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6/13/02 Technical Traders Report
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Technical Traders Report Subscribers:

MARKET ALERTS
Targets hit Wednesday: DISH; PHTN
Buy alerts issued: RGFC; HSY; CYN; RYL; BAC
Trailing stop alerts: None issued
Stop alerts: RAH

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http://www.investmenthouse.com/alertttr.htm

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SUMMARY:
- Selling yes, but more like no buying versus heavy selling.
- Producer prices show no inflation, but consumers come up short.
- Market looking close to sold out on this down leg, but it needs a catalyst.

Indexes try to rally and then again reverse, but the selling was not as vicious.

Retail sales were off and the futures reversed on the numbers. The market was bent on a rally attempt, however, and it double bottomed early and ran up over recent resistance. The Nasdaq and S&P 500 climbed just enough over near term resistance to hit their short term down trendlines, and after two attempts to break those levels the indexes then double topped and spent the rest of the session seeking the lows. In the seminars we talk about how there are two big moves per session. In a bear market the predominant action is an attempted move up and then a move down. That is followed by a move down, a pause, then another moved down. Of course there is also the sell off then reversal in the second half of the session; less common but happens after several consecutive selling sessions.

Today it was the first scenario, but it is not as if the sellers came pouring in when the market hit resistance. It was more as if the few buyers that were in the market finished for the day and left. Without them stocks rolled back down. Volume on the NYSE and Nasdaq slid lower though volume remained solid on the NYSE. The indexes all closed above Wednesday's intraday low. They are trying to hold but getting no buying support.

Oversold, but cannot rally.

The Nasdaq volume is light compared to the NYSE (or you can look at it the other way and say NYSE volume is heavy compared to Nasdaq volume). That is an indication that the speculation in the speculative index is mostly gone. It is the remaining market that needs to be sold off hard. The Dow has been holding up relatively better than its two brethren big cap indexes. The S&P 400 mid-cap index broke its 200 day and sold hard. The S&P 600 small cap is at the 200 day. They all have more to sell to 'catch up' with the Nasdaq and S&P 500. It looks as if the Dow is trying to hold for a bounce at 9500 after a lot of selling.

Conventional wisdom says it is oversold and has to bounce. This is not the conventional market, however. We have been looking for a sell off that could jump the sentiment indicators high enough and cleanse out another big group of investors that are holding on. Each time it gets to the brink the market manages a rally to let off the pressure. On the other hand, when it does attempt to rally off of the precipice it has been unable to sustain a move for more than a day or two. It keeps dancing on the edge and each time it tries to step away it is drawn back. This is a Black Monday scenario just over a longer period of time. I don't know how many of you remember that, but the Dow danced around at the 50 day MVA, started selling lower, then kept trying to rally with intraday reversals that just did not stick. No real selling volume, but it was unable to must any buyers. Then all of the sudden it was down hard; when it went over the precipice it went fast.

The inability to rally is the continued concern. Oversold as the dickens, but cannot pick itself up. It is holding at a key level (9500) and may try again to rally off of that point. Without a change in the sentiment, however, its ability to do so will be limited.

THE ECONOMY

Consumers take a breather.
Retail sales for May were expected to flat to slightly lower (0.0% to -0.2%), but they turned down rather sharply, dropping 0.9% overall and -0.4% ex autos (+0.3% expected). The drop was the first since January and the largest since 11-2001. The consumer is about the only thing other than the toppy housing market that is giving investors much confidence. While there are reports of improving economics in some sectors and companies (e.g., PG and other basics), overall there has not been a lot of upside salve for investors. When consumer stocks are leading the market and then the reports show consumers are spending less, well the math is not hard to do. It takes a little more steam out of investors.

That disappointment reversed the futures as noted, and the market had a hard time trying to get off the mat. Even with the slower consumption in May we still view the economy in an improving condition. May had weather problems (cooler in most parts of the country, but don't tell that to those in Texas) and it also is the last month before stores start their summer sales to try and help a traditionally slower season before back to school sales rev up. Now you can look at this as a bad omen: slowing even before the slower season of the year, meaning that the summer will be dreadful. Or you can look at the macro view of how consumption has been changing over the past two years with the recession and see a pattern.

