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world stock market, us stock market
Begin Part 2 of 3
The Chart: http://www.investmenthouse.com/cd/$ndx.html
Broke below support levels we were looking for at 2750 and 2700. That moves it out of the consolidation level and is threatening to send the index down sharply lower if we see institutions start dumping shares, i.e., high-volume selling. If this is just another lower volume selloff after a rate cut as investors (primarily mutual funds) try to figure out just what all of last week's data means, we would expect the index to find support between 2616 and 2640. That is not far away and the index may sell below that level before recovering to close.
We are at the whim of some rather irrational behavior now as there are many mutual fund managers who were not around in 1980 during that recession and even the 1991 recession. Since just 1990, trillions of dollars have entered the market and mutual funds have ballooned from around 2000 to over 7000. That means there are a lot of unseasoned fund managers in charge of huge amounts of money that have no idea of what a bear market or a recession is. That is why we have been seeing the 'vicious' rotation from sector to sector recently and the extremely high volatility last year as they chased after the day's hot sector.
Right now they appear indecisive about what is going on, and they are being led by economists who said the economy was in great shape when it was failing and who are now saying it is in bad shape and getting worse. That makes them hesitant to buy into the areas that they should be buying into. The financials are showing the right action after a rate cut, but other sectors are not. Historically the second rate cut has moved markets higher; the one time it did not was in 1929 preceding the Great Depression. What we are seeing in the economy does not call to mind the Great Depression even though some of the 'panic' newsletters are saying disaster is just ahead as they pick up on some of the commodity and long bond issues that we noted above and in earlier reports. We don't think this will last. After the first rate cut these doomsayers were able to drive the market back some, but the selling was never intense. We see financial stocks setting up well for a move back up. We think that calmer, steadier hands at the institutions will prevail as they are with the financials thus far. To us this means there are buys to be made in financial, retail and certain technology stocks.
Dow/NYSE: The Dow traded at 11,022.78 on its high, hitting right at breakout territory early in the session before it too spent the day selling back down. Volume was lighter and it appears that the lower volume move up had to give way for a rest and then another future attempt at a breakout. Volume on the selling was low, so there was no real damage done. We look for it to hold at the upper end of the range for another attempt at the breakout.
Stats: Down 119.53 points (-1.1%) to close at 10,864.10.
Volume: NYSE volume again pulled back, remaining below average (1.048 billion, -6.3%). Down volume topped up volume 663 million to 376 million shares. Lighter volume pullbacks are good, but the Dow will need more buying interest to breakout this next time.
A/D and Hi/Lo: NYSE declining issues took over Friday, 1.24 to 1. New highs fell to 219 (19) and new lows fell to 5 (-1).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow traded in breakout range, but no volume on the way up and the move fizzled with the mixed economic news Friday. We think it will pull back to the 10,600 to 10,750 range and mount another charge. The Dow still looks pretty decent.
S&P 500: The big caps turned back from a breakout like a scalded dog Friday, plunging back to the 50 day MVA on a session of selling. NYSE volume was lower on the session, and when an index fails to make a breakout, you prefer to see it sell lightly. It remains in good shape above the 50 day MVA and on top of the 1345-1347 level it used as support recently. This is where it really needs to hold to maintain its positive chart pattern. If the Nasdaq rolls over, however, we think the nice chart pattern on the S&P could be in jeopardy.
Stats: Down 24.00 points (-1.7%) to close at 1349.47.
Volume: NYSE volume fell back again, remaining below average at 1.048 billion shares (-6.3%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
Mercifully there is not a lot of economic news on the plate this week. Not a lot, but there are some important reports out: preliminary fourth quarter productivity numbers on Wednesday and initial jobless claims and wholesale inventories on Thursday. Productivity is key because it helps keep inflation under wraps. Unfortunately it won't be growing at the 3% and 5% levels we saw in quarters last year. That is one of the less discussed side effects of cutting off the supply side: less investing in technology, and that is what really hampers our technological lead over the world and our ability to pull back up out of the recession.
