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world stock market, us stock market
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8/06/02 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS
Target hit alerts issued Tuesday: None issued
Buy alerts issued: SSD; AMGN
Trailing stop alerts: We were able to preserve some profit on these puts even as the market reversed. ROOM; OEX; XOM; WHR
Stop alerts: None issued
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http://www.investmenthouse.com/alertdly.htm
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SUMMARY:
- Too hard, too fast, not enough.
- No Cisco 'home run,' but it does see business stabilizing as it continues to cut costs and take market share.
- Fed cuts and retail sales.
- Team Trades
Bounce comes a session early and volume is still relatively light.
Rumors of FOMC rate cuts to come and a stronger dollar buoyed by an announced German asset reallocation sent futures sharply higher. The market followed on the open and spent most of the session working modestly higher off of the big initial surge. The Dow was up 374 points, the Nasdaq up over 70. The memory of the recent selling was fading fast in another 4% to 5% gain on the indexes.
Then the last hour came and the market started to peel back. It came nowhere near losing its big gain, but the Dow shed 144 points, the Nasdaq 20, and the S&P 500 15 points. Overall volume was heavier on both the NYSE and the Nasdaq, technically an accumulation session. When volume on up sessions outpaces volume on selling, it is a sign that there are more buyers in the market than sellers, and overall that tends to boost stocks higher: more net buyers than sellers means more demand for stocks.
While volume was higher, it was not relatively strong at all. Volume the past month or more has consistently run almost 2 billion shares on the NYSE, with many sessions topping that level. It's hard to get excited about Nasdaq volume without a 2 billion+ session. Yes there were buyers, but the trade was not at a level one would anticipate if there was a lot of short covering combined with long term accumulation.
In short, while there was a strong point gain on rising volume, it has bear market attributes: volume relatively light on the buy side; a huge point snapback after a big point sell offs. While we like the recovery after the low volume drift lower, the upside action did nothing to really herald the advent of solid, sustained buying. These darn 5% single session rallies just run up, fizzle, and burn out too fast. Without real volume behind them the few funds that are out there buying get run over when the majority decide it is time to once again push the sell button. There needs to be continued, sustained, high volume buying that does not just shoot the market up like a near earth rocket that cannot make it into orbit; the tumble back down can be pretty gruesome as we have seen time and again in this bear market.
Cannot ignore the action.
Still we cannot ignore the upside action that occurred on rising NYSE and Nasdaq volume. That shows there are more buyers out there than on the last round of selling. That means the indexes could provide some more upside once again toward the 18 day MVA or so. Maybe, just maybe stocks can use the Nasdaq follow through and the gains on rising volume to rebuild from the strong distribution they have been under.
This is action somewhat similar to late 1974 when the indexes traded higher and lower as they worked through the last portions of that bear market. We have often talked of seasonal changes in the market that are not unlike seasonal changes in nature. When a season changes volatility rises, e.g., spring storms as winter lets go; blue northers sweeping in during late fall.
Volatility heralds change, and there is definitely volatility now. This action winnows out more of the less committed holders, ultimately leaving stocks in the hands of those willing to hold longer term. That allows a bottom to be set. It does not mean that the market rallies when this process is over. What that takes is increased demand for stocks; since stocks are in hands of committed holders, when the rest of the investing world decides it wants stocks again it takes more money to get them out of the committed hands. That is when the gains really start. That takes a pervasive belief that the economy is good and the future is bright. Looking where we are right now you can see that we are not there yet but are still at the point where the undecided are getting shaken out: talk of buying U.S. bonds, treasuries, 'investing' in your home, gold, real estate, and basically anything but stocks shows that the process is moving along quite well toward forming that bottom to start the move up from.
Don't be fooled, however, by those saying the market will spend years going nowhere. If you look at charts from back in 1974, the market definitely went up. What these folks fret over is getting back to the old highs as if that is somehow equal to parity for all investors. If the market moves up 50% form here we make a lot of money taking advantage of those stocks that are ready to make the move. We buy into stocks, we buy into index options. We make a lot more than 50%. That is the fallacy of those you hear everyday that say 'it won't be like the nineties again.' No, it won't be, but I will let you in on a little secret: investors made a LOT of money in the stock market even before the 1990's. It remains the place where the average Jane or average Joe can use her or his smarts to obtain a much better lifestyle. It is not the same as buying a tech stock and seeing it double in 2 months, but a 20% gain in a month on an investment is, by most any historical comparison, huge.
Cisco doesn't hit a 'home run,' but bottom line improves on more cost cutting and market share.
