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us stock market, top stock pick
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7/10/02 Stock Split Report Update
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Stock Split Report Subscribers:
MARKET ALERTS:
Targets hit alerts issued Wednesday: MMC; AZO; MHP
Buy alerts issued: FJF; JCI
Trailing stops issued: HIB
Stop alerts issued: Used the early pop to clear out more dead wood. TSN; PDCO; GLYN
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:
- Selling into early attempts at a bounce with the S&P 500 leading the way once again.
- Very negative internals to the downside as the fear rises.
- Economic news continues improve in the face of a market meltdown.
- Subscriber Questions
Futures were up; the market's future was not.
In typical bear market action the futures were up early and the indexes tried to bounce at the open after two selling sessions. As is typical, the fresh hope was nothing more than fresh meat for the sellers as the indexes tapped at resistance and then spent the session finding lower lows. The selling was broad as indicated by the A/D line, but the S&P 500 for the second straight session was the standard bearer to the downside. Large caps of all sizes, other than a group of large cap technology, were hammered.
Fear was pumping a bit on Wall Street today.
The dogs were excited all afternoon. I guess they heard the tremors in the voices on CNBC and Bloomberg television, not to mention the concern in several broker's voices. They could hear and most likely smell their anxiety and perhaps a bit of fear. The anchors could not figure it out; how could there be more selling after so much selling? Easy; trends continue to trend in the same direction without some outside force to exert pressure to change the trend. Call it Newtonian physics. Herd mentality. Lemmings rushing to the sea. Bear markets. They all have a lot in common.
The market internals had investor internals roiling. The A/D line needed to be renamed the D/A line as NYSE decliners led 3.4 to 1. Volume shot off the scale on the NYSE, some on S&P 500 reshuffling, but it was selling with NYSE down volume leading over 6 to 1. The VIX started a spike higher finally, climbing just over 39. Bulls tanked last week as bears started higher; not crossing yet, but getting tantalizingly close.
On top of that you have all of D.C. at its very worst right now, bickering, finger pointing, lying (of course, that is SOP) about who is to blame for the current 'confidence crisis'. One representative wondered today in yet another congressional hearing how a shoplifting Hollywood actress faced more jail time than Enron executives. Look in the mirror buddy; you and your compadres on the Hill are in charge of penalties for securities violations. People on the street are dejected and disgusted by the posturing and false indignation, the obsessive need to find dirt on the other guy in order to get elected. They think there is no end in sight, just more of this political garbage right up to elections with little actual substance to help out.
These are all signs that the 'process' is moving along just fine. Investors losing hope, fear spiking higher, more bears, less bulls, no end of the selling in sight. Indeed, we heard a couple of analysts saying there was no reason for the selling to stop; that it would just go on unless something dramatically positive changed. They are right to a certain extent, but the dramatic change can just start by itself in the market. Something like spontaneous combustion. In short, we were loving it as the puts continued lower. That is why we have been continuing to take downside positions even as some of the big name stocks bucked the selling (mostly in the techs).
THE ECONOMY
Wholesale inventories post first gain in a year as sales fall.
Cars, computers and non-durable goods pushed up inventories 0.1% after falling a sharp 0.9% in April. Expectations were for a 0.2% drop. At the same time wholesale sales fell 0.2%. That pushed the stocks-to-sales ratio to 1.24 months from 1.23 months in April.
You can look at the glass half full or half empty. On the half full side, you can say inventories are rising as firms have to restock the shelves after a year of liquidation. A shortage of goods requiring restocking means more production. Indeed, manufacturing has been on the mend the last 6 months. The more they have to make, the sooner they will need more workers to help out. On the half empty side, you can say that the slower sales and pile up of goods shows that the economy is slowing down again and that goods are going unsold.
Who is right? You have to lean to the half full position simply because factory production has been expanding for a half year, so more goods are being made even as inventories were shrinking. Production is finally getting ramped up enough to start stemming the tide of inventory reduction as the consumer has continued to buy. Indeed, GM is going back to 0% financing, and that will help move those vehicles that are actually having to sit just a bit before they find a happy home. It is no roaring recovery, but consumption remains consistently solid (as the retail sales and earnings pre-announcements show). Supply is finally getting geared back up to meet some demand.
