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us stock market, understanding the stock market
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4/18/02 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERT SERVICE
Target hit alerts issued this week: WLP (+$6.90; +10%- - bounce play); 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%).
Some more trailing stops either made us a bit of money, got us out flat, or kept our losses very small: VVTV, CSL, CALP, SIB.
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
Emails: We love your emails. We receive hundreds of emails a week, but we don't mind. We respond to them all as fast as we can, so bear with us.
SUMMARY:
- International terror scare in reality an accident. Market tumbles then stumbles back up.
- If there was an earnings honeymoon, it appears over now.
- What language are we speaking? MSFT numbers interpreted differently, but a revenue miss is a revenue miss.
- Jobless claims remain pesky as Leading Indicators and Philly Fed decent.
- Subscriber Questions
Airplane crash sends a familiar shiver through Wall Street.
The market was lower but was starting a bit of a rally, helped out by the Philly Fed report that showed the fourth gain in a row. That was interrupted by reports of a plane crashing into Milan, Italy's tallest building that just so happened to be the center of Italy's financial world. Italy was also one of the targets of reported terrorist plots. Investors stopped buying. No real selling, just buy orders cancelled fast. When that happens stock prices, and thus indexes, fall.
Almost immediately, however, more facts were added. The plane was on fire as it headed toward the building. The pilot had issued a distress warning related to mechanical troubles, not terrorist troubles. It started to look like an accident, and the indexes started to recover within 15 minutes. The recovery continued steadily if uninspired to the close, just missing a positive close. Not a powerful ramble back up, but it was a relief to see the market recover from some potentially bad news.
Earnings are the bigger story.
It was a session full of earnings news both upside and downside. AMD is cautious on its Q2 outlook. NOK just ain't making it. Those hurt. The continuing selling in BA and UTX hurt more. They more than offset IBM's $4 gain.
It was not all bad news, however. AXP beat expectations for its first positive quarter in the last four. MCD guided higher for the rest of the year. UPS beat the street (but it was not positive about the economy; it does not see any 'significant evidence of a rebound' in the U.S. economy. UPS should know; it runs the tightest ship in the shipping industry or something like that. After hours XLNX beat the street by 3 cents, DGX crushed estimates, and SUNW reported a narrower loss. Okay, still pretty good.
MSFT did not do so well. Usually good at managing expectations, MSFT reported 49 cents, 2 cents less than expected. The number included a 15 cent gain from the sale of Expedia and a 14 cent loss. Depending upon who you talked to it was a miss or it was a big earnings score. Once again, the differing methods of accounting caused problems in understanding just what was going on. In one language it was great news. In another language it was rotten skunk entrails. Take your pick.
Actually, revenues were the coin flip that decided how the numbers would be treated. They were lighter than expected. MSFT also warned on the current quarter and the June quarter. So, whether or not the earnings number was a hit or a miss, the revenues were a clear miss. As one of my friends in law school would say whenever grade inflation or deflation was discussed, there is only one top 10%. In other words, argue all you want about the semantics of the numbers, but the bottom line is that revenues were below expectations and are not expected to meet expectations in the quarters to come.
Earnings 'honeymoon' looks over.
Yes S&P earnings are running better than they have in the past few quarters and from a historical view are indicative of a recovery. That does not mean they are meeting investor expectations. Up through tonight earnings were showing solid improvement here, a bit of a disappointment there, and the promise of better and better results in the current quarter and beyond. That was not enough to rally the market, but it was enough to keep the market from tanking. The up and down action on a daily basis is indicative of the wait and see attitude; investors were looking for a series of better than expected reports and future guidance. That kept the market treading water.
What investors have received is some better earnings and positive guidance, but also too many misses or hits with no guidance (BRCM, SUNW) or poor guidance. Now investors are seeing the trend that we talked about over a month ago: tech is not recovering right now and it might not recover this year. It certainly won't recover enough to meet a lot of the P/E's that are in the 50, 60, 70 and more range. Now that this is becoming apparent, particularly with the MSFT miss tonight, the last holdouts in tech land may just toss in the towel. Indeed, that was happening tonight with a broad slaughter in technology. We were looking at some great puts set up for tomorrow, and a lot of the damage will be done by the open. Still, there will be some good plays.
Will this sink the Nasdaq and put it back to the February low or worse? The mood is definitely negative. Even when EBAY reported stronger earnings and revenues across the board, it was taken apart because it said ad revenues were still falling. Usually stocks are ready to rally some on the first few good earnings reports. We had some of those with TXN, MOT, NVLS, MMM, etc. There was no rise in the market, however. It just tread water. Now that whatever good feelings there were are spent and it is clearer that there is no earnings recovery yet in tech to support the P/E's and no strong recovery in sight, investors could go ahead and get rid of the higher P/E stocks. They were certainly doing that tonight.
THE ECONOMY
Jobless claims remain high.
Question: if the jump in jobless claims three weeks ago was due to the extension of benefits per the economic stimulus package, why do the continue to hold at a high, recession level during the following weeks? You would expect to see a big jump as laid off workers reapplied en masse the first week, maybe two. Here is a third week above 400K, namely 445K, up 1,000 from 444K (which was revised up 6K from 438K). That topped estimates of 415K.
