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money investment, day trading
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10/03/02 Technical Traders Report Update
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Technical Traders Report Subscribers:
MARKET ALERTS:
Targets hit alerts issued Thursday: TCB; STT; WFC; RF; AXP
Buy alerts issued: ABFS
Trailing stops issued: None issued
Stop alerts issued: None issued
You can sign up for Technical Trader alerts at the following link:
http://www.investmenthouse.com/alertttr.htm
Emails: We love your emails. We receive hundreds of emails a week, but we don't mind. We respond to them all as fast as we can, so bear with us.
SUMMARY:
- Early spurt on economic news runs out of gas.
- Economic news not that great or bad, but Bush speech disappoints market.
- In a low volume trading range at the lows.
Dow rallies then gives back another 200 from the intraday high.
It is a familiar pattern: rally attempt fades to harsh reality as buyers fail to follow through. It is not so much the selling as the lack of buying. Or as they say down here in the south, it's not so much the heat but the dad blamed humidity.
The economic news was not great but was not as bad as feared. The market rallied on the ISM services number. A sharp move that got a lot of attention. Then it lost its nerve and sold off, continuing the downtrend. Volume backed off as the indexes settled into a post-morning rally decline (borrowing from the bull on the Ameritrade commercials). Lots of gloom over the selloff once again, and it looked like the same ol' same ol'. As discussed below, not entirely.
THE ECONOMY
1992 was the 'jobless recovery.' This one can be called the 'paper recovery.'
The government says there is a recovery underway, but all of the businesses, large and small, don't see it. Moreover, when you look behind the manipulated numbers to the real indicators, the economy stinks. Al Gore got it half right: Bush needs to look at what Ronald Reagan did. That does not mean Bush needs to reassess what he is doing (e.g., tax cuts), but he needs to do what Reagan did in the Emergency Economic Recovery Tax Act of 1981: investment tax credits, accelerated depreciation, further lower the marginal tax rate, reduce (preferably eliminate) the capital gains tax. On top of that he needs a new wrinkle, a new, much larger deduction for all investors to write off their investment losses. That money is gone, but a deduction for these losses would free up existing money for the economy that would otherwise go to paying taxes. Tax revenues will continue to fall even if taxes are raised; without a thriving economy tax rates always fall. Thus the priority is to use the available money to restart the economy now so there will be enough underlying economic activity to support the myriad of entitlements, programs and projects the Congress refuses to reduce by $1.
Are these steps necessary? Look what happened intraday in the market. The better than expected (i.e., not as crappy as feared) economic numbers sparked a sharp recovery in the market. As the market was rallying higher President Bush delivered a speech on the economy. When it became clear that the sole economic assistance item on his list was this terrorist insurance red herring the market turned and started the session-long selloff. The market is clearly telling the administration that terrorism worries ARE NOT what is holding down the economy. How many small businesses have not build a new shop or office based on fear that a terrorist act will cause a loss? Maybe there a few big projects from big business, and maybe there are some lingering effects in New York as it was ground zero, but the rest of the country? We submit that terrorism losses concerns are a very small part and are well down the list of business concerns regarding the economy. The market's reaction was shouting out loud today, but the administration has ear plugs in. It thinks it can defy 60 years of history and re-take the Senate and therefore can forego discussing the economy seriously for now. It will be a bitter pill for the administration to swallow in a month.
Jobless claims up and over 400K still.
No surprise with all the layoff announcements over the past week, jobless claims rose to 417K over the 410K expected. That was 'just' a 5K rise from the prior week IF you don't count that the prior week was revised up 6K from 406K. So, the jump was really 11K. Confused? Remember: 400K is important as it shows a relatively weak jobs market (one that is not recovering). The trend remains up over the past few months. The 4-week average rose to 423K, its highest since May. Continuing claims were up again to 3.68 million. There is simply no job creation.
ISM services 53.9 versus 50.9 prior (51.4 expected).
The lack of jobs is highlighted by the service sector activity report. It was up, again showing expansion, but its employment sub-index fell to 46.6 from 47.3. As with the ISM for manufacturing, this is a sentiment report. What it shows is that will the service sector is a bit more optimistic it has even lower plans for any future hiring. The numbers mean there are layoffs ongoing, and that they are picking up steam. No surprise there given the weekly numbers. Thus, even though the market jumped on this news, the end result was a realization that the numbers showed further employment problems and that does not bode well for a real recovery as opposed to the paper recovery the government is telling us about.
Factory orders flat.
A 0.3% drop was expected after the 4.7% gain in July. It was flat. Much rejoicing. A 4.7% drop is huge and shows that August started another slowdown in manufacturing if that is possible.
THE MARKET
The so-so rally on so-so economic news was trashed with the President's economic speech that focused only on terrorism insurance. We are reminded of Bill Clinton's first item on the agenda when he took office were gays in the military. That is the top of the list of important items? The market tanked on Bush's words, showing that losses from future terrorist acts are not the most critical thing to an economic recovery.
