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us stock market, trend trading stock
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2/07/01 Investment House Daily
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Investment House Daily Subscribers:
TONIGHT:
- Stronger volume rise on Wednesday leads to stronger volume selling today.
- Crossroads
- Productivity falls as expected, but is this a sign the Fed won't cut sooner than later?
- Team Trades
Distribution on the heels of a gain on higher volume: market indecision at its best.
Wednesday the Nasdaq showed a day of gains on stronger volume, though the afternoon fade was not reassuring. Still, an up day on rising volume is what we want. Then came CSCO and the Nasdaq was fed a loss on over 2 billion shares. It was the mirror image of Wednesday with the index taking a waxing the first half of the day, but rallying to cut losses in half by session close. CSCO accounted for 282 million shares of the 2.058 billion traded, or 13.7%. Take out CSCO and the Nasdaq volume tread water. Still, many tech stocks traded lower on sharply increased volume as BRCM added fuel to the fire with its true confession about slower than previously stated earnings going forward.
Thus, one cannot fully discount today's action by blaming CSCO. Sellers were dumping stocks, the second time in six sessions. Whether the selling is due to CSCO missing its number for the first time 5 years or a rate cut that was disappointing because it was less than some expected, mutual funds have started to sell stocks recently. Two days of institutional selling does not mean further serious selling is ahead, but it is a sign of changing character as the Nasdaq showed perfect price/volume action ever since the first rate cut. Wednesday they were buying again, but they abruptly turned tail on the CSCO earnings. The Nasdaq had set itself up for a bit of a rally, but that appears to be in jeopardy.
Not a clear answer today as the indexes remain at crossroads.
The indexes could have chucked it in today, but instead mounted a late day rally with the Nasdaq closing near some previous bottoms where it held as support for moves higher. The candlestick chart shows this reversal from sellers to buyers by a doji with a tail: the index opened, sold lower, recovered and then closed almost at the point it opened. In other words, sellers rushed in early on and unloaded; then buyers came back in late and snapped up shares.
When this action occurs on higher volume as it did today it can mean the sellers were cleared out and is a sign of further buying. Problem is, down volume overwhelmed up volume better than 3 to 1; the heaviest volume was to the downside. Looking at individual stocks, however, we do see late buying as the heaviest volume on the session. We have seen that before with mixed results the following session. It is a positive, but it by no means confirms that the index hit bottom today for the next move up. Another thought: as we said last night, if the market could snap back after early morning trashing on the heels of the CSCO earnings, there was hope to the upside. It came back, but was it enough? If it does not hold here it is a quick ride down to 2500. After looking fairly solid, the Nasdaq is now teetering on falling back down; indeed, many of its key stocks are already well on their way to the lows they just visited back in very early January. If they can find support at those lows, the Nasdaq may turn before it hits its lows of that time (2251).
Additionally, the Dow showed its second doji in a row as it again tested 11,000 on its high (11,004.04). Unlike the Nasdaq, these doji's are occurring at the top of the recent trading range. The Dow is begging for a catalyst to send it through 11,020 to 11,030 for good, but it has not materialized. It is banging its head at this level, and the longer it does without success, the more likely it will fail. Indeed, the twin doji's at the top of the range indicate some further selling before another run at resistance. What has happened the last two sessions is that buyers tried to run the index higher, but were turned back. Today it turned back down on stronger volume selling, and indication it is going to test some support at 10,750 or so. The Dow remains in good shape, but it represents a small part of the overall market.
The S&P 500 broke below its recent support at the 50 day MVA and tapped support at 1335 before mounting its own rise late in the session. That was good to see, but the index sold on stronger volume and broke its recent trading range that looked to be solid. This is a change in character that does not bode well for the broader range of stocks. It is not in dire trouble, but the tide shifted in a pretty big hurry.
THE ECONOMY
Productivity came in at 2.4% for the fourth quarter, slightly lower than the 2.5% expected and below the third quarter's 3.0% (revised down from 3.3%). Many said that this number would prevent the Fed from making further intermediate rate cuts, citing primarily the unit labor cost that rose 4.1% annually for the fourth quarter (a 2.8% rise was expected). The argument is that higher unit labor costs give the Fed less room to maneuver for rate cuts.
Labor costs rose because we know from the employment numbers that employers are not working their employees as hard. While there are layoffs ongoing, many employers are hanging onto their employees whom they have invested time and money in training. Instead of cutting them loose they are working them less. SCH is a case in point. Working the same number of employees less hours means lower productivity and higher unit labor costs because you are still paying them. For the short term companies feel that is better than laying them off and then having to run right back out and hire new people and incur training costs and losses from inefficiencies. Thus, the higher unit labor cost is a function of the slowing economy and not truly a real cost increase.