Consumers are seeking discounts and value. Consumers are savvy. They know that summer sales are just around the corner. If you have some bigger purchases to make, why not put them off for a few weeks or a month until the sales start? They do it at Christmas during good and bad times, and when economic times are slower as they have been, they most certainly do it. Look at Wal-Mart: its May sales were strong and well above expectations. The migration to demanding discounted prices continues. Consumers buy necessities at discount purveyors and then demand price reductions or sales on the bigger discretionary purchases from other vendors. Another example: auto sales. They are strong, but they are strong because of continued incentives. Take away the incentives and sales drop. Another example: airline fares. How many airlines have attempted to raise fares only to get deserted by travelers? Southwest continues to grow every time they try it.

In sum, even though retail sales were down it was not the start of a trend lower. Remember also that sales are measured not in units but in dollars. Gasoline sales are part of retail sales. Gasoline prices have dropped substantially the last three weeks in May. Thus a falling retail sales number. Clothing sales were on the rise as summer fashions are being snapped up. Electronics and appliances rose 2.1% after +10.9% in April. As always you have to look under the stones, look up the skirt, etc. to see what the real story is as the headline numbers are deceptive. As we have noted before, the consumer is not the problem; the consumer will keep consuming as long as the prospects for a job remain good. The key to the recovery is business spending. There are some signs of improvement, but nothing that will spur tech investment to high levels near term.

Producer Price Index (PPI) very tame.
Producer prices fell 0.4% overall versus an expected rise of 0.1%. Core prices (less food and energy) were flat (expectations were +0.1%). There remains no hint of accelerating inflation in the economy. Again, our biggest concern should be deflation, i.e., the loss of value in real assets (buildings, land, homes, etc.) from the flight of foreigners from the dollar and U.S. investments. That is what can crush the U.S. economy if the right steps are not taken to secure continued economic expansion. Despite the idea that we need to suspend tax cuts or even raise taxes to shore up deficits, history shows that raising taxes in a weak economy has horrid effects: 1) it chokes off what recovery that was trying to sprout; 2) exacerbates the deficit problem because Congress won't stop spending yet tax revenues will fall from the reduced economic output even though taxes were raised to higher levels. There is just no incentive to invest with higher taxes in a slack economy, and thus it grinds to a halt and deficits that were necessary during a recession and war become entrenched. Congress should cut taxes further, not buck history just in order to collect votes from those that live off of the government.

Jobless claims rise on the headline number but show important progress elsewhere.
New claims rose to 390K from a revised 384K (383K prior). This is a change. After laboring (weak pun) over 400K for months there is a 2-week ongoing 'trend.' More importantly, continuing claims fell to 3.77 million from 3.79 million the prior week. That is the first drop in continuing claims in over two months (continuing claims measure the number of individuals drawing claims for more than a week). The 4-week average also dropped, falling to 402,250 from 411,250 the prior week. Thus, even though the headline number rose, it was less than expectations (393K), and the other longer term measures are improving. This is real time data versus the monthly employment report. It is turning around, but it is hardly a trend at this point.

THE MARKET

Nasdaq volume was 160 million shares greater than the NYSE. Again the tech index shows signs of just being sold enough after giving back most of the gain off of the September low. The Dow, S&P 400 and S&P 600, however, are still well above those levels. The NYSE has been showing stronger volume compared to the Nasdaq; on a historical basis when they draw close to even the market tends to rally.

The oversold condition has continued to worsen even after the recent attempts to hold the line at this support level. Quick rallies have been pushed back, but not enough to toss the indexes lower as they need to be. Retail sales rattled the market as noted above; the market fears an economic slowdown again but it does not give credence to good economic news. It anticipates something worse and it appears it won't be satisfied until it gets something worse. Retail sales hurt, but they did not trigger any real selling. There needs to be some other catalyst, perhaps weaker economic news again tomorrow. Once again the indexes are on the edge: they can roll over and really fall or they can once again bounce in another small rally. They turned back at the down trendlines again today, so there is not much upside force behind these rally attempts.

VIX: 28.73; +1.72
VXN: 54.3; +1.44. Still rising but not spiking higher as needed to help set the final bottom.

