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us stock market, stock prices
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9/24/02 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Tuesday: PEP (put); SKO (put); FTN (put); CVS (put); KMG (put)
Buy alerts issued: SCSS
Trailing stop alerts: None issued
Stop alerts: None issued
To subscribe to the Daily alert service you can sign up at the following link:
http://www.investmenthouse.com/alertdly.htm
SUMMARY:
- Waves of more bad news starts the market lower once more.
- Fed's 'stay the course' view based on some dated data fails to keep the market from continuing to price in what it views as deflationary policies.
- Nasdaq tries to hold the line as the other indexes play catch up
- Subscriber Questions
More bad news keeps gut punching the market.
The market is unable to absorb bad news, just another indication of its current weakness. Before the open there was tanking French business confidence, LEH missed earnings big, WY missed, and TIN missed big as well. On top of that Maytag announced it is going to miss its quarter and BTM said retail sales fell 1.7% for the prior week. The market could not handle the truth and it was down hard early.
It was not out for the count. After hitting a new low Monday the Nasdaq was trying to rebound. It hit 1200 early and failed, but tried it again late. It failed again. The Dow and S&P 500 were lagging all session. They traded in a range all session. Problem was, that range was much lower than the Monday close. When the Fed did nothing as usual, the market tanked then tried one more time. It also fell one more time in the last half hour with the Dow at a new closing low for the year as it joins the Nasdaq in undercutting support. Sort of; it is still above its July intraday low for now.
THE ECONOMY
Why can't the market get up? The retail sales, falling interest rates, and falling equity prices are not painting a pretty picture. What some are calling an air pocket looks more like something serious developing that was not there two months back, or at least had not risen to the surface.
Weekly retail sales -1.7%.
BTM weekly chain store sales fell 1.7% this past week. After bumping higher early September, retail sales are resuming their August slump as we saw in WMT, TGT, and other retailers (and other sectors as well). The rest of the economy is dead and the consumer is taking a breather that it always takes before the holidays. This is something I noticed early on in life. My father worked in auto repair, and each September and October he would say that it was the slowest it had ever been. After a few years (a fast study), I figured it out and reminded my father that this was a slow time every year. Sometimes the cycles are simple to see yet they are lost in the rhetoric and overly complicated rituals. What we have is a typical slow period that unfortunately is coupled with some serious problems in the global and domestic economies and political disputes.
FOMC leaves rates unchanged.
Some complained, some lauded the move, but when all is said and done, the Fed has been behind the curve all the way down, and it could cut rates to 0.50 and really have no impact at this point. Equities and bond rates are falling in sync. They usually move inversely: low rates are good for stocks, higher rates are a sign of tight money and less business expansion and thus lower stock prices.
Where have we seen lower equity prices coupled with low interest rates in recent history? Japan. That combination is a hallmark of deflation. With the current fed funds rate at 1.75%, it is right at the 2 year treasury rate. That means there is no incentive to borrow money or to take risk on projects. There is no economic incentive to do so because demand is weak, and there is no monetary incentive because you cannot make part of your deal on the interest rates. This is exactly what Japan did as it never got ahead of the curve and now interest rates are 0 and so is the economic output.
Thus the 'stay the course' administration and a Senate that wants to win political seats and not jobs is sending the U.S. in Japan's footprints. Talk all you want about how the fundamentals are strong, the work force is the best in the world, etc., but if that workforce is idle because there is no demand to take advantage of those 'strong fundamentals,' it does not matter. There has to be something to give businesses of all sizes and investors of all sizes reason to step out and take some risk by investing in the U.S. The monetary policy with its 2 year note equal to the fed funds rate and wide borrowing spreads is not providing any incentive. The consumer is not going to pull business out of recession. The government refuses to take action on the economy. We hate to say it just as we hated to say in 2000 that we were heading into recession and a market collapse, but this hands off, let things work themselves out policy is cementing our destiny to follow in Japan's footsteps. The irony of that (there is a lot of bitter irony in this market and economy) is that it was a hands on policy that wrecked the prosperity and now no one wants to do anything to get the prosperity back.
