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us stock market, stock watch
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10/28/02 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts issued Monday: USNA hit target but held positions for now.
Buy alerts issued: AGAM; RGIS
Trailing stops issued: None issued
Stop alerts issued: TTWO
SUMMARY:
- Indexes locked within trading ranges as Nasdaq breakout attempt fails.
- Some more modest distribution as a few more leaders fall under pressure.
- Subscriber questions.
THE MARKET
Leaders come under pressure.
Though it tried to move up and breakout of the range, there was no buying power moving in to support the early move higher. Some positive comments from several areas were overpowered by several valuation downgrades that hit leading retailers and some of the leading health services sectors. Of late several leading sectors have been hit with valuation calls and selling: education, gaming software, education (reprise after recovery), health services (health care plans, hospitals), and retail. Retail was just starting to really perform again when BBBY was hit with a valuation call today and that took the starch out of many retailers.
Why are leaders so important? Market has to have leadership from stocks that are making money, i.e., that are growing earnings and thus have expanding P/E ratios. Those stocks can continue to grow in price because they are growing sales and earnings. Laggard stocks that are merely rebounding from selling do not have the staying power. Thus when leading stocks get downgrades on valuation and cannot recover, that is a sign that the market still is unwilling to go after growth stocks that typically drive market advances. A lot of the key leadership is currently under pressure and has to recover or the market won't have anyone at the helm to guide it higher.
Another mild distribution session.
For the third out of six sessions the market sold on higher volume than it has rallied. That indicates that there are more selling stocks than buying stocks. Even though overall volume was still light, it was distribution and as we have seen in the past, distribution does not have to be booming. Distribution can sneak up on the market with below average selling, but that can be the silent killer so to speak, eroding the market foundation and opening the door for heavier selling.
Still in the trading range for now.
The Nasdaq tried to forge into new territory, but as noted, it does not have the buying behind it. Thus it simply sets itself up for more abuse, selling off each time it makes such a foray. The Dow, SP500, SP400 (mid-caps), and SP600 (small caps) all are moving laterally over their 50 day MVA and below near term resistance, working in a good consolidation/trading range where they work off the excess from the large move higher. Thus far the price action has been very good, refusing to give up the gains off the lows while holding a relatively flat top. That is constructive action that can ultimately lead to an upside breakout of the range.
The volume action is the problem as it shows subtle selling as opposed to accumulation. It has been on comparatively light volume so if the indexes can hold the trading range and leaders recover from their hemorrhaging the breakout will come. We also note how the sessions are swinging back and forth in character on an almost daily basis; volatility often marks change, and in conjunction with the distribution and poor upside volume that could be interpreted to mean a change to more selling from the accumulation seen off the October lows. At this point we view the three distribution sessions and the distressed leaders are red flags of problems near at hand; if not rectified the indexes could break through the bottom of the range for more downside action.
Sentiment Indicators
Individual investor optimism hits a record low.
In a survey that spanned early October to last week UBS measured investor optimism (the retail investor) at its lowest level ever with less than half of the investors polled saying now was a good time to invest in stocks (just 38%). Of those with over $100K to invest, over 50% said it was a good time to invest. Why is this important? Retail investors as a whole tend to be late on the important turns in markets. They moved into stocks during the tail end of the bull run, they left stocks after the bulk of the bear market damage was done, they moved into bonds just before the bond market started to sell and bond rates jumped. Retail investors are an important part of the market, but again, on the whole they miss the big turns because they only get the courage to enter after they feel the market cannot go against them or they are missing out (e.g., the big moves in bonds), and they only leave after most of the water has been drained from the pool. Then you repeat the cycle. Thus they are a contrary indicator, and if most feel it is a poor time to own stocks, that is an indication that the environment for owning stocks is much better.
VIX: 35.67; -0.6
VXN: 51.52; +1.13
Put/Call Ratio (CBOE): 0.71; -0.06. Continuing its counter action of late, now falling on a market drop where it rose Friday on a market gain. Would expect it to rise significantly on another two selling sessions.
