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us stock market, trend trading stock
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3/01/01 Investment House Daily
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Investment House Daily Subscribers:
TONIGHT:
- Nasdaq and Dow bounce off support as the Nasdaq traces an intraday double bottom on a strong-volume reversal.
- AMCC and IBM targeted as catalysts, but could it be that investors are finally realizing that good economic news is good news?
- Feverish talk of a bottom on each rally attempt.
- ORCL, SBC and SANM news splashes cold water on many winners after hours.
- Greenspan back in Washington tomorrow.
- Team Trades
Nasdaq and Dow test support and bounce.
The markets resumed their selling right off the bat and they gave us several good put plays as downgrades continued and the economic news was difficult to digest as good or bad. We used the selling as an opportunity to take even more positions to the downside on the QQQ and others. This worked out well as the market continued to sell lower and lower. AMCC then announced it was taking down its own earnings, and the little rally attempt that started at 1:30 ET dropped hard to a new low at 2070. It found support there just 20 points above that 2050 level that we have been looking at as potential support for quite some time. It started showing signs of a bottom: it undercut the previous low of the session and started tapping the low but most trades occurring above the low. Looked like a double bottom forming at support, so we exited our trades and were going to wait for the resistance at the highs of the session to re-enter to the downside.
Well, they never did stop. The QQQ, BRCM and other great put plays for the day past few days just kept on running up. So, we let them go and missed on a great chance to play the upside. We did contemplate the upside, but that does not make you any money. In any event, it looks as if the selling may resume tomorrow as after hours ORCL warned it would not make its number and SANM said it would miss its revenue numbers. Heavy, heavy selling after hours.
A catalyst appears?
The talk was that AMCC was a catalyst: the company fessed up, and it was not as bad as some thought. Maybe, but when the news came out, the initial half hour reaction was a selloff. That is what pushed many of our put plays to our profit targets and made us take a closer look at the pattern the Nasdaq was forming intraday. Maybe it was the catalyst for today's move, but not in the way most thought: it completed the intraday double bottom as many tech investors said "I'm out" on the news and headed for the door. Maybe.
Then there was the IBM rumor that it was issuing a statement that was saying it was upping its quarter. Not according to IBM's official statement, but the stock shot up anyway on the rumor even when the company said it was standing by its previous guidance.
Could it have been that investors finally started viewing economic news that continues to beat expectations as good news as opposed to bad news? That would be prudent as it does not appear Greenspan is going to cut rates before March 20, especially with today's economic data. Doing otherwise would be denial of what Greenspan said and what the reports are showing. Still, we doubt that investors all of the sudden capitulated to the Fed, at least not yet.
Volume was good, but was today anything but an oversold bounce?
The talk was hot and heavy about this being a bottom, that the Nasdaq was going to rally to the low 3,000 level, and that in a week the Nasdaq would start back up. Other than the AMCC and IBM stories, about the only reason given was an oversold condition. Yes the Nasdaq is oversold, but it has been oversold for quite some time. We would love to see a lasting move, but today was not proof of that. We will know more about that next week.
What we do know is that it made a good bounce on good volume. That might carry it up higher and maybe get us back up to the 2400 or 2500 level we were looking for before Wednesday's disappointment. That is a tall order right now. All we can really say about today was that the Nasdaq traced out a double bottom intraday and a lot of roughed up tech stocks jumped up. They still have horrid patterns and are not ready to lead any market higher. Without the good patterns we have seen each rally make some headway and give up. We would love to be wrong and see the market slide into a nice rolling trading range to form some good bases for a solid breakout in the not too distant future. This move at 2070 is the place to start as there is some support here. Right now we have to sit tight and see if this is a transition or a brief respite before continued selling. The volume was the one factor that keeps anyone from ruling the move out as a fluke. That is about all, however.
ORCL spreads no joy after hours.
