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5/28/02 Technical Traders Report Update
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Technical Traders Report Subscribers:
MARKET ALERTS
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
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SUMMARY:
- No post Memorial Day bounce.
- Economic reports strong but just not doing it for Wall Street.
- Light volume and apathy: summer snooze arrives early.
- Subscriber Questions
Summer driving season is here, driving stocks lower again.
The post-Memorial day bounce lasted all of 5 minutes before the selling started. It is said that Memorial Day kicks off the summer driving season. Well, that must mean that investors of all types hit the road because there was very, very little action, at least as far as volume is concerned. It was not until very late in the session that Nasdaq and NYSE volume topped Friday's low water mark for the year.
What few investors in action today were primarily sellers. It was not a heavy downside day though technically it was a distribution session as the indexes sold on higher volume. Friday's abnormally low volume, however, makes us just toss out these days and look more at the overall trend. What we see is the summer doldrums here. No grace period, no gradual slowdown, just no action. When you have an existing trend, a lack of volume, i.e., a lack of investors, tends to continue the trend. That is exactly what we saw today. Even with the late recoveries in the Nasdaq, S&P 400, S&P 600 and Russell 2000, the trend remains down despite the rally off the lows and the follow through session 10 trading days back.
THE ECONOMY
Consumer confidence rises, but future expectations fall.
Confidence hit 109.8 (110.0 expected), above the 108.5 reported for April (revised down from 108.8), very near expectations. The support was from present conditions at 110.3 (106.8 in April) while expectations fell to 109.4 (109.6 prior). This is a flip from April where consumers were more confident about the future than the present. Technically this means that consumers have lower expectations of growth for the next six months as compared to the present. As seen, however, the numbers did a flip from April, indicative of the fugacious nature of confidence numbers. They are as variable as durable goods orders, and can jump back and forth based on just a factor or two. This time around the weakening stock market got the blame. The conference board read the numbers as continued consumer strength moving forward with readings well above 100 while others read it as slowing consumption ahead. What to take from it: consumers are still confident and are still spending. The number is NOT an accurate month to month indicator of future consumption. If consumers are confident at above 100, that is very solid for the economy.
Existing home sales soar.
Existing homes make up 80% of the home sales, and they rose 7% in April to 5.79 million annual units (5.35M expected and 5.41M prior). Home sales continue to accelerate as the industry heads into its strongest period, the summer to Labor Day, post-school relocation migration. The housing market has been showing signs of toppiness with speculation in some areas while others simply suffer from a lack of available units in the right size. What we anticipate is a continued strong showing through this peak season, and then we will see housing take a break for a more extended period.
Personal income and spending rise again.
Income rose 0.3% as expected, and spending was up 0.5% lower than the 0.7% anticipated. Pretty much in line and pretty much status quo: consumers spending all of their income gains and more. Earnings were up 0.4% in April, spending was up 0.3%. Again, there were gains in both categories; not huge moves, but steady gains that are an exact dovetail with the rest of the economic reports showing a steady, sustained, yet not spectacular economic expansion.
THE MARKET
Just about all major indexes but the biotech index finished lower. Not a crushing down session and the Nasdaq and smaller cap indexes managed to make a comeback later in the session. The Dow and S&P, however, finished near the session lows, closing very near potential support levels. As is typical of this market, it was not enough to declare unequivocally one way or the other: the rally attempt is bruised up but not dead while the downtrend remains in tact. The major indexes, however, remain firmly in their downtrends with poor individual stock patterns (i.e., no accumulation) to drive them higher. Indeed, more stocks than not have been finding rough going to the upside as they help lead their indexes lower. We have to remember: downtrends and uptrends never just run down and up unabated. They move in line with the trend, reverse course, then resume the trend. The indexes have tried to disrupt the downtrend with the reversal and follow through the past 2 to 3 weeks. Those rally attempts are still alive, but the indexes are trying to move back into the overriding downtrend once again.
It was a day where the strong got stronger, the weak got weaker, and some of the strong got weaker. That happens in a continuing downtrend; today more retailers went on the lam as they consolidate some of their solid strings of gains off of the September bottoms. As with the homebuilders, it can be expected that retailers will take a breather and form up some new bases after such strong moves over the months. Regional banks are also showing this kind of wear and tear. After strong moves higher many of these leaders have started showing weakness over the past week. Strong moves up and now it appears they are needing to pullback and regroup.
As these are all economically sensitive sectors, the fact that they are pulling back when there is talk of a double bottom recession and the like makes you take pause. Will they form up new bases while holding most of their gains, or is this just a crash lower. With the continued improvement in the economy and favorable consumer climate, we anticipate they are not in for a crash. With continued Fed comments about a slower recovery due to somewhat sated consumer demand, however, we see the analyst valuation concerns and can expect some downgrades coming from some corners. In this market that has been sending stocks into bases as opposed to just temporary blips on the radar where they run down and touch the 50 day MVA and then bounce back up. The stronger make their quick bounces and keep on rolling higher. Most, however, are taking a rest when they run out of steam.
