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7/24/02 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS
Target hit alerts issued Wednesday: None issued
Buy alerts issued: LMT
Trailing stop alerts: None issued
Stop alerts: BLUD; ESRX
To subscribe to the Daily alert service you can sign up at the following link:
http://www.investmenthouse.com/alertdly.htm
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SUMMARY:
- Massive short covering boosts market from massive oversold condition.
- 'Real' buying and other claims of institutional activity are nothing new.
- Even with Wednesday's rally, the indexes are still well below resistance.
- Subscriber Questions
Strong rally to match the strong selling.
Tuesday we noted that the Dow looked to be setting up one of those short one and one-half day bounces. Man, what a bounce. Another half session of that and the Dow will have rallied over 700 points. That is a lot of rallying, but we have to consider where they are coming from. The Dow and S&P 500 had sold down so far it was hard find reasonable near term resistance. This is the opposite situation where there is a ballistic breakout over resistance and the stock rallies so far it has no real near term support to test when it does run out of steam. When the selling ran out of steam, there was nothing to keep a lid on the market, and all indexes powered higher, posting very impressive single day gains.
What factors were given the credit? Could it be the Dow sold down almost 2,000 points in 2 weeks, finally joining the S&P 500 and Nasdaq in the cellar? Too logical. It made better news to report a rumor the FOMC was conducting an emergency meeting, to show footage of Adelphia owners being led away in handcuffs, to look to the Congress preparing to pass corporate reform legislation. In fairness it was most likely a combination; when the market is that oversold, rumors and headlines can turn a bit of short covering into a stampede of short covering.
The rally was really impressive and on strong volume. That made a lot of commentators forget about how impressive the selling had been. While it was readily noted that the Dow posted its second highest point gain ever, not many were recalling the massive downside selling binge that preceded it. More of that 'equal and opposite reaction' physics at work: the rallies look very impressive, but they are also following record setting down sessions where the indexes piled on record consecutive downside sessions.
Shorts at work covering.
There were the usual calls of a bottom being set, that this move involved 'real' buying. I suppose 'real' buying means buyers wanting to buy and hold the stocks as opposed to shorts covering positions. In both situations the buying is real enough. Rallies just don't start with only long term buyers; in heavy selling shorts have to cover as well, and there was a lot of that going on Wednesday.
How can you tell there were shorts at work? First, after so much selling, on any rally the shorts are buying back shares. Beyond the basics, look at the sectors that rallied the hardest: financials, energy, retail, large cap consumer related. Those are all sectors that have been slaughtered the most. Look at big technology and biotechs. Those sectors were up today, but they lagged most of the action. These stocks had been performing relatively much better than the rest of the market until some selling Tuesday. They rallied today, but they did not make the massive runs: not that many shorts out on them, and thus they did not have that big snap back when the rally started. That is a telltale sign that a lot of the 'real buying' was short covering.
And the final reason, floor traders we talked with said they were not seeing buying by mutual funds and other big institutions but more hedge fund action. Mutual funds predominantly buy shares for long term holds. Hedge funds can short the market. 10 down session on the Dow, massive selling, then a massive spurt higher. You do the math.
As we have said before, short covering should not be looked upon as giving rise to an inferior rally. As noted, most rallies start with the short covering. What is important is what happens AFTER the short covering ends. Do buyers then step into the market and carry things further or does the rally fizzle and roll over at resistance as it has done time and time again in this bear market? The indexes are so far below resistance that any call on a rally of substance is way too soon. The sentiment indicators were not all in place for starters, and again we have to wait until the short covering is over and see whether buyers come in and deliver follow through next week.
Hard to buy stock?
We heard a report that it was hard to buy stock today, meaning that you could not let stock come to you or shave the spread. That was supposed to mean that there were a lot of those 'real' buyers out there. It was reported it had not been 'hard to buy stock' for months and months. Let's see, the last time it was hard to buy stock would have been on July 15 when the Dow tried a big intraday reversal. Then July 5 when it rallied sharply. And of course there were at least three sessions in June where the indexes rallied sharply on short covering.
Yes, when the market is rallying sharply, you cannot get those soft spreads. You have to pay full price. That happens when there is a dash to cover shorts or when mutual funds vie for the shares of leaders.
Listen to the market and reason.
