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us stock market, stock trading newsletter
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2/26/01 Technical Traders Report
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Technical Traders Subscribers:
TONIGHT:
- Rally continues on rate cut hopes as Greenspan updates his testimony.
- Not that a rate cut would be bad . . .
- Interest sensitive stocks perform the best, but they will need that rate cut or face potentially dire consequences.
- Existing homes sales report disappoints as Texas Instruments, Proctor & Gamble, and Nike all warn.
- Subscriber Questions
- Team Trades
A slow start but the rally continues with some help from its catalyst.
The Dow was pretty solid but no rock, and the Nasdaq was bouncing between positive and negative territory all session until Wayne Angell again hit the wires and upped his rate cut percentage to 80%. The reason: word was that Greenspan was revising his testimony from his February 13 address to the Senate, an unusual move. Of course, it has also been unusual for the second half of son of Humphrey-Hawkins to come 14 days later, and there has been some apparent weakening in the economic numbers. Thus, it does not seem all that unusual that there would be some revisions. Is that worth betting on a rate cut? Some apparently believed that to be the case.
The market did not race ahead on the news, but it started a building process that carried the Dow to a 200-point gain and helped the Nasdaq to a 2% run. Not bad, but as we said over the weekend, rallying on the odds of a rate cut can be a recipe for disaster if the cut does not come or it does and there is little surprise in it. The economy and thus the market will ultimately benefit from it, but will it be enough short term to unleash the institutions and their money? That will remain to be seen if in fact a rate cut does come this week. We agree with Mr. Angell as we have been stating since October that the Fed had to start cutting rates fast. It got behind the curve, and it does not want to do that again. Yet, it does not want to appear to be merely trying to rescue the market. A real dilemma, and as with the Fed's refusal to lower rates during the election turmoil, we know who will suffer for that internal Fed conflict.
There is no doubt that the market will ultimately benefit from the rate cuts as they will lead to growth in earnings. But at what cost will it occur? Just as the Fed opened Pandora's box when it started raising interest rates when it was not necessary and then was hit with the energy shock, now that it has cut the supply side of the economy to ribbons and slowed the economy there are signs of inflation. While that can be understood when an economy slows down, money supply is really moving up, and if there is not a lot of stimulus to get investment going to get supplies of goods to the market (i.e., a real tax cut that includes capital gains and withholding cuts), we have the classic inflationary equation: more money chasing a static pool of goods and supplies.
Interest sensitive stocks rising.
After leading the market higher this year after the Fed rate cut, the interest sensitive stocks were showing fatigue. Retailers were still solid, but starting to exhibit softness. Financials had already started to roll over and were selling on sharp volume. Materials and construction stocks were still holding on, but were treating water.
The talk of rate cut probabilities for this week has given all a boost, but they are not yet all breaking to new highs just yet, and volumes on the moves higher has been mixed. Several are just ready to explode to new highs . . . if they get the catalyst. The talk of a rate cut has started them higher, but they need the rate cut to cut them free. If a real cut comes, i.e., 50 basis points, we feel the retail sector is ready to really move up and exhibit more leadership. If it does not, we could have a problem not only in retail, financial and materials/construction, but in all the techs that have been clawing back up a bit the past few days.
Even with a cut, will that solve the short term market problems? We could see select retailers do very well, along with other leading stocks (SGR, LLL, etc.), but that does not mean the overall averages would zoom right up and recover. This market has not responded to rate cuts as it has in the past, and while we still feel they will win out, there is a lot of money still under lock and key as some major fund managers refuse to buy until they see actual bottoming in earnings; some might even wait for signs of improvement based on a fear of a 1929 market scenario or the 1990's Japan stagnation. Of course, as we have said before, that can be a self-fulfilling prophecy. No, what we would have to see is continuing recovery to draw that money into the market. If the market can make it to 2400 or 2500, it will be very interesting what it does from there. We will have to keep an eye on volumes as it continues to move, but at this point we are not confident that it could break through.
Fed Funds Futures building in a cut, but when?
