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online investment information, money investment
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4/24/02 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERT SERVICE
Targets hit this week: MER put (+2.54 per option); SCVL (+$3.60; +21%); ACF (+$7.79; +20%); CECO (+$5.39; +13% on bounce play); URS (+$6; +20%); OEX (+$7.45 per option); SYPR (+$3.90; +23%).
Trailing stops were active again given the continued downside action: CHD, VAR, WSTC, GOSHA, RHD, LECO, BMS were triggered, either preserving gains or cutting losses well below 7%.
Stops issued: The down action was chewing into upside positions, so we were issuing stops to prevent plays that were not working from getting away from us. IT, SNIC, KLAC, EXPD, CRFT, WLT, FCS, PLAB, LRCX, NEU.
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:
- Hope-based rally meets sellers head on; the rally loses.
- Economic news does not help fuel any positive feelings toward market.
- Now that everyone is focusing on the indexes breaking support, it looks time for a relief bounce.
- Subscriber Questions
Looking for a bounce, but in all the wrong places.
After 5 sessions of selling, technology investors were looking for a bounce. We anticipated this in Tuesday's report and we also anticipated that the early bounce would turn into selling. It was a parabolic move on the major indexes. The Nasdaq rallied, hit 1745 once, then twice, then rolled over along with the other indexes. It was pretty broad with the mid-caps and small caps selling right with the big boys. The mid-cap index was down 0.9%, eclipsed by the Nasdaq (-1%) and the SOX (-3.8%); that is one of the first times in recent history one of the smaller cap indexes gave back more than the large cap indexes.
Investors were looking at technology again early. Some habits never dies. Technology, however, has overall been a big disappointment as earnings have not matched up well with starry-eyed recovery anticipation. The selling started before earnings kicked off, it wavered as some results were good and some were not so good, and then it resumed when the clearer trend of continued blas earnings became apparent. Just as investors were disappointed with the earnings and sold, today they used the bound to sell.
The damage was not limited to technology of course. Cyclical stocks firmed up a bit, travel was solid (hotels, online travel), small financials regained some life, and insurance companies looked decent. There were other areas, but the action was not necessarily positive across the board in a particular sector. Some retailers looked super while others suffered. Instead of getting a whole sector moving well as we have seen, this bifurcation within a sector is another sign of the weakness we are seeing. When a mostly steady sector has trouble putting it together, there is some trouble there. Sure we are already seeing weakness; the sector troubles is a sign of that and potentially a sign of further downside action.
THE ECONOMY: No shelter for the market.
Housing signals mixed: new home sales down, mortgage applications up.
When dealing with numbers, just looking at the bottom line or the raw results is often deceiving. Unfortunately, that is how most reports are treated: hit the headlines and let the world be the judge. Problem is, the emphasis given certain reports while others are glossed over or not even reported gives an incomplete universe of relevant information to make that judgment. Such it was with new home sales today.
March new home sales were down 3.1% to 878K units, solidly off the 890K units expected. That rattled the market, erasing an early gain. Within the report, however, there were several good points that indicate the drop may not be that substantial. First, February was revised from 875K units up to 906K, a mere 3.5% upward revision. Going by the previously reported numbers, new home sales would have been up though less than expected. Second, note that expectations were at just 880K as recently as last weekend; they were raised 10K units early in the week. That shows you how amorphous these expectations are. They run up and down as fast as the market today. Third, February new home sales were raised 1.1% to +6.2% from +5.3%. That is a huge gain right there. What are the odds March will be revised upward? Pretty decent.
