|
|
us stock market, trend trading stock
* * * *
7/06/02 Stock Split Report
* * *
Stock Split Report Subscribers:
MARKET ALERTS:
Targets hit alerts issued Friday: None issued
Buy alerts issued: TRI
Trailing stops issued: None issued
Stop alerts issued: Used the rally to clear out some dead wood. ATH; THS; FOSL
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:
- Rally continues after no major July 4 incident.
- Sets stage for higher test.
- Unmeployment rises but workweek and overtime climbs.
- Two seasons swinging into gear: earnings and options expiration
Broad advance to celebrate independence.
The nascent bounce Wednesday turned into a full blown upward explosion Friday as far as prices were concerned. The Nasdaq and techs gapped higher and rallied all session. The Dow, S&P 500, small cap, and large cap indexes all rallied sharply. Of course, volume was meek; just a half session of trading will do that. That makes reading the move very difficult as far as determining whether it was real buying or just some short covering on relief that nothing major happened on the Fourth.
No doubt there was some short covering. As we have said before, short covering is not a bad thing; all rallies start with short covering. What happens next is the key. The move started Wednesday after some serious selling erupted again in the current downtrend Monday and Tuesday. Shorts were taking some money off the table after some solid gains, and were also a bit concerned that some of the selling leading into the Fourth of July holiday would be ending if nothing major happened. There can be little question that a part of the selling pressure the past month was a result of some concern about what was next from the terrorists and whether the Fourth would be an appropriately symbolic day to 'strike at the heart of the infidel' or other such nonsense. When nothing happened and the Nasdaq gapped higher, the shorts were 'forced' to sell. Indeed, the big point moves in and of themselves tend to indicate short covering.
It was not all short covering, though proving that is hard to do. The rally was very broad for one thing; in past short covering rallies we get relatively narrow rallies in the large caps that suffered the most selling on the way down. Makes sense: those that are sold short the most are the stocks that rally the most when a rally starts and the snowball moves the other way, picking up more and more short covering as the rally builds. This last round of selling, however, saw much broader pressure as the small cap and mid cap indexes broke down as well. Thus a broad move back up on a rally could simply indicate that shorts were covering given that all areas sold off on last week's plunge.
Stage set for a higher test?
Regardless of what you call it, the Nasdaq and Dow broke above some fairly important near term resistance, the Dow clearing the 10 day, 18 day MVA, and March down trendline in one move. The Nasdaq cleared its March down trendline and the 10 day MVA as well, but it still must deal with the 18 day MVA. The S&P 500? Well, it still has the march down trendline and the 18 day MVA ahead of it; as we noted before, the S&P 500 is just following the other indexes right now.
The moves do show the glimmer of something higher ahead. As we noted earlier in the week, after a series of trips down the short term moving averages in a downtrend, there is the tendency for the indexes or stocks to seek a higher level before either resuming the downtrend or making a breakout. Some call it pent up demand, some call it the law of physics (equal and opposite reactions). It is some of both. Mangers try to do some value shopping after big sell offs, and markets, being dynamic processes, tend to seek more equilibrium after a strong move one way or the other. In other words, without the continued stimulation to move one direction (e.g., continued buying or continued selling), they will revert toward equilibrium. After this round of selling that could be happening again.
That would move the market higher on this current test, perhaps even up to the 50 day MVA. As noted Wednesday, that would be a marvelous rally on the Nasdaq and S&P 500. This is a very similar move to early May, the last time the Nasdaq came from the bottom of the trough to test the 50 day MVA. It sold down hard, reversed one session, gapped sharply the next, tested the move a bit, and then gapped up again on the way to the 50 day MVA. That rally showed a follow through session and was looking decent. Problem is, there were no big tech stocks ready to make breakouts, and the small and mid-caps that had been leading were in the process of making an interim top. Deprived of any leadership at that critical point, the market rolled over into the current downtrend, filling both gaps in the process.
