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us stock market, top stock pick
TONIGHT:
- Oversold rally on weak volume does not generate much excitement..
- Irrational exuberance in reverse as warnings of possible slowdowns are treated as major disasters.
- Waiting for Greenspan, but just as with the last rate cut, don't expect expectations to be satisfied.
- One day soon all of the good news will suddenly be treated as good news.
- Subscriber Questions
Just a few weeks back the market was handling bad news in stride as long as stocks such as JNPR and EMLX were reporting excellent earnings. So what if CSCO found things unexpectedly 'challenging,' SUNW missed revenues, or Dell felt it was going to miss its numbers? The earnings leaders were again reporting excellent earnings. Then the news got grew old fast and investors started focusing in on all of the negative economic news. Suddenly Cisco's earnings were important; maybe the slowdown would not be just for the first and second quarter; maybe this was the start of something worse than expected.
The selling started quietly but then picked up the pace with the three quick distribution days on the Nasdaq. Today, after eight sessions of trending lower the Nasdaq gave us a weak oversold bounce. It played out pretty much as we had expected it would in the weekend report with a lower start followed by a move up. The moves up, however, were made on weak volume, and those stocks that sold did so on pretty heavy volume. That was one key area we stated to watch. Even the Dow's triple digit gain appeared to be another round of uncertain window dressing as well as its stocks moved higher, but again volume was unimpressive.
No longer able to handle negative news.
Greenspan used to admonish the markets over 'irrational exuberance' as he fretted over inflation that never showed up and ultimately contributed to a much harsher collapse of technology stocks than would have occurred. As is usual, the pendulum has swung completely the other direction, a sign that Greenspan way overshot the market on slowing the economic and investor train down.
Just a few weeks ago EMLX blew out earnings. Then EMLX announced it was seeing some push backs in orders and might, might, see an impact on its earnings if it continued. The stock was down 50% at one point today. Do the math. EMLX crushed earnings that were not revised down, and out of caution now says there might be a slowdown this quarter. A 50% whacking is not in line with what was said. Priced to perfection or not, EMLX's caution indicates nowhere near a 50% drop in earnings that would lead to a 50% reduction in share price. Irrational exuberance in reverse.
Still working on that bottom.
While it is bad overall that the market cannot take what is really not horrific news, there is also something positive to be said. When investors seize on mildly negative news and go on a selling binge, that tends to show that the market has swept so far to the negative side that it is approaching the end of the cycle. That is similar to when a market is topping, but in reverse: when everyone is rushing in to buy for fear of getting left out, that signals the move's end. When everyone is selling to get out for fear of being left holding the bag, that usually works to remove the eager sellers. It is still part of the ongoing bottoming process we have been seeing, and while the EMLX story does not mean the end to the selling, it is another indication that a bottom is being put in, especially when there is not a lot of carnage in other stocks on the news. Yes EMC and BRCD were roughed up on the news, but techs did manage a weak rally after a morning follow through on Friday's selling. So, EMLX and a few others were gutted on the story, but it was not a slaughter across the board when it could have been. Panic selling on some, but others that had reported negative news recently (e.g., CSCO), rose. Not a lot of comfort, but another piece of information to store away when we hear how the Nasdaq is falling to 2000.
Waiting on Greenspan again?
Investors are supposedly waiting on what Greenspan will say. If that is the case, we could be in for another round of major disappointment. He starts tomorrow at 10:00 ET, and the text of his comments will be released at that time. The day before the January FOMC meeting the rumor started up about a 75 basis point cut as opposed to the 50 basis point move that everyone knew was coming. That seemed to set up unrealistic expectations in the market, and when what we knew was coming was announced the market started a selling leg that we are still in.
Today there was talk on the financial stations that since Humphrey-Hawkins was designed for the Fed to tell Congress what the status of the money supply was vis- -vis the economy, we could expect Greenspan to tell us what he is going to do about the money supply, i.e., what the Fed is going to do about rate cuts. Well, heck, when Greenspan was asked that question directly when he was in front of the Senate three weeks ago he dodged it and said he was curious to see what his fellow FOMC members were going to say on the subject.
Do we expect more? We should not. He will still say that the economy is weak, but looks a bit better as well. Will he say the Fed is going to cut rates? No. Will he say that the Fed stands ready to act if needed because it is concerned about how fragile the economy is? Yes. He will also say that he is concerned that the financial markets may further negatively impact the consumer. What the market wants to hear is that the economy is stronger, he will cut rates by at least 100 basis points regardless, and that Congress better pass the full tax cut immediately. That won't happen. That sets the market up for disappointment once again as it hopes for something that has a low probability of occurring. There is an old saying: those who expect nothing are never disappointed. That is a good saying to take to heart as an investor, but the market overall does not know what that means.
