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10/16/02 Stock Split Report Update
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Wednesday: QCOM (took some partial gains early)
Buy alerts issued: DLX; MCHP; QCOM (pullback position)
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:
- Intel does its damage as markets sell but on much lighter volume.
- More job cuts and some slowing consumer sales.
- IBM tries to rectify INTC miss.
- Team Trades
Intel gives a reason to take some gains.
Bulls, not used to such bounty, were looking for a reason to sell after 4 consecutive up sessions. Not that they did not have reason after Intel missed its earnings by a wide margin and had little positive to say about the future. The futures were down and the market sold down all session with very few upside rally attempts. As we said in an early alert, it was a down session and one that was going to be down but could be used for some pullback picking if the selling was on lighter volume.
Indeed it was. Volume peeled way back on all fronts (other than INTC and closely related stocks), and indeed there were some picks on the pullback, e.g., QCOM later in the session when it was clear it was going to hold its 200 day MVA. We were selective, but did use the pullback to take upside positions; that is quite a change from the last year. The selling may not be over (though the IBM numbers have the futures partying again after hours), but we wanted to start picking up some positions on the early strong movers in this rally.
THE ECONOMY
Economic reports hardly glowing.
Our view of the economy has not really changed, i.e., it is still weak and has not seen the solid turn. That was underscored again somewhat by Intel's numbers and other earnings news released Wednesday. Part of Intel's problem was it bet the recovery would be underway and it kept making P4 chips. It did not resume and Intel was holding a lot of chips. Bad for Intel and it also shows that demand for chips is not jumping. Moreover, consumer demand continues to slacken. NLS, the seller of BowFlex workout machines announced poor results and said that 2003 would be lower as consumer spending was down.
More layoffs.
Jobs are not growing either, a logical result from a lack of business activity. JPM announced 2,000 more layoffs. Honeywell announced it was chopping 7% of its workforce. There is no need to hire new workers when you are still laying off workers or business activity does not mandate more hiring.
Economy versus market.
The less than stellar results (the weakness is evident comparing Q3 to Q2 as earnings continue to decelerate overall) continues the talk that the market is ahead of itself. Many continue to say there won't be sustained market improvement until earnings start to improve. While that may seem somewhat logical, it is not how things have worked throughout economic history. As we have noted, the market does not wait for actual events; that is where the 'buy on the rumor, sell on the news' adage came from. The market sniffs out change ahead of time and starts its move before it is evident or at least clear that things are getting better. It is not always right and there will be false starts. However, major bottoms in history started when the outcome was still in question. If the market did just feed off of the current state of affairs, why did it start to collapse in March 2000 even as earnings continued to expand (at least reported earnings) and the 'red hot' economy according to the experts was just getting hotter and hotter?
THE MARKET
The selling was going to happen after 4 sessions and Intel's poor results. The question was how stocks held up overall. Volume was much lower outside chips, and many stocks simply pulled back and tested good moves on lower volume just as you want them to do on a pullback after a good move up. The point losses were a bit excessive, but the indexes managed to hold at the second level of support (the 50 day MVA) could not withstand the pressure). We used some of the pullback to start taking some additional positions on the early leaders.
After hours IBM reported results ahead of expectations and indicated that it was 'comfortable' with Q4 expectations. That was the news the after hours market was awaiting, and that propelled stocks and futures higher after hours. Not wild and reckless buying, but a solid turn. IBM was up $5 from its close if that gives you an idea of the after hours reversal.
The IBM numbers may be enough to start another move up, but it was just one session of rest and after such a strong move you would expect it to take a bit longer blow. When the market moves, however, you cannot really ask a lot of questions or look for the perfect scenario. There still appears to be a lot of pent up demand and that is helping push stocks right back up. MSFT reports after hours Thursday and it could confirm another move up. After the initial earnings excitement sinks in, then we will get a more prolonged pullback over a few sessions.
Sentiment Indicators
Anxiety measures moved higher as you would anticipate. The put/call ratio really jumped again, indicating there are a lot of options speculators still ready for some downside action. We were not looking that way this session; after a follow through we are not going to get too worked up over lower volume selling.
VIX: 41.97; +2.23
VXN: 56.87; +0.50
Put/Call Ratio (CBOE): 1.25; +0.47
Nasdaq
Gapped lower but was able to hold that first March down trendline near 1232, showing a doji at that point as volume dried up to just above average levels.
Stats: -50.02 points (-3.9%) to close at 1232.42
Volume: 1.588B (-21.08%). Pretty dramatic drop in volume, tailing off to barely average levels. This is what you want to see for continued upside action after a rally as it shows there were fewer sellers or that the selling was less intense than the recent buying.
Up Volume: 230M (-1.585B)
Down Volume: 1.338B (+1.152B)
A/D and Hi/Lo: Decliners led 1.53 to 1. After the big upside session, Wednesday's slightly negative breadth was whimpy.
Previous Session: Advancers led 3.03 to 1
New Highs: 20 (-16)
New Lows: 98 (+5)
The Chart: http://www.investmenthouse.com/cd/$compq.html
It was going to sell after INTC's numbers and that is what it did. The selling was contained as far as volume, and the index did hold the March down trendline at 1232. Those were good indications. The price loss of almost 4% was more than you would want to see on one day of pullback, but it was due to one of the major players in the index. If the selling is contained on low volume and it can hold roughly near 1220 on the pullback (that cap up point discussed in Tuesday's report), it can set a good pullback/test of the move and have more upside potential.
S&P 500/NYSE
Broke the 50 day MVA but held handily above the next support level as volume fell. It showed better resiliency than the other two big indexes, something it did on the test of the lows.
