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The first part 1 had some text from Monday
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10/01/02 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Tuesday: CUB
Buy alerts issued: ADLR; DL
Trailing stop alerts: VMI
Stop alerts: LBIX
To subscribe to the Daily alert service you can sign up at the following link:
http://www.investmenthouse.com/alertdly.htm
SUMMARY:
- Iraq/UN accord helps fuel rally.
- Manufacturing still so slow.
- Still in the downtrend, and until a clear break have to respect the trend.
- Will Dell spike the rally attempt or is it just the same old flat punch?
- Team Trades
Indexes speed higher on another reversal.
There was no real news though the move higher really picked up speed when the UN announced it had reached an accord with Iraq on the return of weapons inspectors. Stocks of all shapes and sizes turned and rallied, though the Nasdaq A/D line was really anemic given the gains otherwise seen across the board. Volume was up on the Nasdaq, down on the NYSE, no real follow through and indeed, too early for any real follow through from the S&P 500 Monday reversal off of 800.
It was certainly no one-day wonder as we thought it might be, but it was not a clear signal that a bottom had been reached. There is still so much to work through before that comes into any better focus. For now it was an unexpected turn around that caught most floor traders we were talking with Tuesday morning off guard as a little short covering became more covering, and that led to even more shorts pulled back in (up?). According to our connections on the floor and in several brokerages, there was no real institutional buying, just a lot of shorts covering up. Rallies have to start somewhere, however.
THE ECONOMY
ISM shows manufacturing contraction at 49.5 versus 50.5 in August.
Below 50 for the first time since December. It was apparently not as bad as some were expecting as the market did not plunge into freefall on the announcement. Energy concerns and war were on the list of worries from manufacturers. It is important to remember that this report is a sentiment reading; it is not a measure of actual output or production. It is based on what manufacturers are planning to do. Employment dropped even lower to 44.7 from 45.8, indicating manufacturers are going to or are (as we have seen) shedding jobs faster. New orders did rise to 50.2 from 49.7, a glimmer of hope for the future. Again, however, this is what the manufacturers feel will happen or is happening, not a strict measure of actual new orders, etc. All in all, however, it shows the continued concern in manufacturing, and that means that there is likely to be little upside growth without some sort of push or stimulus to get companies investing back in the U.S.
Construction spending drops 0.4%; -0.1% prior.
As a further sign of the continued slow economy, construction spending was again negative for August as the summer wound down. This goes hand in hand with slow manufacturing and a slowing housing market.
Challenger layoff survey plunges 41%.
Layoff announcements this week were down (lowest in 22 months, not quite the length of this recession), and this gave a short boost to the market when it came out. The bigger picture is still ominous, however, when you consider last the prior week had the 11,000 SBC layoffs in there. Also, over 1 million layoffs have been announced in 2002. That brings layoffs to over 3 million during this recession (calling it what it is), and even more when you factor in those layoffs that occurred before the official recession began but when the U.S. economy went from 8% per quarter growth to 1% growth in two quarters. The weekly drop (which was skewed by the heavy numbers the prior week) does not change the landscape: jobs are still being cut, not created.
Dock worker lockout could be a problem.
Most retailers have wired around this as we discussed in the GDP figures: imports were way up earlier in the summer in anticipation of a strike or other dock problems. That is not the immediate problem. What is the immediate problem are the collateral effects. Shipping has backed up all across the pacific ocean. Those shippers are not making money sitting idle. Truckers waiting on goods are not making money as they sit idle. That is the real cost. Stores still have inventories they stocked up on. It is those that move the goods or are related to those that are going to be the locus of the problem. They won't be making money and thus won't have money to spend. That has a continuing ripple effect that will impact consumption. It is already weakening and this is just another factor to weaken it.