Okay, let's take the report at the headline number of a 3.1% decrease. After all, we have had our doubts that the housing market can keep up the pace; there are signs of it overheating a bit, but they are far from being pervasive. A slowdown yes, a bubble leading to a collapse as Barron's points to? Not a wild enough market yet. It is NOWHERE near where it was in the 1980's in Austin, Texas where I grew up. People would buy some land and flip it that afternoon. Land would change hands 5, 6, or more times with the ONLY INTENT being to sell it to someone else at a higher price. That is a bubble. The Austin market went kaput, but then arose from the ashes again in the 1990's. Look at California. Is it a precursor of things to come across the U.S. (homes south of San Francisco in Silicon Valley are down 30% at the very high end of the market) indicating a bubble, or is it an example that the market gives and takes as always? It was overheated there, but that same type of massive appreciation is not endemic to the rest of the country.
Even with the headline number down 3.1%, mortgage applications finally started to rise once again. What did it take? Two weeks of 30 year fixed rates below 7%. When that happened here came the new mortgage applications and the refinancing applications. After the bond market ran up in a bit of over-anticipation regarding the recovery, rates came right back down. Indeed, despite what we hear from the partisan rhetoric in Washington, historical, empirical evidence shows that rates do not rise when taxes are lowered. During the 1990's after income taxes were raised, mortgage rates and long term interest rates started to rise. That is after they had been trending lower all through the 1980's and early 1990's until Bush Sr. raised taxes and Clinton did again later. Similar pattern throughout economic history.
In any event, lower rates brought the buyers back to the market just at 0% brought auto buyers into the dealerships. There is something magical about that sub-7% rate. You can bet Greenspan and his henchmen are looking at that closely and trying to figure out how they can keep longer term rates falling even while the short term rates stay low to help revive the economy. Raise them as some are suggesting? Kind of a reverse psychology argument; trick the market into thinking things are just fine. Never works. The market may act like a child at times, but it is not a child. Open, clear policies regarding taxes, monetary supply, and rates help all markets respond best. This intentionally obtuse and obscure game that Greenspan coyly quips with Congress about is absurd. This is not a game of Clue, this is the real world where stability depends upon clear, direct policies. You would think they would get a clue, but they have their own agendas other than being true public servants.
Durable goods orders turn negative.
After three months of gains durable goods dropped 0.6% in March. Expectations were for a 0.5% rise, so you have almost a 1% swing. Take out defense orders and the number plunges to -1.2%. Ex-transportation the number was -0.1%; planes made up a lot of that number.
It was not all that bad. Again, that was only the first drop in three months, and it is a volatile number anyway. The trend is still up. Double dip recession scenario? This does not really point to that, though the consumer side of the number was quite weak. February numbers, however, were much stronger, revised to +2.7% from 1.8%. Much as Jerry Seinfeld, things worked out even.
Fed Beige Book reads as dry as its name.
The Fed noted there was a broad-based recovery ongoing. Problem is the same, however: just how strong will it be? The Fed does not know, but it has repeatedly said it won't be like previous recoveries because consumer demand and the housing market are not thirsting to buy. Look at some of the big home improvement stores such as Lowe's (LOW). It is now offering interest free financing until January 2003 on purchases made in the next couple of weeks. This is a sign of stores anticipating a slower sales quarter and are pushing sales. It is a good incentive; it worked for the auto makers, and as noted above, it works for housing.
The Fed also noted that capital expenditures remain weak. That is the key. Also key is that most sectors are reporting activity that is still lower than the same period 2001. No big surge, and that is why the Fed remains cautious about the recovery. Investors have recently become as cautious if not more so than the Fed about the economy's prospects. The caution is not whether recovery is occurring and whether it will continue, but that same old issue of the need for capital spending to increase.
Would we be griping about the weak recovery if we had a real stimulus package?
With no pricing power to offset any costs of buying equipment, businesses are still deciding to make do with what they have. The stimulus package was too light on stimulating capital investment; small businesses do better by simply expensing $20K of equipment than depreciating it per the accelerated depreciation schedules. Most businesses are small businesses. They have to buy a LOT of equipment to make the depreciation 'incentives' work for them. Think of all of the small businesses (80% of all businesses in the U.S.) that could have bought new computer and phone systems with the right incentives.
