financial investment, day trading

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4/22/02 Investment House Daily
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Investment House Daily Subscribers:

MARKET ALERT SERVICE

Targets hit this week: SYPR (+$3.90; +23%).
Trailing stops triggered: LMT, SEE, PCAR, POT. These either preserved a gain or cut losses very short.

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SUMMARY:
- Earnings have yet to impress, and leading sectors stumble some more.
- CSX (railroads) CEO sees manufacturing recovery in Q2
- LU and WCOM set negative tone again, and cause institutions to again re-evaluate telecom holdings.
- A/D line sags as broader market dips, but smaller cap stocks hold up well and even break out.
- Team Trades

Another day of lazy earnings picks up the selling tempo.

Ever hear the old man complain 'it's not so much the heat as it is the dad blamed humidity.' With this earnings season, it's not so much the earnings themselves, just the lack of any real upside momentum in earnings growth and the limited forward guidance. Last Thursday we said it looked as if the honeymoon for earnings season was over as the earnings were not delivering much. If that was the honeymoon, it was more like a trip to McDonald's for a Big Mac and fries to go and then down to the by-pass to count the trucks going by.

The earnings action continued today. It was the same pattern. EDS beats the street by a penny, but gives no forward guidance. That is like dropping your girl off at the front door and getting a cold, clammy handshake instead of a kiss. GLW meets earnings and says fiber sales will increase by at least 10%. Great. Prices, however, will fall and that will erase any earnings gain. Running in place is the best way we can think of to describe this. The only real action was in the gaming stocks with Mandalay Bay beating by 20 cents and saying bring them on. People are going back to Las Vegas; the economy may not be racing back, but they are going to go down looking for lucky 7.

What is happening as a result of the less than exciting results is that gains are being backed out of stocks. We saw this occurring late last week, and today it continued with stocks such as CAT, NAV, WMT and other cyclical leaders to the upside heading lower once again. CAT and NAV after previously double topping; WMT after breaking its 50 day MVA. Indeed, the retail index closed below its 50 day MVA again after just doing so in early April before it fought back. As we say in the seminars, retailers are starting to hang out in a bad neighborhood too much. That is a sign of weakness, particularly after the recent double top.

Weakness in the recent leaders sees health care (less drug stocks; these are ailing and need to come up with their own miracle drug) as a boon. It is more defensive. Small oil and gas companies had a good day. Again, more defensive. This does not mean the leaders are going to fall and not get up.

Homebuilders providing some instruction.

Look at the homebuilders. They ran into trouble in March after a long run, then corrected back. With the recent earnings knocking the cover off the ball, many are rallying higher right now, forming the right sides of cup bases. That is indicative of a potential recovery; it is not a guarantee, but they are working through bases after strong runs off of the September bottom. Their recovery would be the perfect bullish scenario: the early leaders in the rally correct into 2 to 3 month bases after the initial surge on the heels of a stronger economy, and then after that pause and concern about earnings, they rocket out of the bases. That in fact is often the trend in recovering markets and economies: the leaders are out of the gates early, then when the initial surge is over, they make their first bases after the breakouts. After the hesitation about the recovery works through the system, the leaders are ready to go again and blast off on the new good news.

Thus, while we see the problems in the big cyclicals and retail and are willing to take some downside positions to capture the change in the near term trend, we are not saying they are going to implode and totally melt down. They have run long and hard and, like the homebuilders, are putting in for leave to form another base. Stocks, markets, economic recoveries; they are all dynamic entities and act a lot like living beings. After all, they are driven by the emotions of living beings. They run hard, they need rest. They cannot keep up a frenetic pace indefinitely, particularly when they are emerging from a recession and bear market. People still have the finger on the sell button; CEO's are still not believers.

Those are a lot of negative vibes to overcome even if everything is fundamentally looking healthier. BAC issued a report today that people should 'sell in May and walk away,' citing poor performance May to October versus October to April. Now that is something new; it is only one of the adages on the Street for decades. Negative vibes. Hard to get an already weak move to grow with continual buffeting. If it is worth anything, however, it will do so. It is also very interesting to note that CSX' CEO (railroads) said that he saw his business picking up. More than that, he indicated that manufacturing would have a significant improvement in Q2 based on his business and his understanding of how historically recoveries have started. Transportation is key; it moves the goods the nation consumers. Truckers have been performing well and now a major railroad is seeing his business look better.

LU and WCOM set a negative tone.

