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us stock market, stock watch
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2/05/01 Technical Traders Report
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Technical Traders Subscribers:
TONIGHT:
- Split market on low volume.
- Nasdaq again showing of a turn back up, but is it another head fake?
- Chip sales supposedly slowing again.
- Services sector is down but now out.
- Team Trades
Dow trying to breakout while Nasdaq sinks lower.
The Dow's triple digit move brought out the usual comments about a defensive rally given the grim outlook for tech stocks and other economic sectors. Looking at Dow stocks, however, there were not that many moving on good volume. GE and GM both look like good trading buys, but as with the index overall, most that moved up did so on light volume. That has plagued the Dow in its attempt to break out over 11,020 in recent weeks. A move over that level could bring in a flood of money, but that has yet to materialize.
The Nasdaq was another story as it struggled to hold above 2600 and then was able to climb late in the session to close at potential support. It too fought on lower, below average volume all session with many stocks selling on light volume. Looking at the tape at the end of the day, one would conclude the Dow is going places, the Nasdaq not.
Indeed that is what we heard a lot of from all of the financial stations throughout the session, but that gives one more of a view of the trees and not the forest. The move up on the Dow continues to be weak with only a few real participants moving on strong volume. The Nasdaq has sold down on continued declining volume; despite the gloom, there is not a lot of institutional selling right now. Even with the report on potentially slower chip sales, the chips were mixed as to whether they sold down on higher volume or rose on the session. Indeed, TQNT reported strong earnings after the session and is up over 10%.
"Things are different this time" and other emotional noise.
When we start hearing a lot about defensive stocks rallying (but on mostly light volume) and a lot of gloom about technology (or any sector for that matter), we start to look closer. Usually when a consensus is built on what is going to happen, something else starts to occur. We keep hearing way too much about how techs, because of a lack of predicted Fed action in the next few weeks and because of continued slow earnings expected for the first quarter, are going to go nowhere.
We also heard more talk about how this time things are different with respect to the Fed rate cuts. The belief is essentially that this economic pullback is different from every other economic pullback we have had in the 224-year history of this country. The talk is that techs specifically are going nowhere until there are real gains in earnings. Not necessarily other sectors of the economy, but tech stocks. That absolutely flies in the face of all historic models and facts: stocks lead the market up out of the pullback, not vice versa. If it is believed that earnings will be better in the future, that will be built into prices. Moreover, technology is the future of the economy; to say that the economy will recover but tech stocks will not changes the definition of recovery. The same was said today about a tax cut: it would not do anything for the market for quite some time as it had to "trickle back to the market" before the market would move. Again this is not historically accurate. Tax cuts, particularly retroactive tax cuts, will have an immediate impact as far as pricing future gains into stocks today.
Is there really anything different about what is going on this time than in other economic slowdowns? What would your honest answer be? What is usually the answer every time someone proclaims things are different? Over the weekend we spelled out many signs that the economy was already attempting to right itself and that we could get a turn back higher sooner than most all of the 'recession come latelys' have already agreed to among themselves. While the slowdowns in certain data and reports have been dramatic, we also have to realize that the economy was operating at a much higher level. The slowdowns from lofty levels can show some pretty steep angles and the economy can still catch itself before going into a long downtrend. And Alan Greenspan wants to do whatever he can to rescue the economy to keep his aura intact. Earnings are slower across the board. Inventory increases are up across all industries not just tech. Indeed, inventories will most likely clear out faster this time around based on vastly improved inventory management even since 1991. There is just too much talk about things being different this time, that techs are going nowhere, and that along with some other things we saw today lead us to believe otherwise.
Nasdaq looks ready to move up once again, but will it?
What is nowhere anyway? We all knew the story that is being sold now back in early January. The Nasdaq ran up 25% anyway. That is somewhere in most books. It is now pulling back on very light volume as it appears there is a lot of cold feet and emotion out there again after the Fed did not spring for what was really a totally unexpected 75 basis points. That gave the negative sentiment a foothold and the emotion worked its way back in.