Certainly some of the continued increase is filers coming back onto the rolls. Not everyone was able to get to the office the first week. Continuing claims, however, continue to rise, up to 3.84 million. That is a 19-year high (1983), back when the U.S. was coming out of the worst economic slowdown since the Great Depression. Obviously more people are coming back onto the job roles in hope of landing a job now that the economy is recovering. That is keeping the continuing claims high. But, we have to put it into perspective and not just say this is normal when the numbers regarding the recession are not.
What do we mean? This recession has been labeled 'shallow' by most economists and Fed officials. There is nothing 'shallow' about a fall in GDP growth rates from 7+% to -1.3%. When the Fed thinks that 3% is a sustainable rate of growth and textbooks say a recession is negative GDP growth, an 8.3% drop is a recession. You have to look at where you start versus static definitions. There is NO DOUBT individuals and businesses have suffered a severe recession. Look at the profits. Look at the job losses and the inability to obtain new jobs.
The ONLY reason the economy did not totally shut down (housing market and consumer spending) was BECAUSE of the wealth generation during the prior 20 years. That provided a cushion to keep the economy running even as business tanked and the stock market plunged. That won't last much longer because stock wealth that was not cashed out is mostly gone for the majority of citizens. Debt burdens are again at 20-year highs. Again, the jobless numbers are at levels that were not seen since the worst post-depression recession back in the 1970's that really ended in the early 1980's. This number should be dropping again, not rising, and that sours the outlook on the recovery's speed even further. Remember: Greenspan knows he is in a race against the clock. He said it yesterday more or less. Can the pedal to the metal fed funds rate generate enough stimulus to get the economy high enough before there is inflationary pressure from too much money supply? That is his gambit, and given that, his lukewarm comments during the economic stimulus debate are confounding. Is his ego really that big to where he wants to be seen as bringing about recovery just by his 'shrewd' monetary management?
Leading Economic Indicators miss expectations.
After racing ahead for a few months, economic indicators are stalling. Not tanking, just stalling. LEI projects activity 6-months in the future. It rose 0.1%, indicating continued improvement, but expectations were for +0.3% (prior was steady at 0.0%). The news was not well-received by the market; in fact, the market turned an early rebound attempt into a serious plunge to undercut near term support levels. The LEI usually does not move the market a lot, but today it was grasping for direction.
Philly Fed rises to 12.3 but misses expectations.
It was the fourth rise in as many months, indicating that manufacturing continues to improve. Last month it was 11.4. The consensus was for 13.0, however, once again indicating that the recovery is not just leaping higher.
THE MARKET
The session was in trouble early with AMD, NOK and rising jobless claims. It tried to recover but then more bad news piled on and it had to recover the rest of the session. It managed to do that, closing lower on slightly lower volume. Unlike Wednesday, up volume did not outpaced down volume. About the only silver lining other than the recovery was that that Nasdaq A/D line was positive. We would et that is not going to be the case tomorrow with the MSFT news, although MSFT has been recovering late as some analysts are saying it is a hit, not a miss. Yes, if you walk from the front of a building to the back of a building, you will be at the back and not the front.
The Nasdaq QQQ and the OEX (S&P 100) have now each set up a head and shoulders patterns with weak right shoulders. A weak right shoulder is indicative of a stronger bearish bias as the index cannot even muster enough strength to reach the peak of the left shoulder. These bearish patterns follow double tops spanning late 2001 and January 2002. Bearish pattern on top of bearish pattern; that is another sign of weakness. Maybe they are sold out. They will have the chance to prove it.
Put/Call Ratio (CBOE): 0.97; +0.16. Another big jump in the ratio as investors were rattled by the events overseas. That marks four sessions in the upper 90's in the past three weeks, but no closes over 1.0. There is continued nervousness, but not spiking fear.
Nasdaq
Nice recovery in the face of adversity, holding onto 1800 after testing support at 1775. MSFT tanked a lot of techs after hours and while it did climb $3 off the low after hours, we do not have a lot of faith in that late trading. Maybe investors will look at the numbers with favor, but they were not favorable. We think that will carry the day tomorrow.
Stats: -8.24 (-0.5%) to close at 1802.43.
Volume: 1.866 billion (-3.1%). Volume fell on the down session, but with the recovery, you would have liked to see up volume pour in. It did not. Wednesday may have had interesting undercurrents, but this looks like a doji below resistance on lower volume.
Up volume: 663 million (-465 million)
Down volume: 1.185 billion (+407 million). Sellers moved out in front today even with the recovery in the afternoon. The recovery did not have a lot of volume behind it or we would have seen up volume overtake down volume.
A/D and Hi/Lo: Advancers moved in front 1.10 to 1 (decliners led 1.11 to 1 Wednesday). Broader advance in tech stocks than the index showed, but that won't necessarily save the index as it is heavily weighted in MSFT shares. Still, there are many Nasdaq stocks outside the big tech names that did just fine.
