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us stock market, understanding the stock market
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4/10/02 Investment House Daily
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MARKET ALERT SERVICE
Target alerts hit this week: PII (+$9); PII (+$5.85); GGG (+$5.90); HB (+$4.10 per option); 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%).
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertdly.htm
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SUMMARY:
- On again, off again market finds footing in broad rally.
- The bigger picture: back and forth action signals the change of the trend.
- Same store retail sales looking solid.
- Earnings affirmations rising along with earnings reports.
- Downgrades still predominant.
- Broad move looks promising but still range bound.
- Subscriber Questions
- Team Trades
Tennis match score: 30 - 15.
Monday the bulls pulled a reversal out of the hat, providing an overall gain on rising volume (at least on the Nasdaq). Tuesday the bears rocketed a cross-court backhand right back with sharper selling on even higher volume. Wednesday the bulls took the backhand and ripped a forehand down the line. Will the bears get to it Thursday or was it a winner? The bears have an ace in the hole of sorts, with big techs fumbling around and not sure if they are even at the right match.
One of the writers referred to the action as 'schizoid.' Back and forth action on the big indexes can be confounding. However, there are some constants and some trends. One constant has been an overall good A/D line, particularly on the NYSE. Another is the continued success of the mid and small cap indexes and stocks. Despite the back and forth action on the big indexes (even pathetic action on the Nasdaq), the broader market is holding up and even improving.
The action also shows that the indexes are firmly locked in their trading ranges; despite the weaker action in many large caps, the broader A/D line held things up. They bent, but as yet have not broken. They were hanging on Tuesday, but once again did what was necessary to keep the entire market intact. That underlying strength is tied to economic recovery currently taking place; as long as that continues to build, it is harder for the entire market to roll over.
Shifting trends of the economy and the market.
One trend to note. In the seminars we talk about some of the underlying keys to understanding the market. Over the years of study and investing it has become apparent that when trends change there is volatility. This is not necessarily the volatility as measured by the volatility components of options (VIX, VXN), but more of the back and forth action. Up one day, then down equally hard the next. Overall volatility may not change, but the action is definitely choppy.
This type of action indicates that change is trying to take hold. There is a fight between the status quo and the currents of change. That is what causes the back and forth, sometimes violent action. As winter fades and spring starts to emerge, cold air from the north runs into warm air from the south. Windstorms, spring storms, violent thunderstorms result. Then the spring and summer trends take over until the next change of season.
We are seeing this action right now. Big economic and market gains were squashed by a no-money Fed policy designed to chase away the specter of inflation. Violent stock market action in March and April 2000 indicated a season change for the economy and the market. Then the downtrend took hold and the action was decidedly one way. There was change sniffing around in August and early September 2001 before 9-11. After 9-11 massive volatility led to a turn. The initial rise off the bottom was as more an equal reaction to the massive sell-off to the downside after the market reopened than an economically driven recovery.
Now that the first reaction has faded, the market is trying to establish the new trend in light of a recovering economy and not just a reaction to 9-11. It is a fight as the bull to bear converts from the bear market are slow to give up their newly adopted ways just as they were slow to give up their bullish views on the way down. As we all know, there is nothing more stubborn than a convert. That is why we see all of the 'valuation' downgrades. Many stocks are breaking out on strong volume because they have the sales and earnings growth to support higher multiples. Wendy's (WEN) is enjoying explosive sales and broke out of a 32-month base in March, climbing to an all-time high. After a 20% move on the breakout, however, it was time for a valuation downgrade. The mood right now is still 'if it hits a new high, it is too high.' If the economic recovery is for real (and that appears to be the case), money will continue to flow to the leaders; the trend of a bull market will be established. The current choppy action is characteristic of that change. The broad market advance is a signal that the change is toward a rising market.
THE ECONOMY
More same store sales looking good.
Sears (S), after taking a recent beating on a downgrade in late March, pulled the old shell game on the analysts and increased its profit outlook for the year. Not affirmed; increased. It shot up $2.80 on extremely heavy volume. Ruby Tuesday announced a 3.6% gain in same store sales, topping estimates. GM sales up 2.9%; Ford +2.4%; DCX +3.1%. Caught analysts flat-footed. After the close JWN beat estimates with same store sales up 1.1%. Friday more retail same store numbers come out. Surprise, surprise, surprise said Gomer.
Earnings, affirmations, downgrades.
Sears ups its estimates. National Semiconductor reiterates its Q4 sales guidance. Tuesday it was INTU and others. The list is growing, but it is not growing fast enough in technology.
SEBL says it will miss with the CEO saying it was the worst quarter for enterprise software ever. He also says 100 to 200 IT companies will be out of business in a year. The trend is somewhat clear still: INTU makes software for consumers. SEBL, ORCL, IBM and others make software for businesses. The results are pretty much set in stone for now: consumer products are winners, business products are sitting on the shelf.
