world stock market, us stock market

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1/27/01 Technical Traders Report
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Technical Traders Subscribers:

TONIGHT:
- Techs resilient as they and the Nasdaq bounce off of support.
- Still a two-sided market: those that can and those that can't.
- The rate cut debate rages, but there is no real debate.
- Economy: walking a fine line that we should not have to.
- Subscriber Questions
- Team Trades

When things looked really bad for the tech sector and thus the market in general, they once again pulled off another recovery, the Nasdaq bouncing right at the 18 day MVA that was our first support level as discussed Thursday night. Several leading stocks did the same as EMLX, VRSN, BRCD, EMC, JDSU and others all tapped support on the open and rallied the rest of the session. We were wondering just how strong the market really was, and it did give a good showing Friday after really looking weak late Thursday. Volume was not huge, but it did surge in the last hour to the upside as buyers pushed stocks to highs on the session. It is always good to see buyers move back in after more bad news and what appears to be some serious selling ahead.

It was not all roses. The Dow and S&P 500 were not able to make it back to positive territory and there were some serious thrashings, e.g., PMCS and SAWS. PMCS said it had not received an order for first quarter delivery in two months and would miss earnings by 50% this quarter. SAWS reported a 100% increase in profit, but said this quarter would be flat with last year. They were demolished.

The Dow and S&P 500 did fall on lower, below average volume. The S&P 500 continues to look very solid, tapping support on its low and showing a long-tail doji on the candlestick chart. Looks as if the S&P 500 is ready to move up again. Also, we saw some stocks that reported solid earnings actually rewarded once again. JDSU, SDLI, and QCOM gave solid performances after good earnings reports. They had to recover from initial selling and JDSU and SDLI were not able to regain all of Thursday's losses, but they did indeed recover. That marks another positive in the market: it has almost gone full circle from rewarding good earnings to selling on any news to selectively rewarding good earnings again. The two-sided market at work, but that is better than all-out selling.

Rate cut debate remains the backdrop to market action. We have a feeling investors will decide the outcome before the announcement on Wednesday.

There was a lot of interesting news out on Friday. Durable goods orders were up from November but still weak, Abbey Cohen set her S&P 500 target at 1650 for the year and was overweight in technology stocks, and $12.5 billion flowed into equity funds as of Wednesday. Still, the predominant conversation involved what the Fed would do on Wednesday.

Every analyst on the financial stations had to answer 'one last question' before leaving: 25 basis points or 50 basis points? The answers were mixed and the debate continued. Never mind that Greenspan said the economy was at zero growth right now, that output has 'slipped dramatically,' and that he was concerned over the California energy regulatory debacle (not 'deregulatory' as the system out there has been incorrectly labeled). Those are enough right there to warrant all out war on the slowdown. We think there is more than enough empirical evidence that there will be a 50 basis point move. On top of that the February Fed Funds Futures contract stands at a 92% probability of a 50 basis point cut. When it moves decisively over 50% as it has done, it has been very, very accurate.

Indeed, when it comes down to what is going to happen with the financial markets on issues such as the economy, where interest rates should be and the like, individuals (us included) can talk all they like. As always the collective in the form of the market is the best at determining what will happen. We are not betting against the futures contracts as real investors are putting up real money based on what the market is saying.

Given that, we think equity investors are going to decide before Wednesday at 2:15 ET what the Fed is going to do. We believe that after some possible weakness on Monday that they will start to rally stocks into the meeting. We are comfortable with that read, and when we see it start we are going to be in there taking positions as they present themselves.

THE ECONOMY

Durable goods orders for December rose 2.2% versus an expected 1.5% fall, but taking out the very volatile transportation portion, they were down 1.4% for the quarter and 1.8% year over year. Finished goods shipments fell for the third month in a row, the first time that has happened since 1989. Finished goods shipments are a very good indicator of current factory activity.

While the economy looks bad and that is going to induce the Fed to continue cutting rates faster than slower, there are some things to watch for. The Fed has been pumping up money supply pretty rapidly of late. As of January 15, M1 rose $6.2 billion (+0.5%), M2 rose $10.2 billion (0.2%), and M3, the broadest measure, rose $36.7 billion (+0.5%). This has been ongoing for the past few weeks, and the 30 year treasury bond has been creeping higher with it. The longer term note is a good indicator of potential inflation. While gold is not moving higher (a very good sign), the creep in the treasury is cause for some worry.