But it has not been a wreck. We have not seen institutional selling overall and it has appeared in just a few stocks. And when it does surface it is totally irrational in most instances showing us it is emotion at work and not real dumping. Look at EXDS today. It reported it was offering more shares and that would potentially have a 6% dilution effect on existing shares. The stock sold off over 20% on the news. A six percent dilution results in a 20% sell off. That is irrational, and we viewed it as a buying opportunity.
Look at the other signs. Low-volume pullback the last three sessions. Today the Nasdaq hit right at 2600 and then recovered to hold over some potential support at 2640. It showed us another doji on the candlestick chart, indicating that buyers overcame sellers in the second half of the session. Most stocks have been falling on lighter volume apart from specific stories, and today they again showed many, many doji's on the candlestick charts with many tapping support and moving up to the close. We have had false signals before as we did last Thursday, but we feel the move that was set up was wrecked by the mixed jobs numbers that threw fund managers off track. They were set up for bad news from all of the economists at the brokerage houses, and when it was really pretty good news they were at a loss.
There are those saying there is no catalyst for a further move higher right now. Maybe, but there really is, and that is the better economic news. The markets don't need bad news for the Fed to cut rates; the Fed is on our side and the market is beyond needing bad news. What it needs now is for the economy to recover, and that is what it is showing signs of doing. Thus, while most of what we hear is negative about the economy and the market over the next two quarters, there is no real mass dumping of tech shares or retailers or financials, all areas that have been panned over the past few weeks but that are traditional areas that perform well when the Fed cuts rates. That shows us that there are some saner heads out there accumulating these stocks, and we feel we are in for another good move from them very soon. We continue to see financial and retail stocks with good patterns that are merely pulling back on low volume along with tech stocks that are ready to bounce off of support after showing doji's today. The money flow into these stocks is tremendous even with the recent pullback; that is another sign to us that there is accumulation ongoing.
THE ECONOMY
The NAPM services report was out today and it showed an 11-point drop from December to January (50.1 from 61.1). That still shows expansion, but by very narrow margins. Indeed, it was the lowest level ever reported. That tosses some cold water on the argument that even though manufacturing is in a recession, services are still strong. Yes, they are still expanding, but by a hair, and as our economy is more service based now, this is a key area to keep alive. No question the Fed has its work cut out for it, and it should have acted back in November. In any event, the delay means more rapid first aid along with the hope it is not too late.
The Semiconductor Industry Association announced today that chip sales fell 2.1% from November to December. That sequential decline from November to December is normal. Indeed, December sales were 21.6% ahead of December 1999. Not bad for a sector that was supposed to be in the dumps and a diving economy. Still, the Association noted that 2001 sales were going to slow from the 22% originally forecast. The blame is inventory, but again we feel that if inventory is our only problem, we are not going to have too much trouble recovering from this slowdown if we get the right medicine.
That led the two chip 'gurus,' Niles and Kumar to come out with statements about how specific companies would bear the brunt while things would slow down overall. Thanks for the heads up guys; it took the report to come out before you made your calls.
Getting back to the right medicine, today Bush's tax cut hit the hill, marking one of the most important events this Congress will address. You know we feel the tax cut is a necessary for the economic health of the country now and in the coming years. The surplus is sucking life from our economy as that money should be in the economy being put to work in the areas that will drive it forward and help us regain the momentum to maintain our technological edge. History has shown that the private sector is incomparably more efficient at putting money to work for the good of the economy. It is a lot like a good stock with great earnings and revenues. As a stock continues to produce better results, each quarter it has a harder time doing so because the gains must continue to grow. It needs investment in the business to do so. Our economy needs that money it produced and was overtaxed away to plow back into investment in supply to keep growth rates moving ahead. It is really that simple, but they make it sound so complicated in DC. Don't fall for it. Contact your senators and representatives to act for the future of the economy. If the economy wins, we all win big. That has always been the case.
THE MARKETS
Another quiet day as volume fell everywhere. Some good signs, some neutral signs. Tomorrow after the close we have the much anticipated CSCO earnings that some are projecting will be the company's first miss in years.
Overall market stats:
VIX: 24.39; -0.36. Volatility continued to tread water as the markets went separate ways once again. Staying too low on this selling for us, but this is not a leading indicator for us, just secondary. There are other indicators we are focusing on now.