In May when Cisco cut costs and grabbed more market share it was called a 'home run' quarter. The market rallied, but when the hoopla cleared it looked more like a bloop single. This earnings report shows the same type of gains; more of a pop up than a home run. This is a familiar story among many of the large techs that are able to meet earnings expectations (e.g., Dell): business is not that great, but they are capturing more market share to make up for the overall slower business. While that is a positive for that particular company, especially when a better business climate returns, it is not great news for the sector overall. Business is slow and the behemoth in the sector is soaking up what business there is. That is not a great story for a sustained, strong rally in the market.
Nonetheless, CSCO was moving up after hours, taking most of the techs with it. The QQQ was rising along with networkers, semiconductors, etc. It does not make a lot of sense, but it did not make a lot of sense when the market gave the last 'Cisco rally' in May.
THE ECONOMY
Dollar surges on talk of FOMC rate cut.
Once again the sentiment regarding the U.S. economy has taken a 180 degree spin. Remember when the market rallied on bad economic news because it was thought that the economy really wasn't that bad but that worsening economic numbers would cause the Fed to cut the Fed Funds rate? Remember when that sentiment shifted after the realization that the economy was imploding from 8% growth to near negative growth in Q4 2000? At that point the markets were begging for good economic news. Rate cuts did not do it either; after each rate cut we shorted the market and made a sack of money as the market fell because the Fed did not go far enough and because the economy must have been in worse shape.
Now it appears that there is some concern about the economy moving forward again, but at the same time the market is embracing the idea of a Fed rate cut next week. Apparently the feeling is that the economic news, while less than hoped for, is still showing expansion (what we have been saying the past week), and that a Fed rate cut will help accelerate the pace of what is already improving. Thus the positive response to talk of a rate cut.
Should the Fed cut?
Don't ask us that question; we said the Fed should not have ever raised rates in the first place. The market would have topped off on its own and the end would most likely have been less violent than the 10% swing in GDP growth to recession. Why? Because the Fed always goes too far; it always makes one or two rate hikes too many. Remember how the last one was a full 50 basis points after a series of 25 basis point moves? The Fed was not getting the immediate response it wanted (it never does), and so it jacked up the intensity of the hike. Unfortunately it did not act until over 6 months later to start putting the motor in reverse, much, much too late to undo the damage it had wrought.
But that was then, this is now. Many say do not cut because the economy is already turning around, etc., etc. Problem is, the economy is nowhere near its potential and businesses are still not investing in the new equipment. That is not all tied up in what the Fed does, however. That is fiscal policy as well. Are companies going to make long range plans when the current tax scheme provides for cuts that just get fully phased in at the time they are removed? Of course not. It is impossible to plan with that kind of scheme. What needs to happen is the current tax cuts be made permanent and then eliminate the tax on dividends and capital gains as well. That will get business investment, the dormant part of the economy, showing some life. That will create demand, create jobs, get economic activity up and running, and get tax receipts up higher than they were. That will resolve most of the whining and fighting going on in Washington today. Monetary policy won't do that by itself.
Still, the Fed cannot afford to get behind the curve again. That is what it was doing during the first 8 of the 11 rate cuts; it was lagging the drop in nominal rates as measured by the 2 year treasury note. As long as it was behind, there was no incentive to go out and borrow. It finally got ahead a bit, but with the huge treasury rally over the past quarter it is falling behind again. What is the consequence? Well, there is no incentive to borrow and invest in business. That is what killed Japan; sure it cut rates to zero, but it waited way too long to do it. The deflationary recession in Japan had already killed off the Japanese economy, and thus it did not matter how much the Japanese central bank dropped rates; it had missed its window of opportunity to have an impact. It could not get rates low enough to get ahead of the nominal interest rates and thus stimulate investment because the Japanese economy had already ground to a halt.
Thus, the Fed needs to cut rates to stay ahead of the curve and thus do its part to keep trying to stimulate investment. Those arguing that the Fed cannot use up all of its 'ammunition' are just wrong. If you don't use your ammunition to ward off the first invasion and thus keep the enemy at bay, when they come back they will come in force and that ammunition you saved will be of little use in turning them back. Stay ahead of the curve and you can win. If you hold it back and let things get out of hand, you lose guarantee defeat.
Again, monetary policy needs to be coupled with new fiscal stimulus as well, the minimum being making the tax cuts permanent. Of course democrats (and this is not a political jab; just fact) will be dead against this as they have been all along. That makes it harder to do what is necessary for all of us to have a better economy. Still, with only 9% of those surveyed in a new poll saying they believe what Tom Daschle says as the truth, there is hope.
July weekly retail sales down from June.
