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world stock market, us stock market
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9/23/02 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Monday: C (put); BEN (put); MCK (put)
Buy alerts issued: KKD (put)
Trailing stop alerts: ANN (took money off table w/small gain); EBAY (took money off table flat)
Stop alerts: JOSB
To subscribe to the Daily alert service you can sign up at the following link:
http://www.investmenthouse.com/alertdly.htm
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SUMMARY:
- Nasdaq, techs get hammered to new multiyear low.
- LEI down for third straight month.
- Gloom, but not a lot of fear. No indication the market is set for a substantial bottom.
- Subscriber Questions
Techs lead slide lower as no good news from tech land.
Monday is known as a day where analysts make their calls for the week. Depending on the market they can be upside or downside. When the market is up they are usually raised; when the market is trending lower they are usually lowered. Monday the chip sector, already at a new low, received more negative news with CSFB cutting capex and forecasts for many chip equipment stocks. Software companies were cut. JDSU cut itself. WMT said it would only hit the low end of the September forecast. The market had not news to rally it. When the LEI was released at 10ET and it came in lower it was almost a relief.
Not much, however, as the Nasdaq rolled over further and undercut the July intraday low. It tried to recapture that level, but it could not hold onto the lost ground. With the Nasdaq plowing new low ground, the Dow and S&P followed, but did not sell as much. Still, investors are seeing what appears to be at the least a short term slowdown in the consumer (WMT sales), and that dovetails with the continued laggard business investment cycle (hard to call it a cycle at this point; 'cycle' implies it goes up at some point). With that viewpoint there was no reason to buy stocks Monday.
THE ECONOMY
Leading Economic Indicators -0.2% (-0.1% expected).
LEI fell for the third consecutive month, threatening to break the uptrend for the year. These indicators look 6 months down the road and project economic activity at that point. They have not collapsed (July was revised higher to -0.1% from -0.4%), but are showing softening. While that does not seem a bad thing, you have to put it in context. The recovery is already extremely weak. No jobs are being created. If the economy slows further from here, you can bet no new jobs will be created, and most likely there will be more layoffs. Companies have been trying to hold onto some employees in the hope that the economy would improve. Even a moderate softening will unleash another round of layoffs; we just started to see the foreshadowing last week and Monday with rumors that more brokerage layoffs were most likely coming. Actually, they are not rumors. LEH announced it was in fact laying off some of its staff.
That paints a grim picture. The economy is not recovering with enough significance to make any difference to most small businesses and individuals, yet it is enough to take it off the Congress' and White House's agenda unless it is something to make some election time political points with. We would like to say that things are getting better, that a real recovery is on the way. Our views on that have changed in the past two months as the indicators are showing just a fraction of the prior growth potential. That is not going to do it for a lot of U.S. businesses and retirees. We are going to see many more business and personal bankruptcies ahead if immediate action is not taken.
AARP says that the majority of its members now expect to work beyond age 65. Poor monetary and fiscal policy decisions have ripped several trillion dollars from retirement accounts, and that is directly impacting, as we have indicated, the retirement life for millions of older Americans. Moreover, lets not kid ourselves. Owning a house is great, but it is not going to put bread on the table. The absurdity of those suggesting that owners will be able to 'invest in' their primary residences and be able to generate living expenses have not been out of the real world for too long. Older Americans, small businesses, the growing legions of unemployed and even those with jobs are currently under the gun in this economy and there is no help on the horizon. One wonders with the inability to resolve the social security (morphed from the Widows and Orphans of Military Servicemen act) issues if this was not some master plan to force older Americans to work longer and thus wean them off of relying on social security? After all, the more you work, the less SS you get. Far fetched, but the actions taken over the past several years leave reasonable persons scratching their heads.
The scorecard: contacting federal government elected officials.
Week three: Attempted contacts at senators and House representatives to schedule a brief telephone conference to address economic issues: 3. Positive responses: 0. Their streak is alive at 9 to 0 on both fronts over the past three weeks.
THE MARKET
The Nasdaq fell to a new 5-year intraday and closing low as techs had nothing but bad news Monday. With chip equipment (and almost all semiconductors) under pressure from some brokerage cuts the Nasdaq had no support from its primary sub index. Small caps were pummeled as well with the large cap S&P 500 and Dow holding up the 'best.' Volume backed off from Friday's expiration volume, but was also down from the Wednesday and Thursday volume. The internals were terrible and there was a lot of gloom, but selling volume was a fraction of what it was when the Nasdaq was last at this level. That still leaves open the door of an upcoming bottom (out of the darkest clouds bottoms are often found) as the indexes fall back to the July lows on light volume. It will come in like a thief when it does, however, as there was not much positive to hang your hat on for upside moves. Again, that is when the rallies usually come whether short term or long term.
