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us stock market, stock watch
Begin Part 2 of 3
REVISITING THE GAME PLAN
A few things to take from the discussion of the major indexes. First, there is nothing that says the large cap indexes have to go back to the beginning before starting up again. There are too few times in history bubbles have occurred and the variables too great to draw air tight conclusions. The theory of returning to the beginning did not happen after the market took off post WWII; that marked a fundamental change in the U.S. economy as the new age industrial economy exploded. The Dow did not fall back to that level after the big run up through the 1960's ended in the early 1970's.
The point: predictions of a fall to the 1995 or 1982 levels are so remote, would take so long, and involve so many variables that they are for the most part worthless. While the 'new economy', as all economies, is not immune from downturns, the dramatic gains in technology in the 1980's and 1990's provided another fundamental change in the U.S. economy. The U.S. became a technological and service leader as opposed to an industrial leader. These fundamental changes set new watermarks that do not get stripped back to the bone with each economic turnover or upheaval.
The market is CURRENTLY telling us that large caps are not going up. It has shown selling to this point, and it is giving no indication that the selling has stopped or is about to stop (sentiment indicators are not there even if prices are near the September lows). On the other hand, it is showing us that smaller issues are moving higher and continue to do so with periodic downturns as they ride the waves created by the large cap indexes. This is typical small cap action after an economic downturn is ending where the large caps rode high on that prior economic rise.
Play the large caps down, the small caps up.
That is how we map out our game plan. We look at what the market is giving and we take it. That means we can play the large caps and their indexes to the downside with short positions. We prefer to buy put options to selling stocks short because or risk is defined and limited going into the play. We buy them when they turn down from down trendlines or resistance points such as the 10 or 18 day MVA. We buy them when they test breakdowns and then roll over. Don't chase them to the downside, but let them set up for us just as they were doing last week. Many are extended to the downside now after last week's selling; we let them set up and make the play again. Last week we started a few downside plays again that just made us some excellent money two weeks back.
To the upside we still have a lot of choices despite the overall indexes. Split plays are still good even in this market. Why? Because they keep us in the leaders. Whether anticipating an announcement, playing a pre-split, or playing a post-split, we are looking at leaders in this market. As we continue to see, they move into the split and they tend to even rally after the split because they are performing. Stock funds have to put their money to work somewhere. They are putting it into stocks that split because the ones splitting are the leaders that are economically sensitive and are continuing to post good earnings and sales in the improving economy. These provide both short term and longer term plays.
We then look to put small and mid-cap stocks into our longer term holding accounts such as IRA's, education accounts and the like. When these stocks start to outperform after a long period of underperformance the run can last 4 to 6 years. At most they are 2 years into the move. Yes we can still make long term picks by looking at the right stocks in the right sectors. Leaders can be small caps. Small caps can breakout, double, split, and do anything the larger caps can do. Right now they can do at least one thing better: hold a gain. Not all will do it because even in a full blown bull market not all stocks breakout or hold breakouts.
So we continue to invest in the breakouts and weed those out that do not perform and add to those that are performing. Thus we focus our efforts on the winners. That flies in the face of all of the weak-kneed advice you hear these days on diversification, but diversification is the surest way to insure sub-par returns. The 'advice' you hear on the financial channels all depends upon the time you listen. The bears that missed out on massive, massive gains because they felt a fall was coming are saying I told you so. The Jack Bogles are out there saying you have to diversify. What you have to do is sell stocks that break down when they break down. If you get 20 bad stocks you might as well have just one bad stock if you are going to ride it to the ground.
How to 'diversify' in the market.
Here is how you diversify in this market and any other market when you are looking at longer term investments. Don't put all of your money into one stock. Choose a handful that you really like based on the patterns, sales and earnings. We look at those every day and put them on the reports. Buy equal amounts of those stocks (dollar amounts). The ones that don't perform you cut quickly. The ones that do perform you let run. Then when they give you the next buy point (a test of the breakout, a test of the short term moving averages, a test of the 50 day MVA after a good run, a break over the next resistance level), you add to the position with the money you have from any stocks that you cut because they did not perform. You are averaging UP into a WINNER as opposed to averaging DOWN in a LOSER.
