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us stock market, trade stock
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8/10/02 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS:
Targets hit alerts issued Friday: None issued though many are getting close.
Buy alerts issued: TEN; IVGN; SIE; NBIX; USPI
Trailing stops issued: None issued
Stop alerts issued: None issued
You can sign up for Technical Trader alerts at the following link:
http://www.investmenthouse.com/alertttr.htm
Emails: We love your emails. We receive hundreds of emails a week, but we don't mind. We respond to them all as fast as we can, so bear with us.
SUMMARY:
- Low volume Friday to start the consolidation.
- Prepare for consolidation of the recent gain.
- Interesting views on the Tuesday FOMC meeting, but that is about all they are.
- Is the climate really right for a longer term bottom?
Flat lining on a late summer Friday.
After three solid upside sessions it appeared the consolidation of those gains started, though the trade was so light it was hard to take the action's pulse. It was definitely one of those sessions late in a run: many stocks were up and hitting buy points, but there was no volume behind them. They were just testing the waters before the market consolidates those nice gains from the week's trade.
Friday looked like the start of a consolidation.
Given the alternatives, Friday was a good session. The market was 'mixed' with techs down while large cap old economy along with small and mid-caps were up. Volume was very low, rivaling holiday action. We wanted the indexes to jump higher toward the 50 day MVA and then use the late July high as support, but you cannot have everything. The ambivalent action at the 'hump' from late July indicates this is where the indexes will take a breather on this run that more and more resembles the action up off the lows in the January 2001 rally and the September 2001 rally.
In keeping with those moves the indexes and their stocks need to be a bit stingy with their gains from last week. The move after the late July turn was a bit deep (the Nasdaq came almost all the way back); this time around it would be best for the consolidation to hold a bit tighter and be a bit stingier with the gains. Holding at 10 or 18 day MVA on the Dow and S&P 500 would be great. In any event the indexes need to again make a higher low on any test lower and then resume the move higher. That would continue what we consider very good action in building off the July low and sentiment extremes before another test that forms a longer term bottom after 28 months of bear action.
Speaking of bears, we can almost be assured that they will take a run at the market again. They have not gone away, but there has been a change of character where they do not have free hand at pushing stocks around. Still, the Nasdaq and SOX have not even cleared their 18 day MVA on this move, so it is hard to say there has been a sea change in the market. There were some sentiment extremes (and still are; bearish advisors topped bullish advisors once again) that usually mark some change in character, a modest follow through to the late July reversal, and a couple of legs up from that low. After getting just slaughtered, that action looks pretty good. It does not, however, mean that the market is on the rise for good. As we have discussed, most likely this rally will give way to another test of that July low. If this can sustain itself for another three weeks, the timing of the test would be good, coming in September to October, a good time for the market to bottom.
THE ECONOMY
The big event this week is the FOMC meeting on Tuesday with results out at 2:15ET. There has been a lot of debate about whether the Fed will or will not cut rates at that time. The Fed Funds futures market says not yet, and at this juncture that is a very good indicator unless the Fed wants to surprise the market. Some high powered names are saying a cut is coming, some supposed 'insiders' are saying no way, and some are saying it should not come because it could cause a market panic or because it would fuel inflation.
Needed or not? No double dip, inflation could start poking around.
While it probably would not hurt, what is really needed is that certainty on the fiscal side: lower government spending on pet projects, permanent tax cuts so business would start investing. That aside, the Fed still has the monetary pedal pushed toward the floor. So much so that the ECRI inflation gauge indicates that the fall in the inflation cycle has bottomed given the current level of monetary stimulus.
The ECRI is a very solid indicator of economic activity. It correctly called the upturn in 1991 and 1992 and the downturn in 2000. It is showing no signs of a double dip recession. Back in 1991 and '92 there was talk of a double and a triple dip recession. Let's face it, there always is, but it was also campaign time and the rhetoric was high as that mildest of recessions was labeled by those seeking power as the 'worst since the Great Depression.' My goodness; don't recall any dustbowls back then. Anyway, the ECRI dipped back then, but as it is now, it showed no subsequent dip. Moreover, if there was going to be a double dip, the ECRI would need to dip lower than it did 10 years back; it is not doing that. It has turned up above the low 10 years ago. As the indicator looks down the road 6 months and more, it would take an almost catastrophic drop to change the current trend
On top of what a very analytical indicator is showing there is our discussion two weeks ago about how it always appears there is a double dip recession simply based on the mechanics of how a slowdown and re-ignition of the economy takes place as well as how the government figures GDP. That combination of events always makes it look as if a slowdown occurs because inventories rise and fall, and that among other items impacts the government's calculations of economic activity. It is incredible that this ancient method that does not take this into consideration is used, but that is what we have and that is why we are hearing all of this noise about a double dip. Heck, one of the main proponents of the double dip idea this time around totally, totally missed how severe a slowdown was in progress and predicted a 100 basis point rate hike after 2001 just three months before the Fed had to start slashing rates. Consider the source as the saying goes.
