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4/17/02 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERT SERVICE
Target hit alerts issued this week: HET (+$7.55; +18%); COHU (+$5.80; +23%); VSEA (+$7.75; +18%); AGMP (+$5.25; +17.5%); ICBC (+$5.55; +21%); ICUI (+$6.18; +18%); UCI (+$3.34; +20%); HRLY (+$4.45; +22%); OEX put ($8.55 per option); JH (+$4.05; +21%); SLGN (+$5.62; +17%).
We also had a lot of trailing stops triggered on today's action: SLM, ATK, EFII, JCI, SLM, UTX. Most preserved a gain or kept losses at very low levels.
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertdly.htm
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SUMMARY:
- Deuce! Tuesday's rally met with stronger selling volume once again.
- Greenspan not raising rates until he sees whites of recovery's eyes.
- Earnings continue: BA and UTX set negative tone on Dow.
- Subscriber Questions
High volume rally met with high volume selling with a twist.
The ticker had not cooled from Tuesday, but the sellers were ready. A brief run in the morning was met by the sellers as BA and UTX missed earnings and missed them big. Those two plus continuing losses from CAT pretty much sealed the Dow's fate even with INTC posting nice gains on rising, above average volume. Even with some tech leadership the Nasdaq could not hold positive as it too sold lower on stronger volume. The SOX was the lone major index that closed in the black. Even the S&P 600 (small cap) closed down 0.7%, matching the Nasdaq 100 loss.
Immediate distribution days following rally attempts usually doom the rally. That is what we have seen of late. Each rally attempt was met by stronger selling on at least one of the major indexes. When sellers are that eager to sell, it is hard for a rally to get underway. At this juncture, it is pretty amazing that the indexes have not tanked given the distribution sessions on the Dow and S&P 500. For now it has been the back and forth action on a daily basis while the smaller and mid-cap stocks worked their way higher.
The twist.
The action was the same, but the manner was not. Volume rose on the selling. Up volume on both the Nasdaq and the NYSE, however, continued to outpace down volume. It was not all selling. There were more buyers on the session than sellers. The large cap names on the market cap indexes (the big three) were driving the index prices lower. The majority of stocks were being bought. The ones being sold were sold hard and made up a lot of the points on the indexes.
The A/D line on the NYSE remained positive even with the selling. The Nasdaq A/D line was negative, but it was a meager 1.11 to 1 decliner lead. The broader market was not going down with the ship (or more appropriately, the somewhat dishonored officers of the ship).
We saw this before when it looked as if the indexes were heading to the nether regions. The A/D line held up, and up to down volume actually remained positive. The selling never got out of hand. The market does not look great, but it is still trying to transition in the fight between bulls and bears. Earnings are pretty good to not so good, outlooks are much improved to nothing changed. There is not simply a wave of good news to jump on and ride, but the market is not giving up; there is accumulation still ongoing in many shares if not on the big indexes. Greenspan said the Fed was going to hold pat on rates until the economy really was humming. In his words it is in the first stage, and the Fed was not going to do anything until the second stage was a sure bet. That keeps the economic throttle open, and that will help earnings down the road and thus stock prices as well (higher earnings = higher stock prices, all things being equal). Of course, that is not a lot of relief for stocks still trading at 70 P/E ratios and negative earnings. Earnings would have to do some really running, and that is not going to happen. In any event, the day was not a total giveback from Tuesday.
THE ECONOMY
Greenspan working to save the legacy.
Today Greenspan talked to some of our esteemed leaders about the state of the economy. He noted crosscurrents that could impact the consumer and thus the recovery. First it was oil; prolonged prices would hurt, while a short price spike would not do much. Makes sense, and it also drives home the point we made a few weeks back when oil started to rise: the Fed is not so worried about the inflationary effect as it is the negative impact on consumer spending. Just as in October 2000 when prices rose, the Fed was concerned about further slowing consumer demand; that was misunderstood by most, but Greenspan made it clear today.
Second concern was the household wealth decline. Greenspan noted indirectly that the stock market drop had decreased household wealth (he never said this, just noted that it had declined in the economic slowdown). At the same time household liabilities have risen to the cyclical peak hit in the 1980's. Greenspan wants to keep short term rates and long term rates lower to keep the pressure off of the consumer. This debt burden is one we have discussed before: if you have a lot of debt, even if money is cheap you cannot take on more to help boost the economy. What Greenspan seemed to be saying today was that he does not want to raise rates and thus make it more difficult for consumers to cope with existing debt and pressure the lower end discretionary spending items. Let's not forget that consumer debt is high, and if interest rates rise there will be pain. Greenspan is trying to keep rates low enough to get the economy going and people back to work before he has to raise rates. It is a race. Right now inflation is very low so the Fed has time. How much time it cannot really tell.
