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6/10/02 Stock Split Report Market Summary
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Stock Split Report Subscribers:

MARKET ALERTS
Targets hit Monday: None issued
Buy alerts issued: WEN; HUG; THC; WHI
Trailing stop alerts: None issued
Stop alerts: None issued

To subscribe to the SSR alert service you can sign up at the following link:
http://www.investmenthouse.com/alertssr.htm

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SUMMARY:
- U.S. catches a would-be terrorist . . . a month ago.
- Unable to hold the highs after the Friday reversal with last hour selling.
- Long-term market picture: a subscriber asks.

Terror headline dampens rally.

The market was continuing Friday's reversal until a morning headline that the U.S. had captured an Al Qaeda related suspect planning to use a dirty bomb. That stalled the advance in its tracks, cutting the morning gains at least in half. Then more headlines: by the way, we caught this guy last month. Moreover, it was just in the discussion stage apparently as this guy was supposed to come back to the states and do some recon work first. After that investors decided if the buying was good before the headlines, it was good after they were clarified. They came back in and drove the indexes back up.

The action shows the market is still subject to headline upset as they call it. With the ongoing war effort against terrorism, the Middle East problems, and the Indian subcontinent, there is that continued backdrop of potentially really bad news. That along with a weak dollar is keeping a lid on the market that is otherwise seeing a very solid economic recovery. That overhang keeps a governor on the market action; the retail investor is not fired up about the future (potentially a positive longer term) and the bears are using bounces to sell into.

The rally back was positive, but the late action is again a negative.

After the news hit, investors came back in and drove the Dow up 130 points on the high in mid-afternoon. After approaching some resistance at 9750, however, it reversed and fell 70 points to the close. The Nasdaq bumped into 1550 resistance four times and could not clear it; it fell 20 points in the last hour. The S&P 500 ran into the down trendline near 1035 and it too gave 10 points before a slight bounce in the last minutes of trade.

The action leaves the Nasdaq with a doji right after Friday's reversal attempt, and the Dow and S&P 500 closed well off the highs. Those late selloffs that leave the indexes grasping vainly at the highs are a hallmark of the downtrend: attempts to reverse run into trouble at the next resistance point. The relatively light volume after Friday's heavy trade left the indexes short of oomph to clear that resistance. A low volume 'follow through' is not strong action.

This does not mean the indexes are destined to tank further on this move. There were quite a few good small cap moves even if the small cap index finished fractionally lower. In addition the large indexes have been hammered hard the past three weeks. They are testing the next potential support level, and bounced the past two sessions. They could still give more upside, but the poor finish today has the sellers primed to sell into the next attempt to bump higher that fails at resistance.

In short, the action we are seeing falls in line with the sentiment indicators: they got to a point of mild anxiety, but nothing serious. We are seeing a bump higher based on the strong down slope the past three weeks, but it is not one that will be the bottom. There is more downside to come in the usual stair-step fashion until there is a greater test of the September lows on the Nasdaq and the S&P 500. The Dow is not in jeopardy of hitting that level right now, but it will go along for the ride as the other big indexes test lower after this bounce is over.

Longer term picture.

A subscriber asks what the 10 year outlook is for the market given the baby boomer decline we have discussed frequently over the past few years. Baby boomers have been fueling the rally in homes, consumer goods consumption, and the stock market. When they move on from a sector, they tend to leave it gasping for air until the next generation moves in. Generation X has helped, but it is not a baby boomer generation.

The general talk on the street is that as baby boomers age their consumption will decline and their investments in the stock market will decline. Boomers are roughly 45 to 55 years of age now. Conventional investment wisdom says they will start taking money out of the market. Yes, they will. They have been doing it already and buying second homes and other real estate as one area of investment. While it is lost in the daily barrage of 'special reports' on the television about hot investment areas, this rotation from the market to real estate and other investments is a historical cycle. In the 1970's investors looked elsewhere, fueling the real estate boom in the 1980's. Investors were pouring money into every type of real estate venture from rentals to raw land. The action finally became speculation with 'flipping' not referring to pancakes, fishing, or burgers, but to land.

Real estate troubles.

