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us stock market, top stock pick
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2/14/01 Investment House Daily
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Investment House Daily Subscribers:
TONIGHT:
- It may still be an oversold rally, but this one at least looks tradable.
- More signs economy is not on its deathbed.
- Subscriber Questions
- Team Trades
A good day on solid volume, but will it last?
Could it be that fund managers are warming to the idea that the economy may just be stronger than the mainstream believes and that is actually better for earnings than continued bad economic news? You would not know it from the skeptics that again were on the financial shows today, but that is how it usually works: the mainstream is still arguing the facts and fighting the last war when change is underfoot. This could be something good, but it could be another head fake.
What do we mean? Well, with the explosion of mutual funds and the money they control, we have seen instances where a few mutual funds think it is time to buy and that impacts the market in a positive way for a few days as we see higher overall volume and strong moves in individual stocks (a lot like today). When the other funds don't bite on the move, however, the solid-looking rally starts to fade.
That leaves us in a potential dilemma: do we get in on the action on the beaten up tech stocks and risk another wave of sellers in a day or two, or do we wait and see how this shakes out and potentially miss a good move up? That depends upon your goals and how you like to invest. When we see this rise in volume overall and on specific stocks, we are pretty confident we have a tradable move on our hands. It may only last another day or two, but we can carve out a nice piece of the action on some of the 10% and more gainers in a day and get out of Dodge as soon as things look as if they are reversing. If we wait to jump in on the move to see if it is 'for real' and we are looking to play short term, we may get in right on the crest just to see our upside positions start to roll over. If we are looking longer term we can get in now and hope it continues to ride up, or we can wait for stocks to clear resistance on continued good volume. The only way we know something strong is up is if we see stocks in good patterns start breaking out on heavy volume. Today ACS did just that, but it did not have much company. That could change with a few sessions of strong rallying, but today's action alone does not tell us the move is one that will power ahead indefinitely.
So, regardless of our investing style, we have to be vigilant, stick to that plan, and keep profitable positions from turning to crud and keep marginal losses from getting ugly. This move got off to a good start, and we want to take part in it. For now we have to assume a short-term oversold bounce. That does not mean that if you don't want to play the hammered techs that you sit out. We have many solid stocks in solid patterns that are ready to breakout as ACS did today. The big tech names get a lot of play when things turn back up, but they were utterly torched on the way down while other stocks held their patterns. Indeed, these periods of intense selling, then buying, then selling, etc. in the techs do nothing for creating a good base to move out of as overhead supply is built in again at the end of each rally.
Thus, we will never turn our sights from good patterns because they win out over time. But, we will entertain some quick moves on oversold tech stocks that can run 15% and more in a day. We view them as rolling plays now, not breakouts: they have hit some support at their old lows and are bouncing on strong volume. Their patterns are horrid, so we expect the move to fail at old resistance. Play the roll up, and when it fails, bail out or shift to the downside. Look at BRCM: it has been rolling since last December, and it looks as if it has put in an interim bottom at old support. Changing times, changing approaches.
THE ECONOMY
So far those that have been denying the economy is looking better have had to do so in the face of some better than expected data. Today inventories came out for December, and they were lower than expected. Indeed, inventory buildup rose at the smallest level since January 1999. Lower inventories means less buildup to work through before having to order replacement goods, and that means producers can get back to producing again faster than previously thought.
Specifically, December inventories rose just 0.1% versus the 0.4% expected. Moreover, November inventories were revised down from a 0.5% rise to a 0.3% rise, again an unexpected number. We can expect a downward fourth quarter GDP revision because inventories make up part of GDP, but in the current economic conditions, that is not a bad thing.
Again, many are still saying the worst is to come, primarily based on the rapid slowdowns witnessed. There is no denying the speed of the deceleration. One thing they are denying, however, is that certain sectors have hung on even as the economy is supposedly in recession, e.g., housing, retail sales, home furnishings, and refinancing. If inventories are low, the capital glut that some are calling for may not arise or at least arise as much as feared. Remember, INTC was still going to ramp up production as late as November, and if inventories turn out to be more transient than thought, we may see both sides of the equation turn up nicely.
We will see a lot more on Friday when housing starts, building permits, capacity utilization, the PPI, and the Michigan Sentiment Survey come out. Housing starts will be critical to the view that the economy is still holding its own as that is the sector that held up even though the NAPM dove, confidence faltered, and the Fed blinked. That is the key for now in our book. If builders are still seeing enough demand to start new houses, that indicates that consumers are still confident enough to keep driving the economy. We are still looking for some more data to come in, but starts should hold up pretty well based on what we have thus far.
Information Technology Managers see solid purchasing in 2001.
When questions arise, the best place to go is the horse's mouth. Don't go to an economist or an analyst who wants to pontificate and push his or her agenda. We have seen that in the chip sector this past few months, the networking sector, the PC sector . . . just about every sector has its 'gurus' pushing their view of the world. Does anyone go to the companies themselves anymore? Sure Regulation D has changed some of this, but you can still take a survey, visit the plant, etc.