The words that everyone focused on: the current conditions give the Fed 'ample opportunity to keep inflationary pressures in control once sustained, solid economic expansion is in view.' The old 'whites of their eyes' speech. He also adopted a grade school 'show and tell' approach to explaining the economy to our elect. The economy is like a two-stage rocket. Inventory reduction and then building are stage one; they get you to a certain altitude. After that, stage two has to kick in, i.e., jobs, income and profit growth, to get the economy into orbit. He noted that things were different this time because the consumer and housing market had remained strong. Would there be that second stage? Again, that depends on the business side of the equation. Greenspan wants to keep rates low to keep consumers from rolling over, and also to get businesses to come to the table.
THE MARKET
Tuesday's broad rally set the stage for Wednesday's selling. As noted, volume was higher but up volume outpaced down volume. More stocks moved up than down. It was not a good session by any means, but it was not a train wreck. There was some underlying strength as the market prices showed more of the same up and down action.
Earnings after hours Wednesday were not bad, at least when you compare them to what was expected. LRCX lost 5 cents less than expected. Same with BRCM and CNXT. Much rejoicing. CERN beat the street by 3 cents, Allstate beat by a whopping 10 cents, and AAPL by a penny. LRCX said the current quarter demand was 'much better' than the quarter just reported. IBM came out and hit its lowered guidance, but then said it was optimistic about future gains. Nothing ran away after hours, upside or downside, though IBM did jump about $2 from its closing price. It was not a great report card, but it was not received with disdain.
Put/Call Ratio (CBOE): 0.81; +0.17. As would be expected, the higher than usual put activity remained as such, jumping on the selling as put buyers were ready at the mark.
Nasdaq
Gapped up to the 50 day MVA and sold off, testing 1800. Volume was significantly higher, but down volume did not run away. Many of the big name techs rallied Tuesday up to resistance levels and stalled there today. They did not just turn and drop, but the moves up were not powerful and they need some upside catalyst.
Stats: -6.12 (-0.3%) to close at 1810.67.
Volume: 1.926 billion (+8.1%). Above average in a big way, the biggest volume since the April 10 upside reversal session that gave way to selling the next session. A day of distribution early in a rally attempt (started last Friday) can kill off a rally in a hurry. There is something interesting here. When an index sees higher volume but does not go anywhere, that means something. It can mean there is a lot of churning, i.e., large turnover of shares as the index runs in place. At the top of a run that can indicate a drop is coming. At the bottom of selling, it means that buyers have caught up with sellers as the index does not give up any ground on higher volume. The Nasdaq has moved up over the past four sessions, so one could conclude this was churning at the top of a run. The up to down volume was a very interesting subplot to this action, however.
Up volume: 1.128 billion (-451 million)
Down volume: 778 million (+578 million). No question selling volume rose, but it was unable to overtake up volume by a long shot (350 million). If the selling was really rampant, we would have seen the 1.6 billion to 300 million ratio we have seen of late when sellers take over. It may just be that sellers are warming up after Tuesday's rally, but as noted before, we have seen this action before as the market skated past real disaster.
A/D and Hi/Lo: Decliners led 1.11 to 1 (advancers led 2.46 to 1 Tuesday). As with up/down volume, the decliners did not get out of hand.
New highs: 237 (-40)
New lows: 33 (-5)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Gapped higher, sold down, and then ran right into the exponential 50 day MVA (1827.63) on the high and that was the high for the session. It bounced down the 15 minute MVA the rest of the session before bottoming just above 1800 (1804.65) and giving rise to a modest bounce in the last 1.5 hours. It was not much of a bounce, leaving the index just slightly off of some support at 1800. If today's sub-currents regarding the A/D line and up and down volume is significant, the index should hold near this level. A selloff back down to the 1725 level or so would destroy the attempt at a double bottom. Suffice it to say, the Nasdaq made a good move, but it is already encountering headwinds before even testing the next real level of resistance.
Dow/NYSE
The Dow had little chance with the BA and UTX earnings misses. It made a game effort early with a quick try for a session high in the first hour, but after peaking over 10,300, it was down to the 50 day MVA on rising NYSE volume.
Stats: -50.54 points (-0.8%) to close at 10,220.78.
NYSE Volume: 1.375 billion (+2.2%). It was not a massive volume reversal, but it did rise on the selling. We have to note that a lot of the action was with some Dow stocks that were under heavy pressure. It was also just a slight gain.
Up volume: 765 million (-402 million)
Down volume: 594 million (+408 million). A down session, but down volume did not jump ahead of up volume as is the usual case on selling in this market. The selling was not heavy to the downside.
A/D and Hi/Lo: Advancers continued to lead on a down session at 1.12 to 1. Not a big lead by any means, but it changes the complexion of the loss on the Dow. This is a holdover from the 2 to 1 or better A/D line in the prior sessions where advancers led by this margin on 3 of 5 sessions.
