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10/19/02 Stock Split Report
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Stock Split Report Subscribers:
The staff is attending a wedding today and Parts 2 and 3 will be issued later this evening. Thank you for your understanding.
MARKET ALERTS
Targets hit alerts issued Friday: None issued
Buy alerts issued: BCGI; WEDC; CHS
Trailing stops issued: None issued
Stop alerts issued: WAG
You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- A good day of rest as the market starts a breather holding its own.
- Consumer prices show no inflation, no deflation, just the same old nothing.
- Indexes close the week above the 50 day MVA for the first time since August.
- Subscriber questions
Market consolidates with a modest gain on lower volume.
MSFT earnings Thursday evening gave the look of another booming rally Friday, but when the morning rolled around the futures were lower and it looked as if investors were going to start taking some gains from the week right off the bat as opposed to waiting for later in the session. After selling down 1% or so, however, investors stepped in and modestly acquired stock. Low volume, modest gains, refusal to give back much of the recent moves. Those are all very good indications for the rally that is just getting underway.
That MSFT was unable to provide a strong push is indicative of that earnings saturation discussed Thursday. Earnings have been better than beaten down expectations, and after the drubbing taken into October it was easy for stocks to rally on the news. MSFT was able to rally well but the rest of the market was not taking the lead. It was a drift up off a test of support more than a jump on the MSFT bandwagon. The fact it recovered from its early losses indicates an overall upward bias; that is was not a rip-roaring rally on huge MSFT numbers shows that the move needs a breather. Indeed, it took somewhat of a breather Friday and this is a good way to consolidate gains.
THE ECONOMY
Decent numbers Friday but hardly a signal that the economy is recovering. Many more announced layoffs during the week, continued rising jobless claims, Philly manufacturing plunging; it was once again not a pretty sight. Still earnings showed improvement over dramatically reduced expectations, and the guidance for 2003 was in many cases affirmed. There could actually be improving profits for the first time in 2 years, and that is what the market was anticipating and what it is still picking up on despite the continued poor economic numbers.
Consumer prices show modest rise, for now signaling no inflation, no deflation.
Prices rose 0.2% as expected and core prices rose 0.1%, just below the 0.2% expected. Year over year overall consumer prices rose 1.5% after falling 1.1% year over year in the June numbers. Core prices rose 2.2% year over year. These numbers indicate there is no inflation right now and they also indicate there is no deflation right now.
Does that mean they won't happen? Of course not, but it keeps things on good ground for recovery. The market is also showing in response to these numbers that it is not following Japan's exact footsteps. The U.S. attempted recovery is still very delicate; it needs continued stroking to get the fire burning. Some fiscal stimulus that has been overlooked by the administration and just talked about by the democrats would go a long way. Terrorism insurance won't hurt, but we feel the claim it will jumpstart the business construction industry is overstated. Real stimulus is what is needed. We received a real indication that the democrats are not serious about any stimulus; the local Congressmen had promised a small business forum to discuss business incentives. Absolutely no further response after a package of small business incentives was presented as requested. Ah politics.
Trade balance jumps 9.7% to record.
$38.5B actual versus $35.6B expected. That raised some eyebrows as it meant that imports surged versus exports, and that can mean that the current account is getting even further out of balance, i.e., the U.S. owes more than it is taking in. What it does not take into account is that many retailers were importing a lot of goods ahead of any possible west coast longshoremen strike. That is what has impacted the current account for several months as the dispute simmered. Why did so many companies come out and say they were not going to be impacted by the dock strike? Because they had stacked the channel for the holidays already (and they were not expecting a huge holiday season as well). Those are the imports that came in all at once and skewed the report the past few months.
Semiconductor book to bill ratio plummets.
After some rises for a few months the ratio of order bookings to actual shipments fell to 0.84, a 34% decrease from the prior month 1.27 reading. Obviously the chip sector is not raging ahead, but it is just one month downturn after rising for several months. Intel saw the increase and ramped up its production of P4 ships (or kept it steady), then it was hit hard when the market did not continue to improve.
