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world stock market, us stock market
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2/20/01 Investment House Daily
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Investment House Daily Subscribers:
TONIGHT:
- Bad Friday carries over to a bad Monday.
- Big names squashed once again as they push Nasdaq down to test 2300.
- Cisco CEO shows his frustration and warns of global slowdown. As the U.S. goes, the world goes.
- Downgrading a stock that is 75% off of its high? Kicking them while down or a sign of desperation?
- WMT and HD perform decently, give retailers a lift.
- Subscriber Questions
- Team Trades
As we said over the weekend, down Fridays usually lead to down Mondays (or in this case, Tuesdays). We were also looking for a test of 2300 on the Nasdaq. Got both of those, but there was nothing that looked like a bounce when it approached that level. The morning rally attempt faded fast and the indexes slipped lower all session. Looked very much as a repeat of Friday.
Indeed, the big names were pounded lower once again as the smaller and mid-cap names either held their ground or managed small gains. Volume on the NYSE and Nasdaq continued to ease a but, but not a lot. Even with the slightly lighter volume, many of the big names that sold on lighter volume Friday did not fare as well today. Indeed, many found new 52-week lows on rising volume, falling below the lows hit in late December and early January before the Fed rate cuts. The Nasdaq and S&P 500 are following them down, coming close to their 52-week lows as well. The Nasdaq tested 2300, and it looks as if it is just a matter of time (tomorrow?) before it hits a new such low.
Lots of news that led to the continued selling.
Cisco warns of global slowing.
Cisco's CEO stated over the weekend that the Fed should have cut rates in November, and its failure to do so may have already put the U.S. economy into recession, something that makes further aggressive and immediate rate cuts necessary along with the $1.6 billion proposed tax cut. Further, Mr. Chambers echoed something we have said many times over as the economy was heading lower and others were saying that things were better worldwide (indeed, Japan was often cited as an example of the world turnaround): the failing U.S. economy could lead to a domino effect for the rest of the world economies. As we have seen, Japan's 'recovery' referred to last spring and summer was as thin as rice paper.
Mr. Chamber's frustration is something we have all felt: a good economy that was holding the world up has been intentionally seriously hobbled by those who supposedly are in the know about how world economies mesh. Well, when the Fed blames technology for creating (or at least exacerbating) the slowdown we currently have, you realize that those 'in the know' know very little or have different agendas than those articulated.
Another consideration: Chambers and his management team have been one of the most astute in the game, determining technology growth directions, skillfully acquiring companies, managing analysts, and all the while growing earnings and revenues at a rapid pace. That management team made its first misstep in years and it claims to have been the result of outside forces on the economy that slammed on the brakes. You have to take heed when someone with such a skillful track record makes such statements. While Greenspan talked of technology causing the problems related to the current slowdown, you can bet (or hope?) he knows the enemy when he looks in the mirror. Moreover, even if he says the problem was caused by something else, his solution is the same: continue to aggressively defend the economy and what is left of it.
Intel slashing spending, employees.
The market was doing poorly with the Cisco news, and then INTC stated it would cutting spending by 30% and would cut down its work force by attrition. Using these methods it would save hundreds of millions of dollars in costs. This is on the heels of Dell's announcement that it would have its first layoffs ever and Michael Dell's candid statement that he could not give guidance going forward as the economy was the big question mark. This led to Smith Barney saying that those looking for a chip recovery in the second half of 2001 were overly optimistic. The market did not handle this news well at all and picked up speed to the downside.
Downgrades don't help but show negative sentiment is reaching new heights.
Piling onto the weakness were downgrades of such stocks as JDSU and NT. Let's see, JDSU was down from $153.41 as its March 2000 high and $140.50 from its July 2000 high. At the lower of the two the stock was down 75% as of Friday's close. NT was down over 75% from its high as well on Friday's close before its downgrade today. While these downgrades did not destroy these two stocks today, the rest of the market took its cue from them and was torched.
