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stock trading tip, stock trading
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10/29/02 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Tuesday: None issued
Buy alerts issued: SLE; KSWS
Trailing stops issued: RNR
Stop alerts issued: DLX; CHD; CVH
You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- Consumer confidence fuels early sell off.
- 50 day MVA test produces a reversal, but it took its time.
- Volume mixed on the action.
- Subscriber questions.
Economic focus starts with a flat note.
After earnings all eyes were on economic reports to glean if the future might look better than Q3 results. Thirty minutes into the session investors received an eyeful as confidence hit a 9-year low. That tanked the market with all areas taking a licking though retail was naturally getting a large portion as consumer sentiment is associated directly, and somewhat incorrectly, with sentiment. After reaching the 50 day MVA on the lows there was no rush back into stocks. It took most of the session before buyers finally stepped in to fill the breach and driving stocks well off their lows. It was not a reversal heralding another charge higher but more of a bounce back up in the trading range with the final outcome still at issued. It was timely to keep the consolidation going but it did not signal a blast out of the top of the range is imminent.
THE ECONOMY
The focal point: Consumer Confidence tumbles to 79.4.
Expectations were 90, prior was 93.7 (September). It was a jolt to the market as the focus was swinging from earnings back to the economy. Immediate selloff on the numbers, and that took a lot of steam out of the action; a lot like walking in knee deep in sludge. Both present conditions and expectations took hits, falling to 77.5 and 80.7 respectively (11 and 16.5 points). These are still decent levels still, but subject to continued erosion if the Iraq situation does not move toward resolution and nothing is done to help the economy.
One of the big drops was in employment confidence. That fell one point. Not much you say, but that index usually moves one-tenth of a point at a time; a one point drop is huge. That is really a key component. When the Fed was hiking rates and using the excuse the consumer was 'runaway' we noted again and again that consumers will continue to consume until they feel the imminent threat of job loss or the pink slip actually hit. As we saw the rate hikes did not have any impact on consumption. Ultimately and in an indirect way they did: the economy fell into recession and millions lost jobs. That still did not crush the consumer but the lingering effects are now taking their effect as confidence has fallen to a 10 year low that even September 11 could not do. So, when consumers start worrying about jobs, that is when they start to cut back here and there on spending. At first it is here and there, and then it snowballs if things don't improve. As the Conference Board chairman said, the kids will get gifts but Uncle Ed and Aunt Mary will be forgotten.
This is a clear no confidence vote on the current economic climate and the 'all is well' attitude in Washington. Real stimulus is needed soon as consumers simply are losing steam after years of credit buying. They are not going to or will be unable to get more credit. Several economists were calling for action to stem the downward momentum before the consumer goes completely into hibernation. Confidence numbers are a bit overrated, however, in their significance. Historically consumers say one thing and then do the other. Moreover, the results do not include the recent stock market rally, and that would help a bit though as we noted Monday, many retail investors do not believe in this move. Still, the Gulf War is instructive as it shows that consumers pulled in spending on talk of the cost and length projected for that war (Newsweek headline at the time: 'The War We Cannot Win') and then during the conflict they stayed at home and watched television coverage. That was enough to tip a weak economy into recession. That sounds very similar to the economy we have now: weak and unable to withstand any surprises or shocks. You can bet our enemies know or suspect that.
Fed Funds Futures pricing in rate cut.
The confidence report jumped the odds of a 25% rate cut next Wednesday according to the FFF contract. The chance of a 50 basis point cut jumped to 50%. This close to a meeting the market is a very accurate predictor of what the Fed will do.
There is debate as to whether another cut will do much. The Fed has cut 11 times with no result as it refused to get in front of the 2 year treasury note and thus provide real incentive to borrow money. With wide credit spreads, banks still on Fed restriction, banks afraid to lend to small business, and consumers carrying large debt balances, at this stage of the game a substantial rate cut will have a lot less impact than it would have had several months back. If the Fed had front-end loaded the rate cuts initially, it would have had much more success as it would have jumped ahead of the curve and actually provided real incentive to borrow and lend money. Now it is too little too late from the Fed as far as rate cuts. It could, however, reduce or eliminate the lending restrictions imposed on hundreds of banks, it could tell member banks to lend, it could buy bonds and pump up the money supply that has been falling the past 7 months, it could take a leadership roll (even if behind the scenes) for passing some meaningful fiscal stimulus. There are many things the Fed could do if it would.
