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us stock market, top stock pick
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4/27/02 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERT SERVICE
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
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SUMMARY:
- No bounce as Nasdaq suffers worst week since September.
- Stocks of all sectors were hit Friday. Many sectors and their leaders are holding the line, but the market is eroding around them.
- Economic numbers mean little to investors as earnings continue to disappoint.
- Market selling hard and the dollar with it. Are they saying the recovery is bogus or just not that great?
- Subscriber Questions
Weak consumer sentiment smothers early bounce attempt as bearish ways continue.
We were expected consumer sentiment to be a bit weaker on the pullback in the stock market and the Middle East fighting, and Michigan sentiment came in lower than expected. It did not tank, but it was lower than expected. The relief bounce that appeared poised to occur was trying to get underway, but the sentiment numbers combined with earnings misses by JDSU and VRSN undercut the feeble rally attempt. The selling started, and though the indexes held the line intraday, a wave of afternoon selling sent them cascading lower.
Nasdaq lost 7.4% on the week and undercut the February lows. The Dow undercut the 200 day MVA by a hair, and the S&P hit a new closing low since February (still above the intraday lows). The early rise, late plunge action is characteristically bearish. The distribution sessions the prior three weeks were continual body punches, and Friday the legs started to give out.
Equal opportunity selling.
The A/D lines were negative, but not getting trampled. The NYSE A/D ratio was 1.46 to 1, the Nasdaq not quite 2 to 1. Bad but not indicative of a brutal sell off. Still, the selling started taking its toll on some previously unscathed sectors (or at least more buoyant sectors). Some retail stocks were hit, some construction related stocks, some restaurants, health care. They suffered heavier volume selling, something they have not experienced much of lately.
Any stock will have a day or two of distribution, even during good times. Several of these stocks are working through recent bases after solid runs; a bit of distribution is normal. With that in mind we shouldn't get too bent out of shape on any one such day unless key support is broken. The eroding market, however, keeps you alert to these days. While many stocks in the mid-cap, small cap and even large cap areas are still performing just fine, we see more breakout attempts run into trouble along with stocks breaking down. When we see some fairly sturdy sectors undergo some selling as happened Friday, you tighten things up a bit just in case.
Many leading stocks held on fine Friday, e.g., ACDO, PFCB, PNRA, WLP, etc. Leading stocks tend to do that; they are the best in the market as far as earnings, sales, price patterns. Thus they tend to hold on longer. They can still run into trouble if the overall market continues to sell. We need to exercise the continued care with positions, keeping those trailing or tighter stops in place.
THE ECONOMY
GDP up sharply, but not in the right places for investors.
Q1 GDP rose 5.8%, greater than the 5% expected but lower than the 6% some looked for. That was the strongest growth since late 1999 (and the 1.7% GDP in Q4), but that was not sufficient in and of itself. 3.1% of the growth in the number was from inventories. Inventories were still dropping, but they were falling at a slower rate ($120 billion in inventories sold in Q4, $36 billion in Q1). What this means definitely lies with your perspective.
Some lamented the slower decline in inventories because it meant that they were not being cleared out faster and thus give rise to a bump in manufacturing to replace those goods. On the other side of the fence you can argue that inventories continued to fall, meaning there would be the continued need for inventory rebuilding. Moreover, with the manufacturing pickup the economy has seen the past few months, there are inventories being replaced yet the overall inventory number is still falling. With manufacturing levels increasing and inventories still decreasing, we know there is consumption ongoing that continues to cut into those inventory levels. Just a couple of months back, this increased production activity was seen as a good thing; in the current atmosphere it is seen as bad because it is slowing the rate of inventory reduction. This is truly looking for the worst case scenario; again, that is the market mentality right now.
Final sales still solid.
Stripping out inventories gives what is called 'real final sales.' For Q1 it was 2.6% compared to 3.8% in Q4. Zero interest car sales fueled Q4's jump. Even after that binge the 2.6% reading was very solid. Consumers focused on nondurables that rose 8.4% in Q1 versus 2.5% in Q4; cars to clothing so to speak.