Thus, a 2.4% productivity increase given a 1.4% GDP (a 0.9% drop from the third quarter and a 4.2% drop from second quarter GDP) is not that bad. With that cushion it actually acts as more of a buffer zone for the Fed to continue to cut rates as opposed to blocking such a move. Simply put, productivity is still at high enough levels versus the GDP to help offset any inflationary tendencies that further rate cutting might stir up. Thus it is really a positive that productivity is holding at what are historically very high levels, though it is disappointing to see it fall. But, we knew it would with the falling GDP, slowing production, and diminishing IT investment.
THE MARKETS
Financials and retailers continue to sport some of the best patterns in the market, and with the Fed rate cuts, that is not a total surprise. They too, however, are at an important crossroads. They have formed up some good cup with handle patterns and pennants, but are having trouble finding a catalyst to send them higher. The longer they are stuck in the holding pattern, the more momentum they lose and have a greater chance of failing. This underscores the importance of holding pat until we see the strong move on strong volume. That way we do not jump in too early before the stock proves itself worthy of investing our money in it.
Stocks need a catalyst. Another rate cut would do it, but that is not being built into the FFF contract at this point before the March 20 FOMC meeting. If the market continues to tank that will continue to smother consumer confidence. That is the flashpoint for the Fed right now; further market deterioration means lower confidence, something Greenspan cannot have if he wants to prevent our relative recession from becoming a textbook recession. That could spell another unexpected rate cut.
Overall market stats:
VIX: 24.52; +0.70. Volatility rose, but in the big picture it barely budged given the gloom and doom atmosphere today.
Put/Call ratio: 0.58; -0.13. After Tuesday's sharp rise in put activity, today when the market sold hard on the Nasdaq, put buying was more subdued. Hmmm. As we indicated last night, Tuesday's put action may have been due to some short covering when the Nasdaq righted itself after three sessions of selling. On such a strong move to the downside with such negative sentiment, the fact that put activity dropped shows continued complacency in the market. We could still get an interim move up, but the fuel for the move would be low based on this indicator.
NASDAQ:
As noted above, the start of further nastier selling or a reversal day? You can build arguments on either side of the issue and the market is showing signals both ways. What we are seeing is the mutual funds battling it out: higher buying volume Tuesday, higher selling volume Wednesday. We have to wait and watch to see who starts to win the battle.
Stats: Down 56.67 points (-2.1%) to close at 2607.82.
Volume: 2.058 billion shares (+15.3%). 1.563 billion shares to the downside versus just 455 million to the upside. The sellers were in control, but buyers came back late to move big name stocks higher on heavier volume. Interesting, but we need to see the upside action again tomorrow.
A/D and Hi/Lo: Declining issues walked all over advancers, 1.50 to 1, easily stronger than the recent anemic lead by advancers. New highs fell to 78 (-5) while new lows rose to 39 (+16).
The Chart: http://www.investmenthouse.com/cd/$ndx.html
A doji on higher volume after the market tried to sell down. It did not melt down when it could have, but it did not give the kind of massive reversal that favors a follow through of the late action. It is at a great point to hold the line, but it is hanging on after falling from its recent attempts at consolidating. If it cannot hold on, it will test 2500 without much trouble.
Dow/NYSE: Tried 11,020 again and failed on climbing volume. It is still in good shape and looks as if it will break this resistance either after a brief pullback or a launch from here.
Stats: Down 10.70 points (-0.1%) to close at 10,946.72.
Volume: NYSE volume rose on again on the selling, climbing to 1.146 billion shares (+8.11%). Down volume led up volume 664 million to 470 million shares. Continued poor price/volume action, but that is not hurting the index for now, but it does take a toll as there are net sellers.
A/D and Hi/Lo: NYSE advancing issues held on 1.1 to 1 (1.18 to 1 Tuesday). New highs rose to 184 (+3) and new highs rose as well to 19 (+13).
The Chart: http://www.investmenthouse.com/cd/$dja.html
We covered this above. Not in bad shape, but its failure to punch through and the rising volume on selling is tipping toward a pullback to the 10,750 range before a breakout.
S&P 500: As noted, the big caps sold down below what was acting as good support (the 50 day MVA at 1348.44), doing so on rising NYSE volume. It did catch other support on its low (1334.26), and that pushed it back up. Not as strong a recovery as on the Nasdaq or the Dow, and we do not like the higher volume selling. It needs to hold at 1325 or it really changes its character and gives us much more downside risk to the 1300 level.
Stats: Down 11.37 points (-08.%) to close at 1340.89.
