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10/15/02 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Tuesday: VAR hit the target but we liked the action so held on; QCOM ditto though down after hours on INTC news.
Buy alerts issued: AG; HCA; PFGC; EDMC; CHD; HLYW; LBIX
Trailing stops issued: None issued
Stop alerts issued: None issued
You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- Market delivers a follow session though Intel threatens to rain all over the parade.
- Inventories fall.
- Strong surge over the 50 day MVA will be tested as INTC fails on all fronts: Q3, Q4, and the future.
- Subscriber Questions
Solid follow through on strong financial results will be tested by Intel earnings miss.
Strong volume, 3:1 A/D line, large institutional buying, rotation out of bonds, and good financial sector earnings powered a follow through session on the first possible day for such a session to occur (best 4 to 7 days after the rally starts). There was not much rest before the follow through; we would have preferred a few days of resting before the move. Now there will most likely be some give back, and we were feeling that even before Intel blunted the strong earnings throughout the day with its after hours earnings miss. The question will be whether Intel and the Nasdaq (chips are a big part of that index) stall the entire market before some other tech companies can talk of better times in the current quarter.
THE ECONOMY
Earnings up for large banks, autos, drug stocks, some retail.
ONE, WFC, BAC all reported solid earnings and the financials shot higher. GM crushed earnings by 25 cents (zero financing problems?). FRX beat by 3 cents. Earnings had the market rocking pre-market and the market took off. We have to remember, however, that the comparisons are to the quarter ending September 2001; kind of softball numbers. Intel came out and missed even as RFMD, AMCC, MOT, NVLS, DCLK all beat. Wipe the other techs away; Intel missed.
August business inventories fall 0.1%.
Inventories fell. That can mean consumers bought more, or manufacturers produced less, or some combination. Consumers were buying less in August and manufacturers were producing less as the ISM showed. It was weak on both fronts. The one good thing is that falling inventories still give room for manufacturing to pick up once there is some demand without having to work through expanding existing inventories. That is a pretty slim silver lining and you need your glasses to see it. The real key is what demand is, and the recent reports have indicated demand is not picking up yet.
THE MARKET
Follow through came fast. It was just a matter of whether volume was enough along with the breadth of the advance. All were satisfied as the market moved laterally and down in early afternoon only to surge in the last hour to close handily above the 50 day MVA. That was a major milestone on the move; not only were the internals solid, the follow through pushed the indexes over a resistance point that they had not seen the sunny side of since March outside of that short look around at the end of the August rally.
Good earnings from financials, GM, TSCO (retail), FRX and others helped spark the continued rally. After hours saw RFMD, MOT, AMCC, DCLK, NVLS and others beat the street. Then came INTC and cheesed up the system. $0.11 versus $0.13 expected, revenues light by $200 million, stock down 12% from the close. Of course it was taking most everything with it as well as the by-kill is widespread. When futures opened for trading again Nasdaq futures were -28, S&P futures -11. The problems at INTC are deep, the primary one being a miscalculation as to when tech spending would resume. Intel had continued to ramp production of P4 chips in anticipation of demand reviving; it has not, and now Intel is stuck with racks and racks of chips. If you are looking for a computer call Dell and negotiate with them on a system with the best P4 chip there is; tell them you heard that Intel had bins full of them.
Intel's woes were a miscalculation as its inventories have ballooned because spending did not increase. That is very un-Dell and un-Cisco like; those companies have increased earnings by cutting costs, reducing inventory, etc. Still, Intel's results clearly show the tech recovery is not, at least nothing major. RFMD, MOT, NVLS, AMCC and other tech companies beat estimates. Maybe their business is picking up, maybe they are controlling costs well, maybe (and most likely) it is a combination of the two. Intel might have been okay last quarter if it had not been so keen on not missing a P4 sale. It would not have been great, but it could have avoided the very poor performance it turned in. Unfortunately the rest of the market will pay for Intel's inventory mismanagement.
Follow through was real, but so are the problems.