Capital spending 'improved' as well, falling 0.5% after averaging 12% declines over the prior three quarters. It is not positive yet and thus not something that the headlines address, but businesses are buying equipment again as evident from these numbers.
In summary, GDP was good. Look at the final numbers: Q4 GDP increase was 1.7% while Q1 was 5.8%; inventories were lower in Q1 than in Q4, yet GDP was still higher. Thus, it is inaccurate to dismiss the GDP number as 'just inventory related'. If that were the case, then GDP should be lower because inventories were lower. That obviously was not the case. Again, the market's mood is to look at the worst side of things right now. What the numbers are showing is a steadily improving economy but not a sharply improving economy. That 'but' is where the focus remains.
ECRI increases again, but slowing.
This comprehensive basket of leading indicators rose on lower jobless claims and home sales data, but the rate of the increases has slowed over the past month. The ECRI has been showing the recovery without a double dip. The slowing readings for a month, however, indicate that the recovery is not that strong. Increasing strength in weekly readings would indicate the recovery would pick up steam in the future. It is increasing, but just not sharply.
Where does this leave the economy?
This data leaves the economy exactly where it has been: a recovery is still underway, and it is getting stronger, not weaker. In addition to consumer spending, the last GDP report saw business spending improving as well. Not a leap higher, but improvement as the bigger corporations start taking advantage of the accelerated depreciation incentives offered in the stimulus package. As tech companies report lower than anticipated quarterly results, investors question current stock prices and are selling now and looking ahead to when things look a bit better. What we will see are economic reports in a few weeks that start punching the right buttons for investors again, and the cycle will renew itself for the next earnings season.
THE MARKET
Instead of the bounce attempt it was the 'slap down' syndrome that was not our first choice of action. The bounce attempt died early as investors found no solace in the economic reports. The Nasdaq undercut February's lows, the S&P 500 is a breath away from breaking its February intraday lows, and the Dow undercut its 200 day MVA by a hair. Technical breakdown was the phrase heard often Friday. Things have not been roses for quite some time on those three indexes, however, all in downtrends from either January or March. Friday was just the next day of selling on more disappointments. Those indexes are still due for a relief bounce during this continuing downtrend; Friday was not the session for it.
The small cap and mid-cap indexes are still in decent shape, but the mid-cap index is testing its 50 day MVA after hitting a new high less than two weeks ago. How these two indexes perform this week will tell us about the overall market health. A sharp bounce from these levels would indicate the historical trend of smaller and mid-cap stock outperformance during an economic recovery is still in tact. A breakdown would be very ominous for the entire market and indicate a full fledged test of the September bottom is in order for some or all of the indexes.
Market the leading indicator?
In March 2000 the market was predicting the coming economic recession with its usual uncanny accuracy as it started to distribute violently and then sold off hard. We have seen below average volume distribution on the major indexes as a precursor to the recent selling. The dollar is also selling hard, hitting a 3.5 month low against the Euro Friday. As we noted last weekend, the dollar broke its uptrend from the September low as well as its 200 day MVA. It is now cascading below its 200 day MVA on concerns about the U.S. recovery, war tensions, new terrorist threats, and oil posturing.
Is it predicting a failed economic recovery? First, though it is in a recent downtrend once again, it has not broken down and has not pierced the levels it was at before September 11. That does not mean it won't, but at this point it is not predicting double recession. What it is reflecting is disappointment with this round of earnings. The market is accurate in the longer term, but it overshoots on the short term. It overshot on the recovery off of the September bottom. It is most likely overshooting on the downside with respect to the earnings disappointments. The pendulum has to finish its swing the other direction and then find equilibrium. For now we watch the market as our guide, and as we have been saying, the current trend is down. There will be bounces up to test the trend, and we expect one this week. A bounce does not change the trend, however. As noted above, that will take investors working through this earnings disappointment, getting improving economic news again, and then hope springing again for the next earnings season. Again, the actions of the SML and MID indexes will tell us quite a bit this week.
Put/Call Ratio (CBOE): 0.87; +0.09. A rise, but not a spike to where you would think given much of the gloom we heard Friday. Last week it did not jump up as the selling really got underway. Thus, while we may get a bounce to test the down trendlines on the major indexes, without this measure of sentiment hitting an extreme level, there is not the staying power on any bounce.
