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7/01/02 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS
Target hit alerts Monday: None issued
Buy alerts issued: TKTX; OEX
Trailing stop alerts: None issued
Stop alerts: None issued
To subscribe to the Daily alert service you can sign up at the following link:
http://www.investmenthouse.com/alertdly.htm
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SUMMARY:
- Friday rollover at resistance gains speed to the downside.
- Massive Nasdaq volume spiked by WCOM trading resumption leads the slide lower.
- Economic news continues to show that steady gain, just what the market does not want for now.
- Subscriber Questions
- Team Trades
After getting dumped in Friday's portfolio shuffling, large caps cannot capture any interest on the day after.
So what if MMM upped its own estimates for the future and rallied over 5 points (contributing over 35 upside points to the Dow)? Large caps that were politely pushed out of portfolios Friday were rudely kicked Monday as investors dumped large names. The SOX and Nasdaq 100 led the way lower though the overall Nasdaq was not far behind. Small and mid-cap stocks were booted as well, falling even more than the S&P 500 and the Dow on a percentage basis. The volume in those stocks on Friday was indeed somewhat fool's gold as the weekend reports noted it might be. Many small and mid-caps got a dose of some solid price cuts Monday though a lot of the action was on lighter volume. Given the massive volume some experienced Friday, however, it would have been shocking if they had fallen on rising volume.
Price drops were big. Volume may not have shot off the map for many individual stocks, but the price losses were large. On top of that the internals were poor with distribution on the Nasdaq and a very weak A/D line. Selling was broad as the A/D line and percent losses on the small and mid-cap stocks indicate. A weak early rally attempt was overwhelmed, and the selling tempo increased all session. The market showed its intentions Friday, and it confirmed them today.
THE ECONOMY
ISM (nationwide manufacturing index) rises to 56.2 from 55.7.
This makes six straight readings at 50 or better, indicating manufacturing is on an upswing after the 18-month decline following the economic collapse (+8.5% GPD growth to -1.8% in a few quarters is a collapse) triggered by too much money then suddenly no money in the system. The production index hit 61.4, its highest level in 3 years. New orders rose to 63.1 from 60.8. The manufacturing employment index hit 49.7, up from 47.3 in May; employment in manufacturing is still declining ever so slightly, but it has yet to start adding jobs after 6 months of expansion in the sector. The 'negative' aspect of the report was prices paid, rising to 65.5 from 63 in May.
Prices paid is always watched by the bond market as a possible indication of future inflation: if manufacturer prices increase that could mean increased prices later. For the past ten years or more, however, businesses have not been able to raise prices as the U.S. economy flirted with deflation. It is possible inflation could rise again; there is certainly a lot of monetary stimulus in the economy with the Fed Funds rate at a 40 year low, the money supply expanded, and the weakening dollar sending foreign dollars home. That is a recipe for inflation. In the past strong foreign investment in the U.S. had staved off inflationary affects of a burgeoning money supply. All of the Fed's worry about wage-led inflation, etc. of the late 1990's was puffery; inflation is more dollars chasing the same or fewer number of goods. That is the danger now with dollars flowing back into the U.S.
Construction spending plunges -0.7% from +0.4% in April.
May spending on new construction spending fell sharply, most likely because of the warm weather construction boom earlier in the year that put construction spending well ahead of forecasts. It is more like an evening out of the curve than any special drop off, particularly with housing starts jumping back up in May and June. In the May construction report, expenditures for housing was flat; recently we saw housing starts jump back up, indicating that the next construction report will be better. The drag on the number is still business/commercial construction. This is 'normal' in that business construction takes time to get back in the starting blocks after it is shelved in a recession. Plans have to be approved anew, updated, etc. before they can even get close to getting started. It is a lagging indicator. So far it is indeed lagging.
THE MARKET
WCOM received a lot of attention as it returned to trading. Its trade alone made up an average NYSE volume day, coming in at over 1.5 billion shares. It was not just WCOM, however. The SOX and Nasdaq 100 were slicing lower and lower. The Nasdaq 100 rolled over after an attempt to recapture the September lows. The Nasdaq closed at a new 2002 closing low. The SOX also made a new 2002 closing low, and it too is set on another test of the September lows. The large techs continue to lead lower, but they sure had a lot of company on Monday. The distribution session on the Nasdaq before a follow through session is usually an indicator that the rally won't make it.
Lots of downgrades hurt early, and then some of the more renowned short sellers came out and tossed out a basket of stocks that may have accounting woes in the future. IBM and Q were on the list. EDS was crushed on concerns it is going to report some accounting problems. The market cannot shake the idea that more accounting implosions are coming, but that is also just a reason for selling in a market whose long term patterns are very bearish and are on the edge of meltdown.
