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world stock market, us stock market
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3/03/01 Investment House Daily
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Investment House Daily Subscribers:
TONIGHT:
- All of the bulls Friday morning run for cover after lunch.
- Greenspan stands by his decisions.
- Setting up for a bear market rally or another disappointment?
- Money runs from the market, a potentially positive sign.
- Be ready to play the upside and the downside some more.
- Subscriber Questions
- Team Trades
Early rise gives way to afternoon collapse.
ORCL did in fact set the tone for the market after its late Thursday earnings warning, and the market dived lower on the open. In a sign of strength it started to fight its way back after holding above Thursday's low and the down trendline. Unfortunately, that brought out the calls of a 'bottom', the Nasdaq at 3022 (yes, that specific) in 6 to 9 months, and commentators speaking of 'very positive' attitudes among traders. Almost like clockwork Thursday's reversal off of a new low on high volume melted away as the rally faded and the Nasdaq landed at a new closing low for the year once again. Oh, and on even higher volume to boot. The Dow once again rallied off of 10,300, and it managed to hang onto a gain by a hair. The big caps rallied of a low as well, but closed down 7 points.
Two of the indexes are indeed exhibiting signs of trying to bottom: continued tapping down at support or lows and then rebounding both on the Dow and the S&P 500. That has many calling for a market bottom soon. That may in fact happen on these two indexes, but they have not shown their hand yet. Even if they do, that does not mean that they will race up: the Dow has moved sideways for a year, and it may continue to do so while the S&P 500 traces out a sideways move itself before starting back up. After all, as we have discussed before, bottoms don't necessarily mean rebounds right away.
Greenspan stays aloof.
Greenspan did not really help or hurt the markets. He certainly did not give them a boost with his expressly professed desire to be obtuse, but in doing so he also reaffirmed that the Fed could act whenever it saw the need to do so. He further reiterated the need to avoid overspending and that a tax cut was far preferable to new spending programs. Makes sense: sitting on a surplus does nothing for the economy. A national economy is not a household economy where you tuck away money for a rainy day. When a government does that it does two things: 1) sucks the blood from the economy, and 2) lines its pockets for more spending, thus growing fatter at the expense of everyone else. Right now the government's take from its citizens is over 20% of the GDP. This is a time of great peace and prosperity, yet the government's take is more of the GDP than it was during World War II when we were rationing everything from sugar to electricity in an effort to combat world domination. The economy needs this money back in the system to maintain recover and then maintain the growth rate we have enjoyed.
Bottom, bear market rally, or another breakdown?
There is lots of talk of a bottom or a bear market rally in the mix. This is not the first time that a bottom has been declared this year, and we have hit new lows since then. Looking at the Dow and the S&P 500, they are trying to hold the line at the lows on Friday. Moreover, the markets are horribly oversold and that can give rise to fast moves up. There is no question the market is very volatile: the last three days alone allowed us to play the QQQ in basically the same range.
Even with the Dow and S&P 500 trying to hold the line, the Nasdaq is still diving lower and lower as it continues to trend down. We could get an oversold rally or a bear market rally, but will that lead the index out of the bear market? Look at what is happening. There are very few good patterns on any of the household names in the tech sector. They tried to form some bases early in the year, but with the selling those have been shredded, and with the volatility in the market, the best you can look for right now pattern-wise is a double bottom. With the recent selling these tech stocks are still on the first leg of any potential double bottom pattern; not a great time to take the plunge with new positions even if you are bottom fishing.
Then we have sentiment that just refuses to give in. Even with Friday's reversal in the afternoon, the morning hangover dropped the put/call ratio down to the 0.67 range. Bullishness fell slightly last week, but not nearly enough. The Dow continues to hang in, refusing to enter bear market territory along with the Nasdaq and S&P 500. As long as a major index is hanging on, investors appear ready to hang on as well. We were actually quite excited about the Dow's weakness last week, looking for it to crack below 10,000. These factors mean there is not much leadership for a real bull run right now, nor are there enough investors out of the market to fuel a sustained rally: if a rally starts and everyone is in the rally, how far can it go? Yes there is money on the sidelines, but there is not a new flood of money after that to come pouring in if investors continue to ride out the storm. Nonetheless, there is talk on all of the financial stations about $2 trillion on the sidelines just itching to get into the game. That is what we thought last spring as well, but it never materialized. Fund managers are content to watch and wait right now.
