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2/28/01 Investment House Daily
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Investment House Daily Subscribers:

TONIGHT:
- Market set itself up for disappointment, and Greenspan delivered.
- Market has no confidence in the Fed.
- Economic news is not bad, but that remains a secondary (at best) concern.
- Stocks tanking lower without much future for now.
- Subscriber Questions
- Team Trades

No rate cut and Greenspan unrepentant.

Rallying on a wing and a prayer is not often productive. The market rallied on the hope of a rate cut and Greenspan gave no indication that he was inclined to do so in the near term. Indeed, Greenspan's changes to his testimony seemed to reflect a continued faith in the nascent recovery as opposed to fears that it may weaken when he stated that the slowdown at the end of 2000 was "less evident" in January and February of this year. He did note that the "retrenchment" has yet to run its course and that even with the rate cuts in January the risks were still skewed toward sub-par economic performance. But that was about all.

It was enough to have Wayne Angell to more or less retract his prediction of a rate cut. Greenspan continued the dogma of blaming everyone but the Fed for the slowdown, something that Congressman Barney Frank called him on when Frank stated that surely it was not just the businesses and citizens of the U.S. that had caused the slowdown but that the Fed's rate cuts played an active role as well. Frank shifted the question to how this kind of misstep could be avoided in the future, but the point was made for whatever good that would do. Greenspan is in the twilight of his career, and he has the longest running economic expansion under his belt even if it collapses here. If he feels the economy is still strong enough that it won't go into prolonged recession, he is not too worried. His main goal now is to add to his legacy as being the man who advocated paying down the debt and helping make that happen.

We were totally unimpressed with what Greenspan told Congress in either part of his testimony. It was double talk and if, as one commentator said, it was designed to in part cheerlead for the economy, it totally failed to engender any confidence in the U.S. citizenry. That is one of the main problems the market has wrestled with the past four months: no confidence that the Fed has acted prudently or that it is up to the task of rescuing the economy. Indeed, Greenspan indicated today that he has no idea how long it will take the economy to turn back up, but was playing it by ear as we all are. Thus, each piece of economic data will be reviewed under a microscope by all, and then all will guess whether that will be enough to get the Fed to move before March 20 or not. We still don't see anything to change a 50 basis point cut at that point, but there is not a lot today to get Greenspan to move before then based on his testimony today unless a major problem develops. That major problem looks as if it is going to be the Nasdaq, S&P 500, and more and more the Dow as well. The ultimate judge of the economy and consumer confidence gave a big thumbs down to Greenspan today, but then again, it had set itself up for the fall on wishful thinking.

THE ECONOMY

Fourth quarter GDP was revised down to 1.1% growth, right in line with expectations. The GDP price deflator, an inflation gauge, was revised lower than expected to 1.9% from 2.1%. That is some good news on the inflation front after the CPI and PPI scare last week. Gold has moved higher this week, something to keep an eye on. Commodities jumped today, but they are still in a pretty strong downtrend. Again, something to watch, but not serious right now.

The Chicago PMI was very interesting. This index gave a pathetic reading last month of 40.2 and it was expected to rebound a bit from that abysmal showing. Expectations were for a 41.3 reading, but it surprised with a 43.2 reading. Now that is not any pillar of strength, but it is improvement, and that is what the focus is supposedly on. It is being overshadowed by prognostications of inter-meeting rate cuts and the like, but once again, despite all of the negative sentiment, lack of vision, and earnings warnings, we see some improvement in economic conditions. Tomorrow is huge, however, with auto sales, jobless claims, construction spending and the NAPM (the national view of the Chicago report, but the Chicago report is considered very accurate as a national predictor). Tomorrow will tell us a lot more about whether Greenspan's musings are on point or not.

V bottom or not? The economy continues to show signs of life, but confidence continues to fall. Both are rear view indicators, however, as confidence tends to hold up as the economy slows until things get really bad and then tanks and stays down until after there is solid improvement. Fourth quarter GDP does not tell us anything about now other than give a yardstick to measure current events by. One thing we have been hearing consistently from potentially the most accurate source, i.e., the CEO's, is that things have dropped off sharply, they have not yet picked up, and that they cannot tell when they will pick up. Contrast that with 1998 when Wall Street was saying that things were bad and threatening economically but CEO's were saying they just did not see it. Quick rebound in 1998 without any real economic difficulties; long market selloff ahead of this economic slowdown and the jury still out on how fast of an economic recovery. That comparison suggests this is not going to be any walk in the park even if the lagging indicators are continuing to show 'surprising' strength.

The Fed was really, really quick to raise rates when it thought there might be even the shadow of inflation in the future. And it kept on raising rates month after month even though no inflation arose. There is overwhelming evidence of a sharp economic drop off as indicated by top-notch management at CSCO and SUNW and any economic report you want to look at. Yet, the Fed is hanging back because there are weak signs that the economy is not dead yet. Kind of like withholding treatment from a patient because there is still a pulse: let's wait until its dead and then try to resuscitate it! You might save it, but wouldn't recovery be enhanced with that treatment?