How can that be you would ask. After all these stocks have been warning for quarters and quarters and the news just does not get any better. Well, there has been a lot of selling in these stocks. There is still, however, a lot of institutional holdings. Each quarter when they say once again the news will be bad, some more institutions sell. Sure, the major damage is done, having solid off horrifically back in 2000, but the continuing bad news gets those managers that were just could not believe they would not recover to sell more shares. That puts a damper on the market for the session: sellers are out there dumping, and there is not a lot of buying until the sellers get done unloading those telecom shares.

THE MARKET

Not a total breakdown, but it was not a pretty day. The Nasdaq and OEX worked on completing their head and shoulders patterns. Each of the big three held onto support while even the small and mid-cap indexes pulled back on the session. This general pullback was evidenced by the A/D line, at one point greater than 2 to 1 to the downside on the NYSE and Nasdaq before the late bounce corrected some of the carnage. Still, the smaller cap stocks held up very well compared to their larger brothers.

Volume on the Nasdaq increases while it fell slightly on the NYSE. Nasdaq volume, however, was pushed higher by tremendous selling in WCOM (warned again) and ERICY (ditto). Indeed, the trade in those two stocks made up 20% of the entire Nasdaq trade. Just huge, huge selling in those two issues. Without those, volume was lower, and most of the big names on the Nasdaq sold back on volume that was significantly below average. In other words, there was not dumping across the board, but very specifically in telecom.

Put/Call Ratio (CBOE): 0.68; -0.11. The lack of selling conviction is evident in this ratio. Even with the 'stressful trading' session described by the financial stations, there was not a lot of put buying ongoing. Options players, the speculative group in the market, were not going after puts. The selling was not that intense.

Nasdaq

The Nasdaq took the brunt of the selling given the WCOM and ERICY news. The volume was not indicative of the overall action, and the index did not violate the February lows. It is coming close to completing that head and shoulders, however.

Stats: -38.15 (-2.1%) to close at 1758.68.
Volume: 1.702 billion (+1.5%). Rising, but we cannot put much into it as two stocks made a huge, huge difference. It was no follow through session by any stretch, however.

Up volume: 199 million (-609 million)
Down volume: 1.494 billion (+636 million). Big jump in downside action, but again, it was driven by a few stocks. In the rest of the market there were not many sellers, just very few buyers.

A/D and Hi/Lo: Decliners at one point led 2 to 1, but the late move up cut that to 1.87 to 1 (they led 1.10 to 1 Friday).

New highs: 171 (-19)
New lows: 34 (-3)

The Chart: http://www.investmenthouse.com/cd/$compq.html

Gapped lower, moving to support at 1775 on the open and then testing 1750 on the low (1747.65). Volume did not shoot higher, and the overall selling was not intense. Still, even if you want to blame WCOM and ERICY, the move below 1775 opens the door for a test of 1696.55, the February low. Holding 1750 on the close was positive, but as it has done all the way down, the Nasdaq keeps making things harder for itself. Earnings have not been living up to hopes (note we did not say expectations), and the market is suffering accordingly. It is hard to be bullish for the tech sector overall given the pattern, and we continue to play big tech names to the downside while we pick up the smaller Nasdaq stocks that are in good patterns. We expect the Nasdaq to test the February low. That will be the 'jumping off' point as to whether it completes the pattern and sells further toward the September low (at the February low it will be back at a 50% retracement of the move off of the September low) or it tries yet another bounce to overcome the overhead supply. We are looking for a test of the February low given the action today; that really hurt the prospects of a double bottom. If volume continues to pick up on the way to 1700, we anticipate it will breach that support. There is just no upside catalyst for the big name techs that make up the market.

Dow/NYSE

Folded back below the March down trendline and tested support at 10,100 intraday once again. That is the key level for the index. Hey, there was not distribution today.

Stats: -120.68 (-1.2%) to close at 10,136.43.
NYSE Volume: 1.164 billion (-2.4%). No distribution on the Dow even as CAT and other big leaders on the move up sold below their 50 day MVA. Still, the action in no way wipes away all of the distribution seen the past two weeks.

Up volume: 280 million (-328 million)
Down volume: 887 million (+332 million). No distribution, but sellers were in the majority. What today shows: sellers did not expand, but buyers went underground again.

A/D and Hi/Lo: Decliners took a rare lead at 1.65 to 1 (advancers led 1.25 to 1 Friday). Might have been a rare win for decliners, but it was with more force than of late.

New highs: 174 (-4)
New lows: 34 (+12). New lows are not jumping, a mild positive.

