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us stock market, understanding the stock market
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1/20/01 Technical Traders Report
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Technical Traders Subscribers:
TONIGHT:
- Nasdaq reverses on some higher volume in what looks like a pullback ahead.
- Hedge funds, institutions and volatility
- Sentiment drops off to recession levels.
- Get ready for FOMC hysteria.
- Subscriber Questions: third leg of the bear to come?
Nasdaq shoots up and reverses as anticipated.
Thursday we said we hate big opens, and Friday was a case in point. The Nasdaq gapped higher 70 points and hit its high moments later (2841.25). After that it beat a hasty retreat to its low at 2752.06 in less than an hour. It attempted a late recovery, but that was met by a wave of selling that pushed it to basically a flat close. Volume was up 6% on the session.
Friday was options expiration, and that often delivers more market volatility and higher volume. The Nasdaq delivered both of those on Friday. The question we have to ask is whether action showed a change in the market or was just the index getting ready for a pullback and that was accentuated by the options expiration.
The Nasdaq has performed well since the Fed rate cut on January 3, rising 26% on its high Friday. After the initial pullback immediately after the huge January 3 move, it has only sold back 15 points. Moreover, it broke through its down trendline January 17 on strong volume. Breaking a down trendline after a strong move takes a lot of effort; we can expect some consolidation after that. Friday many stocks were higher but reversed and gave back a lot of those gains or closed negative.
There were still strong moves higher on strong volume, but many of the leaders in the last leg up had run hard and reversed intraday and gave back some or all of the session's gains. The good thing: most were on lower volume despite the overall rise in Nasdaq volume. That is a positive, and we anticipate many moving down to test support whether it be the down trendline just broken or some other level of support. As for the Nasdaq, we will look for it to pull back to the 2700 level where there is some support, or 2640 to 2650 where it peaked before its mild pullback 5 sessions ago. This move has shown good strength, unwilling to give up its recent gains. We want to see a continuation of that character, and of course, we want any move lower to occur on decreasing volume.
What do we do?
As noted Thursday, we need to tend to short term positions, but we hope no one has positions so short term a pullback of a few days before another move up would be devastating. We pulled the trigger on a few positions Friday when we had locked in a target gain, but we are letting others ride, ready to use any healthy pullback as a chance to improve our overall strength in the trade. For now we feel the Nasdaq is still in good health even with the slightly higher volume on Friday's turnaround; again that rise looked much like it was option-driven, and the shift from buying to selling was not, as we will see from the market review, a lurch in the opposite direction. It was more like a bicycle using momentum to coast up a hill and then running out of power and slowly reversing back. We hate to see those reversals where down volume zooms ahead of up volume and decliners shoot ahead of advancers. That did not happen Friday.
Again, we do need to keep our eyes open for intensifying selling, i.e., on higher volume in leading stocks and in the indexes overall. Also, note that earnings were met with euphoria at first and the stocks and indexes surging ahead. We had another good round of earnings on Thursday night, but the applause did not last long. The markets may be moving into that period where the earnings excitement wanes and the market is ready to move back regardless of what earnings are. Then we may see a really good earnings announcement spark the next move up. We will see. For now we are inclined to believe this will be an orderly pullback we can use to take positions for the next move up.
Volatility and the institutions.
Remember back in the late summer and fall when we stated our belief that much of the volatility in the markets was driven by institutions running from sector to sector, chasing what was hot that day? We believed that many of the fund managers had never seen a bear market, and they were trying to capture small gains by grabbing whatever was hot that day. We concluded that this was the cause of the massive intraday swings of 100 points and more we saw during that time. A study by Texas Christian University looking at the trading habits of big institutions demonstrates that it is the institutions, not day traders that drive the market, particularly in the first half hour and last hour of trading. Well, at least it hints at it. TCU looked at 1988 records, not exactly up to date. However, when you look at the amount of money it would take to drive large market cap stocks up and down, the amount of money day traders would be putting up in the market is staggering.
Friday Tom Costello stated that several hedge funds were shorting the market at the open in an attempt to drive prices lower. The theory on the floor was that several funds had not believed the signs when they were being presented (the Fed rate cut, and the higher volume confirmation of the rally we were discussing in the report), and believed the market had reached a bottom. They were trying to drive it lower to get in.