Would we be muttering now about a 'weak recovery' if 50% or more of the small businesses went out and bought new computer systems, phones systems, etc.? Probably not. That would be the 'final demand' on the dormant business side that the Fed is talking about. In 1981 investment tax credits were passed along with accelerated depreciation. THAT got things humming because you lost money if you did not take advantage of the investment credit. Given the choice between paying the government $2,000 in taxes or in buying a new computer, you buy the computer because it is the latest technology and makes you that much more efficient.
A blown opportunity to make the recovery work, and what do we continue to hear? How the social security trust fund won't survive with deficit spending, etc. It is not going to make it anyway, especially if the economy does not appreciate to where companies are actually increasing sales and revenues in order to increase tax revenues. Real economic growth is the key to any economy's health.
THE MARKET
The indexes broke down below recent support, the OEX and Nasdaq 100 completing their head and shoulder breakdowns. It is not a pretty picture. The distribution is having its effect though the indexes avoided another such session by a hair. Again it was not out and out selling as the A/D line was still tight as well as up to down volume. It is not what you would call out of hand, but that has been the hallmark of this sell off. There is continued erosion in what have been solid sectors at the same time stocks in other sectors pick back up after a few sessions of weakness (e.g., cyclicals, regional banks).
Two scenarios for tomorrow: the market tries to bounce again and manages to hold a modest gain, or it sells off hard more on the break below support and then rallies late to recover. After six crappy sessions there will be a relief bounce of some sort coming.
Put/Call Ratio (CBOE): 0.78; +0.09. Back up, but not a sharp gain given the negative comments on the Nasdaq breaking support, etc. Over the past several sessions the index has not spiked as the selling off continued. Another sign that this selling has more tenacity to it.
Nasdaq
Sold toward the February low where it will try to mount some type of relief move. Volume was lower but still above average. Selling remains solid, but it is not a total selloff; the SOX and the Nasdaq 100 are leading the way lower.
Stats: -16.95 (-1.0%) to close at 1713.34.
Volume: 1.922 billion (-1.5%). A slight drop in volume but still strong and above average on a session the sellers were in control. The volume remains strong as the index heads toward 1700.
Up volume: 751 million (+324 million)
Down volume: 1.141 billion (-379 million). The spread narrowed with up volume rising and down volume falling. This shows the selling was not as intense, evident as the index was in positive territory until early afternoon. Not a vicious sell off, just not much stopping it.
A/D and Hi/Lo: Decliners led 1.22 to 1 (1.17 to 1 Tuesday). Sellers are not pushing to a strong lead, another indication it is the big stocks selling (Nasdaq 100) as opposed to all Nasdaq stocks.
New highs: 180 (+16)
New lows: 81 (+18)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Still working toward the February low at 1696.55 (intraday), but today it broke 1716, the February closing low. The inability to hold at that level is significant; no buyers were willing to bet the bottom had been hit. Well, some were betting that as we saw the market rally early; they were just not strong enough to overcome the negative bias. Was this the last attempt to hold above 1700 discussed Tuesday? Probably not. We may see another rally attempt after 6 selling sessions. It could sell below 1700 and then spend a day or two rebounding. How can that be now that it has broken the February closing low? Well, stocks and indexes move down to support levels and move up to resistance levels. Sometimes it is dead on exact where they turn. Other times they can overshoot the mark a bit one day before the turn comes. It looks as if they have broken down or broken out, but it is the tail end of the move. Sellers were taking it lower, but they ran out of steam to get it there. After 6 sessions of selling, and now that everyone is saying 'support is broken, support is broken,' we will most likely see a relief bounce attempt. The index may sell off early and then recover to close positive. It may last a day or two before it rolls over. The rollover is the key downside entry point.
Dow/NYSE
Lowest close since February, undercutting 10,100 but not the intraday lows hit in the handle lows back in February just before the index broke out. An attempt to rally failed. The A/D line was not bad and new lows are not spiking higher as the index sells. In other words, stocks are not giving up and tanking en masse. That is a signs that stocks are getting sold out, and that a relief bounce or better could be in the cards. Problem is all of that distribution beforehand.
