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us stock market, trade stock
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6/03/02 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit Monday: GNTA (put); AGY (put)
Buy alerts issued: HP (put); NX
Trailing stops issued: HDWR; COTT; ASD
Stop alerts issued: SLVN; LEXR; CFBX; GIVN; HKF; LLL; INLD; GMRK; HBAN; WY
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
Emails: We love your emails. We receive hundreds of emails a week, but we don't mind. We respond to them all as fast as we can, so bear with us.
SUMMARY:
- Disconnect: stock market and economy.
- Dollar woes are the likely culprit along with prices that are just too high in many stocks.
- Dow and S&P 500 blow through 2002 lows on high volume as small and mid-caps fall as well.
- Subscriber Questions
Economic numbers strong, market not.
The national manufacturing survey expanded for the fourth consecutive month (55.7) with new orders jumping (63+) and the backlog of orders growing. Construction turned in a positive performance (+0.2%) when a negative month was expected (-0.1%), the gain on the back of non-residential building was a long-awaited positive. Automakers increased their Q3 production targets by 10% and GM upped its Q2 and full year estimates. The economy is continuing to improve, and it appears to be doing so at a faster pace.
The market is not listening. It too is growing its trend, but its trend is down and the large caps are starting to take the entire market with it. The economy is rallying back but the market is rallying lower, both at faster paces. Usually a rallying economy means better stock prices as earnings will grow in the future. Stock prices rise to meet those expectations. Thus far stronger economic reports are being ignored by the market. Just too much self-imposed gloom as some pundits are saying or is the market seeing something else?
Dollar is not helping.
Whether hype, fact or something in between, the fading dollar is not helping the stock market. We saw this back in the second half of 2001 when the dollar peaked in July and plunged into September with the stock market hot on its heels. Before 9-11 the market was following the dollar lower even when signs of economic recovery were turning up. Now the dollar has retreated to levels below that immediately after the 9-11 attacks. Hard to imagine with the recovering economy, an economy in significantly better shape than before or after 9-11, that the dollar is still tanking.
There is a growing sentiment that the U.S. is going to go through a malaise as it did from 1960 to 1980; that is a comment we heard casually bandied about on CNBC today. The blanket generalization was so fraught with gross overstatements as to be laughable; in that time period there was a major bear market that bottomed and resulted in the S&P 500 doubling. Of course, looking to the financial stations for the answer is iffy. Nonetheless, a weakening dollar has a host of problems that we first started warning of in 2000. The primary problem is the main one we have stated: lots of overseas dollars. When those overseas investors in the U.S. feel it is no longer the best place to make money or for safety, they cash in greenbacks for other currency.
That creates many problems, some of them conflicting. First it hurts U.S. assets: investors are disinvesting in the U.S., and slackening demand means slack prices. Equities fall as foreign investors cash out of the U.S. That can potentially lead to deflation, i.e., falling real asset prices. We have enjoyed disinflation for a number of years; disinflation is where prices rise at a much slower pace. In spite of disinflation, the Fed chased inflation that was not there. It did so by trying to slow the economy. The problem with that policy (there are many more, but this one is germane to the topic) is that regardless of the existence of inflation, attacking growth slows things down. Disinflation in a rising economy becomes deflation in an economy tossed down by rate hikes after being stoked by a flood of free money (both thanks to the Fed). Japan has suffered deflation for over a decade; Japan cannot get anyone to invest in Japan, not even the Japanese. It may be looking better now, but that is after trillions of dollars in lost value in real assets over years and years of pain.
Dollars cashed in by foreign investors also mean more dollars back in the U.S. That lack of demand further decreases the dollar value, creating a vicious spiral that the Japanese can tell us about. Then there is the problem of all of those dollars at home. The definition of inflation is more dollars chasing the same number of goods. More dollars at home start bidding up the prices of goods. Then our appetite for foreign goods catches up with us as well: foreign goods become more expensive because of the weak dollar, a form of inflation. The Fed, however, cannot do one thing about this form of inflation; raising interest rates is a very inefficient method. It may attract a few extra dollars via higher rates, but that has rarely stopped U.S. consumers from buying overseas. Everything from toys to clothes to lumber to oil becomes more expensive. We saw the same problem in the 1970's and the Fed could not do a thing about it (at least not with the policies it was pursuing). It was not until massive tax reform in 1981 brought about massive investment in the U.S. that broke inflation and jolted the U.S. out of stagflation.