We could still get a rate cut before March 20 despite all of the declarations to the contrary today. If things continue to deteriorate the Fed could let one fly at any time. The Fed will act if its buttons are pushed. Greenspan seems to have adopted the attitude that the economy is on course to recovery and that he is willing to let it do that even if it takes longer than he thought a month ago. That is not as horrible as the market seems to think, especially if the economic reports continue to improve as they have been doing. What we have to do is just stick with what is winning for us right now on the upside and the downside.

THE MARKETS

Greenspan talks again, the markets fall again. Once again investors were looking for more than what they were going to get, and as we opined earlier in the week, that was a recipe for further selling. All three indexes rolled over and sold on higher volume, adding yet another day of distribution where institutions unload shares as opposed to buy them. That makes four in the last six sessions on the Nasdaq as it rolls over to new lows. The S&P 500 has suffered 6 in the last 11 sessions, while the Dow has suffered 4 in the last 8 sessions. Distribution days occurring in rapid succession as we have seen can mean there is even more selling ahead. The Nasdaq is already hitting new lows and the S&P 500 could join it if an upside catalyst does not intervene. The Dow is holding in its range for now, but it is getting eroded by the distribution. Those are the signs. We can get oversold bounces as we have seen, but the selling has not abated yet and there is selling but no buying right now.

Overall market stats:

VIX: 31.00; +1.97. Volatility climbed to 32.43 on its high today as it tries a hasty move back to the 35 level that helped spark the last rally attempt. 35-36 has sparked weak rallies, but that is all. We will watch and try to play an upside rally off of that level with OEX or QQQ options and other solid plays, but we have to be patient.

Put/Call ratio: 0.81; +0.02. With all of the talk of selling and gloom today, put buying maintained its staid response. It is on the high end, and we may not get a cathartic spike in this 'wear them out' market. Still, on a rollover in the Nasdaq and S&P 500 to another downleg, we could very well see put buying spike higher and give us the turn needed. Back in 1974 there was a crash down on the third leg that spiked the index higher, and the market started back up within a couple of months after a first attempt failed.

NASDAQ:

The Nasdaq was weak from the opening, trying to rally in the first hour but then tanking as Greenspan appeared cold to the idea of a rate cut anytime soon. There were bright spots as usual, but the retailers were hurt by no rate cut, the household names already at new lows were sold with rising vigor, and gloom seemed high but did not show up in the sentiment indicators. Same old story. We were looking both at upside plays and downside plays, and that worked pretty well. Right now there does not seem to be much to push it higher.

Stats: Down 55.99 points (-2.5%) to close at 2151.83 and a new closing and intraday low for the last couple of years.
Volume: 2.093 billion shares (+15.8%), another distribution day on the Nasdaq (4 of the last 6 sessions). Down volume again buried up volume 1.633 billion to 419 million shares. There were more buyers today by about 350 million, but it did not help.
A/D and Hi/Lo: Declining issues were still solidly in the lead, 1.6 to 1 (2.05 to 1 Tuesday). New highs fell to 55 (-8) as new lows shot up to 173 (+110).

The Chart: http://www.investmenthouse.com/cd/$compq.html

Yet another 52-week closing low. Heck, it was a two year, 4 month closing low to be more exact. Volume spiked higher and a bevy of former leaders turned yet lower. JDSU at 26.75. It was at 140 last July. AMCC at 26.75 as well. It was at 87.50 in January and 110 in October. There is not a lot left of the former 'blue chip' tech stocks. At the same time we have stocks such as LLL, SDS, ACS and SBUX leading the index. Interesting times indeed.

The Nasdaq almost tapped its down trendline again on its session low (2127.50), but we do not have a lot of hope this is going to propel it higher as it attempted to do four sessions ago. Again we come back to the issue of a catalyst that changes the character of the index. It simply does not appear to be present. Indeed, it would have to be an unexpected catalyst that has some staying power. A rate cut tomorrow? It would spike the index higher, but would it hold? Again, not much confidence in the Fed and there is not much to change that other than very strong indications of an economy that is starting to ramp up. Right now the economy is valiantly hanging in there, but a good punch in the gut would knock it out.

Instead we have the Nasdaq rolling to new lows on higher volume, appearing to complete a head and shoulders pattern that had a very, very weak right shoulder. That indicates a greater downside bias. The way a head and shoulders works is you take the points from the top of the head to the neck and that is how far below the neck the stock or index is supposed to fall. Rounding off, if we take 2850 as the top of the head and 2300 as the neckline, that would be a 550 point difference, and that would suggest a fall to 1750. We say 'suggest' because head and shoulders patterns are not all that accurate, but with the distribution days we have seen and the utter failure to even approach 2400, there would appear to be more downside without that catalyst to change the market's character. There does appear to be some support at 2000 to 2050 from July 1998. We will have to see.