In our interviews of investors that we have conducted over the years (and when we were trying to figure out a way to make money as opposed to what we heard from brokers), almost invariably the best and most successful averaged UP into stood stocks. Winners tend to win. Leaders tend to lead. Losers tend to keep on losing until there is a fundamental shift. Small and mid-caps were laggards behind the S& P 500 in the 1990's, particularly starting in 1995 and beyond (any bells ringing? That is when the large cap indexes really exploded higher.). They started taking over in 2001 as the large caps peaked and rolled over. Fundamental shift. Small and mid-caps are now leading and will continue to do so until the excess is taken out of the market and the current 'nifty 50' are put to pasture.
THIS WEEK
A heavy economic news week. Good news has not had a lasting impact on the market trend, at least no lasting upward trend. We see momentary blips higher and then a resumption of selling. Those blips higher usually occur when the market was already prepared to bounce higher after some selling, and the better economic news was a reason to buy or, more precisely, a reason to cover shorts.
The FOMC meets Tuesday and Wednesday, and that should be one of the bigger non-events of the week, but it will be talked about. Do not be surprised that if the market is able to bounce up early in the week after this selling round dissipates Monday or Tuesday that a 'no bias change' by the Fed sets off the next round of selling. The market topped this year on the day the Fed changed its bias from down to neutral. It was a bogus decision and the market knew it. If the Fed still keeps this charade going it just solidifies the market's lack of confidence in any of the government's numbers as the market perceives the government is ignoring reality at best or spicing the numbers at worst. That announcement could set off the next round of selling after a brief attempt to come up for air.
So Monday we anticipate some more downside action that will hopefully hit some more of our downside targets. Even with the 'good' news from QCOM Friday, it still hit our downside target after saner heads took over with the 'how can QCOM be increasing its sales when everyone else in the sector is foundering. The Dow will test 9100 to some extent, the Nasdaq and S&P 500 will creep closer to the September lows.
Then we get a bounce up after the tremendous selling. The market is way oversold and could stage a stronger bounce. However, it tried that last week, moving past the 10 day MVA to the 18 day MVA, and it failed. We anticipate thus a test lower and then a bounce toward the nearer term resistance at the 10 day MVA or near down trendlines. Then comes the real test of the lows. Unless we see something significant change, we see the Nasdaq and S&P 500 undercutting them as the Dow knifes lower to 'catch up' to their losses. The Dow has been the poorer performer and it could make up some lost ground. It will be key that the large caps and the Nasdaq do not undercut their lows by more than say 5% while the Dow falls. Otherwise it is no longer a test of the September lows but another downleg that sends them much lower. That is the risk right now for the upside in the large caps.
We will also watch the small caps closely. They hit the 200 day MVA and bounced, at least the S&P 600. We would like to see that index make a bounce with the rest of the market and continue to hold that line or start to improve. It will have a chore of it if the overall market continues to tank, but its relative performance has still been excellent.
Support and Resistance
Nasdaq: Closed at 1440.96
Resistance: Closed just below the first March down trendline (1445). 1500, a level of price closes. That is followed by the 10 day MVA (1506.87) and the 18 day MVA (1539.42). Then the May low is at 1560.20. The second March down trendline at 1585.
Support: 1420 is where the Nasdaq tapped intraday four sessions after reversing off of the September 2001 low. After that is the September low at 1387.06. 1357.09 is the October 1998 bear market low.
S&P 500: Closed at 989.14
Resistance: 1000 could mark some minor resistance from prior price points. The September 2000/May 2001 down trendline is at 1002. The March down trendline at 1014. The 10 day MVA (1018.21). The 18 day MVA (1030.49). The second March down trendline at 1048. The May low at 1048.96. 1060 offers minor resistance from previous prices. Then the February lows at 1074.
Support: The bottom channel of the March down trendline at 985. The recent intraday low is at 981.63. The September low is 944.75. 923.32 is the October 1998 bear market low.
Dow: Closed at 9253.79
Resistance: The March down trendline at 9427. 9500 is next. The 10 day MVA (9537.77) and the 18 day MVA (9643.59). 9750 is next and then the April and May lows at 9800 to 9811. The 200 day MVA (9834.50). The September 2000/February 2001 down trendline is at roughly 9920 and the 50 day MVA at 9871.40. Then 10,100, followed by 10,250 to 10,300.
Support: 9100 is some support from the October 2001 consolidation after the move off of the September low. 9000 is the November low off of the first rally from the September low. There is a rest stop at 8500. The September low is 8062.
Economic Calendar
6-25-02
Consumer confidence, June (10:00): 109.6 expected versus 109.8 prior.