New highs: 229 (-11)
New lows: 16 (+4). No big gains or losses either way. A pretty mild selling session.
The Chart: http://www.investmenthouse.com/cd/$indu.html
Looked as if the Dow was going to head back toward 10,100 without a second thought, but found bottom at 10,188 and rebounded a bit to close above that 10,200 level. This puts the index back below the March down trendline (10,260) and just below the 50 day MVA (10,230.01; 10,230.16 simple). The index over the past 7 weeks has pinched into a pennant with the longer leg from the September bottom versus the top leg that trends down with that March down trendline. Conventional wisdom is that the longer leg wins. There are signs that today's move was not that bad. There was a shakeout Monday on lower volume and then a big move Tuesday. Will today's bit of rest on decent internals allow it to break higher? Earnings will be the driver. IBM was up after hours on its rosier future outlook. MSFT reports Thursday. This is an index in need of a catalyst. It is holding up well despite the distribution sessions, but some of its old economy components have not held up their end of the earnings bargain. Earnings will either give it the push up or it won't make it.
S&P 500:
Ran out of gas below the 200 day MVA (1134.33), but was able to hold at 1125 (tested 1123.37 on the low), the nearest level of support above 1100. Failure at this level on high volume after all the distribution could send it right back down. Still, the index held up well with PFE, BA, UTX selling hard. It is still a weak pattern given the recent breakdown through 1125 to 1100, but it did hold the line today. We said Tuesday the real story would be told later this week and even next week as more earnings hit and this 1125 level either is its launching point or failure point. Right now it is in a precarious position, on the edge of 1125 and being pressured by the 200 day MVA.
Stats: -2.30 (-0.2%) to close at 1126.07.
Volume: NYSE volume was on the rise again, but it was not a blowout at 1.375 billion (+2.2%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Initial claims, LEI, and the Philly Fed are on the agenda tomorrow, and though important, earnings will take the stage again. Response to Wednesday night's earnings was so-so. No one came out and said things were humming. LRCX in the chip equipment sector said this quarter was at a much better pace than the quarter just reported, but it did not get a big push after hours.
The market is set up as such: a recovering economy, the rate of recovery is slower than hoped, a Federal Reserve willing to help that recovery along, companies trying to put on a decent face about modestly improving economic conditions. It simply is not a lot to drive the entire market higher. Prices rise in anticipation of future earnings gains. There is improvement, but not a lot in the big names. Thus investors will continue to look toward those stocks that are in fact showing good earnings and growth even if they are not the brand names. They have been outperforming everything else, even to the point that some today were starting to say smaller names were overvalued. It had to happen, but with the earnings being reported by the big names, those will not be pulling much money out of the stocks that actually are making money. At some point earnings will improve for the large caps, but as with all recoveries, it will be the new and nimble companies with the right model and products that will outperform. Right now they are all jockeying about for position with broad moves in banks, retail, health, insurance, entertainment, and more.
Today many of these areas took a rest (gaming shot up on good numbers), but that is the pattern we have been seeing: they rest when the bigger indexes sell, and then rally well when the big indexes don't sell or don't sell as much. We also see enough in the internals on the NYSE and even the Nasdaq to make us think that if some more earnings reports that are perceived as favorable (note we did not say they would really be great historically), these indexes could mount a further move up even with the distribution.
Tomorrow we see a bit softer to flat open. Then we may just see the indexes hold the line at this near term support and start to move higher. It's Thursday, so it would be the day to do it.
Support and Resistance
Nasdaq: Closed at 1810.67
Resistance: Still not totally free of 1800 where the prior bounce attempt failed. Then there is 1850, followed by 1875, the bottom of the November consolidation and the 200 day MVA (1860.92). 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: 1800 held on the low today after 1750 held barely (not barley) on Monday. If the Nasdaq is intent on selling again, 1700 (February low at 1696.55) is the level to be tested once again. Then 1613 to 1626.
S&P 500: Closed at 1126.07
Resistance: As with the Nasdaq, the S&P has not totally cleared resistance at 1125. The 200 day MVA (1134.33). 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 to any longer term move higher. 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: 1125 is key for any move higher near term. 1100 held on the last round. Then 1075, the February low. After that 1050. The S&P moves in 25 point increments.
Dow: Closed at 10,220.78
Resistance: Back below the down trendline from March (10,260). 10,300 blocked it today as well as the up trendline from the September bottom at 10,305. After that 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: 10,100. After that 10,000 represents some support. That is backed up by the 200 day MVA (9947.86). From 9500 to roughly 10,000 - 10,200 is recent support off of the September bottom that for now is holding up.
End Part 1 of 2
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