Big institutions were buying Tuesday, putting in 100K+ share orders all during the session. The A/D line was 3:1, fell on mid-session weakness, and then closed at 3:1. Volume was strong. Now the market has to deal with a tremendous problem we discussed over the weekend: companies not saying Q4 is going to be good. That has to be clarified. Most of those reporting have said things are looking better though they are not visibly glowing about it (TSCO, HDI and others are notable exceptions). Problem is the big daddy said things stink and are still stinking on Q4. For the short term the market is taking its lead from Intel, particularly given the large run up to this disaster.
We have talked about overcoming bad news. Well, this is not the kind of bad news that is as easy to overcome as it speaks directly to earnings in Q4. In the near term the market looks ready to give back some of its recent gains to new heights. It will be up to stocks such as IBM and QLGC on Wednesday after the close and MSFT Thursday after the close to try and pull the technology castanets out of the fire. Until then we can expect some giveback, something that was needed even before Tuesday's huge gains. The key will be whether the indexes can hold up reasonably well, selling on lower volume and not collapsing, giving time for some other earnings reports to come in and say things are rocking along well. Even with this we don't see the shorts running back in to short the market on this news, but more likely waiting to see if there are other negative earnings reports they can use.
Sentiment Indicators
VIX: 39.74; -2.87
VXN: 56.37; -2.71
Put/Call Ratio (CBOE): 0.78; -0.15
Nasdaq
Vaulted over its 50 day MVA on the open and held it all session on volume. Nice move, now will it be able to hold it given Intel? It will be tough to do so, but again the key will be to keep the selling orderly and on lighter volume until some other reports can come out.
Stats: +61.91 points (+5.07%) to close at 1282.44
Volume: 2.012B (+67.62%). Solid follow through volume.
Up Volume: 1.815B (+1.067B). Almost 10:1 at 9.75:1. Good enough to be follow through.
Down Volume: 186M (-255M)
A/D and Hi/Lo: Advancers led 3.03 to 1. Solid, follow through numbers, much better than in the July attempt and in previous attempts in the bear market. None of those follow through attempts were 3:1 or better. There is something different with this rally from all of those attempts since March 2000.
Previous Session: Advancers led 1.11 to 1
New Highs: 36 (+21)
New Lows: 93 (-46)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Gapped over the exponential 50 day MVA (1260.05) and then rallied over the simple 50 day MVA (1268.71), holding both on the close. This is rather rarified air for any of the indexes, but it looks as if the visit might be short as the futures are down 27 on the Intel news and that puts Nasdaq right back down struggling with those levels. It was a major gap, and over the next two to three sessions the Nasdaq will most likely try to fill that gap before enough other big companies (MSFT on Thursday after the close) come out and report some decent earnings and some positives for the future. That would put the index down near 1220, the Monday closing price and the late September high.
S&P 500/NYSE
Rallied to close over its 50 day MVA's as well on some very solid volume. After 4 up sessions, the Intel news will pressure the large caps as well, but the SP500 is not the tech monster it used to be. Many non-tech stocks are there and performing well, namely the medical and health stocks.
Stats: +39.83 points (+4.73%) to close at 881.27
NYSE Volume: 1.873B (+57.86%). Solid volume increase and solid volume overall, easily strong enough to satisfy follow through requirements.
Up Volume: 1.622B (+955M). 7.08:1 up to down volume, not as strong as Nasdaq. We would have preferred closer to 10:1.
Down Volume: 229M (-270M)
A/D and Hi/Lo: Advancers led 2.92 to 1. Edged over 3:1 late but could not hold that level into the close. Still enough for a solid follow through session.
Previous Session: Advancers led 1.06 to 1
New Highs: 35 (+18)
New Lows: 53 (-40)
The Chart: http://www.investmenthouse.com/cd/$spx.html
A strong move through its 50 day MVA's as well (868.47; 877.34 exponential) as well after something of a breather Monday. As with the Nasdaq, 4 up sessions give rise to the need for some give back, and Intel is guaranteeing that for now. The question will be whether the index holds near 850 on the test of the move up and does so on some lighter volume.
