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option trading, money investment
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4/09/02 Investment House Daily
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MARKET ALERT SERVICE
Target alerts hit this week: MIL put (+$3.02 per option); WRI (+$2.38 per option; pre-split run); ISLE (+$3.53; +20%); CBH (+$6; +15%); CHBS (+$5.75; +16%); DGX (+$11.45; +15%); MKC (+$4.84; +10%--pre-split); UNTD (+$2.37; +33%); XMM (+$2.20; +17%).
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SUMMARY:
- Big techs fold the tent and go home after Monday's reversal attempt.
- Small and mid-caps hold their own and even prosper as large cap techs suffer.
- Same store retail sales still solid at many retailers, and CEO's a bit more confident.
- Waiting on a technology recovery. Waiting, waiting, waiting . . .
- Subscriber Questions
- Team Trades
Another dead reversal attempt.
Big techs were game on Monday, shaking off the IBM news and rallying. MSFT was up nicely, just one of many sporting a good gain after reversing. CPQ announced after hours it would meet expectations. The market opened, it rose, it fell. It fell some more. It burped, then it fell some more. Volume picked up. It closed.
Positive earnings 'warnings' had no effect on the big names. Technology, particularly big technology, was kryptonite Tuesday. Downgrades are still in vogue, and they were flying again today. EMLX: downgrade. BRCD: downgrade (one upgrade was laughed off). CSCO: you have to be kidding. INTC: delayed effect from Monday's downgrade was devastating. Boom, boom, boom, and boom. Toss on MSFT and its $2.35 loss and you have a major drag on the Dow, Nasdaq, and S&P 500.
The market is only half ugly. The other side is really quite nice.
Back in 1996 to 1999 the big indexes were rallying ahead without a care. Led by the big names they powered to new high after new high. At the same time small and mid-cap fund managers were grousing about how the great companies in their world were just being overlooked. They received about 10 seconds consideration per week and got about an equal measure of money into them. The big indexes were zooming, the small stocks were withering regardless of sales and earnings. Problem is, no one heard them because everyone focused on the big three indexes
Fast forward to 2001 and 2002. The market looks grim. The big three indexes are heading lower in a bear market. The Nasdaq is in a nasty dive after an impressive run. The S&P is suffering as well. The Dow has some big cyclical stocks responding to signs of an economic upturn underway. All, however, can go nowhere, hampered primarily by large technology stocks. These technology stocks cannot attract any serious buying. Every attempt is thrown back. Focusing on the big indexes, analysts and retail investors are glum.
Small and mid-cap indexes, however, are hitting new highs pushed by more and more small stocks all-time and new 52-week highs of their own. Look at the NYSE A/D line today: 1741 to 1380. NYSE new highs at sharply higher 254. They have been outperforming the big indexes for several months. After years of underperforming, small stocks are getting money pumped into them and making the types of runs the big names of the mid to late 1990's were putting together. Dell, Cisco and friends started as small stocks. They sported good sales and earnings and solid buying before they really took off. There are small stocks right now that are starting to get institutional support. We are running plays on many of these, and as the economy continues to improve there will be a group that sets themselves apart from the rest.
THE ECONOMY
Same store sales looking solid as the consumer continues to buy.
Several stores reported same store sales Tuesday, and the theme was the same: a brief slowing has been followed by renewed, or at least steady, retail sales. DLTR reported same store sales increased 25%; LE +10%; ANF +2%. CVS and SHRP guided higher. While sales cooled a bit in the last 5 weeks (Redbook shows them down 1.4% while Mitsubishi shows them up 0.3%), they are still solid. Year over year Redbook reports a 3.3% gain while Mitsubishi clocked a 6.2% gain. It is relatively clear that consumers are continuing to do what they have done the past 10 years: consume heartily. After a brief respite, the consumer is back in the stores. Again, retail consumption is just part of the economy; business consumption is still low.
Technology spending to lag even if improving forecasts.
A new government report showed tech factories running at just 62% of capacity. That places technology production where we know it is: lagging the rest of the economy. Still, CIO Magazine reports that chief information officers are "decidedly positive" about the future, a shift from the prior month where they were "disappointingly cautious." Does this have something to do with the time change? After all, this is a very quick, 180 degree turn in sentiment.
CIO's expect their budgets to rise 7.7% to the highest level since March 2001, doubling what they expected last month. What is driving this optimism? Most large companies have plans for more technology systems but have tabled them until business gets better. They want to see the bottom line improve and then bring back old workers and get new technology systems. Kind of a people and machines mentality. The backlog of planned expansion means there is money on the sidelines and that there could be quite a bit of pent up demand when the green light comes on.
Sounds great. But when will it happen? This year industry analysts expect a 4% increase in tech spending, up from the 2% expected back in November 2001. As IBM showed, however, technology spending both on the hardware and software sides is lagging the rest of the economy. Factory orders reported last week saw orders from computers and semiconductors fall even further.
