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us stock market, understanding the stock market
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Tech Traders 2/01/01 Market Summary
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Technical Traders Subscribers:
Continuing Plays:
NEU (Neuberger Berman Inc--$82.75; +3.00; optionable (NEU)): Followed up on Wednesday's move up from support in the pennant, and popped higher on stronger volume (183,100; avg. 273,000). Approaching the pattern high of 85.69. Relative strength broke higher on the move, with money flow ticking up and buying continuing to improve.
BUY POINT: 85.82, on volume of 369,000 or better.
POSITION: Breakout: Stock and/or April $85 calls to buy (NEU DO; please note that this option still has only 10 open interests).
http://www.investmenthouse.com/ct/neu.html
(Click to view the chart)
EDS (Electronic Data Systems--$55.65; +0.13; optionable (EDS)): Gapped up on the opening price (56.75), over the 18 day MVA (56.24) and moved up from there. Volume was lower at 1.56 million (avg. 2.1 million), but in a rally look for higher volume to break the stock out of the pennant that is in the upper right side of the stock's year-long base. Great money flow.
BUY POINT: Aggressive: Up from here on rising volume. Breakout: 60.13, on volume of 2.7 million or better.
POSITION: Aggressive: Stock and/or March or June $55 calls to buy (EDS CK or EK). Breakout: Stock and/or March or June $60 calls to buy (EDS CL or FL).
http://www.investmenthouse.com/ct/eds.html
(Click to view the chart)
JPM (J.P. Morgan & Co--$55.85; +0.86; optionable (JPM)): Banking
http://biz.yahoo.com/p/j/jpm.html
STATUS: Opened at Wednesday's closing price and on lower volume made an impressive comeback from a low of 53.51 (9.2 million; avg. 10 million). Look for a continued move up in a rally for a breakout over Wednesday's high of 57.33. Great money flow and high relative strength.
BUY POINT: 57.46, on volume of 15 million or better.
POSITION: Stock and/or June $55 calls to buy (JPM FK).
http://www.investmenthouse.com/ct/jpm.html
(Click to view the chart)
New Play to look at:
MWD (Morgan Stanley Dean Witter--$89.80; +5.00; optionable (MFZ)): Credit Services
STATUS: Breaking out of the pennant on stronger volume (7.4 million; avg. 5 million). Buy point in the pattern is 89.32, which the stock just beat. Remains a buy on the breakout up to 93.79. Relative strength broke higher.
BUY POINT: Up to 93.79 on the breakout, on continued rising, strong volume.
POSITION: Breakout: Stock and/or April $85 or $90 calls to buy (MFZ DQ).
http://www.investmenthouse.com/cd/mwd.html
(Click to view the chart)
XLNX (Xilinx Inc--$57.63; +3.63; optionable (XLW)): The chip stock is heading up on stronger, above average volume (11.5 million; avg. 9.7 million), from support at the 50 day MVA (53.09). Tapped 59, hit twice since October, near resistance at the 60.25 level. Look for a break of that resistance on continued strong volume. The stock has steadily climbed from the November low of 35.25.
BUY POINT: Over 60.25 on continued rising volume.
POSITION: Stock and/or (XLW FL)
http://www.investmenthouse.com/ct/xlnx.html
(Click to view the chart)
SLR (Solectron Corp--$39.82; -0.03; optionable (SLR)): Showing its third consecutive doji at support (200 day MVA, 39.76) after a pullback from the January high of 41.95 on overall declining (and below average) volume. That volume rose for the second day to 5 million (avg. 6 million), so this one is getting ready to move up from here. Tapped near 41 the last three days. In a 10-week base.
BUY POINT: Over 42 on volume in the range of 7 million or better.
POSITION: Stock and/or April $40 calls to buy (SLR DH).
http://www.investmenthouse.com/ct/slr.html
(Click to view the chart)
Put Plays for a Selling Market: Continuing with some stocks that look ready to give it up on more selling.
HGSI (Human Genome Sciences--$58.44; -2.56; optionable (HHA)): Drugs
STATUS: Cannot make the move back over the 200 day (68.56), and Thursday the stock moved down after opening below the 18 day MVA (61.70) and dropping on stronger volume (2.3 million; avg. 3.3 million). This has been a three-day drop from the down trendline, and on stronger volume. Look for a continued move down.