This is just another example of the folly of the government and the Fed thinking they are smarter than the markets. They get some idea that things are too hot or too cold and monkey around with what is working just fine based on natural market forces. It might work for awhile (being generous here; it never has in actual history), but there is always something unexpected that really upsets the cart. Two winters ago it was the energy prices that started up over posturing because OPEC wanted more money. That really put the brakes on the economy as the precipitous drop in GDP showed despite Greenspan's testimony to Congress that he could not see any significant impact (needed new glasses). Then corporate accounting problems. Now a war and a dock strike.
Believe it or not (and our leaders do not seem to believe it), markets are very much natural events. Here in Texas there seems to be a drought every 10 years or so. One of the big reservoirs used for watering rice crops is drawn down during those times. It gets lower and lower. Happened last year again. Said it would take 10 or more years to refill the lake. Well, as so often is the case, when nature breaks a cycle, it does it big time. A major storm came in, dumped a bunch of rain, and the lake was full in two days. If the government would keep its hands off the market takes care of the laggards, the weak, and the cheaters. Problem is now it has meddled and collapsed the market and the economy. It now needs to remove the obstacles to recovery and give the economy a boost to get it going again as the drop was exacerbated by the intervention.
THE MARKET
Monday we noted that maybe the S&P 500 test of 800 and recovery was the start of a recovery. We were not biting on it, but noted it could be. Tuesday the market turned up and logged some impressive price gains. Volume was mixed with Nasdaq up and NYSE down. Still no confirmation volume, but again, it is too early for a follow through to Monday's reversal attempt that was fueled by short covering similar to the Tuesday action.
There was recovery, but many stocks were back up on lower volume. That was not unanimous, but a lot of stocks in continuing downtrends bounced back up on lower volume, still in the downtrend. Even with the strong price rally Monday there was no surge in long term buyers. As noted, many of the floor traders we contacted and brokers for large institutions said the buying was not coming from big institutional investors but more from hedge funds covering up their shorts. Some of the tracks in the sand: stocks that have been hammered were bought up on stronger volume, often a signal of short covering on drastically oversold issues. Others bouncing down in long, continuing downtrends moved up on lower volume, typical action in recovery rallies after the downtrend has made another run lower. In short, it is simply too early to say the big move up Tuesday means any more substantial upside is ahead. The initial wave of short covering must be followed by a wave of buying a week or so later on some heavy volume and breadth that indicates the longer term buyers are picking up after the short sellers have covered.
Sentiment Indicators
VIX: 40.13; -4.44
VXN: 57.24; -1.11
Put/Call Ratio (CBOE): 0.87; -0.22
Nasdaq
A new intraday low set off some short covering as volume moved back over average. Still stalled at resistance on the upside and fell back from there late.
Stats: +41.66 points (+3.55%) to close at 1213.72
Volume: 1.712B (+1.66%). Volume was above average and edged higher on the rebound, indicating possible accumulation. Most of the floor traders we talked to said they were busy covering shorts for clients as opposed to making long term buys.
Up Volume: 1.283B (+956M)
Down Volume: 413M (-916M)
A/D and Hi/Lo: Advancers led 1.25 to 1. Did not turn positive until very late in the session as the large techs led the move once again.
Previous Session: Decliners led 1.21 to 1
New Highs: 31 (+10)
New Lows: 270 (-86)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Charged up off of a second consecutive test of 1160 on the low. Closed at the high and just below the 10 day MVA (1215.52). That is just the first level of resistance (after clearing the recent August downtrend at 1200), and there is a lot more ahead of the index. Maybe this is it. This is similar to the action in July and August where the Nasdaq made a quick double bottom that set off the August rally. It will have to show it, but if it is we are looking at those stocks in good patterns, i.e., those that have not been descending at a 45% angle. We will also take a look at the index itself, but we have to keep in mind it is still very much in a downtrend and there needs to be major buying on the upside coupled with solid breadth to confirm any break of the trend. That was not what happened today though this could be a start.