THE ECONOMY
Tomorrow we receive some important information about the economy in the form of January retail sales. The importance is based on consumption being two-thirds of the U.S. economy. They are expected to surpass December's numbers, but they are not supposed to be colossal with a 0.5% increase overall and 0.4% ex-autos. Don't be surprised to see both numbers a bit stronger than expected. Those numbers come out before the open, and if they are stronger the market will most likely misinterpret strength as bad.
It is our opinion that Greenspan should seize upon this and say that after a feared massive slowdown that some strength in retail sales is a positive that the economy won't slide into the abyss, that the flagging equities markets is still a sign that consumer buying strength may not last, and that the Fed stands ready to step right back in and deliver the necessary rate cuts to help build consumer confidence back up even further. He should do this, and we think his testimony will say this. It would be in line with what he has been saying. Will investors pick up on it? We won't hold our breath, but we could be wrong.
This will suddenly end one day.
Which brings us to the next point. We continue to see signs that investors (mutual funds specifically) are very nervous about what is going on in the economy. The EMLX story speaks to this. The lack of volume on the upside in the 'winning' stocks today is dramatic evidence of this. As we have been saying, however, unless the numbers coming in change considerably, the economy appears to be bottoming out as key areas continue to hold up. That means at some point in the near future there is going to be a breakthrough when suddenly all of the negative sentiment about the future is factored in and the market comes to the realization that yes earnings are going to be disappointing to a degree in the first quarter, but the economic news is improving, i.e., that the worst for the economy has been here. Then the market can overlook the short term and start moving up again.
The signs will be accumulation on higher volume as stocks move to complete their bases or start breaking out in retail, financial, and building materials, sectors where many of the stocks we are following in the reports are from. It won't coincide with a sudden shift from economists or light coming from above. We will see more and more economists saying that things are not that bad (just as we are beginning to see now) and that the slowdown may just not drag into the second half. The stocks will start showing that ahead of time in the accumulation. We will see volume spikes from stocks on up days or sessions where they don't go anywhere as they continue to base. We will see trading ranges tighten and then stocks start to make strong moves on strong volume. There will still be talk of weakness and uncertainty, but the stocks will be telling the story.
THE MARKETS
Overall market stats:
VIX: 24.55; -0.60. Volatility fell as all indexes managed a gain in subdued trading. Complacency remains, but we can expect volatility to fall on days when the market moves up even if it is a rather weak move.
Put/Call ratio: 0.64; -0.09. Put buying dropped off as all indexes moved higher. It tends to hold steady on days the market sells and falls when the market rises. That is an overall indication of a lack of fear, and it continues to conflict with much that we hear from individual investors.
NASDAQ:
A rather weak showing on lighter volume. The fact that it was able to hold on in the afternoon and fight off negative territory for a gain is not bad given the treatment handed EMLX, BRCD, and EMC. Still, the key we were watching for, stronger volume, was not there. Indeed, we need to see stronger volume for more than a session as a few mutual funds in the buying mood can be overwhelmed by mutual funds still ready to sell.
Stats: Up 18.69 points (+0.8%) to close at 2489.66.
Volume: 1.749 billion shares (-7%). Up volume managed to top down volume 884 million to 822 million shares, but this is not the type of volume we wanted on a rebound day, but it is not totally surprising as the techs did not have anything to drive them higher other than the fact they had been sold off pretty hard.
A/D and Hi/Lo: Advancing issues did take the lead 1.12 to 1 (2003 to 1778). New highs rose to 100 (+20) while new lows fell to 53 (-7).
The Chart: http://www.investmenthouse.com/cd/$compq.html
WE got the oversold bounce, but it was not much. That does not mean the move up is over, but the point where it held bottom was nothing really special; seems things were just a bit overdone to the downside and that triggered the move. It is right now in the midst of price congestion from late December and early January. Will Alan give it a reason to hold here and move up? Technically there is not a lot to go on, so we have to look to outside forces as we did on January 2 when we said that the Fed was going to step in soon. Will Greenspan tell us more tomorrow? We are not counting on it, but we are counting on the Fed to make another move before March 20.
Dow/NYSE: A very nice point move on lower NYSE volume. Perhaps this time volume will spur the move to a breakout, but once again the volume is lacking for a breakout you can put faith in.
Stats: Up 165.32 points (+1.5%) to close at 10,946.77.
Volume: NYSE volume eased yet again to 1.013 billion shares (-5.7%) as it fails to muster strength on a gain. Up volume doubled down volume 683 million to 323 million shares.
A/D and Hi/Lo: NYSE advancing issues moved ahead in impressive fashion on the session, 1.71 to 1. New highs rose to 198 (+43) while new lows fell to 15 (-1).