BUY POINT: On a move below 58 on continued rising volume.
POSITION: February $60 puts to buy (HHA NL).
http://www.investmenthouse.com/cd/hgsi.html
(Click to view the chart)
PDLI (Protein Design Labs Inc--$66.88; -7.06; optionable (PQI)): Biotechnology
STATUS: Gave up the put today, selling below its 18 day MVA (68.46) on stronger volume (2.1 million; avg. 1.9 million). The stock moved as expected, up to the 50 day MVA (77.62) and moving down from there as it failed to break resistance. Looking for a continued move down.
BUY POINT: Down from here on continued rising volume.
POSITION: February $70 puts to buy (PQI NN).
http://www.investmenthouse.com/cd/pdli.html
(Click to view the chart)
THE SUMMARY:
For a review of frequently asked questions, please use the link below:
http://www.investmenthouse.com/1questions.htm
TONIGHT:
- Market digests recent events on lower (even by the new Nasdaq standards) volume.
- Just a slow day, right? Well, the Nasdaq tapped support and held its ground while some key stocks look ready for a short term return to gains.
- Mixed economic data has investors puzzled, not to mention the television economists. Now the employment numbers Friday. What is going on?
- Subscriber Questions
- Team Trades
A quiet day of reflection that found support where we wanted.
Wednesday was the first distribution day on the Nasdaq in a month. Those always deserve notice, and because it came on the heels of the FOMC announcement it was a bit more of a wildcard than usual. Was it just nervous trading trying to figure just where the economy is, or was it the beginning of a determined effort to sell stocks lower?
Today helped clarify the issue for us. The Nasdaq tapped at 2750 (actually 2742.44) in the first hour, ran 50 points, re-tested and then climbed to close a bit over the flat line. Volume was markedly lower even with the new Nasdaq system of counting. Our understanding is that the 1.778 billion shares would have been 5% to 10% higher using the old method, but that still put volume 18% lighter than FOMC decision day. The fact that it fought off two tests of near-term support and slid into the close undamaged is a positive sign to us. It shows that sellers were not ready to take the index lower, but were content to let it continue to consolidate in its recent range while it sorts out the economic news and considers taking on 3,000.
Volume in many key stocks agrees with this conclusion. We saw leading techs showing lower volume selling or higher volume gains, and there were plenty of doji's indicating that several of these stocks are ready to make at least another short term move to the upside. Indeed, even the Nasdaq itself showed a pretty tight doji on the candlestick right at the 50 day MVA after tapping that support on the low. That is pretty bullish news for the short term. Still, it has to take out that resistance.
The Dow is flirting with breaking resistance, with cyclical stocks and drugs enjoying the limelight again just as they did the day after the last FOMC rate cut. Will they hold on this time and help drive the Dow through 11,020 on strong volume? The Dow needs some more volume (today's move was on lower, below average volume), but it is looking solid. The S&P 500 also is knocking on the door, but on lower volume as well. Perhaps after investors figure out what has just happened in the market we will see those breakouts.
Today was a positive in our book, not for a powerful move, but for avoiding serious problems and continuing to perform in a primarily positive manner. After the last rate cut many were saying that it just was not enough and that the economy and hence the market were going nowhere. As we said at that time, that is the talk of investment managers who had their fingers burned off in the bear market, and it is more about extreme caution for fear of being burned again than a review of history. Sure things look bad and we will see earnings some earnings that are worse and some that are still good this quarter, but the market looks forward a long way. If the right steps continue to be taken (and 100 basis points within one month with more to come is very aggressive), the market will be discounting those future better times.
THE ECONOMY
The bad.