Volume: NYSE volume rose again on the selling to 1.146 billion shares (+8.11%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Unanswered questions, unanswered questions. When we see this we have to look for the signals that things are really firming up, i.e., heavy buying on a move up. The late action in the techs stocks was not enough to get us into the buying mood today. Instead we focused on those plays that were breaking out or were split contenders such as SDS, PRE and SBUX. These stocks are in solid patterns just itching for the catalyst to breakout. When we saw the vigor of the selling (watching intraday volumes) in the techs, we were not too wild about chasing them. We could have done some target shooting, but we were just not convinced by the late rally attempt. We watched when they got close to support, but we were not seeing dramatic bounces. Best to focus on the solid patterns and play some covered calls on a day such as today.
We will do the same tomorrow, but we also will watch for today's late surge to continue. We are not buyers on the open, but we watch to see where the open takes us to the upside or the downside. Right now Nasdaq futures are up 27 points over fair value, and S&P futures are up 5 points above fair value. We will see if we get a rise and look for a pullback to support levels either in the form of the open, the previous close, or another support line in the form of a moving average, price consolidation or trendline. If we see stocks retreat to those lines and bounce sharply, we can take positions on the strong movers that can rally $5 to $10 in a good session. That is a good short term play. We will also look for those in great bases for breakouts. If we see them popping off on strong moves, we would like to capture the gains. Even with a breakout we have to exercise discipline and get out of the stock subsequently violates the breakout point. The market is still way too tenuous to just buy and forget about it. Thus, use stop losses on breakout plays.
This market is frustrating, but it is still acting as a market post-rate cuts should: overall it is still trending up, though that trend is punctuated by pullbacks and is in what appears to be a tenuous position right now. January was a solid month with the Nasdaq gaining 25%, and February is suffering some mild selling thus far. Though it is in vogue to say so, the economy is not as dead yet.
Support and Resistance Levels
Nasdaq: Closed at 2607.82.
Resistance: 2890 to 2900 is next before the 3000 level.
Support: 2600 to 2640. Then 2500.
S&P 500: Closed at 1340.89
Resistance: 1360 to 1375.
Support: After that 1335 to 1340. After that 1300.
Dow: Closed at 10,946.72.
Resistance: 11,020 - 11,028. After that, 11,400.
Support: 10,750. 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
CSCO: As noted in the 2-05 Daily, we were looking at selling some calls on CSCO naked before when the opportunity arose as we thought that the odds of CSCO beating the number after Chambers' statements was slim. On Tuesday we were looking at the premiums on February in the money calls. Why in the money? Because they had the best premiums with just a couple of weeks left, and because they would move the best if the stock fell.
The stock was bouncing around the $35 to $36 level, so we were looking at February $30 calls. We could sell them anywhere from $6 to $6.25 as the stock struggled just over 35. It was trying to make a move up, but the Nasdaq was having trouble running into its 15 minute MVA, and it looked as if things were going to sell. We saw the premium dip under $6, and when CSCO ran back up a half point but ran into resistance, the options were bidding 6.125. We knew picking the exact top would be a problem, and since we saw some selling pressure we decided to put in a limit to sell the calls at 6.125. The fill was instantaneous. Nothing like a very liquid stock with actively traded options.
The stock did run up a bit and we could have sold the options for $6.50, but it turned back shortly after that and closed right around the $6 level. Not bad. Then CSCO missed and tanked to 32-33 after hours. We figured that may act as pretty decent support, so we were ready to buy them back in the morning.
CSCO opened at 31.94, right at the point where we thought it might find support. It immediately dropped to 31, but snapped right back. We saw an ask on the options of $2.875. We saw buy side pressure and decided to heck with it, we had a good profit and were going to get out. Why so quick? Because we were going naked on the calls, i.e., we sold them without owning the stock. If the stock ran up substantially over $30 we could get called and have to produce the stock at $30; that would mean having to buy it at market to deliver the stock at $30. If it ran back to $36, that would just break us even on the trade. We had a good profit, we figured we might want to use the money that was tied up on margin elsewhere, so we bought them back. The fill took a minute or two, but it was made. We locked in $3.25 profit (less commissions) and moved on to another play.
CSCO moved down to 29.88 on the low, and we could have made another $1 or so on the trade. When we saw some upside pressure, however, we did not want to lose what we had in hand, particularly on a naked position. So, we took the profit and moved on. At the end of the day, CSCO closed just over 31, a bit lower than the 32 we forecast, but that was a rough stab anyway. The future for CSCO is as with most other tech stocks: dependent on the economy coming back. Some say it will drop to 20, others said to buy it today. They don't know. It could go either way here. We took advantage of the uncertainty, however, and used it to make a gain without having to buy a thing.
For a review of frequently asked questions, please use the link below:
http://www.investmenthouse.com/1questions.htm
End Part 1 of 2
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us stock market
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