Stock prices still too high overall.
Another thing the market is telling us when the economy improves at a faster pace and stocks continue to sell: prices are too high. P/E ratios get mentioned about every 5 minutes on the financial stations. What is lost in the rhetoric is a simple fact: stocks are priced according to what a willing buyer and willing seller will pay and take for the shares. Trying to pin an arbitrary number on what that number is smacks of a fool's errand. It is a moving target and it is not really the gauge of why buyers buy and sellers sell. Otherwise there would have been no run up in stock prices in 1998 to 2000. Buyers were willing to pay more because the future looked good.
So now we look to history to give a guide. Stocks prices in general are still twice what they historically trade at coming out of recessions. After such a large run in the market, even the drop over the past two years is apparently not enough. The market continues to sell in the face of economic recovery. That means stock prices in the large cap indexes that have soared still do not warrant new investment dollars given the economic recovery that is underway. Those five-year head and shoulders patterns in the Nasdaq and S&P 500 that are reminiscent of the Dow in 1927 to 1932 after that massive rally may have to be fulfilled to get the prices of the large cap and large tech stocks down to where they will generate buying interest.
As noted in the weekend report, not all stocks are priced at odds with the economy. The big indexes are still overpriced even as the economy recovers and many smaller issues are finding investment dollars. As we have noted several times, this is the historic norm after the large indexes expand at massive multiples: they crash and go through a protracted period of working off the fat and fluff while the ignored smaller issues enjoy attention they lacked for over 5 years.
THE MARKET
Selling turned into heavy selling in the last hour, but mostly in price. The NYSE sold the Dow and S&P 500 on stronger volume, joining the Nasdaq in the distribution the techs suffered Friday. The A/D line was just ugly with almost 3 to 1 declines on both the NYSE and Nasdaq. The Russell, S&P 400, S&P 600 all sold down right in step with the big indexes, vying for the worst spot. That of course went to the Nasdaq, Nasdaq 100, and the SOX in inverse order.
With the S&P 500 undercutting the year lows on rising volume (the Dow undercut the May lows), there is little to keep it from 1000 or on down to the September 2001 lows. It won't go in a straight line though we may see some accelerated selling here after this potential support level was snapped. There may be some more selling immediately on the heels of today's action followed by a test of the breach. We can take a little bit of the action on some more selling and then some more on a test of the breach. The door lower is open, but as we often see, after the door is opened stocks try to move back up through it before they give up. We will look at some index puts on the test, our favorite place to enter downside positions.
Despite the very solid economic data, the market does not respond.
VIX: 25.70; +2.90
VXN: 47.65; +1.70
Volatility is rising, but it is nowhere near where it needs to be to show a reversal point. Another 500 points on the Dow may do it, but the market is very, very complacent. Bulls are much too far in the majority.
Put/Call Ratio (CBOE): 0.93; +0.20
Nasdaq
Software downgrades started it negative, and it built from there. It held up mid session but then dove in the last hour. It held its May low by a hair, but the Dow and S&P 500 are leading the way. FLEX won't help the techs tomorrow as it lowered its outlook by more than 50% on the low end of the range.
Stats: -53.17 points (-3.29%) to close at 1562.56
Volume: 1.622B (-3.84%). Escaped a distribution session, but it was distributing Friday while the Dow and S&P did not. Today they were just playing catch up.
Up Volume: 116M (-299M)
Down Volume: 1.493B (+298M). What a total downside rout.
A/D and Hi/Lo: Decliners led 2.86 to 1
Previous Session: Advancers led 1.05 to 1. Getting ugly in the pits.
