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us stock market, trend trading stock
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2/08/01 Investment House Daily
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Investment House Daily Subscribers:
TONIGHT:
- Early rally attempt fails on waves of sellers.
- Retail sales mixed but mostly lower, and that is breaking down a lot of nice patterns.
- Shades of the end of the summer rally of 2000.
- Many tech stocks at levels before the first Fed rate cut.
- Team Trades
Today's follow through from Wednesday's late rally runs out of gas.
The indexes picked up where they left off Wednesday, opening higher and climbing to respectable gains early in the session. Even with the move up there was not much excitement as it seems everyone views any rally attempt with a rightfully jaded eye. Indeed, we do the same when the markets start the day stronger as they tend to burn out, especially when we start seeing signs of distribution, i.e., where the big money starts to dump shares. It has not been wholesale selling, but it is the first time the Nasdaq has done this in a month.
Today was not technically a distribution day as volume on the NYSE and Nasdaq was lower. Or was it? Wednesday CSCO traded almost 280 million shares with the Nasdaq turnover at 2.056 billion shares. Today volume came in at 1.885 billion shares, but CSCO traded a 'mere' 102 million. That is about 180 million shares less on CSCO alone, and if you take that off of Wednesday's volume you get 1.876 billion shares. This is not exactly an apples to apples comparison, but given that many key Nasdaq stocks sold on heavier volume today, the technically lighter volume may be camouflaged by the extraordinarily heavy CSCO volume on Wednesday.
The importance? A few quick distribution days can signal worse things to come as mutual funds, pension plans and other big money players are in a selling mood. Obviously, additional selling pressure would push the market down even further.
Retailers deliver weaker sales reports.
As soon as the Nasdaq was an hour into the session and things looked pretty decent, it started to sell. Retail sales came out mixed but predominantly weaker, and that took a lot of steam out of the move. Indeed, retail stocks had been some of the stronger patterns in the market, but on today's news we saw high-volume selling that either took retailers out of their patterns or is threatening to do so. Last night we stated that the longer these stocks held in these patterns without a catalyst to break them out, the more likely they were going to start to fail. We could have seen that starting today.
This weakening and breaking down of patterns is also occurring in another strong post-Fed rate cut sector, the financials. While there are still some very solid patterns out there, some key players have broken to the downside, e.g., MWD, and that is a concern. When these stronger patterns start to fail, investors are inclined to begin to take profits, especially as many of the value players are saying that these stocks are overpriced. In a weak market as we have now, that can take its toll on otherwise strong stocks. If a market is solid, we know that stocks that are considered pricey by 'value' players break out of these patterns and really start to mount impressive gains. Without a trigger, e.g., another rate cut, there has not been anything to counter this view. When retail sales came in predominantly weaker, that started the selling.
Summer of 2000?
After what everyone thought was a pretty fast, brutal bear market in early 2000, the markets staged a comeback in May through July. Lots of battered stocks surged higher, very nice breakouts by SDLI, KEI, TEK, PWER and others moved the market higher. More cup with handle patterns were established and ready to move in the next wave. Then the rug was pulled out, and the summer rally turned into a 1200 point plunge, and that was just the first leg down.
This move in January has not been nearly as impressive as last summer's in size or in the quality of stocks moving up. Indeed, unlike last summer, the moves in January were not breakouts of strong patterns, but just rallies from the depths of a 52-week low and very ragged double bottom patterns. Just when the first set of good patterns appears to be forming, they are in jeopardy based on weak economic outlook. They may not get the opportunity to have that first round of breakouts.
Moreover, many key tech stocks are really looking pathetic. Not only have they experienced some selling, many are down to levels approaching 52-week lows where they were before the Fed stepped in to cut rates. Look at JNPR, BRCM, AMCC, ADBE, EXTR, EXDS, GLW, NEWP, SUNW, and VRSN to name a few. Some major selling in the seven sessions since the second Fed rate cut.
We are experiencing this weakness even as the Fed has cut rates twice for a total of 100 basis points in cuts in less than one month and a new tax cut bill was introduced into the Congress today. Problem is, we now have people waking up to a weak economy, something that was the furthest thing from the mind of most back in the summer. Which side will win out? History says the Fed and the tax cuts, but it looks for now as if we are experiencing one of those dips that occurs even after the Fed has pledged its support to right what it has wrecked. Obviously institutions are not convinced the Fed and Congress are up to the task as they appear to be selling stocks in volume right now. That requires us to think twice before we enter any play. We have to be certain we like the pattern, the fundamentals and the risk. There are still great patterns out there and several plays moving up on solid volume, e.g., NATI, THQI, EDS, FRED, SDS, and others. We don't abandon them, we just use our usual caution.