Put/Call ratio: 0.54; -0.06. Again put buyers were nowhere to be found as the ratio hugs the flat line.
NASDAQ:
Another doji on low volume as the index tested a support point and was able to recover. There has been a lot of accumulation ongoing, and we are going to watch to see if this doji and the doji's we see on many charts today can lead to another run back up from this key level.
Stats: Down 17.29 points (-0.6%) to close at 2643.21.
Volume: 1.65 billion (-3.28%). Down volume again led the way again, 1.053 billion to 541 million shares. Lighter volume once again on the selling. We want to see a rise on higher volume now.
A/D and Hi/Lo: Declining issues continued to lead 1.4 to 1 (1.83 to 1 Friday). New highs fell to 89 (-13) while new lows rose to 28 (+7).
The Chart: http://www.investmenthouse.com/cd/$ndx.html
Fell below the January 3 closing high (2616) on the session low (2596.73), but found support at 2600 and then moved up in the afternoon session to close right above the support we outlines over the weekend at 2640. On the candlestick chart the index showed a doji with tail right over the support. That indicates a momentum shift in the second half of the day to the positive side. We will see if the tide can turn now given some of the accumulation we have seen.
Dow/NYSE: The Dow made another stab at breaking past 11,020 to 11,030. Volume was lower on the rise again, however, as the Dow continues to lack power on any move up. It has a great pattern, but cannot as of yet garner the backing to push it higher.
Stats: Up 101.75 points (+0.9%) to close at 10,965.85.
Volume: NYSE volume was lighter and below average once again, coming in at 1.010 billion shares (-3.6%). Up volume was ahead of down volume 556 million to 447 million shares. Needs to find some backing to break resistance.
A/D and Hi/Lo: NYSE advancing issues recovered the lead 1.12 to 1. Not a show of strength on a move up. New highs fell to 168 (-51) and new lows rose to 9 (+4).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow took a shot, but once again found no supporters in the form of volume buyers. It came up short on the breakout attempt, but don't count it out. It has tested the resistance, fell back on lighter volume, and is moving up again. There could be some volume ignite and send it higher.
S&P 500: The big caps bounced up off of the 50 day MVA today, but again volume was lower on the move indicating that there was no real institutional support for the move. We prefer to see more volume up off of the 50 day MVA, but it was a light day overall on all indexes. The S&P is holding above its January 3 rate-cut close, a perfect point to mount a real move up. If it can get help from the big tech stocks that would most likely get that volume to kick in on the upside. A big factor looming tomorrow is the CSCO earnings that many are anticipating will be the first CSCO miss in years. If it is a disaster, the good pattern could be over.
Stats: Up 4.84 points (+0.4%) to close at 1354.31.
Volume: NYSE volume again fell, remaining below average at 1.010 billion shares (-3.6%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
The big news tomorrow will be the post-close CSCO numbers. CSCO has been roughed up since the fall 2000, and it gapped lower today on higher volume. Its chart is building in bad news, and a miss will hurt it some, but the market perhaps more. If it fails to meet its number, one of the constants in the tech sector will have changed. Indeed the adage that fallen leaders may not be the new market leaders may start to apply more and more.
The Nasdaq and tech stocks look ready to start a move back up, perhaps anticipating CSCO giving that penny ahead of expectations it always does. The problem is whether revenues will hit the number. What if earnings are not ahead by a penny but just meet expectations? Selling anyway? We do not thing CSCO will keep the market from moving higher if it is so inclined, but it won't make things easy. The look is there in financials, retailers and some techs, but at this point we are waiting for the move to come. We are looking for stocks moving higher on rising volume. That will gives us the key that we are looking for as that will show us the money flow we are seeing turning into out and out buying as demand outstrips supply.
Support and Resistance Levels
Nasdaq: Closed at 2643.21
Resistance: 2890 to 2900 is next before the 3000 level.
Support: 2616 to 2640. Then 2500.
S&P 500: Closed at 1354.31.
Resistance: 1360 to 1375.
Support: 50 day MVA is at 1348.60. After that 1335 to 1340.
Dow: Closed at 10,965.85.
Resistance: 11,020 - 11,028. After that, 11,400.
Support: 10,750. 200 day MVA is 10,704.37. 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.