We knew this was happening already after the big June run to the stores. July sales were down 0.4% from June after originally expected to rise 0.3%. Everyone knew this was going to be lower, however, and it did not give the market any pause at all. Year over retail sales were up again, rising 1.7% over last July. That continues the string of rising year over year sales, and it also continues to show that the economy is still improving, just not at the break neck pace that analysts, hungry for continued massive growth to pull us out of the recession, desire.
THE MARKET
The market was poised to fall further but the stories from Europe about a large German asset swap into U.S. equities propped the dollar higher (have to buy dollars to buy U.S. assets) and turned down futures into massively positive futures. The gap caused some short covering. When stocks did not come back, there was more short covering. Then on the close there were a lot of sell on close (as opposed to buy on close) orders after a so-so volume session. That is an indication that the shorts were trying to assert themselves again after the big rally failed to show a lot of volume. The question is whether Cisco can spark further upside or if the shorts will take control after just one session. We anticipate a further move up in the morning session that may just run out of gas after the initial run is over and the sellers who say 'so what' to the Cisco numbers come back to selling.
Sentiment Indicators
VIX: 45.73; -3.58. Peeling back on the rally as usual, but it did the damage the past few sessions.
VXN: 64.18; -3.34
Put/Call Ratio (CBOE): 0.76; -0.11. The put/call ratio has been stubborn, not giving the close over 1.0 as the market sold sharply last week.
Nasdaq
Rallied sharply, gapping higher but then closed well off of its highs after tapping the 10 day MVA. A good move, but not powerful.
Stats: +53.54 points (+4.44%) to close at 1259.55. A solid gain, but well off the session high over 73.
Volume: 1.54B (+14.43%). Volume rose but it was still paltry, coming in below average once again as the market tried to rally.
Up Volume: 1.358B (+1.237B)
Down Volume: 172M (-1.007B)
A/D and Hi/Lo: Advancers led 2.36 to 1. Good breadth, reversing the Monday action.
Previous Session: Decliners led 2.47 to 1
New Highs: 14 (+3)
New Lows: 142 (-154)
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq surged up to the 10 day MVA on the high (1279.57) but then sold in the last hour. It did not give up the gains so you cannot call it a reversal. Nervousness before Cisco earning? Maybe. Shorts before the Cisco numbers? No doubt that was some of it. Will the shorts hate it Wednesday? At least in the morning. The point we have to really watch on any further move up is the 18 day MVA (1305.78), the cap on each rally attempt since mid-May. It is only a day away from that level on the Tuesday close, and how the Nasdaq trades around the 18 day MVA (particularly the volume) tells us to get more puts ready or look for more upside.
Dow/NYSE
A higher low on some rising volume as the Dow turned up well above the July low. Volume rose, but it had trouble with the 18 day MVA, and that will be where it is tested again on this move.
Stats: +230.46 points (+2.87%) to close at 8274.09. A massive rally but shed 144 points on the last hour trade.
Volume: 1.504B (+7.13%). Rising volume but still below average volume. It was not enough to be considered real accumulation.
Up Volume: 1.228B (+1.066B)
Down Volume: 261M (-977M)
A/D and Hi/Lo: Advancers led 2.92 to 1. Flipped the Monday breadth as well; they were buying as many as they sold Monday.
Previous Session: Decliners led 3.13 to 1
New Highs: 26 (-8)
New Lows: 91 (-127)
The Chart: http://www.investmenthouse.com/cd/$indu.html
The Dow did not gap higher but climbed all session before it peaked and sold off a third of its gain in the last hour. On the high (8418) it tested the 18 day MVA (8456.21), and that helped to push it back down. We don't want to give the impression it was a bad session; the Dow made a higher low and rallied on some rising volume. It just was not a solid upside move; it had several warts on it with the lukewarm volume and close well off the high. It is definitely capable of rallying higher from here and most likely will do so early Wednesday on the general good will of the CSCO earnings. Whether it takes out 8500 and then 8736 (the middle of the attempted double bottom), however, is another matter. The below average volume is a governor on that.
S&P 500:
The large caps also tested toward the 18 day MVA on the high (874.44) before giving back 15 points to close just above some support at 850 and below the 10 day MVA (868.78). It too made a higher low, rallying back up on slightly rising though still below average NYSE volume. It has some immediate resistance at the 18 day MVA (882.32) and then the middle of the double bottom pattern (of sorts) at 911.64). Big move that will need more volume to continue and really challenge that resistance. It looks as if it will attempt the move early Wednesday on the heels of the Cisco earnings.
Stats: +24.97 points (+2.99%) to close at 859.57
NYSE Volume: 1.504B (+7.13%)
The Chart: http://www.investmenthouse.com/cd/$spx.html
End Part 1 of 2
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