us stock market, stock split

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5/15/02 Stock Split Report Market Summary
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Stock Split Report Subscribers:

MARKET ALERTS

Target hit alerts issued Wednesday: JILL; ASL; UOPX.
Stop alerts issued: DHR; NUE; CAT; PCAR; FCN
Trailing stops: AZO

Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertssr.htm

Emails: We love your emails. We receive hundreds of emails a week, but we don't mind. We respond to them all as fast as we can, so bear with us.

SUMMARY:
- Upside move hits stalling point, but it does so with a bit more style.
- Volume lighter though still strong as internals shift to neutral: running out of momentum.
- Economic numbers back to mediocre.
- Just resting or ready to plunge again?
- Team Trades

Indexes rally and then fall, running out of gas.

As anticipated, the market took a breather from its last two sessions of strong gains. What was not expected was the lower open followed by a sharp bounce. That kept things from getting really ugly in a hurry and actually made the market look decent through much of the session. Mid-afternoon, however, several rumors hit (e.g., SEBL failing to send key personnel to a June analyst meeting seen as negative) and oil prices slumped. Those were blamed for a turn lower in the indexes that sent the Dow and S&P negative and shaved almost all of the Nasdaq's gains.

The rally attempt after the early selling was some better action than we would have seen in the teeth of the recent downtrend. In that downward move, once any upside momentum faded, it was over until the indexes became so oversold they had to bounce. Even though they ultimately lost out, there were buyers stepping in after early selling. It was not just short covering as shorts don't cover as a rally stalls and the selling starts; at that point they pile on to the downside. Again, that was a decent sign of at least a bit of underlying upside strength.

Not a clear cut day of rest.

Of course, it is never all roses with this market. Just after their follow through sessions on Tuesday, the big three indexes all reversed in the mid-afternoon hours and gave back their gains. The Dow swung over 100 points in its afternoon reversal. Each one finished well off their intraday highs on continued strong volume. Volume was lower (barely so on the NYSE), so it was not a clear case of a complete shift in momentum from buying to selling. Up volume continued to outpace down volume handily, and the A/D lines remained positive. Positive A/D lines on a negative day on the Dow and S&P 500 is always a good sign.

The NYSE came a whisker away from distributing the session after follow through. Much as with the economy, such action shows that the move is not all that solid; there is some sustained buying occurring, but it is not yet endemic.

Then there are the big techs. They rallied for 2.5 sessions and then closed flat to down. Volume was still strong though a bit lower on most. Looking at the patterns, they all appear to be stalling at some resistance whether a continuing downtrend or a key moving average such as the 50 or 200 day. Doji's on the candlestick charts abounded, and those can mean a change in momentum.

We discussed this among the analysts and writers. But for the recent higher lows and follow through session, we would look at this as a shorting opportunity. The strong NYSE volume on a turn back down lends some credence to the short side. Given the recent events, however, e.g., volatility in the indexes, the higher lows, and the follow through session that shows more sustained buying, we are not jumping into shorting these stocks at this point. The volatility that we discussed last night combined with the above factors indicates there is some attempt at meaningful change. At those times where there is indecision we prefer to just make the safer money on strong patterns whether up or down.

THE ECONOMY

Economic reports were nothing exciting, just showing relatively quiet consumer prices and industrial production creeping higher. Mortgage applications, after gains for a couple of weeks, turned lower again. The market took it all in stride, but it did not gain any fuel from them.

CPI rising but still tame.
+0.5% (+0.4% expected). Take out food and energy and you get +0.3% (+0.2% expected). Gasoline prices rose 10%, accounting for most of the rise. Gasoline is a direct cost to consumers. This is not a situation where increased producer costs due to higher energy prices are being passed along, but is a direct higher cost of gasoline. That is not great, but it is still indicative that there is not upside pressure being passed through from producers.

Industrial production steady, capacity utilization rises.
Production rose 0.4% from March's 0.4% gain (lowered from +0.7%). The manufacturing sector continues to work its way out of its recession, but it is slow going. Factory usage rose to 75.5%, a shade lower than expected, but up from March and its 75.3% rate. Again a sign of improvement, but very modest and within the statistical margin of error.

Business inventories fall 0.3%.
Inventories fell more than expected, indicating that even with the higher manufacturing activity (though barely higher), inventories are not keeping up with consumption and continued inventory cuts in other areas of the economy. To us this is good news as it shows consumption, even with rising production activities, is whittling away existing inventories and that will require continued increased production in the future. That is some insurance the economy will keep improving even if slowly.

Mortgage activity falls.
After two weeks of gains, mortgage activity fell an average of 8.7% last week according to U.S. MBA. The drop was across the board from new mortgages to refinancings as 30 year fixed rates rose one-tenth of a point. It does not take much to derail mortgage gains now, a sign the housing sector is getting softer.

THE MARKET

Best face: a breather or a 'pre-rally resumption dip' according to the bull on the commercial. Given the higher low, follow through session, and volatility we are leaning toward the breather scenario as the nascent rally catches its breath. That is a risky gambit of sorts given the recent history of the market and the horrid patterns in the Nasdaq that has been leading the way, but when you see potential change afoot, it does not pay to put the pedal to the floor. The big techs showing doji's at resistance have a familiar allure, but there are enough shifting currents to make us hold off on that action.