THE ECONOMY
Weekly jobless claims rose to 361,000, up 15,000 over last week and well above the 4,000 gain expected. That is the highest since December 2000 when the jobless claims hit a 2.5 year high. The four-week average climbed to 331,250 from 327,000 the week before. The January layoffs are showing up in the numbers as not all of those laid off are being converted directly into new jobs. We will have to see how this shakes out over the next four weeks at which point we feel we will get a better picture of how well the existing job market, which remains relatively decent, soaks up these new layoffs. Every time we contemplate these numbers and the lives impacted, we get steamed. The callousness of the Fed last summer saying that unemployment needed to be higher. Well, it has done wonders in wrecking the dreams and hopes of millions of U.S. citizens, even those still with jobs. Why? Just look at your 401k statements for the year that are hitting the mailbox.
The mutual fund effect.
A lot of investors received a shock they knew was coming when the yearly 401k statements came home. We were talking with a few such people today who were wondering what the heck to do. Put what was left in a money market? Bury it in the back yard so the Fed could not get it? What?
Realize that this is occurring millions of times over all across the country. We have a feeling that this is part of what we are seeing right now in the market: investors calling their mutual funds and saying 'liquidate.' Of course, the damage has been done for the most part. The time to sell mutual funds was when the market was showing major distribution back in March and April. At that time, however, we all heard no less than 10 times a day to 'stay the course, don't panic, let your money work.' Of course that is what the mutual funds say: they want to keep your money to generate fees that pay the bills. What happened was you money worked its way down to a fraction of what it was even as the mutual funds charged fees. That is the name of the game, however, and now is not the time to fret. It looks as if most of the damage has been, and if you pull out now and put money into a money market, the few percentage points you gain (on an annual basis) will most likely not mean much if the money is not put to work at the right time. If you are earning 5% per year on the money market fund and the market starts to move, if you don't believe it and wait too long, you could easily miss 15% or more of a move. The 5% (and that is annualized) that you earned does not make up for the other 10% you missed.
Anyway, there is by our sources about $2 trillion sitting on the sidelines. That is a lot of money (of course, not by tax cut standards) to hit the market. It needs something to push it. Right now fund investors are clamoring about taking some out while fund managers say 'don't do it.' That may have some impact on the market that we are seeing, but it is temporary at best. With all of that money on the sidelines, a bigger move is ahead.
Retail sales came in mostly as gains, especially from the big discounters, but as we had reported in December when the buying spree in the last week was occurring, even that would not bail them out as the sales were the result of massive discounts to move tons of merchandise. Thus, sales were fairly impressive from the discounters and certain specialty retailers, but the profits will most likely not be there when the earnings come. That appears to be the excuse for profit taking in these stocks, and we could see more selling that gives us short term short plays that could put some good change in our pocket. Another rate cut will turn that right back around, however, so we are looking for a quick move to the downside, make some money, and bank it. Efficient, machine-like.
THE MARKETS
Overall market stats:
VIX: 24.09; -0.43. Volatility fell on a day of selling. There is massive complacency out there, and it is being reflected in option prices as well. Not a lot of great premiums on options for the covered call writers.
Put/Call ratio: 0.71; +0.13. Back to where it was on Tuesday as put action picked up as the markets showed that nagging propensity to sell into rallies. We like to see it climb on selling; about time. If we get more tomorrow we would like to see it move back over 0.90. Not enough fear right now to do that, but we do like the pop it gave today.
NASDAQ:
Techs sold into the rally, and many sold on higher volume even if the index volume was technically lower. Some poor looking patterns out there at or approaching 52-week lows. Will they find bottom here ahead of the overall index and start things back up? We will see.
Stats: Down 45.76 points (-1.8%) to close at 2562.06.
Volume: 1.855 billion shares (-10%). 1.120 billion shares to the downside versus 662 million to the upside. Volume was lower on the selling, technically a good thing and perhaps positive as many techs hit near their 52-week lows. Will they bounce? As we noted earlier, however, volume was still hefty if you factor out the aberrant CSCO volume on Wednesday.
A/D and Hi/Lo: Declining issues still led, but fell to 1.22 to 1 (1.50 to 1 Wednesday). New highs rose to 87 (+9) and new lows fell to 36 (-3).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq has firmly dropped below potential support at 2600, and it is just a skip down to 2500. The market has never looked just super this year, but it has shown promise. What was a consolidation attempt above 2750 that looked as if it could challenge 3000 started selling on higher volume. Key tech stocks that were trying to put together double bottom patterns rolled over and started selling on higher volume. As we said two reports ago, the market bias was down even as the index tried to set itself for moves higher. It stopped absorbing bad news, however, as the recession feeling has pervaded more investors, analysts, economists, etc. It now needs something to convince it that buying should start.