Sentiment Indicators
The sentiment indicators help bring the Monday action into some focus. The indexes were getting pummeled, but the VIX and VXN were just up over a point on their highs. They then backed off from there in the last hour as the market rallied. We wanted to see the indicators surge as the market pulled back on lower volume: high levels of fear without a ton of sellers would show the market was mostly sold out. The only sentiment indicator that was at an inflection point was the put/call ratio with a week of closes over 1.0 (the overall put/call ratio from all indexes made it three in a row). On Monday even the put/call ratio fell as the markets were hammered. Perhaps this is the ultimate sign: the market sold but nobody cared. The only thing that will tell you much now is if the market responds with a strong rally. The sentiment indicators would not have confirmed that move, but you take each rally as it comes: it either has the strength and breadth or it doesn't. For now that is getting a bit ahead of the current picture.
VIX: 44.71; +0.16
VXN: 59.85; +0.77
Put/Call Ratio (CBOE): 0.88; -0.28
Nasdaq
Hit the hardest, falling to lows not seen since 1996. Another historic moment, and you were there.
Stats: -36.16 points (-2.96%) to close at 1184.93
Volume: 1.444B (-19.73%). Volume was lower than the last three sessions last week. That was one of the few bright spots, and it was hard to see through the rest of the wreckage.
Up Volume: 233M (-768M)
Down Volume: 1.2B (+421M). Once again when the selling was on, the sellers were out in force.
A/D and Hi/Lo: Decliners led 3.05 to 1. About as ugly as it gets.
Previous Session: Advancers led 1.07 to 1
New Highs: 12 (-6)
New Lows: 328 (+106). A surge in new lows, but still below the 400 to 500 level seen in July. When you consider the index itself just hit a new multiyear low, that is a better sign: many stocks are holding above those prior lows on this round of selling, a signal that there is some support holding for now.
The Chart: http://www.investmenthouse.com/cd/$compq.html
No comeback, no holding the line, just a slide lower and lower below the July intraday low (1192). The Nasdaq is now at levels not seen since 1996. A brief attempt to hold 1192 or thereabouts failed, and an attempt to recapture that level in the last hour failed as well. There was no spontaneous groundswell of buyers ignited at that level. Now what we have seen in this continuing downtrend is short covering after a new low is punched in the bottom of the pattern: a solid drubbing that leads to shorts taking profits; they buy back the stocks they sold short, and that buying pressure moves prices higher. The Nasdaq is definitely primed for some short covering here and possibly a significant bottom, but now that support was broken the point where it starts is less than clear. It slipped below 1192 without a struggle and without volume, a good scenario for a bounce. At this point the downtrend is very much intact and we ride short positions lower while we prepare for a bottom.
S&P 500/NYSE
Sold down below the early August low and recovered to that level. It is just at the August lows and just below the first bottom channel line to the March downtrend.
Stats: -11.69 points (-1.38%) to close at 833.7
NYSE Volume: 1.346B (-24.69%). As with the Nasdaq, NYSE volume backed off from the triple witch volume, and it was also below where it was last week. The selling was not intense, it just felt that way (there is a difference, you just don't feel it).
Up Volume: 293M (-665M)
Down Volume: 1.063B (+292M)
A/D and Hi/Lo: Decliners led 2.51 to 1
Previous Session: Advancers led 1.09 to 1
New Highs: 51 (+10)
New Lows: 301 (+130). New lows were up, but as with the Nasdaq, not overpowering. Unlike the Nasdaq, the Dow and S&P 500 are not yet near their July lows.
The Chart: http://www.investmenthouse.com/cd/$spx.html
Tested 825 on the low and recovered 8 points. Nothing major, but there was some short covering starting at that point. It managed to close just below the first down trendline at the bottom of the March downtrend (836) and could not quite make it back to the early August closing low (834.60). Despite the general gloom today about the Nasdaq undercutting the July low, we still believe the S&P is ready for a bounce higher in its continuing downtrend as indicated by the late start of some short covering. As with the Nasdaq, however, it is in that downtrend and has to deal with the daily barrage of war and economic news. Recently it has not been able to stomach the bad news as it is taking on another dimension, that of a much poorer quality recovery than anticipated (again). Nonetheless, stocks and indexes have relief bounces in their downtrends and we think the Nasdaq hitting a new multiyear low will trigger some more short covering for a short covering rally up to those short term moving averages. Overall we are still looking for a move to test near 775 on the low before a more serious rally is put in place.
Dow:
Stats: -113.87 points (-1.43%) to close at 7872.15
Volume: 1.346B (-24.69%)
The Dow and S&P were on pace together with the Dow also touching lower and rebounding, but its low was just 86 points from the July closing low (intraday 7532.66). It closed below the March downtrend bottom channel line at 7925 after some late short covering stalled at that level. It too is oversold and close to the prior lows; it is primed for some more short covering along with the Nasdaq, but the action will have to show the move.
The Chart: http://www.investmenthouse.com/cd/$indu.html
TUESDAY
High levels of gloom but not high levels of fear shown. Some late short covering Monday, but it was just a small round that trailed off somewhat in the last few minutes. The Nasdaq is below its near term support while the S&P 500 and the Dow were in a struggle to hold onto the near term levels. The big picture, however, is a lower volume test of July and August lows underway. The Nasdaq is leading the way as it always does.
The issue is whether the Nasdaq plunges another 10% and is no longer a real test but a new leg down in the bear market. The S&P 500 and Dow's action will be important with respect to how they hold up at their prior lows.