Keep an eye on jobless claims as well. We want to see how they interact with the recent employment data and the layoffs recently announced. Are continued job opportunities sopping up laid-off workers? Keep an eye on the four-week trend. Finally, we will see if inventories are shrinking; that is a sign as to how fast the economy can turn up. We expect lower inventory growth than the 0.5% expected.
Critical week for the indexes, particularly the Nasdaq. Are investors, mainly institutions, going to again step back in and start buying after another lower volume pullback after a rate cut, or are they totally buying into the idea that gloom is ahead for us all and sell them off? Hard to answer, but we have to go with the lighter volume selling as a positive sign while we keep an eye out for more selling on higher volume. We fully expect to see more downside early on Monday given the close Friday, but we will be looking for support levels to hold and a rebound. If they don't, we have to look for a 2500 level on the Nasdaq.
The irony of the situation cannot be escaped, and indeed it is one reason we are holding out for support to hold and give way to a rally. Specifically, even the late to the party economists predicting a recession say it will be a first-half phenomena, and the second half of the year will show strong growth. That is only six months away. We know, however, that markets look ahead at least that far, and more like 9 months and beyond when it sets prices. Thus, even those analysts we hear on the television that say stocks are going nowhere because first quarter earnings will be bad are not looking at the big picture or at history. First, we know earnings are going to be bad already. But that is old news according to where the market normally looks. If that were the case, why is the Nasdaq up over 20% this year? It had no reason to rise, and indeed was ready to tank to 2000, when the Fed stepped in. That flies in the face of those (we even heard some this weekend), saying stocks are going nowhere. That is why we are still looking at solid stocks at good buy points: for now it appears institutions are not looking that far ahead, but they will. When they do, they start buying and that starts pushing stocks higher.
When the Fed gets aggressively on the market's side, the market ends the year better off. Tune out the noise and focus on great stocks, great patterns, great sectors. There are short-term and long-term buys out there. Short term great patterns, pre-announcements and pre-splits. Longer term leaders that were once again roughed up some after the Wednesday Fed rate cut are going to give good entry points for longer term and shorter term trades as well when they bounce. So, when we hear the gloom and doom again, keep a cool head and stay abreast of the key indicators. We are watching them all for you and update you each night.
With all of that said we repeat that even rallies after Fed rate cuts have sharp pullbacks. We think that is what we saw after the initial rate cut and what we are seeing now. Will the Nasdaq stop at near support or go back to 2500? We are looking for near term support to hold because that fits best with the lower volume pullback after the rate cut as those quick sellers who were disappointed with just 100 basis points in cuts in less than one month finish selling out. That fits more with emotional investing than reality. Still, if emotions rule the fund managers and they sell off on high volume, we have to be ready to exit profitable positions and cut losses and get ready for the next move. We will look again at some covered call plays on long-term holds we still have or just picked up in early January and some put plays as well if that happens, but we don't like shorting a market that has a lot going for it but some key players have not figured it out yet.
In short, we hate to sound overly bullish, but we have looked at the economic numbers, history, and everything else but the moon phase, and we do not see the gloom that we hear from the just recently converted, and we have the Fed there and a tax cut being introduced in the Congress this week. There are macro concerns showing up in long term interest rates and commodities, but they cannot control our investment decisions at this time because they are not at the level to be a threat just yet. There are many pitfalls for the market and the economy; there always are, but now with the U.S. economy slower, they have been magnified. Still, we are the best game in town by far, and we think they are going to be better faster than most think.
Support and Resistance Levels
Nasdaq: Closed at 2660.50
Resistance: 2890 to 2900 is next before the 3000 level.
Support: 2616 to 2640. Then 2500.
S&P 500: Closed at 1349.47.
Resistance: 1360 to 1375.
Support: 50 day MVA is at 1348.37 (18 day MVA is coincident). After that 1335 to 1340.
Dow: Closed at 10,864.10.
Resistance: 11,020. After that, 11,400.
Support: 10,750. 200 day MVA is 10,702.91. Then 10,650.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
2-5-01
NAPM services for January (10:00): 55.0% expected versus 61.1% prior.