THE MARKET
The large cap indexes all closed over the 50 day MVA for the first time to end the week since August. The second back-to-back weekly gains since August. That was the rally off of the July low. It has made another start up off of those lows. It has not made much of a pause since the run started seven sessions back. It has given two follow through sessions and immediately overcame some bad Intel earnings news and did it on rising volume.
The market has several positives right now, but it is still very early in the move and very fragile. A major change is the affirmation of 2003 earnings by many companies, a signal that earnings are starting to rise. Companies had been very pessimistic yet are seeing things firming and improving even before the economic numbers really show much. The market started up before the earnings started hitting, and it has really moved on some key earnings reports.
After the MSFT earnings Thursday the market looked ready to rally again, but it had also rallied hard off the low. MSFT made a strong move, but the market could not. It started lower in fact, but it was able to drift higher. The ability to melt upward even after earnings saturation is starting is something new. For a long time the market has fallen on no news or moderately positive news; when there was no impetus it went down. Now it rises. Again it is still early and fragile, but it is doing the right things.
Now the market needs a bit of rest, but it basically has been doing that the past three sessions (S&P 500). Wednesday it sold after the Intel numbers hit, but on much lighter volume. Thursday it was back up on solid volume but topped intraday just over the Tuesday close. Friday it drifted higher again, but once more it closed near the week highs. The constant highs and lateral movement the past three sessions are indicative of consolidation action in progress on some good price/volume action. It is also occurring at a good point: just over the 50 day MVA and just below some interim resistance. Note how the index is moving laterally after the move off of the low this time as opposed to the immediate slump it took after the move off the July low. It is being stingy with its gains and it fought right back after selling Wednesday. It is a small difference and the indexes may still sell back on this consolidation, but it is an indication of a change in the market character as it made the successful test of the low. Again it is doing what it needs to do.
Sentiment Indicators
Last week was a classic example of doing what the market tells you not what your stomach tells you. Bears surged while bulls waned even as the market rallied. If there was ever a classic case of the inverse relationship between sentiment and market action, this was it. That makes the move all that more appealing.
VIX: 39.82; -0.34
VXN: 55.33; -0.89
Put/Call Ratio (CBOE): 0.68; +0.02. The ratio jumped back over 1.0 on the Wednesday selling as fear was still high in the market even after the rally. One major news story can send fear shooting higher still. That fear is very good. It keeps all the money from rushing into the market at once and acts a longer term fuel for a continued rally.
Nasdaq
Held over the 50 day MVA on the close for the week as it moves laterally along that level.
Stats: +15.57 points (+1.22%) to close at 1287.86
Volume: 1.669B (-8.54%). Lower though still above average and also above the Wednesday selling volume. On an absolute and relative basis trade has been better on the up sessions.
Up Volume: 1.01B (-584M). Even most of the session, up volume took over later in the day and while not dominant it did show a continuing positive trend.
Down Volume: 638M (+417M)
A/D and Hi/Lo: Advancers led 1.1 to 1. Indicative of the session.
Previous Session: Advancers led 2.62 to 1
New Highs: 21 (-18)
New Lows: 59 (-6)
The Chart: http://www.investmenthouse.com/cd/$compq.html
A big week for the Nasdaq as it gave 2 follow through sessions to the rally that started seven sessions back. This is what we were looking for, where the initial short covering rally on the S&P 500's successful test handed the ball off to some longer term buyers. There were institutions buying on the week with big 100,000 share blocks being taken on Tuesday and Thursday. It is not a guarantee of success, but it is what needs to happen. Now after a couple more sessions of lateral to slightly lower movement the Nasdaq will be ready for the next move. It is riding along the 50 day MVA (1260.60), a very good point for it to hold above on a further test though that may be a bit optimistic. The 10 day MVA at 1229.60 is the next positive level to hold for a good move back up. After that it has to break through resistance in the 1290 to 1320 range. If it consolidates well that should be doable.