Nasdaq
After bouncing 15 points early the Nasdaq turned lower and never made an attempt to turn things around. Undercutting the February intraday lows and capping its worst sell-off since September 2001. Friday's action left the index in even more shambles than it was, but puts it close to the bottom of its channel from the March downtrend. That will give rise to a relief bounce, but for now that is all that can be said as far as upside activity.
Stats: -49.81 (-2.9%) to close at 1663.89.
Volume: 1.892 billion (-3.9%). Not massive dumping Friday as stocks sold on lower volume than the prior three sessions. Little comfort after the distribution earlier in April set the stage.
Up volume: 290 million (-761 million)
Down volume: 1.594 billion (+736 million). No overall distribution but down volume shot higher. So much for weakening selling.
A/D and Hi/Lo: Decliners stretched the lead to 1.93 to 1. Serious selling, but not runaway.
New highs: 138 (-11)
New lows: 123 (+14). New lows still climbing still indicating not sold out. Not surprising as it undercuts the February low. Not the 400+ seen in the bear market, but then again, it still has more selling to come.
The Chart: http://www.investmenthouse.com/cd/$compq.html
Undercut the February lows (all of them; 1696.55 intraday). At this point there is not much in the way of past support to hold it above 1600. There is a gap up point at 1626 where the index also spent a few days before it started its serious October 2001 move higher. That does not mean it will be a straight drop to that point. It never is (well, usually not). As we will see with the other indexes, the Nasdaq is just above the lower channel in its downtrend from March. That usually provides a bounce point. Moreover, indexes like to come back and test support levels they break just as they test resistance levels on upside moves. We anticipate a bounce up to 1700, the support it just broke; that also represents the March down trendline. As with last week, however, it is a relief bounce, not a new rally.
Looking at a bigger picture, the Nasdaq touched down to 1620 intraday back in April 2001 and started a bear market rally at that point. Then it dipped below that level in September 2001 (1387 on the intraday low) and made the rally into January. Now it is working its way back down toward 1620. A hold there could establish a reverse head and shoulders pattern. That is conjecture at this point, but we have to keep the big picture in mind. A recovering economy (albeit slower than hoped) after a 2-year bear market. At some point the next turn will come and we need to keep an eye out for it.
Dow/NYSE
Undercut the 200 day MVA after reversing off of that level Thursday. 340 points in 5 days. Near the lower channel on the downtrend.
Stats: -124.34 (-1.2%) to close at 9910.72.
NYSE Volume: 1.385 billion (-9.4%). Lower than Thursday, but still strong, above average trade.
Up volume: 336 million (-368 million)
Down volume: 1.029 billion (+227 million). Things got ugly in a hurry.
A/D and Hi/Lo: Decliners took over 1.52 to 1 (advancers led 1.09 to 1 Thursday). Not runaway to the declining side given the negative mood Friday.
New highs: 147 (-5)
New lows: 60 (+4). Second consecutive session above 40 new lows. 5 consecutive sessions is a sign of further selling to come according to Dow theory. Of course by that point a lot more damage will have been done waiting to see.
The Chart: http://www.investmenthouse.com/cd/$indu.html
First time below the 200 day MVA (9933.08) since February as the Dow failed the last real test before 9750 to 9500. While it broke that level Friday, it was not a tremendous breach point-wise, and we often see the market overshoot support levels on the downside and then recover to further test them. Closing below that level is not a good thing obviously, but it is not the automatic 'here we go to the September low' that it was made out to be Friday. It still has the downside channel on the down trendline, and that acts as a bounce point for indexes in downtrends just as the upper channel acts as a barrier to upside moves.
Thus we still anticipate a bounce up to test the down trendline early this week even as the 18 day MVA crossed down through the 50 day MVA the past two sessions. What often happens is that the index will bounce back up to hit that 18 day MVA after it crosses down through the 50 day. Also, this is also the point where the index checked its fall in late August. Thus there is some support here, particularly after the hard fall. Of course, after that bounce in August, the index rolled over and fell another 425 points in 2 days. That was even before 9-11. Thus, if we do see a bounce, in all probability it won't be a market turning bounce, but a move up to the near resistance at 10,050 to 10,100.