That is very important. One of the fears we had back when all of the Fed rate increases were occurring was that the Fed would kill off the production or supply side of the economy. That is where inflation comes from: if demand stays strong as it has, if there is not enough production to match demand there will be more dollars chasing fewer goods, i.e., the textbook definition of inflation. That is one reason we were so adamant about tax cuts to get business reinvesting in itself to keep competitive in production methods (no one wants to buy in a slowdown as the PC, networking, and other tech sales slumps showed us) and to keep producing goods. We risked losing our competitive, technology driven advantage (we still are at risk of that) as well as inflation with all of the factories shutting down production. As we have seen, it takes a long time to ramp production back up to meet demand, and this was the real inflation worry one to two years back. Thus the increase in production activity is a nice thing to see for reasons other than just jobs. We still have to worry about the inflationary effects of a weak dollar if all of those dollars in foreign hands come home, a more recent inflation threat compared to the lack of supply. Improving supply as the manufacturers pick up the pace to meet demand is thus a good thing.
THE MARKET
The selling crescendo picked up today, really ramping it up in the last hour. This was a really positive development longer term. The Dow and S&P 500 broke to new 2002 lows (make that 2001, 2000, 1999 for the S&P 500) as some fear indicators moved higher; not to critical levels, but higher. The question right now is: will the downtrend pattern continue, i.e., a cut to fresh lows followed by a rebound back up to near resistance, or will the market finally just roll over and slide down the maelstrom, spiking indicators to critical levels and preparing the foundation for the real bottom? The former will once again take the pressure off the market and prolong the downtrend. The latter would be painful to many, but can make us a lot of money and then set the bottom for the inevitable move higher. Despite what you heard on the tube today and have read elsewhere, the stock market will come back and it will most likely do it faster than the doomsayers are suggesting. Remember, things never get as good as some say they will, and they never get as bad as others say they will.
A continuing interesting development are the handful of large cap techs that are not selling off to new lows with the larger indexes. Some were even up today. MSFT, ORCL, EXTR and some others are trying to buck the trend. Are they indicators of a near at hand large cap tech rally just as we saw back in September 2001 to January 2002? There is no real good reason for these stocks to move; their P/E's are still high by historical standards at the bottom of a bear market, but as we have said again and again, we won't quibble over P/E's if the market wants to rally those stocks. As William O'Neill is fond of saying, if people want yellow dresses instead of red dresses, we will own those making yellow dresses. We are keeping a close eye on these stocks regardless (actually because of) what we are hearing on the financial stations.
Sentiment Indicators
VIX: 39.02; +5.1. Jumped over its high for the year at 35.99, making a spiking move. This is often how the VIX works: it spends some time in the upper thirties, then it really takes off for its climax run over just a few sessions. At almost 40, it can reach 60 in short order. As seen in September 2001, it can tear off 10-point chunks as it screams higher. This is a breakaway gap in the indicator. To be really positive the market needs to continue to sell and the indicator needs to continue to race higher.
VXN: 65.22; +3.1. A solid gain as well, but this move just carries the VXN up to its late June highs. It has about 15 to 20 points more to hit a critical level that can set a good bottom.
Put/Call Ratio (CBOE): 0.63; -0.24. Again, curious action on the put side after closing over 1.0 at least 5 times in the past two months. In short it has done its work. The lack of put activity is still curious. It indicates that institutions are simply selling and not hedging anymore; just sell the damn stocks. It also indicates that the speculators are not there the past two sessions.
Bulls versus bears: In a dramatic shift from last week, bulls fell to 39.8% from almost 46% the prior week. Bears rose to 36.7%, their highest since October 2001, from 33% the prior week. This is a big swing comparable to the drop seen last week from fairly high levels. The bare minimum reading we want to see is bears ahead of bulls; with another move such as this week's, it could easily happen in the coming week if selling remains strong.
Nasdaq
It may have 'gently' filled the gap Tuesday, but after testing the May down trendline, it slammed back down through the cap on stronger volume. Some large cap techs, however, held up well in the tanking.
