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us stock market, top stock pick
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5/16/02 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS
Buy alerts issued Thursday: UPC; PMI; ROOM; AGN; CTX; UAG; TEVA; AHC; CAO; CHGO; BMS; CCRN
Target hit alerts issued: Nothing hit the targets today on a lackluster session.
Stop alerts issued: PETC
Trailing stops: DANKY; PNRA; MTEC; WOOF
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertssr.htm
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SUMMARY:
- Another lackluster session, but indexes again avoid the big sell off.
- Small and mid-cap indexes under performing, a concern for the market overall.
- Housing reports a standoff, continuing jobless claims still rising.
- Dell beats street, but did it stealing market share with just a 'gradual improvement' in business spending.
- Options expiration Friday could spark the next move.
- Subscriber Questions
Minor gains continue on low volume, but stocks avoid the big reversal.
After the big gains on the reversal and then the follow through session we would normally say this modest sideways action on lower volume with buyers coming in on each dip was good action. Well, it is good action: based on recent history the indexes would be diving lower now after the initial surge higher. Now they are showing orderly consolidation of gains just as we saw after the big moves off of the September bottom. While many were calling those consolidations the end of the move up and the beginning of the next fall, we were touting them for what they were: consolidations of good gains ahead of the next leg up.
Right now we like what we see, but we are not wild about it. Why not? The indexes never showed any extremes in sentiment on the recent selling. A few weeks back we posited that perhaps on this test of the September bottom those prior extreme levels were all that was needed. Indeed, we noted that the rally in small and mid-cap stocks may have been hampering any real spike in the sentiment indicators: overall the majority of stocks were moving up, not down, so there was no corresponding panic or fear in the market. We were not wild about that prospect, but conceded it could be the case. We are still not wild about that idea, but again we are not totally discounting it. That is why we continue to take upside positions as the stocks in good patterns present themselves. We have nagging concerns, but we also know that the market plays against your emotions. While we did not see the extreme sentiment we wanted, we do know that the market is showing good action. It requires the usual 10 pounds of caution in this market, but when opportunity presents itself you have to act on what the market is showing.
Some of the big techs mirror this action to a certain extent. BRCD and BRCM. BRCD rallied up to its 50 day MVA and down trendline, and that would normally have sent it cascading lower. Instead it has shown a couple of doji's as it eases back on lower volume. BRCM is the same story. Then there are GNSS, QLGC, and EMLX that all held onto their building patterns ahead of other tech stocks today. This is action that indicates the lack of selling wrath during the prior 4.5 months when the opportunity was presented. They indicate there is more upside to this move. We are not ready to say it is the same as the September bottom where the indicators were clear, but we are also not going to say that because this is not the perfect rally scenario we are too good for it. We are not totally comfortable by any stretch, but we will take that money lying on the ground if we find it. For now we approach it as a short term rally if it shows us life tomorrow on expiration Friday. If it is more, great.
Small and mid-caps under performing.
The nascent strength in the larger indexes has taken a toll on the smaller indexes. They were down today while the big indexes managed modest gains. It is disturbing that the indexes cannot all put in improved performances together. That means money is chasing around the market once again, looking for immediate, near term performance as opposed to investment performance. It is not really what we would call healthy rotation as we recall the mad dashes from sector to sector in late 2000 and the first half of 2001.
Smaller indexes have not by any means tanked. They are just struggling at their recent highs. They looked ready to resume their runs as all indexes rose earlier in the week, but now they are balking again. We do not doubt that they will continue their move; historical patterns lend support to this. What concerns us is that when they do, will that mean that money leaves the large caps and big techs once again and they roll back over? That is the real root of what we don't like about the recent action. If everything started to rise together a bit more and not show this tug of war, the move in the Nasdaq would instill more confidence. We will see how it plays out of course, but this keeps us extremely cautious on the big names.
THE ECONOMY
Housing starts plummet, but permits jump.
Housing starts fell 5.4% in April to 1.555 million annualized units, well below the 1.625 million expected. That initially shocked the market, but permits managed to reverse the recent slide and rose 0.36% to 1.634 million annualized. That helped stabilize the market as more permits means there are more plans to build in the future even if there was a lull in starts after the surge in the first two months of 2002. Those were very strong months, and it was impractical to think the pace could be maintained.
