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money investment, investment help
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2/15/01 Investment House Daily
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Investment House Daily Subscribers:
TONIGHT:
- The illusory rally?
- NT announces bad news once again and turns tech gains to losses in after hours trading.
- Economy continues to show strength, companies reporting strong earnings and outlooks, and more key numbers due tomorrow.
- Subscriber Questions
- Team Trades
Late day fade and after hours fires dampen the rally.
CIEN and GX helped add fuel to the rally this morning as both handily beat earnings estimates and raised guidance going forward. The higher expectations in the future went hand in hand with the surprisingly stronger economic news and the FOMC member's talk that this economic slump was just an inventory hiccup. Investors seemed to be warming up to the prospect and sent stocks shooting higher early in the day.
At 1:00 ET, however, the Nasdaq hit the first part of a double top, and after failing to take that top out at 2:30 ET, the selling was on. Three attempts to stem the tide in the last hour and one-half failed as the Nasdaq pretty much sold to the close. Thus, while volume was up overall for a second straight session, the action was not overly bullish. Indeed, the Nasdaq ended the session at the lower end of its trading range, and that is not indicative of real strength. That, however, is the problem with big opens: they tend to burn out even in the best of markets.
The action shows that there are sellers out there ready to jump in on any rally. But, let's not overstate the case; downside volume did not swell in the last hour. At 3:12 ET down volume clocked in at 308 million shares versus 1.32 billion upside shares. At the close down volume had only risen to 425 million shares versus 1.619 billion upside shares. There were not a lot of sellers; buyers just left the stage and took some light profits. Thus, we cannot say that a wave of selling hit the techs.
When the session ended, many techs were still holding onto nice gains on solid volume, but the candlestick patterns consistently showed doji's on many of the big name stocks that jumped up out of the gates, surged, and then faded toward the close. Given the lighter selling pressure we could have lived with that. Then NT warned of yet further slowing in its business, and that did bring out the sellers in force. Many solid gains turned to losses on stocks such as AMCC (+4.56 on the close; -0.38 after hours), JNPR (+2.81 on the close; -3.38 after hours), BRCM, and JDSU. Even CIEN, the company that had just told the world it was printing money in the back and was bringing in another printer moving ahead, closed at 89 but was trading down at 85.38 after hours. Apparently the fact that NT (in the same area as LU the company you keep) and its management are unable to keep the business growing takes precedence over hard facts that CIEN is performing much better. The irrational rational market strikes again.
What does this show? It shows that the market is still groping, and that is no surprise given the severity of the bear market and the damage inflicted on tech stocks. One step forward, one back. Good news was trumped by old fears when a recent laggard (remember, back in October NT already reported a slowdown, reported weak results in January and laid off employees then) had to come to the table and fess up to weak business. The big names have a lot of overhead and skeptical investors to overcome. There are leaders out there unaffected by tonight's news after hours. While we can sock away a few shares here and there of those companies that continue to demonstrate superior earnings power (JNPR, AMCC, EXTR, EXDS, VRSN, SEBL, etc.) while they are roughed up, we also need to focus short term money on the leaders that are making their own wake.
There is a theme here: confess even if there is no trouble.
So far we are seeing two worlds: companies that have previously reported problems having to come to the table and report problems again. NT is a prime example. NT really smacks of the LU story to us. Lucent's problems started to leak even as other companies were still reporting great earnings last year. It was a blip, a failure to execute claimed management. Then LU missed again the next quarter. Things were worse than thought admitted management. Now Lucent's bonds are little better than junk bonds. NT's story is sounding similar. Other fiber companies and internet structure companies are still producing impressive returns, but NT is lagging the competition.
Then we have the other world: companies reporting superior earnings and continued solid prospects for the future. AMCC, JNPR, EMLX, BRCM and others come to mind. They are still generating superior earnings and projected the same. Then, however, they have come back after those reports and said while still on tract, they were seeing some shifting in ordering patterns from customers, and that may, repeat, may impact earnings. The stocks have been slaughtered on those words.
