us stock market, stock prices

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5/04/02 Investment House Daily
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SUMMARY:
- Same story: Large cap indexes swoon as smaller indexes hold the line.
- Economy is recovering, but not fast enough to save technology stocks at these prices.
- Not much to hold Nasdaq up, broader market moving higher.
- Team Trades

Downtrend pushes the large cap indexes back down, the Nasdaq perilously so.

As suspected, the bounce had no legs and the modest move up off of the lower channel line of the downtrend was tossed back down. Of course the Nasdaq never really bounced; the Nasdaq 100 broke below the April 2001 low and as we noted Thursday, the Nasdaq 100 was leading to the downside again as it did all the way down in the prior downtrends in the bear market. Being so heavily influenced by the big tech names, the composite index followed it lower, closing at its lowest since mid October as it sprang off of the September bottom.

With Friday's break lower there is no real major support between 1600 and September's low at 1387. This downtrend is every bit as tenacious and destructive as any in the bear market. The outlook for technology stocks is not improving nearly fast enough to support even these lower prices. Prices fall, but the earnings projections dim even faster. They keep falling as sellers unload them.

WCOM was one of the very notable implosions this year (though its decline has been steady for over a year. Mutual finds acted just like a lot of retail investors: holding the stock until they just could not take it anymore. It was not until late January when it broke below $10, however, that the selling became incredible. Why? Mutual funds started to unload the stock because many mutual funds by nature of their charter for that fund cannot hold stocks that are less than $10 in price. Volume spiked up in late January and has been massive ever since. Short sellers know this and they continue to sell, sell, sell.

ORCL is now attracting that attention. It broke below $10 Wednesday, and the selling volume has mushroomed. Institutions are unloading the stock and short sellers are selling it with gleeful abandon. JNPR also broke below 10 and others are approaching. When some of the biggest names on the index keep hitting new lows, the index cannot go higher. Right now there is nothing to turn them higher other than a shift in belief that they are at a price where future growth expectations could warrant some buying. But it won't be massive buying because future expectations are not past the saucer shaped recovery belief.

Economically sensitive areas performing very well.

Last weekend we said much of the market's future was in how the small and mid-cap indexes performed this week. Could they recover from their pullback last week or would they turn with the rest of the market? Well, they did okay. The small cap index rallied back up to its previous high, rising 2.3% for the week. The Russell 2000 rose 2.2%. They did not, however, breakout to new highs, instead showing doji's Friday. The Russell may be making a lower high if it does not put it together next week. The S&P 400 mid-cap index finished higher on the week, but is hovering perilously close to its 50 day MVA again. The S&P retail index has double topped and is moving toward its 200 day MVA near 890 as WMT, HD and other big names struggle.

At the same time regional banks and savings & loans are shooting higher. Those are economically sensitive issues benefiting from low short term interest rates. Packaging companies are doing very well (got to pack those goods being bought). Small energy companies, gold, and steel companies are performing very well. Even some of the bigger name sin stocks, e.g., alcohol and tobacco, are doing well. These usually prosper as some fear rises in the market, and they are perking up.

Thus, it continues to be a market of sectors and stocks within those sectors. If you follow the main indexes it is a slaughter (unless you play to the downside as we have been doing with those and their stocks). If you follow the broader market where stocks are still rising, the story is different. The smaller indexes are showing some weakening signs once again, and that has us watching closely for topping out from these stocks. Right now the strong groups are getting stronger for the most part, however.

THE ECONOMY

Economic reports still failing to inspire investors to buy big names.
Investors saw little today to make them want to buy stocks. That is not a really accurate statement. They saw little to make them want to buy large cap stocks, that is. Economically sensitive smaller stocks were shooting higher as many regional banks and savings & loans enjoyed banner days. The economic and dollar uncertainty also pushed gold and metals stocks. Mixed opinions about the future, but still driving many stocks higher.