Stats: -35.11 points (-2.54%) to close at 1346.01
Volume: 1.843B (+8.26%). It was almost eclipsed by NYSE volume, but a late surge pushed it handily past that index. Still, the NYSE was running neck and neck with volume on the speculative index. As stated before, this is an indication that the selling is getting closer to climaxing.
Up Volume: 429M (+21M)
Down Volume: 1.394B (+121M)
A/D and Hi/Lo: Decliners led 2.11 to 1
Previous Session: Decliners led 1.34 to 1
New Highs: 31 (-10)
New Lows: 227 (+82). Turning back up but still needs to spike to 400+ on some more selling.
The Chart: http://www.investmenthouse.com/cd/$compq.html
Tested the May down trendline on the high (1396.95) and then tanked, falling below the March down trendline on rising, average volume. Given that it rose to the 18 day MVA on the last move higher, the tanking did not take it to new lows for the year (1336.06) as the selling did with the Dow and S&P. The close at the session low indicates it may test that low Thursday; it does not have far to go to do just that.
Dow/NYSE
Stats: -282.59 points (-3.11%) to close at 8813.5
Volume: 1.774B (+32.16%). Was in a dead heat with Nasdaq volume until the last half hour. It was a significant jump to above average levels as the selling re-established itself on volume.
Up Volume: 233M (-19M)
Down Volume: 1.555B (+457M)
A/D and Hi/Lo: Decliners led 3.04 to 1. A very broad decline. Not many sectors held up today, and indication that the selling fanned out from just the large caps.
Previous Session: Decliners led 1.57 to 1
New Highs: 47 (-1)
New Lows: 213 (+116)
The Chart: http://www.investmenthouse.com/cd/$indu.html
Three heavy selling sessions that finally brought some strong volume to the game. As expected, the Dow continued to sell and undercut the bottom channel line as it has done recently. It undercut the recent lows (8897) on the close. 8750 is the next support level. Typically in this downtrend, after 3 to 5 sessions of selling the index rallies. 550 points in three sessions is strong downside action. A test to 8750 and then a rebound seems about right if the downtrend stays in force. If not, then maybe the final selling is on.
S&P 500:
For the second session it took the licking on very strong volume. The S&P easily undercut the recent lows (934), taking it below the September 2001 lows. Some say that since that level is broken now the whole process has to restart, i.e., another low, a rally, and then a test of that rally. The classic definition of a double bottom, however, is an undercut of the prior downleg to make the final shakeout of the sellers. Thus if the other indicators get in line, it could still set the bottom even with the close below the September 2001 lows. There is still that longer term head and shoulders pattern hanging over the index. If there is continued bouncing up to release the pressure from the selling in the downtrend, that pattern takes more force: there is no event to finally flush the market of the final sellers and set a bottom. Then we have a continued bleed.
Stats: -32.36 points (-3.4%) to close at 920.47
NYSE Volume: 1.774B (+32.16%)
The Chart: http://www.investmenthouse.com/cd/$spx.html
THURSDAY
The Dow and S&P 500 undercut the recent lows, and the typical pattern in this downtrend is to make a fresh low and then rebound up to near resistance as shorts cover. Three tough selling sessions indeed has the Dow and S&P 500 primed for a relief bounce, but there will most likely be a test lower Thursday in any event. Further, it is very easy for these stocks to sell off 3 to 5 sessions before a significant bounce. Usually, however, once the indexes make a fresh low, they then bounce up.
Momentum will most likely keep things lower at the open. We would very much like to see the indexes just continue to plunge lower the next few sessions. They have come close in the past, but have not followed through to the downside. Thus, even with the VIX rising sharply, we are still playing the trend that is in place. Thus as the market sells lower on early momentum from the Wednesday close, we are going to be taking some more profits from our put plays as they hit the targets. We want to be able to play each rotation of the selling and not have to ride the short positions back up if at all possible. So, in anticipation of a possible bounce that has been typical of this downtrend, we will take the profits if they are there or are close.