The April FFF contract is pricing in 75 basis points in cuts. As there is no meeting on April, that means 75 basis points by the March 20 meeting. After that, no more cuts. What the traders are doing is betting the Fed will take back all cuts and leave it at that for now based on what the economy is showing. Will the Fed cut before then or will it wait for a massive cut? The Fed raised rates slowly, but that was because the economy was not responding (it never does until it craters). Now that it has dropped off sharply, will the Fed just go ahead and drop rates 75 basis points now as opposed to later? Don't count on it. The Fed is still too scared, playing from behind but unwilling to do what is really necessary to win the game. It should just drop rates to its target immediately and let the markets and the economy run. We still believe the Fed will cut before March 20, but it could be after the testimony to Congress. We feel that could give the markets more of a boost than one before the Wednesday testimony as it would not be built in as much.
THE ECONOMY
Existing home sales fall instead of rising.
Sales fell 6.6% to 4.65 million units, well below the 5 million (on an annual basis) expected. December sales were revised upward to 4.98 million units annually from the previously reported 4.87 million units. So, December was stronger than expected, and the revision made it even stronger than previously thought. January was lower than expected, but still stronger than the rest of the economy. Problem is, if home buyers are cooling off, one of the main catalysts of the economy that has kept it from being totally in the toilet is failing. There is no way to find a silver lining in that.
Indeed, this is even more critical to us than the consumer confidence report. Sentiment is ethereal. It gives you a feel for things, but it is not hard data. When the real numbers come in slower, that is the real story. Home sales had been defying sentiment indicators for several months. That is no longer the case. Sales are still relatively strong compared to the rest of the economy, but if they roll over, that cuts off durable goods orders, construction materials and on down the line.
Gold stocks are running higher. Gold prices are not shooting up, but these stocks have been running the past few sessions. We never like to see gold start to raise its head as that is another sign of longer term inflation. Commodities continued to tank today, and the 30 year note gained a half point, moving down the yield. That is still good, but the gold button is something to watch. It can be a silent killer even as everyone talks about the economic slowdown.
THE MARKETS
Overall market stats:
VIX: 27.34; -3.00. Volatility dropped precipitously with the rallying today. In January when the VIX hit over 34, it took 10 sessions to fall to 26. When it hit 35 in December, it took 7 sessions to hit 26. This move to 27 has taken less than 2 sessions. In December when the VIX hit 26 the rally was over. In January it folded down to 24 before the rally ended. In any event, the spike higher has very quickly melted 7 points off of the index. That does not give us too much hope for a lot more rallying without another catalyst, e.g., a rate cut.
Put/Call ratio: 0.52; -0.19. Massive drop in put buying on today's less than inspiring rally. It never really got all that high on the selling in February, and as with the VIX, the quick decline simply does not bode well for the current rally attempt. The ratio never spiked very high and it was quick to reverse on the first signs of a weak rally. Most frustrating.
NASDAQ:
It took awhile and another promise of a rate cut by Wayne Angell, but the Nasdaq did manage to put together a very nice gain on the session. Volume was lower, however, demonstrating that a lot of people seemed to simply be waiting for a rate cut before they are convinced. It was not an impressive day, and we are looking for more evidence of strength, but with those waiting to see who is right about the rate cuts.
Stats: Up 45.99 points (+2.0%) to close at 2308.50.
Volume: 1.835 million (-18%). Volume continued to scale back on the rally, with today's drop being significant. Sure a lot are waiting to see what the economic numbers are and what Greenspan says, but the fact that few have the confidence to participate in a rally says a lot. Up volume was a solid 1.144 billion shares wit 659 million to the downside. Still, this is not the price/volume action you want to see when a market is trying to recover. Looks more and more like simply an oversold rally.
A/D and Hi/Lo: Advancing issues took the lead 1.81 to 1 (decliners led 1.22 to 1 on Friday). New highs rose to 63 (+23) while new lows dried up to just 53 (-132).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq has bounced up off of its down trendline after testing it on its lows both Thursday and Friday. In a healthier market that is a prescription for a rebound, but today's move needed the index' newest and latest cheerleader to help it make that second straight gain. It rammed its head into resistance at 2300, and it almost did not clear it. The declining volume does not give the move much momentum, however. We were looking for a move to 2400, but it is already struggling at its closing price at the first of the year.
