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us stock market, trend trading stock
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2/27/01 Investment House Daily
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Investment House Daily Subscribers:
TONIGHT:
- Rally dies at 2300 as the Nasdaq sells back on slightly higher trade to another closing low.
- Many more downgrades before the bell add to the drag on the market.
- Economic news goes from so-so to almost 'oh no.'
- Market still waiting to see which way it will go with Bush speaking tonight and Greenspan tomorrow.
- Team Trades
Heavy artillery comes out and punches holes in the rally.
Before the open the brokerage companies and analysts were out with another round of downgrades and generally negative comments on the market. Goldman Sachs stated there was no tech bottom in sight through the summer. That was cheery, but it was interesting to know that Goldman is also joining the ranks of those who feel there will be no quick recovery. As soon as everyone gets there we can be sure of the recovery starting.
Goldman was not alone. Bank of America let fly with another round of its own downgrades, this time focusing on the software sector. The idea is that these companies have not warned because their quarters are very backend loaded and they just don't know how bad their quarters are going to be just yet. Thus it downgraded ORCL, SEBL, PRGN, ITWO, EXDS, DIGX and others. We were somewhat amused by the comment that BAC was getting in 'ahead of the curve' before they started warning. Let's see, ORCL is 53% off of its high, SEBL 65%, ITWO 70%. Now that is getting ahead of the curve. In BAC's defense, if it is right these stocks could fall even further as we have seen repeated warnings from companies and further takedowns.
On top of that we had the Nike miss, the Bristol Meyer inquiry, and the JDSU layoffs announced. That was a lot to handle for a market that was attempting to rally on rather flimsy hope and volume. It started lower, tried to rally and then rolled over. It still does not look good, but a lot of people are saying the market is heading lower for the near term. It still is searching for direction either lower or to hold here and continue building that bottom or trading range. The more people who believe it is going lower, the better that is for the market; problem is, there is just not a lot of fear out there as the Dow continues to hold up. The bifurcated market gives somewhere to hide, and that keeps investors from despair.
THE ECONOMY
Economic news is once again good and bad.
Confidence hit a 4-year low in January, new home sales dropped the hardest in seven years, and durable goods fell 6% versus expectations of just a 2.5% drop. On top of that, no rate cut before Greenspan speaks tomorrow morning. At first the lagging consumer confidence number gave the markets a bump higher, but that died out fast. This was not good news; we all know the Fed is going to cut at some point. What we need to see is improving economic numbers. Greenspan will have to talk about some less than rosy new numbers tomorrow.
Durable goods down, but not really bad, and chain store sales were up.
Durable goods were down 6%, well below the 2.5% drop anticipated. This was shocking until you look at what caused the drop: the airline component. It was down 49.3%. So great was this one sector's influence, if you back it out durable goods were down just 0.3%. The airline component was not anticipated to be so low as this was not reflected in Boeing's books. Thus, it really looks as if the number was a good number economically, at least better than was expected. On top of that, retail chain store sales were up for the week, once again surprising analysts with their continued tenacity in light of weak sentiment reports.
New home sales straining under the load.
New home sales were very disappointing as Monday's existing home sales report foreshadowed weakness in today's number. Indeed, new home sales suffered the largest monthly drop since January 1994, falling 10.9%. December sales were revised higher than originally reported to an all-time high 1.034 million units on an annual basis. Impressive, but it appears the trend is weakening and cannot continue to carry the load by its own without some help from improving sectors elsewhere in the economy. This has been the workhorse of the economy, and even though it is trying to hold up in line with lower interest rates, it is being undermined by growing weakness in consumer's future expectations.
Consumer confidence continues its fall.
Confidence fell to its lowest level since June 1996 when it showed a weak 100.1 reading. Today's 106.8 reading was well below the 111 expected and the 115.7 in January (revised). Greenspan indicated in his prior testimony and indeed in speeches back in October 2000 that weakness in the consumer was his main concern. Back in October he was worried that rising energy costs would negatively impact consumer confidence, though most missed that statement, instead focusing on energy alone. Recently he tied confidence to the stock market, noting that weakening equity prices could have a negative impact on consumer confidence and seriously jeopardize any attempted economic recovery.
Thus, those who are saying that the Fed cannot lower rates now because it would be viewed as a naked attempt to prop up the markets are not entirely accurate. Greenspan was very careful to make the linkage in part 1 of his testimony. He can reiterate that again tomorrow and then let a rate cut fly on Thursday and be fully justified in doing so (at least in his mind). After all, it makes sense to us that if you are going to buy into the wealth effect as Greenspan professes to do, then an opposite effect should also occur when the markets tank and not only take away gains but eats into principal as well. Given this, we really don't see an impediment to Greenspan cutting rates whenever he wants to as he has once again laid out the groundwork. Will it give the impression that something is wrong with the economy? For crying out loud, we all know something is wrong with the economy. Personally, we would rather get a rate cut and worry that things might be worse than not get a rate cut and have the economy continue to slow and really turn out worse.