S&P 500:
Friday the large caps closed below the February closing low (1080.17) and are right at the intraday low (1074.36). That is also right at the February 2001 intraday low (1081). Further, the lower channel of the March downtrend is right at Friday's closing point. The combination of being immensely oversold, the support at 1075, and the lower channel of the down trendline suggest that a bounce. Just as with the Dow this is also where it spent a few days before taking the plunge down in August and September. There is reason to bounce soon, but the down trendline at and resistance at 1100 would stop the move.
Obviously the big caps don't look well. After a broad double top pattern from November to March, they have broken down to a very important level. Friday they moved back down to the March 2001 low on that double bottom, the top of the first run off of the September low, and the February 2002 double bottom. If it breaks here it's a pretty safe bet it is going to test below 1,000 once again (944 in September 2001; 923 in October 1998). That is bad enough in and of itself. Looking at a weekly chart of the S&P, however, 1998 to today shows a broad head and shoulders pattern. It is a long way from completing the pattern, but if it does, that indicates even more downside. This would represent a complete shift from large caps into small caps after years where large caps left small caps in the dust.
Stats: -15.16 (-1.4%) to close at 1076.32.
Volume: NYSE volume peeled back on the selling, but it was still strong at 1.385 billion (-9.4%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
Another full week of earnings and a very full week of economic data. Earnings have been disappointing for investors, and economic reports have not provided a sufficient salve. Indeed, unless economic reports turned, very, very favorable it is unlikely they could provide any upward impetus of lasting consequence in the near term. Why? Because companies are saying right now they don't see things that great for the future, and the economic reports are mostly considered behind the times. It would take many companies this week saying things were getting a lot better.
That is something not to count on obviously. So the question is will the indexes hold on their own? Fear indicators are not at extremes (put/call ratio, VIX, bulls/bears), the indexes have been distributing over the past three weeks, they are breaking through support levels in the near term, and they are in steep short-term downtrends. While we anticipate an oversold bounce to test the levels being broken, at this point there is not much to make such a move stick. Again, a key will be how the small and mid-cap indexes hold up this week. If they can continue to rally off of support that is a positive sign for the market overall; if they fold that pretty much speaks for itself.
The economic recovery is continuing and we anticipate that it will continue to do so. The market is overshooting to the downside with its reaction to earnings in spite of a steadily improving economy. We believe it will overshoot to the downside some more, perhaps after that test to the upside this week. It has to rally some to set up better positions for downside action as many stocks have sold hard and are extended to the downside. A bounce up to resistance (former support) would give that 'kiss goodbye' entry point on downside action.
As for upside action, we will keep a close eye on the mid and small caps as well. We did see selling in these stocks Friday that went a little broader and further this time. While we still see very solid patterns under accumulation, we also want to see the indexes hold the line and the stocks make solid breakouts on strong volume. The big cyclicals did not look bad Friday at all despite the sharp selling on the major indexes. That is another slight positive mostly overlooked.
Support and Resistance
Nasdaq: Closed at 1663.89
Resistance: The March down trendline at 1700 (February low at 1696). 1743 to 1750 may act as some resistance (the 18 day MVA is at 1760.02), then 1775. 1850 is next (200 day MVA at 1847.83), followed by 1875, the bottom of the November consolidation.
Support: Right at the lower channel line from the March downtrend (1660). Then not much until 1613 to 1626 (April 2001 low at 1619 intraday).
S&P 500: Closed at 1076.32
Resistance: 1100 represents former price consolidations as well as the March down trendline. The 18 day MVA (1111.92), and the 18 day acts as resistance in continuing downtrends. After that is 1125 and the 200 day MVA (1130.09) is sitting right above that level. There is some resistance at 1150 as well. After that there is a lot more, but w will take one step at a time.
Support: Fighting to hold 1075, the February low as well as the March 2001 intraday low. This point marks the completion of the 3-month head and shoulders. After that 1050 represents the October lows and the last price consolidation level before the September low.
End Part 1 of 2
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