The selling was not harsh, however, as volume was lower on the NSYE and Nasdaq. Once again there were simply no buyers. That action kept the indexes in the two-week range near the July lows. The indexes are showing overall decent price/volume action as they work through this range. They could very well be building at this level for an attempted move higher.
When we discussed the 'perfect' scenario back in August, it called for that August rally carrying into September, then selling in September and October that takes the indexes to their July lows, all occurring on relatively light volume. The August rally fizzled a bit early, but early September found some upside legs that gave the same result. Then the selling in late September and now the lazy trading range as gloom about the economy builds: effect of war, effect of terrorism, effect of higher energy prices, effect of dockworkers' strike, eroding consumer buying, potential housing bubble. The list is longer than my sons' Christmas list. The selling the past two weeks, indeed all the way down in September, has not been ugly. Lots of gloom but no vicious selling. Could be something here.
Could be. As we said over the weekend, the market is at an inflection point. It is either going up from more or less the current level, (a significant bottom) or it is going to roll over and really sell off further with serious downside moves on the Nasdaq and S&P 500. With the action we are seeing, we are not going to chase much more downside right now. The risk/reward ratio is not that great. Yes we yanked in several downside gains over the last few days and making $1K, $3K, $5K and more. From here, however, until we see something significant such as a rally up to resistance that fails or a breakdown and subsequent test that fails we are going to take it slow and cautious downside.
What we are seeing. Many sectors are still holding up despite the drop to the prior lows by the indexes. In July everything was hammered. Volume has not been wicked on this drop; more of a lazy drift lower. New lows are not shooting higher on the selling, indicating that many stocks are not breaking to new lows as the market tests the current lows. Then there is sentiment; bullish and bearish advisors are in a dead heat. There was a rally attempt that is still technically alive for a follow through similar to what happened in early August when the indexes deeply tested the July low. Gloom is very high. Then there are logistics. It would take a major breakdown to make serious money on downside plays; they would have to take out their prior lows, and with the price/volume action we are seeing we are not ready to bet that will happen. With all of that we feel it is better to take it easy. We still have some shorts out, but we will pull them in if there is another bounce from the lows.
Not all is rosy. Financials were hammered for the second straight session on big volume. It is hard for the market to make a meaningful move with the financials getting busted hard. Maybe this is their last flushing out. Maybe. The point: the market is not showing that steady downward push but is range trading in a very narrow range. Investors get hurt on the big turns in the market; when the market is near an inflection point and exhibiting signs that it is not the same old action, best to turn cautious and let the trend show you it is still in place or see if it changes. There will be PLENTY of plays regardless of which way it goes. One thing I hope you have all learned: regardless of which way this market goes we can make very good money on it. Our main concern is identifying the major trend and the subtrends and matching our plays accordingly.
Sentiment Indicators
Bears/bulls: Bearish advisors jumped from just 30% to 38%. Bullish advisors dropped from 42% to 38%. A dead heat but ready to cross over. Another cross over that was seen back in July and August would be some good icing on this test. When bears surpass bulls that is usually a sign that some sort of rally is ahead.
VIX: 44.96; +1.6
VXN: 58.21; +0.06
Put/Call Ratio (CBOE): 1.04; +0.21. Another 1.0 close indicating that there is still a lot of downside speculation.
Nasdaq
Testing back down to the recent intraday lows at 1160 but holding, making another new closing low.
Stats: -21.74 points (-1.83%) to close at 1165.56
Volume: 1.645B (-7%). Volume backed right back down on the selling as the Nasdaq tested the recent intraday lows.
Up Volume: 430M (-37M)
Down Volume: 1.125B (-159M)
A/D and Hi/Lo: Decliners led 1.4 to 1. Not ugly at all.
Previous Session: Decliners led 1.78 to 1
New Highs: 19 (+1)
New Lows: 269 (+44). Not much of a move. Still a good sign. Remember, new lows fell on Wednesday's selling.
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq made a new closing low but was able to hold above the 1160 intraday lows touched Monday and Tuesday. Sure it is skating on thin ice, but volume was lower and price/volume action has not been bad during this 2-week range from 1160 to 1225. It is still trending lower with lower and lower highs; the pattern is technically a bearish descending triangle, but with the S&P 500 still holding up well above its lows, the Nasdaq can hang out down here while the S&P tests and maybe finds its bottom.
S&P 500/NYSE
Held the near term bottom channel line on the close as volume slid back.
Stats: -38.42 points (-0.5%) to close at 7717.19
Volume: 1.677B (-2.46%). Lower volume on the Thursday selling. Price/volume remains decent on this lateral move.
Up Volume: 562M (+257M)
Down Volume: 1.097B (-259M). The ratio is not that bad, at least not as bad as it has been.
