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us stock market, trend trading stock
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7/22/02 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS
Target hit alerts issued LEN; LLL; KMI; ATK
Buy alerts issued: ESRX; PPDI; QQQ; SOX
Trailing stop alerts: LBIX
Stop alerts: HARB; PTEK; SNIC; FORG; NSTK; QQQ; SOX
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SUMMARY:
- No Black Monday, just shades of grey.
- Inability to sell off kept the indexes on a slow burn.
- Your home is an alternative to stock market investments?
- Subscriber Questions
Friday fear fails to fan flames for further falling.
We were up early to see what the foreign markets were doing, to see if the late Friday selling was going to push stocks lower at the open. In a word, disappointing. Modest selling, futures were just mildly pressured. Again the market was going to find a safety valve and let off some pressure without getting coming to a hard boil. There was no pre-market panic; there was no buying either, just lower prices and sluggish action.
A move lower gave rise to a pretty strong rebound. Without the sharp downside catalyst to really blow out those sellers that held the course on Friday, however, the rebound had trouble. We ventured in with a few QQQ and SOX calls to be in on any reversal, but the action quickly reversed and we quickly closed them to get out of the way when the indexes starts to roll over again.
The market was not going to die without a fight even if it did not blast lower early. The indexes formed intraday head and shoulders patterns and enjoyed some decent moves off the lows right after lunch. They ran into resistance from earlier in the session (the second top in the morning), however, and that was the extent of the upside action. Even as it attempted to rally, the market was internally weak. The NYSE A/D line was -4.25 to 1 with 506 new lows in the morning. After the attempted rally things were not much better at -4:1 and 545 new lows in the afternoon. It is hard for any index to move up when the majority of its components are declining. Common sense, but common sense is usually the first thing to go in the market.
With no rousing sell off, slow burn continues.
Despite all of the headlines, rhetoric, and lead news stories over the weekend, the market did not cascade lower Monday. Those assuring investors things were okay should have been muzzled. Things are not okay if you are playing the long side waiting for a bottom. The best thing that could happen for long term upside is a wild sell off to the downside. Without the downside flush, the indexes just erode with a slow burn.
Think of it as a big log on a fire. The fire is not burning well; it won't get into a roaring blaze. All night it spits and sputters, never jumping into a big blaze that threatens to take the whole house down. What is happening is that the log is being slowly eaten away from underneath. You can see some flame, but not much. Then the log finally caves in when most of the fuel is spent, sending up sparks and flames as it burns out.
Instead of a big flameout sell off, right now the market is just suffering from that slow burn. Investor after investor is being slowly burned out of the market, waiting for it to make a turn. Everyone is waiting for a big blow down, not wanting to miss the big reversal. That is keeping them in the market though they are being ground out as is seen in the rising mutual fund redemptions and shrinking investor class. At some point the log will cave in and the sparks will fly as the last sellers are out.
Monday the market continued the burn as the indexes rolled lower once again after failed rally attempts. The burn continued, just not the big conflagration that could have been.
THE ECONOMY
Your home as an investment. There is a lot of talk about Americans 'investing' in their homes. Remodeling, cocooning, buying new homes. Whatever you call it, it is hard to call it investing. Indeed, when we hear Greenspan and others saying people are investing in their homes instead of the stock market, that just sounds preposterous.
You have to have a place to live. So you buy a home because rates are low. Problem is, prices are at their highs. If you sold a home you may have got it at a good price, but what about the place you bought? You are buying into the same market you sold into. Unless you are willing to wait it out and toss money away on rent until prices are lower, it is hard to say you came out ahead on the investment if you buy an equivalent or larger home. It is like buying Dell at $12, riding it up to $80, selling it, and then buying it back at $80. Your money is still tied up in it, and you only make money if it continues to rise in value. With this real estate market overheated, that is not going to be the case much longer.
Sure people in California and other places allow people to buy in and then make a load off of their homes and move elsewhere for a lot less (though that is much harder to do these days). There are a lot of people who 'invested' in some high priced homes in Austin, Texas who are now trying to sell them for less than they paid. The idea that most Americans can trade in and out of their homes as some form of investment is ludicrous. Trading real estate is one thing; trading homesteads is another. There is a ton of baggage in a home that a stock certificate does not have: family roots, high transaction costs, family disruption, etc. Buying and selling the two is completely different.
Perhaps what they mean to say is that the home is being used now as a store of value as Barton Biggs suggests. This is just what stocks were used for in the late 1990's. There was no better place to put your money during that time; everything else paled in comparison. Now homes have been increasing in value month after month, and after losing in the market, many Americans have given up on the market and are sitting on money. With all of this glowing talk by builders, etc. of a 15 year run in housing, they feel secure in putting money into their homes. That is a store of value definition. They are not going to go out and trade out of their houses, however, if home prices start to fall. They buy at the height of the market or remodel at the height of prices, and then try to sell when prices are lower? They then have to come with hard cash to the closing. That is not why people are buying houses Mr. Greenspan. They are not going into it thinking they will sell in a year or two and pocket the difference and then move on. Again, there so much more that goes into decisions to buy and sell homes. This drivel that Greenspan and others are feeding to the masses to keep them calm and felling good about themselves is very harmful.