Employment report.
Since March 2000, 3.1 million citizens have been put out of work. We won't get started on why this carnage took place. We won't talk about the snipe hunt for inflation or the war on 'irrational exuberance.' We won't talk about the lives ruined because the FOMC voting members were callous enough to say they actually wanted the jobless rate twice what it was. Well, they got what they wanted, and with it all of the usual accouterments: recession, crashed stock market, retirements lost, collapsed energy companies, retailers, and possibly telephone giants. No, we won't talk about that. It has made us ill enough over the past two years.

The headline unemployment percentage of 6% caught many off guard, but as we said, the weekly jobless claims were not showing the needed improvement to get the number lower. The news of the improving economy also has more laid off employees returning to the job pool looking for work. As we noted, continuing claims are rising not falling on a weekly basis; that means those seeking are not finding much yet. More workers in the pool but not finding jobs means a higher unemployment rate. This is something we discussed a couple of months back.

Non-farm payrolls did post a rise of 43K (60K expected). Decent, but March was revised from $58K to -21K, another massive change. That makes the 43K gain easily within statistical variance; thus, we cannot make much of it. Service jobs added 134K; that is strong. Manufacturers lost 19K. Not great, but the fewest lost since October 2000, so the improvement is there. It won't be long until they are adding employees.

Work week and wages show some positives.
The workweek actually fell to 34.1 from 34.2. That was a disappointment as you want to see the workweek get longer as employers want more from existing employees. Still, since October it has increased 0.7 hours which is not bad. The manufacturing workweek held steady at 41. Overtime, however, rose to 4.3 from 4.2. Overtime is key: the more overtime the more work that is being required. It takes around 4.5 hours of overtime to trigger new hires. Earnings rose 0.1%; not threat of inflation but better because workers are working more.

ISM Services lower than expected, but still expanding.
55.3 versus expectations of 57. New orders were up 3 points. That is the good news. The not so good news: prices paid rose to 59.5 from 53.0, a possible sign of inflation. The employment index was still below 50, but improved from 45 to 48.

FOMC meeting Tuesday.
The Fed meets on rates Tuesday. With the employment numbers there won't be a rate hike. There is a 20% chance at the June meeting and 50% of 25 basis points in August. We will see. For now the Fed is not going to do anything.

Summary: The economy continues to improve, but it is slow going. Too slow for technology stocks to be saved near term, even with the strong increase in semiconductor sales reported Thursday. It is enough, however, to keep smaller issues moving as they normally do in economic recoveries.

THE MARKET

As we anticipated, the indexes bounced toward the down trendlines but the bounce had no strength and was repelled at that point. The key is where they finally stop the fall. Today was not it as the Nasdaq undercut its April 2001 lows and sentiment indicators are not close to showing the extremes that indicate a turn is at hand. Thus we anticipate some vigorous selling this week and that is why we did take some put positions late in Friday's session after taking some profits on some put plays earlier in the day (with options we don't want to let the nearer term positions start to feel the time decay issue, and when profits are there we will take them).

Again, where will they stop. The NYSE A/D line was positive by a hair, not bad for a pretty big down session. Then there is the Arms indicator that flashed a rally signal Friday and Monday; those occur 1 to 2 weeks from the actual signal. That signals a tradable rally, but in the interim there can be more selling. The indexes need more selling to spring the sentiment indicators to extreme levels. As for the Nasdaq and the S&P, they are close to extreme levels. What is keeping the overall market from showing extremes is the fact that most of the market is moving higher as the A/D line shows. Retail investors are making the switch somewhat to the sectors that are working while many mutual funds still dump technology shares they should have sold a long time ago.

Indeed, we can almost view the selling in WCOM, ORCL, et al as a reverse blow off top. In that situation a stock shoots higher as latecomers rush into a 'must own' stock. Institutions are busy selling the stock under cover of the rush of late buyers. Here we have mutual funds dumping after everyone else has left or may actually be interested in these stocks. Massive volume on these stocks. If the rest of the index showed that kind of volume, it would be a positive.

In any event this week should provide more downside action. The Nasdaq has a whiff of support at 1550 to 1560 from some quick October lows. After that it is the bottom. The Nasdaq is not well and has to get all of the selling done by the mutual funds in the big names before it can really move higher. The Dow and to a lesser extent the S&P are in better shape and can turn much sooner. They still have viable support to rescue them even after a strong round of selling this week. That is where we feel we will get a more sustainable upside rally in the big indexes. Until then we look to them for downside action. It could be very fast.