The point of pointing this out: it is easy to get sucked into the hype of the day. A big rally and everyone is in a tizzy. Yes it was the Dow's second greatest point gain ever, but it is coming off of the Dow's worst two-week selling period. It all needs to be put into perspective. The indexes still have room to run up to near resistance even after Wednesday's session; that is how far down they had sold. What we are seeing, however, are many downside opportunities developing in stocks that were sold hard and are just now rallying back up. Yes there are some upside plays in stocks that have held onto relative strength positions as the market sold, but until there is something more, i.e., follow through next week, we are letting more downside action set up just as we were doing in the report last night: let those stocks that have sold sharply rally back to resistance, and then we will see if there is any support for them or not.
THE MARKET
These rallies out of the depths of selling are impressive, but as noted earlier, they are not the proof there is a bottom. We really don't like them. They are impressive to witness (another point in history to observe and marvel at as discussed Tuesday night), but they just tend to burn out. There is nothing really scientific about that observation, but in this bear market, big rallies are used as relief valves where the little pent up demand there is blows off, stocks get back up to resistance, and shorts lick their chops once more after a very quick rise to resistance. It is too early to know whether Wednesday's action is anything more than an interesting historical rebound from a record setting sell off on the Dow. You can bet, however, that when the indexes approach resistance, and maybe even before, that the shorts are going to make another run at the market.
Sentiment Indicators
VIX: 45.29; -5.19. 56.74 on the high, near the 60 from 1998 in that brief bear market, and then the market rebounded. Closer to a significant intraday level; perhaps it hit that level Wednesday. We would have preferred to see it rise even more, but our preference carry little weight in the market.
VXN: 65.59; -0.80. Was up to 69.73 late in the session before starting to come back as the buying picked up steam late in the session.
Put/Call Ratio (CBOE): 0.87; +0.02. Relatively calm trade in puts, but when you think about the magnitude of the upside move, the action was pretty intense still.
Nasdaq
The Nasdaq was not really joining in on the party until late in the session. The Nasdaq was not as heavily shorted, so there was not as much short covering to power it higher. That changed a bit later in the session as some of the big stocks actually attracted some buy interest, particularly when the SOX reversed (it lagged all session) and came up sharply off of its lows.
Stats: +61.18 points (+4.98%) to close at 1290.23
Volume: 2.476B (-4.8%). Volume ramped up on the rally, somewhat typical of a short covering binge as seen today.
Up Volume: 1.838B (+1.096B)
Down Volume: 180M (-1.655B). The shorts were buying, not selling.
A/D and Hi/Lo: Advancers led 1.38 to 1. A big turn intraday as decliners did lead 3:2 at one point.
Previous Session: Decliners led 3.41 to 1
New Highs: 7 (-6)
New Lows: 553 (+125). Wow. Still massively high after finally cracking 400 Tuesday, adding to the total in a big way. This is one of the other indications of a market that has been sold hard.
The Chart: http://www.investmenthouse.com/cd/$compq.html
As noted Tuesday night in this section, the indexes never give a straight drop lower, and we expected the Nasdaq to give a bounce up to the 10 day MVA (1325.23) or so as the next entry point for further selling. That will be the first test of the rally, and it is a pretty easy move to get there or the 18 day MVA (1361.84). At that point we will see how the index reacts: does it show a topping pattern that is so familiar, e.g., a doji at that resistance, or will it actually hold the line and deliver a follow through for a further upside move.
Dow/NYSE
The Dow got things started Tuesday, showing an attempt at rallying, and then blasting off Wednesday. Second strongest point gain ever, strong volume. It was too strong in a way.
Stats: +488.95 points (+6.35%) to close at 8191.29
Volume: 2.77B (+14.69%). Fourth straight 2+ billion session, easily blowing away the prior volumes. Short covering was involved, but we also have to look again at the relative volume on the NYSE the past month. It had moved higher in June, was spiking in mid-July on that selling, and then shot off the map the past week. This action of sharply higher volume on rally sessions off the lows bespeaks of short covering.
Up Volume: 2.146B (-469.002M)
Down Volume: 503M (-1.445B)
A/D and Hi/Lo: Advancers led 1.5 to 1. You would have hoped to see a reversal, but look how narrow the rally was. From almost 5 stocks down to 1 stock up Tuesday to just over 1 stock up for every one stock down in a huge Dow and S&P 500 move. Narrow, narrow, narrow, and limited to the stocks on the big indexes.
Previous Session: Decliners led 4.76 to 1
New Highs: 10 (-2)
New Lows: 951 (+223). Unreal number of new lows even AFTER the Dow and NYSE reversed and powered ahead on average 6%.