The permits were a real concern for us because after months of steady improvement, they were showing that old volatility from month to month, i.e., up and down. They still have not re-established the clear, unbroken uptrend, so the volatility is still a sign that there is unrest in the market. It is showing classic signs of a near term top with units going unsold, some speculation in certain housing markets, and volatile permitting. These are not rampant, however, and the April starts are just 2% below the record year in 2001. What we see is a housing market that is definitely flattening out and topping in some areas, but not all areas of the country. That means less positive impact on GDP and the economic recovery in the months ahead.
Initial jobless claims only a hair higher, but continuing claims at a 19-year high.
For the past two months we have been wondering why economists brushed off the rising continuous claims numbers as being just a part of the overall rise in jobless claims due to the extension of unemployment benefits. New claims yes; continuing claims, no way. After an initial bump when more claims were filed, continuing claims should not have continued to rise. What that means is that those coming back to the market are finding it no easier to find jobs than those that were already in the job pool. Today's 19-year high (3.86 million continuing claims) finally woke them up to the fact that there were a lot of people looking, but not many finding, jobs. The economy has just not run hard enough yet for companies to begin hiring. They are working existing employees harder as the overtime figures show, but there is not that confidence to bring on new full-time hires. We are seeing more temp staffing being used, and that is a positive sign; many of those temps will be converted into full time employees once things pick up.
Philly Fed falls, but shows some positive indications.
These regional manufacturing reports are very much the same as the consumer confidence and Michigan sentiment reports, but for businesses. Thus it is not an actual measure of activity per se, but of optimism or pessimism about the next six months.
The number fell sharply to 9.1 (12 expected, 12.3 prior). Still it was above zero, and that indicates more favorable optimism for the next six months. 29% said they saw improving conditions versus 19% that said conditions were worsening. That was the fifth straight month where the optimists topped pessimists, a sign of continued improvement. Moreover, 17% said they were adding jobs versus 12% stating they were cutting. That is the first time more have been hiring than cutting in 19 months. Significant though not definite proof things are better on the jobs front (see the jobless claims).
THE MARKET
Again, it could have been worse but did not give in. When selling started, buyers came back in, and they did it late in the session as well when the indexes were threatening to head toward the session lows. This is good action, but let's not get carried away with glimmers of positive action following a heavy sell off the prior two months. Sure the indexes have not turned tail and sold off after the two strong moves higher, but they are still at resistance levels and are by no means out of the woods. One bad story could easily send the sellers back in as that overhead supply turns from a few buyers to a mountain of sellers. The market is in better shape with the reversal and follow through, but that is no guarantee of success. We are seeing positive indications, but technology stocks are overwhelmingly in poor patterns. Real leadership in the near term will have to come from those stocks that are in accumulative patterns. As noted before, a rally can give good returns in the big name techs as they build their patterns, but they are volatile and we have to go in with eyes open and knowing they can turn on us quickly.
Put/Call Ratio (CBOE): 0.86; +0.07. Once again climbing even as the indexes posted modest gains. This action is interesting in that it could show continued concern about the prospects for a continued rally; contrary indications are what we like in sentiment. More likely is that it is also potentially related to Friday's option expiration for May.
Nasdaq
Another gain, but on lower volume and showing definite strain at the 50 day MVA and below the second March down trendline. It has not tanked, but we would prefer to see it move laterally a bit before trying to move higher. It has not tanked, but the pattern is not great for a move up near term.
Stats: +4.88 (+0.3%) to close at 1730.44
Volume: 1.644 billion (-27%). Major slowdown in volume as the index runs out of steam on the move higher.
Up volume: 1.050 billion (-286 million)
Down volume: 560 million (-324 million). Not bad upside action even on the lower volume.
A/D and Hi/Lo: Decliners took over 1.22 to 1 (advancers led 1.08 to 1 Wednesday). Not a powerful turn lower, but the day was not one that was powerful either way, just a continued slowing of the upside momentum.
