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world stock market, trend trading stock
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6/25/02 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS:
Targets hit Tuesday: EXPE; CYMI; ATMI
Buy alerts issued: FNFG; HUG; NCR
Trailing stops issued: YUM
Stop alerts issued: PRV; HSIC
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:
- Just another reversal at near term resistance.
- Existing home sales down but not much; confidence slightly lower.
- Downtrend resumes but after very little rebound.
- Subscriber questions
Modest reversal attempt ends abruptly.
The Dow and S&P 500 made it to the 10 day MVA and near down trendline in early trade, following the Monday reversal from the lows. That had some upbeat talk on the financial stations about the 'important' test of lows Monday. That near term resistance was the high point, however, and the indexes rolled over and sold, sold, and sold some more. Triple digit Dow gains were turned into triple digit losses. The Nasdaq took all it gained Monday, multiplied by 2, and subtracted that from the Monday close. Talk about 1 step forward and 2 steps back.
Large caps suffered again. Big names such as MMM and PG either broke trendlines are at the moment of truth testing them. I had to laugh (a wry one) when some analyst said that tech stocks were so oversold they were good buys. With an average P/E of 50 and no recovery in sight until well into 2003 are they a 'good buy' today? A low interest rate environment and strengthening economy help valuations not look so bad, but they are not great enough to spark massive buying. They are still not on our 'A' list of must have stocks. The air is still coming out of these stocks. It looks as if more air is going to come out of some big name Dow stocks judging by their action today.
It was an equal opportunity kill today. Small caps and mid-caps were right in there selling with the big boys. The S&P 600 broke back below its 200 day MVA. The Russell 2000 and the S&P 400 mid-cap index meanwhile resumed their trek lower, already well below their 200 day MVA. It was a pretty ugly session, but we have to be careful here. Lower volume and close to the September 2001 lows. In the 'Market' section we cover this more, but we did not get much of a relief bounce to let some of the pressure off.
THE ECONOMY
Confidence down but still decent: not weak, not great.
Those are the words of the Conference Board chief. June consumer confidence was 106.4 versus expectations of 106. May was revised higher to 110.3 from 109.8. Anything over 90 is considered expansive. Two big points to take from this. First, this is consumer confidence, not business confidence or investor confidence. Business spending has been the laggard, and though what the consumer thinks has an indirect impact on business confidence, burgeoning consumer confidence has thus far not led to a rally in business confidence or investment. Second, confidence does not have a direct correlation with spending. A confident consumer usually indicates consumption will continue, but there is no tick for tick correlation. Thus confidence is overblown in its importance once the big moves at major inflection points are made (i.e., after the 9-11 attacks).
Existing home sales down, but not much.
Existing home sales account for 80% of all home sales. They were down 0.3% in May to 5.75 million annualized units when a drop to 5.70 million was expected. Inventory was down as well, meaning that with falling interest rates in the hottest season of the year, there won't be a lot of fall off in the housing market just yet.
THE MARKET
More selling after a very brief sojourn up to the 10 day MVA provided little release for the market. When the steep May decline started, it had a run up to the 50 day MVA or so behind it to sell from. The recent move to the 18 day MVA let off a little pressure, but then the market just tanked after that. The little bump up to the 10 day MVA did not provide much air. New lows actually fell on Tuesday's selling; that is one indication an index is getting sold out. While the indexes could easily start another very steep drop down the 10 day MVA, the proximity of the September lows warrants some caution as that combination could give rise to another rally attempt.
On the other hand a lot of Dow stocks were really hit today. Some of the stronger stocks sold to trendlines or broke them. The Dow could be readying for a major meltdown if stocks such as MMM and PG breakdown as well. That could be part of that accelerating slide down to the September lows for the Dow. It is needed. This market appears to be unwilling to go higher without taking more air out of the Dow.
Sentiment Indicators
VIX: 31.47; +1.60. S&P 100 volatility is improving, holding over 30 the past four sessions, but that is just a start. During past bottom formations, the VIX climbed over 30, held there as it built up pressure, and then exploded higher. Not always, but that is a scenario that indicates a good build in anxiety that then is overcome by fear.
VXN: 59.88; +1.23. Bumping into 60 on the high the past three sessions. The index stalled at 55 several days two weeks back, and it looks as if it is preparing for another break higher.
Put/Call Ratio (CBOE): 0.76; -0.03. Not a lot of option activity even on further selling. It has already given the indication we look for, but it has not been joined by the other indicators, e.g., volatility, bulls/bears. It is interesting that put activity fell on the reversal and sell off when you would expect it to rise. By it self that would indicate there is still room for more selling.
Nasdaq
Another closing low for the year but managing to hold above the recent low that also marks the intraday tap as the index moved up off of the September low.
Stats: -36.35 points (-2.49%) to close at 1423.99
Volume: 1.883B (-7.89%). Lower but still strong, above average volume on the renewed selling. It was not officially distribution, but the price selling more than made up for lack of volume.