Stats: -21.24 points (-2.41%) to close at 860.03
NYSE Volume: 1.541B (-17.75%). Volume pulled back significantly on the selling.
Up Volume: 242M (-1.38B)
Down Volume: 1.322B (+1.093B)
A/D and Hi/Lo: Decliners led 2.91 to 1. Unlike the Nasdaq, the A/D line matched Tuesday's action in reverse. The selling was broader than we would have liked. It would have been best limited to the semiconductors. This is a chink in the armor.
Previous Session: Advancers led 2.92 to 1
New Highs: 23 (-12)
New Lows: 93 (+40)
The Chart: http://www.investmenthouse.com/cd/$spx.html
The large caps fell through the 50 day MVA (868.14) just cleared Tuesday, but managed to hold above the next level of support at 850 to 855, tapping 856 on the low and managing a slight rebound. All things considered, the pullback was rather orderly though a 2%+ price loss in one session is a stretch to call orderly. No doubt it will receive some help from the IBM numbers, and if it can fight off 850 and work higher from there it will have put some very positive momentum behind it.
Dow:
Stats: -219.65 points (-2.66%) to close at 8036.03
Volume: 1.541B (-17.75%)
Turned lower at the top of the March downtrend channel and the 50 day MVA (8173.18), fading back close to the next support level at 8000. That level represents an early August low on the test of the move off the July low as well as a late September and early August high. That is a good place to hold, but it is awfully close, and the index may ultimately test the 18 day MVA (7854.59) before it can make a move up. IBM is a component, however, and it will contribute to the upside. It was down 3.58 sticks Wednesday ahead of the news and it was up $5 from the close after hours. If MSFT can take a lead from IBM heading into its numbers, the Dow could pull off holding this level and give it some breathing room for another test later. Of course it would help if MSFT can deliver as well.
The Chart: http://www.investmenthouse.com/cd/$indu.html
THURSDAY
Earnings remain front and center over economic reports as earnings are the real-life synthesis of the plethora reports issued each week. Tomorrow morning we will hear about housing starts, jobless claims, industrial production followed by the Philly Fed report at 12ET. Those will be important, but the effect of IBM earnings and the anticipation of MSFT earnings will still dominate.
Futures were up along with stocks after hours. Solid gains but not zooming to new highs. That speaks to a higher open, but that is something to be careful of. We took some positions on Wednesday's dip, but not complete positions. The idea was we start working into the pullback but there could still be further selling. An early rally could lead to a test of those support levels that were brushed Wednesday as the market has moved a long way and one pullback session may not be enough to let those wanting to sell get out.
Overall, however, our focus is to the upside given the action in the market seen over the past few months and the follow through session this week. We are not giving up on the downside as there are some plays that look doomed to fall no matter what the market does, but our focus is on the upside. There are several good stocks that are pulling back to test their recent good moves. These can be the best entry points as they are the tests of the breakouts; if they hold the stocks can make some really good moves in the future. That is a lot like the test of the breakdown (the kiss goodbye) that is such a good entry point to the downside: it shows the move is holding and ready to continue.
Support and Resistance
Nasdaq: Closed at 1232.42
Resistance: The 50 day MVA (1258.96). 1291 to 1316, an early August interim high. 1357.09, the October 1998 bear market low. There is a downtrend line from the March and May highs at 1325. 1418, the interim test after the September 2001 low, and 1426 the August high.
Support: The March/May downtrend line at 1230. 1200 (August closing low) to the July intraday low at 1192.42. The 18 day MVA (1205.01). The 10 day MVA (1203.70). 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 860.02
Resistance: The 50 day MVA (868.14). 875 is some price resistance. July, August and September interim highs at 911. The September 2000/May 2001 downtrend line at 909. The downtrend lines from the March and April highs (911). Price resistance at 950. 965, the September 2001 closing low along with the August 2002 high.
Support: 850 to 855 (the October 1997 and Q2 1998 lows). The 18 day MVA (837.08). The first March down trendline 836. The 10 day MVA (835.76). Prior closing lows and highs at 800 from July and October. The first bottom channel line in the March downtrend (797). The September 2000/January 2001 down trendline at 784. 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 8036.03
Resistance: The 50 day MVA (8173.18). The second March down trendline at 8212. 8250 acted as resistance before. 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: 8000 (August low at 8043; September 2001 intraday low at 8062). The 18 day MVA (7854.59). The 10 day MVA (7834.66). The August down trendline at 7485. 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.
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TEAM TRADES
QCOM: QCOM was one of the stocks in the tech sector that was showing more than the rest of the techs, and after its strong start last week it was ready to test the move. It broke over the 200 day MVA Tuesday and it was due to test that. Wednesday it did that, selling back on lower volume, holding the line at the lows mid-session, then starting a move up in the last hour. That test lower and start of the move higher was what we were looking for. We sat and watched the Nasdaq Level II for quite awhile before we saw the pressure start shifting to the buy side. We were looking at some January 32.50 calls with a decent delta at 64. They were trading 5.10 by 5.30 as we watched the stock. When it looked ready we issued the alert and then went back to the options. They were still at 5.10 by 5.30 but the bid then moved up to 5.20. That is often a signal that an order is in and that the market maker is trying to make the potential buyer pay up. It also signals that the market maker is not too eager to lower the price. Given the buy side pressure the odds he or she would shave such a narrow spread were slim. We slipped an order in at 5.30 while we could and the fill was very fast. The stock gyrated a bit but moved up to close at 34.20 (we got in right around 34). The options were 5.20 by 5.40 on the close, but the stock moved up 60 cents or so after hours on the IBM and QLGC news. Good test and decent entry point.
End Part 1 of 2
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