We all know how that ended. The S&L collapse as a result of illusory loan portfolios (you don't have to go back to the tulip craze to see bubbles) much the same as the illusory values of many small tech and internet stocks in the late 1990's resulted in bankruptcies (business and personal), wrecked homes and families, and literally hundreds of billions of dollars in losses the government had to back up. On top of that throw in a half trillion dollars in attorneys' fees in all of the ensuing litigation. As we are seeing now with the new lawsuits regarding stock market investments, the ones getting rich in the end are the lawyers. That is usually the sad ending of a market excess, regardless of the market.

What we will see now that all of the focus is on real estate is ultimately excess investment in real estate that will lead to a sharp drop and investor dissatisfaction with that form of investment. It is not imminent, but it is getting there. Before the real estate movement is over, i.e., before everyone is finally in it thinking it is a very safe store of value that cannot lose, we will start to see a recovery in the stock market.

Further stock market travails.

That recovery, however, will come after there is more selling. There is still some residual excess speculation in the market that has to be wrung out. Looking at the recent selling and seeing volatility and bulls versus bears still surprisingly high, the conclusion is that there is more selling ahead. The Nasdaq and S&P 500 have to resolve those 5 year head and shoulders patterns one way or the other, and it is still too early to call the ultimate outcome. Some say a full downside resolution to take out all of the run higher. If the economy stays as strong as it is now, however, the dollar will find support at levels reasonable for foreign investors to stay in dollars. Regardless of the rest of the world, if the U.S. economy is showing continued steady gains and good continued prospects, foreign money will be invested here. Thus a full resolution to the downside is less likely.

We still see the need to test the September lows, however, before anything meaningful can be put together. The Nasdaq and S&P 500 have broken down now to the point where they will need to test that level more and get the anxiety level high enough to drive those sitting on the fence out of the market into real estate or other areas. Judging from the lack of fear and lack of bearish sentiment, that could take some blasting to do it. When they leave the stock market to chase the real estate boom late, that is just about the time that the smart money will be back in the stock market. It is not there right now. Warren Buffet is trying to get the market there; he talks of terrorist attack certainties and no values in the market, using his bully pulpit as a deified investor to try and push more people to give up and sell out.

Always strong areas to invest.

That said, there are always strong areas to invest. Right now the health care services area is strengthening once again as we have seen, and there are still many very good smaller companies that continue to move higher. The baby boomers are still in the peak of their consumption power, and despite predictions, the demise of the baby boomer is premature. We are going to live longer. We have to have investments continue to return growth, not just income (particularly after the stock market collapse wiped out some nest eggs). That means stock market investments. College funds for kids are going to be in stocks for the most part. Boomers are still a very wealthy class; they still have a lot of strong earnings years ahead of them to amass wealth again. There will be markets we don't even see yet that they will lift as they continue to consume in addition to the ones everyone sees, e.g., health services.

Real estate will swell then fall. At that point stocks will have bottomed and be on the way up. We face more selling in the market over the next several months (with a summer rally tossed in) until the September low is resolved. We anticipate some meaningful downside action in August to September. After that the market may be ready to move higher, but it won't really get going until October or November on any move higher. Until that time, however, there continue to be investments in many small and mid caps stocks and the strengthening sectors that benefit from rotation. Of course, there is also always the downside to play as well as we have seen and enjoyed.

THE MARKET

The massive volume Friday on the reversal backed off to comparably anemic levels. As we have seen in the past, that is a sign that much of the rally back was short covering along with the fact that the indexes gapped down to potential support levels after already intense selling. Then late in the session the indexes pulled well of the intraday highs. The short covering was coming to an end near the next resistance higher, and the shorts were selling into it a bit.

VIX: 26.15; -0.50
VXN: 52.57; +0.33. Held at Friday's levels as the late selling pushed them higher.

Put/Call Ratio (CBOE): 0.86; +0.07. Stayed at the higher levels, moving up on the gains.

Nasdaq

Ran into Friday's high and minor resistance at 1550 and turned lower. Showing a doji on lighter volume, an indication that the small move is already over. Might test higher again, however, given all of the selling the past three weeks.

Stats: -4.79 points (-0.31%) to close at 1530.69
Volume: 1.518B (-28.11%). After Friday's big volume spike, volume fell way below average. It could get not traction or volume support to the upside, and it sagged back at the close.

