world stock market, us stock market

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4/25/02 Investment House Daily
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Investment House Daily Subscribers:

MARKET ALERT SERVICE

Targets hit this week: ESI (+$7.60; +17%); SEBL put (+2.55 per option); KSWS (+$7.74; +20%); BOL put (+1.65 per option); ATH (+$11.80; +20%); 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 issued to preserve gains or get out flat: KRI, TXT, IFF, IPCR, DRXR, ATMI, ETM, RKY.
Stops issued: WTW, ASBC, PCLE, AEN, BBA

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SUMMARY:
- Indexes poised to bounce.
- Historical trend of smaller issues leading after a bear market still in place.
- Economic news continues to cool from robust gains early in 2002.
- GDP hits tomorrow.
- Team Trades

Testing, testing. Nasdaq tests February intraday low and rebounds as other indexes do the same.

It was a very choppy day, a day that looks like a transition day when all is said and done. Transition to a massive rally? Doubt it. More like that relief bounce we talked about in Wednesday's report. With any change the there is volatility, and today we saw that as the Nasdaq tested the February intraday low, rallied, doubled topped, tested the low again, and rallied to the close. Same action on the S&P 500.

What resulted were doji's on the candlestick charts. In our 'last hour' alert we stated the indexes were forming doji's if they could rally in the last half hour. That would be indicative of a relief bounce getting underway. That is precisely what happened as all three major indexes showed tight doji's on the close. Not only those three, but also on the SML, MID, NDX (Nasdaq 100), and SOX. A straight doji flush.

Indicative of the bounce to come.

Okay you say, who the heck cares? The indexes have been hammered down for over a week, and today's bounce at the close was hardly something to be fired up about. Yes, it was not much to look at, but in the bigger picture it is the start of the bounce that we talked about last night. The doji's after a steady sell off (and after a steady rise for that matter) indicate a change in direction. In this case, since the index opened lower, tested even lower and then rebounded to close where it opened. In other words, the sellers were in the lead once again today, but the buyers were able to come in (twice on the Nasdaq) and overcome those sellers. That is something they have not tried for the last four sessions as the indexes all finished on their lows and well below the open price for that day. Again, this action is an indication of a change of character and points to a bounce higher.

We emphasize bounce, at least with respect to the larger cap indexes. The Nasdaq, et al are in steep short term downtrends. Unlike some were saying on the financial stations about a bottom, we are under no such illusion (delusion?), at least not until it shows us something more. What we do see are indexes in downtrends that have sold hard off of the down trendlines and are at points where they are ready for a bounce back up to test resistance, either support that was just broken or the actual down trendlines themselves. This is the typical action in a downtrend. We don't want to get fooled when the bounce comes and the downtrodden stocks rise again and think that the bottom is here. That has to wait for follow through, good breakouts, etc. Until we see that we recognize it for what it is. The question you have to ask yourself is, do I want to play the bounce up with aggressive plays and then get out of Dodge at the first sign of trouble, or do I stick with the leaders that have held up well and just taken a breather while the market sold back?

Mid-cap and small cap indexes testing breakouts, not just bouncing, as the historical shift from large caps to smaller issues continues.

That is an important distinction. While the Nasdaq and S&P are in downtrends and most likely will give us only a relief bounce, the small and mid-cap indexes are testing their breakouts, the small cap index showing a hammer doji today, testing its 18 day MVA on the low. It is primed for a bounce back over the new high set just 8 sessions back. The mid-cap index also showed a hammer doji where it tapped the 50 day MVA on the low and rallied back. It set its new high 8 sessions ago as well.

These indexes look to continue their move higher as opposed to just bouncing up to resistance. First, there is no resistance other than the recent high. With the cooler economic news we have to always watch for double top action, but we do not anticipate that as the case. The smaller issues, particularly the small caps, have been ignored for years as the large caps garnered all the glory. There is a sea change that has and is taking place. The big tech names and other large cap stocks are in disfavor. Small stocks did better out of the last 3-leg bear market in the 1970's, and they typically perform better after longer bear markets. This happened with the 'nifty 50' in the seventies. It is happening now with technology and other large caps (not all) that stole the show in the late 1990's.

Smaller issues thus have history on their side. We are accused of looking at the past all the time. We do that because the past repeats itself in the future again and again. What just happened in the market the past few weeks or months tells us how it is set up to act in the next week or two or more. The action of the economy and the market the past two years tells us that certain historical trends are back in place that will continue to see the smaller issues outperform the larger issues until there is a firm economic recovery and the larger issues start showing earnings growth. By that time, some of these small issues won't be so small anymore just as CSCO, DELL, MSFT, INTC, etc. were no longer the small buys when the roaring bull of the 1990's was running.

THE ECONOMY

Employment Cost Index low and going lower.
This possible measure of inflation (remember how the Fed was concerned about 'wage-led' inflation back in 1999 when it was hiking rates to fight inflation that was actually disinflation?) rose 0.8% (+0.9% expected), the smallest gain since Q1 1999. Today's number was heralded as non-inflationary. If today's rate is non-inflationary and it is what it was back in 1999, then it is pretty clear that it was non-inflationary in 1999 as well. Oh Fed, why did you do what you did? It sure was not to fight inflation. In any event, given the Fed's inflation formula (something akin to Colonel Sanders' secret 11 herbs and spices), this gives the Fed more room to keep rates low as long as it wants/needs.