The Chart: http://www.investmenthouse.com/cd/$dja.html
Making another run at resistance at 11,020 to 11,030, but not on the volume that we want to see. If there are not more buyers on a move up as indicated by rising volume, that means there are sellers out there ready to sell when things get rocky (when some bad news comes out) or just to 'get even' when it gets back to its resistance point. It has pulled back as we thought, and it is making another run at the resistance. This is time for it to breakout as this is the third real attempt at breaking this level since the September sell off, and in breakouts, it is usually three strikes and you are out. Need something to trigger the volume.
S&P 500: The S&P 500 jumped up off of its down trendline today, posting a solid 1.2% gain. NYSE volume, however, was lower as discussed above, and that is not a strong endorsement of the move. Further, it is sitting below potential resistance at 1335, but if volume comes to life we doubt that will act as a deterrent to further gains. From a practical standpoint the S&P needs to have a sustained move from this level or it is going back down to test its lows for the past year. The move up from the down trendline was good, and now we need to see it build on volume. As with the other indexes, however, there has to be some lasting catalyst. The market is just not there yet though it is trying to put in that change in sentiment.
Stats: Up 15.55 points (1.2%) to close at 1330.31.
Volume: NYSE volume declined on the move to 1.013 billion shares (-5.7%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
As noted, we get some major news tomorrow with January retail sales and part 2 of the Greenspan Congressional testimony. With the current market psyche it could go either way, but we expect the retail sales numbers will be a jolt but not fatal to today's move. The real test will be based on what Mr. Greenspan has to say and how the market reacts to what may be disappointment based on a non-commitment about the timing or the amount of further interest rate cuts. If it can shake off the news or react favorably to the news with good volume, that is a start. Then we need to see more institutions continue to stay on board.
Watch for retail stocks, financial stocks, materials stocks to move up on stronger volume as a sign of positive reaction to the news. They were moving today, shaking off the problems encountered late last week. Some moved on solid volume (e.g., PNC, SBUX), and others may start doing so tomorrow. The tech stocks are really worked over and the latest round of selling has once again thrown them to lows and requires rebuilding bases. Some double bottom patterns were trashed and need to be totally rebuilt into something more constructive. There is just not a whole lot of great tech to pick from. There are exceptions, however, as SDS, NATI, THQI have shown, and PRGN and AZPN are examples of other techs building nice patterns. It is not a washout, but we have to look at other names with solid earnings that are showing leadership characteristics even as the recent powerhouses struggle.
This market has shown that good patterns continue to be the way to go for the surer gains. While we have made money playing bounces on the tech big names, as we saw with EMLX that can blow up at any time with another negative announcement even if of the milder variety. That allows us to take long term positions on great companies that have been roughed up once again based on our belief that you simply should not fight the Fed at this point, particularly when we do not see any cataclysmic economic news. Sure there are panic comparisons to Japan's implosion after its run, but Japan's move was not based on a boom in technology spurred by relaxed governmental intervention, but was the result of government intervention that helped get the move started, but ultimately strangled it through lack of innovation brought on by lack of incentive.
Thus we believe the economy and the Fed will win out as it has done almost every other time, and that means that the market will start discounting in the better economic times. As we said, it won't be a light from on high; it will show up in the chart patterns as accumulation, something that has been going on for the most part but for three sessions of distribution this year. That is why we are still taking positions in stocks that just recently showed they had the earnings and revenue power over the rest of the companies traded in the market. These include JNPR, CTXS, BRCM, and even EMLX as they have all showed superior earnings power. We are not dropping everything into a position at once, but buying a little, waiting for a pattern to develop, or then waiting for it to fall again to meet a buy point. We were taking positions right when the Fed lowered the first time, and we are ready to take positions on those stocks again when it looks as if things are firming again. They may be doing that now, but we will see. It is riskier than waiting for a breakout. In that regard if we start buying at this level because we see better volume, we won't let them sink much farther because if the Nasdaq breaks down, we don't want to ride them to 2200 or 2000. This is risky investing because you are truly guessing at a bottom and we don't like to do that. But, we usually don't have the Fed jumping in with interest rate cuts; that changes the ballgame, and we believe that those saying this time is different are going to be wrong once again. A year from now we feel these positions will be in great shape.
That is some of our long term money in IRA's and the like. For other money that we want to grow faster in the short term we look for those good patterns discussed above. Those are showing they are ready to break higher now, and those tend to deliver the best near term gains if the volume comes in and they breakout as they should. We focus money in those stocks and then use some of the profits to build further positions with those stocks exhibiting superior earnings power that we think are taking a hit on short-term economic outlooks while we plow gains back into more good patterns. The idea is to have a plan for what you want to do with your money. Is it long term money that you want to put toward companies with superior earnings power to regain territory in big chunks over a few years, or do you want to put it into stocks with solid patterns for nearer term profits? We usually focus on the latter, but this is in our opinion an unusual time where misperceptions about the economy's strength lead to a lot of uncertainty. The fact that the Fed has stepped in gives us more confidence to play the uglier patterns as we feel we could get a faster turnaround with that money than most anticipate. Risky, but risk with a purpose.