Nasdaq
Nasdaq tried to get a big frisky Monday, gapping higher but once again finding no volume to support the move up. Gains quickly gave way to selling and the index was pushed back on some once again higher volume.
Stats: -15.3 points (-1.15%) to close at 1315.83
Volume: 1.639B (+11.36%). Volume back above average on the selling, making the third distribution session in the past 6 trading days. That is a sign of trouble for the tech index.
Up Volume: 668M (-478M)
Down Volume: 946M (+636M)
A/D and Hi/Lo: Decliners led 1.15 to 1. Selling was again not broad for Nasdaq stocks in general but was focused. Those that sold did so on higher volume.
Previous Session: Advancers led 1.82 to 1
New Highs: 53 (+28)
New Lows: 50 (-6)
The Chart: http://www.investmenthouse.com/cd/$compq.html
A move up to 1346 on the open was it. The Nasdaq started lower and though it tried to hold the line a time or two, the gap up to open the week had no supporters. Semiconductors were about the best tech performers in spite of a brokerage call to take gains now. That did not help the overall index action, and the Nasdaq has not helped itself. It has been creeping higher on no volume and selling on rising volume. The desire to move higher is good, but it ultimately has to be supported by enough buyers and that shows up in the volume on up sessions. That has not been the case of late, and these moves up out of the range from 1260 to 1300 set it up for bigger down sessions. It really needs to come back on lower volume and get the fluff out of the recent move, hold the 50 day MVA (1271.53), move sideways, and then jump up on a sharp increase in volume. That would show it had effectively consolidated its move off the low. Right now it is showing more volatile action, the opposite of what you want to see on a consolidation move before a breakout. That is why it needs to settle down just to preserve the current move before it can really contemplate advancing from here. Certainly the price/volume action is not supporting any move higher.
S&P 500/NYSE
Tried to move over resistance at 900 and failed again, reversing on some slightly rising trade.
Stats: -7.43 points (-0.83%) to close at 890.22
NYSE Volume: 1.387B (+4.55%). A modest increase in volume and still below average on the session. That is not bad action though distribution, even on below average volume, is destructive to rallies.
Up Volume: 592M (-380M)
Down Volume: 782M (+412M)
A/D and Hi/Lo: Decliners led 1.3 to 1. Again no widespread selling on the down day with selling breadth less than upside breadth.
Previous Session: Advancers led 2.16 to 1
New Highs: 26 (+12)
New Lows: 36 (-13)
The Chart: http://www.investmenthouse.com/cd/$spx.html
There is resistance at 900 and the large caps encountered that again Monday with a move to 907.44 on the high. That was all there was Monday before it was time to sell back down. The S&P looks really good in this trading range from the 50 day MVA (874.19) to 900, at least as far as price goes; it is moving up and down within the range as it refuses to give back much of the gains off the October low. That is a great sign of strength, but it is countered by that poor volume action. Overall the S&P looks better than the Nasdaq, but the key is whether the price/volume action improves and it can hold at the 50 day MVA a the bottom of the range. At this point it looks as if another test of the 50 day MVA will be made.
Dow:
The Dow tried 8500 again and could not hold, turning lower on again rising volume. Very similar to the S&P500 with the price action, but the volume is not great.
Stats: -75.95 points (-0.9%) to close at 8368.04
Volume: 1.387B (+4.55%)
Ran to 8531.45 on the high, again testing the 8500 level and then reversing once again. It held above the Friday low and the 50 day MVA (8236.01) as it forms something that looks very much like a handle to the move off the October low. Looking at just the volume of the Dow stocks (not the NYSE volume), other than Monday when it sold on rising volume, price/volume action has been good in the consolidation. Too bad the NYSE volume is not providing the same action for the SP500, but those are the cards as they are. The Dow is looking very good in its consolidation, but we have not been looking to the Dow for leadership. Perhaps that will changer here, but for any move to succeed the other indexes (at least the SP500) will have to move with it.
