us stock market, stock watch

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2/12/01 Investment House Daily
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Investment House Daily Subscribers:

TONIGHT:
- Oversold rally tries but dies after Greenspan finishes speaking.
- Investors still unwilling to believe good news is good news.
- What Greenspan said.
- Patience is the key as the time is coming.
- Subscriber Questions

Investors can't handle the truth.

Retail sales for January were better than the main street economists expected. Indeed, they were the best they have been since September and were stronger with auto sales factored out. That was the opposite of what consensus economists expected as well. That did not destroy the market. Indeed, we heard some of what we said in last night's report that you would start to hear: good economic news is actually good news for the economy. It makes sense: if you want the economy to recover so earnings will be better, isn't it better to see the economy recovering now as opposed to worsening and requiring first aid or life support just to bring it back from death? Sure. The 'investor psychology we see now is akin to a sports team that is in the playoff hunt but would rather lose all of its remaining games in order to get a good draft choice for next year.

Still, investors seemed to be buying into the idea that a stronger economy was good for earnings a bit in the morning as the major indexes were all notching nice gains. What was wrong? Volume was pathetic. That was blamed on Greenspan speaking about the economy, but that is not really the point. Volume is volume regardless of what causes it, and it was not there. So once again there was no conviction on the attempted continuation of Monday's meek rally as investors were unwilling to accept the fact that good economic news is good economic news.

Greenspan speaks: again good news is not treated as good news.

Greenspan took the mike and did as we expected: economic news was a bit better, but there is still deep water ahead from inventory buildup, sagging investor confidence, flagging stock markets, and foreign economic slowdowns. The Fed is still standing ready to help out if needed. What we viewed as hilarious if not so pathetic was the blame cast on technology itself as the culprit for the imbalances that allegedly arose: "And even though demand for a number of high-tech products was doubling or tripling annually, in many cases new supply was coming on even faster." Moreover, Greenspan stated that "supply-chain management and flexible manufacturing technologies may have quickened the pace of adjustment in production and incomes and correspondingly increased the stress on confidence. . ." My word. First you bad-mouth a person for months, and when they ignore your foolish talk you cold-cock that person on the head with a sledgehammer and then blame the person for making you do it. Unreal. The spin maestro was dancing fast and furious today.

Further, his damn 'slow growth' side showed itself again today, not so much in his words, but in his attitude toward the projected growth rates. This economy should be racing with the kind of investment and technology we have available, but Greenspan opts to blame the current situation on too much technology. He truly thinks we are buffoons. Why not? The senators asking questions let him get away with it. I downloaded the text and read it before the testimony started. The illogic of that section was screaming at you: Greenspan originally praised technology for allowing the economy to grow as fast as it has, yet then when a scapegoat was needed to cover his missteps, he blames technology for causing the imbalances. If nothing else, we learned today that technology can do it all. Unreal, yet not one question on this contradiction. No wonder the Fed gets away with whatever it wants to regarding the economy if it can sell this tripe in front of the watchdogs for the citizens.

His testimony did not give what investors wanted, but as we noted last night, that was pie in the sky thinking. Greenspan said what the numbers are saying: no technical recession. Again, that is good; yet, investors must not believe him (credibility problem perhaps?) because they want rate cuts and they want them now. We can understand some of the disappointment as Greenspan seemed content with 2% GDP growth. That is atrocious and helps narrow the technology gap at our expense. Still Greenspan has been and continued to say: the Fed stands ready to act if the numbers require it. A strengthening economy does not require immediate cuts right now, and he all but said there would be rate cuts at the latest at the next meeting. There is a lot of economic data between now and then, not to mention the fact that the market has some twisted desire to seek its previous lows; that alone would more than likely get the Fed to act in order to try and maintain or boost consumer moral. Indeed Greenspan once again expressly noted the equity market's role in consumer confidence. That is pretty clear support for the market; Greenspan will try to be the floor (or doormat, depending upon how you view him). It just was not as forceful as it was two weeks ago, and that was troubling to the market.