Thus, if we do get a rally in the near term we do not believe it will be a long term rally in the sense it launches another bull run. We will have to watch the price/volume action that develops, but that is always the case on any rally attempt.
To invest or not to invest.
Does that mean we cannot or should not play a bear market rally? Absolutely not. Last summer made us quite a bit of money as the market pulled off the bottom in May and several good stocks started breaking out of decent if not somewhat more volatile patterns. SDLI led the charge when it raced out of a cup pattern in early June. It was joined by JDSU's double bottom, JNPR's double bottom, PWER's ascending wedge breakout, etc. And that is the key: you still have to have good patterns to lead the market higher. Looking at the fallen leaders, they are not going to be leading a sustained rally any time soon given their strong downtrends. They will lurch upward as eager buyers head back to the old favorites, but the fact that they have been bought on every rally attempt means that they will be met with overhead sellers who will pressure the move up. Perhaps they can form double bottoms in the near term, but they are not ready now; moreover, a double bottom entails a rally, a failure of the rally, and then another rally. Either way you are looking at a move back down before the final move up.
So, the fallen leaders, unless there is a dramatic, dramatic change in the market, will in all probability not lead any near term rise. What we would do with them is wait for the rally to fizzle and then reap the reward to the downside as they roll over and plunge one more time. When sentiment turns against them, they fall fast and furious, and if they have made their way up 20% or more, the fall can be sharp and fast. They can be played to the upside on a rally, but the reversals on these can be fast and ugly.
What to look for? The solid patterns that will lead in a rally, bear or otherwise. These are the stocks that have been tracing out good bases even as the brand names continue to tank. There are stocks in the defensive sectors doing well, but they have a hard time leading the market higher with any authority. We are continuing to look at stocks such as CEFT, IVGN, SDS, CPN, SGR, etc. that are showing continued strength and good patterns throughout the selling. There are others we are pointing out on the reports in good cup with handle patterns and sporting excellent earnings, relative strength, and sector strength. On any breakout rally, these are the potential leaders: look for that breakout on huge volume and latch a hold. This is some of the easiest trading when a rally kicks off: hit the breakout and buy, set a stop loss right under the pivot point and let it run.
These breakouts are occurring with or without a bear market or other rally, giving us entry points each week. A market rally, however, would send them shooting out of their patterns right and left. What we would then have to watch for is the type of reversals we saw last July and August that led into September's nasty slide. Still, stocks such as SDLI and friends rallied 200% and more in that time. Nice gains for a bear market.
We also continue to look to the downside. The talk may be of a bear market rally or some other bottom, but it has yet to show its face. To the contrary we continue to see stocks breaking down below support or bouncing down from resistance. Those are providing continued downside plays every time these stocks tap resistance and fall. With the continued volatility in the market, these are plays arising again and again.
Playing the downside.
You do it the opposite from the upside: instead of upside breakouts on high volume, look for downside breakdowns below support on high volume. They test the breakdown just as breakouts test their moves. They bounce down from resistance just as upside plays bounce up off of support: if the stock is trending down, it will bounce down along that trendline, and you can enter the play as it taps the down trendline and turns back down. Many people don't want to play the downside, but it is not any different than the upside. You can buy puts as opposed to calls, sell calls as opposed to selling puts (but this is much riskier than selling puts with unlimited risk), or you can sell the stock short (similar risks as to selling calls short). Thus, we frequently buy puts as the limit there is the same as buying calls: limited to your investment. This has been almost a yearlong bear market, and it does not look as if it is ending next week, particularly with the continued lack of fear. We should take advantage of what the market is offering, in other words, take what the market gives. It is simply adapting to the conditions to make money in the market, and that is the name of the game.
