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us stock market, trend trading stock
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5/11/02 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS
As we note in the reports, Friday we were unloading upside positions in number and looking to the downside again as we let our previous downside plays run after the Wednesday short covering rally. We saw the smaller issues taking on some water as the market quickly gave up the short covering gains. We were looking for the smaller issues to improve after the rush to the big name techs, and the fact that many were suffering caused us consternation about the overall market in the near term. While many continued to perform solidly, we took money off the table if they showed weakness.
Target hit alerts Friday: HDWR (+21%)
Trailing stops alerts issued Friday: WWW; FITB; IRIC; STI; LFIN; APOL; PNRA
Stops issued Friday: HB; FCTR; PTEC; DKWD
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertdly.htm
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SUMMARY:
- Big indexes distribute on second day following rally attempt, a bad sign for the future.
- Smaller issues take on water, retreating with the big boys, a disconcerting change in character.
- Homebuilders failing to make the grade thus far in their corrections.
- The big picture: test of the September lows and then old economy stocks continue to outperform.
- Subscriber Questions
- Team Trades
Distribution session waits until Friday.
Thursday's disappointment was not a washout as the indexes did not pull one of their famous 'slap downs', i.e., an immediate higher volume sell off. That was just put off a day, however, as the indexes did distribute, i.e., sold off on rising volume Friday. It was not a huge volume sell off with volume topping Wednesday's up volume. As we surmised Wednesday night, however, the action was short covering, and that generated the high volume. Thus Friday's distribution is more a reversion to the 'norm,' and most likely killed any chance of Wednesday's rally becoming a longer term rally.
The market could still post a follow through session next week, but as we have written the past few sessions, we doubt that will be the case, at least for the larger cap stocks. As discussed below, the action Friday was disconcerting for other sectors as well. What we have failed to see is the necessary sentiment extremes or the solid patterns that would sustain a move in these sectors. Friday's action was just another indication there is not much upside life here yet.
Smaller issues showing strain.
We wrote over a week ago that some of the smaller issues were showing some trouble signs and that the small and mid-cap indexes were struggling. We have continued to watch their performance, and Friday the Russell 2000 smashed through its 50 day MVA along with the S&P 400 mid-cap index. The S&P 600 is right back at that level. Hanging around in bad neighborhoods tends to rub off some bad habits.
This is not a total breakdown in these issues. They have enjoyed a strong run and are due some profit taking. Still, many were selling on higher volume or breaking levels that should have acted as support. In short they were more mimicking the large cap indexes than going their own way. We had anticipated they would resume their climbs when the money that ran to the big name techs tried to work its way back into other areas of the market. That did not happen Thursday or Friday. Yes some stocks such as CAND and OATS continued to move higher, but they were more the exception.
While the smaller indexes may not have broken down as of yet, we don't like the look of the S&P 400 as it breaks its 50 day MVA again and forms something of a head and shoulders top. If these indexes give up the ghost and follow after their larger brethren, there will not be many places to take refuge. There are always upside winners in any downtrend as we have seen, but the failure rates are higher. You might see 5 stocks make good moves, but only 2 can hold the moves and not reverse. Those are not good odds, and that is one reason we were taking money off the table Friday on upside positions if they showed any weakness.
Homebuilders symptomatic of market in general.
Another area we have been watching is the homebuilders. Greenspan was talking about them Friday, or at least the housing market. Greenspan said there were no signs of a bubble, the new evidence being softening housing prices. Softening prices may be an indication of no bubble formation, but they did not help building stocks. They have already been correcting and forming new bases after strong runs the prior six months. CTX and BZH sliced through their 50 day MVA Friday. PHM looks as if it has formed a low volume double top and is fading toward its 50 day MVA. The patterns are breaking apart or at least not showing the calm action you want to see as a pattern nears its completion. We are looking at several of these for downside action if the patterns break down.
THE ECONOMY: the big picture.
What is happening with the economy is the main concern. The line we heard is if everything is okay with the economy, then everything will be okay with the market. Ah yes. The market. The market continues to be defined as the same stocks that were the leaders in the last move higher. The market continues to be defined as the Dow, S&P 500 and the Nasdaq, with the emphasis on the Nasdaq.
Here is what is happening with the economy and how it is impacting the market. In the 1990's there was a big buildup of technological equipment as the economy was booming and the need for newer and better systems grew. 'Old economy' companies were buying these systems, investing for the future. They were hurt by the lack of the most modern technology to help inventory control, supply control, marketing, employee management - - just about every aspect of their businesses needed the systems, and they spent a lot of money upgrading. That hurt the bottom line as all new investment initially does.
At the same time the technology side of the equation was booming. They were making and selling all of these systems to businesses across the board. They were the suppliers in a sellers market. They had the systems that everyone had to have in order to compete in the new, highly productive economy.
