading range at 10,600 (10,679 intraday high), is still holding it back. 10,800 represents some resistance. That is followed by resistance at 11,000 on its way to the May 2001 high at 11,345.72.
Support: 10,400 held on the close, violated intraday today. That cracks the ice some, but it held. That is followed by the January high at 10,300. Then the 200 day MVA (9997.61) and 10,000 teaming up together.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
3-19-02
Trade Balance, January (8:30): -$26.9B versus -$25.3B%
FOMC Meeting (2:15): No cahnge in Fed Funds rate (1.75%). Balance of risks shifted to neutral.
3-20-02
Housing Starts, February (8:30): +2.8% to 1.752M actual versus 1.63M expected and 1.721M prior (revised from 1.678M).
Building Permits, February (8:30): +1.8% to 1.752M actual versus 1.65M expected and 1.721M prior (from 1.706M).
Treasury Budget, February (2:00): -61.0B versus -$48.2B prior.
3-21-02
Initial Claims, 3/16 (8:30): 371K actual versus 375K expected and 383K prior (revised from 377K).
CPI, February (8:30): 0.2% actual versus 0.2% expected and 0.2% prior.
Core CPI, February (8:30): 0.3% actual versus 0.2% expected and 0.2% prior.
Leading Indicators, February (10:00): 0.0% actual versus 0.3% expected and 0.8% prior (from 0.6%).
Philadelphia Fed, March (12:00): 11.4 actual versus 18 expected and 16.0 prior.
FOMC Minutes, 1/30 (2:00)
End Part 1 of 2
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