What is causing this? Well, as we have been saying, the Fed choked off the supply side of the economy first by raising rates and cutting off investment. That meant no goods to meet the continued strong demand. That started that creep in prices we saw in March 2000. As we know, once supply plans (i.e., new plant expansion, new technology purchases, etc.) are taken off the burner, they are not just trotted right back out at the first sign of good news. Producers have to be certain that they are not going to be caught in a whipsaw. Now that demand has peaked back in October 2000, the pressure is off on the supply side. But, now that money supply is rising, the treasuries are picking up on the fact supply is not there yet and it won't be there for some time. More money in the system chasing the same amount of goods (because of no production) is a recipe for inflation.

Thus, it is imperative that supply be energized. A rising stock market will help, but a lot of investors have been taken out of the market and $4 trillion dollars of investment capital lost. The stimulus needs to come from somewhere else, and despite what Greenspan said Thursday, tax cuts are a very good source of stimulus. Why? Because a company can invest knowing that it is going to get a real, tangible benefit even if sales do not take off right away. To fight inflation a tax cut is necessary. That is something that makes no sense to those who only think in demand terms and do not understand how the economy works.

THE MARKETS

A quick bounce off of support kept the Nasdaq up near 2800 on the close, and if it can hold more or less at this level, it has a good shot of challenging 3000 next week. That is critical, critical resistance. The S&P 500 continues to look great with a low-volume pullback to support and a bounce up from there.

Overall market stats:

VIX: 25.14; +0.16. Volatility hit 26.50 early in the session, but it dropped dramatically as the Nasdaq rallied into the close. On the day it was flat and right in the middle range (20 is low, 30 is getting higher).

Put/Call ratio: 0.59; -0.04. This ratio has been holding in the 0.5 to 0.6 range for the past two weeks as the Nasdaq has more or less continued to rally. At this point there is not much to take from this indicator as it is best when the market is selling.

NASDAQ: Nice recovery off of the 18 day MVA on slightly lower, but still above average volume. Key stocks found support after a few minutes and then rallied up on strong volume. It was not a definitive session, but it was important that the index did not sell down after the round of bad news threatened it Thursday. We still want to see it hold near this level as it heads into the FOMC meeting as it will be close enough to make a serious run at resistance at 3000.

Stats: Up 27.02 points (+1.0%) to close at 2781.30.
Volume: 2.268 billion shares (-0.9%). Lighter volume once again (2.29 billion Thursday), but there was a volume surge to the upside in the last hour that was buying volume. Up volume moved past down volume 1.09 billion to 1.024 billion in that last hour.
A/D and Hi/Lo: Decliners shaved advancers 1862 to 1856 (6). New highs rose to 92 (+34) and new lows rose to 21 (+3).

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

The Nasdaq passed the test that the bad news threw at it, holding at its 18 day MVA and rebounding sharply from there. Not an overwhelming buying spree, but it definitely showed that buyers were not being taken aback by the earnings reports. Indeed, it appears that those who wanted to get into the market for fear they had missed the bottom used the early weakness to start building or adding to positions. That is a real positive if buyers are starting to use the dips as opportunities to get right back into positions at better prices.

The index closed right above its 50 day MVA (2777.55) and is in good position for a run at 3000. It usually takes two attempts to clear strong resistance. The high Wednesday was 2892.36, close to that 3,000 level. Could be that was the first shot at resistance. If the Fed does cut rates by 50 basis points Wednesday and the market is more or less in a holding pattern until then (not sinking lower), it could very well clear that resistance on high volume. If it cannot, we will have to see how it shakes out over the next few sessions. It could turn south after a failed breakout attempt. After Friday's action it appears it is going to attempt to hang around for a run at that resistance. Whether it breaks it or not will tell us a lot about where the market is going this first half of the year.

Dow/NYSE: The Dow continues to bang around in its trading range, but as we noted on Thursday, the range is tighter and that usually signals a breakout attempt is coming. Friday was not the day, however, as the index gave back Thursday's gains. Volume was lighter and below average on the move, a good sign that the consolidation is still holding up for now.