Not that one would not understand the caution with the economic numbers that are coming out. The NAPM forecast by the Chicago NAPM on Wednesday did not surprise anyone with its strength. It tumbled in at 41.2%, the lowest since the recession of 1991 and well off of the 43.8 reading expected. What is really scary is that the new orders index fell to 37.1, a level not seen since the 1980 recession, the worst one since the Great Depression. Last month the head of the NAPM survey said that 42 and below was a recession reading. Well, as we said three weeks ago, manufacturing is in a recession. This number has been below 50 now for six months, meaning that manufacturing has been contracting all that time. The rate of contraction is accelerating as consumer confidence skids and consumers slow their buying. Inventories build up and when that happens there is no need to produce any goods. It all ties together. Problem is, the Fed kept tugging and tugging at the string until it all came undone. Now it is trying to retie the package with a sledgehammer. Not the most efficient method.
Then jobless claims for the week came in higher than expected at 346,000, jumping back up from last week's 314,000. That did not help, though the four week average held relatively flat in the 330,000 range maintaining the best levels since November. This is not great news, but to put it in perspective, back in the 1991 recession new claims were coming at between 400,000 and 500,000 per week. At least we have not hit that level yet.
The not so bad.
Consumer spending rose 0.3% in December, higher than the 0.2% gain expected. That had some trumpeting about a strong consumer still hanging in there. Well as we all heard, most of that gain was in the services sector where the heating bills come in and not in the durable goods or other products sector that burns up inventory. On top of that, personal income rose to 0.4% over an expected 0.2% gain, showing that what consumers are not spending on staying warm they are trying to hang onto just in case things get worse.
Remember when some economists were saying that the slowing consumer spending we saw starting in August was a 'normal' slowdown after binge spending? No, it was the result of a bear market in the Nasdaq, tighter money and fears of a slowing economy. The only thing 'normal' about it was that if consumers see their portfolios shredded and money getting tighter, they normally slow their spending. Today some economist was saying again that this was a normal pullback after a spending binge. Denial works for some people, just not those who tend to have to adhere to reality. So, this news was not so great after all.
Auto sales were down across the board, but not as bad as most thought they would be. Ford sales tanked 11% and GM 5% as inventories continued to be fat. Still, GM sold more high-end SUV's that command the highest profit margins and sales were better than expected. That is pretty good news.
Construction spending also was not bad. It rose 0.6% when it was expected to fall 0.5%. On top of that, November was revised from negative levels to a 0.2% gain. Wednesday the new housing numbers came out very strong, above expectations as well. The low interest rates long term (even as the Fed hiked rates) have kept this sector alive and have thus kept the economy alive. That is a real positive that gets overlooked. Loosening credit will help these even more and perhaps keep this segment of the economy moving and help pull the rest out of the dumps along with more rate cuts and a tax cut.
So what is the verdict?
The economy is still slowing, but there are pockets that are trying to stay afloat. GDP did not turn negative in the fourth quarter, and it will probably be revised slightly higher when the numbers from the last week or so of December come in; there was a lot of buying going on during that week. If the looser credit can keep those areas moving forward, the recession may be mild and short-lived. Wall Street is still in the stage of accepting things are worse than expected (no help from the economists who appear in the popular media), and that is causing some of the hesitancy. While things are not roses by any means, so far they are not in the dumpster either. If we continue to see these pockets of strength holding up, the economy will right itself all the quicker.
Heck, some even see things as pretty damn rosy as we heard from Ms. Swonk again tonight. She claims this is nothing more than an inventory cycle and we are in the weakest quarter right now. Sounds good to us if she is right. She does not see a recession, but then she did not see a slowdown at all, calling for a 100 basis point hike "after January 1, 2001." She even thinks the Fed will do a quick 180 when it sees that things are really just fine. As we said, great if she is right. She did say half jokingly, half seriously, however, that the equities market only "looks two days ahead." Despite the fact that she ignores some other very compelling data (e.g., NAPM, lay-offs, jobless claims, drastically dropping GDP), that statement about the markets is so wrong it is laughable. According to her theory then, the stock market did not foretell months ahead of time the coming economic slowdown when the leading sector of the economy, technology, sold into the worst bear market in decades. We know that is wrong. If this were a mere inventory cycle, the collective of the market would be pricing that in right now. Nice scenario, but we seriously doubt she will be any more right on this prediction than her one in the fall. If she can get some people out spending with her rosy view, however, more power to her. At least she is adding balance to the economist late-comers who have just recently concluded that "gee whiz, guess we could have a recession after all."
End Part 1 of 2
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us stock market
understanding the stock market
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