Dow/NYSE: The doji on the Dow was prophetic as the industrials turned right back down and tested support at 10,400 on its low. Volume was higher, marking yet another distribution day. It could easily break that support if things don't change.

Stats: Down 141.60 points (-1.3%) to close at 10,495.28.
Volume: NYSE volume moved back up to 1.174 billion shares (+5.3%). Again, that marks the fourth distribution day in eight. That does not bode well for the future. Down volume rose to 758 million shares versus 415 million to the upside.
A/D and Hi/Lo: NYSE declining issues continued to lead 1.2 to 1 (1.09 to 1 Tuesday). New highs fell to 95 (-11) as new lows rose to 33 (+11).

The Chart: http://www.investmenthouse.com/cd/$dja.html

The Dow shot down but found support on its low (10,423.50). That point represents the convergence of the down trendline connecting the September and November highs and a level (10,400) that has acted as both resistance and support several times in the past. That is why the Dow was able to recover somewhat today. The problem is, its stocks are being sold as the distribution days indicate, and it is in jeopardy of breaking that support. If it does so, it will have 10,000 to hold it before it falls to 10,750.

S&P 500: The big cap index notched its own new 52-week closing low on rising NYSE volume. It has already broken back below its down trendline, and today's selling on higher volume once again does not bode well for the future for this index as well. It has leading stocks selling down on high volume. Plus, as we noted before, technology is only 20% of the S&P 500 after the tech bear market. That means other heavy hitters in the economy are struggling as investors factor in the impact of the economic slowdown on those as well. 1175 is looking closer to reality.

Stats: Down 18.00 points (-1.4%) to close at 1239.94. It to recover 10 points late in the session to do it.
Volume: NYSE volume rose on the selling to 1.174 billion shares (+5.3%). While Tuesday did not show institutional selling, today was the opposite.

The Chart: http://www.investmenthouse.com/cd/$spx.html

TOMORROW

As noted above, lots of important economic news out tomorrow that can show us whether Mr. Greenspan's aloof attitude toward questions about economic recovery is warranted. We could see indications that the patient's pulse is in fact getting better (did Greenspan see these numbers before his testimony?), or we could see the need to wheel in the crash cart. We think it will be the former not the latter, but again, just because the patient is recovering, do you stop giving the antibiotics? The Fed Funds Futures contract has priced in a 100% certainty of a 50 basis point cut on March 20, and when it gets this close to the event, that is a very accurate indicator. Why withhold the medicine for twenty days when it could be working on the system now? As Larry Kudlow said, if you know there is going to be a sale in three weeks, why go shopping tomorrow?

We may get a rate cut tomorrow. Maybe Greenspan was just sandbagging and maybe the numbers are going to be sickly enough to warrant another inter-meeting cut. Maybe. If he is concerned about the market as well, he is also going to get a chance to factor that in as it looks as if the Nasdaq is heading lower, and the S&P 500 and Dow are looking weak as well.

We don't want to sound too gloomy, but we have to be realistic. We have been getting short rally attempts that give us some playing room to the upside, but the big money is selling into these rallies as evidenced by the distribution days. The trend for the big names to be sold while the sectors we have been following to the upside quietly go about their business. That is how we have to invest in this market. That is what it is giving us now. Today was a money maker as the put plays lit up the board while pre-splits like LTR and CYTC turned it green to the upside. We also had plays such as OCLR and WCNX breakout to the upside. The big names are not moving up right now. Take what they give to the downside and take what the other stocks are giving to the upside.

Tomorrow we see more downside without something to change things. If the Nasdaq can bounce again off of its down trendline at 2100, there might be some upside as the Nasdaq remains incredibly oversold. But oversold does not automatically equal rallies. We will get there, but the short interest is not overwhelming right now. Stick with solid upside breakouts and solid breakdowns.

Support and Resistance Levels

Nasdaq: Closed at 2151.83.
Resistance: 2400 to 2500. Then 2650. 2890 to 2900 is next before the 3000 level.
Support: 2000 to 2050

S&P 500: Closed at 1239.94.
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 10,495.28.
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% actual versus 1.1% expected and 1.4% prior.
Chain Deflator-Preliminary, Fourth Quarter (8:30): 1.9% actual versus 2.1% expected and 2.1% prior.
Greenspan, Son of Humphrey-Hawkins, Part 2 (9:30).
Chicago PMI, February (10:00): 43.2% actual versus 41.3% expected and 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: Have you considered using the VXN, the volatility index for the Nasdaq?
A: Yes, we are indeed looking at it. The VXN is a newer measure of volatility that covers the Nasdaq. It was needed and it will be a useful tool. Will be. Right now there is less than one month's data on the index. Yes it is has shot higher since mid-January, but that does not tell us anything at this point because there is not backlog of data to compare its moves to the Nasdaq's moves as there is with the VIX. We are watching it, but we need to get more data to know how the moves between the index and this volatility measure match up.

End Part 1 of 2

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