Contrary to popular belief the best source is the industry. Today a survey of IT managers was released and it surprised those forecasting slower IT demand. The results: IT managers see a 5% to 10% increase in IT spending this year over 2000 levels. That is lower than the forecasts before 'recession' became popular, but when you consider the forecasters were saying IT spending would be less than 2000 levels, it is a very significant report. Will it occur in the first quarter? The survey did not specify when the purchases would be made, but with the uncertainty, probably not. Still, this is really good news for the economy and the market, and another indication that things could warm up faster than popularly predicted.
THE MARKETS
A test of some lows and then a rally on the Nasdaq on sharply stronger volume. The techs have been oversold and even with Greenspan's water on the market Tuesday, there was pent up demand that was unleashed after selling carried through in the morning. The indexes could not get in sync once again, however, as the Dow sold on higher NYSE volume. The S&P 500 was down as well, but it reversed course after again tapping its down trendline on its low, and the fact that it recovered for a small loss on increased volume may just be a good sign. Again, the higher volume is good, but with the battered techs in horrid patterns, it is not a green light to buy and forget it.
Overall market stats:
VIX: 24.22; -0.40. Volatility continues to flat line, hitting a high of 25.50 today at the height of the early selling. Indicates continued complacency as the Nasdaq sold down and now as it rises and the Dow sells down. Because none of the indexes are in sync, the volatility is not spiking.
Put/Call ratio: 0.73; -0.01. Put players remained in action today even as the Nasdaq burst off of its bottom. There was no doubt short covering going on with the large short interest in the market. The volumes show some of this was short covering. In any event, we like seeing the put/call ratio staying in the upper range even as the Nasdaq scored a gain on big volume.
Sentiment: After ranting a bit about the bogus argument for the need of a 'flush out' of buyers that was supposedly being hindered by investment advisors' (as if the advisors control the trillions of dollars in institutional hands) excess bullishness, a new survey today indicated that bullishness in the group dropped to 57.8% from 61%. Still high, but maybe that will take away one of the excuses. To us this is similar to blaming the day traders and individual investors for the volatility in 2000. To be honest, the retail investors just don't have that kind of clout. Funds control 80% of the cash in the market. Figure it out.
NASDAQ:
This time the sellers could not push the market back. After getting flogged for two weeks the sellers were spent in the morning, and the buyers got a chance to pick up shares relatively unmolested. After such a hammering, there was plenty of room to the upside. We still have to watch for upcoming resistance on individual stocks that could put the brakes on this move as the buyers at those levels become sellers. At that point we just have to watch to see if the buyers continue to come in or if we want to exit positions, take some profits, sells some calls, or buy some puts.
Stats: Up 63.68 points (+2.6%) to close at 2491. Right back to where it closed on Monday.
Volume: 1.994 billion shares (+15.5%). Finally volume that was solid on a move up. This volume was the highest since the 2.05 billion shares when the market sold on 2-7. Good to see it. Up volume was 1.384 billion shares versus 568 million to the downside.
A/D and Hi/Lo: Even on the gain, declining issues topped advancers 1.1 to 1. New highs dropped to 75 (-29) while new lows rose to 76 (+32).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq tapped 2388.40 on the low and raced up from there. Supposedly 2405 was some sort of magical level that if broken would have sent the index down to test its lows. As we have seen over the past year, picking bottoms is guesswork, and we are simply pleased that this reversal was on some of the highest volume seen in awhile. The Nasdaq has a hiccup of resistance at 2500, but that is 9 points away, and if this move has any steam at all it will carry over that level. After that we just have to keep an eye on the price/volume action and resistance in individual stocks, knowing that many rallies that started out looking strong ran out of interest in a hurry.
Dow/NYSE: The Dow is playing it risky, but its price/volume action has not been good overall for this entire move through the pattern. After testing 11,000 again Tuesday and failing once again, it continued the move down today without a fight. Indeed, volume rose significantly on the selling. It needs to hold at 10,750.
Stats: Down 107.91 points (-1.0%) to close at 10,795.41.
Volume: NYSE volume moved higher again on selling to 1.118 billion shares (+3.9%), handing the Dow its fourth distribution day in the past 7 sessions. That is not good news, and that many quick selling days can send the index lower. Down volume topped up volume 650 million to 459 million shares.
A/D and Hi/Lo: NYSE declining issues took the lead 1.24 to 1. New highs fell to 165 (-58) while new lows rose to 26 (+11).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow is still in its ascending wedge pattern, but it has made three attempts at breaking out with no success, it is squeezing tighter into the point of the wedge without a breakout (another bad sign), and it has sold on heavier volume in 4 of the last 7 sessions. Those all add up to an index that is going to head lower, perhaps down to 10,500 before it can try again. It is still above a very important level at 10,750, and that could turn it right back up for another shot. If it does, it better breakout this time because if it cannot on a fourth try, it is going lower.