The Chart: http://www.investmenthouse.com/cd/$indu.html
As anticipated, the Dow started higher after showing some signs of holding the line Tuesday. It was much more powerful than anticipated, but after such strong selling it makes sense to have such a strong short covering snapback when the rally started. We were looking for one of its famous 1.5 day rallies; at this rate that would put it near 8500, just below the 18 day MVA (8567.75). As with the Nasdaq, that has been the real test on each of these rallies back from the harsh selling.
S&P 500:
The large caps tested down to 775.68 and found a point to rally. Volume was impressive as was the point gain, but it still left the S&P 500 well below the short term moving averages (869.63; 902.55). After such a massive rollover we anticipate the large caps to test these levels on a bounce. Then whether they roll back over or just consolidate the gains for another move higher next week will tell more about how significant Wednesday's short covering rally was.
Stats: +45.72 points (+5.73%) to close at 843.42
NYSE Volume: 2.77B (+14.69%)
The Chart: http://www.investmenthouse.com/cd/$spx.html
THURSDAY
The first economic news of the week hits with jobless claims, durable goods orders, and home sales. After a short covering rally started Wednesday, maybe good economic news can give some 'real' buyers reason to buy. The economic news has been steady, however, so any further good news would just be a reason to rally further as opposed to igniting buying interest by itself.
There is little doubt Wednesday's action was short covering, and there is usually a follow through of some sort after such a strong move. Usually. In this bear market we often see follow through trashed right after a rally attempt. This rally, however, started from much lower in the spectrum than previous rallies from previous selloffs. Those would pop up right after the indexes cut to new 2002 lows. This time the indexes ground lower and lower as negative sentiment went higher and higher. The rubber band was stretched a bit further and there is simply more upside room before the indexes get back to even the nearest resistance at the 10 and 18 day MVA (on the Dow and S&P 500).
Thursday we are therefore looking at some more upside to carry the indexes toward another important test with the near term resistance levels. As with the Tuesday report, we are going to let some more downside plays set up toward those levels. Then we will see if they market shows the same signals of rolling over, or if it tries to consolidate the move, holding onto the gains for a few sessions. That could be a rest stop before trying to deliver a follow through for a further move upside. That remains to be seen, and we will just have to let the plays set up.
As for existing put plays, many were at resistance levels at the close; we will see how they trade tomorrow morning before we decide on what action we want to take with those plays. While the indexes may just run up to resistance and roll back over, we are not that interested in riding them back up, then down, and then getting out. We tightened up a lot of the stops anyway, so we can still close them out in relatively decent shape for the most part if we decide to do so.
As for upside, we are looking at those stocks that had the relative strength in the recent selling, mainly some biotechs, some techs, and a few rare solid upside patterns. We are not wild about chasing the rebounding stocks that have been hammered so hard. It can be done, but they get to be very volatile and many are near resistance. We will stick with those that held up fairly well during the recent selling; they will be less likely to kill us on a sudden hiccup back to the downside.
For now we have to approach Wednesday's action as short covering just as we have seen all during the downtrend. It was simply on a more massive scale because the selling had been on a more massive scale. The sentiment indicators were getting extreme, but until there is sustained buying in the market we have to acknowledge the downtrend that is still in place.
Support and Resistance
Nasdaq: Closed at 1290.23
Resistance: The March and May down trendlines are intersecting here (1299). The 10 day MVA (1325.53) and the 18 day MVA (1361.84). 1357.09 is the October 1998 bear market low. Then 1418, the interim test after the September low. After that is the 50 day MVA (1474.84) and the second March down trendline at 1481. That is followed by 1500.
Support: 1190 to 1200 is next. There is some support right above 1100, but to wipe away the gains from 1995 when it rally started a ballistic incline, you look more at 1,000. That is getting way out there, however, and as we said, much fuzzier.
S&P 500: Closed at 843.43
Resistance: 855 and 850 from the October 1997 low and Q2 1997. The 10 day MVA (869.63). Some resistance at 900. The 18 day MVA (902.55). The lowest bottom channel line of the March downtrend at 905. The predominant bottom channel line from the March downtrend at 940. The March down trendline at 965. The 50 day MVA (975.42).
Support: 750 to 760 with an intraday touch to 730.
Dow: Closed at 8191.29
Resistance: The September closing low is 8235.81. The 10 day MVA (8292.79). 8400 to 8500 is some resistance. The 18 day MVA at 8567.75. The bottom of the channel of the March downtrend at 8715, Then 9000. The March down trendline at 9120. Then the 50 day MVA (9162.80). After that price resistance at 9250 and then 9500.
Support: 8062, the September 2001 intraday low. The October 1998 lows are at 7400 and 7467, and they held Wednesday. 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.
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End Part 1 of 2
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