THE MARKETS
Waiting on Bush and Greenspan. The markets sorely need leadership. Consumers need to feel reassured. Reagan had a way of making people proud to be Americans again, and that was an important part of getting his economic plans passed. Tonight we will see if Bush can capture some of that charisma as he introduces his budget to the U.S. citizens. Then we will have Greenspan tomorrow; did he take out the references to technology causing its own ills? He needs something more than his usual tap dancing to get the markets and U.S. citizens back on board. Like it or not, warranted or not, this economy is going to be placed on his shoulders. His legacy is coming down to whether he can get the 'V' bottom on the economy or whether it drags out in a prolonged downturn and recovery. He needs to tell Congress that the U.S. needs a capital gains tax cut and a withholding reduction on an immediate basis. We don't think we will get it, and we think today's action shows that the market figured out that it was rallying on a pipedream.
This led to a quicker turn down than anticipated. The Nasdaq did not even try to get to 2400. Several of our put plays got going today, e.g., MERQ, CHKP, OEX, and QQQ, all heading down on significant and steady selling all session. These were easy plays to make in this market that just bled all day long.
Overall market stats:
VIX: 29.03; +1.69. Volatility climbed back toward 30, but the move was not terrific as the Dow and S&P 500 suffered milder losses. The quick drop in volatility from Friday's spike to 35 showed this rally was in trouble fast. It still has a ways to go to really act as a longer term catalyst.
Put/Call ratio: 0.79; +0.27. Good movement on the put/call ratio today after a precipitous drop on Monday. The fact that it gave a good jump higher today is positive as it did not take put buyers long to get back into the market when the selling started. That gets us closer to some significantly higher readings in the near term on more selling. Again, we want to see a close over 1.0.
NASDAQ:
The selling started early, and overcame a brief rally attempt in the morning. After that it was steady selling all day as volume edged up a bit. The sellers won the battle today, and volume edged higher for another distribution day. With many name brand stocks such as JDSU, GLW, JNPR, AMCC, SEBL and others hitting new 52-week lows on strong volume, the downside risk remains high without some catalyst to turn it back up. The Nasdaq was in a bad spiral on January 3 when Greenspan stepped in the first time. We may see him step in on Thursday with a rate cut if his testimony does not help end the selling.
Stats: Down 100.68 points (-4.4%) to close at 2207.82.
Volume: 1.808 billion shares (+4%). Volume edged higher (though still below average) on today's selling as some big names hit new lows on higher volume. Down volume swamped up volume 1.602 billion to 180 million shares. No buyers today; appears that they are all waiting on policy direction from Washington.
A/D and Hi/Lo: Declining issues destroyed advancers 2.05 to 1. New highs held steady at 63 (+0) while new lows rose to 83 (+30).
The Chart: http://www.investmenthouse.com/cd/$compq.html
A 52-week closing low today once again as the Nasdaq attempted to rally before lunch, but sellers cut that short and sent the market down to its low on the close. That is not bullish action, and with the earnings warnings after the close from ALTR and CHRT we could get a lower open as investors mull Greenspan's pre-released testimony, GDP, and the Chicago PMI.
The selling started earlier than we wanted. We were looking for 2400, maybe 2500 to really set things up. Doesn't always work as planned, however, and we went ahead and took what the market was giving. With the big names heading lower on high volume, they could take the index down with them. It would have been a neater package if we had the rise to 2400; now we are left with the wildcard of what Greenspan is going to do on Thursday after his speech. A rate cut then would put a crimp on put plays as everyone scrambles to cover. Lack of action will continue the downward pressure. After this rally tanked this fast, it is hard to see upside action without a Fed cut as a catalyst.
Dow/NYSE: The Dow was able to minimize its loss, and it did so on slightly lower, below average volume. It held up fine as UTX and MO performed very well, offsetting other weakness. Its candlestick pattern indicates a stall just below the 50 and 200 day MVA's, however.
Stats: Down 5.65 points (-0.1%) to close at 10,636.88.
Volume: NYSE volume edged back to 1.106 billion shares (-2.2%). At least it avoided further distribution if it cannot muster higher volume on its gains. Down volume overtook up volume 566 million to 506 million.
A/D and Hi/Lo: NYSE declining issues jumped back ahead of advancers 1.09 to 1. new highs climbed anyway to 106 (+8) while new lows held steady at 22 (+0).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow hung on today, but it was unable to hold positive and shows a very tight doji on the candlestick pattern after it tried to challenge the 200 day MVA. It was a weak attempt as volume was below average. This pattern indicates the move may have topped out already, but where the market goes over the next few sessions is almost totally news driven, and that can jerk it one way or the other.
S&P 500: The big caps turned back as well after attempting a rally in the morning session. It rolled over at lunch and never came back. Many big caps sank to new lows on increasing volume, but the index is still holding above its recent lows as the selling of all big caps was not totally widespread. For example, technology makes up just 20% of the index as opposed to over 30% early in 2000. Thus when technology burns now, it does not harm the S&P 500 as much. The index is still in poor shape below its down trendline with resistance at 1285. It too is awaiting Bush, Greenspan, and any Fed action. That may give us the move higher, but then we just have to see if the buying comes in from the big institutions that have been holding back billions and billions of dollars for fear of committing to the market until they are sure. Are you ever sure?
