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5/9/02 Technical Traders Report Update
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Technical Traders Report Subscribers:

MARKET ALERTS

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SUMMARY:
- Rally dips, but avoids a heavy volume sell off.
- When all is said and done, the downtrend remains thus far for the big stocks.
- Jobless claims drop a bit, retail sales do same.
- Team Trades

'Disappointing' session, but better than what usually happens.

No question the tech stocks did not perform as they did Wednesday with the Nasdaq and the big techs fading. After such a large gain that was to be more or less expected. Still, there was not much of an attempt to even mount a small rally. The indexes tried to form an intraday double bottom, but that fizzled late and they tanked to session lows on the close. Most labeled the day a disappointment.

There are several things to note, however, before Thursday's action is labeled an out and out disappointment. First, it was not that high-volume reversal that is most feared in a continuing downtrend following a big upside session. That was a moral victory right there. Second, the selling was on much lighter volume, indicating that there was not a lot of dumping of those shares purchased Wednesday (though a lot of those were bought to cover short positions). Third, any 'follow through' session would not occur today, but next week. Sure we don't want to see the indexes tank, but as long as they don't suffer heavier volume selling prior to any follow through session or undercut Wednesday's low, they can still follow through on Wednesday's surge. What the later surge (4 to 10 days after the first rally session) shows is that the big money is still interested in taking upside positions well after the initial buying surge. There is always a lot of speculation as to whether a rally attempt has staying power. Why not let the market show you with buyers coming back in a week later? Historically it has preceded each major rally, so it is something worth waiting on.

Still have the same problems to deal with.

On the downside there are the same problems: very poor patterns in technology stocks that led the rise Wednesday. They are not showing accumulation, but continued distribution. Most are not even in remotely positive price patterns as they have been continually hammered lower and lower. Some are asking so what? Well, the problem with those price patterns is the overhead supply. Those are levels where investors bought heavily only to see the stock fall from there. If the investors have not sold out, then when the stock hits each such level as it struggles back up, those investors sell to get out 'even.' The stock has to continually come up with more and more buyers to overcome this excess supply hitting it each time it makes a good run. As one subscriber noted, there are still investors out there that cannot afford to sell and take losses at these levels. Apparently there are many mutual funds in the same boat looking at the recent selling in issues such as WCOM and ORCL.

That is why the sentiment indicators are so important. They never hit extremes that would flush those still holding, i.e., the overhead supply ready to sell shares when they get in the same time zone of where they were bought. You literally want to have those that feel they cannot sell finally say 'I have to sell' based on the idea it is not going to get better. That is what some of the analysts were looking at with the WCOM selling: they were finally giving up on that dog. That is a sign, but it is not complete. Bulls still better than 50%, put/call ratio not spiking over 1.0, volatility comatose. In short, none of the sentiment indicators gave the first signal of a possible rally with legs. Pile on top of that the distributive patterns in technology, and there is little hope of a sustained rally that is led by tech. What it looks like is more of what we have seen before: small caps and their kin leading the market after a nasty, 3-leg bear market strolls to an end in light of a slowly improving economy.

THE ECONOMY

Jobless claims fall but remain above 400,000.
Jobless claims fall 11,000 to 411,000. Well, kind of. Last week was originally reported at 418K but was raised to 422K. Thus the 11,000 drop was really a 7,000 drop. Close to expectations, but still over that 400,000 level that is a sign of recession. The government says it is the extension of benefits causing the lingering high numbers, but again continuing claims rose 61,000 putting 3.8 million on the roles receiving jobless benefits. They have come back to the job pool, they are ready to work, but there are no jobs for them to take. Business spending is not increasing, and without that there won't be a lot of hiring. It is a slow recovery, particularly from an employment perspective.

It is heresy to say it with all of the hand-wringing over social security, but the solution is more tax cuts in the form of investment credits that this time will motivate the smaller businesses to buy capital goods. If you can expense $25,000 of equipment per year as a small business, you are not going to increase your spending just because you get some accelerated depreciation; it is better to expense them immediately. If you want to get businesses buying, 80% of all businesses are small businesses; give them something they don't already have, e.g., tax credits. Then you will see a surge of investment because you either pay the money to the government and get nothing, or you use that money to buy a PC or some other equipment. No brainer, and it has empirical evidence to back it up. Moreover, it is small business week. Do something for the majority of U.S. businesses, i.e., small businesses.

Retail sales are mixed as usual, but lower overall.
It was a disappointing April. Apparel retailers had a hard time of it, but they still performed well Thursday thanks to raising guidance. The action was mixed, reflecting the S&P retail index' troubles of late. WMT was up 3.2%, TGT just 0.4%. Those were suffering. Others such as CHBS, ANN, CHS, i.e., some niche players, were doing much better. Overall, we are concerned about retail numbers coming in Q2. The demand seems a bit weak right now, and the revenues may not be there in Q2. The consumer continues to consume, but as we have said over and over, the consumer cannot and never has done it alone. The consumer consumed like mad to keep the economy in a shallow recession. Still, it could not keep the economy out of recession. Now the Fed is still betting on the consumer to pull the economy out of recession, but it is having a hard time. At most it will be a slow recovery.