Up Volume: 284M (-879M)
Down Volume: 1.584B (+729M)
A/D and Hi/Lo: Decliners led 1.59 to 1. Leading higher but not a blowout.
Previous Session: Decliners led 1.2 to 1
New Highs: 74 (+4)
New Lows: 202 (-21). Getting sold out? Falling new lows on renewed selling can be an indication of this.
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq did not even hit the 10 day MVA before it rolled over. It came close, but sellers were eager to get on with the selling. On the low it hit close to the Monday intraday low (1419.25 and 1414.69, respectively) and rebounded ever so slightly. There is some support here from the interim low following the September 2001 low, and the declining and fewer new lows suggest there may be some support here. The large cap techs and semiconductors were leading the way down, however, and they usually point the index' direction. After hours COMS beat the street (rah, rah), but MU did not. In fact, its inventories actually rose during the quarter. That was putting a damper on tech trading after hours.
Dow/NYSE
Rallied to the March down trendline/10 day moving average and promptly rolled over as 100+ points became -100+ points. It is back at that 9100 level that is some decent support. If it breaks here as some stocks are indicating, it is going on down.
Stats: -155 points (-1.67%) to close at 9126.82
Volume: 1.498B (-4.51%). Slightly lower volume on the session meaning technically no distribution. Still, as with the Nasdaq, price losses were steep regardless of volume.
Up Volume: 387M (-324M)
Down Volume: 1.095B (+254M)
A/D and Hi/Lo: Decliners led 1.25 to 1. Decliners were below where they were on a gain. It was not a widespread slaughter even though the small and mid-cap indexes were down themselves.
Previous Session: Decliners led 1.41 to 1
New Highs: 105 (+8)
New Lows: 100 (-101). Plummeting new lows on a pretty strong point move down. Again, it was a narrower loss just as Monday's gain was a narrower gain.
The Chart: http://www.investmenthouse.com/cd/$indu.html
Another new closing low for the year, close to the recent lows and the 9100 level that marks some support. There is pretty much a band of potential support from 9000 to 9100. This is right at the March 2001 intraday low (9106.54) as well. Then there is the bottom channel of the March downtrend that sparked the Monday reversal (9078). There is thus some significant support piling up right here. This is truly a crossroads for the index: you have some big names under pressure, and if they go the index goes. There is also significant support with almost no release of the selling pressure that started in earnest last week. At this point we watch closely and see if the index is going to break down below the recent lows. It is poised to do it, but it will take a push given the support and the relatively unmitigated selling the past week.
S&P 500:
The large caps also tested the 10 day MVA as well as the longer term down trendline from September 2000 (999). The rolled over and even broke below the bottom channel of the March downtrend. This is some significant selling but not on higher volume. There is no real support now until the September low.
Stats: -16.58 points (-1.67%) to close at 976.14
NYSE Volume: 1.498B (-4.51%)
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
The Fed gives its edict in the afternoon, but that will be an afterthought to the action. WCOM turns out to have massive ongoing fraud regarding earnings. Oh great. It hardly seems surprising, but another blow to confidence (more appropriately the lack thereof) in corporate America. WCOM may go bankrupt. Hello, Congress? Can we get together another inquiry for yet another bankruptcy?
This could continue the selling tomorrow, but will it be the catalyst for a massive selloff? Doubt it. As one of our writers said, it is hardly a surprise but another massive bankruptcy that involves fraud is not what anyone, bear or bull wants. It damages the long term credibility of the U.S. markets and it hastens some flight away from the dollar and investment in the U.S.
With this news we can pretty much assume more selling tomorrow as the QQQ's drop after hours. The Nasdaq and S&P could give an actual test of the September lows while the Dow could move below the support from 9000 to 9100. WCOM was 90 cents when the word hit; wild to think that a 90 cent stock could drive the markets to a full test of the September 2001 lows.
With the continued selling we see two possible scenarios. First, the indexes are extremely oversold even after the Monday bounce attempt. They could sell lower and then make another stand at the September lows and bounce higher for a more substantial move to relieve some of the selling pressure. Or, this could be the catalyst that sends the indexes cascading lower for several sessions in a straight drop that spikes sentiment, scares out the last stock holders, brings about world peace, etc.
We will do what we usually do, i.e., pick up those stocks that are breaking down and at good buy points, simply taking what the market is giving. We will watch the VIX, VXN, block trades and the like just to see how virulent any selling really is. And of course we will watch those support levels and how the indexes react to them. This is a critical juncture for the market and there are a few signs that it might want to make a stand here, but the overwhelming indications are for continued selling as the conditions for reversal or a bottom have not been satisfied.