Downgrades are also still very much the game as we outlined earlier. Notice how some firms are putting out more downgrades than others? At some firms there is literally a bounty on the downgrades. The most and best downgrades are factored into compensation. That is why we see the trigger-happy analysts now. Heck, today IDTI had coverage initiated at one broker with a sell rating. Why even bother? You have not been putting clients into it because you don't cover it. Why start coverage with a sell? Because that is what is in vogue in the current environment. They want to say 'look at the stones we have.' Much as the Henry Blodgett call on AMZN at $500 was made for splash (though it was right; chicken or the egg?), these calls are made for headlines as well. Let's find a stock we don't cover and our clients don't own and initiate coverage and downgrade it. Makes a lot of sense.
Two concerns for brokers: they are too cautious to raise views in case they are wrong and the recovery does not take hold. That is the name of the game; do your analysis and make your calls based on that. We do it every night. Second, there is still fear of lawsuits. The Blodgett/Meeker suite was dismissed, but now state AG's are pursuing this conflict of interest where clients are put in a stock and then the hot shot, 'independent' analyst (who is paid by the same firm mind you) makes a contrary call. We pointed that conflict of interest out a month ago. A suit was filed this week. Maybe someone in the right places was reading.
THE MARKET
There was not a whole lot of news to drive the market. Some warnings, some affirmations, some upside revisions. The market found traction and the old economy blue chips rallied along with the small and mid-caps today. MSFT and INTC did not stand in the way; INTC abstained while MSFT rallied back. The trading range held on the highest volume since mid-March. The Nasdaq and S&P are still looking squeamish. The Dow is already knocking at the next level of resistance in its range. The trading ranges are still in force, but the news after hours in tech land was not that great with stocks selling on their earnings. Will techs now step back in the way of progress for the big indexes? That is the pattern.
Put/Call Ratio (CBOE): 0.80; +0.06. Falling slightly on a strong market gain. Still holding in the high part of the range, the two closes at 0.88 or better apparently helping this bounce up in the trading range.
Nasdaq
Did not lead, but did not get in the way. Rising on the best volume in a month, it tested resistance at 1770 three times Wednesday, but could not crack it.
Stats: +24.50 (+1.4%) to close at 1767.07.
Volume: 1.965 billion (+18.4%). Best Nasdaq volume in a month, rising to slightly above average levels. Volume has dropped the past two three months, and that has brought the average level down below 2 billion. Still, above average volume moves show more conviction. 2 rises on higher volume, 1 decline on higher volume in the past three sessions. Buy side volume, however, was not nearly as powerful as it should have been to give us a lot of confidence in the move.
Up volume: 903 million (+601 million).
Down volume: 1.028 billion (-318 million). The upside volume could not eclipse downside volume, a sign of weakness in the upside move even as volume rose overall.
A/D and Hi/Lo: Advancers led 1.49 to 1 (3 to 2) after decliners led 1.20 to 1 Tuesday. Tuesday was not broad selling. The buying was broader, but not runaway in the techs.
New highs: 262 (+43)
New lows: 53 (-5)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Tested the Monday low intraday (1733.69) and found life there, still holding above the February intraday low right at 1700 (1696). Maybe the reversal and rise on higher volume gives the index all it needs to complete its 3-month double bottom pattern or a longer term reverse head and shoulders from April 2001. The higher volume was nice (with the up/down caveat noted above), but the Nasdaq is still in a short term downtrend from March and well below the down trendline established from the January top. It appears set to test 1850 with the action, but this index has given several potential reversal days just to get wracked back down. The problem is the poor patterns in the stocks making up the bulk of the index. What was up Monday was down Tuesday but was up Wednesday. What was down Monday and Tuesday was down today as well (SEBL, BRCD). It was good to see a recovery attempt on Tuesday's heels, but lets not get deluded. As we said in an alert today, it is tempting to chase the familiar big name techs. Heck, you can make money in short trades. The problem, however, is that they are still subject to news and get run up and down on the day's latest headline.
Dow/NYSE
The big cyclical stocks were back on the buy ledger today with some serious money moving their way. The technology stocks did not stand in the way this session, so the gains stuck. The Dow is safely in the trading range, and is now trying to find its way to the top half of the range with a move over 10,400.
Stats: +173.06 (+1.7%) to close at 10,381.73
NYSE Volume: 1.431 billion (+15%). Rising, above average volume as with the Nasdaq. Unlike the Nasdaq, however, up volume almost doubled down volume, so the reading is much better. There was buying in them there stocks, and it helped erase some of that distribution.