Enter the Fed and its snipe hunt for inflation and its gross miscalculation on the effects of Y2K. It took a strong market and gave it a dose of nitrous. The extra capital injected into the economy was put into the market and it shot higher. Then the Fed, already worried about too much prosperity (who can forget the claim that unemployment needed to be twice the current rate?) took back all the money it had made available and then some. It basically took all of the money out of the system, raised interest rates well above real rates, and then tightened loan requirements so no banks could lend money even if they wanted to. The triple combination punch took the stock market down and set the economy on the path to recession, dropping GDP growth from 8% to -1.5%. Huge, huge swing in prosperity. Over 3 million people put out of work, bankruptcies, private and public businesses gone overnight, and retirements whisked away, intensifying the moot debate over how to 'fix' social security. A lot of problems we did had on the ropes were suddenly very real problems again, and we did not have the strong economy to overcome them that we enjoyed in the eighties and nineties.
Now the economy is recovering, but it is not raising all boats. The 'old economy' stocks outside technology are the stocks seeing the early improvement. Why? All of those systems installed are having the effect. Productivity is up. Profits may not be soaring due to the continued disinflation (close to deflation) in the economy, but they are recovering as sales recover due to that increased productivity and efficiency as their investment in themselves pays off.
What is wrong with technology? It is no longer a sellers' market. Massive networks were installed and are now being used. These systems could handle the massive consumption from the late 1990's, and with the slow recovery, there is no need to invest in new systems now as current systems can easily handle the load. Many companies are consciously putting off acquiring new systems until 2003 or beyond. As the economy is on a slow recovery and there is no other real incentive to invest in new systems (e.g., tax credits), businesses are deciding that existing systems are just fine. Hence there is no big market for technology from its primary source, business capital investment. Technology won't see a real boon until the economy has improved enough to where businesses are comfortable installing new systems or the old systems become unable to handle the business, whatever comes first.
THE MARKET
Wednesday's disappointment coupled with 'lack of trust' on Wall Street has many asking what is going on with the market. The weekend talk shows were filled with comments on the loss of faith in analysts, sucker rallies, and an economy that just won't improve fast enough. Judging from what we heard you would think things are getting emotionally extreme.
Unfortunately, they are nowhere near that level. Even with the resumed selling, bullish advisors are still at 52.6% versus just 28.4% bears. At a minimum you want to see bears eclipse bulls; they are nowhere near that. The put/call ratio closed Friday at 0.83, again nowhere near levels indicating extreme speculation to the downside in the options market. That is good for our continued put plays, but not much for upside potential. Volatility measures are still anemic. Big tech stock patterns remain in disarray.
The big picture for the market.
There is no doubt the large caps continue to be oversold. Oversold conditions give rise to big bounces as we saw Wednesday, but they do not last without more foundation. The fact that the leading sectors of the market, e.g., small and mid-caps, are showing continued strain is another concern. If these stocks and the more economically sensitive larger cap stocks that have been outperforming the market stumble, there won't be many places to hide and most action will be to the downside.
Even if the smaller issues do not roll over, we are anticipating the large caps to now test the September lows, particularly the S&P 500 and the Nasdaq. The economy is better, but not for technology. On top of that, large caps are just underperforming as they tend to do when the market emerges from long term bear markets. The economy might be improving, but the market does tend to overshoot on the upside and the downside.
For now the trend is down and the sentiment indicators and stock patterns are in no position to indicate a change. The market is in an established downtrend and there needs to be a major change in attitude before the big indexes can mount a rally that lasts. That occurs when stocks sell sharply and test former lows. As the market has sold back this far without a jump in sentiment, the test of the lows or much closer to them is what is needed. While they could still mount a follow through session next week after Wednesday's rally, we anticipate a continue downtrend in the large cap indexes with sharp drops punctuated by a few sharp rallies. If the smaller cap indexes breakdown as well, the selling could be all the more faster. The faster the selling the better for our puts and well as the ultimate turn back up.
Put/Call Ratio (CBOE): 0.83 (+0.06). Rising again on a decline, but still well off a close of 1.0 or better that would indicate extreme downside speculation in the option market.
Nasdaq
It has almost filled the gap from Wednesday, but we doubt that even that event will change the prospects much for the techs as the rally already has undergone distribution.
Stats: -49.64 (-3.01%) to close at 1600.85.
Volume: 1.839 billion (+2.8%). A distribution session just two sessions after the rally puts any follow through in jeopardy.
Up volume: 221 million (-60 million)
Down volume: 1.606 billion (-127 million). Sellers ramping up as buyers fall.
A/D and Hi/Lo: Decliners fell to 1.74 to 1 (1.95 to 1 Thursday).