Dow:
Stats: +378.28 points (+4.8%) to close at 8255.68
Volume: 1.873B (+57.86%)
Surged through 8000 in a session that saw action early and late. It cleared its 50 day MVA (8178.79) but not its simple 50 day MVA (8282.01), and it is right at the key March down trendline now at 8242. It will take some beating tomorrow as INTC is a component along with MSFT and IBM. IBM announces Wednesday after the close and is (still?) expected to top estimates. That will help, but it will take some more such as MSFT on Thursday after the close to put a band aide on the Intel earnings report. It would be nice to hold at the 50 day MVA on some selling, but the 8000 level is much more likely. Again we want to see that test on lower volume.
The Chart: http://www.investmenthouse.com/cd/$indu.html
WEDNESDAY
Wednesday's thunder was stolen by Intel after hours. Again it looks a lot as if INTC did not manage its inventory, but that still leaves the problem of a lack of improvement in technology demand. The market was ready for some testing of the move, and INTC is going to usher that in unceremoniously. The key will be contained selling, holding major support and not tanking on huge volume dumping. We are already hearing tonight some analysts saying that the Intel news was not as bad as the numbers showed, that continued slow demand (not tanking demand) was exacerbated by poor decisions regarding Pentium 4 chip production. If that takes root the selling will be contained somewhat and investors will be looking for the next few big earnings reports to see if they take a different direction from Intel. IBM is a leading indicator as opposed to Intel that responds to orders from companies such as IBM and Dell. That makes IBM's earnings Wednesday after the close very important.
Until then there is going to be some selling. As the day progressed we were starting to look at some positions from the standpoint of waiting for the pullback that was going to come. That is what will happen and if the selling is on light volume and near term support and breakout points hold, those will be good entry points when the selling is over and the rally resumes. Those tests are excellent entry points. Whether or not they develop, however, depends on the strength of the selling. Given the broad follow through we would expect investors and shorts to look at the next few earnings reports to make the decision to dump or sell short.
That means Wednesday we will be watching stocks pullback and noting where they fall to and on what volume. If they show good action we will wait for them to start back up and then move in. That is how you approach entering into an upside market, i.e., looking for the good entry points on breakouts, tests of breakouts. After these strong moves we now wait for the next entry points to start new positions or to add to existing positions.
Support and Resistance
Nasdaq: Closed at 1282.44
Resistance: 1291 to 1316, an early August interim high. 1357.09, the October 1998 bear market low. There is another downtrend line from the March and May highs at 1328. 1418, the interim test after the September 2001 low, and 1426 the August high.
Support: The 50 day MVA (1260.05 - - it actually rose). The March/May downtrend line at 1232. 1200 (August closing low) to the July intraday low at 1192.42. The 18 day MVA (1201.78). The 10 day MVA (1197.32). 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 881.27
Resistance: July, August and September interim highs at 911. The September 2000/May 2001 downtrend line at 910. The downtrend lines from the March and April highs (913). Price resistance at 950. 965, the September 2001 closing low along with the August 2002 high.
Support: 875 is now some support but it was not totally broken Tuesday. The 50 day MVA (868.47). 850 to 855 (the October 1997 and Q2 1998 lows). The first March down trendline 838. The 18 day MVA (834.38). The 10 day MVA (830.37). Prior closing lows and highs at 800 from July and October. The first bottom channel line in the March downtrend (799). The September 2000/January 2001 down trendline at 786. The July intraday low at 775.68. The lowest channel line in the March downtrend channel (757). 750 to 760 with an intraday touch to 730.
Dow: Closed at 8255.68
Resistance: 8250 acted as resistance before and is not totally cleared. The second March down trendline at 8242 is right there as well. 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.
Support: The 50 day MVA (8178.79). 8000 (August low at 8043; September 2001 intraday low at 8062). The 18 day MVA (7833.25). The 10 day MVA (7789.91). The August down trendline at 7520. The lowest bottom channel line of the March downtrend (7610). 7100, the March 1997 tops. 6975 is next.
Economic Calendar
10-15-02
Business inventories, August (8:30): -0.1% actual, 0.2% expected, 0.4% prior.