Up volume: 572 million (+430 million)
Down volume: 478 million (-156 million).
A/D and Hi/Lo: 2.55 to 1. Huge day for the broad NYSE. The continued upward bias in the A/D line indicated the move was still on just as it did in late October and late November 2001. when the indexes moved laterally, consolidating their large gains.
New highs: 371 (+117)
New lows: 43 (+7). Continued strong gains in new highs.
The Chart: http://www.investmenthouse.com/cd/$indu.html
The reach down to 10,100 was apparently enough as the Dow mounted a new rally as cyclical stocks were once again in fashion. The close left it just below the barrier to the upper half of the trading range: 10,400 on up to the top at 10,679. It held where it had to right at 10,200. The stronger volume move puts it in position to run to the top of the range. It has to cross 10,400 first; it should do that tomorrow if there is any follow through (a big if lately). The questions will be whether it can make it to the top of the range and whether it can breakout if it does. The trend is not completely established yet. It held the up trendline off the September low; we now wait and see if a more powerful uptrend can be established.
S&P 500:
Held at 1125, and on above average volume. Buying in the big names. Still a lot of resistance at the 200 day MVA (1137.06) and then 1150, the next key levels. The four tops in November, December and January at 1175 are the ultimate key, but all we can say for now is that the big caps rallied when they had to and are still in the trading range getting a boost from big volume buying on the NYSE.
Stats: +12.67 (+1.1%) to close at 1130.47.
Volume: NYSE volume jumped to above average levels immediately following Tuesday's distribution (1.431 billion; +15%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
To hold gains or not to hold gains. Thursday the market will have a chance to give the daily reprise to that question. Thus far it has been a daily whipsaw. The one constant has been the solid performance of the broader market populated by the mid and small cap stocks. Those have held things together while the big stocks struggled. Today they were all working together more or less (the Nasdaq still was not impressive) and the moves were solid. Many, many of our plays broke to the upside, hitting their buy points. This is typical of good patterns: they tend to hold up better during the down sessions, and then when the market rebounds they are off and running above resistance. If the market can hit on most cylinders again (some follow through in the common sense as discussed on the financial stations) these stocks should continue to move on up.
With that in mind we are still looking at the same groups of stocks, i.e., the better patterns and better numbers. We don't want to chase breakouts too far of course as that is how you can get in trouble: extended runs need to pullback to near-term support whether it be the former resistance point just broken, a trendline, or the short term moving averages. Indeed, we will be seeing some tests of the breakouts over the next several sessions, and that can always give us a chance to enter any stocks we like but missed on the breakout, add to positions, or start new positions again (if we sold on the initial run, something we often do with our option positions).
Given the daily up and down action, we will have to see where tomorrow takes us. After hours YHOO and COGN reported decent earnings, but they were not lighting the board to the upside. Could be more of a tech drag that could work to stall things a bit. When the market is bent on rallying, that would not stall it. We will see more tomorrow. Still, we are not expecting a breakout from the trading ranges at this point. We may see more strength develop that gives us more insight into that, but for now we are playing the good breakouts and tests of breakouts and taking our money when the targets are hit. Until the market character makes that more definitive change that is the prudent course.
Support and Resistance
Nasdaq: Closed at 1767.07
Resistance: 1770 to 1775 stopped it today. After that is 1800 that stopped the prior bounce attempt. That level is followed by a jumble of trouble at 1850 with the simple 50 day MVA (1830.05). Then 1875, the bottom of the November consolidation and the 200 day MVA (1867.44). 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 1130.47
Resistance: 1125 was cleared today on strong volume. The 200 day MVA (1137.06). 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 is possible, though it 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 10,381.73
Resistance: 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 (10,189.42) held on the recent selling. 10,000 was almost tested. That is backed up by the 200 day MVA (9958.29). From 9500 to roughly 10,000 - 10,200 is recent support that for now is holding up.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
4-8-02
Wholesale Inventories, February (10:00): -0.7% actual versus 0.0% expected and -0.5% prior (revised from -0.2%).
4-11-02
Initial Claims, 4/6 (8:30): 425K expected versus 460K prior.
Export Prices ex-ag., March (8:30): 0.0% versus 0.0% prior.
Import Prices ex-oil, March (8:30): na versus -0.5%
4-12-02
PPI, March (8:30): 0.7% versus 0.2% prior.
Core PPI, March (8:30): 0.1% versus 0.0% prior.
Retail Sales, March (8:30): 0.4% versus 0.3% prior.
Retail Sales ex-auto, March (8:30): 0.5% versus 0.4% prior.
Michigan Sentiment-Prel., April (9:45): 96.8 versus 95.7 prior.
End Part 1 of 2
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us stock market
understanding the stock market
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