New highs: 101 (-32)
New lows: 107 (+38)
The Chart: http://www.investmenthouse.com/cd/$compq.html
The inside day and tweezer pattern on the candlestick chart gave us the indication of direction Friday, though it was not really a surprise. The Nasdaq broke to the downside on rising, slightly above average volume. 1589.98 will fill the gap from Wednesday, but as noted, the current indicators do not have us anticipating that will hold for a solid rebound. The recent low is at 1560.20 intraday which is in line with the October lows and the bottom of the downtrend channel. The Nasdaq will try to bounce during this downtrend at those levels just as an index always bounces up or down in a continuing trend. Until we see the sentiment indicators change, however, we have to keep the current trend as our focus.
Dow/NYSE
After stalling at 10,100 Wednesday, the Dow has retreated below the down trendline and is again testing the 200 day MVA. Without the help of IBM, MSFT, and GE, it struggles as the upside movers cannot offset the large downside moves.
Stats: -97.50 (-0.97%) to close at 9939.93.
NYSE Volume: 1.169 billion (+2.5%). Still below average volume, so the distribution was not as severe. In this respect as well as others, the Dow is holding on much better than the other large cap indexes.
Up volume: 196 million (-117 million)
Down volume: 972 million (+140 million)
A/D and Hi/Lo: Decliners fell to 1.77 to 1, but still very strong and continued even stronger than Wednesday's 1.72 to 1 lead by advancing issues. The NYSE move up was not that strong, and the move lower had been stronger as see in in the A/D line and in the smaller cap indexes.
New highs: 65 (-31)
New lows: 53 (+23)
The Chart: http://www.investmenthouse.com/cd/$indu.html
Not an impressive session as the Dow fell back below the down trendline (now at 9955), able to hold things in check at the 200 day MVA on the low (9910.29; 9922.35 on the low). The entire area down to 9750 is very congested from trading from November to February, and thus it could find support at any point in that range. The most immediate level is the 200 day MVA, followed by the recent lows at 9811. The bottom of the downtrend channel is at 9640, and that is followed by some support at 9500. The key will be how the Dow react to the 200 day MVA, the recent lows. If those fail, the trip to the bottom of the channel is not a long one, and a test of 9500 would be in order. It will most likely try to bounce at 9811 to 9750 before resuming the move down to the bottom of the channel.
S&P 500:
Again, the Nasdaq and the S&P 500 are in a horse race for the ugliest looking index. In two quick moves the big caps undercut the down trendline again and are already resting on the bottom channel in the downtrend. That could give it a bounce higher, but it undercut that level on the last selling round before making a bounce. Its recent low is at 1048.96, marking the bottom of the October trading range. It bounced sharply from that level on Wednesday after showing signs it was bottoming there, but we do not give it much chance for holding at that level this time around. We anticipate that it might attempt a bounce from 1050, but fail and seek lower levels at 1025 to 1000, the last shelf of potential support before the low.
Stats: -18.65 (-1.74%) to close at 1053.91.
Volume: NYSE volume remained below average, but rose on the selling with down volume rising and up volume falling. A distribution session on the heels of a rally attempt. 1.169 billion (+2.5%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
Economic news will once again rise to prominence as earnings season is mostly over and the key to the future is the economy. We had a preview of retails sales late last week, but the official April results will be out Tuesday, followed by business inventories and inventories out on Wednesday. Then housing starts, permits, the Philly Fed, and Michigan sentiment round out the week. It is a big economic week ahead with some key indicators of economic activity.
One of the problems with the recovery has been the idea that the recovering economy would save the market. It will, but the timetable most investors wanted versus the timetable the economy is working on are two different calendars. Moreover, there is still that issue of the need for tech spending. It is just not there yet and won't be most likely for the rest of 2002.
Still, however, that does not mean as some are saying that the Nasdaq will not rise until there is proof in the actual numbers that the sales are up, etc. As we saw in the spring, the market anticipates improvement ahead of time. There was improvement in Q1, but it was not as strong as investors wanted. So, the sell off. There will be anticipated gains once again, but it most likely will not occur until there is a more cathartic sell off after this last earnings disappointment. That has to be flushed through the system with a spike in investor fear and anxiety. There has been selling since the earnings let down, but it has not been severe from a sentiment perspective. After such a selloff, it will take a jump in the sentiment extremes to launch a sustained move.
Late Friday we were taking downside positions, anticipating further selling early this week. We may see a the indexes attempt to hold at the recent lows after a quick sell off to those levels early. Unless we see an unexpected jump in the sentiment indicators on that selling, the odds of a serious bounce continue to be limited. Thus we continue to look to the downside on the large indexes. The lack of a strong put/call ratio shows us there is not excessive downside speculation.
As for upside positions, we see some very good plays once again. As we noted earlier, there are always stocks that defy the overall market. The faltering small and mid-cap issues have us more cautious, but we also see many good moves continuing. We will selectively move in on those issues that look the best.
End Part 1 of 2
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us stock market
trend trading stock
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