What is going on? Growing pains with Regulation D is part of it. Securities 'fraud' lawsuits is another part of it. These companies really do not see any slowing in their earnings forecasts even with the slight juggling of orders. What they are concerned about is getting sued by shareholders if for some reason beyond the company's control, e.g., a massive economic slowdown that has yet to materialize, earnings do fall a penny short or revenues slide in $50 million light. They don't see the slowdown in their business, but they are being very cautious as a matter of survival. After all, every day they see economists predicting a dire future for the economy, but they are not seeing it in their business. They cannot take an analyst aside and really make their case (Regulation D), so they issue these statements. Some of the richest lawyers we know are lawyers who got rich suing companies on behalf of the shareholders. We firmly believe that these companies are sandbagging a bit just to make sure they don't disappoint. We have the feeling there are going to be some companies crushing earnings when announced in April and even more in July. That way shareholders are happy with how management was able to pull the rabbit out of the hat again even in these 'challenging' times.
THE ECONOMY
And indeed, we saw more evidence today that the economy is performing better than thought. For starters, look at CIEN and GX. Will they change their guidance going forward? We doubt it because they have announced much later than others and have a better view of the quarter (already half way through it). AMCC, JNPR, EMLX, BRCM and others reported strong results and more to come as well, but they backed off for, we believe, the incongruity between what their business was showing them and what the economists have been saying.
Initial jobless claims down, but not a perfect picture.
Beyond that we saw initial jobless claims come in lower than expected at 352,000, down from 363,000 the prior week, and 3,000 less than expected. This was good, but not as weak as we wanted. It is a continuation of the fall after last week's blip higher, but the four-week average rose to 345,000, the second week in a row it has risen. Moreover, continuing claims made a significant jump from last week. What does that mean? It means that those just laid off are having a harder time moving right into a new position, indicating that the overall job picture has deteriorated a bit. This is something to keep an eye on, but it is still below even recent levels as it continues the overall trend down.
Prospective homebuilder's survey looks solid.
A very important piece of data that received no attention on the financial stations was the release of the National Association of Home Builders (NAHB) February housing market index. That index rose 3 points to 58 as continued low mortgage rates continue to help offset weak areas in the economy. Builders are saying the single-family housing market has stabilized based on the lower rates. That is important, because single-family homes are the driver of the housing market. Of course, if rates rise as they have been trying to do since Greenspan's speech, that may splash some cold water on future building, but the market continues to be strong. The reading is still below most of 2000, but a reading over 50 means that most builders believe sales conditions are good as opposed to poor. Very interesting to note is that the rating for single-family sales rose to 62 while expectations of single-family sales in the next 6 months rose 6 points to 67. To us that shows that builders are still seeing quite a bit of confidence in prospective home buyers.
Philly Fed improving, but no rose.
This general economic indicator rose to -30.5 after logging -36.8 in January, its lowest reading since December 1990. The first increase in three months and the second increase in the last six. This indicates that the manufacturing slowdown may not be worsening.
Big news tomorrow.
PPI, housing starts, building permits, capacity utilization and the Michigan Sentiment Survey smother the market tomorrow. Again we are focusing on housing starts, but with the NAHB report we saw today, we expect them to come in better than expected. The other reports can impact the market, but to us the housing number is the one that tells the tale of how the economy is holding up as it has held up the economy while other sectors fell off the table.
THE MARKETS
As we said, less than a reassuring rally in the Nasdaq, and the S&P 500 imitated the Nasdaq on the close. The Dow, on the other hand, bounced off support at 10,750 and posted almost a triple digit gain on slightly lower volume for the session, holding on to the lion's share of the gain with a late surge to counteract the urge to sell. The major indexes looked to be ready to move in tandem, but there is still a gulf of sentiment separating technology stocks and other industries.
