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5/13/02 Technical Traders Report
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MARKET ALERTS

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SUMMARY:
- Market rallies on hope of better earnings this week from AMAT and DELL.
- Looks more like a bounce off of bottom of downtrend channel than real buying, though Dow looks interesting as it continues to move above down trendline.
- Intel 8086 chips look to be in more demand than Pentium 4.
- Manpower survey: 27% of companies plan to hire in Q3

Friday's distribution gives way to hopeful, low volume bounce.

It was Monday after a pretty unmerciful beating in the market, and before the open there was an old, hopeful, and almost frighteningly familiar call to buyers: time to get into technology now that prices had dipped and AMAT and DELL earnings were out later this week. There are calls that the AMAT and DELL numbers (Tuesday and Thursday after the close, respectively) will be better than expected, and apparently there are those thinking they could give rise to a CSCO-like rally or more.

There is some allure to the argument: the economy is improving, there has been a lot of selling, and AMAT is in a leading technology sector (i.e., should recover before the others). Surely after all this selling it is time to buy into technology.

Could be that there is some continued upside potential here. Still, this is frighteningly familiar as stated above. After selling, it is now time to hope for a recovery. Yes, at some point there will be a recovery, but does this make it safe to jump into big tech names? This same advice, almost to the letter, has hurt investors buying for the long term bad over the past year or more. It can make for some good upside trades, but the advice is to buy for the long term. There is nothing but the hope that earnings will be better than the earnings we have already seen from many tech and old economy companies, including computer and semiconductor equipment manufacturers just like AMAT. Heck, from the sound of it, Nasa's demand for the old Intel 8086 almost sounds stronger than demand for the current Pentium 4. That is of course an exaggeration, but it is put in to underscore that demand is still very low for these chips even though it may be improving over 2001 levels.

Bouncing off the bottom channel on low volume.

If there was more strength to the bounce we might feel a bit different. Volume was lower on the Nasdaq and NYSE, falling from Friday's distribution session. The A/D line was weak for an upside session. It was no follow through as far as buying volume or breadth. Who led the charge? The Nasdaq 100 with its bevy of stocks with pitiful patterns that show little accumulation and a lot of overhead supply to crush them down when they try to rise. If just about any other sector led this move higher we would take more comfort in staying power. Once again, however, a move up was led by stocks in distributive patterns with P/E's still miles ahead of any possible earnings based on the projected economic recovery rate.

Thus we have the Nasdaq and S&P 500 bouncing up off of the bottom of their downtrend channels, attracting what little upside money there is out there. The small and mid-cap indexes rose, but were underperformers as they continue to struggle after their leadership over the past several months. As we said before, maybe this is a rotation out of these stocks into another sector. Again, however, the big name techs are overpriced even for growth stocks, have terrible patterns, and have dim prospects. Money rotating into these stocks is setting the market up for a big upset. As we have seen, bounces on earnings are possible, and if there are enough of them that could set off an upside move. It will have a hard struggle longer term, however, for the majority of tech stocks that have a lot of overhead supply.

Dow has some promise to it.

While the S&P 500 and Nasdaq looked like that old, familiar bounce off the bottom of the downtrend channel, the Dow held again at the 200 day MVA and moved back over its down trendline. Yes it did so on even lower volume, but it has made a higher low after holding twice at 9800, and is the only one of the big three that is over that trendline and actually working higher. Moreover, its pattern never deteriorated as much as the Nasdaq or the S&P 500. The Nasdaq could slip down lower and lower while the Dow holds on. In fact, that is pretty much what it has done: as its tech components suffered mightily, the Dow did not undercut its February lows.

The Dow's relative strength is indicative of the 'old economy' recovery discussed in the weekend reports. These companies are benefiting from their investment in technology, and they tend to lead in an improving economy. They have been doing so, and when the Dow's technology components are not tanking but at least holding steady, the Dow can make some nice progress. On days such as Monday, when the techs are moving higher the Dow performs well. Given their patterns and outlooks, however, the Dow has to be able to make it with the many sessions these stocks will not contribute. It is a struggle without them, but it has been holding up above 9500 on the bottom and 10,200 on the topside. It is squeezed between two levels of overhead resistance and support from the move off the September lows. It is trying to set up another test of the resistance right now. For the moment the move has not been strong to the upside.