Put/Call Ratio (CBOE): 0.91; -0.02. This is an example of sentiment indicators not where they need to be. Even with Friday's continued selling, put buyers were not showing increased fear. There needs to be a few closed over 1.0. That could happen on some sharp selling this week toward the September low on the Nasdaq.

Nasdaq

Undercut the April 2001 low and entering a range of prices from 1550 to 1600 that offers some support, but not much. It still needs a cathartic week of selling. The mutual funds have to get rid of all the shares they want or even have a faint desire to sell.

Stats: -31.79 (-1.93%) to close at 1613.03
Volume: 1.991 billion (-3.3%). Volume backed off again on a selling session. AT this point that does not really help. The index is in full selling mode, and it needs to have volume ramp way up on the selling to clean the pipes for a more sustainable upside move.

Up volume: 455 million (+164 million)
Down volume: 1.521 billion (-236 million). More buyers less sellers, but hardly noticeable.

A/D and Hi/Lo: Decliners led again, but it is still not a rout at 1.18 to 1 (1.04 to 1 Thursday). It is a decline led by the big name techs.

New highs: 193 (-23)
New lows: 137 (+41). New highs jumped today after holding steady on Friday's selling. Not sold out yet.

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

Broke below the April 2001 low but volume was lower, so no real sell off. 11 out of the last 13 sessions were down sessions. Some support at 1550 to 1560 from the October lows, but that is not anything strong. 1500 is another potential level. As seen when the Nasdaq is in the throes of selling, support, especially weak support, is of little value. The best thing for the Nasdaq is to have a really vicious round of selling without any bounce.

Dow/NYSE

Reached down to test the 200 day MVA and rebounded to hold a hair above 10,000. Small victory. We still expect it to sell more this week toward the bottom of the channel.

Stats: -85.24 (-0.84%) to close at 10,006.63
NYSE Volume: 1.283 billion (-5.8%). Volume backed off to average levels on the selling, indicating continued mild distribution. Gives it a better chance of holding at the down channel at 9750.

Up volume: 498 million (-145 million)
Down volume: 779 million (+66 million). More sellers, fewer buyers. It may not have sold on higher volume, but the sellers were still very much in the majority.

A/D and Hi/Lo: Advancing issues clung to a slight lead at 1.09 to 1 (led 1.41 to 1 Thursday). Not a bad showing at all as the index once again sold but the NYSE was rising overall.

New highs: 257 (+9)
New lows: 58 (+17). Seven straight sessions of greater than 40 new lows. Again, this indicator says the Dow has further to fall. It looks that way. It needs to.

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

Tested down to the 200 day MVA (9925.46) on the low and rebounded over 10,000, a psychological level. It has hit the down trendline and the 18 day MVA (10,093.37) and is bouncing down toward the April low at 9800 and the bottom of the downtrend channel at 9750. The 200 day MVA does represent some support, but with MSFT, INTC, HWP (soon to be HPQ), and IBM, the Dow will have a hard time holding the 200 day. As the Nasdaq falls the Dow has room to the downside.

S&P 500:

Thursday the large cap index hit close to the down trendline and Friday it started to sell again. Tapped close to the bottom channel on the low (1068.89) and rebounded to the close. It has not undercut the recent lows (1063.62). The bottom of the channel is at 1064.54. Below that 1050 is the last shelf of lows before a wrinkle in the prices at 1000. Then the September low at 944.75. As with the Dow, the Nasdaq fall will hurt the S&P but not to a heavy degree as techs make up less of the S&P 500 now from a market cap perspective, and that is what counts on this index. 1050 is very reachable on further selling on the Nasdaq, and that is where we set our sights on a rebound on further selling. That level should provide a platform for a good relief move up that can last a week or so.

Stats: -11.13 (-1.03%) to close at 1073.14.
Volume: NYSE volume fell to average levels at 1.283 billion (-5.8%).

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

End Part 1 of 2

us stock market
stock prices