New Highs: 87 (-17)
New Lows: 165 (+71)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Held above the prior May low (1560.29), but that may have just been a formality with the Dow and S&P 500 busting their lows on rising volume. The index has certainly resumed the downtrend, and we know that after this type of drop it will seek support and bounce. After the rally out of early May, the downtrend channels have been shifted out and thus the same channels most likely were shifted as well. Indexes tend to bounce up off of the bottom channel of the downtrend. While the Nasdaq has not bounced yet to establish the bottom channel on this resumption of the downtrend, it would appear that the first downtrend off of the March high is at the right point to act as the lower channel. That is down near 1540ish; the Nasdaq could tank to that level on continued momentum before attempting a bounce higher. It could do that in the first 30 minutes Tuesday on continued downside momentum and the FLEX news where it sliced its estimates in half.
Dow/NYSE
Blasted below its May low at 9811 on a shot of volume. A major break and close to its bottom channel. A bounce up off of that level would set up dome nice downside entry points.
Stats: -215.46 points (-2.17%) to close at 9709.79
Volume: 1.301B (+6.09%). Rising volume on the selling, indicating distribution in Dow stocks.
Up Volume: 160M (-578M)
Down Volume: 1.149B (+676M). A downside rocking as on the Nasdaq.
A/D and Hi/Lo: Decliners led 2.67 to 1
Previous Session: Advancers led 1.57 to 1. Decliners reversed the action and hammered the NYSE.
New Highs: 92 (-25)
New Lows: 73 (+33). Four sessions straight of 40 or more new lows. More selling ahead according to this indicator, and it was accurate when the index topped in March.
The Chart: http://www.investmenthouse.com/cd/$indu.html
Undercut the May lows at 9811 on rising volume. The drop puts it right in the middle of some closing prices from November to February, and it also puts it right at the down trendline in the March downtrend. That down trendline looks as if it will mark the lower channel on this new down trendline after the early May rally attempt. A big selloff (2+%) often gives a reflex bounce the other way, and combined with the potential support at the trendline and the prior price closes could lead to that reflex bounce to set up better downside positions after testing the breach of 9811. The breach does open the door to 9500, the next real level of support before 9100.
S&P 500:
No attempt at another bounce higher from 1065, just ripping lower and undercutting the May low (1048.96) on rising NYSE volume. The large caps distributed as well, and with this move they are staring 1000 and then the September low (944.75) in the face. There is not a lot for it to catch support on ahead of 1025, but we will get a bounce to set up more downside that will be coming. The trend remains down and we will look for a bounce to set up a better downside entry point. It has sold very hard the past two weeks, tried to bounce and failed. It is still hard to chase to the downside here without a bit of an upside respite to set up another plunge lower.
Stats: -26.46 points (-2.48%) to close at 1040.68
NYSE Volume: 1.301B (+6.09%)
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
No real economic reports due in the morning, so the market will be up to its own devices. Those look to be to the downside with FLEX announcing its earnings woes after hours. FLEX is a contract electronics manufacturer, and as such it relies on the semiconductor industry, making a lot of circuit boards. If its business is still in the toilet that indicates that the increased demand for semiconductors reported by the SIA is not flowing through very rapidly to other areas.
The momentum on the close was down hard, and that usually implies a weaker open as a follow through to the selling. After the early to mid-May rally attempt, the market has some more upside steam it can blow off here. The new lows in the Dow is indicating more selling ahead as well as continued distribution and blowing out the bottom side of the rally attempt. The tendency is to look only straight down, but experience shows the market bounces down. Not be straight down (only if it would be so and thus scare the remaining crap out of most investors), and after such an ugly breakdown and some follow through in the morning, the indexes may try to recover some lost ground. That is what we are looking for to set up some downside plays on the indexes and some of the other stocks that have sold hard the past two weeks and need a bit of a respite to set up better entry points, particularly on some semiconductors.