New highs: 213 (-24)
New lows: 32 (-1)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Opened a bit softer, but then rallied as we anticipated. That did not convince us, however, as we waited and watched. Gains again turned to selling and finally the Milan story hit. On the low the index held support at 1775 (1778.10 low) and then rallied. On the high it ran right into the simple 50 day MVA (1816.44). It closed with a tight 'hanging man' doji, a signal that the index is ready to head lower. It also just happens that the rise this week to the 50 day MVA followed by the lower closes formed the right shoulder to a head and shoulders pattern. It still has to break down below 1700 to complete the pattern, but we are looking to play the move down from 1800 to 1700 as well. This is a bearish pattern following a bearish double top formed in December and January.
Dow/NYSE
Similar action on the Dow as the Nasdaq. Lower open, a rally when MCD opened (better earnings) and then selling. The recovery was nice, but the Dow stalled at the 50 day MVA as well. No head and shoulders pattern, and it is holding above 10,100. Struggling at the down trendline, however.
Stats: -15.50 (-0.2%) to close at 10,205.28.
NYSE Volume: 1.371 billion (-1.1%). Volume was a hair lower than Wednesday's higher volume selling. That indicates there was some churning ongoing.
Up volume: 585 million (-180 million)
Down volume: 741 (+147 million). There was not a lot of buying on the way back up after the early selling.
A/D and Hi/Lo: Declining issues took the lead by 35 (1.02 to 1). Wednesday advancers led in a down session, and today decliners still could not really run away. That remains a positive for the overall market if not the Dow.
New highs: 179 (-50)
New lows: 19 (+3). No big gains or losses either way. A pretty mild selling session.
The Chart: http://www.investmenthouse.com/cd/$indu.html
The Dow has refused to break down below 10,100 though it cracked a new intraday low for the last 6 weeks (10,057.00). It is tenacious at this level and it has not formed the bearish patterns that the Nasdaq and S&P have other than a continuing short term downtrend. It is struggling to clear 10,300, stalled by the short term down trendline at 10,245 and the up trendline it breached last week (10,310). It continues to make lower highs and lower lows along this trendline, today showing a hanging man doji after testing just above the simple 50 day MVA (10,241.56). MSFT will not help it tomorrow just as it was hurt by BA and UTX again today. With the big tech names selling it will have a hard time clearing the down trendline. We are reluctant to short it, however, as it is not as clean a breakdown in progress.
S&P 500:
The S&P 500 pattern is not as clear as the S&P 100 head and shoulders. Before this last rally off 1100 it did not test down to the neckline at 1075. Still, it too is in the process of making a lower high just below the 50 day MVA (1128.19) and the 200 day MVA (1133.87). At the same time it is struggling to hold onto support at 1125, dipping all the way to 1109.29 on the session low. Another hanging man doji right below resistance when all was said and done. We also note that the 18 day MVA has undercut the 50 day MVA while the 50 day MVA was unable to break up through the 200 day MVA. The move keeps it just above the middle of the February double bottom, but that has given way before as we saw just last week. Indeed, we are looking to make the same play we did on the OEX a week ago.
Stats: -1.60 (-0.1%) to close at 1124.47.
Volume: NYSE volume fell slightly on the loss (1.371 billion; -1.1%), but it was not a good volume day given the price action.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
No real economic news scheduled for Friday. It is the April option expiration, and that could cause some volume increase of its own, although volume has been running higher this week already. The action will be dominated by how the market treats MSFT. As noted, it was first taking a lot of stocks lower with it, but it managed to rebound off the lows very late in the after hours session. We do not think, however, that there can be much good read into the report with revenues lower and warnings for the current quarter and the June quarter. That is not inspiring.
Thus we could see the start of a more severe fall in the Nasdaq and possible the S&P. Bulls have been edging higher as bears have edged lower the past three weeks, and other than being bullish for the small and mid-caps, the rise must have been based on hopes of improved earnings. The earnings are not really there for the Nasdaq, and all of the built in expectations (what there are after the selling the past few weeks) will be backed further out. We must remember, however, that stocks price earnings at least 6 months down the road and usually longer. There have been indications that orders are increasing right now (LRCX, NVLS, etc.). There is economic improvement, just the degree is the question; that is what stock prices are jockeying around with.
Given the bearish patterns in the OEX and Nasdaq, we are looking to play some key components to the downside. Combination patterns, whether to the upside or the downside, are powerful. When a bearish patterns forms following a prior bearish pattern, that is something to be ready for. The indexes have not broken down yet, and could still hold at the recent lows. We can still make money down to those levels as we just did on the OEX, and if the head and shoulders patterns breakdown from there, we will play that as well.
There has already been a lot of selling, but there has been no clear direction as the up and down action has shown us. The MSFT news could be the news that breaks it down and washes out the bad news. It could be the news that breaks it down for a deeper test. We will play what is there now and then see where it takes us.
This also means some running into safety in healthcare, chemicals, defense; the usual suspects. We are looking at those as well as the winners for the past several months, the good old small and mid-caps.
End Part 1 of 2
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us stock market
understanding the stock market
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