THE MARKET
There were two failed rallies Monday. The first failure was out of the gates after opening lower and surging right back up to positive territory. That led to new lows on all of the indexes before they set up that intraday head and shoulders pattern. From there they surged again through lunch but made a lower high at the first intraday resistance and worked back down the rest of the day.
Many times in a session you see two big moves for the day. The moves can be opposite or a continuation move after a respite. The action today was a continuation move in line with the trend, but what made it really negative was the two rally attempts that both failed. That keeps a very negative tone for the market and the possibility of a steeper decline and sell off of a cathartic nature. Certainly the Dow and S&P 500 are not just bouncing down in their downtrends now; they have undercut the channels and are tanking hard. Not hard enough to spark a big upside rally of any sort (interim or long term). The techs may still be showing some relative strength, but the relatives look pretty sick right now.
Sentiment Indicators
VIX: 48.23; +4.78. Hit 49.67 on the high and just missed eclipsing the closing high from September 2001 (48.60). A spike up to 60 on some serious selling would signal that conditions are ripe for a rally.
VXN: 62.58; +1.41. 63.61 on the high as the VXN continues to lag in the fear indicators as the Nasdaq continues to show some relative strength to the other indexes.
Put/Call Ratio (CBOE): 0.87; -0.27. The slow selling lowered the put buyers once again. No sustained fear in option speculators even as the indexes fell 2.8% and more on the session. When that kind of selling fails to elicit high levels of fear you can see there is still more work to be done in clearing out the market. One could argue that it is to the point that investors do not care anymore. That would not effect the option speculators, however. No matter how many options trade, the ratio is the key.
Nasdaq
Tried to hold the line, but it too failed and undercut its July lows and is fell to a new 2002 closing low. For showing relative strength, it is down 115 points in three sessions. As we noted, its relatives really stink.
Stats: -36.50points (-2.77%) to close at 1282.65.
Volume: 2.361B (-1.77%). Lower volume but volume was still very strong on continued selling.
Up Volume: 999M (+680M). A rally attempt with a bit more buying to it as shown in the up volume. Still was not enough to turn the index from its selling.
Down Volume: 1.355B (-150M)
A/D and Hi/Lo: Decliners led 2.29 to 1. A better A/D line, but still terrible.
Previous Session: Decliners led 2.6 to 1
New Highs: 16 (+8)
New Lows: 339 (+79). Getting there. Want to see it over 400 for a few sessions.
The Chart: http://www.investmenthouse.com/cd/$compq.html
Joined its brethren in undercutting prior lows for a new 2002 low. It tried to bounce, some of its leaders still held on decently, but in the end the selling was not strong enough and the buying was not strong enough. The selling was, however, still stronger than the buying, and thus it burned lower again on some strong volume. It has now handily undercut the September 2001 lows and the October 1998 bear market lows (1357). There is not much now between the close and 1200.
Dow/NYSE
Another big point loss, but it did not lead the charge lower. That was reserved for the S&P 500 and S&P 400 (-3.3% each). The Dow now has the October bear market in its sights.
Stats: -234.68 points (-2.93%) to close at 7784.58.
Volume: 2.168B (-17.87%). Volume backed off but was still huge at 2.1 billion. Again it was close to the Nasdaq volume after eclipsing it Friday.
Up Volume: 279M (-175M)
Down Volume: 1.879B (+1.879B). Unlike the Nasdaq, selling increased as buying volume decreased.
A/D and Hi/Lo: Decliners led 4.06 to 1. Not the worst of the session, but it did start rising again as the market edged lower in the last hour. These ARE massively negative A/D ratios that are a sign of flushing/bottoming.
Previous Session: Decliners led 3.32 to 1
New Highs: 21 (-7)
New Lows: 558 (+135). New lows were over 400 Friday, and they soared again Monday, indicating that investors and funds are unloading NYSE shares just as they were doing to tech shares the prior year.
The Chart: http://www.investmenthouse.com/cd/$indu.html
No late rally to retake 8,000, no sell off to take it down to the 1998 bear market bottom at 7400. Just more of that burn lower that is grinding out reluctant sellers and driving anxiety higher on the VIX. There is simply not any real support levels before 7400. The Dow is so far below its downtrend channel it is basically in freefall; it just won't melt down 600 points or so in a session to really scare everyone.
S&P 500:
The S&P 500 is so far below the 1998 bear market lows it can barely see them. It is also below the October 1997 lows (indexes tend to bottom then) and tapped the Q1 1997 high in the 817 range. It held those levels and moved up 5 points - - wow. The next level after this is 730 to 755. That is the range of the December 1996 'irrational exuberance'. If that was irrational exuberance on the S&P 500, if Greenspan was right (won't get many takers on his side for that argument), there is still more downside. Prices still cannot support the current P/E's, and if that is your guidepost there is a long way to go on the downside still.