Double bottom or head and shoulders? If you look at the December high as the start of the pattern, you can see the selloff, the rise in January forming the middle of the W, and the recent selloff setting up the last leg of a double bottom pattern. It slightly undercut the left leg, and that is good to clear out the last week sellers. Problem? A double bottom is a fear pattern: you want to scare the sellers out. Looking at the sentiment indicators, the bulls remain bullish, the volatility is not relatively high, and put buyers are nowhere to be found. That does not appear to indicate the right psychology for a double bottom. Looking at the December and early January lows, the subsequent rise and fall back to previous lows, one could also argue the Nasdaq is developing a head and shoulders pattern that could be setting the stage for another leg down. If it rallies to the 2500 level and fails, that would be a weak right shoulder, and weak right shoulders can lead to pretty sharp downturns. At this point we will have to see how it unfolds. We don't have a lot of confidence in this rally right now unless its dynamics change.
Dow/NYSE: Triple digits on the Dow, but lower volume as well. The Dow cannot put together the right price/volume action to propel the index out of its range. It is locked there for now, and it needs a change in dynamics to get it moving as well. It could easily run higher, but it has serious resistance and has not been able to put it together yet.
Stats: Up 200.63 points (+1.9%) to close at 10,642.53.
Volume: NYSE volume again slid back, falling to 1.124 billion shares (-8.7%). Up volume was well ahead of down volume, 850 million shares to 240 million shares. Again, many were sitting on the sideline, but you just don't like to see increases on such anemic, below average volume if you are looking for a more long term move. On the other hand, if you want to play a trading range, this is it.
A/D and Hi/Lo: NYSE advancing issues took over again with an impressive 2.55 to 1. The smaller guys were doing the moving and shaking today. New highs jumped to 98 (+33) while new lows fell to 22 (-30).
The Chart: http://www.investmenthouse.com/cd/$dja.html
A nice recovery off of support after some pretty deep selling early Friday. The Dow shot back up and is ready to challenge resistance at 10,700 to 10,750 (down trendline, 200 day MVA, price consolidations). It has a load of overhead, but it can clear these levels and still have to deal with 11,020. The Dow is hanging in there, refusing to give up and fall out of its trading range. If you cannot get new highs, holding in a trading range is the next best thing.
S&P 500: The big caps continued their reversal from tapping a new 52-week low on Friday, but as with the other indexes, volume fell on the continued move up, a sign that the reversal off the new low does not have a lot of followers. We need to see strong volume on these moves up. After such a long bout of selling high volume on the selling is not really primary, but we do have to see buyers come in with aggression. There was some pent up buying, but we don't see a torrent of buying hitting the market. 1285 to 1300 is going to be a key level for the index if it continues to move up before Greenspan's Wednesday testimony.
Stats: Up 21.79 points (+1.7%) to close at 1267.65.
Volume: NYSE volume sagged again on an up day, falling to 1.124 billion shares (-8.7%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
Same place we were in on Friday: a rally on news of a possible interest rate cut, but no real commitment to it. Perhaps investors are just waiting to see, but markets don't usually work that way: if there is belief something will happen, money moves to it in a big way. We are not seeing that type of support for the move thus far, and that keeps us looking for the point at which it will fail. We don't want to approach the market with a preconceived notion, and thus we continue to evaluate the data each day as we see it. Right now while it showed us this oversold rally was coming, it is showing us the rally, and it is showing us that the rally at this stage is not very strong.
While there are always upside plays we can make and will make, we have to be ready if it starts to roll over again and start selling with vigor again. If it stalls there may just be selling back down to the lows where it finds support again. That is okay. We said last week that if we get a trading range, that is something we can play with a lot of success and confidence moving forward. Indeed, if the market settles down into a trading range as the Dow has shown, that usually leads to a building of pressure to the upside that leads to a breakout. Beautiful. We can play the up and down movement waiting for the breakout, and we can then catch the breakout. If it collapses, that is no fun, but we use our stop losses to clear out of stocks we want to sell and we ride the downside with downside plays. Take what is given.