New highs: 148 (-22)
New lows: 78 (+17)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Could not clear the 50 day MVA (1743.45), but did hold above the first March down trendline (near 1700). The candlestick chart shows slowing momentum on the move up: candle bodies still showing gains but shorter in height along with volume declining as it makes the moves higher. Classic slowing momentum no question. The issue is whether stocks such as BRCD and BRCM with their modest pullbacks are representative of the Nasdaq. As noted Wednesday, the best place to hold is at 1700 for a move higher. There is support there, and it is a natural point to launch a rally. If selling picks up substantially on any selling (and it is not a reversal session after early selling), that is a bad sign. It is showing those bullish tendencies to come back from selling, but it has to give another powerful move after some consolidation or this slowing momentum to show it has more staying power. We are in EMLX and GNSS already, and are looking at QLGC on a resumption of buying.
Dow/NYSE
Moved back up after Wednesday's selling, but no volume and could not take out 10,300. That is the level it needs to clear on strong volume. It is showing the type of pause it needs before such a move, so we view this action as positive.
Stats: +45.53 (+0.4%) to close at 10,289.21
NYSE Volume: 1.242 billion (-10.7%). It was not much of an upside session, and there was no volume to back the move. We view it as more of a flat, consolidation session, so the lack of volume is not bad at all.
Up volume: 614 million (-7 million)
Down volume: 607 million (-172 million). Dead heat that pretty much sums up the session.
A/D and Hi/Lo: Decliners moved ahead 1.22 to 1 (advancers led 1.13 to 1 Wednesday). Disappointing to see the broader market perform worse on a gain in the Dow, a definite switch from previous sessions as the NYSE did not get help for the small or mid-cap indexes.
New highs: 122 (-24)
New lows: 49 (+17)
The Chart: http://www.investmenthouse.com/cd/$indu.html
Again trading over the key level of 10,300 on the intraday high (10,318.83), but could not hold above that level on the close. That keeps it just below that January/September 2000 down trendline that is a key, key level for this index to cross with authority. After two taps at 9800 and a higher low that held the 200 day MVA, the Dow appears to be forming a sideways handle on declining volume. That is the best action a bull could hope for right now: a few days laterally and then another move higher on above average volume. This is the best looking of the big indexes, and if it continues to consolidate like this, its prospects of testing the recent highs at 10,600 look good.
S&P 500:
The big caps also mounted a modest, low volume gain Thursday, the best of the big indexes. It too, however, could not take out important resistance at 1100. As with the other big indexes, it is holding its own as opposed to immediately tanking after big moves; bullish action, but it has a lot of overhead supply still to buck. A close over 1100 for the week could launch it toward 1125, perhaps 1150 on this move. If we get that, we may not see more upside on this move. It is setting up decently for that move if it can once again avoid the sell off. It is holding above the second March down trendline, and as with the Dow, if it can move sideways again Friday and then launch a strong volume move next week it can make that move. We must remember, however, that the index is still in a downtrend and still has a lot of overhead supply. When it hits those critical levels, e.g., 1125, there is a lot of selling that takes place. If it clears 1100 and can close over that level Friday, however, that could trigger more short covering and give that boost up to 1125 or a bit higher. That is a move we would like to play.
Stats: +7.16 (+0.7%) to close at 1098.23
Volume: NYSE volume fell further to below average levels at 1.242 billion (-10.7%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Dell, Michigan sentiment, and options expiration will dominate Friday's action. Dell beat the street and said it saw "gradual improvement" in business spending, but most of its gains were from its continued capture of market share. That had the stock up a bit after hours, but nothing dramatic. As with CSCO, we get the impression that the gains were from efficient operations as opposed to improving business. It was not a runaway catalyst after hours, and we don't expect it to be so Friday.
Michigan sentiment is out 15 minutes after the open. It is expected to come in flat. Economic expectations are in a period where they are overall a bit flatter than expected. With the stock market so-so, energy prices higher, and a slower apparent recovery, we don't expect any upside surprises here.