We feel it is overly optimistic to think of a technology recovery of substantial proportions (i.e., big techs resuming any kind of leadership role) for 2002. 2002 is a recovery year, not a growth year after such a huge inventory increase that was left unused due to the sudden collapse in the economy from a 7%+ GDP growth rate to -1.3% (a huge 8.3% swing that some have the nerve to say was not a recession). Recovery years feature more value oriented, old economy stocks that are the nuts and bolts of an economy. Technology is important, but there is just no demand right now; as noted above, companies want to get the bottom line in order before they start buying major technology systems. What they have now will suffice for another 9 months or so. The stimulus package was not that big of a boon for business investment as it did not really help 80% of the businesses out there, i.e., the small U.S. business.
Thus, on a macro view, we see the rest of 2002 as a guns and butter year for stocks, meaning the basics: food, retail, defense, homes (furnishings, some continued buying), transportation (trucking, packaging), some healthcare. There will be technology in the mix as always, but selective smaller names and a few bigger names (chip equipment is always first). As the year progresses there will be greater increases in technology. Why? Because a 2003 recovery will be priced in to a certain extent ahead of the actual numbers. The market senses when a change is coming. There will definitely be better earnings news coming, and that will also drive these stocks to a certain extent. A 70 P/E on marginally rising earnings, however, will not be a lightening rod for investor dollars.
CEO confidence up.
In a sign that recovery has already taken hold, pessimistic CEO confidence increased to 66 in Q1 from 40 in Q4. Half of the 120 polled indicated improved conditions from 6 months ago versus less than 2% saying the same back in Q4. 80% said conditions would improve in the next 6 months. Now that CEO's are warming to the idea that the economy is actually improving, one of the somewhat lagging indicators is coming in line. That will help more spending on the business side, including hiring and systems.
THE MARKET
The big cap market was down again, unable to sustain Monday's reversal attempt. Technology led the way down with the Nasdaq 100 down 3.4% and the SOX down 3.2%. The Dow was fine without MSFT and INTC. The mid-caps were flat, the small caps up a fraction. It was a bad day overall from the usual perspective, but it was just a slight off day from the recent leaders. Indeed, many good smaller and mid-level issues enjoyed a very solid session. A tale of two markets, but it is not the new economy versus the old economy. It is the neglected issues versus the former leaders.
Put/Call Ratio (CBOE): 0.86 (-0.05). Monday's close at 0.91 generated about 30 minutes of positive activity. Interesting that the ratio fell on some pretty stiff selling. That is some indication that this ratio might be falling into a routine where it will take a real spike to show any real option speculation to the downside. It is holding at higher levels with a close over 0.88 and at 0.91 within a week. The more the better, though it needs a spike or two over 1.0 on the close to show real power.
Nasdaq
Short rally rolled over and sold on higher volume. Did not take out Monday's low, but note how volume rose on the heels of a stronger volume rise. That is classic bearish action.
Stats: -43.30 (-2.4%) to close at 1742.57.
Volume: 1.662 billion (+4.2%). Immediately after a reversal and gain on rising volume Monday, the index sold off harder on once again rising volume. For any accumulation Monday, there was more selling of technology today. As noted, that is classic bearish action that we saw in the bear market's downtrends.
Up volume: 302 million (-639 million).
Down volume: 1.345 billion (+ 711 million). Back to levels even stronger downside than before Monday's reversal attempt.
A/D and Hi/Lo: The lead switched back to decliners at 1.20 to 1 after advancers led 1.16 to 1 Monday. Not an index-wide selloff; this indicates that it was indeed the big stocks that were doing the selling.
New highs: 219 (+55)
New lows: 58 (-12). Another telling feature. New highs rose as the Nasdaq 100 led all selling. New lows fell as well. Take out the big names and the index looks a lot better.
The Chart: http://www.investmenthouse.com/cd/$compq.html
Monday's reversal gains were Tuesday's losses. What looked to be a reversal that might carry it up to the next level of resistance came yet closer to the next support level at 1700. The index started above 1775, the nearest resistance level, but then started selling off. It bounced at 1770 where it held on the lows last week, but that gave way as well. It closed below some potential support in the 1945 level on rising volume. It is riding down below its 10 and 18 day MVA now, and the quick repudiation of Monday's reversal attempt indicates a test of 1700 where it touched down in February on that test. That is not that far away and earnings really don't start rolling in until late in the week and next week. Plenty of time for the Nasdaq to test this level if not down to 1619 the April low. The big caps are sick, but the new lows are declining. That is a positive indication on continued selling as it shows stocks are getting sold out. That is not a timing indicator for buys, however, and there are not many big techs that look like savory investments right now. Earnings and sales are not growing for the big names, at least not from what they have told us thus far. Thus their prices are being reduced ahead of actual earnings. That leaves room for upside surprises, but it won't be the big names doing the leading if they are better than expectations.