2-7-01
Productivity (preliminary), Fourth quarter (8:30): 2.5% expected versus 3.3% prior.
Consumer credit for December (2:00): $8.5 billion expected versus $12.9 billion prior.
2-8-01
Initial jobless claims (8:30): 346,000 prior.
Wholesale inventories for December (10:00): 0.5% expected versus 0.4% prior.
SUBSCRIBER QUESTIONS
Q: Can you please explain how one calculate an x% probability of a rate cut by 50 basis points by looking at the Fed Funds Futures?
A: This indicator has received a lot of attention in the past few weeks since the Fed surprised the market with a 50 basis point cut. As we had been reporting in November and December, the FFF contract was not fully pricing in a rate cut at the December 19 FOMC meeting, but after the market tanked subsequent to that meeting, it started to price in a 25 and even 50 basis point move. After that turned out to be the case, everyone started reporting on it. As such, it may lose some of its efficacy as a predictor, but for now its record is clean.
What you have to do is know when the Fed meets and then look at the contracts both before and after that meeting. In that way you can look at the numbers and determine if a rate cut is being priced in before or after the meeting. We will use the recent January 31 FOMC meeting as an example.
As the meeting was at the end of January, the January and February contracts were primarily in play. Why? Because the January contract would tell us if a pre-meeting move was being priced in as it was the near-term contract that would expire at the time of the meeting. The February contract would act as a backup or confirmation of how strong the January contract was by how much of a rate cut it built in. The further out you go on a contract, it should more firmly entrench a rate cut. If the January contract built in 25 basis points, the February might have built in just 25 basis points, or 50 basis points (the actual case). That would mean that by the end of the contract the bet was a 50 basis point cut would come.
In January, the January FFF contract was showing signs of 50, then less than 50, and then 50 basis points before the meeting. The readings go as follows:
94000 would be no chance of a rate cut
94250 = 100% chance of a 25 basis point cut
94375 = 100% chance of a 25 basis point cut, and a 50% chance of a 50 basis point cut.
94500 = 100% chance of a 50 basis point rate cut.
The numbers can range everywhere in between. To calculate the percentage, take the current price. One day it was 94480. It was over 94250, so we knew it was factoring in a 100% chance of a 25 basis point cut. It was less than 94500, so we knew it was less than a 100% chance of a 50 basis point cut. So, we took 94480 - 94250 to get 230. That is the price over and above a 100% chance of a 25 basis point cut. We then divide 230 by 250 (the price of a full 25 more basis points in cuts) and that gives us 0.92, or 92%. So on that day there was a 92% chance of a 50 basis point cut factored in. The percentage continued to rise until it was fully factored in by the meeting. When the FFF contract gets over 50%, you have to start banking on it.
Right now the February contract stands at 94530. As rates were cut 50 basis points, we use 94500 as our baseline. There is no real cut priced in for February. March stands at 94665 and that is factoring in a 34% chance of a 25 basis point cut. The April contract stands at 94940, a 100% chance of a 25 basis point cut, and a 76% chance of a 50 basis point cut by April.
TEAM TRADES
IFMX: We picked up on IFMX in mid-January with it was forming a handle in a long cup pattern at the bottom of a long base. This is not the best buy point for a stock, but when the market is starting to look better and we see a long, flat base form into a cut with handle, it is worth looking into. We were able to pick up some positions on 1-23, but then we went to sleep the next day when the stock pulled back because it exploded the next session up to $6 and ran to over $8 from there. It has been pulling back the last three sessions on lower and lower volume, with volume falling below average on Friday. we were looking for a pullback to the 6.59 range, and as the day wore on IFMX was getting close, but kept bouncing up. When we saw the low volume heading into the afternoon session we decided we would try to pick up some more shares if we could. The spread was one-sixteenth, so there would not be much to do other than pick a spot and put the order in. The stock was trading 6.88 by 6.94, and with the market falling we felt it would fall a bit more. We put in an order at 6.88. We could always adjust our order if we had to. The stock fell to 6.81 by 6.88 and the fill was made.