Jobless claims fall, but still top 400K.
Jobless claims hit 421K, down 31,000. That drop, however, was after a 7K upward revision of the prior week numbers (452K, up from 445K). Expectations were for 425K, so it was taken as a 'win.' The 4-week average rose by a mere 750 after a few weeks of substantial gains. This longer term measure appears to be peaking. Not bad, but we still question the soundness of the increases being blamed on the extension of benefits. Note that the level is over 400K, a level considered indicative of recessions. Recovery is underway, but it is no surprise to tell you it is not gangbusters.

Existing home sales slightly weaker than expected.
This area of the market makes up 805 of home sales. It fell 8.3% in March to 5.4 million units; 5.5 million were expected. Not a big miss, but let's understand the numbers. They are from buys that originated 2 to 3 months back that closed in March. Rates were higher then (other than a brief sharp drop). Rates are now a bit lower now with the 30 year fixed dropping below 7% for two weeks now. We saw mortgage (new and refinance) applications rise again this week in response to lower rates. We could see units move higher in the May and June report. Thus, while the market is cooling a bit and causing some to say the run is over (the bubble mentality), we think there will be a surprise for many in early summer as housing sales hold and even rise.

GDP out tomorrow.
Expectations have been ratcheted higher to 5%, and now we hear 6% increases. There may be a knee-jerk positive reaction to a 6% reading. Traders, however, know this is old news based on those strong economic reports that have already been released. The recent reports have been much more moderate, and that is the current data. Any rally on strong GDP numbers will most likely face some selling.

Other indicators showing mediocre performance.
The dollar made a real move lower today after already breaking its trend and its 200 day MVA as we reported last weekend. The recent economic reports and earnings data are not backing up a strong recovery that the reports 4 to 6 weeks ago were doing. The dollar was very strong because the U.S. was the focal point of global recovery.

The U.S. is still the key economy that must recover for the world, but for the past four weeks we have been reporting of continued noise from Japan that things are firming. It may be another rabbit trail that leads to Tokyo, but the Japanese stock market has outperformed the U.S. indexes this year (the big three, that is), and signs of recovery there are drawing on the dollar. Further, the Euro hit a 3-month high against the dollar even as Germany reported that business sentiment dropped.

That is contrary to what should happen, but indicates there is systematic weakness in the dollar right now. Even with the administration taking a strong stance on the dollar, it is almost as if the underlying if unspoken desire is to have a bit weaker dollar to help domestic businesses. Remember how positive Greenspan was about the economy two months ago when he changed from 'mixed results' to 'definite improvement?' The dollar was hitting a peak at that point on its run off the September low. Since then he and his gang of 11 have been very clear that the recovery strength is questionable, uncertain, etc. With that kind of endorsement, it is no wonder a dollar that moved up on expectations of the U.S. recovering and leading the world once again as it did in the 1990's is now heading sharply lower.

While a lower dollar theoretically helps U.S. businesses (did not seem to hurt in the 1990's, however), if foreign investors feel they can do better elsewhere, they will sell dollars and convert to the currency of the country of choice (i.e., where they want to invest). That takes money out of U.S. investments, pressuring stock prices further. We always said it was a dangerous game tinkering with the dollar. There is no overt statement regarding a weaker dollar. O'Neill and the administration have been clear on that. No change in stated policy, but the Fed's comments are somewhat 'back dooring' the stated position.

THE MARKET

The market gave us the second scenario discussed Wednesday: the sharper sell off and then the rally back on stronger volume. It was choppy action where the buyers edged out a gain with a late rally. The action overall was constructive for a bounce from the big indexes. The NYSE A/D line turned positive late. Nasdaq up volume surged ahead of down volume late. Overall volume moved higher on the reversal. The elements of a reversal day and bounce higher are in place. What we have to watch for are the resistance points where it could turn and head back down, most likely a the down trendlines, or watch for a follow through session late next week. We believe the former more likely than the latter given the distribution and woeful state of most large cap stocks, but as always we will let the market be the guide. For now the bounce looks set. Of course, we always have to watch for the immediate 'slap down,' i.e., where the sellers reassert themselves immediately upon the first attempt at reversing. One thing going for the indexes against that scenario: the move to positive territory was barely positive on the close. As for the small and mid-cap indexes, they could give us more than just a bounce as they continue to build on their gains and look for another new high.

Put/Call Ratio (CBOE): 0.78; +0.00. No change on the up and down activity and late rally. Not bad given the late rally. Not great either as it is at a level that shows no real change in character.

Nasdaq

The pattern still looks horrid, but the index held at the February low (twice) and showed that doji after selling off hard for over a week. Primed for a bounce back up to test resistance. That can set up some more downside action, or, if something unexpected happens, provide a follow through session that sets the stage for a better rally. That might be a stretch. One step at a time.