We know many are again worried about the market. We talk to brokers and investors every day and they are concerned once again. It is not showing up in the market, however, because it is in that area coming off a 25% move in January and not yet plunging to new lows. Welcome to bear market recovery even with rate cuts. The drops still occur, but the trend should remain up overall. What we have to keep an eye on is whether the Nasdaq continues down and takes out more of its interim lows. It has popped two already, and the next is a long way down. So far many stocks have already given up all gains from the first rate cut, but the index overall is still holding up more or less. It needs to hang on at 2500, however.
Dow/NYSE: Falling back a bit as we thought, but on lower NYSE volume and still looking decent.
Stats: Down 66.17 points (-0.6%) to close at 10,880.55.
Volume: NYSE volume pulled back to 1.093 billion shares (-5.6%), demonstrating a more orderly pullback on today's action. Down volume topped up volume 622 to 462 million shares.
A/D and Hi/Lo: NYSE decliners took the lead 1.15 to 1, a pretty dead heat. New highs fell to 155 (-29) as new lows fell to 15 (-4).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow is pulling back as expected after it attempted a few low-volume runs at 11,020. The selling was on lower volume and looks under control thus far. That is just what we were looking for, and the index is still above support at 10,750 where we want it to hold for another run at 11,000.
S&P 500: The A/D line was virtually a dead heat as the big caps sank to support, closing at the lows of the session. At least volume was lighter on the NYSE, and perhaps this level will hold as it is decent support. The bias appears to be to the downside at this point, however, and we want to see a move up on decidedly higher volume. Again, if it does not hold at 1325 on higher volume, there is downside risk to the 1300 level.
Stats: Down 8.36 points (-0.6%) to close at 1332.53.
Volume: NYSE volume fell on the selling to 1.093 billion shares (-5.6%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
The indexes finished on their lows and the futures are lower. Looks like a recipe for a lower open which is not all that bad. We prefer that to today's early rally, quick flop. When the markets start slower, it gives us a chance to size up the move better. What we do not like, however, is that the market has been gasping this week, and Friday is not a good day to start a rally and take a lot of new positions. Why? Monday. In a weak market there are a lot of things that can impact stocks. One recurring problem we have had is brokerages huddling over the weekend and coming out with major downgrades on Monday, effectively gut-punching the market before it even knows what it wants to do.
Thus, with the weakness in the market, we will have to be impressed by any moves we see to take new positions. This is a time for extreme patience. Our time will come. As it turns out, this would have been a great time to short the market, but when things are so complacent we don't like to go short because moves up can be explosive. Also, as many stocks broke downtrends, it is not like playing the trend down as we were before the January move over the down trendline. The S&P 100 looks like a play to the downside, however, and there are a few of special note. As stocks approach their 52-week lows, we keep an eye out. Will they bounce or will they flop? If they flop, the downside could be wicked because we would be entering some uncharted waters with two Fed rate cuts and a tanking market. That is the Great Depression kind of action. The economy, however, is not in a Great Depression range by a long shot.
Support and Resistance Levels
Nasdaq: Closed at 2562.06.
Resistance: 2890 to 2900 is next before the 3000 level.
Support: 2500.
S&P 500: Closed at 1332.53
Resistance: 1360 to 1375.
Support: Right at support now. After that 1300.
Dow: Closed at 10,880.55.
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
CTXS: Wednesday's high volume turn above the 50 day MVA caught our attention. Today the stock was looking pretty salty even as other stocks were selling off. We were going to use some weakness as a chance to pick up some calls with expirations out in the summer as this stock has shown some real strength and we think it is going to do some leading in the next move up. So when it pulled back after the first hour on a sharp drop and touched 32 3/16 and buyers swarmed in, we went in as well. June $30 calls were trading at 7.38 by 7.625. This was a narrower spread than we had seen, so we jumped in immediately with a limit of 7.625. Well, by the time the order hit about 10 seconds later, the spread had moved to 7.38 by 7.88. Of course, once our order was in, the bid was moved to 7.625. The stock was hemming and hawing, and we thought we would get hit. Then it took off and ran to 33.25 and the options were asking $8 and more. Watching Nasdaq Level II, we saw some sellers again enter when the stock hit 33, and we decided to leave the order at 7.625 to see if the sellers would push it back. We did this because the stock was showing good action in a market that was weakening. Thus, after Wednesday's solid move, we did not think it would sell down hard.
Indeed, the stock turned right back down and tapped 32.50, and turned back up. The fill was made at that point. The stock danced and weaved as the market sold down, holding pretty tough. Then it rolled sharply down to 31.88 and we were concerned. But buyers jumped right back on and drove it to 33 in 20 minutes where it danced and weaved and held tough even as the overall index tanked. We made the play because this stock is showing us something others are not: resilience and tenacity. Also, it has sold hard for a year and has now turned the business around as management said it would. The recent earnings show that to be that case. We are going to buy even more if it continues to perform. Again, when we see what we perceive to be an emerging leader giving us good action, we like to focus money in that issue.
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
trend trading stock
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