Existing home sales, May (10:00): 5.63M expected versus 5.79 prior.
FOMC meeting day 1
6-26-02
Durable goods orders, May (8:30): +0.5% expected versus +0.8% prior.
New home sales, May (10:00): 915K expected versus 915K prior.
FOMC announcement (2:15): Expect no change in rates or bias.
6-27-02
Initial jobless claims (8:30): 385K expected versus 393K prior.
GDP (final), Q1 (8:30): 5.6% expected versus 5.6% prior.
Chain deflator (8:30): 1.0% expected versus 1.0% prior.
Help wanted index, May (10:00): 47 expected versus 47 prior.
6-28-02
Personal Income, May (8:30): 0.3% expected versus 0.3% prior.
Persona spending, May (8:30): 0.0% expected versus 0.5% prior.
Michigan sentiment, revised , June (8:45): 90.8 expected versus 90.8 prior.
Chicago PMI, June (10:00): 58.5 expected verus 60.8 prior.
THE PLAYS
Best plays:
1) ADVP: Ready to fall.
2) MMSI: Nice upside pattern.
3) ATH: Good pullback.
4) DTC: Making its move.
5) NFB: Looks like it is ready for an add-to.
6) SSNC: Nice-looking pullback.
7) Continuing plays watchlist: PBG
NEW PLAYS
Downside
ADVP (AdvancePCS--$27.16; +0.23; optionable): Health services
http://biz.yahoo.com/p/a/advp.html
STATUS: Test of breakdown. ADVP crashed below the 200 day MVA in May, fell below 22, and climbed back up to the 50 day MVA (27.69) and has rolled back over. Friday it was falling on rising, above average volume. The stock has been undergoing some heavy selling. It was owned at one point by RAD, just now with criminal indictments of some of its former officers. Corporate governance issues still roiling stocks.
Volume: 1.614M Avg Volume: 2.363M
BUY POINT: $25.25 Volume=300K Target=$21 Stop=$28
POSITION: QVD UZ - Sept. $32.50 put (-74 delta)
http://www.investmenthouse.com/cs/advp.html
IGT (International Game Technology--$58.01; -0.33; optionable): Electronic poker
http://biz.yahoo.com/p/i/igt.html
STATUS: Test of 200 day MVA breach. IGT broke the 200 day MVA (59.52) 8 sessions back, rallied to test the move and has now show three consecutive doji's below that level. Friday it tested the 200 day MVA again and closed near 58 that has been holding as support. We want a higher volume breach of 58 to get us into another run down toward 54. That would be a nice gain. Money flow is poor and there has been some institutional selling.
Volume: 850.9K Avg Volume: 1.019M
BUY POINT: $57.70 Volume=1M Target=$53.50 Stop=$61.50
POSITION: IGT TM - Aug. $65 put (delta available Monday)
http://www.investmenthouse.com/ct/igt.html
Upside
MMSI (Merit Medical Systems--$18.79; +0.13; optionable): Merit Medical Systems
http://biz.yahoo.com/p/m/mmsi.html
STATUS: Cup w/handle. In the handle of a 10-week cup with handle base. Excellent accumulation in the base with 4 accumulation weeks to just 1 distribution week. Relative strength is already breaking out. This is relatively early in the stock's run, and it is in a good sector.
Volume: 77.9K Avg Volume: 159.545K
BUY POINT: $19.5 Volume=240K Target=$23.4 Stop=$18.14
POSITION: RMQ JC - Oct. $15 call (80 delta Low OI) and/or stock
http://www.investmenthouse.com/cs/mmsi.html
IO (Input/Output--$9.70; +0.45; optionable): Scientific and technical instruments
http://biz.yahoo.com/p/i/io.html
STATUS: This is a trading play. IO gives us these plays now and again, and over the past three months has been working in a small ascending wedge. The past three sessions have shown some very strong above average volume as the stock bounces from the 50 day MVA (9.18) to 9.75. We are looking for a breakout over that level to give us the trade. Relative strength is running up nicely and money flow is out ahead of the move.
Volume: 192.9K Avg Volume: 105.636K
BUY POINT: $9.95 Volume=160K Target=$12 Stop=$9.12
POSITION: IO KU - Nov. $7.50 call (85 delta, Low OI) and/or stock
http://www.investmenthouse.com/ct/io.html
End Part 2 of 3
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us stock market
stock watch
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