Support and Resistance Levels
Nasdaq: Closed at 2489.66.
Resistance: 2650. 2890 to 2900 is next before the 3000 level.
Support: 2300.
S&P 500: Closed at 1330.31.
Resistance: 1360 to 1375.
Support: Down trendline at 1300 to 1305.
Dow: Closed at 10,946.77.
Resistance: 11,020 - 11,028. After that, 11,400.
Support: 10,750. Then 10,650.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
2-13-01
Retail Sales, January (8:30): 0.5% versus 0.1% prior.
Retail Sales ex-auto, January (8:30): 0.4% versus 0.0% prior.
Greenspan semi-annual testimony on economy, part 2.
2-14-01
Business Inventories, December (8:30): 0.4% versus 0.5% prior.
2-15-01
Export Prices ex-ag., January (8:30): -0.2% versus -0.2% prior.
Import Prices ex-oil, January (8:30): 0.9% versus 0.9% prior.
Philadelphia Fed, February (10:00): -23.0 versus -36.8 prior.
2-16-01
PPI, January (8:30): 0.2% versus 0.0% prior.
Core PPI, January (8:30): 0.1% versus 0.3% prior.
Housing Starts, January (8:30): 1.550M versus 1.575M prior.
Building Permits, January (8:30): 1.493M versus 1.493M prior.
Capacity Utilization, January (9:15): 80.3% versus 80.6% prior.
Industrial Production, January (9:15): 0.0% versus -0.6% prior.
Preliminary Michigan Sentiment, February (10:00): 94.0 versus 94.7 prior.
SUBSCRIBER QUESTIONS
Q: Once a stock has broken out (e.g., through a critical level of resistance) and you have made some profit on the move, what guidelines do you use to sell and take your profit? It would be nice to be able to follow your advice on exit as well as entrance criteria. Thanks.
A: Many times we let the manner in which we played the stock, options or stock, tell us when we will take profits. In the simplest sense, we tend to take profits on options trades when a stock's breakout move starts to slow and roll over. We move up trailing stops behind the play in case of unexpected weakness, and then when we see it starting to roll over, we will go ahead and sell. We may be wrong and miss a brief pullback and run back up, but in the type of market we are seeing, we would rather take the profit in hand than see if the stock is going to recover after the almost inevitable pullback to test the move. We say 'why not take the profit and play the test if it successful?' As options are wasting assets, we will take profit first and play it again rather than ride it down in this market.
On very strong breakouts, i.e., powerful volume such as SDS' breakout over several days, that shows institutions are still buying after the breakout. There will be some profit taking before too long, but the volume on the buying shows massive support. Thus, we are willing to ride it back on a test as long as the volume remains low. We may even sell half the position to lock in some profits if we are uncomfortable, but on this move we will most likely hang on as SDS could be a real leader. We will watch if it can make a quick 20% move; that is an indication a stock could be a long term winner. If volume is not that strong on the breakout, we would tend to lock in profits after the breakout tends to top. There are not fixed percentages, though some around here use 20% gain as a rule of thumb. In a weaker market, not a bad idea. The key on stocks such as SDS is to watch volume; if it starts notching higher on selling, we get out. If support holds and it moves back up on stronger volume once again in a successful test of the breakout, we can get back in.
In short, where and when we decide to take profits depends on the type of position we took, the strength of the breakout, and the condition of the market. Some big gainers from the summer (SDLI) broke out and powered ahead, but when the overall market started to fold, SDLI started to sell down as well on higher volume. That combined with a weakening market showed the move was over.
Q: When I follow your suggestions and make a purchase (as in PLC & IFMX), & no follow-up mention is made from you, should I just sit & wait or what?
A: As there are many times to take positions on a stock that is moving up, so setting stating sell points is not as easy. First and foremost, we don't enter a positions unless it hits our buy point on the volume we want. If we take an aggressive position, i.e., before the breakout move, we need to be ready to cut and run if it turns against us or sells down 7% or 8%; that is the price of playing an aggressive position. If a stock hits a buy point but then stalls, as long as it holds above the buy point that is fine. We are on alert, however, that it has stopped moving and thus are ready to get out if it starts to fall below the buy point. If it makes a move but then returns to the pattern, while that is not the best sign for a move back up, if the pattern holds on and it continues to show decent price/volume action, we will give the pattern a benefit of the doubt to continue to work toward a solid break to the upside. If the pattern breaks down, we get out immediately as the reason for following the stock is no longer there. Patterns give you an edge over just picking a stock, and if it stops working, it is time to move on.
End Part 1 of 3
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