Overall market stats:
VIX: 23.46; -0.76. Volatility is approaching levels that tend to stifle upside moves. Given that today's move was not a wildly bullish one we have to be ready for the rally to end at some point in the near future if not tomorrow based on the after hours trading.
Put/Call ratio: 0.64; -0.09. Put players backed off on the strong rally, and indeed we feel that there was some short covering going on Wednesday and early today. What will be interesting to watch is how this ratio responds if we see this rally fail. We we want to see it spike higher and move into the next range of 0.8 and better.
NASDAQ:
Gapped higher, raced ahead, sold back to where it started the day, all on higher volume. Technically a mixed day with the late close and after hours torching taking precedence in our view. Futures are down about 60 points below fair value. Without the after hours selling we would still be confident about tomorrow with perhaps some weakness early on that once again ignites the buyers. After the surprisingly negative reaction to the NT news, however, we will have to see how the index recovers in the morning. It could still work out well with a weaker open and recovery, but not as clear in the smoke and dust of NT.
Stats: Up 61.51 points (+2.5%) to close at 2552.91, giving back 40 points from its high (2593.09).
Volume: 2.111 billion shares (+6.34%). Another strong volume day that saw up volume improve to 1.621 billion shares and down volume shrink to 426 million shares. A very solid volume day, and the lack of sellers shows that buyers were indeed in control.
A/D and Hi/Lo: Advancing issues jumped out in front 1.5 to one. New highs rose to 92 (+17) and new lows fell to 36 (-38).
The Chart: http://www.investmenthouse.com/cd/$compq.html
Strong volume and solid buying, but a disappointing close to the session. Futures look bad after the NT news, but we are still going to watch for some weakness that the index just may overcome. NT has a recent history of earnings troubles even as other companies in its sectors were reporting strong earnings in the fall and in January. We do not agree with those who say that this weakness is going to spread to other companies. LU was its own worst enemy. NT is showing that it is taking its eye off of the ball over the past six months or more. Even as they struggle and warn, others are posting impressive profit gains.
Will the Nasdaq immediately fill the gap? It may work on that early in the session tomorrow, but if this move has any life at all, it should hold at or above the previous close (2491) and reverse its course for a gain on strong volume. Remember, with so many mutual funds these days, a few can paint the volume tape to look stronger. Today's volume was indeed strong given the new method of counting (6% to 8% lower than previous), indicating that more than a few institutions were buying. Still, not a lot of great patterns in the big names, and thus we have to remain concerned about the durability of this rally.
Dow/NYSE: The Dow refuses to give in, rallying from support on slightly lower volume. And, it did not give up at the close. The Dow looks to have nine lives.
Stats: Up 95.61 points (+0.9%) to close at 10,891.02.
Volume: NYSE volume is a question mark. Last night it clocked in at 1.118 billion shares, but today the NYSE reported 1.150 billion shares for 2-14. So, volume today at 1.132 billion was 1.6% lighter on the gain. That keeps the Dow out of a positive price/volume day. Up volume was higher at 687 million shares while down volume fell to 432 million shares. Today's action does not wash away those distribution days.
A/D and Hi/Lo: NYSE advancing issues moved back in front 1.20 to 1. new highs fell to 159 (-6) and new lows also fell to 15 (-11).
The Chart: http://www.investmenthouse.com/cd/$dja.html
Again, the Dow is maintaining its ascending wedge pattern, trying to break out over 11,020 to 11,028. It has spent a lot of time at this level without success and without good price/volume action. It is trying, but it is not making it. It has to have some volume to get it over the hump, and as noted, that is not happening right now. It has to clear this level to make any progress, and it has to do it on strong volume.