S&P 500/NYSE
Tuesday's action was much more impressive if nothing else than the 35 point recovery from the low. Volume was not as strong, so we will see if there is some follow through late this week to provide more backbone to the reversal attempt.
Stats: +32.63 points (+4%) to close at 847.91
NYSE Volume: 1.711B (-2.51%). Volume was still above average and a vast improvement over the August rally volume.
Up Volume: 1.354B (+802M)
Down Volume: 340M (-823M)
A/D and Hi/Lo: Advancers led 2.23 to 1. Was much stronger than the Nasdaq all session as small and mid caps continued to move though nowhere near the level of the large caps. That indicates short covering as well as the large cap names are the most widely sold in shorting.
Previous Session: Decliners led 1.22 to 1
New Highs: 100 (+24)
New Lows: 152 (-161)
The Chart: http://www.investmenthouse.com/cd/$spx.html
The S&P moved back into its downtrend channel Tuesday, crossing the 10 day MVA at the same time. It stopped at the August down trendline, but there are more serious levels ahead such as the 18 day MVA and the March down trendline. Those are key levels in continuing downtrends and represent real tests for the index. If there is substance to this move it does one of two things. It breaks over the near term resistance with a chuckle of ease or it moves laterally or slightly lower for a session or two and then powers ahead. It just came off of a 2-deay test of the September low and successfully tested the July closing low as it did. It may just do the former rather than wait around. What we do is see what the index does at resistance and take care of existing positions accordingly.
Dow:
Stats: +346.86 points (+4.57%) to close at 7938.79
Volume: 1.711B (-2.51%)
The Dow provided its own fireworks, putting on a SOX-like day. It cleared the 10 day MVA, closing on the high. Volume was lower but as noted with the S&P 500, still solid compared to the last time it started up after a second test in August. It is moving back into the March downtrend channel is set to challenge 8000 and the 18 day MVA. It too is still locked in its downtrend, and these sharp upside moves on lower volume indicate the tend to burn out if they do not spark some long term interest from those feeling they are missing out.
The Chart: http://www.investmenthouse.com/cd/$indu.html
WEDNESDAY
After hours DELL gave its update. It increased its revenue projections by $200 million ($9.1B versus 8.9B), said it would meet the high end of the earnings range (21 cents; range was 20 to 21), and that 'momentum with customers is broad based.' By the reaction after hours, you would have thought it said that business was booming, yet it did not. The increase in revenues was brought about by a Cisco-like, $1 billion in cost cutting. Moreover, unlike one reporter stated, business was not enjoying a 'broad based increase.' Dell must have had the lawyers working overtime to come up with that 'momentum with customers is broad based' description. It has as much substance as a rice cake. Does it say that business is improving? No. Does it say that momentum is improving? No. It simply said momentum was broad based, i.e., there were many areas it was selling to. That is nothing new. Heck, momentum could be heading down and still be 'broad based.' The lawyers deserve a huge bonus, maybe a percentage of the amount Michael Dell's net worth increased on the news (Dell was up another $1 after hours). To be able to say nothing and get such a move; a work of art.
Boiled down: Dell increased revenues by $200 million by reducing costs by $1 billion. Do the math. That means Dell's business was down $800 million as it was only able to realize $200 million of that billion in cost savings on the positive side of the ledger. That is not good news but a continuation of the same old tune: the efficient businesses are maintaining earnings by stealing market share and cutting costs. With the ISM showing contraction, layoffs on the rise, and consumer spending flagging, the Dell news is nothing new but the same story heard the last year.
Nonetheless, a market desperate for any positive news grabbed the headlines and ran screaming to the 'buy' button. The Nasdaq 100 stocks all jumped immediately. After all, broad based momentum is worth buying into. Futures are up big time over fair value after hours, and it will be an interesting morning Wednesday. The news can drive more short covering and could eventually drive a recovery if enough start buying on fear of missing out. Still, we recall the Cisco rally on that 'home run' quarter that was brought about by nothing more than cost cutting. The market rallied until many decided that the storage emperor had no clothes on.