The Chart: http://www.investmenthouse.com/cd/$indu.html

Clinging again to 10,100, testing that level intraday once more (10,109.24). Since the beginning of April the Dow has tested 10,100 7 times, 6 of those on the intraday low from where it bounced higher. That has been a tough level to break, the point where the last big move started at the first of March. The move pushed it back below the March down trendline (now at 10,210) and the simple 50 day MVA (10,263.86). Given all the times it has bounced from that level, that is the key. The distribution indicates it will break below that level and test the 200 day MVA at 9943.49. Again, the pattern is not nearly as dire as the Nasdaq's head and shoulders pattern, but the distribution indicates a lower test.

S&P 500:

As with the Nasdaq, the S&P took another step to forming the head and shoulders pattern (much clearer on the S&P 100, the largest of the large caps). It has further to fall than the Nasdaq to complete the pattern as 1100 has held up well as support above 1075 where the index double bottomed in February. It is suffering from significant distribution sessions (a bit lighter than the Dow, however), and that is pressuring it for a test of 1100. With many of the big names that helped lead the indexes higher suffering in addition to the general distribution, we would not be surprised to see the index sell down to test the 1075. We are anticipating the move to 1100 given the put positions we have taken; after that, 1075 is gravy on those and will be the real test for the index.

Stats: -17.34 (-1.5%) to close at 1107.83.
Volume: NYSE volume was down again, indicating no distribution the past two sessions (1.164 billion; -2.4%).

The Chart: http://www.investmenthouse.com/cd/$spx.html

TOMORROW

The March book to bill ratio for the chip equipment makers was better than expected tonight, rising to 1.04 from 0.90 in February (revised from 0.87). This beat expectations of 0.96 and is an indication of improving demand for chip equipment products as bookings rose to $838 million from $737 million. The news had some impact on stocks late, but because its release occurs so late in the after hours session, it is hard to gauge the impact. Nasdaq futures were not improves, however, upon the release of the figures.

Tomorrow there is again a dearth of economic news, so earnings will drive the story once again. Tonight they were mixed, some missing, some hitting, some beating. Then revenues were the same. No real winners after hours. Overall 62% of those reporting have beat expectations, 25% have equaled them, and 13% have missed. Sure sounds good, but they are all lowered estimates, and we are seeing a lot of the 'beat by a penny, revenues flat to lower, no real pickup ahead' kind of news. That does not generate much excitement for investors hungry to see the economic pickup translate into improving earnings.

Without a catalyst we expect the indexes to test that next critical level of support before they do much else. This market has a penchant for making a bold move and then taking it right back, all the while working its way in one direction. Over the past few months that has been lower, but not to breakdown levels. In our view it has to test these key support levels before it can make a definitive move either way. Of course if it is heading lower it has to test them, but the market appears to be working its way down to those levels. The thing we have to remember is that the market is not making straight-line moves in any direction, at least not fast moves. The patterns are bearish on the Nasdaq and S&P 500, and they have to resolve those bearish patterns with a breakdown or a recovery. We think they will test, and we are playing that move. After that we will let the indexes direct us to where they go from there for further downside plays or upside.

Upside means the stocks that are leading right now; it does not mean jumping back on the old tech names with gusto. If something dramatic changes for them and they bounce, they can give some returns in a hurry, but one false word and they give them back in a wink of an eye. Even today we saw good breakout moves from many of the small stocks we have on the reports. Others pulled back on light volume, readying for the next session where the bias is more positive to make additional moves higher. Those remain our primary focus upside.

Support and Resistance

Nasdaq: Closed at 1758.68
Resistance: 1775 and then 1800 (simple 50 day MVA at 1815.65). After that is 1850, followed by 1875, the bottom of the November consolidation and the 200 day MVA (1856.38). 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 was beaten almost on the open. After that is some support at 1750 to 1743. Then 1700 (February low at 1696.55). Then 1613 to 1626.

S&P 500: Closed at 1107.83
Resistance: 1125 was not holding today, and now it might be blocking a move back up. The 200 day MVA (1132.85) is sitting right on top of that level, acting as another layer of ice. 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 did not hold, and now it is testing toward 1100, the point that held in the last round of selling. Then 1075, the February low that completes the head and shoulders. After that 1050 represents the October lows.

Dow: Closed at 10,136.43.
Resistance: The March down trendline at 10,210. 10,300 blocked the move the last time it made to that level, and the up trendline from September is right there at 10,350. 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 has been holding on the lows the past two weeks. After that 10,000 represents some support. That is backed up by the 200 day MVA (9943.49). 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

financial investment
day trading