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us stock market, trend trading stock
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9/18/02 Stock Split Report Update
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Stock Split Report Subscribers:
Monday and Wednesday we give update reports showing the best plays for the next session. Full reports Tuesday, Thursday, Saturday.
MARKET ALERTS:
Targets hit alerts issued Wednesday: OEX put; DJX put (second target); AVE (put); MTB (put); PPG (put)
Buy alerts issued: EXPE; AXP; UPC; CYN
Trailing stops issued: None issued
Stop alerts issued: DCOM; ACXM
You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.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:
- Market plunges to next support and bounces on some short covering (i.e., profit taking).
- Economic numbers will help Q3 GDP, but they are numbers games.
- Indexes still in downtrend despite recovery from next lower support levels.
Downward slide continues as indexes touch lower support and recover.
It was a classic scenario. Some will say 'look how the indexes rallied when they hit support!' Yes, they did that, and volume was solid on the move. Stepping back a few sessions, however, and the picture takes on a different view. After trading roughly laterally since the start of September where the indexes tried to rally but failed, Tuesday the broke lower on the strongest volume in a month. Wednesday they sold to the next support level. At that point they started to rally. That is the classic scenario we have seen again and again: indexes trend lower, hit new lows or the next lower support level, and then they rally back up on short covering. Short covering typically is accompanied by those volume increases as the shorts move in to buy the shares they sold earlier. When there are abrupt sell offs in a downtrend, the rallies back are on solid volume as well as the shares sold are repurchased.
As we have noted, in uptrends and downtrends stocks and the indexes move up and down within that trend. Heavy selling or buying is usually met by somewhat equal buying or selling in the other direction. Nonetheless, unless the trend is decisively broken with decisive internals the overall trend stays in place. What happened today was a reaction bounce on some profit taking/short covering after a solid breach of the September trading range and completion of the short head and shoulders patterns. Without a test of the prior lows, no sentiment indicators at extremes, and no change in economic status, there is nothing to act as a catalyst to a sea change that would break the indexes out of this slide.
THE ECONOMY
Weekly mortgage applications fall 8.7%.
After a big 16% jump last week applications had to cool off. It did not help that mortgage rates ticked higher. Consumers are all trained now to look for lower prices, and upticks are given the cold shoulder as consumers prefer to wait for prices and rates to start back down.
Given that it looks just like another downtick as rates upticked. That is what it was, but it also shows something else: if rates rise and don't come back, the housing market is going to stall. It may not tank but the rush to refinance will wane and the rush to home ownership will slow as well. Why is this important? Because all of those on the Fed, the economists, and our leaders seem to think that the recovery is moving ahead just fine. It is underpinned, however, by home buying and consumer buying. If that slows the economy slows because there are no other sectors, none, that are actively consuming. Business is still awash in oversupply after 2 years, and even with the current consumer demand levels (which are historically high) there is still no need to ramp up production or improve business infrastructure to handle the demand. This is the real Achilles heel for those (Fed included) that believe the consumer will help pull the economy out of the pathetic state it is in. If the consumer has been consuming at such tremendous rates for years (remember, Greenspan was citing 'runaway' consumer demand as a reason for raising interest rates), how is continued consumption at that pace (and probably at a slower pace given the job losses) going to turn the economy when it could not prevent the recession? The truth is not being told or they are the biggest stone heads to walk the planet. You make the call.
Consumer Price Index +0.3%.
This is the high mark since November 2001 and at a 1.8% year over year rate, it is indicative of some pricing pressure. Not much, however. There is a lot more risk of deflation in this economy than inflation. Those talking of inflation risks cite the rate cuts, tax cuts, refinancing and the like that supposedly make so much more cash available to the consumer to drive the economy. It all sounds so great in theory, but in the harsh reality of every day life, it is not.
Money is not that easy.