Several points. First, if this was the intent, we saw the market recover from this attempt. All it did was give back its high for the day. If there were hedge funds out there trying to drive the market lower, it shows that a few funds cannot change the market's direction for long. Second, if this rumor was true, it shows that many more institutions believe the index has bottomed and they want to put money to work. That would be a positive. If the market pulls back as we think it will over the next few sessions, they may get their chance to get in on the move, and new money could really send the market higher as more institutions buy in.
True or not, who knows? What can we take from this: keep an eye on the market, particularly the price and volume action. It tells us if the institutions are in the game. When the bear market was taking hold in March and April the financial stations were saying day traders were causing the volatility. Nonsense. The institutions were still at the heart of the action as they hold the massive amounts of money needed to move the market. By recognizing their tracks we can follow the big money and go eat at the same table they are preparing. That is what we were saying when we saw the big moves early this month, and it has paid off. Just look at the money moving back into the telecom stocks and you know the institutions are at work there as well. Follow the money that can move the markets. That is a good place to profit.
THE ECONOMY
Consumer sentiment continues to freeze up. Friday the Michigan Sentiment Survey unveiled its latest measure of consumer sentiment. It was expected to come in at 98.3 versus the low 98.4 reading from December. It crashed to 93.6, the third largest drop in the history of the survey and was the lowest level in four years. The other two times the sentiment indicator fell more than on Friday? Prior to the recessions in the early 1980's and 1990's.
This does not bode well for the economy, especially given the incredibly weak Philly Fed report on Thursday which basically shows that the manufacturing sector is already in a recession. The Fed really needs to act with another aggressive cut on January 31. The slowdown is acknowledged by the Fed as Richmond Fed president Broaddus Friday, but the Fed is not making public statements about how bad it is. Broaddus insisted that it "is not at all clear . . . that the economy as a whole is slowing really precipitously." Broaddus is playing games with his words. By saying "as a whole" he is implying that the Philly Fed report shows regional slowing only; moreover, he is implying that the housing market remains strong. Well, that is only because interest rates are reading in no inflation and economic slowdown and are low despite the Fed's hiking short term interest rates. He admits to decelerated economic activity and a "fairly pronounced decline" in consumer and business confidence. Wow, what an admission. He still believes fourth quarter economic growth was 2%; guess we will just have to get the results. This is more than he has conceded in the past, however. Broaddus was one of the worst offenders in the Fed's arrogance club back last spring and summer.
And what will the GDP results be? Pretty bad we think. The Michigan Sentiment Survey will be revised later in the month as the preliminary figure released Friday is more weighted to the first part of the month as that data has already been compiled. Likewise, the first GDP report will look at October and November more. We know those were so-so months. It may take the very last part of December to salvage positive growth out of the quarter as the first half of December was hideous. There was a buying spurt in the last week of the year, and that pulled things higher. Unfortunately, the government is running very late with the GDP numbers this year, and the government has not confirmed if the report will be released before the Fed meets January 30-31.
THE MARKETS
All indexes opened higher and then sold off. The Dow and S&P 500 sold on lower NYSE volume; if you are going to do it, that is the way to have it. The Nasdaq was slightly higher on slightly higher volume; basically churned, with sellers stepping in on the move higher and closing the index 71 points off of its high. Things look ripe for a pullback.
Overall market stats:
VIX: 26.29; -0.80. The volatility index has once again touched its 200 day moving average. the last time it did that was in mid-December when the Nasdaq reached its high for the month before falling off the table and making a new low for 2000. Thus, this indicates a confirmation of our view that there will be some selling ahead. The market, however, is not showing us the same weakness as it was then and thus we feel the selling will be milder. We have to be on the watch, however, for volume spiking higher on selling.
Put/Call ratio: 0.48; -0.11. Put buyers continued to fall on Friday, but we may see that reversing a bit this week. We do not anticipate heavy selling, so we don't anticipate much of a rise. There has been some confusion about where the ratio has been the past few months. CBOE data shows it spiked to .97 on the close 12-14. It closed at 0.94 on 12-15. It closed at 0.95 on 12-26. Some, IBD, show it closing at 1.1 during that time. That would put it at a level that would historically lead to a reversal. In review, the series of high closes showed a very high level of fear, and that coincides with what we have heard from brokers and others when this was going on.