What do we do while the market tries to figure out what it is going to make of this? We sit back. We recognize we are still in a downtrend that has not been broken. We recognize that these big moves higher on lower volume such as the Dow and S&P 500 so early in a rally attempt often burn out. We close the downside positions that are at our stop points or that we want to preserve gains on and then see where this goes. We are not going to chase the beaten up stocks to the upside; they are prone to reverse sharply after the covering is over. We continue to look to the better stocks as far as patterns, accumulation, earnings and sales to pick our upside plays. We have scouted out many of those already and are indeed in many of those already to the upside. As we said before, those hold up on the selling and then use the rallies to make serious upside moves. We saw that Tuesday once again.
At these points in time where the market has tested a low and could possibly be trying to set a longer term bottom we will back off and let the action tip its hand. If it is another rally that folds, there will be some great downside plays set up. If it continues higher, we have bird-dogged many of the best patterns with the best fundamentals to jump on board for a ride higher.
Support and Resistance
Nasdaq: Closed at 1213.72
Resistance: The 10 day MVA (1215.52). 1230 and 1250 are price resistance points. The 18 day MVA (1237.58). 1270 is still more price resistance from the September lows. The March/May downtrend line at 1280 along with price resistance at 1300. The 50 day MVA (1300.97). 1316, an early August interim high. 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 1360. 1418, the interim test after the September low. That is followed by price resistance at 1500.
Support: Price support from 1190 to 1200 (the July intraday low is 1192.42). The August down trendline at 1200. 1160 has held twice intraday. 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 847.91
Resistance: 850 to 855 (the October 1997 and Q2 1998 lows) stopped things Friday. The 18 day MVA (858.30). The March downtrend line at 862. 875 is price resistance of some significance. The 50 day MVA (892.90). July and August interim highs at 911.64. The September 2000/May 2001 downtrend line at 922. The downtrend lines from the March and April highs (930). Price resistance at 950. 965, the September 2001 closing low.
Support: The 10 day MVA (844.47). The first bottom channel line in the March downtrend (822). Price support at 800 held Monday. The lowest channel line in the March downtrend channel (783). Then the July intraday 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 7938.79
Resistance: The August lows (8043) and the September 2001 intraday low (8062). The 18 day MVA (8059.36). The September closing low at 8235.81. 8250 acted as resistance before after acting as support. The March down trendline at 8248. The 50 day MVA (8419.82). Some price resistance at 8500. 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 10 day MVA (7909.45). The lowest bottom channel line of the March downtrend (7825). The July low (7532.66). The October 1998 lows are at 7400 and 7467. After that is 7000, at some 1997 lows and highs.
Economic Calendar
9-30-02
Personal income, August (8:30): 0.3% actual, 0.5% expected, 0.0% prior.
Personal spending, August (8:30): 0.4% actual, 0.5% expected, 1.0% prior.
Chicago PMI, September (10:00): 48.1 actual, 53.0 expected, 54.9 prior.
10-01-02
Auto sales, September: 6.1M expected, 6.6M pior.
Truck sales, September: 7.8M exepcted, 8.8M prior.
ISM index, September (10:00): 49.50 actual, 51.0 expected, 50.5 prior.
Construction spending, August (10:00): -0.4% actual, -0.1% expected, 0.0% prior.
10-03-02
Initial claims (8:30): 410K expected, 406K prior.
ISM Services, September (10:00): 51.4 expected, 50.9 prior.
Factory orders, August (10:00): -0.3% expected, 4.4% prior.
10-04-02
Nonfarm payrolls, September (8:30): 6K expected, 39K prior.
Unemployment Rate, September (8:30): 5.9% expected, 5.7% prior.
Average workweek, September (8:30): 34.1 expected, 34.1 prior.
Hourly earnings, September (8:30): 0.3% expected, o.3% prior.
End Part 1 of 2
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