What do we mean? Despite the 11 rate cuts that make money available to banks and other lenders at low rates, banks are not having an easy time of it. Regional banks have been under the gun for the past two weeks as it becomes clear that the lower interest rates are hurting their primary methods of making money. Larger banks such as JPM are also under a lot of pressure. Even though the cost of money to banks is lower thanks to the interest rate cuts (Fed rates cuts are not cuts of the interest rates you or I pay but are cuts of the Fed Funds Rate, the rate banks charge one another for loans), the cost of money for you and me and the small business next door is not falling that much.
This has been an ongoing problem. What happens is the cost of money to the lender is lower, but for various reasons the cost to us, a.k.a. the spread, is higher. In other words the 'spread' between what it costs banks to borrow versus what they charge for us to borrow is wider, ostensibly giving the banks more profit. Two big problems have kept a lot of that money out of the economy since the Fed first started lowering rates.
First, the Fed placed hundreds and hundreds of banks on restrictive status in late 1999/2000, meaning they were limited in how much and to whom they could loan. Regardless of rate cuts, if a bank is not allowed to lend to those needing the money, the money stays put and does not benefit the economy. Second, with the recession and continued erosion of balance sheets for businesses and individuals, banks are concerned about getting overextended in case the bond market is right and the economy is not coming back. They are denying a lot of loans. You sneeze and a credit company offers you a pre-approved credit application to wipe your nose. You bring home one paycheck from a job and a car dealer will put you in a new $40,000 SUV at 0%. You want to start a new business that has a readily identifiable clientele and you get the door slammed in your face.
Wider spreads equal lower money availability regardless of the interest rates. If the economy is weak and it is not seen as getting better, spreads widen. They are wide now. Indeed, the real cost of money is not below inflation, and that is the point at which there is real incentive to borrow money to invest in new business. With spreads too wide, the incentive to borrow is not there. The banks are getting burned on both ends: reluctant to make too many loans because of a bad economy (and thus truncating their earnings potential) and yet struggling to make loans in a weak economy. Thus JPM's and the regional bank troubles. The charts are showing it; if the financial stocks are not making money and not rising in stock value, the market is not ready to move up because the economy is not there. That is an old maxim on the street: financials have to move up for the market to make headway.
What does all of that mean? It means harsh reality on the streets is plainly showing that the economy is weak, that rate cuts cannot do it alone due to the varied dynamics of our huge economy. Monetary policy without fiscal policy is the same as fighting for the heavyweight title without a left arm: you may land a few good punches, but you are going to get beat to death in the process.
Trade deficit shrinks to -$34.6B from -$37B expected.
Thus when you see that exports rose and shrank the trade deficit and hear that will increase GDP (exports add to GDP, imports detract from GDP), you should not get too excited. The reason is because it is all how the government keeps the books. Imports are real as they show consumption here at home, but they detract from the main indicator of the economy that most use as their benchmark. Thus our leaders will see that GDP is up and feel recovery is on track. Hardly the case as the main street banks are showing; they cannot make money lending in a 'loose money' and 'accomodative Fed' environment. The only conclusion that can be drawn is that the economy stinks because no one wants to pony up for the cost of money because the potential return is not great enough. In that environment you have to give incentives to get people and businesses to invest. Tax credits work wonderfully as history shows: buy a computer system and get a $1,000 tax credit. Even if you don't need the computer system you buy it because instead of giving the government $1,000 in taxes and having a fat goose egg for it you spend $1,000, get a computer system, and then take $1000 off the bottom line of your taxes. Instead of owing $15,000 you owe $14,000 and get a computer. Unless you are brain dead you buy the computer. Multiply that buy millions of businesses and consumers. Now THAT is stimulus. It does not have to be limited to computers: cars, trucks, machines, and basically anything you can use in business. The business side is dead. It needs a heart needle full of adrenaline. Investment tax credits are just that.