Stats: +0.36 (+0.02%) to close at 1713.70.
Volume: 1.969 billion (+2.5%). Rising, above average volume on a reversal session. You want to see volume surge as stocks reverse as that indicates buyers coming in. Indeed, the swing from downside volume to upside volume late in the session indicates that is what happened.

Up volume: 1.051 billion (+300 million)
Down volume: 858 million (-283 million). Wednesday we saw the up volume rise and the down volume fall on a down session, indicating the selling was weakening. Today we saw the shift to buy side action as that trend carried through.

A/D and Hi/Lo: Decliners still led at 1.20 to 1 (1.22 to 1 Wednesday). Not much teeth in the decliners even on the selling.

New highs: 149 (-31)
New lows: 109 (+28). New lows continue to climb, a recent trend that shows the Nasdaq is not totally sold out.

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

Sold close to the February low (1696.55) on the intraday low (1697.27), testing that level twice. It rebounded each time, hanging onto the last bounce as time expired. Good that it held on that low and rallied on stronger volume. The candlestick chart showed a doji, indicating that the round of selling is over for now. This is a good point for a relief bounce after heavy selling and then a reversal at support. As for how far it can rise, indexes in downtrends tend to bounce down from the short term moving averages. The 10 day MVA is at 1754.22, the 18 day MVA at 1771.33. There is also resistance at 1775, the October high. If the index makes it that high, the 18 day MVA and the October high combine to make tougher resistance.

Dow/NYSE

Tapped down to the 200 day MVA on the low and rallied sharply to close with a hammer doji on sharply higher NYSE volume. A good indication of an intent to provide a relive bounce.

Stats: +4.63 (+0.05%) to close at 10,035.06.
NYSE Volume: 1.513 billion (+9.4%). Strongest volume in 2 months. When there is a reversal, we want to see it on strong volume.

Up volume: 704 million (+157 million)
Down volume: 802 million (+3 million). Down volume held steady while up volume narrowed the gap. A practical dead heat.

A/D and Hi/Lo: Advancers were able to hold the lead today at 1.09 to 1 (decliners led 1.09 to 1 Wednesday). Transition day.

New highs: 152 (-25)
New lows: 56 (+20). New lows rose above 40 for the first time in weeks. Not a concern yet as the NYSE will most likely rise tomorrow.

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

Tight doji after reaching down to the 200 day MVA (9935.92) on the low (9926.57) and then rebounding to the close. It took three tries, but it held the last rally as time ran out. The A/D line swung from negative to positive again in the last hour, bolstering the move as the small and mid-cap indexes bounced sharply as well. The 200 day MVA was the point where it really had to test, and today it passed. It is far from out of the woods. Distribution sessions are still weighing it down, but as with the other indexes, it is time for a relief bounce. Resistance is at 10,100 potentially. The March down trendline is now at 10,150, and that has to be the focal point of potential bounce stopping action on any move higher. After that is the 50 day MVA at 10,206, right with the 18 day MVA (10196.05). So, ready for a bounce, but does not have a lot of room to move higher. It can always break through resistance intraday, however, and then fall back the next session as we have often seen even if it does manage to crack through.

S&P 500:

Similar action, diving lower (1084.81 on the low) and then rebounding to close with a tight hammer doji on rising NYSE volume. It held above the February closing lows at 1080; they never got a full test. The large caps reversed after the Dow and Nasdaq rallied off of potential support levels, following their lead. It has resistance at 1100 as the first round. That is not much of a gain; if the sellers are intense they could squash it there. Again, it is typical for indexes to bounce up to the short term moving averages while in downtrends. The 10 day MVA is at 1108.62, the 18 day MVA at 1116.11.

Stats: -1.66 (-0.2%) to close at 1091.48.
Volume: NYSE volume surged on the reversal (1.513 billion; +9.4%), the preferred action on a reversal session.

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

TOMORROW

The relief bounce we were looking for Wednesday night looks to have started with a solid volume reversal off support on the Dow and Nasdaq. Tomorrow the GDP numbers come out, and if they are at 5% or better, the knee-jerk reaction could be enough to fuel some buying to feed off of Thursday's reversal. That could drag a few buyers and short coverers in and let the bounce take shape before sellers can come in and push it down. Michigan sentiment is out 15 minutes after the open and it is expected to rise slightly. That is a point of concern; the market has slid, the recovery is not as strong as thought, and that adds up to weakening sentiment. That might dampen any bounce attempt.

For now we anticipate the indexes to attempt to bounce higher after the lengthy round of selling. At the same time we anticipate that the smaller issues that have pulled back to test their recent moves higher will resume their climb. These stocks are in the best position with little overhead resistance to make continued moves. The big techs that have been roughed up can make the move higher, but they are subject to the next news story or resistance point, and then the selling begins anew. Thus we will focus on those stocks to the upside as we wait for the bounce to end and then look at the bouncing techs, etc. to set up for more downside action. If they prove otherwise, so be it. At this point we don't see anything to indicate they will change character appreciably.

End Part 1 of 2

world stock market
us stock market