S&P 500/NYSE
Tapped the 50 day MVA on the low and then just moved up the rest of the session in a slow rise.
Stats: +5.19 points (+0.59%) to close at 884.39
NYSE Volume: 1.408B (-19.41%). Barely made average on the modest rise. Good low volume session on a day of rest.
Up Volume: 757M (-510M)
Down Volume: 644M (+141M)
A/D and Hi/Lo: Decliners led 1.05 to 1
Previous Session: Advancers led 2.26 to 1
New Highs: 24 (-11)
New Lows: 95 (+12)
The Chart: http://www.investmenthouse.com/cd/$spx.html
Tested the 50 day MVA (869.19) on the low early in the session and then closed near the session high. It was not a breakout day but a day where the large caps fought off early selling and consolidated in a very positive manner. The highs in the latter part of the week were right at 885, just below resistance around 910. The S&P 500 is squeezing above the 50 day MVA and below this resistance. A continued lateral move would be excellent; on the downside the 10 day MVA is right at some additional price support at 850.
Dow:
Stats: +47.36 points (+0.57%) to close at 8322.4
Volume: 1.408B (-19.41%)
Very similar look to the S&P 500, moving over the 50 day MVA (8182.87) and below the early August and early September interim highs near 8726 to 8745. It too has run far and it is moving somewhat laterally as well after the strong run. It too needs a couple more sessions of rest either at this level or back down to 8000 and then it would be ready to move again.
The Chart: http://www.investmenthouse.com/cd/$indu.html
THIS WEEK
The market gave important follow through last week on two sessions. The early leaders we have been following on the reports mostly enjoyed a good week. That is the proof of the pudding in any rally: do leading stocks breakout of good patterns and hold onto them? So far they are doing that though the medical sector had some stocks that struggled the past two sessions. Thursday was hard on a few leading medical stocks but most regained their balance Friday. They need to keep good action, rising on volume then pulling back to the short term moving averages to consolidate the gains. Those are the little 'pyramids' that Nicolas Darvis, the real father of investing in breakouts, described in his writings.
Indeed, many of the stocks we moved into over the past 3 weeks are in various stages of their moves. Many have rallied and are now testing those moves, pulling back toward the 10 and 18 day MVA test the good moves. After a breakout in an improving market, stocks will rally up the short term moving averages, testing them 4 to 5 times before falling back to test the 50 day MVA. Those rotations up the short term moving averages can build into excellent percentage gains. Thus we have been inclined to let the solid stocks run up past the targets, taking some gains, but also holding onto positions for further moves. We will also use the pullbacks to the short term moving averages to add to positions or enter new positions in the stock. In an improving market that is how you really make gains: averaging UP into a winner as opposed to averaging down in a loser.
Many stocks have made solid moves. Some are still buys as they are just moving out of their bases, others are starting to form handles to their moves up this past week, and others are already testing their breakouts, heading toward those short term moving averages. That means for new positions this week we are going to be looking at tests of support that hold for new entry points as well as the formation of lateral handles for stocks that have shot up and formed double bottoms or cup patterns and need a rest. When they make the move back and start up we move in. The market needs a rest, but it is showing strength in its action, being stingy with its gains as opposed to rolling right back down as it did in August. Thus we are going to be ready and once again move in when the opportunity presents itself such as a breakout on volume, bounce from support, etc.
Support and Resistance
Nasdaq: Closed at 1287.86
Resistance: 1291 to 1316, an early August interim high. There is a downtrend line from the March and May highs at 1318. 1357.09, the October 1998 bear market low. 1418, the interim test after the September 2001 low, and 1426 the August high.