Stats: Down 9.71 points (-0.8%) to close at 1257.94.
Volume: NYSE volume fell back again to 1.106 billion shares (-2.2%) indicating there was not any wholesale dumping going on today. More of a wait and see day.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
We will have to see how the Bush then Greenspan plans impact the markets. At this point, we cannot see it having a lasting impact to the upside. Why? This is a 'show me' market. Greenspan tried to hold it up with words back in December and that failed miserably. Greenspan delivered 100 basis points in rate cuts within 30 days of one another and that did not stop the slide in the Nasdaq or S&P 500. Several big fund managers controlling billions of dollars have professed (to the cameras at least) that they want to see signs of improvement before they commit their billions. The consensus is that the Fed let things get out of hand and may not be able to get it under control all by itself. If they see that tax cuts are close to being a reality (something that is far from happening right now as the market is showing us), more rate cuts and continued strength in retail sales and housing, perhaps things will move.
Until then, and even if we do get a rate cut, we are not overly optimistic for the short term. A rate cut could take the Nasdaq to 2500 where it would get its first test. At this stage we don't think it would hold even with that rate cut. We think sellers would still be there to overwhelm the buyers this early in the game. That could send this market back to new lows even with 150 basis points in cuts. Unprecedented, but this market is not behaving exactly according to precedence. We would be ready to play that move as well.
Don't get us wrong. We still see decent economic data that don't point to catastrophe just yet. Things could always worsen, but if we get the cuts timely and get assurance of an economically meaningful, retroactive tax cut, we believe the economy will recover and the market will start to discount that recovery ahead of that event. Again, we are just not too confident of near term success because of the attitudes of fund managers displayed thus far and how the market has reacted to rate cuts. Again, the pervasive feeling is that the Fed has not been up to the challenge and has let things slip too far. Until decisive action is taken that shores up this investor confidence, we continue to believe the downside risk is predominant.
So for tomorrow we are watching how investors react. Today we saw several of our put plays start earlier than anticipated, and several are out ahead of the indexes, hitting new 52-week lows on above average volume while others appear to be reversing from the recent rally and ready to fall. A rate cut would most likely give the market a pop up, making us move out of our put plays for the short term. We feel we will have at least until Thursday, however, to continue to ride them down. If economic data Wednesday and Thursday shows the economy hanging in there, that may just eliminate the Fed's inclination for yet another inter-meeting rate cut. In that event we will continue to hold our positions. If there is a cut, after any rise we will be looking for the moves to stall and then we can pick up plays again.
That does not mean we have abandoned upside plays. To the contrary. As we have seen, even as the techs are in a bear market, other sectors are performing very well and continue to do so. A rate cut would propel those sectors higher, and we do not believe those would be as prone to selloffs after the move, particularly if the volume on the breakouts are strong. These include several of the retailers, financials, materials/construction, and others we have been tracking. Look for the strong volume on the breakouts, keep stop losses in place, and let them run for as long as they will.
Support and Resistance Levels
Nasdaq: Closed at 2207.92.
Resistance: 2400 to 2500. Then 2650. 2890 to 2900 is next before the 3000 level.
Support: 2050
S&P 500: Closed at 1257.94.
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 10,636.88.
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): -6.0% actual versus -2.5% expected and 1.2% prior (revised down from 2.1%).
Consumer Confidence, February (10:00): 106.8 actual versus 111.0 expected and 114.4 prior.
2-28-01
GDP-Preliminary, Fourth Quarter (8:30): 1.1% versus 1.4% prior.
Chain Deflator-Preliminary, Fourth Quarter (8:30): 2.1% versus 2.1% prior.
Greenspan, Son of Humphrey-Hawkins, Part 2 (9:30).
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.
TEAM TRADES
LTR: We were looking at some pre-split plays, which can be real movers, and one of the stocks we focused on was LTR, an insurance entity that made a good move up in its handle Monday. The stock had closed at 102.42 Monday, and the handle high was 105.40. The stock pulled back to 101.55 within the first 20 minutes, but then made a nice move up to 104 in the next 15 minutes. That looked good to us, but then the stock gave a bit of a pullback; after hitting 103, however, it started up again. With a pre-split we were not just waiting for a breakout, so we wanted to catch the next solid move up, so our cue was to be a move over 104. The April $100 options were 7.20 x 7.70 when the stock was back at 103. Unfortunately, we were called away from the computer. So we entered what we thought was a buy stop at 8.125 and left. Should have called a broker instead of relying on the computer system (user error). We ended up missing the move, which came just 15 minutes later. The stock bolted over 104 and the options went to 7.60 x 8.10. Too bad we missed it, because the stock went on to break out, hitting 106.90 at its high before closing at 106.40. Still a buy and we are still looking at it, as although we missed the big moves today, there could be more to come. The options we were looking at had very low open interest, but they closed for the day at 9.0 x 9.5, with the bid hitting a high of 9.4.
End Part 1 of 2
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us stock market
trend trading stock
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