As soon as the question and answer period ended, the market decided to pitch all morning gains into the garbage and sell before the holiday rush. It did not get the dire statements about the economy it wanted nor what it felt was a firm commitment to continued cuts. Investors were just not buying the fact that the economy is looking better for now. They are still projecting a lag in earnings through the end of the year. With all of the economic data coming out, however, they wont be able to ignore it forever if indeed it continues to show improvement.

When will that happen? As we said, we heard talk of that this morning after the retail sales numbers were released. Still, the diehards are saying things are going to get worse. Perhaps, but they were saying things were going to get hotter and hotter economically just last September and October.

THE ECONOMY

Why such a big deal about retail sales? They show whether the consumer saw its shadow and went back into hibernation or is going to come back to life and power two-thirds of the U.S. economy. The idea is if consumers are worried, they won't buy, and that leads to further inventory buildup, less production, layoffs, cats sleeping with dogs, etc. If consumers continue to buy, one of the main engines of the economy is still driving. That helps draw down inventories faster now that producers are scaling back production. A rational person would view that as a positive if the concern was lower future earnings based on lower economic activity. In other words, if the economy is not slowing down as much as thought, earnings should turn around faster than thought.

Ah but we are in a realm that, while ultimately rational, takes a while to find the center. The pendulum swung very high in the spring of 2000, crashing just as the phrase 'things are different this time' was gaining acceptance. It has crashed the other direction now, and lo and behold we are hearing the same 'things are different this time,' but with respect to the economy's and the market's inability to recover. Now we are not saying things are great. When Greenspan said the economy is going to grow at 2% GDP this year and seemed somewhat content with that, we did not get a warm fuzzy feeling. We felt he should have said that was concern enough to stand vigilant, but that would have been as unrealistic as expecting him to say a 50 basis point was coming this week. Still, things are not as dire as many are saying. Even Steven Roach, Morgan Stanley's economist who boldly announced on January 4 that the U.S. was going into recession said that "one swallow does not make a spring," but that the retail sales figures were "a fat swallow." Hey, he has more life to him than you would have thought. You know our position; draw your own conclusions.

Consider, however, the following. The retail numbers, +0.7% and +0.8% ex autos, were the highest since September and up 3.5% over the same period last year. That is right after we were reporting signs that things did not look good for the coming holiday shopping season. That was the start of the slowdown. Now sales are back at the level they were when the slowing started. We heard the usual that this was weather related, that it was inventory clearance from a bad holiday season, etc. As we have always said: so? That is factored into the expectations when they are generated. Expectations are not pristine numbers that only cover fairy tale scenarios; they try to factor in weather, strikes, holidays, wars, sun spots, you name it. That argument is bogus.

Further, December sales held steady at 0.1% when the expectation was a downward revision. Didn't happen. Finally, auto sales were supposed to boost the retail sales because as you recall, they were unexpectedly higher than anticipated when reported two weeks ago. Auto sales were up, but when taken out of the mix, retail sales INCREASED. They did not need help from autos and indeed the higher yet lower auto sales dragged the overall number down. Instead we saw items such as furnishings rise over 6% as the impact of the continued strength in the housing market helps keep things going.

There is more to come with inventories tomorrow, but not sure if that will do much for the markets because no one understands inventories; they can be good in some numbers and bad in other situations, so they are mostly ignored. Right now we want to see them lower. In fact, you usually want to see them lower with the just-in-time technology of today helping to avoid bottlenecks that lead to price increases. Friday is the big day with the PPI, housing starts and Michigan Sentiment survey. Lots to come.

THE MARKETS

Unfortunately the markets did just what we thought they would do: rally some more on light volume in the morning while anticipating more from Greenspan than they knew they would get, then pout after Greenspan said the expected because they were 'disappointed.' The action was not good as all indexes moved higher then reversed and finished at the lows for the session. That is the opposite of bullish price action. Further, NYSE volume rose while Nasdaq volume was a fraction lower. No commitment to the upside, and we suppose we can be happy there is no harsh commitment to the downside either. The market, a.k.a., the institutions, does not know what to do, and because the outlook is gloomy, the market is sinking while the big boys shrug their shoulders.