NASDAQ: We had the higher open that reversed and gave back the early 2.6% gain. Volume was higher, but many of the leaders on this move fell on lower volume. That makes us believe volume was options related. Still, we have to keep our eyes peeled on the volume as we don't want increasing volume on the selling.
Stats: Up 1.89 points (0.1%) to close at 2770.38. Still above Tom Costello's magical 2700.
Volume: 2.703 billion shares (+5.95%). Down volume took the lead 1.305 billion to 1.258 billion shares, the first time quite awhile. This is where we have to keep our eyes.
A/D and Hi/Lo: Declining issues moved ahead of advancers for the fist time in a while, 1.03 to 1. New highs fell again to 63 (-10) while new lows rose to 16 (+1).
The Chart: http://www.investmenthouse.com/cd/$ndx.html
The Nasdaq gapped higher then sold. On its low (2752.06) it traded below its 50 day moving average (exponential, 2772.96), but then recovered to close at that level. That is a very good sign, but the index appears as if it needs and wants to pull back a bit. That is fine as indexes cannot continue to rise without rest. We just want it to be stingy with its recent gains.
Dow/NYSE: The Dow continues locked in its trading range, turning back Friday at its 200 day moving average and down trendline it tapped on its high (10,717.72). The index had just started showing some decent price/volume action, so it did not have a lot of power at this point to break that resistance. Volume was a bit lower, an improvement over the higher volume selling we have seen.
Stats: Down 90.69 points (-0.8%) to close at 10,587.59.
Volume: NYSE volume edged back down to 1.408 billion shares (-2.6%) on the selling. Down volume led 784 million to 577 million upside shares.
A/D and Hi/Lo: NYSE decliners overtook advancers 1.27 to 1. New highs fell to 119 (31) while new lows fell to 9 (-1).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The break over the 50 day moving average did not last long (10,648.75) as the Dow fell back from the 200 day moving average and the down trendline connecting the September, November and December highs. There is some decent support at 10,450, but the index has been weaker than the Nasdaq and S&P 500, and it may test 10,300. It really needs to clear the 200 day moving average at 10,712.22 and the down trendline now at 10,710.
S&P 500: The S&P 500 sold back to the 50 day moving average on the close, tapping its down trendline on its low (1336.92) before moving up to close. It too sold back at the close, but it was able to move up at the close to stay over the 50 day MVA. Volume was lower on the NYSE as the S&P continues to show correct price/volume action of late. The breach of the down trendline is a big move, but it leaves little room for the index to pullback as it appears it wants to do. We will be watching for this level to hold. If not, it needs to find support above 1325.
Stats: Down 5.43 points (-0.4%) to close at 1342.54 after giving up a high at 1354.57.
Volume: NYSE volume pulled back on the selling to 1.408 billion shares (-2.8%) as the S&P 500 continues healthy price/volume action.
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
Some more economic news this week in the form of the Leading Economic Indicators on Monday, the Employment Cost Index on Thursday, and durable goods orders on Friday. In addition, we get the pleasure of a speech from Alan Greenspan on Thursday. The Fed tends to look at the ECI more, but the overall picture painted by all of the data is an economy that is slowing and can slow even further with the remaining rate cuts that have not hit the economy as of yet. With all of the data we have seen, a 50 basis point cut is what is needed to help prevent meltdown if that is possible at this point. It may take a tax cut as well, and fortunately that is a top priority in D.C.
Speaking of rate cuts and the Fed, expect to see more and more rate cut hysteria as we approach the January 30-31 FOMC meeting. Last week already brought out the first guessers about what the Fed is going to do. One says the Fed won't cut 50 basis points because the Fed just won't do that two times in a row. Now that is in-depth analysis for you. This same person was shocked that the Fed cut rates intra-meeting and by 50 basis points. So much for that theory. Another has said that there is fear out there that the Fed knows something that no one else does and that investors keep looking for that boogey man out there. Maybe, but highly unlikely; the Fed gets some sneak preview numbers, but if there was something that prompted the January 3 cut, we would have seen it by now.