ORCL announced after hours it was going to miss earnings by 2 cents (0.10 versus 0.12). Looks as if the downgrades of the software are coming home to roost. The stock was halted, but other stocks stepped in for it and sold hard. Software was murdered as SEBL, BEAS, VRTS and others were chopped to ribbons. When ORCL opened it fell from its 21.38 close to 18, and was down at 17 the last time we looked. Other tech stocks from other sectors were down $3 - $5, but at least were not getting blown out.
SANM did not help, saying its revenues would not be up to snuff. That hurt FLEX and JBL after hours. SBC said it would miss earnings, and it took some telecom stocks back down with it as well. Futures were tanking, but we will have to see how it shakes out overnight.
THE ECONOMY
Loads of economic data point both ways, but the consensus is the economy is still heading north, not south.
Jobless claims up, but the headlines are confusing as usual.
Jobless claims were higher than expected at 372,000, up 39,000 from the 333,000 the prior week and the 355,000 expected. That was higher than expected, but also once again the prior week's number was revised substantially lower. That has been something we have seen each week since December: the headline number is higher, but then the revision knocks the initial numbers down significantly. Last week they revised the prior week down 12,000. This week they revised last week down 15,000. As a result, the 4-week moving average is not racing ahead as one would expect. It came in at 352,500 up modestly from 350,750 last week. Thus, while 372,000 is a big number, if the trend holds, it will get a big write down as well. Also, continuing claims fell from 2.503 million to 2.463 million, reversing the recent move to more an more unable to find work right away.
Moreover, note that most layoffs were in the auto industry from areas outside of Michigan. As we reported over the past two months, the auto layoffs are temporary plant closings. Under union contracts, employees receive 95% of their salary if a layoff is temporary. That might impact some spending, but 95% for not working is not bad at all.
NAPM scratches out a gain.
Following the Chicago PMI, the national reading edged higher to 41.9% (42.0% expected) versus January's 41.2% reading. Still well below the 50 reading that would indicate expansion, but with talk of the economy sliding further into the pit, at least the manufacturing sector is trying to hold the line for now. Significantly, the prices paid component slid in lower at 58.1 versus 61.57 in January. That is good to see as it helps alleviate the fear of inflation the PPI raised.
Construction spending jumps as do personal incomes and spending.
Another sign of continued strength, real strength, is the 1.5% gain in construction spending, far outpacing the 0.5% gain anticipated. Further, December's number was revised higher to 1%. The January jump was the largest rise in 10 months.
Personal incomes rose 0.6%, above the 0.5% expected rise and the 0.4% move in December. Spending (PCE) rose 0.7% versus the 0.6% expected. December's spending was revised higher to 0.4% from 0.3%. These increases are the largest since the 1.1% and 0.8% gains respectively back in September 2000. Still, adjusted for inflation, spending rose just 0.2%. That is not getting us there.
Auto spending down but not nearly as much as thought.
All three major U.S. auto producers reported lower sales, but all solidly above expectations. Ford said consumer spending was more resilient than the confidence numbers were suggesting, and indicated it looked for 16.5 million unites for the year, the third best year ever (15.5 million units in the year ended in December). GM reported a 9% decrease in sales, but that was much better than the 15% to 17% decline expected. And Chrysler was expected to limp in with sales 20% lower, but suffered just a 10% decline. It does appear that the consumer confidence numbers are not translating 100% into sales in several parts of the economy.
How low can the stock market go before it really destroys the U.S?
Many say that Greenspan is not worried about the market as his goal is to maintain a stable economy an stable inflation. But in a cause and effect world, he has to worry about this and work in conjunction with the Treasury Secretary and others in the administration. The reason is one we have talked about many times in the past: if the market falls too much we start to lose investment in the U.S. That sets off a chain reaction where foreign money is taken out of the market and put into investments elsewhere in the world. To do that, dollars must be converted into the currency where the money is to be invested. That drops the value of the dollar and the snowball effect starts: more money taken out of the U.S., the dollar buys less, you need more dollars to buy the same item. Uh oh. That is inflation.