One day we will look back and say man what a great buying opportunity: the Fed hacked rates 100 basis points in less than a month, the economy was not nearly as bad as they were saying, tech stocks were at prices we never thought we would see again. Hopefully those will be fond recollections and not followed by the thought "if only I didn't have my thumb up my . . ." Heck, we always wish we would have put more money to work after a great run. Prudence holds us back. That is why we are buying here and there when we get the pullbacks; again, we are not committing it all at once, but buy some and wait and see what happens. As frustrating as this market is when we know what we are seeing but the fund managers are not, we just have to realize this is a time for patience. As we said last night, at some point it will all come together, and those trillions of dollars on the sidelines will start moving into the market.

Overall market stats:

VIX: 24.62; +0.07. Still going nowhere even as the markets sell. Complacency. Remember, it was hitting 34 in the fall when the market would start upticks.

Put/Call ratio: 0.74; +0.10. Put buyers are showing more life. The ratio has been starting to hang out in the 0.70 and better area. Some of the problem is a lack of call buyers that pushes up the ratio, but put buying is expanding. We also see less volatility in option premiums right now. That is no surprise when you look at overall volatility.

Sentiment: We heard tonight someone again lamenting that 61% of the newsletters and advisors were bullish and that was keeping investors hanging on in the market. Even if that were true, that is not how it really works. Bullishness truncates rallies when they start; lack of bullishness does not necessarily mean bearishness, and it is the increase in bearishness that starts rallies. High bullishness won't stop a rally from starting, it just keeps it from getting very far because the bulls are already in he market and that limits the number of new investors.

Anyway, that same analyst was saying that the high bullishness in investor advisors was keeping people from selling and thus no 'flush out' of the market. His point was that no real advance could be made without that 'flush out.' Wow. He is applying one set of rules to all situations. Yes, in some instances you need that flush out to get things going right back up. That occurs if the downturn is shorter and is sharply down and sharply up. That occurred in the 1998 bear market, one of the shortest on record. That market produced a tightly spaced double bottom pattern that shook out sellers on huge volume. It knifed right back up and never looked back. This bear market is nothing at all like that market. Believe it or not, we are about a month and a half from a year-long bear market. We did not have that in 1994 or 1992. Not 1984. We have to go way back to the 1970's to get this kind of action as until now bear markets had become shorter term phenomena. In these markets that drag out, you usually don't get that cathartic selloff. It is a war of attrition.

It is very much like a long cup with handle pattern. The selling at the beginning is pretty dramatic as we often see growth stocks correct 50% on such moves. Does it shoot right back up? No, it spends several months finding bottom, moving sideways on lower volume and finally when the majority of the sellers have been weeded out over the months of frustration, demand climbs ahead of supply and it starts making that move up on higher volume. It moves toward the old high and the rest of the sellers sell to 'get even,' and then it breaks out when new money flies in to chase the shares. There is no one day that shakes out the sellers. It is a process that occurs over time. It is true that the Nasdaq is still fighting the buyers that come in when the market starts to test higher, but those sell out faster and faster as the action does not improve. With the Fed in the game and the economy looking a bit better, it is getting closer to that time. Patience is the key right now.

NASDAQ:

Another rally attempt overwhelmed with sellers at lunch as the Nasdaq gave up a 65-point gain and reversed 126.93 points for a solid loss. The waves of sellers into rallies is as constant as the waves on the beach. Volume was lighter, so still not much love or hatred, just wallflowers standing around. Problem is, with this kind of attitude, it just wants to sink lower.

Stats: Down 61.94 points (-2.5%) to close at 2427.
Volume: 1.731 billion shares (-1.03%). Down volume led handily, 1.338 billion to 347 million upside shares. Lower volume, but a weak show of buying.
A/D and Hi/Lo: Declining issues were ahead again, 1.3 to 1. New highs actually rose to 104 (+4) While new lows fell to 44 (-9).

