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world stock market, us stock market
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5/30/02 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
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SUMMARY:
- Indexes tap recent lows and stage a reversal as anticipated.
- Volume rises on the reversal, but still below average and internals still weak.
- Weekly jobs report indicates continued stagnant job pool.
- Comparisons with WWII economy.
- Market: Relief bounce begins.
- Subscriber Questions
A bounce by any other name is still a bounce.
The downward momentum continued through the open as the indexes speared lower to test the recent lows. With that done they reversed and rallied back sharply. No run to new highs, no smashing through resistance levels, just a reversal at the next potential support levels after another two weeks of downside action. It was pretty much to script, ignoring the continued tensions in the Indian subcontinent and an empty shoulder-fired missile canister believed to be Al Qaeda related. As we said Wednesday, news stories are usually excuses to do what the market was already going to do. The market was primed for a rebound after selling off on continued concerns about the primary driver of stock prices: future earnings. The same items blamed for the recent selling did not stop the rebound today, but that was beyond most of those on the financial stations. The end result was their concern: Dow and S&P down, so it was a bad day prompted by continued war tensions, etc.
It was a reversal along the lines of most that we have seen in recent history.
Volume was up on the test of May lows and subsequent recovery, but it was not a blowout session. Nasdaq volume remained significantly below average, but NYSE volume just missed an average session. That gives it a little more clout; certainly there were more buyers in the crowd today than in previous sessions, but nothing dominant. The A/D line was still negative on the NYSE and Nasdaq even with the reversal, though it did improve significantly in the last 20 minutes. In all respects this looked like many bounces we have seen in the continued woes of the market.
There is reason for some upside hope and there is reason for concern.
As with many recent reversal days, Thursday's action may not mean a whole lot. Case in point is April 25. After 5 sessions of selling the indexes reverse off the lows and gallop back up on a strong shot of volume, showing a doji on the candlestick chart. A classic signal that there may be an upturn ahead. The next two sessions were a slaughter; lower volume, but still a slaughter. Thus, this reversal action in an overall downtrend is nothing to put in the old 'lockbox' even if there was such a thing as a lockbox outside of a politician's screwed up view of how government works vis- -vis the real world economy.
On the upside, the S&P 500 shows a very similar pattern to that of February 2002 when it double bottomed at 1074 to set up a solid move back up to resistance at 1175, a move that took it out of the long term down trendline that runs from September 2000. The move did not convert the large cap index into a winner, but it did change the character, salvaging the move off the September bottom. The fact that it looks to have double bottomed at the next lower support level is not a wonderful sign, but it is further indication that a move up beyond Thursday's action is at hand. The last time it did this it managed a 100-point move; we don't think it has it in it this time, but there is more there than just a single tap lower and reversal.
THE ECONOMY
Jobless claims fall but again, not very much.
It is a matter of how much they fall and what the prior revisions were. The headline number was 410K, a 12K drop and less than the 411K expected. The prior week, however, was revised higher to 422K from 416K, so the drop is really 6K or one-half the reported drop. The bottom line: still above 400K, a level that is considered recession-caliber, and that is enough to keep the Fed off the brake.
The big issue: continuing claims up another whopping 49K, a clear, definitive 19-year high. There are two factors at work. First, those looking for jobs are not finding them. Those that came back onto the rolls for the extended benefits are still on the rolls and are not finding jobs. Those already on the rolls are not finding jobs. Then there is the increased size of the job pool overall; many that gave up looking for work have come back into the employment pool the past few months, and they are not finding work. That does not really show up per se in the continuing claims unless they reapply for extended benefits, but that is what is happening in the job pool overall, and there is some influence on the weekly continuing claims.
In a nutshell, even with a measurable economic upturn, the economy is not strong enough where businesses are at the point where they need to hire more personnel. Businesses don't hire until their business equals or exceeds where it was at the point the downturn started. There is no need to do so; business is still slower than it was. Maybe a few hires as business picks back up (layoffs occur at various points on the way down), but not back to full levels. Businesses have a load of relatively new technical systems that are hardly taxed by the upturn in business. No point in hiring more people when not needed; better to get more out of current employees, use the technology to keep costs lower and profits higher, and thus recoup some of the losses during the downturn.
Technology turnover pushed back.