So, even if Greenspan sees the economy in a recovery glidepath and inflation threats low, he still cannot let this piece of the puzzle unravel. If the Dow, the last major index holding up, breaks below the 10,000 level and the Nasdaq and S&P 500 cannot recover, he may be compelled to drop rates sooner than later. Just something to keep in the back of your mind when you hear the analysts on the tube say it won't happen based on what Greenspan said Wednesday. That is overly shallow analysis as it ignores reality.
Greenspan on the Hill again.
Greenspan speaks to the House Budget Committee tomorrow the day after it passed the Bush tax cut and is ready to send it on to the full House. Greenspan will have a chance to mitigate some of his harsh words from Wednesday, but the economic data out today appears to bolster his position if he is now inclined to allow for a slower road to recovery. It is a bitter pill to swallow as he had intimated in January he wanted a V bottom to the economy. Maybe we will hear some words to that effect tomorrow, but we doubt anyone will be expecting him to embrace the markets with open arms.
THE MARKETS
A rally off of support saved a nasty day. Did it start a rally or put off the inevitable? A lot of the late upward momentum was short covering as the indexes broke over their highs for the session, triggering the short covering. Rallies need to be confirmed, and that won't happen until next week. Perhaps Greenspan will be more repentant tomorrow and give the markets something to work with. If not, ORCL's warning after hours could test that low again. Bear market rally or the third leg: what is next? If the markets can recover from ORCL's news after selling down in the morning, it would be ready for that bear market rally as support held today and it would have recovered from a trial by fire.
Overall market stats:
VIX: 31.08; +0.08. The VIX hit 34.22 on its high, right at reversal levels, and low and behold there was a rally. All of the components meld together to give moves up. Lasting? Probably not. Playable? Bear market rallies can last for weeks.
Put/Call ratio: 0.69; -0.12. Put buying tanked on the rally, but it still remains in the upper end of the range. Once again it bounced higher, but never reached that fear level we like to see, i.e., a close over 1.0. Again that leads us to believe this bounce came premature to be lasting.
NASDAQ:
It tapped at support twice and then exploded to the upside. Stocks that have been crushed were given some new life on strong volume. That bodes well for a short term rally if they can overcome ORCL and company's warnings after hours as support held and gave rise to a solid bounce.
Stats: Up 31.54 points (+1.5%) to close at 2183.37, a 113 point recovery.
Volume: 2.259 billion shares (+7.9%), the first solid up volume gain in 11 sessions. It does not wash away all of the distribution, but it does give us another shot at a rally. Up volume shot up to 1.439 billion shares versus 732 million to the downside.
A/D and Hi/Lo: Declining issues still maintained their lead, 1.35 to 1 (1.6 to 1 on Wednesday). New highs rose to 56 (+1) while new lows jumped to 220 (+47). Not great internals for a reversal, but we need to see what they look like on a confirmation day next week.
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq tapped a new low right above support and reversed on higher volume. Another high-volume reversal. Let's see, we saw a load of those on the way down from September. Still, we always have to pay attention to them because the market has sold off hard since then and it could be ready to turn things around. We need to watch for a strong gain starting next Tuesday on again stronger, above average volume. That shows the money managers are buying in and can give the move some power.
That said, we have to also consider the woeful state of patterns on the Nasdaq. Based on what we see, the Nasdaq has more work ahead of it before it can mount a sustained move. Perhaps this move can shift it into a trading range to complete some patterns and prepare for a blastoff to better times. Still, with the lack of fear in the market we are skeptical that any rally will last without another further leg down. We may get a nice little rally to the upside here, but we will have to be vigilant.
Dow/NYSE: The Dow once again fought off serious trouble as it tapped down at 10,300 again on its low but then jumped right back up to close handily above support on stronger volume. It staved off disaster for now and may run again to 10,750. Without something really dramatic to change the market, however, it may have to test 10,000.
Stats: Down 45.14 points (-0.4%) to close at 10,450.14.
Volume: NYSE volume edged higher to 1.284 billion shares (+4.8%), a nice change from the frequent distribution of late. Down volume led up volume 704 million to 540 million shares.