Stats: -27.91 points (-3.29%) to close at 819.85
NYSE Volume: 2.168B (-17.87%)
The Chart: http://www.investmenthouse.com/cd/$spx.html
TUESDAY
Monday certainly left the door open for further downside, perhaps sharp downside with the two failed rally attempts in one session. Each time the market has looked ready to implode, however, it has found short coverers and some buyers to bail it out so to speak. Tuesday it will have another shot at it, but something needs to happen to break it into a real freefall where no one comes back into try and rally the thing.
After hours NVLS announced earnings but did not impress. The chips were down so to speak, though TXN gave a Dell-like 'we are gaining market share' report. Better for TXN, but for the chip market as a whole it is not a sign of increased demand. In short, some stocks were holding on after the earnings announcements Monday (the same stocks that have been hanging on all along lately), but most all were a bit lower. Not any major sell off, just nudging lower.
Another piece of the puzzle that is starting to fall into place are stock buybacks. The theory goes that as long as companies don't think their stocks are good buys, no one really has conviction for those stocks as well. Countering that is the apparent core of investors that are not even looking at their statements but are keeping their investments. Maybe they are the stronger, long term holders. After all, they sound whipped, not even caring if it goes up or down. If they rode them down this long, resigned to hang onto them, they will tend to hang with them and let them work for them if they start to move up. Perhaps.
We also need to consider the season we are in. Earnings yes, but it is turning into late summer and no summer rally. August and September are historically bad months for the market. In past sell offs you usually get a rally up and then a final test in October that starts a rally through the end of the year. This market is still plunging without showing any sign of a rally to set up another test in October that would set a bottom. What we could be looking at is continued selling through the 'bad' months of August and September, then a rally in the fall, followed by a test of that rally in the spring. That is long term conjecture at this point based on historical trends, so it has to be taken with a healthy dose of salt. Still, the market has to STOP selling before it can start up. Seems to be a simple concept, but it has to bottom and then let leading stock patterns set up, test a bit, and then breakout and run. That is the usual pattern, and this market is still in the selling phase, having long since undercut the 1998 lows on the Nasdaq and S&P 500.
In any event, Monday once again did not give the sharp, heavy, downside action, but it sure gave us more downside opportunities. With the market still moving lower and not giving a big reversal, we continue to look to downside positions. Earnings continue to leave everyone with a hollow 'just not there' feeling: the tumble lower in earnings may be over, but there is no rebound to bring investors in. The trend remains down, and until we see the sentiment indicators all fall in line, we have to let the overall trend direct our investing as it did today with more downside plays being hit.
Support and Resistance
Nasdaq: Closed at 1282.65
Resistance: The March down trendline (1310). The May down trendline (1335). 1357.09 is the October 1998 bear market low. The 10 day MVA (1356.55) and the 18 day MVA (1386.88). Then 1418, the interim test after the September low. After that is 1500 and the second March down trendline at 1492. That is followed by the 50 day MVA (1492.71).
Support: Then the March down trendline bottom channel line at 1270. After that is roughly 1250, but really not much support until 1200.
S&P 500: Closed at 819.85
Resistance: Again, it has fallen so far there is not much above it. The 855 and 850 from the October 1997 low and Q2 1997. The 10 day MVA (892.73). Some resistance at 900. The lowest bottom channel line of the March downtrend (910). The 18 day MVA (922.66). The predominant bottom channel line from the March downtrend at 935. The May down trendline (949). After that 969 is the March down trendline. The 50 day MVA at 988.29.
Support: 817, the Q1 1997 highs, held Monday. After that, 750 to 760 with an intraday touch to 730.
Dow: Closed at 7784.58
Resistance: Similar to the S&P: it has fallen so far there is nothing really above it close by. The September closing low is 8235.81 and the intraday low is 8062. 8400 to 8500 is some resistance. The 10 day MVA at 8451.57. The 18 day MVA at 8719.06. The bottom of the channel of the March downtrend at 8740, then 9000. The March down trendline at 9145. Then price resistance at 9250. Then the 50 day MVA (9263.68) and 9500.
Support: The October 1998 lows are at 7400 and 7467. After that is 7000, some 1997 lows and highs.
Economic Calendar
7-25-02
Initial jobless claims (8:30): 385K expected, 379k prior.
Durable goods orders, June (8:30): 0.5% expected, 0.9% prior.
Employment cost index, Q2 (8:30): 09.% expected, 0.8% prior.
New home sales, June (10:00): 960k expected, 1.028M prior.
Existing home sales, June (10:00): 5.73M expected, 5.75M prior.
7-26-02
Michigan sentiment, revised, July (9:45): 86.5 expected, 86.5 pior.
End Part 1 of 2
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us stock market
trend trading stock
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