Stats: -58.81 (-0.6%) to close at 10,030.43.
NYSE Volume: 1.343 billion (-3.8%). No distribution but as with the Nasdaq, still strong, above average volume.
Up volume: 547 (-47 million)
Down volume: 799 (+80 million). Holding the line with neither side gaining or losing any real ground.
A/D and Hi/Lo: Advancers were ahead until late in the session when they gave up the lead. Decliners stretched the lead to 1.09 to 1 (1.01 to 1 Tuesday), but it was no appreciable gain.
New highs: 177 (+15)
New lows: 36 (0). New highs held steady on the selling. Indicates stocks getting sold out even as the indexes drop further.
The Chart: http://www.investmenthouse.com/cd/$indu.html
Closed below 10,100 to a new low since February. It still holds above the intraday lows in the handle from February when it broke out. Today's action was thus not a complete breakdown and the 200 day MVA still has to be reckoned with on the downside before the pattern is resolved fully. Volume is still above average as the index sinks; no distribution today, but the action certainly did not wipe away the prior 5 such days in 11 sessions. That is a lot of weight on the index, but it too looks as if it is ready for a relief move. The new lows have not been racing higher as the A/D line still holds up well. This is a key level for the index, and after the selling over the past few weeks it is due a bounce. Indeed, its pattern is to sell off 5 or so days and then give a strong upside move. It could still salvage the pattern and move higher here from a technical standpoint, but one has to wonder what the catalyst would be. Not technology, so it would have to come from a belief that the old economy stocks are still a value based on the recovery. More likely is a relief bounce that fails after a session or two, but we will keep an eye on the volume as always.
S&P 500:
Broke 1100 on strong but not increasing volume. Still above average and still indicative of the prior distribution. The S&P 100 has already broken down in its pattern while the S&P 500 has a date with 1075 before it can be declared massively in trouble. Still it has given us good downside plays, and we will be looking for another. First, if the Nasdaq and Dow want to give a relief move, the big caps will most likely tag along. That relief move could provide a move back up to 1100 or even a higher. If volume does not enter, it will fail, and that gives the next downside entry point. Unlike the Dow, the S&P is not at a point where one could say 'if it rallies here, it has a chance.' It appears that it will have to test 1075 ultimately before any resolution is made.
Stats: -7.82 (-0.7%) to close at 1093.14.
Volume: NYSE volume remained above average, but backed off to 1.343 billion (-3.8%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Lighter on the economic news with jobless claims and existing home sales. As noted above, the indexes are primed for some type of relief move. The Dow's pattern is indicative of that: selling down to the breakout point and above the 200 day MVA and showing a loose rising star doji. After the selling this can indicate a bounce ahead.
A bounce in this market has not meant much. Each one is met with selling. This is a bit different as it is at the point of last resort where it bounces with some vigor or it goes on to break the 200 day MVA and really break down. Thus we anticipate the bounce, but with the overall downtrend and the distribution, we need to be convinced of it being more that just a bounce that sets up further downside plays.
Today we saw some leadership sectors that had taken on the hiccups the past few sessions look better, namely large cyclicals, small financials, hotels, restaurants, retail. Something had to be holding the line with the A/D line close to flat and new lows not rising. These could help the market back up in a relief move.
We may see a continuation of the selling out of the gates and then a recovery move or the market may try to make another up move out of the gates. The softer open (maybe even hard selling) would give rise to a better chance at an upside move sticking. We always have to be skeptical of upside opens in a market that is behaving with bearish patterns: upside early usually means downside later.
Support and Resistance
Nasdaq: Closed at 1713.34
Resistance: 1743 to 1750 may act as some resistance, then 1775. 1850 is next (200 day MVA at 1853), followed by 1875, the bottom of the November consolidation. 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: 1700 (February low at 1696.55). Then 1613 to 1626.
End Part 1 of 2
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