10-17-02
Housing starts, September (8:30): 1.636M expected, 1.609M prior.
Building permits, September (8:30): 1.670M expected, 1.666M prior.
Initial jobless claims (8:30): 384K prior.
Industrial production, September (9:15): 0.1% expected, -0.3% prior.
Capacity utilization, September (9:15): 76.0% expected, 76.0% prior.
Philly Fed, October (12:00): 2.0 expected, 2.3 prior.
10-18-02
Trade balance, August (8:30): -$35.2B expected, -$34.6B prior.
CPI, September (8:30): 0.2% expected, 0.3% prior.
Core CPI (8:30): 0.2% expected, 0.3% prior.
ONLINE SEMINARS LIVE OR NOW ON CD!!
Have the knowledge to take advantage of any kind of market as well as the confidence to act when you see the action unfold. We cover it all from trends, to accumulation/distribution, patterns, stocks, buying and selling options naked, covered, or creating spreads. Go to
http://www.stockseminarsonline.com
and look for the link to the CD seminars or the next live series dates where you can learn and ask questions from the comfort of your home without having to incurr costly travel expenses and time away from work, costs and time that very few can deduct from their taxes . This is Jon Johnson's internet site for online seminars and they get you up to speed on how to deal with up or down markets. Hope you check it out.
SUBSCRIBER QUESTIONS
Q: The second "GAP UP" in three sessions that has not been filled. Is it necessary to fill a gap? Is this a test of patience to the upside or has the train left the station?
A: There is an adage in the market that gaps must be filled before further progress can be made. Think about what has recently been happening on the downside (before late last week): stocks would gap below support (50 day MVA, etc.) and sell lower. Then they would rally back up to fill the gap, testing the breach of support and then falling again. Whether the test came the next session or a week later, many times the gap was filled on the next rally phase in the continuing downtrend. Now we are looking at the other side. The Nasdaq made the big gap up Friday and then again Tuesday. We know the market cannot run up or sell forever; it has to come back and test some support or resistance. Oftentimes when this happens it works to fill the gap on a normal consolidation of the gains in the rally.
But what happens when there is a gap up that is not filled? Back in October 1998 there was a gap higher that remained unfilled until the September 2001 low. Did the market inexorably sell just to fill that gap? No, it was part of a much large market collapse after a historic run-up. It did not seek that gap, just sold through it as it went lower. And that is the key; the market does not seek a gap point just to fill it; it is something that can act as support on selling or it can just plow through it as the 1998 gap that was filled after the Nasdaq ran from roughly 1530 to 5000.
Thus there is really no reason the first gap must be filled. If this rally fizzles and it craters, it will be filled as the market heads lower to find a new low and try all over again. As in 1998, however, the market can continue to rally a long, long way without filling that gap. The Tuesday gap? It will most likely be filled at least partially in the pullback that is going to take place after such a strong run. That is the simply normal consolidation after a strong move and does not really in our opinion necessarily result from the gap. Strong moves, gaps or no, are followed by consolidation. Sometimes it is a full test, other times a partial test. If you wait for the complete fill of the gap during a strong upside trend, you could miss out on substantial upside moves.
As far as the train leaving the station, there were many institutions buying Tuesday as the market followed through on the rally that started Thursday. Follow through sessions set the stage for stronger advances but they do not guarantee the move will hold. It is a signal to start putting more money to work but you have to keep an eye on breakout stocks. You want to see good stocks breaking out (they are doing that now) and they must hold their gains when they perform those inevitable tests of the breakouts. If they crash back into the bases on high volume, that is a signal the rally is in trouble. This rally has set up well and is showing very solid indicators (sentiment, follow through internals, breakouts) early on. The first test is the Intel earnings news; the gap will try and fill here and we will know more if breakouts hold up and the market tests back on lower volume a few sessions and then rallies again on strong volume. It is a close enough imitation to a train leaving the station to warrant putting money to work on the good breakout stocks just as we have been doing all along as they formed up and started to move as this rally started.
End Part 1 of 3
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