And, that is what the Fed is hinting at to Congress. When the Fed talks about final demand as the second stage rocket that is needed, it is not talking about the consumer. The consumer is almost a given right now with good future expectations and its track record of spending everything it makes. The Fed is saying businesses have to pick up, i.e., that final demand ingredient that is missing. A decade of massive consumer spending has not kept business spending going. How is it going to do so now? The 'hints' are plain but no one is listening. The Fed does not like to take political sides, but it is hinting loud and clear there needs to be something to motivate businesses to buy equipment.

THE MARKET

The indexes turned right back down, but did so on lighter volume. While the indexes did not build on Wednesday's gains, they did not reverse and distribute. That gives them a chance to consolidate a bit and then look to a follow through next week. As noted Wednesday, there are no tech stocks in good patterns to lead in a sustained manner. What we most likely would see is a return to the smaller issues leading, though the Dow is not in bad shape to mount a recovery. Its problem, however, is very similar to the Nasdaq: a big shelf of overhead resistance starting at roughly 10,300. Each time it has moved up to that point recently, it has been banged back down.

Put/Call Ratio (CBOE): 0.77; +0.12. Up as it should be on some selling, but still nowhere near the 1.0 level needed to signal a potential rally. More than that, it usually takes at least two such closes. Not there yet.

Nasdaq

A modest pullback compared to Wednesday's gain, but on any other session, a 2.7% loss is a big move lower. It did not distribute, a good sign, but the candlestick action was not great. Friday will tell the tale as they say.

Stats: -45.80 (-2.7%) to close at 1650.49
Volume: 1.788 billion (-25.5%). Big drop in volume. Big drop. That shows there was no dumping of the shares bought yesterday, but we do note that some big tech names sported heavy volume again, e.g., KLAC, NVLS. It was not all roses.

Up volume: 281 million (-1.749 billion)
Down volume: 1.479 billion (+1.132 billion). What a reversal in action.

A/D and Hi/Lo: Decliners reversed the tables, leading 1.95 to 1 (2.28 to 1 Wednesday). This shows how fragile things were Wednesday in the rally.

New highs: 133 (-14)
New lows: 69 (+11)

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

An inside day, not the greatest pattern. On the candlestick chart it showed a closing tweezer. Tomorrow's action is determinative as far as these patterns are concerned. Basically, as noted last night, we don't have a lot of faith in a Nasdaq-led recovery, at least not in the near term. The patterns making up the bulk of the index have a lot of work to get done. Someday tech will lead the market; in this age it almost has to. It most likely won't be the familiar names that do it when that happens. Between now and the end of the year and 2003 there will be a lot of new companies or more accurately, companies new to most people, that will assume tech leadership. For now the index does not have a lot of strength, but it can, as we saw last fall, mount an impressive run out of some questionable patterns. That will keep us looking for a follow through next week along with some better looking stocks that can make us some good returns during any rally. At the same time, however, we see several puts developing once again. Again, tomorrow's action will tell us more about which way it is going near term as we wait to see if it can muster follow through next week. The quick reversal in the A/D line, however, is almost like a quick distribution session.

Dow/NYSE

Stalled at 10,100 again and slid lower to close on the session low. A triple digit loss, but just a third of Wednesday's gain and on very low volume. Still in decent shape if it can hold here for a few sessions and then try a follow through. Talk about looking for silver linings.

Stats: -104.41 (-1.0%) to close at 10,037.42
NYSE Volume: 1.140 billion (-23%). Well below average volume on the selling. If there was much buying Wednesday (there was some as opposed to all the short selling) there was not much selling Thursday.

Up volume: 313 million (-921 million)
Down volume: 832 million (+557 million)

A/D and Hi/Lo: Decliners moved ahead 1.86 to 1 (advancers led 1.72 to 1 Wednesday). It was not a strong session Monday for the NYSE overall, and the fact that decliners led today on rather mild selling underscores the weakness in the move.

New highs: 96 (-18)
New lows: 30 (+8)

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

Held in check by 10,100 and the 50 day MVA (10,128.55) and then closed near the low (10,016.73) as the index fell hard in the last hour. It closed near the down trendline (9975), still riding above it on Wednesday's break. It is over its down trendline, but could ride down to 9900 (200 day MVA at 9913.64) as it consolidates Wednesday's move. If it can successfully do that it still has significant resistance at 10,300, the key to it moving higher.

S&P 500:

Its brief foray above the March down trendline was brief indeed, stalling at the 18 day MVA (1076.80). It is now at the February lows (1074) as the large caps resume their downtrend. The late April lows are at 1063, then the lower channel of the downtrend at 1053. The index could still follow through next week, but it is in a downtrend still. We cannot let Wednesday's move override what the market has been telling for months.

Stats: -15.84 (-1.5%) to close at 1073.01
Volume: NYSE volume backed way off to 1.140 billion (-23%).

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

End Part 1 of 2

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