The Chart: http://www.investmenthouse.com/cd/$indu.html
TUESDAY
Consumer confidence is out 30 minutes into the session, the first big economic number of the week. Most analysts are saying the indexes are tired. Well, they have been resting for a week, it just is restless sleep, the kind you wake up from feeling as if you did not sleep. That is the effect of that poorer price/volume action where there is more selling pressure than accumulative pressure. It has not been really pronounced yet in terms of volume, but it places a big question mark over whether this lateral move is going to provide a solid breakout higher or a breakdown through the bottom of the range. Good price action, not so great volume action. You need both to hold moves higher, but if volume is working against prices, that is usually enough to bring the market down.
There were some good moves Monday. There were several stocks under pressure that managed to hold their 50 day MVA. What these key leaders do at this point will show us a lot about what we can expect the market to do. For now the indexes are holding their ranges, but if the stocks that make up the indexes, particularly the leadership groups that led the move higher, cannot hold up there is little chance for the indexes overall. With the distribution it looks as if there will be a test of the 50 day MVA on the Dow and SP500. If price/volume action improves on the move lower to test, we still feel there is enough buy side support to continue to the push higher in the rally. If it continues to erode the market will do the same and we will see more leaders fall and those that are trying to hold the 50 day MVA undercut and fall as well.
Tuesday we expect some further softness early as the indexes and leading stocks try to work through the Monday selling. The best action for the S&P 500 would be a 2 to 3 day move back to the 50 day MVA on lower volume. As for leader stocks hitting hard times, we will watch volume to see if it backs off and they look as if they will hold onto the 50 day MVA as the action unfolds. That means being patient during any early selling. Valuation calls are hitting most stocks that are performing well; after any bear market the key is whether investors are willing to hold growth stocks even if there are valuation calls by analysts. Also after a bear market or at the end of part of the bear market, analysts will continue to use their new found tool, the valuation calculator, and they will issue downgrades based on what was the thought at the bottom of the market. The change will come from the institutions that feel it is time to accumulate regardless of what analysts say. There has been a fledgling bias shift toward growth stocks; these valuation downgrades are testing that perception shift.
Support and Resistance
Nasdaq: Closed at 1315.83
Resistance: July, August, and September interim highs at 1345. 1357.09, the October 1998 bear market low. 1418, the interim test after the September 2001 low, and 1426 the August high. Then some price resistance at 1500 and the 200 day MVA (1555.79).
Support: There is a downtrend line from the March and May highs at 1293. The 10 day MVA (1288.19). The 50 day MVA (1271.53). The 18 day MVA (1265.10). 1200 (August closing low) to the July intraday low at 1192.42. The March/May downtrend line at 1193. 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 890.23
Resistance: The March down trendline at 899. The September 2000/May 2001 downtrend line at 900. July, August and September interim highs at 909 to 911. Price resistance at 950. 965, the September 2001 closing low along with the August 2002 high.
Support: The 10 day MVA (879.86). 875 is some price support. The 50 day MVA (874.19). The 18 day MVA (868.61). 850 to 855 (the October 1997 and Q2 1998 lows). The first March down trendline 820. Prior closing lows and highs at 800 from July and October. The July intraday low at 775.68. 750 to 760 with an intraday touch to 730.
Dow: Closed at 8368.04
Resistance: 8500, former price points, is acting as the top of this range. 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. The 200 day MVA (9321.86). 9500 from June and July lows.
Support: The 10 day MVA (8290.02) is possible. 8250, the simple 50 day MVA (8232.95) and the exponential 50 day MVA (8236.01) are key. The 18 day MVA (8178.40). The second March down trendline at 8090. 8000 (August low at 8043; September 2001 intraday low at 8062).
Economic Calendar
10-29-02
Consumer confidence, October (10:00): 90.2 expected, 93.3 prior.
10-31-02
Q3 GDP, Prelim (8:30): 3.6% expected, 1.3% prior.
Employment Cost Index, Q3 (8:30): 0.9% expected, 1.0% prior.
Initial jobless claims (8:30): 405K expected, 389K prior.
Chicago PMI, October (10:00): 50.0 expected, 48.1 prior.
11-01-02
Auto sales, October: 5.7M expected, 5.5M prior.