A/D and Hi/Lo: Decliners led 1.38 to 1. Was not a bad day at all as the string of really bad 2:1 down sessions ends.
Previous Session: Decliners led 2.11 to 1
New Highs: 74 (-2)
New Lows: 211 (+100). A fairly big jump, but still at a very manageable level.
The Chart: http://www.investmenthouse.com/cd/$spx.html
The S&P sold but not aggressively. Yes it is moving back down in the downtrend as it again tested the August down trendline on the high (840.02) and fell back. It also managed to hold the first of the bottom trendlines of the March downtrend channel. Not a lot of support there, but a good place to hold. The S&P still has not approached its July intraday low of 775. It tapped 800 Monday and jumped back up. It too is range trading right now from 800 to 850. Looks as if it is going to test the bottom of the range again at 800 before it moves higher. If it does and it holds, we are inclined to take a flyer on some OEX calls or some S&P futures to catch another explosive move upside. We would prefer it did not even make it to that point before it started back up as that would be stronger; higher low, etc. We cannot, however, lose sight that it is still trending lower with a similar pattern to Nasdaq, and that can result in a bigger breakdown if the market is not ready to rally. Again, we can let it show us what it is doing and then react.
Dow:
Stats: -38.42 points (-0.5%) to close at 7717.19
Volume: 1.677B (-2.46%)
The Dow opened, rallied to near the top of its recent range (8000 to 7500) and then gave it all up and more once again (another 200 points shed from the high). It too is still in the downtrend but is trying to work laterally and hold this level. The candlestick pattern showed a doji; ready to rally? We are not willing to lay bets on that. The index tested the top of its range and is now settling back toward the bottom of the range on lower volume. It will most likely touch it before it heads higher and lets us know if it is interested in making an advance or breaking down.
The Chart: http://www.investmenthouse.com/cd/$indu.html
FRIDAY
The employment report is out before the open. Last month there was a surprise drop and a jump in payrolls though most were government related; the private sector lost jobs. That report will dominate the action. Expectations are for 5.9% to 6% but again the key will be jobs. There is even less chance of a surprise in payrolls given the layoff announcements we have seen over the past month. It may be the news that either stokes a final test of the lows and recovery or a blowout of the bottom for a freefall.
Again we are not going out on a limb at this point. There is a potential at these important levels that the trend could change. We would prefer to let the trend re-establish itself or give way, and then pick up the trend that develops. On a move lower on the economic numbers we will watch to see if the 800 level holds. If it does we will pull in most if not all of our shorts that have not hit the target. At that point most will be darn close if not there as we were setting targets in line with a test of the lows. Then if there is a reversal we may take that flyer on some index options; the OEX blasted from 400 to 425 in two sessions last time. That is a nice return. No guarantee it will happen again, and that is why it is a more aggressive move while we wait to see what trend actually holds.
One point to keep in the back of your mind (it has been in ours), and it is more of a sentiment consideration. Most analysts out there are predicting a further, major drop in the indexes. They may very well be right; certainly there is no good economic news right now and a whole basket of indicators of decent and dubious value indicate a further fall could take place. Even tonight one analyst was on saying the downside volume momentum was not great enough to set a floor nor was the upside momentum enough to sustain a rally so there was nothing good upside ahead. Some look at this, some look at that, none match up. Problem is most of these indicators are not really tested. There have only been a few periods in history (really just one) where something like the past 2.5 years has happened. Even if one of these supposedly predicting indicators is right, which one?
We look at history. History from the 1930's and the 1970's suggest that the market could sell further or it could form a bottom here. After that it is up to the market to show us which one. There is a saying about garbage in, garbage out. We are not saying they are garbage, but there is a real lack of consistent data to input into these predicting formulas. In 1974 there were many, many dire predictions about how much further the market would sell by some very prominent market analysts. More than a simple majority predicting further major selling in the market from the actual lows. The economy was horrid, interest rates too high, energy crisis and environmental regulations would drain business activity for decades to come. The market bottomed. All of the volume momentum calculations, wave theories, etc. that predicted further significant downside were wrong.
That is why we keep it simple: identify the trends that are in place and play them until they are broken OR we are at an important inflection point and the actual market action is showing that there may be a change at hand. Then we get conservative and let the market show us what it is going to do. What if the theory is right and the Dow goes to 5000? Do we have to make bets right now on that theory? No, there will be time to sell what we have and align ourselves with the prevailing trend and make a lot of money on it. Are we going to bet the farm right now on a prediction that the Dow will go to 5000? Of course not. We will play what the market shows, taking what the market is giving. The point: don't get distracted by the literally dozens and dozens of 'predictors' out there. We know the market could go a lot lower but if it does we will play that move and protect ourselves by using some good selling rules. Keep focused on what the market is showing us now with an eye on the horizon. That will keep us in what is working now and also warn us of any clouds or trains coming.
End Part 1 of 2
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