Indeed, today some of the airwaves were churned by talk of a push out of technology replacement. The 'usual' period of turnover for technical systems is between 2 and 3 years. At 3 years there have been enough changes in the fast-paced high tech world to warrant updating systems to avoid falling behind the competition. If, however, current systems are capable of handling business efficiently and the competition is not going to move ahead of you if you maintain current systems, there is no incentive to upgrade. With the recovery still forecast as slow, businesses are holding onto machinery as long as possible until business justifies a change either through inefficiency or potentially lost ground to the competition.
Well, 2003 was seen as the point where businesses needed to start replacing tech systems. Some of the more aggressive estimates were for second half to late 2002. Now that is being pushed out by some to late 2003 and then 2004. That of course is a negative for technology recovery any time soon. We were not looking for one to start being seriously priced into shares until late 2002 in any event. Thus, we doubt today's theories will impact tech recovery much. Indeed, it did not keep tech from reversing off the lows and rallying positive at the close.
World War II economy?
One of the ideas tossed about today that was bullish for the economy: the current situation post 9-11 is better than post Pearl Harbor. The theory: as a percentage of GDP, the increase in federal spending is equivalent to that after the attack on Pearl Harbor. That jump in spending for the war effort ignited industry that had to be designed to meet the threat much as security and defense companies are being tapped to fill in the holes in our home defense.
On top of that, there are tax cuts that are in fact increasing the economic output and that helped get the economy moving up faster than it otherwise would have. There were no tax cuts in 1941, so the theory is that there is an extra layer of stimulus on top of the government spending that was not present in WWII. That federal spending unleashed the economy's power, and one economist believes there is going to be a 'very powerful recovery' in the second half of 2002 that is much stronger than anyone is anticipating.
THE MARKET
Tested the May lows and then moved back up on higher volume to finish roughly flat. As anticipated Wednesday, this is pretty typical action in this market: what looks to be intense selling undercuts a support level and is followed by a rebound on rising volume. It took two tests of the lows to get the bounce done, and when the second bottom held, that brought in some short covering after more than a week of selling. This is the double bottom psychology to a lesser degree. The indexes have now set a bottom to bounce higher from, but for now it appears to be a short term bounce in a continued downtrend. If tech and large cap patterns were bad before this selling, they are in shambles now. The best they can hope for as a group is the double bottom pattern that finds its home in very choppy markets and is born out of excessive fear. There are some potential double bottoms out there, but they still need a lot of work. At this point they can give us a bounce just as the market can, but counting on more from those patterns is very risky.
At the same time we see some leaders that just got thrashed today, e.g., PNRA and PFCB. After strong runs in the face of the major indexes, these stocks were hammered below their 50 day MVA on massive volume. A crop of leaders is being taken to the woodshed right now. When juxtaposed to the bounce action today, that mitigates the upside action even more.
VIX: 23.14; +0.04
VXN: 46.57; +0.87
Put/Call Ratio (CBOE): 0.8; -0.09
Nasdaq
Undercut the April 2001 low, tapped at 1600, and rebounded on rising volume. Pretty much as expected, and thus far it is not showing any strong upside potential.
Stats: +7.53 points (+0.46%) to close at 1631.92
Volume: 1.577B (+11.2%)
Up Volume: 824M (+611M)
Down Volume: 736M (-435M)
A/D and Hi/Lo: Decliners led 1.05 to 1
Previous Session: Decliners led 1.64 to 1
New Highs: 95 (+22)
New Lows: 133 (+27)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Broke through the April 2001 low (1619), bottomed at 1607.30, and rallied back. It was not a straight shot but took two rallies to close at 1631. The first attempt died 1.5 hours into the session, and after another test of the first bottom the rally back up managed to stick. Volume was up with more upside volume, but it was not a powerful reversal; still, an even session internally on such a reversal is about typical. Technically the rally that started the second week of May is still alive. Practically, however, we are looking at this from the standpoint of a continuing downtrend that needed a relief bounce. Again we look for resistance at the 18 day MVA (1672.43) and the second March down trendline just below that level at roughly 1665. It could make it to the February lows at 1700, but without a lot more positive input (e.g., a cessation of war hostilities in India) it would be hard pressed to go much further.
Dow/NYSE
Crashed the 200 day MVA but bounced at 9800 for almost a full recovery on solid NYSE volume. A double bottom or just a relief bounce? It has to clear the near term resistance to prove the former.