That may be getting premature right now. Though we were wrong Monday, we still anticipate a bounce higher in this selling as it remains rather tame with lighter volume. Then that late attempt at short covering. This market tends to fall for a week or so and then rally. It is not in full meltdown as it was in July. We believe the late action was a precursor to another round of short covering that will take the indexes up to the short term resistance points before another sell down toward the July lows on the Dow and S&P 500.
Support and Resistance
Nasdaq: Closed at 1184.93
Resistance: Price support from 1190 to 1200 (the July intraday low is 1192.42). 1230 and 1250 are price resistance points. 1270 is more price resistance from the September lows. The August down trendline at 1250. The 10 day MVA (1248.34). The 18 day MVA (1271.69) and price resistance at 1300 are also in play. 1316, an early August interim high. The March/May downtrend line at 1323. The 50 day MVA (1327.88). The late July high (1354.48) and 1357.09, the October 1998 bear market low. There is another downtrend line from the March and May highs at 1380. 1418, the interim test after the September low. That is followed by price resistance at 1500.
Support: The Nasdaq is now down to 1996 levels. There is price support from 1080 to 1100. Then there is a big shelf of support at 1050 down to 1000.
S&P 500: Closed at 833.70
Resistance: 850 to 855 (the October 1997 and Q2 1998 lows). 875 is price resistance of some significance. The March downtrend line at 876. The 10 day MVA (874.68). The 18 day MVA (886.51). July and August interim highs at 911.64. The 50 day MVA (911.88). The September 2000/May 2001 downtrend line at 926. The downtrend lines from the March and April highs (939) along with price resistance at 950. 965, the September 2001 closing low. Then 1000 is psychological resistance.
Support: The first bottom channel line in the March downtrend (836) has not been totally broken. The lowest channel line in the March downtrend channel (798) along with price support at that level. Then the July low at 775.68 and marks the culmination of the short head and shoulders pattern. 750 to 760 with an intraday touch to 730.
Dow: Closed at 7872.15
Resistance: The lowest bottom channel line of the March downtrend (7929). The August lows (8043) and the September 2001 intraday low (8062). The September closing low at 8235.81. 8250 acted as resistance before after acting as support. The 10 day MVA (8173.07). The 18 day MVA (8310.70). The March down trendline at 8345. Some price resistance at 8500. The 50 day MVA (8589.83). The late July interim high at 8762.14 (8745 closing). A range of resistance from 9000 on up to 9050. Then 9250 and then 9500.
Support: The July low (7532.66). The October 1998 lows are at 7400 and 7467. After that is 7000, some 1997 lows and highs.
Economic Calendar
9-23-02
Leading Economic Indicators, August (10:00): -0.2% actual, -0.1% expected, -0.1% prior (revised from -0.4%).
9-24-02
Consumer Confidence, September (10:00): 95.0 expected, 93.5 prior.
FOMC meeting results, 2:15
9-25-02
Existing home sales, August (10:00): 5.35M expected, 5.33M prior.
9-26-02
Durable goods orders, August (8:30): -1.8% expected, 9.2% prior.
Initial jobless claims (8:30): 420K expected, 424K prior.
New home sales (10:00), August: 990K expected, 1.017M prior.
FOMC minutes, 8-13 meeting (2:00)
9-27-02
GDP Q2 final (8:30): 1.2% expected, 1.1% prior.
Michigan Sentiment revised (9:45): 86.2 expected, 86.2 prior.
SUBSCRIBER QUESTIONS
Q: In newsletter and Alert Service you provide targets and stops for equity positions. Is there a way of converting them for use with options? I am not always able to hang around my PC for your alerts.
A: Great question. There are two ways to look at options: the current option value and/or the option value versus the underlying security or index value. When we deal with our options we look at them two ways, a kind of blend of the option price and the underlying equity price.
First and foremost to us, particularly in the early stages of a play, is the underlying security. In the initial stages of a play the underlying security is the key. The option's movement is based almost entirely on the movement of the underlying security. Thus we are most concerned about that action as opposed to the value of the security. If the underlying is holding support or resistance, breaking out, etc., the option's value will track that performance. When time starts to ebb before expiration (and also if the underlying security slows down in its move or starts to stall), then the option value gets more attention. A security that is running and then stalls and loses momentum will start to see its option value fade a bit; if it is within 30 days of expiration, then time value starts to eat away at the value. At that point it becomes a function of time and movement: running out of time and the price is now stalling. Then it is more of a decision to take the gain because the stock has stalled and you are running out of time.
Thus, we use the underlying stock primarily to key our option plays. In almost all cases we decide to enter, exit, or stay in a play based on the movement of the underlying security. Only when time is running out will value overtake movement, and then only if the stock is not moving enough to offset time decay in the option. Now sometimes we will have a stock tank on us abruptly (e.g., a gap down) and leave us still in the options. If we cannot expect a reasonable chance at a recovery and the option hits a value of 50% of what we paid for it, we will close it out. The odds of it recovering from a 50% reduction in value is long. It can always happen, but over time you will save more money than you lose in that scenario.
End Part 1 of 2
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