Put/Call Ratio (CBOE): 0.82; -0.17. Backing off on a down session. This is contrary to what the indicator would normally show, but it has also given 3 closes over 1.0 in the last month. It is ready.

Bulls versus bears: Bulls fell for the second straight week, dropping a solid 6% from 48.9% to 42.9%. Bears rose from 31.3% to 34.7%. Still not there as we need to see bears outnumber bulls, but it is getting enticingly close. A big selling spree the next several sessions should turn that one around.

Nasdaq

Back below 1500 but holding well above the lows recently hit intraday. Volume backed way off; there was no intense selling, just malaise. ADBE reported after the close and was being hit hard, and GNSS cut its quarter and was being wasted as well. It is not getting better for techs from a recovery standpoint.

Stats: -22.26 points (-1.47%) to close at 1496.86
Volume: 1.57B (-23.42%). Big drop in volume to well below average levels. It was not an intense day of selling, indicating that the Nasdaq is ready to move higher. It just cannot get help at this point.

Up Volume: 530M (-619M)
Down Volume: 956M (+73M)

A/D and Hi/Lo: Decliners led 1.68 to 1
Previous Session: Decliners led 1.23 to 1

New Highs: 42 (-8)
New Lows: 167 (-91). Backed off significantly on a down day as opposed to the spike higher on Wednesday's up session. That possible indicates a bottom being set, but we never had the big spike to 400 new lows we see at most significant bottoms.

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

As further indication that the Nasdaq appears more sold out at this level, it held well within the recent low, showing an inside session, i.e., where it opens and closed within the prior session range. This can be resolved either way; after a steep selloff it can signal an attempt to rally. The Nasdaq held above the Wednesday low (1474.56) and did not suffer heavy selling. As noted, it is ready to make a move higher but it will most likely not be able to move significantly on its own. The Dow most likely holds the key as it has the most to sell if it does break 9500; it needs to sell off for the market to have a chance at recovery longer term.

Dow/NYSE

Easy come, easy go. Up 100 points Wednesday, down 114 Thursday. It held 9500 on the close on lower volume as there was no short covering today. This is a critical juncture and it does not have a lot of strength to hold itself up.

Stats: -114.91 points (-1.19%) to close at 9502.8
Volume: 1.413B (-18.6%). Just below Nasdaq volume.

Up Volume: 464M (-249M)
Down Volume: 937M (-48M)

A/D and Hi/Lo: Decliners led 1.59 to 1. The ratio worsened considerably in the last two hours of trading.
Previous Session: Advancers led 1.02 to 1

New Highs: 63 (0)
New Lows: 101 (-49)

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

Dancing on the edge of the cliff at 9500. This is a support level has the most teeth. It is where the market was ready to bounce on 9-10-2001. It is where it gapped down from after the market reopened. It loitered there on the way back up, and successfully tested it earlier this year. It is also very near the April 2001 low. Thus this is significant support, and it continues to dance around at that point. When a stock or an index hangs out in a bad neighborhood, bad things can happen. It is not distributing right now, however, and that is a positive for the level holding. It has not crossed over on the close as of yet either. It is holding and could deliver a bounce again from this level even after the last two rally attempts the prior two sessions. The fact that those rallies did not last and indeed so quickly reversed, however, is not a sign of strength. In short, this is solid support, but the Dow is unable to put together a solid upside move off of it. If it continues to show failed rallies off the level it will fail and test lower.

S&P 500:

Right back lower again, giving back all of Wednesday's gains and more though on lighter NYSE volume (though still above average). On the high it could not even make the March down trendline at 1027 before turning lower. It is trying to hold at the longer term September 2000 to April 2001 down trendline (right at the Thursday close), and it has the bottom channel of the March trendline below that at 1000. It too is oversold, but it also cannot put in a rally that lasts. It looks as if it will test 1000 again and decide to hold or to tank even closer to the September 2001 lows. As noted previously, it has sold back enough to test; it has that problem of the Dow, however, that has not undergone its correction to flush the market.

Stats: -10.7 points (-1.05%) to close at 1009.56
NYSE Volume: 1.413B (-18.6%)

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

End Part 1 of 2

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