This was a stock that we were trying to get some more positions on for another run back up to $8 or beyond. It is not a long term play right now, but we are going to let it work for us if it will. We often like to pick up stocks after a high-volume breakout when they pull back in an orderly manner toward support.
For a review of frequently asked questions, please use the link below:
http://www.investmenthouse.com/1questions.htm
THE PLAYS: We are continuing to watch the financial sector for stocks that look like they can make good moves when the market moves back into the rally mode. Many are showing strong patterns, while others are pulling back and consolidating for moves up in the next rally.
All prices reflect prices at the close on Friday.
Best Plays:
1) THQI: Breaking out and still a buy.
2) SUB: Showing a doji and ready for a rally.
3) PNC: Ready to move up in the ascending wedge.
4) NCC: Two consecutive dojis at support in the pennant.
5) NEU: Still looks ready to breakout.
6) CSBI: Very ready to break out of this pennant.
7) FRED: Great volume on this incipient breakout move.
8) SLR: Ready to explode from the tight lateral consolidation.
9) BSC: At support in the handle.
10) C: At support on lower volume.
11) JPM: Back at support in a handle.
READY TO BREAK TO A NEW HIGH:
LEH (Lehman Bros--$82.05; -1.55; optionable (LES)): Brokerage
http://biz.yahoo.com/p/l/leh.html
STATUS: Pulling back from the breakout high of 86.20 on steadily declining volume since Wednesday. Currently holding support at the 10 day MVA (where the stock closed Friday), solid support that is reinforced by a string of late January prices. Looking for a move back up in a rally for a break to a new high. Continued high money flow and relative strength.
BUY POINT: Aggressive: Up from here on stronger volume in a rally.
POSITION: Stock and/or April $80 calls to buy (LES DP).
BREAKOUTS:
New Play:
THQI (Thq Inc--$29.94; +2.25; optionable (QHI)): Software
http://biz.yahoo.com/p/t/thqi.html
STATUS: Breaking out of a 14-month cup with handle on good volume (1.17 million; avg. 280,363), beating the buy point of 28.88. Relative strength broke out, and money flow is a new high levels. Remains a buy on the breakout.
BUY POINT: Up to 30.32 on the breakout, on continued strong volume.
POSITION: Stock and/or June $25 or $30 calls to buy (QHI FE or FF).
TESTS OF THE BREAKOUT: Some of these stocks are moving back on low volume to test the breakout. We often take profits on option plays when they start to pullback on the breakout move and then get back in when the stock bounces up off of the breakout point. This second move is where some of the biggest gains are made.
Continued Plays:
MAY (May Department Stores Co--$37.29; -1.66; optionable (MAY)): Retail
http://biz.yahoo.com/p/m/may.html
STATUS: After reaching a breakout high of 39.50 Thursday, the stock pulled back to the 10 day MVA to close on Friday. Volume was lower on the abrupt move (1.1 million; avg. 1.4 million), and the stock moved below the breakout point of 38.44. Still, the lower volume suggests a possible hold at this support. 18 day MVA is at 36.31. Retails still look good, and MAY shows high relative strength and money flow.
BUY POINT: Aggressive: On a bounce on rising volume. Safer: Over 39.50, on volume of 1.48 million or better.
POSITION: Aggressive: Stock and/or June $35 calls to buy (MAY FG). Safer: Stock and/or May $35 or $40 calls to buy (MAY FG or FH).
HBC (Hsbc Holdings Plc--$77.20; -0.75; optionable (HBC)): Money Center Bank
http://biz.yahoo.com/p/h/hbc.html
STATUS: Holding above its 18 day MVA (76.93) but slipped below the buy point of 77.33 in Friday's action. Volume dropped lower below average (69,400; avg. 96,500), so look for the support to hold until the financials break into a rally. Continued good buying and high money flow, relative strength.
BUY POINT: Aggressive: Up from here on rising volume. Safer: Over the January high of 80 on volume of 93,690 or better.
POSITION: Aggressive: Stock and/or June $70 calls to buy (HBC FN). June $75 options have 13 open interests. Safer: Stock and/or June $80 calls to buy (HBC FP).
End Part 2 of 3
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world stock market
us stock market
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