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6/20/02 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS:
Targets hit Thursday: BXS; KLAC
Buy alerts issued: JAH; ERES; AXP
Trailing stops issued: None issued
Stop alerts issued: None issued
You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.htm
Emails: We love your emails. We receive hundreds of emails a week, but we don't mind. We respond to them all as fast as we can, so bear with us.
SUMMARY:
- More selling again. Nothing vicious, just more selling.
- Lower closing lows for the big indexes.
- Economic data rosy on the feel good numbers but grim regarding the less understood waters.
- Getting there on the sentiment, but doing the slow grind.
The rollover on the large caps continued as expected, but it does not get ugly.
The brief sojourn up to the 18 day MVA continued its rollover Thursday as all indexes rolled lower. There was an early attempt at some resilience after futures fought off some bad pre-market news (downgrades, NOK warning). That did not pan out, but a strong Philly Fed report sparked another rally attempt. That lasted 10 minutes, sold back, and then the trading range continued.
In typical bearish fashion the indexes all turned lower in the last hour, falling to session lows. Thursday there was no real reason to pin the selling on as there was Wednesday with the bombings. It was just an afternoon sell off that usually accompanies resumptions of downtrends. Volume edged higher again on the NYSE and slid in a fraction lower on the Nasdaq. The A/D lines were negative, but not crushingly. It was just another day in the grind lower in the current downtrend.
Quietly putting in lower closing lows.
All three large cap indexes closed at the lowest level of the year though they did not undercut the intraday lows set last Friday. Thus in the most optimistic bulls out there, the rally attempt that started that day is still alive. On life support and being fed intravenously, but still alive.
This is definitely not a barn burning, pulse quickening sell off at this point. It is a grind lower that is again chewing through the large caps. There was no fear today, just some whimpering 'here we go again' when it became clear that yet another rally attempt was going to get the selling treatment. That in itself is good. A quiet bottom that gets the negative sentiment to high levels is just as good as a noisy, boisterous selloff. Instead of scaring them out it grinds them up, hands out some ulcers, and locks the door behind them. Then there is some room to move higher.
Sentiment is getting there, but again, it is not a loud run higher. The VIX made its highest close since early November 2001 when it was on its way back down. The VXN joined with its highest close over the same time period. Bulls fell and bears rose, coming ever closer to that crucial crossover where bears actually outnumber bulls. Grind them out if you cannot scare them out.
THE ECONOMY
Jobless claims fall but less than expected.
393,000 last week versus 395,000 the prior week (up from 390,000) made it 3 straight weeks in a row below 400,000 though the number was expected to fall to 385,000. The 400k level is considered a sign of recession, but it is similar to horseshoes; if you are close it counts. The 4-week moving average fell to 396,250 from a revised 403,250 (originally below 400,000; shows how inaccurate the government figures are). Continuing claims, after a dip for a couple of weeks, rose again to 3.78 million.
From the numbers one would conclude that jobless claims were peaking. The data does not, however, track what is going on in the rest of the economy if you want to attribute the falling claims to be due to increased jobs. Jobs always lag the economy, and just about everyone we talk to in the employment industry and in industry says there is no real hiring right now. There are plans for hiring in Q3 if the economy continues to improve, but businesses see no need to hire right now because the business is just not there. That leads one to conclude that the improving numbers may just be the same old story we saw in the first part of the year when the numbers were falling: just people being pushed off of the jobless claims rolls with no real new hiring started.
Trade deficit and current account hit record gaps.
The trade deficit rose 10.7% to $35.9 billion, a record. It was expected to fall but was pushed higher by a surge in imports (+4.7%) while exports rose but just by 2.2%. This is one of those numbers that economists love to fight over. A deficit to some is bad no matter what. What it means domestically is that there is still strong consumption of goods. Whether from the U.S. or other countries, consumption is good for the global economy. Sure it detracts from the GDP numbers, but that is an illusory, paper shuffling number. The key is consumption. Consumption continues to rise.
The problem is the current account. It showed a $112.5B deficit, much greater than expected and much greater than the -$95.1B prior. When it hits 6% or so of GDP historically that triggers a further slide in the dollar as the U.S. is unable to attract enough investment back into the U.S. The deficit in the account shows investment abroad but not back into the U.S. That continues to pressure the dollar as global investors look for other places to put their money. It is a vicious cycle. The dollar hit a 2-year low versus the Euro, not so much on a demand for the Euro but a lack of demand for the dollar. If all of those dollars come home to roost that are currently in foreign hands (not even all of them; just a fraction), the dollar plummets in value and inflation is a serious problem. More dollars at home chasing the same number of goods.
Leading Economic Indicators rise greater than expected.
+0.4% gain in May, reversing a -0.4% reading in April, and topping expectations of +0.2%. The LEI look out 6 months to forecast gains or declines in economic activity. The fact that they rose despite the downward spiral in the stock market (one of the leading indicators) shows that there is strength in other areas.