Money leaves the market for the first time since August 1998.
February saw $13.4 billion pulled from stock funds, the first outflow in 2 years and seven months. Even with 401k's and IRA's, investors finally said 'no mas' and pulled money back. All in all, that amounts to just 0.3% of all mutual fund assets. In the past, investors tended to yank money out when the market tanked, but over the past 20 years with the advent of more IRA's and the 401k, they tend to leave it alone, having learned the lesson to put it in and forget it. For example, the last time money flowed out in August 1998 it amounted to 0.4% of all fund assets. In October 1987, 3.09% flowed out in that month alone. That has some saying the dynamics have changed and that is keeping the market down. There is definitely a lack of negative sentiment, and perhaps this is a sign it is starting to shift for the better.
THE MARKETS
Thursday night we asked the question whether Wednesday's rally started something new or just put off more depressing times. On the Nasdaq, it looks as if Friday was potentially just a stalling tactic while the Dow and S&P 500 have made legitimate attempts at putting in a bottom for a near term bounce. The Nasdaq did not fold, but it sold once again on higher volume than it could muster on a rally.
That does not spell a great rally to come, but we have to remember that the Nasdaq is a weighted index based on market capitalization. Thus it is very distorted by a relatively small number of stocks. Even as we see the biggest names continue to struggle, we see smaller issues with great earnings and revenues setting up good patterns. These stocks will be leaders in a new rally. That goes for the NYSE as well: several 'three letter' stocks are setting up nicely as well. With the money staying in the market, something has to be moving.
Moreover, we don't want to sound overly pessimistic in our assessment of reality. The Fed is in a cutting mode; Greenspan is playing coy, but even with the economic numbers coming better than expected, they are still low and very fragile. It would not take much to turn them back to the downside. Greenspan expressly wanted to regain some of the Fed's secrecy, but there is little doubt in our mind that a 50 basis point cut is coming on or before 3-20. We feel that the economists are overstating the economy's weakness just as they were overstating its strength back in the summer and fall. Things are still touchy, and that is why we believe Greenspan will cut again, and that will ultimately start the markets to discounting future gains. We are not there yet as the markets continue to discount the bad news for now. That means we have to prepare to take what the market gives us once again.
Overall market stats:
VIX: 30.86; -0.17. Volatility managed to slide as the Dow finished slightly higher, the S&P slightly lower, and the Nasdaq back in the dumpster. It did spike to 34 Thursday, but as we saw also last week, a move to 35 could only muster a day and a half of a rally before selling took over.
Put/Call ratio: 0.67; -0.02. This was a great disappointment as put buying did not move up at all on the reversal of fortunes Friday, and that is just another indication of the complacency in the market that lingers on for now.
NASDAQ:
Able to overcome ORCL and turn positive, it lost out on the session in the afternoon and closed lower on rising volume. Waves of sellers did not want to hang around over the weekend and sent the techs to a new closing low for the year.
Stats: Down 65.74 points (-3.0%) to close at 2117.63.
Volume: 2.374 billion shares (+5.7%) as volume rose above average on yet another day of distribution. 1.602 billion shares to the downside versus 675 million to the upside.
A/D and Hi/Lo: Interestingly, advancing issues managed to outperform decliners 1.1 to 1. This is an indication of what we mentioned earlier regarding the Nasdaq being market cap weighted: it tanked, but overall stocks on the index performed better. New highs still managed to fall to 42 (-14) as new lows fell to 143 (-77).