VIX: 22.43; +1.27
VXN: 45.11; +2.25
Put/Call Ratio (CBOE): 1.08; +0.26. CBOE option buyers actually traded more puts than calls Tuesday, closing the ratio over 1.0 for the first time since February 15 when the ratio closed at 1.15 and 1.05 on January 31 before the March rally began. As that rally showed, it often takes more than one close above 1.0 to indicate that there is enough excess speculation to the downside to spark a turn higher. The volatility components are improving, but they are still very, very low as far as indicating extremes of pessimism. With summer setting in, it would be surprising to see volatility numbers that have been dormant for months perk up, but we will keep watching them as always.
Nasdaq
Continued its downtrend, but rallied to close just above some support at 1650. hard to put too much emphasis on the latter, especially when NVLS would not give Q3 guidance in its mid-quarter update after the close.
Stats: -9.32 points (-0.56%) to close at 1652.17
Volume: 1.319B (+8.83%)
Up Volume: 658M (+420M)
Down Volume: 639M (-319M)
A/D and Hi/Lo: Decliners led 1.2 to 1
Previous Session: Decliners led 1.7 to 1
New Highs: 80 (+7)
New Lows: 63 (+1)
The Chart: http://www.investmenthouse.com/cd/$compq.html
It was a decent comeback for the Nasdaq after selling down to 1632.75 on the low, rallying to recover 1650, a minor support level. The move puts the techs back below even the short term moving averages and below all but the steepest March/April down trendlines (near down trendline at 1668). It is showing some gumption at 1650 where it traded a bit in April before tanking and where it has tapped touched or closed around the past four sessions. This is the gap up point on the follow through, and thus is a very important level on this rally off the May lows. This keeps the short term rally off the May low alive, but that is about all. It continues to fall back on each attempt, mired in that downtrend that quickly erodes gains right after they are logged. NVLS is getting sold after hours after high hopes heading into its mid-quarter update, and it is dragging down AMAT, the QQQ and other big names. Lack of guidance equals lack of buyers. As much of the late recovery was due to the chips along with the biotechs, NVLS lack of clear guidance going forward may just send the Nasdaq down to test lower once again.
Dow/NYSE
The Dow Did not finish on its low. The Dow held above the 200 day MVA. Those were the positives. It broke some pretty important support at 10,100. Volume was still nonexistent, but the underlying strength that it sometimes shows is belied by the weakness in its tech components. When some of the old economy components join in, then the Dow starts to look downright poor.
Stats: -122.68 points (-1.21%) to close at 9981.58
Volume: 963.982M (+9.42%)
Up Volume: 298M (+43M)
Down Volume: 646M (+19M)
A/D and Hi/Lo: Decliners led 1.29 to 1
Previous Session: Decliners led 1.53 to 1
New Highs: 82 (-8)
New Lows: 29 (+13)
The Chart: http://www.investmenthouse.com/cd/$indu.html
After rallying to 10,300, the mid-point of the Dow's 7-month range, the Dow has again turned tail and run. 10,100 looked good to hold for another rally to 10,300 to 10,400, but it gave it up Tuesday as well. The move took it below the September 2000/February 2001 down trendline once again, taking back below another longer term downtrend. There is some support near 9990, and the 200 day MVA is below at 9895.64. That MVA helped it make a higher low off 9811 in early May, but it is now in the process of making lower lows. As with the Nasdaq its rally off of the May lows is not technically over, but it is wheezing and stumbling under the weight of a downtrend that is starting to reassert itself. Near term we look at the 200 day MVA and 9811 to provide some support, but the better looking pattern is breaking down.
S&P 500:
The big caps flirted with undercutting some important support at 1074, testing down to 1070 on the low before rallying somewhat to hold that level on the close. This puts it at the February 2002 intraday lows and back below all but the steepest of its short term down trendlines from March when the index double topped once again at 1175. If it turns here it can preserve its rally attempt, but the lack of accumulative patterns and the lack of help from some of the old economy names today really hurt the index. If the old economy names are not going to support the index it is sooner going to 1050 than 1100, and it appears to us that the big caps are going to do that first.
Stats: -9.27 points (-0.86%) to close at 1074.55
NYSE Volume: 963.982M (+9.42%)
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
It does not look as if the Nasdaq is going to get much help from NVLS Q2 update. While there was no violent selling after hours NVLS was down over $1 and several other techs were down with it. The market can find no solace in good news that is not spectacularly good news. It did not get it tonight, and thus some more selling looks to be in order and there is no economic news scheduled that would shift sentiment.