The Chart: http://www.investmenthouse.com/cd/$compq.html

The oversold bounce was overdone by the time Greenspan finished his Q&A portion, and investors had enough and pushed the sell button. That brings the Nasdaq closer to its post-rate cut low of 2299.65 and its 52-week low of 2251.71 (1-3-01). Volume remains rather light on the selling, but there have been distribution days with no accumulation days of late, and that indicates further downside even if not on rising volume: a drift lower unless something triggers sharper selling (stronger economic numbers this week? Now that is weird) or stronger buying (stronger economic numbers this week?). The market has no clue, and that is dangerous. Downside risk is to the lows. As we said, however, there is someone lurking back there who does not want the market to sink the economy (further than he has), and if it does retreat to these lows we feel we will see another emergency rate cut. May not save it, but it won't hurt.

Dow/NYSE: Another bold attempt at a breakout that reversed and sold back on slightly higher NYSE volume. The Dow is running out of time on this move as it continues to fail to muster higher volume for a breakout except for when it sells back after another unsuccessful test. It is still in good shape as it is compressed into somewhat of an ascending wedge, but it is pushing its luck. Good economic news, i.e., continued signs of an improving economy, may just help the Dow.

Stats: Down 43.45 points (-0.4%) to close at 10,903.32 after mounting a 67 point gain on its high.
Volume: NYSE volume edged higher on the selling to 1.067 billion shares (+2.7%). Down volume led up volume on the selling 576 million to 479 million shares.
A/D and Hi/Lo: NYSE advancing issues still topped decliners 1.09 to 1 (1.71 to 1 on Monday). New highs rose again to 223 (+25) while new lows held steady at 15.

The Chart: http://www.investmenthouse.com/cd/$dja.html

The Dow is squeezing in an ascending wedge with a breakout at 11,028. It keeps testing that level and pulling back. Normally that is good, but a rule of thumb on breakout attempts is three strikes. If it does not make it on the fourth, it is going down. The Dow is on number three. If price/volume action was better, piece of cake. It is still in good shape, but it is running out of time.

S&P 500: Monday's decent move (albeit on low volume) gave way to higher volume selling today as the NYSE volume expanded slightly after the S&P also reversed early gains and closed near the session low (1317.51). The big caps are ramming their heads at 1335 right now after bouncing up off of its down trendline now at 1303. The bounce up was nice, but it never got the volume boost to give it the momentum to clear resistance. Looks as if it is going to test this level once again unless investor psychology about the economy or the economic numbers change.

Stats: Down 11.51 points (0.9%) to close at 1318.80.
Volume: NYSE volume increased to 1.067 billion shares (+2.7%).

The Chart: http://www.investmenthouse.com/cd/$spx.html

TOMORROW

The only economic news is inventories, and that while not usually a hot button for investors, given all of the talk about inventory buildup, it might spur some good tidings if it comes in lower as expected. Still, this is not the type of number that will be the catalyst for the market unless it shows a major reduction in inventories, but then that would scare investors that something was wrong.

This is a time of extreme frustration calling for extreme patience. Market bounces do not last for a full two sessions and tend to reverse intraday. That makes for tough trading even if you can watch the screen all session long (but who wants to?). Shorting the market is working a bit, but it is still up and down intraday, and these lower volume meanderings can turn on you fast. The best way we have found to play this one is to rely on superior patterns and today we were selling calls on long term holdings again. We do that at the start of a down leg, and try to do it again if it continues. After this much selling we are playing with fire: when we get frustrated after a lot of selling and finally sell calls, that is almost a sure bet things are going to turn back up. Still, as we saw the market start to turn over after Greenspan ended his talk, after we saw the market start to do what we thought, we sold calls. We will try to buy them back fairly quickly if we see things bounce. Selling calls in frustration is not smart.

As we indicated the market is not showing much either way. Selling on slightly higher volume on the Dow and S&P 500, slightly lower on the Nasdaq. It is standing around as it is unable to break resistance and sinks lower. We do know that each rally attempt is met with selling even now, so the bias is lower in the absence of compelling news to break the drought and bring the big money into action. With the big name techs still in a mess, we don't look to them for leadership, but continue to watch the new crop of resilient stocks from technology, retail, finance, construction and other sectors that are showing great patterns, great buying and great money flow. We also take advantage of these rallies that roll over as it did today to sell some calls on long term holdings to bring in more cash to have when things get better. Patience is the key at this point. Don't let frustration make you commit unforced errors. See the move and act; don't anticipate the move.

End Part 1 of 2

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