Now the market is doing the same thing. This move will most likely have to test back early this week as nervous investors clear out of some positions, selling into a bit of strength. Then it will either roll over to fill the gaps, or it will again make a move higher to break the current sharp downtrend. This time it might (might) have some more success. This time around the small caps have corrected back after a strong run, and they should rally back up with the overall market as seen today. When the breakout comes this time they won't be as extended. If there are a lot of stocks with leading earnings and sales breaking out after a market follow through, then at least the small and mid cap uptrend would resume. Whether the large caps follow is another story. They still have a lot of valuation issues to fight, but they will show us if they are ready or not when we see how those patterns have developed at that point. Right now they are just coming off of the selling with no real patterns though some such as MSFT are shaping up and look interesting.
THE ECONOMY
June unemployment numbers continue to be mixed.
The headline number was as expected with unemployment rising to 5.9%. Non-farm payrolls rose a very modest 36,000, lower than the 75,000 expected but better than the 24,000 in May. Once again the prior month jobs count was revised lower from 41,000; higher initial numbers are revised lower in the face of harsh reality.
This is a trend for the year. February reported a 66K gain; that was revised to a 165K loss. March and April initially reported gains, but they too turned to losses. Now May is the first month reporting job gains, and May was mostly government workers; government hiring does not equal a healthy economy; you need to see the private sector creating jobs. Why? Because government derives its ability to hire from tax revenues created by a robust private sector. Well, at least in theory; the way the government is spending, it does not seem to understand the relationship: need strong private sector to have strong tax revenues. Anyway, three times as many people have been laid off this year than have been hired.
The reaction to the headline numbers was somewhat dejected. One economist trumpeting last month's numbers called June's jobs report 'clearly disappointing'. Well geez, what did this economist expect? Jobs always lag, and the weekly jobless claims, while stable, were not dropping. On top of that you have WCOM and EDS announcing recent layoffs. Permanent jobs are not racing higher.
But . . . there are signs that the recovery continues to chug along and that employment is responding just as it has always done after past recessions. For one, surveys at temporary firms indicate that more temp workers are being put to work all across the country. Some of the temp firms we talked with said it was indeed nationwide and that companies typically look at workers on a temp basis to see if they 'fit' and also to see if business continues to increase before making permanent hires. Not all temp agencies said activity was up on par with past recoveries, however.
In addition, the average hourly workweek was up to 34.3 hours from 34.2 hours. Overtime was up to 4.3 hours from 4.2 hours in the manufacturing sector. These are the signs that there is a recovery ongoing. These are always the first areas to show signs of improvement when the employment market starts to turn. They are still off of levels that indicate new hiring, however. You need overtime at 45. to 4.6 hours. The workweek needs to be in the high 34's even 35.
Jobs garner attention because of confidence and consumer spending accounting for so much of the economy. But at the most basic level, jobs mean votes, and we see how the jobs numbers are used in politics for votes. That leads to poor policy decisions no matter what party is in power. Thus we never do reach our true potential as growth is hamstrung by political agendas. Even the strongest economic times are hobbled by politics. Too bad. Have you noticed how crime rates have started to rise across the nation during this recession and slow recovery? Do you remember back in the late 1980' and early 1990's all of the murders in D.C. and elsewhere in the nation? Then all crimes dropped across the board in the nineties. Some will jump up and take credit for the drop, but over history the crime rate has tracked the economy: better economic times mean lower crime; recessions and layoffs mean higher crime. Another reason to put aside political gain do what is right for economic growth whenever possible.
THE MARKET
The relief rally was raging Friday. As noted, that was one of the reasons you could peg it as short covering: blistering rallies after blistering selling, those equal and opposite effects. There are other factors that will impact the market in the next few weeks, one comes every quarter, the other every month.
Earnings season is here.
Q2 earnings season launches this week with the usual first week announcers, e.g., AA, GE, JNPR, THC, YHOO. Part of this bounce has to do with earnings season. There was selling ongoing, then shorts started to cover ahead of earnings this week. Not that they are expecting earnings to be boffo, but we all remember the CSCO 'home run' when stocks shot up before someone asked the question 'so what?' Add that most warnings tend to come out in the last half of the prior month and that the market made it through July 4 without too many downside warnings, and you have the possibility of some upside earnings surprises. In the game of market shorting, those possibilities (a.k.a., rumors) drive the action. Thus the shorts were covering for a number of reasons today, the lack of a terror attack and the coming earnings season among them.