Argue about invading Iraq, but if we don't have the economy to pay for it we don't win a war on terrorism. What is the primary way to beat the terrorists? Get their money. We are having a very hard time doing that. Thus the only way we can beat them is to outlast them and be willing to spend what it takes to doggedly track them down. That takes a lot of money just as it took a lot of money to outspend the USSR on defense and force the soviets to bankrupt their economy trying to keep up. We did that with big tax cuts that caused the investment boom in the U.S. that produced huge tax revenues. That is the only way we can pursue this multiyear (multi-decade?) war on terror. If we don't get the economy up and running as a first priority we will lose the war on terrorism because we will either spend ourselves into ruin or we will have to abandon it.
Consumer confidence manages a rise. A good sign, but the consumer is not enough.
September confidence came in at 93.3, above 92.4 expectations. August was revised to 94.5 from 93.5. This was positive news. Expectations rose a point to 96.5 from 95.5. Current conditions fell a point, but it is normal in a recovery scenario. As long as the jobless rate does not jump sharply (it was 7.8% in the 1991 recession) this is a good gauge of some future stability in the consumer. It does not equate one to one with consumption, but in general high confidence sets the stage for continued consumption. The jobs picture does remain the caveat: weekly claims have been over 400K for a month and continuing claims continue to climb. If a consumer is worried about his or her job, that is when the consumer stops consuming.
Of course, the consumer has remained strong before, during, and after the recession. It did not prevent the recession, and thus are we being pragmatic or just Polly Anna if we think the consumer will rescue the economy? The consumer is not going to purchase more Cisco servers. It is a 'trickle down' effect. The theory is the consumer is active enough to require businesses to buy more services to handle the load, i.e., new computer systems, vehicles, machines, etc. Again, however, given the huge technology investments in the late 1990's and 2000 and the at best steady consume demand, there is no need to get new systems to handle the same or even less load. If all things remain equal (and it is not clear that the consumer will remain strong) obsolescence is about the only thing that will make businesses invest in new systems other than an inducement to do so. These new systems are not at that point yet, so if we stay the course we are assuring ourselves of a very slow recovery at best, a deflationary economy following Japan at worst. Neither is a very savory prospect.
THE MARKET
The market tried to snapback, led by the Nasdaq, but two tries could not overcome the sizeable pile of negative company news and the Fed's ability to drive stock prices lower. In the end the short covering rally we were looking for had to wait for more selling as the bad news continued to pile up. Instead of a nice little bounce above the July lows to take the market into October, the market is going ahead with a full test of those lows henceforth.
Tuesday the Dow closed at a new 4 year low, joining the Nasdaq that made another 6 year low as well. Misery loves company. The S&P 500 managed to hold above a new low, but not because it did not sell. It tanked as well, but it started out higher so it is not at its lows yet. Volume jumped on the selling indicating more dumping as the indexes knock out new closing lows. There was no apparent fear accompanying the selling as the VXN fell and the VIX was up less than a point. The market appears to be slipping below the July lows without a lot of concern. There is a test in progress, and thus far an undercut of lows by both the Nasdaq and the Dow has not generated any response to the upside, just higher volume selling. The S&P 500 is the last holdout.
Now the question becomes will the S&P 500 join the others in a full test, and if so, will it hold? The market rises from the gloom is the saying. It appears as if the market has a lot of gloom to rise from but not a lot of fear to drive it.
Ultimately it comes down to an evaluation of the economic recovery potential. Despite all of the economists who are saying a recovery is underway, a quick poll of small businesses indicates that few are looking to hire or expand; they are in survival mode. That does not appear to be the stage for a dramatic improvement in investment and hiring, and certainly not earnings improvement. Thus far the bond and equity markets are forecasting the continuing malaise in the economy. On the other hand, look at the Commodities index. It is back to the Q4 2000 highs. Commodities rise when there is economic recovery forecast. They are very sensitive. That is not a sign of deflation, and it runs contrary to the bond market/equity market forecast. Now some of that is the gold portion of the index, but not all. We will know much more when we see how the S&P 500 handles its July lows and if the Nasdaq (the Nasdaq 100 closed positive) can help start a move higher as the S&P tests its lows or just above them.