One is housing. Housing starts jumped as we saw to record levels. Despite Mr. Greenspan's admonishments, despite the homebuilder CEO's and their theories about housing demand, despite the current idea that investors are going to continue to pour money into their homes instead of the market, there is a problem with housing. We get 'spirited' mail every time we talk about this, but the housing market is bubbling. There is speculation in retirement areas, there is speculation in new subdivisions. We talk to builders who are having harder times selling homes; there are subdivisions that were all pre-sold just six months ago but now comparable ones are lagging. The so-called lack of supply sounds very, very familiar to the office space build-out boom in the early 1980's. When that boom died you could pick up office space in Denver for 50 cents a square foot at auction. Houston, New Orleans, Atlanta, etc. all suffered. Heady optimism was slapped down by harsh reality that the spigot cannot run wide open forever.
It is a false sense of security to think that the housing market will continue to drive the economy: housing starts do not equal housing sales. Remember how Cisco and other tech companies were ramping up production and making as much gear as possible because the optical, networking, pc'ing age was here for good and would just grow at geometric levels. Well, they were forced to write off massive levels of inventory. The housing market is at excess in some areas and is approaching excess in other areas. There will be a glut of houses on the market next year. When interest rates go up, and they will, the housing market will cool off. It is going to happen.
THE MARKET
Another session lower on all indexes with the Nasdaq 100 and SOX neck and neck in the race lower. Volume was higher on the NYSE, lower on the Nasdaq as the indexes made new closing lows for the year. Action was driven in part to the expiration of futures and options over the Thursday/Friday sessions. Even with this increased action and though there were more sellers of NYSE stocks, the selling was not running away to the downside. Indeed, the S&P 600 small cap index may just be ready to make a bounce here ahead of its larger cousins.
SENTIMENT INDICATORS
VIX: 32.5; +2.79. Highest closing price since November 2001. Starting that move higher that usually takes a couple of weeks to get to the critical level, i.e., over 50. The move is usually not just a three-day move, but one that builds up in the thirties for several sessions and then makes a dramatic leap higher over just a few short sessions to the peak intraday.
VXN: 57.93; +2.69. Same as with the VIX. Getting to a level where if it is sustained for a week or so can then leap up to 80 and above in just a session or two.
Put/Call Ratio (CBOE): 1.04; +0.14. Yet another close over 1 on the CBOE, indicating that there were more put trades than call trades. Fund managers are buying puts to protect against what they perceive as further downside while speculators are loading up on short term out of the money puts hoping to capture more downside action. This marks five readings over 1.0 on the close in the past 5 five weeks. The speculators are there; now we just need to see the other elements line up.
Bulls versus bears: Bullish advisors fell to 40.8% from 42.9% last week while bears rose to 35.7% from just over 32% last week. This is the best reading since last September and October when bears eclipsed bulls 42% to 33.7%. At a minimum you want to see the bears top the bulls to see a bottom being set.
Nasdaq
Stats: -32.08 points (-2.14%) to close at 1464.75
Volume: 1.708B (-1.04%). A slight volume decline and still below average on the selling. Again, nothing major on the Nasdaq as it once again looks more sold out than the NYSE. That is not a buy signal, however, as we have seen; it is just an indication that the bottom is trying to set itself. A slow alignment is taking place that could lead to a good bottom being set.
Up Volume: 217M (+49M)
Down Volume: 1.478B (-57M). Crushing down volume. Even if selling overall was a bit lighter, the down volume was still sharp.
A/D and Hi/Lo: Decliners led 1.32 to 1. The A/D line improved markedly on the selling. It just was not a rout, but it was more of a large cap tech problem as usual.
Previous Session: Decliners led 2.2 to 1
New Highs: 58 (-17)
New Lows: 184 (+39)
The Chart: http://www.investmenthouse.com/cd/$compq.html
A new closing low holding right on top of the March down trendline as well as the May down trendline as they intersect at the close. It is possible that the Nasdaq could find some punch to rally from that point, but the downtrend has just resumed and we would expect it to once again test the recent lows near 1445 last Friday on this move. We would really, really like to see it test all the way down below the September 2001 low at 1387 on this move to go ahead and get that established. If it does it over the next two to three sessions it could get the sentiment indicators rocking. More than likely it will test a bit lower and then stage another rebound attempt. That should relieve some pressure on the sentiment indicators, but not much. Then a rollover after that would really send them rocking. Either way would appear to work, and the latter is usually the way it has played out in history: one more attempt to rally the troops ahead of the abyss so to speak, but then the edge gives way.
Dow/NYSE
Stats: -129.80 points (1.36%) to close at 9431.77
Volume: 1.375B (+2.88%). Volume grew on the selling, indicating that the big money was using the rally to sell into, and there was more of a rush today to get the selling done before all of the recent gains in the large caps were squelched.
Up Volume: 354M (+41M)
Down Volume: 997M (+62M). Holding roughly even on the increased selling.
A/D and Hi/Lo: Decliners led 1.22 to 1. It was a large cap sell off as the A/D line did not rally on the move. That indicates that there may be a bounce off the recent lows.