S&P 500: The S&P 500 turned in a negative performance, but the move was not all bad. Volume was higher, and that is not a good sign on selling. Important differences today, however, take it out of that normal analysis. First, the index started lower early, but touched its down trendline at 1304.72 early in the session and started to reverse. This is the level we said last night it looked as if the big caps were going to test again. It did and turned and ran higher the rest of the session and was positive. It sold back late and fought back to finish almost flat. Second, the volume surged late in the session as it fought its way back. When we see a stock or an index sell early, test support, and then reverse and rise on heavy volume and finish in the top half of its range, that is a bullish indicator. We would have preferred a positive close, but not bad action. It now has to clear 1335 on strong volume.
Stats: Down 2.88 points (-0.2%) to close at 1315.92.
Volume: NYSE volume increased to 1.118 billion shares (+3.9%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Not much economic news, but the Philly Fed report is out at 10:00 ET. That report is expected to be crappy, and it won't disappoint. We don't think it is going to be worse than expected, however, and thus do not believe it will derail the move up in the Nasdaq. The big day is Friday, and remember that Friday is double witching expiration and the day before a three-day weekend (President's Day on Monday). The morning economic news could be a boost if housing sales remain solid as we believe investors are finally warming to the idea that a good economy is good for the economy. Sounds funny, but that is what it seems like the argument goes. If it is, the question is what happens before the close?
Well, if we get a solid rally Thursday on increasing volume once again, and investors react favorably to the economic news on Friday, we could very well see some selling before the close as the short term traders clear out for the weekend happy to have scored some gains. That should not bother the long term plays, but be aware: this past year the markets have had a history of coming back from holidays and getting hit with bad news from analysts, companies, and anyone who wants to make a comment. If things are bottoming it should not phase the market too much. Problem is, we are in no position to determine if that is the case; more to the point, there is nothing to show us that stocks are going to break out and lead as there are not a ton of solid patterns in what would be leading sectors (retail, financial, technology). Without a lot of great patterns ahead that are leadership patterns, there is still a lot of work to do.
That work can be completed, however, as the market moves up. Remember, stocks complete their bases as they move higher on higher volume. Then they pause in a market pullback before blasting ahead. So, we can continue to see the market move up while the patterns are completed. Indeed, we will see stocks breaking out even as this happens such as ACS, SDS, NATI, PNC, etc. that will keep things running while the remaining stocks complete their patterns. Problem is that many techs with the household names have very jagged patterns and are showing way too much volatility for a good base. They have to settle down or make some major moves up to clear out the overhead resistance. Maybe we are going to see some triple bottoms, reverse head and shoulders patterns and the like as opposed to traditional cup bases and double bottoms to lead these stocks out.
Believe us on this point: we feel that these stocks are the future of the economy, and those in the right places with the right products are making the most money and making it faster than all the others. Unless there is a real and fundamental change in the U.S. economy such as becoming a second-rate economy, these world-leading companies will be back. Even as they have been sold off, their earnings have been the best. Earnings and revenues drive stocks. If the economy continues to improve, these stocks will be leading in earnings. That will put them back into leadership potential. In the interim, we have to watch the new crop of stocks that have held up well and are giving us the good plays now even as the Nasdaq and Dow sold down. Those are the stocks we have been trotting out because in choppy, volatile markets, patterns give you the edge.
Tomorrow we are looking to cash in on more of these moves to the upside. Nasdaq futures are ahead of fair value about 27 points and stocks were showing excellent action after hours. We anticipate a higher open and then some profit taking, but not a whole lot. When we see stocks hit some support level, e.g., previous close, morning opening price, previous day's high, and start up, we are looking to open and add to positions. We will also continue to patrol our breakout plays, pre-split plays, pre-announcement plays to capture momentum to the upside as it occurs. This rally looks as if it has legs through at least part of Friday, and we want to capture some of it with short term plays and any longer term with any solid breakouts we see. When it ends, we will be looking for a reversal off of the highs. At that point we will look at some possible downside plays and covered calls.
Support and Resistance Levels
Nasdaq: Closed at 2491.40
Resistance: 2650. 2890 to 2900 is next before the 3000 level.
Support: 2300.
S&P 500: Closed at 1315.92.
Resistance: Interim at 1335. Then 1360 to 1375.
Support: Down trendline at 1300 to 1305.
Dow: Closed at 10,795.41.
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): 0.8% actual versus 0.5% expected and 0.1% prior.
Retail Sales ex-auto, January (8:30): 0.7% actual versus 0.4% expected and 0.0% prior.
Greenspan semi-annual testimony on economy, part 2.
2-14-01
Business Inventories, December (8:30): 0.1% versus 0.4% expected. November revised down to 0.3% 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.
End Part 1 of 2
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