The Chart: http://www.investmenthouse.com/cd/$compq.html
Friday gave the index a reversal the other way. It remained above its down trendline. It showed a doji just below where it closed on Thursday. Those are signs it is trying to make a move back up along with the Dow and S&P, but it is locked in a downtrend and it has to show a reversal and follow through before anything can start to muster in the big names. We are a long ways from there, but Friday's doji was a decent start despite all of the mess left with the afternoon selloff. It may just move some plays back in a better position for a put play to the downside if the rally rolls over, or we could see real volume on the upside that does give us an indication a rally is underway. At this point is too early to tell. The downtrend for February remains in place and the selling was on higher volume. Those are powerful counterbalances.
Dow/NYSE: Hanging on and continuing to bounce off 10,300. We would prefer to see it crater down to 9750 or so to strike up some fear. Looked as if that would happen Wednesday or Thursday, but the Dow is hanging pretty tough.
Stats: Up 16.17 points (+0.2%) to close at 10,466.31.
Volume: NYSE volume came in at a virtual dead heat at 1.294 billion shares. 760 million shares to the upside versus 508 million to the downside. This indicates there was indeed more upward momentum, but it was not spectacular.
A/D and Hi/Lo: NYSE advancing issues took control 1.71 to 1, a surprisingly strong number given the overall performance. Again, as stated in the market summary, there is a lot of upward movement outside the big names. New highs rose to 130 (+33) while new lows fell to 35 (-25).
The Chart: http://www.investmenthouse.com/cd/$dja.html
A repeat of Thursday: found support at 10,300 (10,302.06 on the low) and rallied back. It rallied to its 10 day MVA on the high (10,579.27), and finished in the middle of its range. It is showing signs it is trying to hold and move up as it has tapped at 10,300 three of the last six sessions and jumped up from there. It still looks as if it has stomach for a shot at 10,750 again.
S&P 500: The 500 big caps tested the lows again (1219.74) and managed to bounce to 1251.01 on the high. The big caps continue to flirt with bear market territory on the close, down 19.50% from its all-time high. The index is struggling to find support for a bounce up from here having touched down near 1200 three of the last six sessions in a similar pattern to the Dow. Unlike the Dow, however, it is well below its trendline and at a new closing low for the year. Lots of overhead resistance starting at 1250 and 1275 that can put the brakes on any move that is not more than one of the session and a half bumps we have been getting.
Stats: Down 7.05 points (-0.6%) to close at 1234.18.
Volume: NYSE volume held steady at 1.294 billion shares.
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
The economy has a chance once again to show the economists it is a bit better than thought with the services NAPM out Monday and productivity out Tuesday. The big story will be Friday's employment report, and that may mean a slowdown in action on Thursday before. We can only hope at that point that we are writing about the Nasdaq trying to break 2400.
Much as we said in the market summary, we will continue to wait for the breakouts and the put plays to set up again. There has been some serious selling that moved a lot of our favorite put candidates down, but we have come up with even more to play this week if the downside bias continues. At the same time we patiently await our upside plays to hit the buy point. In this market patience is the key. We much prefer to make trades that are a week or more in duration, but many that we have run the past few weeks have been 1-2 days. The QQQ and OEX have been so volatile and set up so well that intraday plays are fairly easy, but they are not easy to do when you are not looking at them. The one trend on these has been down if you can stand the spikes higher. That is why we prefer to play the breakouts and also the puts to the downside when the big names run into resistance. Those tend to run for more than just a couple of days as you are playing trends: the breakout and the downtrend.
Friday left the markets mixed again. They all have some potential to move higher, but the Dow and S&P 500 looked the best after Friday as they continue to rebound after testing the lows. That is about all you can say for the S&P at this point as it languishes just off its lows along with the Nasdaq. Thus, while the indexes appear to have the potential to move up from here on an oversold move, the are showing nothing that would make one believe the move would be different than the 1 to 1.5 day thrusts higher. We have to see a strong up day on strong volume sometime on Tuesday to Thursday to try and kick off any real bounce higher that we can play for more than a day. Until then we will continue to watch for breakouts and our put plays to develop. We won't rush any play; in this market, impatience can lead to disaster.
End Part 1 of 2
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world stock market
us stock market
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