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Economic Calendar

6-05-02
ISM Services, May (10:00): 60.1 actual versus 56.0 expected and 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: It seems the markets would have to come down quite a bit for PE levels to reach level that would make stocks more attractive. If that is correct how far would the Nasdaq, Dow, and S&P 500 have to come down?

A: It is hard to pick bottoms in terms of an absolute number. That is one of the things that gave technical analysis a bad name (e.g., the Dow will be at 11,323.73 on February 4, 2003). One thing to remember when looking at P/E levels: it is not just price but earnings. If you look just at price without earnings growth, the drop would have to be much more significant that it most likely will be. When earnings start to improve you automatically have a better ratio. In terms of average P/E's, Sir John Templeton says the market is twice as expensive as it has been in the past, and he takes that to mean there is a lot more grinding to go through.

On the charts we can look for general levels of support (points where historically the indexes have held), points where the 'froth' from the massive run up is completely taken out, or the completion of bearish patterns. In some historical scenarios the entire move up had to be wiped clean. What that means is not just the last spurt higher, but the entire gain from the start of the run. Look at a weekly chart of the Dow back to 1987. It more than doubled from the low of 1987 to 1994. Then it took off on a 45 degree run that put it over 11,000 in 5 years. Wiping away that gain would put the Dow at 4,000. The Dow has not really suffered a bear market, and in that respect it is vulnerable. As some analysts have noted, the Dow is still in a bull run, still in a long term uptrend. It was in the best shape of the big indexes until this recent breakdown. That has opened the door lower. It could retest 9000 (1998 highs) and even 8000 without too much selling in terms of its long term chart.

The S&P 500 has that 5-year head and shoulders pattern with a neckline roughly at 950. If it completes the pattern it could fall to near 450; that would put it back at the starting point in 1995 when the index took off. As we discussed two weeks back, the last time this type of massive climb occurred was in the late 1920's and early 1930's, and the Dow completed its head and shoulders and fell even lower. You have no doubt heard recently about the '2 down years and then up' theory, i.e., that the market does not fall three years straight. Well, it does sometimes, and one was back in the 1930's.

We want to be clear: that was a depression. This is no depression. Thus we do not believe the indexes will fall to these low levels as there is underlying earnings support as the economy improves. Rising economic activity means rising earnings and more support for stock prices. That means they do not continue to tank but the big names may grind in a range for quite a long while before they can move higher (as we noted before, some will not every move higher). That is one potential reality we have to face and why we need to be cognizant of the stocks that come to market and show new ideas and have the sales and earnings that show consumers want their products.

THE PLAYS:

BONUS PLAYS: EXPE made a little bounce toward the 50 day and is set up for a possible drop and put play.

ODSY (Odyssey Healthcare--$35.20; +0.33; optionable): Long-term healthcare facilities
http://biz.yahoo.com/p/o/odsy.html
STATUS: Ascending wedge. A new issue since November 2001, ODSY broke from a small cup in April and, after hitting over 36 on the breakout, came back to test the prior pattern and highs and the 50 day MVA (then 31, now 32.65). It held up, forming the ascending wedge base over the prior base. Volume has been light in the pattern, but since the test of the 50 day ODSY has climbed nicely along the short-term MVA's (18 day at 34.45). Looking for another breakout. The high (on an intraday spike) is 36.80. Target: 42.
BUY POINT: Over 36 on volume of 250k (avg. 186k; today down to 66,400). Stop: 33.57 (7%)
POSITION: Stock and/or October $30c to buy (UPE JF - no OI as yet).

QCOM (Qualcomm--$32.84; +0.40; optionable): Communication equipment
http://biz.yahoo.com/p/q/qcom.html
STATUS: Put. QCOM is in a long, established downtrend. After hitting a low of 24.63 in May, it battled back to test the 50 day MVA (currently 33.29), which has served as steady resistance. The last dip held 30 and QCOM again is challenging the 50 day, which coincides with the down trendline for a double layer of ice. After bouncing up on above average volume Tuesday, QCOM could only edge up today and close with a loose doji on reduced volume. Looking for a failure here and drop. We can take positions on the initial drop back, and pick up more on a drop through the recent support at 30. Target 26.
BUY POINT: Below 31.50 on above average volume (13.7m; today down to 11.2m). Additional positions on a drop through 30 on above average volume. Stop: 34.50
POSITION: October $40p to buy (AAQ VH).