One subscriber noted that reaching capitulation may be difficult given the mindset of modern investors that the market always comes back and also that the memories of the 1998 bear market are fresh enough where many recall selling out just to see the market reverse. We wrote about that in 1999 and 2000, how investors are trained now by their mutual funds to 'stay the course' regardless of market conditions. Jack Bogle is on CNBC every Thursday saying you have to stay fully invested at all times; somehow riding a Nasdaq index fund down 73% is justified by the fund rising 8% a year average over the next 10 years (if it even does that). I have not figured that one out yet. And then there are those who write and say they cannot afford to take a loss on their tech stocks. That one is puzzling as well. The loss is there; most of these stocks (if any) will never approach their former highs. If they do recover, it will be a long, slow process. There are faster ways to get back to where you were. The interest in these stocks won't go away even when there is little showing they will have any real upside for quite some time. Sure there may be a summer rally off of this oversold level that puts some life back into them. The odds are long, however, that any rally will carry them back to their old glory. That is why so many funds are dumping them each time the market rallies. The tech climate is rough, yet it is not cleansing itself yet as many continue to hold the former leaders that are just shadows of what they once were.
Thus no washout, no grind out yet. Volatility barely budged on Monday's kicking. As we have said before, it may not have to be a cathartic sell off over several days to set a bottom (though that would be so nice to see) but more of a grind out over time. In either event, however, you see volatility rise. Volatility shows the change of seasons in the market and in any dynamic process. When in a trend everything is status quo with little excitement other than the continuing trend. When the trend tries to change, that is when volatility picks up. Trends can change without wild up or downside action. Volatility can spike without wild up and down price action. Each major market change we have studied in the history of the stock market is accompanied by a sharp increase in volatility. This matches natural swings in nature. That is why we continue to look at volatility and sentiment to help mark major changes in the market. It is not there yet as we have been saying.
Sentiment Indicators
VIX: 30.56; +1.43. A solid but not spectacular move higher given the percentage selling seen on the indexes. A long way from showing a bottom.
VXN: 57.45; -0.50. A 5.1% loss in the Nasdaq 100 failed to inspire more fear and anxiety in the Nasdaq 100 volatility indicator. This index has been lagging the action by a day of late so we will see if the index pops higher tomorrow or if this sluggishness is just the way the market is viewed.
Put/Call Ratio (CBOE): 0.85; +0.19. Back up on the selling. The put/call ratio has already hit the level that shows historical reversal points, but it usually does not act alone. You need bulls and bears in line as well as volatility. And then, of course, you need to see the indexes rally and follow through afterwards along with stocks breaking out of good bases. Not there yet.
Nasdaq
Continued the rollover from the 10 day MVA started Friday, slamming to the lows on the close on massive volume facilitated by the WCOM trading resumption.
Stats: -59.41 points (-4.06%) to close at 1403.80
Volume: 2.976B (+7.75%). WCOM traded over 1.5B shares, and thus was a huge part of the overall trade. Still, volume was higher on a big loss and that distribution before a follow through to Wednesday's reversal session usually means the rally is terminal.
Up Volume: 172M (-1.345B). Massive drop in buying.
Down Volume: 2.146B (+932 million)
A/D and Hi/Lo: Decliners led 2.12 to 1. When the selling resumed, it easily outstripped the prior buying breadth.
Previous Session: Advancers led 1.49 to 1
New Highs: 68 (-111)
New Lows: 171 (+4). No major spike in new lows, an interesting development given the 4% loss on the Nasdaq. This would indicate some sell out at this point, but new lows never hit the 400+ level that usually marks a sell out.
The Chart: http://www.investmenthouse.com/cd/$compq.html
Rolled over at resistance from the 10 day MVA on Friday and continued lower today. The big question is whether the September lows will hold again as they did on the bounce last week. The closing low was 1454.04 and 1387.06 on the intraday low. With the spiking volume it does not look as this will hold this time around. The Nasdaq closed at the March down trendline and its confluence with the 1991 up trendline. That could provide another bounce higher. If it does not, an undercut is coming ant then the October 1998 lows come into play and lower.
Dow/NYSE
Also a new closing low for the year as the Dow found resistance at its March down trendline and turned lower. Even the big jump by MMM could not stem the tide. At least volume was lower, falling to average.
Stats: -133.47 points (-1.44%) to close at 9109.79
Volume: 1.423B (-31.2%). Volume backed off to average levels on the selling as the quarter end shuffling Friday that led to that volume spike ended. No distribution session, and the lowest volume since mid-June.
Up Volume: 289M (-1.011B)
Down Volume: 1.122B (+300M)
A/D and Hi/Lo: Decliners led 1.85 to 1, almost eclipsing Friday's broad move based on portfolio shuffling to some of the stronger mid and small cap stocks.
Previous Session: Advancers led 1.97 to 1
New Highs: 69 (-70)
New Lows: 88 (+19). As with the Nasdaq, no surge on new lows on the selling.