THE ECONOMY

Oil continues to move higher.
One thing that has not changed over the past two months even with the Middle East tensions ebbing and Iraq ending its 'embargo' is the rise in oil prices. Today oil rose again, hitting an 8-month high as OPEC said it would keep output steady. Greenspan talked of oil Friday, and the market seemed to take some justification for its price rise from that. The oil market is responding to two forces: OPEC manipulation and a recovering world economy. Problem is, the U.S. recovery is not strong enough, and rising prices will act as an indirect tax on U.S. consumers. It is not that higher energy prices will pass on to consumers (they did not in 1984 and in 1992), but the higher prices at the pump just in time for the summer travel season is not good at all for a country starving for a resurgence in domestic vacationing.

Manpower survey shows improved plans to hire.
16,000 businesses were surveyed and 27% said they were planning to increase hiring in Q3. 59% said they were going to hold steady while 8% said they were going to cut staff. This is a vast improvement and is more or less in line with historical norms. What we are seeing is an increasing workweek, increasing overtime, and increasing productivity. Those are all the ingredients of a recovery in the labor market. The plans to hire dovetail with that. Caveat: plans are plans. Plans can be shelved quickly if improvement does not continue. Things look to be on track, but with this economy, the tracks can get bumpy.

THE MARKET

Instead of continuing the downtrend, some hope was injected in the market with some big name tech upgrades on the "hope" that the numbers would be better when AMAT reports Tuesday after the close. If it is true, great. Even the, however, will that mean a time to buy? We have heard many 'this looks like the bottom' for the chips over the past three quarters, and the bottom just gets deeper and mushier. We even heard this earlier this earnings season from other chip equipment manufacturers. Further, is this not the same earnings season that proved to be woefully below expectations? Unless AMAT has something real and tangible other than 'looks like the bottom to us,' it would be hard to get a lasting pop from its earnings. This has the look and feel of all of those FOMC meetings in early 2001 where investors hoped the Fed would come out with some strong, favorable policy statement that would benefit investors, only to be let down and then crushed as the market sold again. We don't mean to be pessimists, but there is a saying in the market: hope rhymes with dope. There are exceptions to every rule or saying, but usually hope lets you down.

No follow through but a solid price bounce. As it began on hope of better AMAT earnings Tuesday, it may just continue on up to those earnings. There is certainly no underpinning for the move in big techs other than some upgrades on hope. If AMAT delivers the big 'this is it' speech and has blowout numbers, maybe it can pull it off. Again, there are no underpinnings to support it.

Put/Call Ratio (CBOE): 0.85; +0.02. Rose on a gain today, an interesting reversal of the typical inverse relationship. More put activity on a rise in the market. Either there are more bets the market will fall again, or there was put selling. Until we get some closes over 1.0, however, it is not telling us much.

Nasdaq

Held at 1600 again, about 25 points above the bottom of the channel in the downtrend, and bounced higher. Volume was very low, so no conviction on the buy side. Still has room to the upside, however, on a continued bounce.

Stats: +51.69 (+3.2%) to close at 1652.54
Volume: 1.648 billion (-10.3%). Volume slumped on the up session, falling well below average. No follow through, and low volume assents tend to fail as they run out of support. It takes more buyers to push that rock up the hill.

Up volume: 1.242 billion (+1.021 billion)
Down volume: 387 million (-1.219 billion). Big swap in up to down volume, but lower overall.

A/D and Hi/Lo: Advancing issues took over at 1.50 to 1, still well below the 1.74 to 1 decliners Friday and the 1.95 to 1 decliners Thursday. It was not a 'broad' rally as spouted on the financial stations.

New highs: 98 (-3)
New lows: 81 (-26)

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

Gapped higher, tested the prior close at 1600, and then spent the rest of the session running higher. It was a big tech rally led by the Nasdaq 100 and the SOX. The Nasdaq did not retest the bottom of the channel at 1575 but rallied above the steeper down trendline (1627). Volume was not there, coming in lower than Thursday and Friday, both downside sessions. As the rally is based on hoe regarding AMAT earnings out Tuesday, we could continue to see a move higher ahead of the number and then some late-session profit taking before the actual release. Any further upside move has resistance at the 18 day MVA (1672.74), the May high and February low at 1696 to 1700, and the second down trendline at 1715.