Stats: -11.35 points (-0.11%) to close at 9911.69
Volume: 1.225B (+14.08%)
Up Volume: 391M (+42M)
Down Volume: 834M (+122M)
A/D and Hi/Lo: Decliners led 1.14 to 1
Previous Session: Decliners led 1.28 to 1
New Highs: 77 (+5)
New Lows: 60 (+7). Second consecutive session of greater than 40 new lows. Keeping score as last time around this was an accurate portent of steeper selling to come.
The Chart: http://www.investmenthouse.com/cd/$indu.html
The action on all indexes was much the same: initial selling, recovery, selling again to test the bottom one more time, and then a last rally that stuck as some short covering took place when the lows held. The test was down to the April and May lows at 9811, undercutting them slightly and then rebounding. This sets up a potential double bottom at this level, but it is too early in the pattern to draw conclusions: the pattern is completed on a move over the 'hump,' and that is at 10,300. From here it is a bounce, and it does look as if it is ready to do just that. It has resistance at 10,100 with the 18 day MVA at 10,086.64 and the 50 day MVA at 10,125.53. If this is just a bounce those will be tough to beat, though it could make it to 10,250 if it has some real momentum behind it. For now it is ready to move up and test the nearer term support. Remember, there is still the 18 day MVA crossover of the 50 day MVA. Usually the index will rise up to test that crossover and run out of gas at that point.
S&P 500:
Very similar action to the Dow. The S&P undercut support at 1074 Wednesday, and we anticipated a further downside move followed by a reversal after shaking out or scaring out some investors. This also causes some shorts to cover as the index breaks below their prospective target. The pattern looks like a double bottom at 1050 that could have more legs to it, but it is still in a continuing downtrend. In those downtrends the short term moving averages and, of course, the down trendlines act as resistance. There is a March down trendline at roughly 1075 and then the 18 day MVA at 1082.53. As with the Dow, until it shows more at the 'hump' in the potential double bottom (1106.59), it is just another bounce. If it gets up to 1100 it will be a very, very pretty bounce. That is an awfully long move on some really thin and unchanged current prospects.
Stats: -3 points (-0.28%) to close at 1064.66
NYSE Volume: 1.225B (+14.08%)
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
The week ends on a big economic note with Michigan sentiment, factory orders, Chicago PMI, and productivity. The indexes are ready for a relief bounce from support after some steady selling. This news can augment that move if it is positive. Will the news provide the launching pad for a new upward run? Doubt it. We have had continued good economic news but nothing sterling silver. More like the second hand cutlery. There will have to be a galvanized belief that future earnings are going to be better in such a way as to support higher stock prices. That is not going to come from another set of economic data on Friday.
There is always the chance of that reversal gone bad discussed above where one session looks good only to give way to more selling. The double tests on the Dow and S&P 500 (as well as double tests intraday) makes that less likely. So, we are left with a rally that will most likely test those near term support levels. Again, if there is no significant upside news stories, we anticipate the indexes to resume their downtrends after testing those levels or maybe moving up through them and then reversing. That has been the continued pattern in this market. It is always subject to change, but there is no sign of anything different this time around.
Support and Resistance
Nasdaq: Closed at 1631.92
Resistance: Near down trendline at roughly 1665. The 18 day MVA is at 1672.43. The next March to April trendline now at 1695 and 1700 (February low). 1750 and the 50 day MVA (1720.91) are next. The January/March 2002 down trendline is at 1760 and the 200 day MVA at 1805.97.
Support: 1619 (April 2001 low) down to 1600. 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 1064.66
Resistance: The March/April down trendline is now overhead again at 1076, right at the February lows at 1074. The 18 day MVA backs that up at 1082.53. After that 1100 and the 50 day MVA at 1097.31. The 200 day MVA at 1115.89, and price consolidations at 1125. September 2000/March 2002 down trendline at roughly 1124.
Support: 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 9911.69
Resistance: The September 2000/February 2001 down trendline is at roughly 9990. The 18 day MVA (10,086.64) is next, and it is backed up at 10,100. Then 10,250 to 10,300. 10,400 is 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 (9890.52). Then 9811 to 9800 acted as support again Thursday. 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): 410K actual versus 411K expected and 422K prior. (revised from 416K)
May 30
Help-Wanted Index, Apr (10:00): 47 actual versus 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.
End Part 1 of 3
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