You will hear more of the same, and it is based on some supposed understanding of the Fed thinks or does. We have to admit that we were off on our prediction of rate cuts before the end of 2000, but it was by three days as the cut came on January 3. The Fed Funds futures contract had not even priced in a pre-meeting move when that one came. This time around, the Fed Funds Futures contract has currently priced in almost a 100% certainty of a 50 basis point rate cut at the meeting. That could change with stronger economic numbers, but this contract is very accurate at forecasting the size of cuts or hikes by a certain point in time. Our point: don't get flustered by the crescendo of Fed-talk you will hear. For now the futures contracts show a very high probability of a 50 basis point rate cut.
We are looking for a lower volume pullback to test the recent moves up, and we anticipate using that for new positions for another rise to come. One thing we have to be aware of is the cycle of earnings. When they get off to a good start as they did with JNPR, AMCC, EMLX and the like, it tends to energize the market, but then it becomes sensitized to the news and it does not give the jumps on the numbers. Indeed, it often starts to sell back as the market has factored in the news with the moves made on the first earnings announcements. Then after the pullback, some rip-roaring report triggers the next move up. Again, we keep our eyes on the volume when the indexes and individual stocks sell.
There are many stocks we have on the reports that are etching out very nice patterns such as cup with handles (a popular financial stock pattern), ascending wedges (check out HBC), and other stocks pulling back to support already (JNPR). We will be watching for these this week for new opportunities to enter. At the same time we watch volumes to see how the stocks and the indexes sell down on some profit taking. Plenty of opportunity out there, we just have to be patient and adjust to what the market is giving right now.
Support and Resistance Levels
Nasdaq:
Resistance: Cleared the 50 day moving average. If it can hold there, 2890 to 2900 is next before the 3000 level.
Support: 2700 is what we are looking for as the first round. Then 2640 to 2650.
S&P 500:
Resistance: 1360.
Support: 1335 to 1340. Then 1325. After that we look to where it turned up last time at 1313.65.
Dow:
Resistance: 200 day moving average (10,712.22). Down trendline at 10,710. Then 10,900 and 11,020. After that, 11,400.
Support: 10,300 to 10,400. After that, 10,000.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
1-22-01
Leading Economic Indicators for December (10:00): -0.3% versus -0.2% prior.
Treasury budget for December (2:00): $32.0 billion versus $33.1 billion prior.
1-25-01
Initial jobless claims (8:30): 330,000 versus 306,000 prior.
Employment Cost Index, fourth quarter (8:30): 1.1% versus 0.9% prior.
Existing home sales for December (10:00): 5.05 million versus 5.22 million prior.
Greenspan speech
1-26-01
Durable goods orders for December (8:30): -1.5% versus 2.5% prior.
Help wanted index for December (10:00): 75 prior.
SUBSCRIBER QUESTIONS
Q: I'm a newcomer. Love the newsletter. I confess the bears are making me nervous. Red Herring twice noted the forecast of an unnamed technical analyst ("Mr. C") who sees a third leg of this bear market coming with the NASDAQ at 1900. I also read the comments of Mr. Steve Leuthold, president of The Leuthold Group in Minneapolis. He speaks of this same third downward bear market leg. He forecasts that "One year from now, the Dow will reach 8000 on its way back from a projected low of about 7000."
Are we investing into a trap? What is this historical "third leg" of a bear market? I was looking at a 10 year chart of the Nasdaq and I don't see any such pattern in past corrections. I would appreciate your enlightenment.
A: There is a lot of noise out there. There is no shortage of prognosticators and it can be very, very confusing and distracting. Your email raises one of the biggest problems with technical analysis: guessing about where an index or a stock will be at a certain time. That gets off into the witch doctor aspect of technical analysis, and there is very little an investor can do to disprove such claims. Thus, many are scared off from investing, waiting for that inevitable downturn. Heck, we know some people here in the U.S and overseas who have been predicting an economic crash and corresponding stock market crash in the U.S. for the past ten years. Maybe they will be right; but can you imagine staying out of the U.S. stock market for the past 10 years? Many of those people are convinced that what is going on now is what they predicted. Nonsense. This downturn was caused by the Fed, not the natural cycle of the economy.
End Part 1 of 2
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us stock market
understanding the stock market
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