Truck sales, October: 7.6M expected, 7.3M prior.
Unemployment rate, October (8:30): 5.8% expected, 5.6% prior.
Non-farm payrolls, October (8:30): -10K expected, -43K prior.
Hourly earnings, October (8:30): 0.3% expected, 0.3% prior.
Average workweek, October (8:30): 34.2 expected, 34.3 prior.
Personal income, September (8:30): 0.4% expected. 0.4% prior.
Personal spending, September (8:30): -0.2% expected, 0.3% prior.
ISM Index, October (10:00): 49.0 expected, 49.5 prior.
Constructoin spending, September (10:00): -0.3% expected, -0.4% prior.
THE PLAYS:
Upside:
Play Date: 10/28/2002
RARE (Rare Hospitality--$27.48; -0.03; optionable): Restaurants
http://biz.yahoo.com/p/r/rare.html
STATUS: Double bottom w/handle. RARE is working on a handle to its 6-month base, trying to form a handle, a.k.a., final consolidation before moving higher over resistance at the middle of the pattern (the mid-August 'hump' at 28). There is very good accumulation in the stock since May when the pattern started with 8 accumulation weeks to 3 distribution weeks. It still needs to pull back for another couple of sessions and tap 27 on the low on some lower volume. From there we look for the breakout on strong volume. Once a stock starts forming the handle that is when we start giving it a closer look as the breakout can then come at any time. Relative strength is at a high even at a lower price than in May, and it is ready to breakout with the stock's breakout.
Volume: 446.9K Avg Volume: 246.772K
BUY POINT: $28.22 Volume=355K Target=$33.85 Stop=$26.24
POSITION: QRH BE - Feb. $25c (85 delta) and/or Stock
http://www.investmenthouse.com/ci/rare.html
Play Date: 10/28/2002
HITK (Hi-Tech Pharmacal--$15; -0.16; no options): Generic drugs
http://biz.yahoo.com/p/h/hitk.html
STATUS: Testing the breakout. HITK is currently testing the breakout from a 9.5 month cup base. HITK made the big breakout October 11 and has moved laterally and lower to the 18 day MVA (14.69) since that time. Monday it showed a tight doji that used the 18 day MVA as its low as volume crept up slightly. Accumulation in the base was solid at 6 accumulation weeks to 4 distribution weeks. It makes big jumps off the short term moving averages when it moves, what we call a flag thrower as it runs the flagpole up and then moves laterally. Want to get in when we see the move starting.
Volume: 31.6K Avg Volume: 21.363K
BUY POINT: Aggressive: 15.35. Next buy: $15.75 Volume=60K Target=$18.55 Stop=$14.65
POSITION: Stock (no option chain)
http://www.investmenthouse.com/ih/hitk.html
Revisited:
Play Date: 10/24/2002
ABFS (Arkansas Best--$30.48; -0.39; optionable): Trucking
http://biz.yahoo.com/p/a/abfs.html
STATUS: Testing the breakout. Holding above 30 on the intraday tests and closing over the 10 day MVA (30.40) as volume dries completely up. Held up well during the overall down session, a good sign.
Volume: 112.5K Avg Volume: 371.454K
BUY POINT: $31.05 Volume=475K Target=$37 Stop=$28.88
POSITION: FDQ CF - March $30c (60 delta, low OI) and/or Stock
http://www.investmenthouse.com/ci/abfs.html
Play Date: 10/21/2002
ALLY (Alliance Gaming--$17.25; -0.45; optionable): Gaming
http://biz.yahoo.com/p/a/ally.html
STATUS: Testing the breakout. Very nice lateral move over 17 as the 10 day MVA rises to meet it. Volume has trended lower as the stock as pulled back. This is exactly the kind of test we like.
Volume: 554.44K Avg Volume: 613.318K
BUY POINT: $18.12 Volume=845K Target=$21.75 Stop=$16.85
POSITION: AQL DC - April $15c (76 delta, low OI) and/or Stock
http://www.investmenthouse.com/ci/ally.html
End Part 1 of 2
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