As for tomorrow, consumer confidence is set to come out, and it is supposed to stink. There is fear it could be even lower than previously anticipated as the Michigan Sentiment survey was very weak. Paradoxically that could further the rally as it gives more credence to the argument for an early rate cut as speculation about that is the primary catalyst for this rally thus far. We would like to see that happen, and we would like to see the rally expand with solid volume. But what we would like is often not how the market acts. Thus we are going to continue to play the solid upside plays that have been presenting themselves this past week and today while we get ready for a potential return to the selling we have seen. If the Nasdaq can handily clear 2300 tomorrow, we are still looking for the 2400 to 2500 level to put the brakes on it. If volume stays light on the move up we are pretty confident of that, but we will let the market show us when it is time to make the move.
Support and Resistance Levels
Nasdaq: Closed at 2308.50.
Resistance: 2400 to 2500. Then 2650. 2890 to 2900 is next before the 3000 level.
Support: 2050
S&P 500: Closed at 1267.65.
Resistance: 1285 to 1300. Then 1335. Then 1360 to 1375.
Support: 1200 is the next clear level, and it was almost hit on Friday's low (1215.44).
Dow: Closed at 10,642.53.
Resistance: 11,020 - 11,028. After that, 11,400.
Support: 10,300 - 10,400. Then 10,000.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
2-26-01
Existing Home Sales, January (10:00): 4.65M actual versus 5.00M expected and the revised upward 4.98M for December.
2-27-01
Durable Orders, January (8:30): -2.5% versus 2.1% prior.
Consumer Confidence, February (10:00): 111.0 versus, 114.4 prior.
2-28-01
GDP-Preliminary, Fourth Quarter (8:30): 1.1% versus 1.4% prior.
Chain Deflator-Prel., Fourth Quarter (8:30): 2.1% versus 2.1% prior.
Greenspan, Son of Humphrey-Hawkins, Part 2 (10:00).
Chicago PMI, February (10:00): 41.3% versus 40.2% prior.
3-1-01
Auto Sales, February: 6.5M versus 6.7M prior.
Truck Sales, February: 7.0M versus 7.5M prior.
Initial Claims, 2/24 (8:30): 350K versus 348K prior.
Personal Income, January (8:30): 0.5% versus 0.4% prior.
PCE, January (8:30): 0.6% versus 0.3% prior.
Construction Spending, January (10:00): 0.5% versus 0.6% prior.
NAPM Index, February (10:00): 42.0% versus 41.2% prior.
3-2-01
Michigan Sentiment-Final, February (10:00): 87.8 versus 87.8 prior.
SUBSCRIBER QUESTIONS
Q: Your weekly newsletter is the best I have ever read. Could you please include in your reports the historical price ratios you reference? You state the put/call ratio has not hit its high. Could you tell me what is the historical high? Thanks.
A: Thank you for the compliment. For the put/call ratio we look for historical comparisons we want to see the ratio close over 1.0. All of the major reversals in the past that have been reversals based on high volumes of selling and fear have shown a closing put/call ratio of value of greater than 1.0. The highest we have seen is 1.7.
TEAM TRADES
SGR: Shaw Group is one of our new leaders that is really leading. It had formed a 7-week cup pattern that saw a breakout to a new high seven sessions ago but on just average volume. We like to see those breakouts on a substantial increase in value. Well, pulling back right to the breakout point late last week and finding support on the 18 day MVA, we were interested. Also, it showed a nice volume spike last Thursday as it made a solid move up. Those volume spikes are key in showing us that there is a lot of buying interest.
With that in our back pocket, SGR was one of the stocks we were looking for this week: leading stock in a leading sector and looking ready for a new high. Today it got right on board and started up. We were tempted to jump right in, but in this market there is that conundrum: do I get in right away or do I wait for the stronger move? If I wait, will it be over at that point?
We split the difference. Whenever we get those type of choices we often buy a little now and then a little later. We like SGR and we were looking for stock positions. It opened and ran to 51.75 in the first 20 minutes. We were looking for a pullback, but after holding steady for 10 minutes it started back up. When it did we were already putting in an order. The spread was 51.65 by 51.94. We put a limit order in at the ask, and after seeing it bounce from there to 51.90 to 51.86, but the fill came at 51.94. Hmmmm. The stock then ran to 53.50 and started a sideways consolidation. We saw strength in the NYSE, and we were interested in more positions if it cleared the early high. We set a buy stop at 53.65. The stock moved up and the fill was at 53.64. It was showing excellent volume and moved up to right at 55 for the close. Solid move by a solid stock.
End Part 1 of 2
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