THE MARKET
Not much action Friday but it was what you would want if you cannot have big gains. For the third session the index started lower and then rallied off of those lows. That is healthier action given the solid rise on this leg. After three sessions higher the indexes are ready to give way to a downside move as they tested important resistance near the late July high. After making a higher low on the first pullback off the July low, the indexes need to pullback on low volume, hold most of the gains, and do it all again. It is important that they make that higher low and move up on another leg higher that lasts through August.
Sentiment Indicators
Is the market climate right for a longer term bottom?
At the recent July low we noted that sentiment indicators such as the put/call ratio, volatility index, bulls versus bears, newspaper and magazine covers, and party conversation indicated that sentiment was negative enough for some form of longer term bottom. On top of that there were other signs such as volume expanding in all of June and then shooting higher in July, usually a dull time for the market. New lows exploded in the last few down sessions in July. All sectors, even those that were leading up into July, got hammered.
Back in 1999 and early 2000 party talk often touched on the market and was how stocks just kept going up; "I have got to get in on this" was a comment we heard quite a bit. When the bust came, the market was not mentioned. After 28 months of flogging and the failure of the September 2001 lows, party talk came back to the market. This time it centered on how bad it is and what else someone can make money at.
That last point is something we have not touched on before but something that we keep hearing about. The idea is that when there is an asset bubble that bursts there won't be a recovery until everyone swears off that asset class. Many of these folks are still arguing that too many people still look to stocks as an investment vehicle for the market to bottom.
First, there will always be investors in the stock market. Even when the market crashed in 1929 through 1932 there were still investors. What is interesting, however, is that the last rally was fueled by technology buying and leadership. Note how NYSE volume has outstripped Nasdaq volume the past few weeks. Thursday on a good session NYSE volume again outpaced Nasdaq volume. Nasdaq volume just barely shaved NYSE volume Friday; neck and neck. What investors are doing, and what is typical in the cycle of investing, is shunning the last speculative group.
The investing cycle starts with investors moving into 'safe' areas; consumer products, healthcare, medical, financials. As the cycle progresses they start moving more into growth areas to capture better gains. The cycle continues as investors move to more and more speculative areas until the economic cycle starts to slow (and sadly that is usually through the fumbling of the Fed as it did in 1999 and 200 with the big Y2K cash infusion and then sponge to sop it all up). At that point the more speculative areas crash as they were the last to get money and the first to lose it. In the early 1980's it was the biotech sector that was the last and greatest speculative part of that market surge. The biotechs were going to come up with miracle drugs to save us all. Of course that idea was exploded and when they went down the market rolled over.
So, investors staying away from techs and going back to what is 'safe' is typical action. It is also indicative of investors giving up on that last area of 'mania' in the cycle. When all else fails, look at the facts as shown by the hard numbers.
Second, look around. Listen. The stocks editor on CNBC wants to be called the real estate editor. CNBC, even as the market bottomed in July and the recent rally started, continued (and still is) airing a nightly series on what else you an invest in other than the stock market. Real estate, homes, art, wine, CD's, bonds (and bonds, and bonds) are all better alternatives than the market, or so the bit goes. All financial investors are saying a more balanced approach is needed, just as they go and chase the bond market and overweight clients in bonds just as they did tech stocks in 1999, 2000, and 2001. Their idea of balance is putting stocks at the smallest percentage. Outflows from equity funds continued this past week at a huge pace even as the market continued its rally off of the July low. The vast majority of the investing class is looking and chasing alternatives to stocks. The facts are there again, but it is chic right now to be negative on stocks. That is good for stocks and those who listen to what the market is saying.
VIX: 39.36; -0.44. The volatility held flat, matching the session.
VXN: 58.7; -0.65. Ditto.
Put/Call Ratio (CBOE): 0.69; -0.06. When the market rises, the ratio falls, but it is still at the 'high' end of the range even after a strong advance off of the July lows. That is a good contrary sign that there is still significant anxiety about this rally.
Bulls versus bears: As reported Thursday, the bears once again overtook the bulls as far as their view of the market, another good sign that pessimism remains at a healthy level. This is punctuated by the 'special reports' investors are receiving from some investment services discussing how the rally off the July low is 'already over' and that the market is set up for another cataclysmic decline. As we discussed last week, however, the market is trying to build off of that low and is showing some positive characteristics as it does so. While it will most likely test that July low again before a longer term move would be in store, the market is not showing signs of a cataclysmic sell off starting again just yet.
Nasdaq
Struggling at the 18 day MVA, barely holding the level on the close as volume dropped way off pace. Not a great session, not a bad session. Just right? We will ask Goldilocks later.
Stats: -10.4 points (-0.79%) to close at 1306.12
Volume: 1.33B (-13.49%). Backed off even further below average, down to levels hit the prior Friday and Monday when the market sold. That is better action if you have to have selling, and you have to have selling at some point.