TEAM TRADES
Many stocks were on the move to test support today on light volume. EMLX is one we have some positions in, and we did some more target shooting at some options positions that we had taken late last week. We had looked at 90 as support for EMLX and it opened below it today, making us make some decisions about whether we wanted to cut and run if it tested that level or hang in there and look for a buying opportunity. The stock moved to 87 then ran up to 89.50, venturing over 90 for just a few trades before falling for the rest of the morning. The test of 90 was expected, and when it did not break over it, we thought about selling out, but we still felt relatively comfortable with the lower volume selling on the index, so we hung around to see what would happen. It hit 85.50 at 12:35 CT and bounced between that point and 86.50 for about an hour. Right before 2:00 it broke over the morning low as volume moved much higher. We had been watching the April 95 calls, but we missed the first move and didn't get on it until it was over 87. We jumped in with a limit order for more at $12.38 and got another partial fill. At least the move held after some late-session selling attempts.
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 Monday.
Best Plays:
1) LEH: Showing a doji at support on low volume, in the pullback.
2) MAY: Ready to move up in a rally as the retail stocks continue to look good.
3) HBC: Look for a break of resistance on the stronger volume.
READY TO BREAK TO A NEW HIGH:
LEH (Lehman Bros--$82.20; +0.15; optionable (LES)): Brokerage
http://biz.yahoo.com/p/l/leh.html
STATUS: Showing a doji on the pullback from the recent high (86.20). Volume continued to drop, reaching 1.7 million (avg. 2.4 million). The tight doji signals a turn back up from here; look for the move on stronger volume. The stock has already tested its recent breakout and is ready to make another move up. 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 (from the weekend):
THQI (Thq Inc--$29.94; 0.00; optionable (QHI)): Software
http://biz.yahoo.com/p/t/thqi.html
STATUS: Remained a buy on the breakout move from its 14-month cup with handle, but the stock showed a doji instead as volume dropped back to 651,000 (avg. 291,000). Showing the doji near the low in its trading range (low is 29.38), the stock can pull back to test the buy point of 28.88 before heading back up. Buying improving; relative strength and money are high.
BUY POINT: A pullback to the 28.88 range, or over the intraday high of 31 on rising volume after that pullback.
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--$37.85; +0.56; optionable (MAY)): Retail
http://biz.yahoo.com/p/m/may.html
STATUS: Held at the 10 day MVA (37.31) as expected, moving up slightly from there on even lower volume (911,500; avg. 1.4 million). The stock looks ready to move in a rally; MAY hit a high of of 39.50 on the breakout high reached last Thursday, before pulling back to the support. MAY shows high relative strength and money flow.
BUY POINT: Over 39.50, on volume of 1.2 million or better.
POSITION: Safer: Stock and/or May $35 or $40 calls to buy (MAY FG or FH).
HBC (Hsbc Holdings Plc--$77.93; +0.73; optionable (HBC)): Money Center Bank
http://biz.yahoo.com/p/h/hbc.html
STATUS: Moved up from the 18 day MVA support level (77.03), firm footing for the stock. Price broke back over the 10 day MVA (77.74) on slightly stronger volume (78,200; avg. 96,454) but needs a rally to break the resistance just over 78. We like the move back over the buy point of 77.33 (breakout point from the recent ascending wedge). The stock hit a breakout high of 80. Continued good buying and high money flow, relative strength.
BUY POINT: Over the January high of 80 on volume of 106,000 or better.
POSITION: Stock and/or June $80 calls to buy (HBC FP).
ACS (Affiliated Computer Svc--$64.25; +0.45; optionable (ACS)): Software
http://biz.yahoo.com/p/a/acs.html
STATUS: Continues to hold the consolidation above the 10 day MVA (62.97, tested on the low of 63), as volume keeps dropping below average (211,500; avg. 305,363). Buy point in the recent breakout is 62.76, and we like the hold above that price. Looks ready to move up in a rally. Continues the great money flow and high relative strength.
BUY POINT: Over Friday's high of 65.75 on volume of 286,000 or better.
POSITION: Stock and/or April $60 calls to buy (ACS DL). April $65 options have 65 open interests (ACS DM).
End Part 1 of 2
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