Sentiment Indicators
VIX: 45.38; +0.67
VXN: 59.4; -0.45
Put/Call Ratio (CBOE): 0.86; -0.02
Nasdaq
Tried to rally but was hammered back at 1200 twice. Closed just about flat on rising volume as it failed in its first recovery attempt.
Stats: -2.76 points (-0.23%) to close at 1182.17
Volume: 1.667B (+15.5%). Rising, above average volume on a day of selling. The index did attempt a recovery, but the action was not such that you could say 'aha, a bottom.'
Up Volume: 862M (+629M)
Down Volume: 791M (-409M)
A/D and Hi/Lo: Decliners led 1.71 to 1. Pretty strong downside action given that the index spent much of the session in positive territory before sliding negative very late.
Previous Session: Decliners led 3.05 to 1
New Highs: 16 (+4)
New Lows: 374 (+46). Getting to a point of concern as it approaches 400 new lows. You want to see new lows hold the line on a test. They are about to balloon to high. This indicates that a lot of stocks are not able to hold the lows of the first sell down; if enough undercut their prior lows the index gets dragged lower by its own weight.
The Chart: http://www.investmenthouse.com/cd/$compq.html
Twice failed at resistance at 1200, unable to capitalize on some attempted resilience after hitting a new six-year low. It traded roughly flat on the session on rising, slightly above average volume. After a selloff this kind of churning can indicate a bounce coming as the buyers are in there buying as fast as the sellers are selling. In other words, the buyers are catching up with the sellers after the long slide lower. As of yet, however, these sessions have been unable to produce a winner in the current downtrend. With the Dow breaking to a new closing low the test is underway without one more relief bounce. The Nasdaq looks ready to try and salvage the July lows even though the tech news is dreadful. It now needs some help from the S&P 500 that has yet to hit its lows, but note that the Nasdaq 100 actually managed to close positive. The Nasdaq could start a move back up.
S&P 500/NYSE
On the way to the July closing low and then perhaps the intraday low as the index sells on rising volume. It is the last hold out and may be on a collision course with the lows. It is still in the hunt to find a bottom and we will have to let it show us if it is there despite the negative economic news.
Stats: -14.42 points (-1.73%) to close at 819.29
NYSE Volume: 1.703B (+26.56%). NYSE volume outgunned the Nasdaq. Another quiet, undercover sign that a bottom might be at hand.
Up Volume: 304M (+11M)
Down Volume: 1.381B (+318M). Some serious selling.
A/D and Hi/Lo: Decliners led 2.3 to 1. Pretty nasty internals. Perhaps, just perhaps, the selling is getting ugly enough.
Previous Session: Decliners led 2.51 to 1
New Highs: 61 (+10)
New Lows: 363 (+62). Getting too high and the S&P is still relatively far from its low.
The Chart: http://www.investmenthouse.com/cd/$spx.html
Very choppy action all session failing three times at roughly at 828 to 833. In the end, however, it could not overcome the downside pressure as the July lows act as a magnet for the index (797.70 closing, 775.68 intraday). As noted, the S&P 500 is the last holdout of the large cap indexes to test its lows, and the higher volume seems to indicate it will attempt to test them. Noting past bottoms, however, not all indexes had to test the lows; it was sufficient for one or two other indexes to do that.
Take the 1974 bear market for example. The Dow and S&P both hit lows, then 2.5 months later the Dow undercut its October low but the S&P 500 never did. It held above them and they both rose from there to end that bear market. What were the economic conditions? Gloom and gloomier. We were trapped by OPEC still, unemployment made today's figures look like a blessing, interest rates were through the roof, we had yet to recover from Viet Nam, the cost of environmental compliance was eating up corporate profits, and the stock market was in a 2 year bear market. There was no sign of relief in sight economically speaking. Yet, the market bottomed in all of that gloom with a scenario much like today's: economic gloom and the Dow moving down and undercutting its prior lows ahead of the S&P 500.