Downgrades at this stage of the game not only upset investors who bought on the reiteration of a 'strong buy' back in April 2000, but after 75% and more losses, it shows analysts throwing in the towel and joining the downside. That is another sign that another extreme is being reached when those who were touting stocks as they were in the process of topping are now telling you to sell them when they hit 52-week lows.
Gloomy viewing on television is another sign of extreme pessimism.
The tech selling had the financial stations so gloomy it was painful to watch. If you looked at the indexes and the big names it was easy to get the life sapped from you. Ever watch the old sitcom 'Barney Miller'? There was one episode where it rained for days and days, and slowly the gloom and depression spread from one cop to the next until all were under the spell of gloom. We have a feeling that many investors are mirroring the gloom they see. It was pretty thick this afternoon with Joe Kernen as glum as we have seen him, John Bollinger saying it would be years and years before the big name techs (CSCO, DELL, MSFT, INTC the former top tier) would make it back to prominence, and others saying the techs were just not going to recover now if ever. That is getting pretty extreme, and extremes are always something to watch for. Looking behind the big names, however, it was not all that horrid as we continue to note the Nasdaq 100 leading the overall tech sector lower while the small and mid-cap tech stocks and Nasdaq stocks are holding their ground.
Some decent news on the retail front belies a lot of the economic gloom.
Wal*Mart and Home Depot (WMT, HD) both met fourth quarter earnings estimates before the bell and said January was better than December. Moreover, both maintained first quarter forecasts. Did you hear that? They maintained first quarter estimates. We know that January sales came in better than expected as reported last week, and WMT and HD would not be saying they were standing behind first quarter estimates if February sales were not meeting those expectations. To us this would be very good news as it would show that even though sentiment indicators have dropped and the mood on the financial programs is somber, the consumer has not fled the country.
THE MARKETS
Not much to get excited about looking at the major indexes unless you shorted the OEX or the QQQ, the former being one of the plays we had on the Technical Trader report. The big names were getting hammered once again though the indexes dropped on slightly lower volume. Not looking solid on the Nasdaq and the S&P 500 while the Dow is now struggling at a support level.
Overall market stats:
VIX: 27.50; +2.42. Volatility rose all session as it finally showed some movement in the face of selling. It is approaching the 30 level that is considered significant in fanning a rally to the upside, but remember that previous rallies in December when it hit 34 to spark a rally. Indeed, it was 37 to 38 in late December, so today's 27.50 close is not that meaningful.
Put/Call ratio: 0.70; -0.19. Market sells hard again, heading for new lows on the Nasdaq and the S&P 500, and put buyers fade from the scene. At this stage of the game that is not what we want to see. Shows that some of Friday's action was related to option expirations. Today's action stripped away the expiration volume and the underlying number was disappointing. We really want to see this one back up in the 0.90 and better level.
NASDAQ:
The index is performing atrociously as are its big cap members. Roughly equal volume with Friday's selling, but the big names ramped up volume. Looks like at least a test of the lows.
Stats: Down 107.03 points (-4.4%) to close at 2318.35.
Volume: 1.879 billion shares (-0.68%). Down volume was again well ahead of up volume, 1.566 billion to 279 million.
A/D and Hi/Lo: Declining issues continued to lead 1.91 to 1 (2.56 to 1 Friday). New highs rose to 78 (+16) as new lows jumped to 117 (+50).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq blew through 2390 early on and then bounced down from 2380 when it tried to rally back. It was pretty clear at that point that it was going lower. The index found some support at the 2300 level in late December and early January after it hit a 52-week low, but we don't really expect that to hold. Lots of downward sentiment. The Nasdaq futures are up after hours sharply, but will this lead to an attempted hold at 2300, and if it does, will it be just another rally that is sold into? The Nasdaq is approaching a level where it is testing lows and there may be undercutting of lows. As evident from the whipsaw action, the market has not flushed out the sellers and it will most likely have to hit new lows to move some of the hangers on out of the market. Look for a sharp break below 2251 and a reversal on high volume. That won't mean that the absolute bottom has been hit or that the recovery is underway; it will mean that we have the start of a potentially tradable rally. If it fails, we can play it on the failure.