Stats: Down 69.54 points (-0.6%) to close at 10,659.98.
Volume: NYSE volume pulled back again, coming in at 1.098 billion shares (-12.7%). Below average, just what you like to see on a pullback. Down volume topped up volume 598 million to 437 million shares. No rout to the downside.
A/D and Hi/Lo: NYSE declining issues nosed out advancers 1432 to 1398 (34). New highs jumped to 148 (+23) and new lows climbed to 8 (+3).

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

As fast as the Dow jumped up on Thursday, it was back down in the recent range again, closing just above the 50 day MVA (10,649.85) but back below the 200 day MVA once again (10,699.87). It is showing the signs of wanting to break to the upside: narrowing, tight range and better price/volume action. Getting close to test that 11,020 level again.

S&P 500: A down day for the big caps, but we think it was a constructive day. NYSE volume fell back below average on the selling as the S&P 500 continues to show good price/volume action. Then it tapped right at the 50 day MVA on the low (1344.66) and bounced up smartly to the close. That price action left a doji with a tail on the candlestick chart, and we like those especially when they tap support on the low. The S&P showed great resilience Friday and it looks ready for a real move up. The FOMC rate cut could give it the impetus.

Stats: Down 2.56 points (-0.2%) to close at 1354.95.
Volume: NYSE volume fell again on the selling 1.098 billion shares (-12.7%) as the S&P 500 continues to show the proper price/volume action.

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

THIS WEEK

A very heavy week of economic news is ahead of us, the most important of which is the FOMC results on Wednesday at 2:15 ET. The Fed will have plenty to chew on with first quarter GDP coming out Wednesday morning, but as we already know, the Fed knows what this number is going to be. The Fed will also have consumer confidence numbers to look at along with new home sales for December to look at if it so desires. The sum total at this point is that the economy needs the Fed's help and the only question is whether it has waited too long to save the U.S. from recession.

The gloom and doomers are out there again just as they were for Y2K, saying that this rally is setting up for the big fall, implying it will be like 1929 because the California power crisis and associated financial crisis, higher OPEC prices, and the economic downturn will snowball into a major economic meltdown. A the same time we have the overzealous who were saying last week that the bottom had been formed and that people (including fund managers) were afraid they had missed out on it. As we said last week, this is crazy talk, and as soon as it surfaced the Nasdaq started to get wobbly. We would have liked to see the fear indicators (VIX, put/call ratio) spike higher on the recent violent selling. They did no, so there is still a new optimism in the market. Despite what you hear on the television, people feeling good about the market is counterproductive. We want them scared and unsure. That helps propel stocks higher.

Which camp is right? Who knows right now. We are getting what we call 'panic' reports in the mail where the pitch is fear then greed. The first pitch is to play on fear by painting a picture of major world economic upheaval and the second pitch is to play on greed by then saying you can profit while the world suffers. We saw the same scenarios in the 1991 recession, the 1998 bear market (comparisons to 1929 ran wild), and the latest (before now) with Y2K. It is as if they recycled the newsletters and just changed the events.

This may be nothing more than an intense rally before another test of 2200 or lower. But, as all those who predicted world disaster last year or a 1929-like depression in 1998, extrapolating the infinite variables into a sure-fire scenario is next to impossible. We were able to see the coming downturn because that was the obvious result of the Fed's actions given the numbers that were coming out. The market was showing this well in advance. At this juncture we have many of the same variables we have experienced in past downturns, and historically when the Fed cuts rates a second time that gets the market discounting the future economic growth. The Great Depression is the one instance that did not happen. Things are delicate right now with the California power problem and continued weakness overseas, but no worse than in 1998. The U.S. is not as strong, however, and that is worrisome as we have noted in the past.

So what do you do? You look at what the market is telling you. Right now we are seeing good price/volume action, good resilience in strong, leadership quality stocks. We are seeing a Fed willing to step in and aggressively cut rates. Those are historically positive signs for the market. We still don't see these leadership quality stocks in great patterns that will lead the market higher and higher upon the breakouts. That may act as an anchor on any move up and indeed result in a tumble back down. Right now, however, the market is acting well and we have to go with what the market is showing us now while we keep an eye on possible problems out there. If gloom hits, we are out of positions and look to play the downside.