The put/call ratio closed above 1.0, but that is not an automatic rally indicator. It usually takes two or more such readings, and as we have seen they can be spaced apart by a couple of weeks before it starts working on the market. It looks as if the indexes are attempting a resumption of their near term downtrends. They will either fall into line with them or try another rally first. After two sessions of downside action, we expect to see some more downside early and then an attempt to hold the recent rally and follow through and keep it alive. Unless there is a dramatic change, we do not anticipate any attempt to keep the rally afloat to succeed.
Support and Resistance
Nasdaq: Closed at 1652.17
Resistance: The short March to April trendline now at 1698 and 1700 (February low). 1750 and the 50 day MVA (1728.63) are next. The January/March 2002 down trendline is at 1765 and the 200 day MVA at 1810.
Support: 1652, the gap up point, has been filled and held twice. 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 1074.55
Resistance: The March/April down trendline is now overhead again at 1077. After that 1100 and the 50 day MVA at 1099.91. The 200 day MVA at 1117.25, and price consolidations at 1125. September 2000/March 2002 down trendline at roughly 1125.
Support: February lows at 1074 held on the close, but not intraday. 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 9981.58
Resistance: 10,100 represents first resistance, then 10,250 to 10,300. Then there is 10,400, the level that has acted as 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: The 200 day MVA (9895.64). After that two lows at 9811. Then 9500 to 9600 in the shelf of support from 9500 to 10,100.
Economic Calendar
May 28
Personal Income, Apr (08:30): 0.3% actual versus 0.3% expected and 0.4% prior.
May 28
Personal Spending, Apr (08:30): 0.5% actual versus 0.7% expected and 0.3% prior. (revised from 0.4%)
May 28
Existing Home Sales, Apr (10:00): 5.79M actual versus 5.35M expected and 5.41M prior. (revised from 5.40M)
May 28
Consumer Confidence, May (10:00): 109.8 actual versus 110.0 expected and 108.5 prior. (revised from 108.8)
May 30
Initial Claims, 05/25 (08:30): 411K expected and 416K prior.
May 30
Help-Wanted Index, Apr (10:00): NA expected and 46 prior.
May 31
Productivity-Rev., Q1 (08:30): 8.6% expected and 8.6% prior.
May 31
Michigan Sentiment-Rev., May (09:45): 96.0 expected and 96.0 prior.
May 31
Chicago PMI, May (10:00): 55.0 expected and 54.7 prior.
May 31
Factory Orders, Apr (10:00): 0.7% expected and 0.8% prior.
SUBSCRIBER QUESTIONS
Q: I don't understand how to read the put/call ratio. I cannot get it through my head how to interpret this. A solution would be greatly appreciated.
A: The put/call ratio measures the number of puts traded versus the number of calls traded in a given session. First thing to understand is that the put/call ratio is a sentiment indicator. It is a super sentiment indicator so to speak as option traders, as a whole, tend to be speculators. They buy out of the money call and put options at low costs and low deltas, hoping to hit the home run. When speculation gets to an extreme it can clue us in on potential market direction. It is a measure of market sentiment that can help give you an idea if the market has potentially hit a bottom or if it is potentially topping. A sentiment indicator means two things: 1) it is secondary to primary indicators such as price and volume, breaking resistance levels, breakouts, and other indications of bullish or bearish action; and 2) it is a contrary indicator.
Because it is a measure of sentiment, we have to look at extremes for it to be of use. In a typical uptrending market (not what there is right now) the ratio ranges from 0.4 to 0.7 as a 'normal' range. It starts to get extreme in readings beyond those levels. On the down side, a reading below 0.4 indicates complacency. The closer to zero, the more complacent. That is bearish because markets that are complacent tend to be fully invested; there is no new money to come in and drive things higher.
A reading above 0.70 tends to indicate some fear in the market, i.e., there is concern the market could fall further (if already falling) or could be topping (if rallying to highs). When there is fear there is cash on the sidelines, i.e., the market is not fully invested. Thus, as the market continues to improve (as it should, e.g., if there is an economic recovery underway), it drags more of that sideline money into the market. That helps keep rallies alive. As far as predicting a rally after selling, however, you need to see a close over 1.0 on at least one, usually 2 or more occasions. That indicates an extreme level has been hit where option traders have switched from their typical bullish outlook to a bearish outlook.
When the majority of the speculators in the market are betting on further downside, that indicates an extreme indication. Speculators are typically wrong about market direction; as the saying goes, when the crowd thinks something is a sure bet, it is usually time to go the opposite way.
End Part 1 of 2
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