Up Volume: 588M (-415M)
Down Volume: 917M (-175M)

A/D and Hi/Lo: Decliners led 1.2 to 1. Even with the rally higher early, decliners grew in strength. Nothing alarming, just underlining the overall weak nature of the index.
Previous Session: Decliners led 1.01 to 1

New Highs: 66 (+23)
New Lows: 122 (-137)

The Chart: http://www.investmenthouse.com/cd/$compq.html

Back to some resistance at 1550 on the high and again unable to crack through. No severe selling, just a weak move up that ran out of gas, reversing again off of that resistance level. It still has to deal with the May low at 1560 and the near term down trendline now at 1550. After rallying off of 1500 Friday on that reversal and thus avoiding starting the spiral lower, the inability to move up a bit more on this move is surprising. Thus we anticipate another test of 1550 or the 10 day MVA at 1583.51 to the 1600 level. The latter might be more than it can handle. The trend remains down, and if it cannot take out 1560 tomorrow, it looks to be heading lower again near term.

Dow/NYSE

Rallied up toward near resistance at 1750 but never made it, falling 70 points from the high late in the session. A weaker, lower volume bounce that could not hold the high by a long shot. As with the Nasdaq, it might try a bit higher before it rolls over, but it needs some staying power that it does not have right now.

Stats: +55.73 points (+0.58%) to close at 9645.4
Volume: 1.212B (-32.67%). Fell well back, holding at average volume on the gain. Weaker volume rallies are the hallmark of downtrends.

Up Volume: 667M (-265M)
Down Volume: 544M (-303M)

NYSE A/D and Hi/Lo: Advancers led 1.06 to 1
Previous Session: Advancers led 1.31 to 1. Advancing issues clung to a lead late in the session though the broader market was weaker on today's gain than on Friday's loss. Either way the moves were not powerful.

New Highs: 84 (+41)
New Lows: 55 (-76). Eight sessions in a row greater than 40 new lows. The point has been made.

The Chart: http://www.investmenthouse.com/cd/$indu.html

The high was 9718.09, a bit lower than the 9750 move we were looking at on the upside. It turned tail long before that level today, and well below more serious resistance at the 10, 18 and 200 day MVA (9874.25; 9774.34; and 9867.54, respectively). Before that are the April and May lows at 9800. Lots of overhead, and the weak bounce today will be severely challenged if it approaches those levels. We expect another try higher to 9750 and the 10 day MVA, and then a turn back.

S&P 500:

Hit the March down trendline (roughly) on the high (1038.18) and reversed 8 points to close, a big drop for this index. The action was the mirror reverse of Friday where the index reached way down and rallied back on strong volume. Here it ran up and then fell back on weak volume. It just had no steam behind the move. It is still way underwater from the selling the past three weeks, and if you push anything far enough underwater that has some life left in it, it will try to pop back up. We anticipate again that it may try to hit 1050, the interim October low, the November low and the May low. The 10 day MVA is also right there at 1047.26, and the 18 day MVA at 1058.76. As we have noted in the past, in a continuing downtrend, those short term moving averages act as resistance.

Stats: +3.21 points (+0.31%) to close at 1030.74
NYSE Volume: 1.212B (-32.67%). Lower volume on the gain. There was not a lot of intensity in the buying after the short covering rally Friday.

The Chart: http://www.investmenthouse.com/cd/$spx.html

TOMORROW

No real economic news out there tomorrow. NOK has its mid-quarter update, and it was weak going into it at the close today. Hope does spring eternal, and there is not a whole lot to push the market right now other than news. Thus we anticipate that the indexes may in fact make another run at that near term resistance once again before they find real selling. Indeed the shorts would like to see the indexes rally a bit more again and then jump on the selling once more.

Today we saw some smaller issues make some good high volume moves as well as health services. The latter (and somewhat the former) are defensive sectors in this market. We have been picking up shares of THC, ATH AMI and the like as they have strengthened in the anxiety over the past two weeks. There are a plethora of smaller and mid caps as well that are showing excellent relative strength that we have been interested in as well. Those always keep our interest. Again, there are always upside investments to make that can give us very nice returns.

Today we also saw some of the put plays set up again or get even a bit better for the buy as they bounced up but failed at resistance on weak volume. We will look to open some positions and add to some puts that turn and fail on those moves. This is our favorite spot to make downside plays, the test of the breach, a.k.a., the kiss goodbye.

End Part 1 of 2

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