Dow/NYSE: The Dow broke below 10,750, tapping its simple 50 day MVA on its low (10,727.53). Its recent tighter trading range is in jeopardy as it may need to pull back and try to mount another charge after failing to break through resistance since November. Volume was lower, a plus on the selling.
Stats: Down 68.94 points (0.6%) to close at 10,730.88.
Volume: NYSE volume edged back on today's selling to 1.105 billion shares (-12%). Down volume fell to 733 million shares as up volume also dropped to 362 million shares.
A/D and Hi/Lo: NYSE declining issues remained in the lead 1.34 to 1 (1.68 to 1 Friday). New highs rose to 131 (+18) as did new lows (36; +8).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow dropped below 10,750, a point that has acted as resistance and support for the index. It is still in decent shape, however, as it held above its simple 50 day MVA (10,726.77) and its 200 day MVA (10,708.14). If these levels fail, its next downside risk is at 10,650 to 10,300.
S&P 500: The big cap index broke back below the down trendline it jumped over back on January 18. We anticipated this move given the distribution days the index has suffered this month. It is now resting just above potential support at 1275. Volume was lighter on the selling, but the big names took hits on higher volume. We now have to look at the 52-week low at 1254.07. S&P futures were up after hours, so perhaps it will try to rally at this point, but as with the Nasdaq, a rally without Fed intervention may just prove to be another selling opportunity.
Stats: Down 22.59 points (-1.7%) to close at 1278.94.
Volume: NYSE volume edged back to 1.105 billion shares (-12%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
The CPI hits at 8:30 ET. After the PPI, many are gun-shy about what it may show. We don't expect it to spike higher as the PPI. Passing prices along has been very hard for companies, and flagging consumer confidence means they will have a hard time passing any wholesale price increases onto consumers.
Will a steady number do anything for the market? A sigh of relief that may give the market a better start. What a tame CPI will mean is that the Fed continues to have room to cut rates according to the conventional wisdom and that will be good for the market. Indeed it should as the market has not just jumped up and raced of the greener pastures since the 100 basis points in cuts already delivered. What that means is that the market does not have overwhelming confidence in what the Fed is doing and whether it is up to the task. Look at retailers, however, and they continue to outperform, particularly with WMT and HD hitting earnings and reaffirming estimates for this quarter. That does indicate that investors are buying into the idea that the Fed moves are good for retailers; after all, after the dismal holiday sales forecasts, for the retailers to have hung on and moved up is impressive. Will they be the next sector to get torpedoed? Watch the volume.
Where is the Fed? The FFF contract has a 74% possibility of a 50 basis point cut at the March 20 meeting. Almost no chance built in before that. This is a volatile contract and will change week to week, economic report to economic report. Right now the trend is later as opposed to earlier. If the market hits new 52-week lows on the Nasdaq and/or the S&P 500, look for the contract to change and we look for a greater chance of an inter-meeting cut to prop up the markets and consumer confidence.
Tomorrow we may see a rise out of the CPI. With the Nasdaq just above its 52-week low, that would be a good combination shot to push it higher, but at this point there is nothing that has changed the character of the market: we have been here before and no lingering sellers would have been pushed out of the market. It is a bit easy to let it drift to the lows and then move up from there for an end to the selling. This market is one that is still working on its direction and the bottom is not going to be that easy. We will play the obvious plays in a rally, e.g., breakouts, pre-split momentum plays and the strong pre-announcement patterns. And if we see an easy downside play as the OEX was today, we will jump on it. As we said over the weekend, patience, pick the plays you like the most, and patiently make the play. If the move reverses and runs out of steam, we will look at covered calls on the long term holds and obvious put plays.
Support and Resistance Levels
Nasdaq: Closed at 2318.35.
Resistance: 2650. 2890 to 2900 is next before the 3000 level.
Support: 2300. 52-week low is 2251.71. 2050 is next.
S&P 500: Closed at 1278.94.
Resistance: Interim at 1335. Then 1360 to 1375.
Support: 1275. 52-week low at 1254.07.