S&P 500: The big caps were roaring as was the Nasdaq, but they too gave back a chunk of the gains in the last two hours. Its gain was less, but it gave back less of its gains as well. Note where it hit at its high and bounced back down: 1331.29. That level has pushed it back all week, and with the lighter NYSE volume on today's gain, it once again is lacking the power to make a solid move to take it out. Tomorrow we expect a down open, and we will have to see if the trendline at 1297 holds (that would take a lot of selling to get there, and we don't think things are that negative) for another run at 1335.
Stats: Up 10.69 points (+0.8%) to close at 1326.61.
Volume: NYSE volume fell to 1.132 billion shares (-1.6%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Early morning economic news may help turn the NT tide that was washing over stocks after the close. If investors are starting to buy the fact that a strong economy is good for earnings, buyers could use early weakness as another opportunity to move into positions and reverses that tide. Those are the best days as they show true buying strength as buyers step into the face of selling and turn the market as opposed to hopping on the back of good news.
In any event, if things stay as they are tonight, we anticipate a lower open. That will get us watching for a turn back up off of support levels for a continuation of the rally. Of course, we have the added element of a long weekend that may cause many to pull the trigger and sell to close positions over the weekend. For short term positions that can be a problem. Longer term, that should not worry us too much unless it overruns our sell points on more recent additions.
What do we do? Exercise supreme patience. Keep the solid patterns on the screen. Those stocks, especially the stocks in sectors that traditionally lead bull runs (e.g., technology) that are holding good patterns while the rest of the market jumps back and forth tend to be the leaders when the market really starts to rally. Look at SDS, SGR, LLL, SBUX, AEOS for example; all of the after hours carnage did not impact them at all as they continue to hold in their patterns, looking for a breakout move (LLL had another one today). While we believe the earnings megahounds such as JNPR, AMCC and friends will recover in the future, that is down the road as their patterns are atrocious. Don't feel you are missing out on a rally such as today because no rally thus far has really proved itself. We have the luxury of adding these big names on weakness, a bit at a time, until they form up great patterns and breakout. Then we pour on the coals. Those stocks that are performing well in this market, however, have something going for them. We are not talking about REITS and oil stocks, as those are left behind in the real bull moves. We are talking about the companies with innovative businesses and the potential to lead their sectors as they lead the market. That is how CSCO started its runs: it held above the carnage in market corrections, forming bases on top of the market while other stocks were mired deep in the bottom. Then when the market was ready for a bull run, it exploded out first and ultimately gained in the neighborhood of 80,000% at its zenith. Not all stocks that are holding up are the future CSCO's, but the fact that they are performing well in a weak market is a strong indication of business and earnings strength.
When we saw the double top today, we were selling calls on our positions. Even though volume was good, we had a hunch that things were not going to hold on to the close. The NT news will send stocks down early we believe, and we will be buying back calls in anticipation of a rally if we see support levels hold. Thus, we can still see the rally continue, but we have used the market's up and down action even while it rises to our benefit. While we may not be able to get much bang out of puts, selling calls on long term positions allows us to pick up incremental dollars to use to buy more stocks. We love to do this in our retirement accounts as we can make a few hundred, a thousand, a few thousand here and there with no tax worries. Indeed, if things turn and rally after early morning selling, we may just look to sell some calls when the market appears to be rolling over on Friday as some try to get out before the long weekend.
So tomorrow we look for breakouts from solid patterns, opportunities to tuck away a few more shares of our favorites if there is heavy selling in the morning but support holds, play momentum pre-splits to capture some pretty easy money, and take advantage of the volatility with covered calls on long term positions. There are many ways to skin the cat, and having a solid arsenal of strategies helps turn chaos into money in the pocket.
Support and Resistance Levels
Nasdaq: Closed at 2552.91.
Resistance: 2650. 2890 to 2900 is next before the 3000 level.
Support: 2300.
S&P 500: Closed at 1326.61.
Resistance: Interim at 1335. Then 1360 to 1375.
Support: Down trendline at 1300 to 1305.
Dow: Closed at 10,891.02.
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.
2-15-01
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): -30.5 actual versus -23.0 expected and -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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