That leaves options expiration. We have seen over the past few months that Friday of expiration week has jumped up volume. After a couple of mild days maybe expiration can trigger a higher volume move over resistance. That will make the move somewhat suspect, however, as expiration always involves adjusting and rolling out positions, and thus volume tends to move higher. What we would prefer is for the market to hold off for a session or two, be stingy with its gains, and then vault higher on strong volume next week.
Again, we cannot always get the perfect scenario, and this market is definitely not delivering the perfect scenario. While we did not see the big sentiment swings we wanted to set up a strong rally, that does not mean we don't get a sustained rally here in the face of poor tech patterns and severe downtrends on the Nasdaq and S&P 500. There are bullish traits emerging that show the short term bias wants to be bullish. It does not look as if Dell is going to gut the move up, so if the market opens mixed to weak and then finds legs, we won't hesitate taking opportunities as they come up.
We remain uncomfortable with this market, not liking the relative weakness in the small and mid-caps of late as the big indexes try to show some strength. It is to be expected that they would lose some clout when the big indexes jumped higher, but with the overall weak action the past two sessions, the poorer performance in the leading indexes is another caution flag for us. Thus we proceed with caution (nothing new there). Pick the plays you feel best about and that fit your investment style. We cover a lot of stocks and types of plays because of our diverse subscribers, but as with all things that you are good at, you must feel comfortable with the play. Confidence leads to success.
Support and Resistance
Nasdaq: Closed at 1730.44
Resistance: 1750 and the 50 day MVA (1743.45) are the immediate overhead resistance with the simple 50 day MVA (1767.97) backing them up. The January/March 2002 down trendline at 1785 and the 200 day MVA at 1822.64.
Support: 1700 is some support (recent lows and highs) and where we want it to hold. The second March down trendline is also right at 1700. Some support from 1600 to 1620 from the October consolidation. 1550 to 1560 are the October lows and could try to hold. Then 1500. After that is the September low at 1387.06.
S&P 500: Closed at 1098.23
Resistance: Holding just over the second March down trendline at 1089. After that is 1100 from price consolidations and the exponential 50 day MVA at 1103.76. 1125 is the serious resistance as that represents strong price points and the 200 day MVA (1121.58).
Support: February lows at 1074. The October lows at 1050 are the last price consolidation level before the September low. There is possible support at 1000, but it is not much. The September low is 944.75.
Dow: Closed at 10,289.21
Resistance: The January/September 2000 down trendline at 10,289 is right overhead. 10,300 is the next level that holds the key to reaching toward the March high. After that is 10,400, the barrier to the upper half of the March trading range. The top of the June, July, and August 2001 trading range at 10,600 (10,679 intraday high) marks the top half of the March trading range.
Support: 10,100. Then the 200 day MVA (9906.76). After that two lows at 9811. Then 9500 to 9600 in the shelf of support from 9500 to 10,100.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
5-14-02
Retail Sales, April (8:30): 1.2% actual versus 0.7% expected (revised from 0.5%)
Retail Sales ex-auto, April (8:30): 1.0% actual versus 0.4% expected
5-15-02
CPI, April (8:30): 0.5% actual versus 0.4% expected and 0.3% prior
Core CPI, April (8:30): 0.3% actual versus 0.2% expected and 0.1% prior
Business Inventories, March (8:30): -0.3% actual versus -0.1% expected and -0.1% prior
Industrial Production, April (9:15): 0.4% actual versus 0.4% expected and 0.4% prior (revised from 0.7%)
Capacity Utilization, April (9:15): 75.5% actual versus 75.7% expected and 75.3% prior (revised from 75.4%).
5-16-02
Housing Starts, April (8:30): -5.4% (1.555M) actual versus 1.63M expected and 1.646M prior
Building Permits, April (8:30): +0.3% (1.634M) acutal versus 1.63M prior
Initial Claims, 5/11 (8:30): 418K actual versus 405K expected and 416k prior (revised from 411K)
Philadelphia Fed, May (12:00): 9.1 actual versus 12.0 expected and 12.3 prior
5-17-02
Trade Balance, March (8:30): -$32.3B versus -$31.5B prior
Mich Sentiment-Prel., May (9:45): 93.0 versus 93.0 prior
End Part 1 of 3
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