Up Volume: 397M (-782M)
Down Volume: 913M (+581M)
A/D and Hi/Lo: Decliners led 1.33 to 1. Very even session.
Previous Session: Advancers led 1.56 to 1
New Highs: 23 (+1)
New Lows: 116 (-17)
The Chart: http://www.investmenthouse.com/cd/$compq.html
After topping the 18 day MVA (1304.73) Thursday, the Nasdaq tested the 10 day MVA on the low (1289.10) and fought to close just above the 18 day. It is hardly a clear break over that level; indeed the lower volume the past two sessions when it moved over that level indicate that the move had lost some momentum. After a 100 point move off the recent low hit Monday, the index is ready to consolidate a bit before taking on the late July hump at 1354.48. It has lagged the other two indexes on the move. The SOX is really dragging. Thus how the techs act on this move lower will be important for the entire market as it cannot handle indexes heading in different directions. It would be nice to see it hold at some level such as the 10 day MVA (a pipe dream) or 1250. Indeed 1250 is roughly a 50% retracement of this move, and that would be typical. In any case it needs to make a higher low than 1206 where it turned back up early in the month.
Dow/NYSE
A modest move higher after clearing the 18 day MVA Thursday. It is right at the late July high and ready to take a rest.
Stats: +33.43 points (+0.38%) to close at 8745.45
Volume: 1.249B (-24.49%). Lowest volume since early July as a summer Friday set in with full force.
Up Volume: 772M (-477M)
Down Volume: 484M (+113M)
A/D and Hi/Lo: Advancers led 1.24 to 1. Modest internals for a modest session.
Previous Session: Advancers led 2.24 to 1
New Highs: 42 (+3)
New Lows: 63 (-22)
The Chart: http://www.investmenthouse.com/cd/$indu.html
Held over the 18 day MVA (8510.74) and held inside the March downtrend channel after moving back up into it Thursday on rising volume. The action Friday was much weaker as it barely cleared the late July high (8736.59, closing). As noted before, between that high and the 50 day MVA (8901.04) is a logical plays to stop and take a breather after a 700+ point move last week. It will either spurt up to test the 50 day MVA early this week and then sell back some or it will start here at the July high. The 18 day MVA would be a great place for it to hold on a test lower.
S&P 500:
The large cap index closed just off the July high as well (911.64) on that low NYSE volume. A 70+ point move of its own needs some consolidation. The index is sitting at the bottom channel line of the March downtrend line, showing a doji that tapped close to the 18 day MVA (886.80) on the low. It too can run up to the 50 day MVA (938.77) as a last spurt on this leg, but the momentum definitely slowed at the end of the week. A good test would be down to the 18 day MVA or the 10 day MVA (882.46) would be great if not a bit idyllic. As with the other indexes it needs to test and then turn back up prior to the August low at 834.60. Thus far the price/volume action has been good (not great; could use more upside volume), so the action supports a lower volume test for now.
Stats: +3.18 points (+0.35%) to close at 908.64
NYSE Volume: 1.249B (-24.49%)
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
Last week the indexes showed some of the new character, rising toward the close of the sessions, holding onto gains, making a higher low, some positive price/volume action. It is almost sad when you tally up a relatively weak volume move and feel good about it. Be that as it may, when markets form bottoms your emotions tend to tell you it is not happening. You have to let the market be the guide, attempting to view the action in an emotion-neutral environment. In short, your gut says stay away but the market is showing something it has not shown in months and months.
You have to act when it shows you should act, either to the upside or to the downside. Sentiment extremes, strong volume on the selling, explosive new lows, extreme volatility, and then a recovery that is starting to show some better volume and some leadership in drugs, medicals, healthcare, and financials indicate that the upside is trying to assert itself. This is most likely just a pre-rally, a necessary move up before an ultimate test of the July lows, but when I look to the market to make money, I want to take advantage of the moves it is showing me today so I can make short term gains as well as position myself for longer term gains.
This week not much may happen before the FOMC announcement Tuesday afternoon. The market will most likely use the impending FOMC meeting as a reason to take some profits. The idea that there will be no rate cut will take some of the steam out of the market though that is more of an excuse to take some profits than a real desire to dump stocks for fear the Fed won't cut or that the economy is weaker than thought. That might give the market enough pullback time, but it would be cutting it thin. The market needs three or so days of consolidation for the next move higher.
Monday we anticipate more summertime action before an FOMC meeting: light volume. We want it to be light volume and slightly lower prices. This time around it would be best if the prices did not sink as low as the prior move. The market is now showing more upside bias, and it is a matter of patience to let it work through a consolidation and then act when the stronger stocks start moving back up after testing their moves. If the volume spikes up on the selling and stocks start popping below support levels that is a problem for the rally attempt. It can survive a session of mild distribution, but if the selling intensifies this new rally will have problems. For now it is showing positives so we let the move run.
End Part 1 of 2
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