THE MARKET
The breach of support broke wide open Wednesday but as soon as the indexes tapped at the next level of support they fissure was narrowed with an afternoon rebound. This was not a one-day reversal or any major bullish move. It was a round of short covering after some major drops on the indexes the past two sessions after they broke below the September consolidation range and tested the next lower level. Again, that is classic action in downtrends. The rising volume was indicative of the covering: those shares sold the previous sessions were repurchased to close the positions, hence rising volume. The indexes may be ready to move up to test the short term moving averages or other near term resistance as they showed doji's on the session, but the trend is still easily in place, and we would not be surprised if Wednesday's recovery was about all the upside the market sees for now.
Still options expiration is Friday, and after some selling earlier in the week stocks can reverse before expiration as positions are squared and rolled out. There is a lot of short interest on the S&P 500 near that 870 level, and market makers don't want to be roasted on those outstanding positions. They will do what they can to push the S&P over that level on the Friday close. Overall, however, that will be a fleeting effect. Even above 870 the S&P is still in the downtrend and will be free to fall. We already made great money on the DJX and OEX puts; we use the rally back up as a chance to reload positions to the downside.
Always, always, always keep the bigger picture in mind and do not make decisions in panic mode in the heat of battle. A stock can be running up against you intraday and you feel the stomach tighten, the throat get dry, and other body parts pucker. When the trading session is over, however, you realize it ran into resistance and stopped and it did so on low volume following a high volume crater before. It is set up to roll over again. If you did not keep support and resistance in mind as well as average volumes and where a stock is in its pattern you could make a bad decision (EVERYONE still does, so don't beat yourself about the head and shoulders). If you know your gameplan and know what are the limits based on your risk tolerance, you avoid those heat of the moment decisions that are uncannily made just at the wrong time.
Sentiment Indicators
Again, sentiment indicators must get to very extreme levels in this market to mean much. They are moving in the right direction, but they are not nearly there. Today's recovery backed volatility way off its highs (over 44) even as put traders zoomed again on the CBOE and in all option markets. They all need to get there, and they all need to do it in a big way.
VIX: 40.89; -1.07
VXN: 59.33; -1.06
Put/Call Ratio (CBOE): 1.36; +0.16. Third straight close over 1.0 and the total of all option markets was over 1.0 as well. This is the first indicator to get there, but there is a lot more work to do.
Nasdaq
Gapped lower below the next level of support and touched the next support level on the low. It managed to rally back to that support it gapped below. Confused? It tanked 2 support levels lower, then shorts started covering to push it back up to that first lower support. It is still in a downtrend.
Stats: -7.81 points (-0.62%) to close at 1252.13
Volume: 1.569B (+5.07%). Once again Nasdaq volume just edged NYSE volume. Volume was close to average on the move, but more selling and then short covering are the reason.
Up Volume: 474M (+133M)
Down Volume: 1.064B (-66M). Downside action was well ahead of upside action even on the recovery.
A/D and Hi/Lo: Decliners led 1.57 to 1. It was a lot, lot worse before the late recovery.
Previous Session: Decliners led 1.76 to 1
New Highs: 22 (-5)
New Lows: 228 (+49). New lows higher on what some are calling a reversal. Hardly.
The Chart: http://www.investmenthouse.com/cd/$compq.html
Gapped below 1250 support and touched at 1230 support on the low (1233) and rebounded to retake (kind of) 1250. Volume rose, and that is good on a reversal, but down volume out muscled up volume easily. It was not an up session. The Nasdaq could try 1270 again, maybe 1300, but the latter is remote. The breakdown on volume Tuesday set the tone as the September range failed. A test of 1270 and a resumption of the downside seems more likely given the recent failure of that 3-week trading range.
S&P 500/NYSE
Gapped lower, sold almost to the next support level, and then recovered to close just below key resistance at 870. Volume ballooned to almost average on the short covering. Then EDS announced things have gone from poor to crappy. It is down about 13 points after hours and IBM is getting fogged with it. Lead weight on the Dow and S&P 500.
Stats: -4.06 points (-0.46%) to close at 869.46
NYSE Volume: 1.499B (+8.76%). Volume shot up on the flat session, but it was the sell off and recovery that was the story. One-day reversal? Nah.