A/D and Hi/Lo: NYSE declining issues continued to lead 1.06 to 1 (1.2 to 1 on Wednesday). New highs rose to 97 (+2) while new lows rose to 60 (+27).
The Chart: http://www.investmenthouse.com/cd/$dja.html
Found support once again at 10,300 and rallied to recover. It was needed as the Dow was ready to test 10,000. For now it may recover again to test 10,750, but the overall bias on the index is down. For now, one up day does not erase all of the distribution we have seen. Indeed, in order for the overall market to make a lasting move, the Dow might have to actually break down below 10,000.
S&P 500: The big caps tapped a new 52-week low again, brushing down at 1214.50 on its low before it too staged a strong reversal on rising, above average volume. It is still mired way down at the bottom of its pattern. It is set up for a bounce higher if it can overcome the ORCL news as must the Nasdaq. If it does, it is set up for a run back up to 1275 as a first step.
Stats: Up 1.29 points (+0.1%) to close at 1241.23.
Volume: NYSE volume rose to 1.284 billion shares (4.8%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Friday again. Greenspan speaks again. The markets have to overcome some bad news after hours once again. Daunting, but not impossible.
The rally in the last hours of Thursday was on solid volume and it translated over into solid volume on individual stocks. There was a tremendous amount of pent up buying desire that was unleashed. It was ready to continue after hours until ORCL warned. Nasdaq futures are 45 points below fair value at the time of this writing, and S&P futures are 5 points below fair value. Not devastating, and levels that each can overcome if the desire to rally is there.
Without looking too far ahead (this is titled 'tomorrow' after all), if the market can recover we are not looking for any great rally, but we are not going to turn away from it. What does that mean? We won't go looking at the beaten up techs unless we see one or two that are just absolutely begging for a short term upside play. In all likelihood they are not going to move out of this range for some time, i.e., until they can build some bases. Many are on a 45 degree trajectory to the downside, and that is not much of a pattern for more than a quick move up.
What we are going to focus on are those plays that continue to perform even as the big name techs don't. As we have been seeing, those plays are still out there and we have more today. We will also take advantage of the selling that occurs once a rally starts to fizzle out. Last time it just made it to 2300 before it died. It has formed a head and shoulders with a weak right shoulder, and the potential is to the downside unless and until it changes its character. The trend remains down, so we will continue to look for those stocks that bounce up on new hope and then fail and start to roll over. Those plays to the downside give the more consistent gains with these stocks right now.
This is a time that does not come around often, but unlike other bear markets in the past, there are places to put money to work and make good money. Indeed, many plays are working just as they always do, i.e., playing the breakouts, just in different sectors from in 1999 and 2000. Many have walked away from the market even as it gets more predictable with its upside and downside moves. In addition to the breakouts in solid sectors, the back and forth action gives great opportunity to make money just watching when stocks hit resistance and fall and then hit support and bounce back up. Tomorrow we are going to look for those stocks that continue to breakout of solid patterns while we see how the rally versus ORCL announcement plays out. Patience waiting for the breakouts and patience to let the downside plays set up for the next round.
Support and Resistance Levels
Nasdaq: Closed at 2183.37.
Resistance: 2400 to 2500. Then 2650. 2890 to 2900 is next before the 3000 level.
Support: 2000 to 2050
S&P 500: Closed at 1241.23.
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 10,450.14.
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.
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): 372,000 actual versus 350,000 actual and 333,000 prior (revised from 348,000).
Personal Income, January (8:30): 0.6% actual versus 0.5% expected and 0.4% prior.
PCE, January (8:30): 0.7% actual versus 0.6% expected and 0.4% prior (revised from 0.3%).
Construction Spending, January (10:00): 1.5% actual versus 0.5% expected and 1.0% prior (revised from 0.6% prior).
NAPM Index, February (10:00): 41.9% versus 42.0% expected and 41.2% prior.
3-2-01
Michigan Sentiment-Final, February (10:00): 87.8 versus 87.8 prior.
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