We could thus see the market move on up this week ahead of the numbers coming in earnest the following two weeks. This all looks like coincidental timing; everything coming together at once. It is not. This is how the market moves. Its cycles match the cycles of events that impact stock prices. That is why we always emphasize a look at the bigger picture along with a day-to-day view. You have to overlay the daily action with the overall trends and forces impacting the market.
Options expiration and market maker actions.
Each month there is options expiration season. The options market is used by big money funds to hedge positions (e.g., buy puts on long positions to cover losses if the positions fall) as well as speculators hoping to hit the long ball buying out of the money, inexpensive options. When very large open interests build at one end of the spectrum for a certain expiration, i.e., lots of July calls held at a price higher than the current stock price, the stock will have a hard time making and holding that strike price where all of the call option interests are open come the third Friday in July. It may rally up to that point during the month, but there will be pressure on the stock before the current expiration period is over.
One of the reasons for this is the ability of a market maker to impact stock movements within a range while still maintaining a trend in a stock. Market makers can set the bid and ask based on what their perception of the market is. There is not a lot of easy to enforce regulation of this, so their perception can change quite a bit even intraday if you get the drift. Why is a market maker interested in this? The usual; money. Market makers shoulder big risks; they have to make a market for their stocks. That means they have to step in and buy or sell if the market gridlocks or if trading gets thin. They have to buy or sell the stocks or options personally. So, they try to take care of their business in a way that they won't be forced to act if the stock hits a level where all of those open interests will sell or otherwise be unwound. The risk to the MM: the stock gets to that price where those large open interests want to liquidate and the market maker has to get involved. As the market maker has to buy and sell personally (market makers cannot go naked), they would assume huge risk as there are so many positions to be unwound (bought and sold). If the market hiccups, the market maker could be screwed.
So the MM skillfully works the bid and ask in a range that is still within the trend. The MM can do this because it is normal for stocks to rise and fall in a range within a trend. We have all seen a stock run down and take out a stop loss set at a safe distance only to rally right back. We have all seen a MM refuse to sell at option at the ask or buy at the bid only to say that the market was moving 'too fast' when the failure to execute is challenged. Only when buying or selling surges can does the MM really lose the ability to keep the stock in a range. It is this that the MM fears the most; it does not want to be left holding the bag. By working the bid and ask the MM can impact buying and selling, supply and demand. It can work to keep a lid on or a floor under a stock's moves. A stock may move up or down to that level of large OI during an expiration period, but it usually bounces back away from it (same as when a stock moves up to resistance level and falls back as some investors sell to get 'even;' the MM can pull the price back a bit and get more to sell out at a favorable price, let it move up again, then repeat the process).
The result is that in an established trend or trendless market, the MM will direct prices away from levels that will trigger liquidation of the large blocks of options. We know that 70% of all options expire worthless. The MM knows this, knowing the majority of option positions are for hedging purposes; if they expire worthless that is the cost of insurance that mutual funds are willing to pay. Thus, the MM works to keep the bid and ask away from the large open interest strikes so that they will expire worthless. Or as it is commonly called by traders, away from the gain and toward the pain.
We need to understand and use this. First, we can out and out trade it if we want. In other words when there is a trend in place as we have had or there is a trendless market, we can sell options at the strike where the large open interests are and rest fairly confident that they will expire worthless; sell high, buy low. Or you can buy options that take advantage of the move away from the gain and toward the pain. In a downtrend such as we have now that would mean finding strikes where there are large OI's and then buying puts when the stock tests that level (or resistance below it) and starts to fall. Many, many times these large OI's are right at resistance levels. They act to reinforce resistance.
Second, we incorporate this into our review of stocks that we want to buy or buy options on. Is there a large OI ahead of the price that could cause a problem? Is there resistance at or near that level (they often coincide)? That can either make us scrap a trade or just let us know that if the stock makes that level and does not break through we should close out the play and take our gain. This is nothing new as it works in conjunction with support and resistance we can see on the charts. It is something that helps us understand why stocks move the way they do and helps us take what the market gives.
End Part 1 of 3
|
us stock market
trend trading stock
|