Support and Resistance
Nasdaq: Closed at 1423.99
Resistance: March down trendline (1430). The 10 day MVA (1484.88). 1500 and the 18 day MVA (1519.82) are next. Then the May low (1560.29) and the second March down trendline at 1575.
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 976.14
Resistance: The bottom channel of the March down trendline (980). The September 2000/May 2001 down trendline (1000) and the 10 day MVA (1006.77). The March down trendline at 1008. The 18 day MVA follows at 1021.21. The second March down trendline at 1042. The May low at 1048.96. 1060 offers minor resistance from previous prices. Then the February lows at 1074.
Support: The September closing low is 965.80 and the intraday low is 944.75. 923.32 is the October 1998 bear market low.
Dow: Closed at 9126.82.
Resistance: 9250 represents some ressitance from some intraday and closing prices. The March down trendline at 9410. The 10 day MVA (9424.97). 9500 is next and joined by the 18 day MVA (9555.12). Then 9750 and the April and May lows at 9800 to 9811. The 50 day and 200 day MVA at 9819.98 and 9827.20, respectively. and the 50 day MVA at 9848.28. The September 2000/February 2001 down trendline is at roughly 9905. Then 10,100, followed by 10,250 to 10,300.
Support: 9100 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 closing low is 8235.81 and the intraday low is 8062.
Economic Calendar
6-25-02
Consumer confidence, June (10:00): 106.4 actual versus 106 expected and 110.3 prior (revosed form 109.8).
Existing home sales, May (10:00): -0.3% (5.75M actual) versus 5.63M expected and 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.
SUBSCRIBER QUESTIONS
Q: I liked your explanation of your game plan, June 22, The Daily. But I am still confused about short selling. Apparently Thom Calandra and several others feel short selling to be risky, dangerous, expensive, requiring constant monitoring, and suitable only for professionals. Calandra thinks options are even worse. I can't figure out why. I stayed away from short selling for a long time because of these warnings. Since I started doing short sales a month ago I feel as though I'm in a bull market again, only in reverse. I'm making money with what feels like a lot more safety. Am I missing something?
A: You are discovering something we have been trying to instill ever since we started publishing these newsletters several years back: you can make money regardless of which way the market goes. All you have to do is look at what the prevailing strong trend is and then play that trend. It can be up or it can be down. There can be an overall trend and then subtrends within it. Example from today: overall downtrend in the large caps but overall uptrend in small and mid-caps. Play the trend that is easiest for you; play the trend that you understand and are comfortable with.
What many have against short selling is the risk associated with it. The idea is that if a stock does not fall but keeps rising, your risk is potentially unlimited. It is similar to selling naked calls: if you sell a $40 call on a $35 stock but that stock just keeps going up and up and hitting $70 you could be called out at $40 and have to go out and buy the stock at $70 to sell it at $40. Ouch. Shorting is the same thing: if the stock rises you have to repay the stock you borrowed and sold with stock at market price. Thus your risk is unlimited.
Add on to that the fact that downside action can be rapid and volatile, as well as the general idea that the individual investor is incapable of rational decision-making in the wake of the tech meltdown, and you have a lot of advisors saying do not short and do not buy puts.
As you have discovered, however, the money to the downside in this continuing downtrend and bear market is AS EASY as it was to the upside in 1998 and 1999. Just as investors could buy each dip in the raging bull market, short sellers or put buyers can 'buy' into each rally to the resistance levels and then reap the easy gains as stocks fall once again. The trend is so slanted downside right now it is truly easy. Received another email Tuesday from an investor who plays whatever side the market that presents itself. He was up 57% for the year. We have corresponded with other subscribers who are up even more.
The brokers and advisors are against short selling because they are afraid the masses will get burned in a market reversal. These are the same guys who were against selling puts into the massive bull run. It was a no brainer; it was hard to lose, but in theory your risk was huge: if the stock went to zero, you had to make up the difference. You are not like that however. You are an educated investor and take what the market gives you. You will not get caught up in the euphoria. You will take your gains when they are there and you will cut your losses when the plays move against the trend. Staying with the trend, however, gives you a great buffer or cushion. If the trend is broken, exit. If not, let it work for you. We teach this over and over in the online seminars (live, CD series, archive series, whatever) and it is amazing and great when you see the light come on inside the heads.
One thing we prefer. We like to buy puts because our risk is limited to the amount invested, no more. Sometimes it is a challenge to find a good delta at a good price for the anticipated move, but we can usually do it. If not we will pass on the trade. We do short stocks, e.g., when we see just the best shorting pattern out there and there is no option chain. In that case we have been known to do some shorting.
In sum, you are not missing anything. Indeed, you have recognized the overall trend and you are taking advantage of it. That is the key to success: unemotional pursuit of the best trends in the market. You cut away the baggage that is not going to make you any money (i.e., long on tech stocks) and put that money to work for you in areas that will make you money the fastest and safest. Playing the downtrend is the way to do it.
End Part 1 of 3
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