Dow: Closed at 10,730.88.
Resistance: 11,020 - 11,028. After that, 11,400.
Support: 10,650. Then 10,300.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
2-21-01
CPI, January (8:30): 0.3% versus 0.2% prior.
Core CPI, January (8:30): 0.2% versus 0.1% prior.
Trade Balance, December (8:30): -$32.4B versus -$33.0B prior.
Treasury Budget, January (14:00): $73.0B versus $62.2B prior.
2-22-01
Initial Claims, 2/17 (8:30): 345K versus 352K prior.
Leading Indicators, January (10:00): 0.4% versus -0.6% prior.
Help-Wanted Index, January (10:00): 79 versus 79 prior.
SUBSCRIBER QUESTIONS
Q: Is there a chance that you might discuss Brocade's (BRCD) earnings announcement on Wednesday? Thank you!
A: BRCD is one of the earnings horses we really like but has been utterly crushed this year, much of the recent selling on the news from EMLX about its potential problems with future earnings. Most analysts expect BRCD to meet its estimates, something it has done with ease in the past, including in November. Brocade has not warned, a good sign, but at a recent Goldman Sachs technology conference (February 13, right after the EMLX blowup) the CEO made it clear that he was not going to talk about the company because it was in its quiet period. Thus, we don't have a lot of guidance if there were any recent hiccups. For these earnings, however, we don't see that as a problem. The big issue is whether BRCD drops any bombs about future business tomorrow after the close in its 4:30 ET conference call. The stock has already been plundered, but it was also one of the last quality stocks to really hold up on the heels of its excellent earnings and stock split in November. We anticipate good earnings for the prior quarter, but it remains to be seen as to whether BRCD will have to give cloudy guidance moving forward. This is a great company and we would not be surprised for it to say the outlook is great as did CIEN. Problem is, not many are believing it when companies say this, and when they do rally, if the move does not stick, they tend to give it all back. We really like BRCD. It is not one of the old guard, but one of those companies that has been growing sales and revenues at an incredibly rapid rate. It is one we feel will recover when positive earnings outlooks begin to be factored in. When that happens is what we are watching for.
TEAM TRADES
PRGN: Showed a doji Friday above its 10 day MVA (28.77) on below average volume. Opened at 29.25 and was up a point by 8:38. Set alert at 31, a resistance level in the handle. The stock is in a cup base of 25 weeks, and we are looking for a breakout over the handle high of 33.13 as the stock has held up decently in this market, no small feat. We always keep an eye out for those stocks that are forming solid bases ahead of the other stocks that are getting hammered still. They are the potential leaders when the market turns back up and rallies. Average volume for this stock is 3 million.
At 8:55 the stock was up to 29.94, volume at 334,000. Still pretty low, and the stock pulled off its high of 30, though it was still above its 10 and 18 day MVAs, so it was looking at resistance from other prices in the handle that it hit as it pulled back. The Nasqaq had been in the plus side (up to +17 earlier), but was now down to -15.02. Without a rally, the stock could hold here until it got that volume surge. Kept the alert set at 31.
30.50 at 9:12 Volume 620K (avg. 3 million). At 9:50 the alert went off as the stock hit 31, and it quickly pulled back down to 30.50. Volume was now at 1.26 million, not bad. Now we knew the stock was trying to make a move, so we left the alert in at 31.
At 10:30 volume was at 1.78 million, so that was still moving up, but not as fast as it had earlier in the morning. By 11:53 volume reached 2.23 million, not quite average and still lower than that of Friday, which didn't reach average either. We weren't making a play until volume beat average and the stock was over 31. Left the alert intact.
By 2:30, volume was at 3.91 million, the stock at 30, up one point from the previous session. Pretty good action considering the rest of the market, but software has been holding up pretty well overall, particularly with smaller stocks. We will continue to watch for a breakout. It was a day for patience on this one.
For a review of frequently asked questions, please use the link below:
http://www.investmenthouse.com/1questions.htm
End Part 1 of 2
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world stock market
us stock market
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