Up Volume: 474M (+293M)
Down Volume: 1.015B (-174M). Down volume was still squashing up volume even on the recovery.
A/D and Hi/Lo: Decliners led 1.54 to 1. Finished almost flat but was still negative though much improved from just two hours left in the session.
Previous Session: Decliners led 2.33 to 1
New Highs: 42 (-8)
New Lows: 193 (+78). New lows rising dramatically on a 'recovery.' Not a sign of strength and indeed was worse than on Tuesday's selling. That is pretty telling.
The Chart: http://www.investmenthouse.com/cd/$spx.html
On the candlestick chart there is a big doji with a tail. In other words the index sold off down to 857 on the low (right above 855 support) and then rallied back to close just off the open. That can signal a change in momentum as the sellers shoved it down and the buyers drove it back up. Problem is, the S&P just broke down from the early September trading range on the highest volume in over a month. It is trying to move back up into the range (over 870), but the move was driven by short covering Wednesday, not a big demand for stocks. Sure there was word about a reallocation from bonds to stocks, but the bond market did not show any major drop that would confirm such a move. That again points to short covering. As the index just broke down from the trading range, we don't see much upside here. It could fool us and run to just below 900, but that would still keep it in the downtrend. In short, there was nothing to say today was a reversal of the trend. Indeed, it was very much in line with the downtrend and how this market has acted in downtrends.
Dow:
Stats: -35.1 points (-0.43%) to close at 8172.45
Volume: 1.499B (+8.76%)
Was taking its licks, down to 8051.91 on the low, below the 8062 level marking the early August low. After the triple digit plunge it was able to find itself and recover on that short covering. It made it to 8260, just over the 8250 support that failed Tuesday, and then it turned down to close below that support now turned resistance. It too showed a doji that reversed on the best volume in a long time, but we view this much as the S&P 500; it could test higher, but it is in the downtrend and we don't expect much of a test higher since it just fell out of the early September consolidation.
The Chart: http://www.investmenthouse.com/cd/$indu.html
THURSDAY
JPM epitomized the problems in the economy Wednesday. Banks have cheap money available, but the soft economy (and bankruptcy new highs) makes them leery of being too lax with loans. The money is supposedly there as it supposedly always has been since the Fed started cutting, but it is not making it into the system because of the wide spreads and the fact that interest rates are still not far enough below inflation (CPI up) to make the money truly 'easy.' Another day, another fact of the weak economy revealed, another day that our leaders overlook the economy in favor of war games without considering that wars are won by those with the best economy. Let's not forget. It is just not Iraq. We go in there, and it may be necessary to do that, we open the war against terror on all fronts. The ONLY way we can fight that is with a strong, leading economy. Unfortunately, the purposeful or inept policy blunders in the late 1990's and early 2000's hobbled the U.S. economy. As is usually the case, something major comes up to really torpedo the economy when the Fed starts to tinker and the Congress decides it can now solve all the ills of the land by just a few more programs and handouts.
Now we are stuck with a huge bill and an economy that cannot pick up the tab. Instead of unleashing the power of the economy through tax cuts and incentives to invest in the U.S., the administration has abandoned its investment incentives package it came up with in the Waco GOP get together and the debate in Congress is not whether to lower taxes but whether to raise taxes. This repetition of historical blunders would be laughable but for the millions who lost their retirements and businesses as a result and will now have to live their golden years on bent knee to the government. The government that caused the problems should set up the conditions to let the economy fix them. Not handouts, just re-establish those conditions from the early 1980's that led to the 20 year boom through 2000. If it does that, everyone who wants to will be able to take part and reach as far as they want. At the same time tax revenues will shoot higher as they did in the 1980's and 1990's. Everyone will be happy. The mind boggling aspect is that our leaders have the ability to look history and facts in the face and tell you that you are misinformed. It is not rocket science, but then again, politics is about seeking and maintaining power, not what is best for you, me, and the country.
End Part 1 of 2
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