Support: The 50 day MVA (1260.60). The 10 day MVA (1229.21). The 18 day MVA (1220.07). The March/May downtrend line at 1222. 1200 (August closing low) to the July intraday low at 1192.42. 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 884.39
Resistance: The September 2000/May 2001 downtrend line at 907 and the downtrend lines from the March and April highs have merged. July, August and September interim highs at 911. Price resistance at 950. 965, the September 2001 closing low along with the August 2002 high.
Support: 875 is some price support. The 50 day MVA (869.19). 850 to 855 (the October 1997 and Q2 1998 lows). The 10 day MVA (851.06). The 18 day MVA (846.02). The first March down trendline 829. Prior closing lows and highs at 800 from July and October. The first bottom channel line in the March downtrend (792). The September 2000/January 2001 down trendline at 782. The July intraday low at 775.68. The lowest channel line in the March downtrend channel (750). 750 to 760 with an intraday touch to 730.
Dow: Closed at 8322.40
Resistance: Some price resistance at 8500. The late July and early September interim high at 8726 to 8762.14 (8745 closing). A range of resistance from 9000 on up to 9050.
Support: The simple 50 day MVA (8265.84). 8250 acted is some support. The exponential 50 day MVA (8182.87). The second March down trendline at 8180. 8000 (August low at 8043; September 2001 intraday low at 8062). The 10 day MVA (7988.85). The 18 day MVA (7943.44). The August down trendline at 7475.
Economic Calendar
10-21-02
Leading economic indicators, September (10:00): -0.2% expected, -0.2% prior.
Treasury budget, September (2:00): $40.0B expected, $35.4B prior.
10-23-02
Federal Reserve Beige Book (2:00)
10-24-02
Initial jobless claims (8:30): 405K expected, 411K prior.
10-25-02
Durable goods orders, September (8:30): -2.0% expected, -0.4% prior.
Michigan sentiment, October final (9:45): 81.0 expected, 80.4 prior.
New home sales, September (10:00): 985K expected, 996K prior.
Existing home sales, September (10:00): 5.35M expected, 5.28M prior.
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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: PLEASE....could you give me the current numbers for these supposed "downtrend" lines everyone is watching for a break to the upside??? Nasdaq . . . SPX . . . INDU. Thank you.
A: You have probably been watching CNBC where one of the floor traders was supposedly scratching his head Friday wondering what the Dow was going to do as it failed to 'breakout' of its channel and was supposedly right up against that level. Channels are trendlines that often define a range an index or stock trades in until it makes a definitive breakout. They are also where you want to draw them and are thus subject to different interpretations. Generally we like to look at the first channel lines that are formed when a trend starts as those 'set the bar.' After that you look to the trendline that is hit the most and continues the trend.
What was referred to Friday was a down trendline formed off the August high from the March peak as opposed to the first closely tied down trendlines that are at the 50 day MVA (8182.87) and 8000. That trendline is now roughly at 8400. Maybe it will stall the Dow a bit when it gets there but the Dow is not the leader in this move. That goes to the S&P 500 and the Nasdaq. The S&P 500 still has to deal with its March/April downtrend channel near 907. The Nasdaq has the March/May down trendline at 1318 ahead of it. Those are key levels to break to move over the downtrend. It is interesting to note that the Dow channel referred to on CNBC could be drawn even higher if it took into account the May highs; it does not, so in theory the downtrend channel could be drawn from there as well leaving yet another hurdle to cross.
What you do is draw the trendlines when a lower high (downtrend) or higher low (uptrend) is made. That typically sets the channel. There will be variations above and below the line; as seen in May's spike, those sharp moves up and down that quickly reverse can be tossed out. Using this method, the August spike in the Dow crossed over the first downtrend line and then quickly corrected as in May. The next high was in early September and that turned at the first down trendline. No doubt there is a down trendline still ahead of the Dow that is formed by three interim spikes on the index. As noted, however, the Dow is not our primary focus as the other two indexes are leading it around and they still have to face their down trendlines.
End Part 1 of 3
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