The selling was broad with the small and mid-caps falling heavily with the large cap indexes. Thus we are being very cautious on upside action. Many good patterns suffered today while others held up admirably. Those that hold up during the market duress are the ones we want to be in when they show us they are ready and clear resistance. That can be either breakouts or tests of breakouts (some of the better entry points as a successful test has the best chance of continuing to hold up against the market). Some stocks continue to perform and rally after holding on or selling slightly during the overall market selling. We saw that again today. Even then, when we get a decent gain in those stocks we are still taking the gain. Maybe that is 20%, 15%, 10% on stock plays. On options we can grab more because we are leveraged in (upside and downside). At this time it is just not the best tactic to buy and hold but to take gains when they are there.
Support and Resistance
Nasdaq: Closed at 1562.56
Resistance: 1600 is some resistance. Then the second March down trendline at 1655 and the 18 day MVA (1655.52). The next March to April trendline now at 1680 and the February low at 1700. The 50 day MVA (1710.74) and the January/March 2002 down trendline is at 1755.
Support: 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 1040.68
Resistance: 1050 is some resistance. 1060 offers minor resistance after that from previous prices. The March/April down trendline at 1071, right at the February lows at 1074. The 18 day MVA (1076.67). After that 1100 and the 50 day MVA at 1093.96.
Support: There is possible support at 1000, but it is not much. The September low is 944.75.
Dow: Closed at 9709.79
Resistance: 9811, the April and May lows. The 200 day MVA (9885.73). The September 2000/February 2001 down trendline is at roughly 9980. The 18 day MVA (10,031.77), then 10,100. Then 10,250 to 10,300.
Support: 9500 to 9600 in the shelf of support from 9500 to 10,100.
Economic Calendar
Jun 03
Auto Sales, May (00:00):5.7M actual versus 6.3M expected and 6.3M prior.
Truck Sales, May (00:00):6.9M actual versus 7.4M expected and 7.5M prior.
ISM Index, May (10:00):55.7 actual versus 55.0 expected and 53.9 prior.
6-05-02
ISM Services, May (10:00): 56.0 vs 55.3 prior.
6-06-02
Initial Claims, 06-01 (8:30): 410K vs 410K prior.
6-07-02
Nonfarm Payrolls, May (8:30): 70K vs 43K prior.
Unemployment Rate, May (8:30): 6.1% vs 6.0% prior.
Hourly Earnings, May (8:30): 0.3% vs 0.1% prior.
Average Workweek, May (8:30): 34.2 vs 34.1 prior.
Wholesale Inventories, April (10:00): 0.1% vs 0.0% prior.
Consumer Credit, April (15:00): $6.0 B vs $4.6B prior.
SUBSCRIBER QUESTIONS
Q: I have enjoyed and profited from your service for several years and have a question. How important is it for a stock to reach the target volume or better on a BO play or even a play where you note the target volume? I've been following your alert service and note that up to 80% of the alerts do not reach the target volume even though they reach the BO point. I regularly calculate the % volume using the % of the day that has passed and that doesn't help much. Keep up the good work you are the only service I now use and find your analysis of the market and economic situation invaluable.
A: Your observations on the breakout are right on target: many times the price is met before the volume is met. As volume levels and intensity vary throughout a session it is often difficult to determine where the volume is exactly. It is easy at the end of a session or if there is an immense amount of early action on a stock. In most cases, however, it is relatively early in the session and the volume is decent but not flying. What do we do when the alert is hit? We look at the intraday volume and see if there is volume building on the move through the buy point. If we see that we will go ahead and enter into a position, but in this market we usually will not take a full position. We will take that position and then see what the volume is at the end of the session. If it is a good breakout, i.e., it holds the gains and volume is at or near our target (or blows it out on the upside) on that day, we will look at taking more positions late in the session. Or, we might wait until the next buy point, maybe after it rallies and then tests the 18 day MVA for the first time. Strong stocks will breakout and rally and then test the 18 day MVA; that is the next solid entry point. Thus we can work our way into a proven winner that is showing more strength than other stocks. That is a key in this choppy market.
End Part 1 of 2
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