PRE-ANNOUNCEMENTS: NYT is still holding up well, and MUR continued to drop on light volume.

SLM ($95.05; +1.80): After crashing through the 50 day MVA (95.97) Monday, SLM reversed Tuesday on a 'hammer' doji on strong volume. That indicates a bounce, which is what we got today. However, the moved up was on much lighter volume, and failed to reach all the way up to the 50 day. Off of this weak bounce we can look for a drop back and put play, targeting 89 (stop 97). On a move below 94 on increased volume (608k today; avg. 696k), July $100p to buy (SLM ST - 19 OI, -.71 delta).

PRE-SPLITS: FOSL continued its nice move! STJ made the weak bounce and we are looking for the put play as set forth in Tuesday's report.

CPS ($59.90; +0.40): Splits 4:3 effective 6-7-02. Going toward the split and still set up in the ascending wedge. Volume has been strong and continued to be today (335k; avg. 233k) as CPS made a small move up toward the pivot. On a strong breakout we will ride through the split, protecting profits. The buy point is 60.50, with July $35c to buy (CPS GK).

ATK ($101.90; +2.64): Splits 3:2 on or about June 11. After the hard drop through the 50 day MVA (104.32) that triggered stops on any remaining upside positions, ATK made the anticipated bounce today, moving up on reduced volume (488k; avg. 343k). We will see if we get any more move up, but are looking at a put play on a drop back through 100 on continued strong volume. July $105p to buy (ATK SA - 48 OI). Target: 90. Stop: 106

YUM ($64.92; +2.06): Splits 2:1 effective 6-18-02. Made the bounce today! Last Friday's bounce stalled at the short-term MVA's (64), but today YUM blasted through that resistance on big volume (1.12m; avg. 771k). Still a buy on a move over 65.50, with July $60c to buy (YUM GL). Stop: 61. Target 72.

KSWS ($42.84; +0.84): Splits 2:1 effective June 22. After making a lower high on its last bounce, KSWS dropped like a stone, taking out its 50 day MVA (43.93) with vigor Tuesday. We were not ready for a put play at that point, waiting instead for a test of broken support. Today KSWS gapped down (low of 41.25) but rebounded on much lighter volume (77,800; avg. 90,900), stopping well short of the 50 day. We could get a bit more of a test, but are looking for a strong drop back through 42, with July $45p to buy (SWU SI - no OI). Target: 37. Stop: 45

CONTINUING CANDIDATES: TGH broke to a new high!

KLAC ($52.00; +0.84): After giving up the 200 day MVA (52.84), KLAC rebounded a bit Tuesday, and today tested the 200 day at its high but closed with a tight doji just under that level, with volume continuing to be strong (15.8m; avg. 12m). With the doji under resistance we are looking for this move to fail, and in a retreating market we look for a drop through 51, with July $60p to buy (KCQ SL). Target: 44. Stop 54.50.

POST SPLITS: WLP and WTSLA made solid moves up, and CPS continued the bounce and hit the buy point!

AMAT ($22.35; +0.35): Managed a rebound through its 200 day MVA (21.72) Tuesday, but today could only manage a small move on lighter volume (29m; avg. 23.8m), tapping the 200 day at its low. We could see a bit more upward movement, but are looking for a drop back with a continuing downtrend in the market. In a weak market, on a drop through 21.50, July $25p to buy (ANQ SE).

Good Investing!
Jon L. Johnson and the Stock Split Report Staff.

All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Online Investment Services, LP or its paid consultants and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on our related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of Partners of Online Investment Services, LP or its paid consultants may, in some instances, include securities mentioned herein and on our web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors.

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