This week we are looking for some waffling before the FOMC meeting, but nothing serious. The bulk of the earnings are out so we are not looking for major gyrations as we saw last week. We will use weakness as we did on Friday, i.e., for taking some positions as stocks test support levels and move higher. We will continue to look for the breakouts from the abundant cup with handle and other patterns we see in financial stocks and other Fed friendly sectors. Then we anticipate that investors will divine the outcome of the FOMC meeting and start to move the market up before the actual event.

As we are confident of the outcome, we will be taking positions ahead of the meeting when the opportunity is presented. How the market responds to a 50 basis point rate cut depends upon how far it moves, either direction, before the announcement. If it rallies hard to 3000 before the event, that could be a problem as it will have built in an 8% move already. We would prefer to see it around 2850 to 2900 to give it some running room. We will keep an eye on the price/volume action as always to give us a further clue as to how the markets are setting up. We anticipate good things this coming week, but have to be ready as always.

Support and Resistance Levels

Nasdaq:
Resistance: 2890 to 2900 is next before the 3000 level.
Support: 2700 is what we are looking for as the first round. The 18 day MVA at 2685. Then 2640 to 2650.

S&P 500:
Resistance: 1360.
Support: 1335 to 1340. Then 1325. After that we look to where it turned up last time at 1313.65.

Dow:
Resistance: 200 day moving average (10,699.87). Down trendline at 10,680. Then 10,900 and 11,020. After that, 11,400.
Support: 10,300 to 10,400. After that, 10,000.

Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.

1-30-01
Consumer Confidence, January (10:00): 125.0 versus 124.5 prior.
FOMC Meeting, Day 1

1-31-01
GDP Fourth Quarter (8:30): 2.3% versus 2.2% prior.
Chain Deflator-Adv., Fourth Quarter (8:30): 2.1% versus 1.6% prior.
Chicago PMI, January (10:00): 43.0% versus 45.2% prior.
New Home Sales, December (10:00): 895K versus 909K prior
FOMC Announcement (2:15)

2-1-01

Auto Sales, January: 5.8 million versus 5.8 million prior.
Truck Sales, January: 6.7 million versus 6.7 million prior.
Initial jobless claims for prior week (8:30): 316K versus 316K prior.
Personal Income, December (8:30): 0.2% versus 0.4% prior.
PCE, December (8:30): 0.2% versus 0.4% prior.
Construction Spending, December (10:00): -0.5% versus -0.6% prior.
NAPM Index, January (10:00): 43.8% versus 44.3% prior.

2-2-01

Non-farm Payrolls, January (8:30): 80,000 versus 105,000 prior.
Unemployment Rate, January (8:30): 4.1% versus 4.0% prior.
Hourly Earnings, January (8:30): 0.3% versus 0.4% prior.
Average Workweek, January (8:30): 34.1 versus 34.1 prior.
Factory Orders, December (10:00): -0.5% versus 1.7% prior.
Michigan Sentiment Review, January (10:00): 94.0 versus 93.6 prior.

SUBSCRIBER QUESTIONS

Q: What is the relationship between volume and open interest [on options]? Is one more important than the other? What is the minimum number one should watch for, before placing an option trade. Should one exit the trade when the number drops below and remains below, the stated minimum number?
A: Open interests shows the number of contracts that have been opened on a certain option either by selling the option to open a position or buying an option to open a position. Volume as shown on programs such as eSignal is the volume in contracts for that session. Thus over time there are usually more open interests than volume for a particular option. As far as importance, we like to see over 100 open interests in a particular option because that means it is fairly liquid and we have a better success in using pre-set stop losses and stop limits. The less trades made in an option, the less likely a trade will be made at your stop price and thus 'activate' the stop order. If there are less than 100 open interests that does not mean we won't buy or sell the option to open a position, but it does mean we have to realize that we will have to be more diligent in keeping up with it when we want to sell or if it goes against us and we want to cut losses.

We like seeing good volume in an option when we are placing an order to buy or sell as that way we have a better chance of shaving the spread and getting a better trade. It also shows us that there is a lot of interest in the position and that means it will more than likely give us better movement as well.

As far as exiting a trade if open interests fall, we won't unless the trade is not going according to our plan. In other words, just because open interests fall below 100, that does not mean we will exit the trade. If the play is still working for us we will stay in it. We just have to be aware that stop orders will have less likelihood of being executed.

End Part 1 of 2

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