Dow/NYSE

Held at the 200 day MVA and charged up to 10,100 for another test after a higher low. A positive, but sure would be nice to see volume support the move and give a follow through session. It did not.

Stats: +169.74 (+1.7%) to close at 10,109.66.
NYSE Volume: 1.084 billion (-7.3%). The Dow looks a bit better with this higher low, but it cannot attract a lot of upside volume to support the move.

Up volume: 791 million (+595 million)
Down volume: 298 million (-674 million)

A/D and Hi/Lo: Advancers took over on the NYSE as well, but at 1.67 to 1, it too was well below the decliners on Friday (1.77 to 1) and on Thursday (1.72. to 1). The move up is again weaker than the move down for the broad market.

New highs: 85 (+20)
New lows: 63 (+10). New lows rising on an up session. Another sign the move was not all that strong.

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

Tapped the 200 day MVA on the low (9920.20) and rallied to make a higher low. After a series of lower lows in a downtrend, the higher low off of a small double bottom at the end of April and early May shows promise. Volume stunk, coming in well below average and thus showing no real buying and definitely no follow through. It rallied to the close, landing right at resistance at 10,100. It is above its recent March down trendline, and the higher low is a good launching point for an attack on 10,200 to 10,300, the level barring the way to the top of the range at 10,600 at the March high. It did not receive follow through Monday, and it has to have volume with the moves to be able to sustain any rise. It is in better shape than the Nasdaq or S&P 500, but it suffers from the same malady: lack of volume and poor patterns in its tech components. Without stronger volume, the high side of this rally is 10,300 in our estimation, with the simple 50 day MVA at 10,266.31.

S&P 500:

The big caps bounced at 1050 as we anticipated over the weekend, using the bottom of the downtrend channel as leverage (at 1051). In the big move Monday it covered a lot of ground, running up to the February lows at 1075 and the first March down trendline at 1076. The 18 day MVA is thrown in there at 1082.36 for good measure. That is strong resistance in a continuing downtrend, but the large cap index is trying to make a higher low as has the Dow. It is not as pronounced, but it is trying to do just that. Such a move gives more leverage against that first down trendline and the 18 day MVA. If it had volume to back the move it would be credited with more of a chance to break it and rally with some staying power. The momentum generated Monday could carry it toward the next down trendline at 1090 and resistance at 1100, but without some serious buying volume we still believe the move will fail.

Stats: +19.57 (+1.9%) to close at 1074.56.
Volume: NYSE volume fell even lower on an upside day. Definitely not follow through volume at 1.084 billion (-7.3%).

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

TOMORROW

April retail sales are out before the open, and these are one of the 'meat' economic reports as they give insight as to the one area that has held the economy up, the consumer. Sales have been flagging recently after a good start to the year. A bit of a downside surprise may put some brakes on the Monday hope rally even ahead of the AMAT numbers. If retail is a letdown, we do not anticipate this weak bounce to last much longer. If it is inline, then we get a rise up toward the AMAT numbers.

The big point will be AMAT's actual numbers and how positive it is about the future. It has to be positive and not just another 'this looks like the bottom' pronouncement that has hampered semiconductors and the rest of tech for the last three quarters. There are signs such as INTC keeping its investment decent and AMD increasing its equipment expenditures, but these did not get the market excited in the past couple of months. After CSCO's questionable news, however, it is a market in search of a catalyst. The indexes are all trying to put in some higher lows to attempt to change character. If they can put together a higher volume rally and take out near resistance, we will have to close out some downside positions, but we are not going to run out of them just yet.

What we anticipate is a move up to next resistance ahead of AMAT if the retail numbers don't get in the way of the move. Then the indexes are primed to fall if there is no volume and no major headlines from AMAT. Two up sessions then more selling; that is about the norm for a downtrend, but the indexes are putting in those higher lows. They are going to try and rally, and how they react to next resistance is the key.

End Part 1 of 2

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