Dow/NYSE
IBM was up, but not the Dow. It had MSFT and INTC to help it into the red. The Dow was holding positive (though nothing really great) until MSFT and INTC really got involved in the technology selloff. It held on to its recent bottom above 10,100, however, based on the performance of the older economy stocks. Without at least neutral action from the technology components, however, it will have trouble marching higher. It needs a break from the INTC and MSFT selling. If it gets it, the Dow can rise up to 10,400.
Stats: -40.41 (-0.4%) to close at 10,208.67.
NYSE Volume: 1.206 billion (+9.2%). Monday's reversal could not muster higher volume, but Tuesday's selling did. That makes 3 of the last six sessions distribution sessions. That can spell trouble for the attempt to hold the breakout.
Up volume: 572 million (-29 million)
Down volume: 634 million (+148 million).
A/D and Hi/Lo: NYSE advancers held onto the lead at 1.26 to 1 (1.37 to 1 Monday). As noted, this is an indication that the selling was limited to the larger stocks as the broader market advanced and the mid and small cap indexes avoided selling.
New highs: 254 (+68)
New lows: 36 (-8). Very similar action to the overall Nasdaq: there were more new highs and fewer new lows on the selling. The overall market looks better than the index.
The Chart: http://www.investmenthouse.com/cd/$indu.html
The Dow has those technology stocks the handle. Monday MSFT and INTC were able to help pull the index back up after IBM's warning. Today they switched sides and worked to run the Dow back down. It continues to hold above the 10,100 to 10,200 level that roughly marks the top of the consolidation after the September bottom. For any progress this is the level it must hold. Three higher volume down sessions out of the last six indicates some distribution, and that is always a trouble sign. A break below the recent lows at 10,100 opens the door a bit further toward the 200 day MVA at 9959.61. Once that door is opened, the end is not as clear. Holding the breakout above the post 9-11 recovery is key. Again it has to have at a minimum just flat trading by the tech components to mount any upside move.
S&P 500:
A distribution session for the S&P as well, its third in six trading days as well. It broke free of 1125 and 1120 on the rising volume, closing just below the closing high at the middle of the double bottom (1118.51). The rising volume indicates further downside ahead, but it bounced at 1111 Monday, and after some serious selling the past week it may be a bouncing ball downwards, i.e., trying to find support at 1111 again with a bounce, then stepping back down. The price/volume action has turned over and it is stepping lower on rising volume. 1125 is a pretty significant level. If it does not hold at 1125 there is not much until 1110 and then 1080 to 1075.
Stats: -7.49 (-0.7%) to close at 1117.80.
Volume: NYSE volume rose on the selling to 1.206 billion (+9.2%), a third day of distribution out of six.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
The big indexes could not continue Monday's reversal attempt, instead turning lower on rising volume. The broader gains in the overall market again show the downside action confined to a narrower range of stocks. Overall that is the only thing saving the indexes from total meltdown: there are many more stocks that are performing much better than the biggest stocks. Money is coming out of big technology once again, but it is not all going to the sidelines; it is going into smaller issues. It is pushing them to new highs. These include old economy and technology stocks as well.
Most stocks tend to follow the overall market. However, the Dow, S&P 500 and Nasdaq indexes are not necessarily the overall market. There are the small and mid-caps, and there are more of them. As we have seen the broader range of stocks is bucking the trend, moving up, hitting new highs. At the same time we see sectors moving up as a group while other sectors suffer most of the decline. Don't get despondent when the big indexes don't perform. We have switched the majority of our plays and investments on the reports substantially away from big tech for the past several months. What is bemoaned on financial stations in general is not all bad as much of the market is performing well. That is pointed out on the financial stations, but the sex appeal is in the big indexes. Don't let them rule your thought, however.
Support and Resistance
Nasdaq: Closed at 1742.57.
Resistance: 1775 and then 1800 stopped the last bounce attempt. That level is followed by a jumble of trouble at 1850 with the simple 50 day MVA (1833.59). Then 1875, the bottom of the November consolidation and the 200 day MVA (1868.55). 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: 1775 and 1745 did little to stop the slide. 1700 is next.
S&P 500: Closed at 1117.80.
Resistance: 1125 is now to be dealt with. The 200 day MVA (1137.45). There is some resistance at 1150 as well; any bounce on low volume might find that level trouble. After that the December high (1173.62) and the January high (1176.97) are the real key. Those points also mark 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: 1120 did not hold on the close Tuesday. 1100 has acted as support as well. 1075 marks the bottom of the February double bottom pattern.
Dow: Closed at 10,208.67.
Resistance: The January high at 10,300 is the first level to clear, and it held last Friday. Next is 10,400, the barrier to the upper half of the March trading range. The top of the June, July, and August 2001 trading range at 10,600 (10,679 intraday high) marks the top half of the March trading range. 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: The simple 50 day MVA (10,179.10) was undercut intraday. 10,000 was almost tested. That is backed up by the 200 day MVA (9959.61). From 9500 to roughly 10,000 - 10,200 is recent support that for now is holding up.
End Part 1 of 2
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