Does that mean that will happen? Of course not. There are some big differences. Interest rates are tanking along with equities. While at first blush that is better than the high 1970's rates, if it is a sign of deflation (and it is a first sign), then that is infinitely worse. Further, it can hardly be argued that 1973 to 1974 was a post-bubble bust. The S&P had run up 70% from 1971 to January 1973, but not quite the run of the late 1990's. Further, the S&P 500 also formed a head and shoulders pattern from 1971 to 1974, and it fully completed that pattern before it rose. If the S&P completes its big head and shoulders formed from 1998 to 2002, it would hit 500 before that was fully completed in the sense that it fell an amount equal to the height of the pattern (neck at 1000, head topped at 1500, that leaves 500 points from the neckline, or 500 for the S&P 500. Lots of 500's there.). Those are some big differences.
Thus the S&P could still test a bit lower and then move up with the Nasdaq if Nasdaq can follow through on its attempts to start higher (remember that the Nasdaq 100 managed a slight gain after the selloff). We are throwing out the possibilities here in order to be prepared. If there is a rally from here or a slight test lower, we still have to view it with great skepticism and as basically a relief bounce until it shows otherwise, i.e., a big follow through with some major upside volume.
Dow:
Stats: -189.02 points (-2.4%) to close at 7683.13
Volume: 1.703B (+26.56%)
Dow undercut its July closing low (7702.34) and now has 7532.66 as its intraday test. Volume was higher as it sold lower, and that indicates the big 30 were under distribution. It is just part of Tuesday's session away from a full test. Its fate, however, is in the hands of the Nasdaq and the S&P 500.
The Chart: http://www.investmenthouse.com/cd/$indu.html
WEDNESDAY
Existing home sales are out at 10ET. It won't really stem the tide of selling if it is good; it is more reason to sell if it is bad. The financial talk is dominated now by questions and speculation about 'what else is out there' that could come out and upset the market. The braintrusts are wondering what other accounting-like issue has yet to be discovered. EDS was mentioned in the same sentence with derivative issues, and that opened speculation about bank solvency and the like. The point: the focus is totally on what could go wrong. That may be good for a market bottom and we have to be detached enough to see that.
We are included. After today's action I sat down and thought hard. In our staff meeting on the market I said that I was falling victim to the gloom. Things are not good economically and there are some serious issues facing it, but we have to remember that the stock market bottomed in 1974 a long, long, long way from anything near what we would call good economic times. It is critical to stay as detached as possible, taking in the facts about the economy and then filtering them through the markets' action (bond, equity, etc.).
Tuesday was mixed: Dow and S&P falling on rising volume, Nasdaq trying to hold the line on rising volume. Could be an inflection point for a move up, could be a failed attempt to rally by Nasdaq. Right now the market is showing selling action, and until it can put together an upside move it remains in a downtrend. This is an important point for the market and we need to be ready if we see a solid rally on volume taking place. At potential key levels it is best to take the gains and see how it shakes out than to ride gains into losses on a sustained move. The sentiment indicators are not spiking, but the gloom on the financial stations is, and the selling volume is gaining some steam but is nowhere near vicious. There are the seeds of a turn here, but again, we need to see it.
We took some downside profit throughout the session and took a few new positions in the choppy action. We still expect a bounce here; right now we feel like the princess waiting for the prince to come, but the market is extended to the downside. Another test lower by the S&P 500 could complete this trip to the downside. We still have some downside plays that look decent and some upside plays making good moves. Unlike July, not every sector is being torn down as the indexes test the July and August lows. That is a very encouraging sign that the market is not going into meltdown. We need to see how the Nasdaq responds Wednesday and just how far the S&P 500 falls as well. We still have a feeling that it is going to find bottom ahead of its lows based on this action, but feelings don't mean squat to the ticker. Thus we are going to be ready to close out positions to the downside if we see a test and turn and be ready on some more upside.
End Part 1 of 2
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us stock market
stock prices
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