Previous Session: Decliners led 1.67 to 1
New Highs: 86 (-34)
New Lows: 101 (+39)
The Chart: http://www.investmenthouse.com/cd/$indu.html
The Dow has been lagging the other indexes in the bear market, having hardly undergone a bear market at all. Thursday it broke to a new closing for the year, undercutting a key level that has tried to hold at 9500. Volume increased on the session, driving volume higher above average on the selling. The 9260 level that came out of nowhere to turn the market last Friday becomes important. Was it a blip or something that will hold? 9100 looks like more support. A test of either one would probably give way to a bounce higher as that would represent 500 or more points in selling. After that bounce and small rally we could see the final selling start and then really spike sentiment levels. For now, the downtrend continues.
S&P 500:
The large caps broke below the March down trendline at 1015 and proceeded lower to close at the lows and right on top of the September 2000/May 2001 down trendline (1003). NYSE volume moved higher on the selling as the large caps distributed once again (big money dumping large cap shares after the rally). There is support from that down trendline and the 1000 level; the bottom channel of the March down trendline is at 986. The recent low last Friday is 981.63. Any combination of those should try to bounce the index early next week.
Stats: -13.70 points (1.34%) to close at 1006.29
NYSE Volume: 1.375B (+2.88%)
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
The selling has increased in tempo over the recent buying, the usual sign that the rally attempt is dead. That said, the indexes have sold hard for two straight sessions. After some more selling Friday and perhaps carried over to Monday, they will more than like try another bounce back up off the recent lows. After more selling over the next session or two, the 10 day MVA again looms as the first resistance. If the downtrends are going to resume in force that level will hold.
What we may very well get, however, is what we had in May: a test lower, a bounce up over a day or two that fails, and then the indexes hold near the recent lows and rally higher toward their 50 day MVA. That would take the Dow near 10,000, the S&P 500 over 1050, and the Nasdaq over 1600. That could be enough to then start a freefall back toward the September lows that really spikes up the negative sentiment. We would prefer to just get it over, but from a historical standpoint, there is usually this rally off of a low as we saw last Friday before a deeper plunge sets the bottom.
That is history, but history is molded by current events. We will keep an eye on the sentiment indicators as the selling continues and see if they reach the levels that typically indicate a successful test. For now we expect more selling down to the recent lows or slightly lower, and we intend to take advantage of that still.
Support and Resistance
Nasdaq: Closed at 1464.75
Resistance: 1500, a level of price closes. The 10 day MVA (1521.52) followed by 1500 and the 18 day MVA (1551.00). Then the May low is at 1560.20. The second March down trendline at 1590.
Support: 1460 is some support and held Thursday, and it is bolstered by the intersection of the May and March down trendlines at that level. The recent intraday low is at 1465. After that is the September low at 1387.06.
S&P 500: Closed at 1006.29
Resistance: The March down trendline at 1015. The 10 day MVA (1024.67). The 18 day MVA (1035.36). The second March down trendline at 1049. The May low at 1048.96. 1060 offers minor resistance from previous prices. Then the February lows at 1074.
Support: 1004 is the September 2000/May 2001 down trendline. Below that is the bottom of the March downtrend channel at 991. The recent intraday low is at 981.63. The September low is 944.75.
Dow: Closed at 9431.77
Resistance: The March down trendline at 9445. 9500 is next. The 10 day MVA (9600.87) and the 18 day MVA (9689.45). 9750 is next and then the April and May lows at 9800 to 9811. The 200 day MVA (9838.69). The September 2000/February 2001 down trendline is at roughly 9930 and the 50 day MVA at 9896.61. Then 10,100, followed by 10,250 to 10,300.
Support: The recent intraday low at 9250 is possible support. Then 9000 to 9100 appears better. There is a rest stop at 8500. The September low is 8062.
Economic Calendar
6-18-02
CPI, May (8:30): 0.0 actual versus +0.1% expected and 0.5% prior.
CPI, core (8:30): +0.2% actual and +0.2% expected and 0.3% prior.
Housing starts, May (8:30): +11.6% to 1.733M actual versus 1.600M expected and 1.53M prior.
Building permits, May (8:30): 1.674M actual versus 1.620M expected and 1.631 prior.
6-20-02
Current account, Q1 (8:30): -$112.5B actual versus -$108.0B expected and -$95.1B prior. (revised from -$98.8B)
Trade balance, April (8:30): -$35.9B actual versus -$32.2B expected and -$32.5B prior. (revised from -$31.6B)
Intial jobless claims (8:30): 393K actual versus 385K expected and 395K prior. (revised from 390K)
Leading Economic Indicators, May (10:00): 0.4% actual versus 0.2% expected and -0.3% prior. (revised from -0.4%)
Philadelphia Fed, June (12:00): 22.2 actual versus 11.0 expected and 9.1 prior.
Treasury Budget, May (2:00): -$80.6 actual versus -$70.0B expected and -$27.9B prior.
End Part 1 of 2
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