We would normally just assume the downtrend pattern would hold, but we see the VIX spiking and bulls and bears shifting positions, as well as the handful of large cap techs that are hanging on and building 'growth' patterns, i.e., patterns they can use to move up higher in their bases. Sort of like a ladder or setting up some blocks to climb higher from. Those show there are some undercurrents here, but again, they are not showing a bottom. Sentiment indicators are getting there. Tonight on CNBC they talked about the VIX no less than two times. Everyone is watching again, not necessarily a good sigh. Still, we resist the mindset that 'things are different' this time. Indeed, when we start hearing that with some frequency we are pretty sure that things are indeed the same this time as they have been each time in the past.
Why? Because the market is ruled by two emotions: greed and fear. What have computers and more information done to the markets? They have not changed anything. They just make things more efficient, faster. Greed is still powerful, fear is still powerful. They both control market movements on a macro scale. From the ancient rice markets of the orient to the computerized markets today, human emotion remains the same and that is why things are not different down under even if they look different.
Support and Resistance
Nasdaq: Closed at 1346.01
Resistance: The March down trendline (1370) could offer some ressitance. Then the May down trendline at 1390 and the 10 day MVA (1405.92). Possible resistance at the September interim test (1418). Then 1500 and the May low (1560.29). The second March down trendline is at 1527. The 50 day MVA (1544.57) seems like a distant memory.
Support: The July intraday lows may have some stability (1336) for a bounce back up in the downtrend. Then the March down trendline bottom channel line at 1315. 1357.09 is the October 1998 bear market low just for reference. After that is roughly 1250.
S&P 500: Closed at 920.47
Resistance: The bottom channel line of the March downtrend at 955. The 10 day MVA (965.03). The 18 day MVA (981.54). Then the May down trendline at 978 followed by the March down trendline at 985. The September 2000/May 2001 down trendline at 988. The second March down trendline at 1025 and the 50 day MVA (1026.39). Then the May low at 1048.96. 1060 offers minor resistance from previous prices. Then the February lows at 1074.
Support: Has broken everything near term. Still near the October 1998 bear market low at 923.32. 900 is after that.
Dow: Closed at 8813.50
Resistance: the bottom channel of the March down trendline (8905). Then 9000 is some resistance as the November low off of the September 2001 low rally. The 10 day MVA is a long way up at 9144.05. The 18 day MVA is at 9261.91. The March down trendline at 9249. Then 9500 is some resistance followed by 50 day MVA (9592.73).
Support: 9000 is the November low off of the first rally from the September low. The bottom channel of the March downtrend at 8915. 8750 is an intraday test level heading into and coming off of the September 2001 low. There is a rest stop at 8500. The September closing low is 8235.81 and the intraday low is 8062.
Economic Calendar
7-08-02
Consumer credit, May (2:00): $6.08B expected, $8.8B prior.
7-10-02
Wholesale inventories, May (10:00): +0.1% actual versus -0.4% expected, -0.9% prior (revised from -0.7%.
7-11-02
PPI, June (8:30): 0.0% expected, -0.4% prior.
Core PPI (8:30): 0.1% expected, 0.0% prior.
Initial jobless claims (8:30): 382K prior.
7-12-02
Retail sales, June (8:30): 0.6% expected, -0.9% prior.
Retail ex autos, (8:30): 0.4% expected, -0.4% prior.
Michigan sentiment, preliminary July (9:45): 93.3 expected, 92.4 prior.
SUBSCRIBER QUESTIONS
Q: On yesterday's news on NBR it was stated that the S&P 500 will remove several stock listings and add substitutes to replace them. My question is how is the index calibrated to account for these changes? The to be replaced companies have been in the dumper so to speak and the replacements are relatively more sound and level priced stocks. How do the managers of this index account for the transition?
A: The S&P 500 is market cap weighted. That means those stocks with the largest capitalization have the most impact on the index movements. If you take out a stock whose market capitalization has tanked and replace it with a stock with a larger market cap, the value of the index will rise. What fund managers must do is factor in the market cap of the stocks coming in and those going out and determine what the overall value of the index is and what percentage the new stocks make up of that value. Then the new stocks are bought and positions of stocks already in the index are bought or sold to get the fund inline with the overall index.
End Part 1 of 2
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