We like history, and have pointed out historical similarities in this recovery to other times in the past, e.g., the behavior of unemployment and weekly jobless claims last year and earlier this year, spiking sentiment indicators last year, etc. Today's IBD pointed out that the Nasdaq is very similar to the 1932-1933 Dow where the Dow collapsed after the central bank determined it had to stop the rampant prosperity and raised rates until it in fact broke the market's back. Then the Dow bounced off its low and then spent 6 months testing that low, giving back over half the gain. From there it followed through a rally session and never went lower from there. Similar action on the Nasdaq with its rally off the lows and then deep test of those lows. It has now followed through as the economy improves. Sounds good.

The Nasdaq also looks a lot like the S&P 500 back in 1974. A LOT like that period where the S&P hit its low, rallied 25% off the low, then retraced 60% of that move. After that it too mounted a follow through rally and that was the bottom. History is fascinating because it repeats and repeats, but we get too wrapped up in the minutia to really take a look at it and see the pattern repeating.

So what about the Nasdaq and its hideous patterns? That is a problem and as we noted last night the Nasdaq will have to rebuild its patterns as any rally progresses. Then it will stand a critical test as its major stocks reach breakout points over key resistance. Many may not make it and suffer the fate of the Nifty 50 in the 1970's. Technology is here to stay, however, and we will see leaders in new technology emerge to lead the index. That will be a while in coming. The small and mid-caps of all stripes will lead before then as they have been doing. Long term the market is fine; it is the short term that is treacherous as many of the tech favorites may not be able to make substantial moves out of these downtrends, and they may reverse and fall again.

Put/Call Ratio (CBOE): 0.79; +0.13. Back up on the mixed market action, though the late selling showed a definite downward bias. Still not going to give us the extreme signal we would have liked to see to support any lasting move.

Nasdaq

Early selling was met with buyers. They won the session, but gave back 35 points to hang onto a narrow gain. Many big techs are at critical resistance, making then next two sessions 'interesting.'

Stats: +6.51 (+0.4%) to close at 1725.56
Volume: 2.265 billion (-13%). Strong, above average volume, but lower on the session. Technically that is not good, but given the big close off the high and the negative implications that gives, the lower volume was a good thing. No high-volume reversal off the intraday high is a positive at this point.

Up volume: 1.336 billion (-361 million)
Down volume: 884 million (-8 million). Still very good action on the session.

A/D and Hi/Lo: Advancing issues continued to lead but were way down at 1.08 to 1 (2.18 to 1 Tuesday). The A/D line needs to improve big time on the next up session to show there is broad staying power on the move.

New highs: 170 (0)
New lows: 61 (+6)

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

Raced up to 1759.33 on the high, above some resistance at 1750 and the simple 50 day MVA (1771.17) and then ran out of steam. It gave back most of the sessions gain, but it did manage a nice early recovery from selling pressure on the open, and then it led the market the rest of the session. It has the bad habit of leading to the upside and the downside with more emphasis on the downside. A good place to hold on a further test: 1700. If not there, 1700 represents the February low and some interim highs. Those are good pullback levels. Of course, volume on the pullback will be key to the life of the rally. Today was strong, but did not take out the follow through volume. Not a bad day at all given the recent history. It is setting up some big techs for entry points for the next bounce higher, e.g., QLGC.

Dow/NYSE

The Dow ran out of steam at 10,300 and reversed over 100 points on the session. Not a big deal after such a strong run, but the volume was higher than you would like, running just below Tuesday's follow through volume. That is a caveat on today's session that on the face looked like some innocuous profit taking.

Stats: -54.46 (-0.5%) to close at 10,243.68
NYSE Volume: 1.391 billion (-2.4%). Volume remained above average, but it did back off on today's reversal. Volume was a bit higher than we wanted on the selling, almost smacking of a high-volume reversal. It was not higher, however, so the sellers were milder than the follow through buyers though the down volume did run up and overtake upside volume. It was not, however, a downside runaway.

Up volume: 622 million (-509 million)
Down volume: 779 million (+501 million)

A/D and Hi/Lo: Advancers held onto a narrow lead at 1.13 to 1 (2.26 to 1 Tuesday). Good to see the NYSE holding positive on downside moves in the Dow and S&P 500.

New highs: 146 (+7)
New lows: 32 (+4)

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

Peaked out at 10,349.07, right at the key to higher levels, i.e., 10,300. The simple 50 day MVA (10,256.75) is also holding as some resistance, though not as strong. The Dow is set for a pullback as anticipated, and it started today. 10,100 is the level we would really like to see the index hold on this pullback. That is a test of solid support and would provide the ideal launching point for a further move higher. As we have noted the past week, the Dow is holding up well and is well out ahead of the Nasdaq and the S&P 500. Given the higher recent low and break over the shorter term down trendlines, we like the prospects of a test of the recent highs on this run. It must clear 10,300 on a strong volume move, however, to have a chance of moving past the March high of 10,600, however.

S&P 500:

Similar rally higher and then rollover as the big caps reversed 13 points from the high to close lower for the session on slightly lower NYSE volume. The high tapped right at the 50 day MVA (1103.99) and then folded quickly in the afternoon with the rumor-related selling. Any excuse in a volatile market after a good gain. The move lower pushed it under that second March down trendline and unable to break over resistance at 1100. A test of the February lows at 1074 is a good place for this pullback to end. The index is still in a downtrend, however, and we have to keep that in mind. Even if there is economic recovery, large caps just as large techs are lagging the overall market and face a lot of overhead resistance. It chances of a recovery that does not drive investors insane with small moves up and then back is low. There are better areas to look than large caps in general.

Stats: -6.21 (-0.6%) to close at 1091.07
Volume: NYSE volume edged lower but remained strong on the selling, something that makes the large cap follow through less then spectacular (not to mention the pretty horrid index pattern). Volume came in at 1.391 billion (-2.4%).

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

End Part 1 of 2

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