The Chart: http://www.investmenthouse.com/cd/$indu.html
Turned at the March down trendline and closed near a support level at 9100, but we do not anticipate that to hold. The Dow has the look of another test of the recent intraday low at 8926.57. Before that it has the bottom channel of the March downtrend at 8990. The selling was not on intense volume Monday, so the index may try to hold at the recent lows near 9000 that mark the interim lows coming off the September 2001 lows as that now combines with the bottom of the downtrend channel. Given the holiday shortened week, there may not be a lot of strong volume; that does not mean it will not continue to sell, however.
S&P 500:
Undercut the bottom channel line of the March downtrend (now at 973) and looks ready to test the September low again (closing 965.80, 944.75 intraday).
Stats: -21.16 points (-2.14%) to close at 968.65
NYSE Volume: 1.423B (-31.2%)
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
The week is shorter, but the short day is on Friday when the market closes at 1:00ET, not Wednesday. With that said, all pretty much is status quo. Monday's ISM data certainly did not set the market on fire; indeed, the market continued its selling in the face of continuing economic improvement. Again the concern has to be that even improving earnings are not going to justify running up technology and other large cap prices from the current levels. Buyers are just not buying into the recovery having the wherewithal to drive earnings high enough to justify current P/E ratios, much more push them higher. So, more air comes out of the stocks as they try to find equilibrium where they can build bases to start a move higher.
This week is going to pressure the market as Monday indicated. Fund managers did not come back into the market to buy after shuffling stocks at the end of Q2. Fund managers did not buy on indications that manufacturing continues to improve. Add on top of that the factory orders out Wednesday, event risk associated with new July 4 terror warnings, the aircraft collision over Germany tonight, and the unemployment report Friday, and you have the recipe for some weak, indecisive action. Already we saw lower volume on the NYSE, and Nasdaq volume would have been lower but for the WCOM trading bulge.
Given the circumstances, it does not appear to be a good week to try an upside rally. That is one reason we were taking short positions Friday and added more today. There is downside action to the recent lows or lower on this drop we believe, and then next week will come and we will see what kind of mood fund managers come back in. We don't like post-holiday action either. In the bear market, sessions after holidays have predominantly downside action. We say we don't like it; if we are set up with downside action at the right times we actually like it quite a bit as the market is giving it so we are taking it. That is how you have to look at the downtrends: take what is there for the taking when the market is showing these trends.
Many stocks got a jump on selling today, but there are others that are just turning down. We will look at some more of those though you do not want to get in too late on each roll down from resistance. There are some upside plays holding on, but we did not take any upside positions today as most did not hold their gains for the session, and given that we wanted to see how they play out Tuesday to determine how the Friday/Monday action pans out.
Support and Resistance
Nasdaq: Closed at 1403.80
Resistance: The 10 day MVA (1458.26). After that the 18 day MVA (1490.34) and 1500 team up for resistance. Then the May low (1560.29) and the second March down trendline at 1550.
Support: The March down trendline at 1400, teaming up with the long term up trendline from 1991 at 1400 provide a potential bounce point. The March downtrend bottom channel line at 1350. The September low at 1387.06. 1357.09 is the October 1998 bear market low.
S&P 500: Closed at 968.65
Resistance: The bottom channel of the March down trendline (973). The 10 day MVA (992.04) and the September 2000/May 2001 down trendline at 995. Then the March down trendline is at 1002, backed up immediately by the 18 day MVA at 106.55. The second March down trendline at 1034. The May low at 1048.96. 1060 offers minor resistance from previous prices. Then the February lows at 1074.
Support: The recent low is 952.92. 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 9109.79
Resistance: 9250 represents some resistance from some intraday and closing prices. The 10 day MVA (9291.40) and the March down trendline at 9325. After that is the 18 day MVA at 9422.04, followed by price resistance at 9500. Then 9750 and the April and May lows at 9800 to 9811. The 50 day MVA (9726.15) is just below price point resistance at 9750. Then the 200 day MVA (9813.53). The September 2000/February 2001 down trendline is at roughly 9890. 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. The bottom channel of the March downtrend at 8990. There is a rest stop at 8500. The September closing low is 8235.81 and the intraday low is 8062.
Economic Calendar
7-01-02
ISM Index, June (10:00): 56.2 actual versus 55.5 expected and 55.7 prior.
Construction spending, May (10:00): -0.7% actual versus 0.3% expected and 0.4% prior (revised from 0.2%).
7-03-02
Initial jobless claims (8:30): 385K expected, 388K prior.
ISM services, June (10:00): 58.2 expected, 60.1 prior.
Factory orders, May (10:00): 0.6% expected, 0.4% prior.
Auto sales, June: 6.1M expected, 5.7M prior.
Truck sales, June: 7.2M expected, 6.8M prior.
7-05-02
Non-farm payrolls, June (8:30): 60K exected, 41K prior.
Unemployment, June (8:30): 5.9% expected, 5.8% prior.
Average workweek, June, (8:30): 34.3 expected, 34.2 prior.
Hourly earnings, June (8:30): 0.3% expected, 0.2% prior.
End Part 1 of 2
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