Sadly and ironically, several Fed governors are commenting how the economy is weak and any recovery is fragile, obviously leaving open the door open as to what else needs to be done besides a rate cut. They have been telegraphing a rate cut for the next meeting, but it is clear even to them based on their comments of late that the Fed rate cuts cannot promote the necessary economic stimulus. The sad irony part of this is that El Greenspan told Congress a little over a year ago that no more economic stimulus was needed. Fed governors are putting out the message very subtly that it is now needed, prodding the budding discussion in Washington about doing something. The Fed could provide some leadership and clearly say that some more fiscal stimulus is needed and say what does and does not work (Greenspan is at least on the record saying more than once to Congress that marginal tax rate cuts are one of the best ways to stimulate the economy), but it is reluctant to tarnish the words and thus the sterling record (at least in Hollywood views) of El Capitan de Dinero. With everyone playing for how they will be viewed by posterity, it is a wonder anything gets done at all.
THE MARKET
Test of the 50 day MVA finally yields a move up.
When a stock tests the 50 day MVA, you really like to see it ricochet off that level like a superball smacking a concrete surface. That may be a bit overboard, but the idea is that you want to see buyers jump back in at that level, viewing the pullback as a great buying opportunity as they scramble over each other to buy. Tuesday the DJ30 and SP500 both tested the 50 day MVA and even slightly undercut it. They did not leap off of that level. As noted in an intraday alert, it was more like slogging through knee deep mud as they churned sideways at that point. At least they did not just roll over at that point and sink into the quicksand.
It took all afternoon, but with an hour left the indexes all started a solid if somewhat less than spectacular move off the lows. The Dow turned ever so slightly positive while Nasdaq and SP500 moved well off the lows. Volume was up on the NYSE, lower on Nasdaq; good action for the Nasdaq and somewhat for the Dow, not so good for the large caps. What can be said: there was a test of the 50 day MVA and it produced a solid bounce. It was not a massive reversal that signaled the next big run had begun, but it was another move inside the trading/consolidation range that kept stocks working on consolidating the recent gains and somewhat blunting the distribution sessions. It needs to continue to work laterally and improve that price/volume action to work those out of the system, and then breakout on strong volume. That is how success on this move will be measured.
Looking at the index charts, it is important for further upside that the indexes move up out of this consolidation. They cannot really afford to make a lower high here. Some are saying a 50% test of the move off the lows (Dow to 7872; SP500 to 837; Nasdaq to 1227) would be normal, but a look at the charts reveals that such a move would produce very, very weak chart patterns that would basically confirm the continuing downtrend. In order to change the direction, to change the character of the action for the past year or more, the indexes really need a positive breakout from this trading range without undercutting the range too far (there can always be intraday tests lower that act as shakeouts).
Right now the indexes are basically forming handles to the double bottom patterns off the July and October lows. If the pattern breaks down the underlying accumulation and shakeouts that occur in such a pattern are undermined and the market is open to more selling. That is why we are so keenly watching the action within this trading range and larger pattern. That is why the price/volume action is so important. It needs to complete the pattern and then breakout to the upside to have any chance of really rallying into the end of the year. For now the indexes are mostly doing what they need to do, but price/volume action must improve or else the accumulation seen thus far will be undone and the pattern will fail. The Tuesday action helped try to set the indexes back on the right path.
Sentiment Indicators
VIX: 36.8; +1.13
VXN: 52.47; +0.95
Put/Call Ratio (CBOE): 0.74; +0.03
Nasdaq
A deeper test that still did not hit the 50 day MVA on the low given Nasdaq had been edging higher and higher, it managed to reverse as well, dragged by the other indexes.
Stats: -15.29 points (-1.16%) to close at 1300.54
Volume: 1.594B (-2.75%). Volume edged back on the loss and reversal, better price/volume action.
Up Volume: 366M (-302M)
Down Volume: 1.189B (+243M). There was no power in the reversal. As noted, Nasdaq was dragged along on the afternoon move higher.
A/D and Hi/Lo: Decliners led 1.2 to 1. Another very modest breadth decline, a continued positive in the face of the distribution on the index.
Previous Session: Decliners led 1.15 to 1
New Highs: 34 (-19)
New Lows: 67 (+17)
The Chart: http://www.investmenthouse.com/cd/$compq.html
After edging higher on low volume the Nasdaq started to form something that looks more like the early stages of a consolidation. The Nasdaq kept cheating higher after breaking over the 50 day MVA 2 weeks back, never really giving good consolidation action. Tuesday it reached down and on the low was still above the 50 day MVA (1272.66) when it managed to recover 21 points of losses. It finished the session lower and on lower volume so you cannot really call it a reversal. It also was not a distribution session. It was a day where it was yanked lower by news and managed to recover and maintain the current range. It could stand to slowly move lower and test that 50 day MVA on lower volume and then start a stronger volume move up and out of the range that roughly runs from 1270 to 1300. The action is the start of what it needed to settle down in this range and really consolidate the prior moves to give it a chance at a further, sustainable break higher.
S&P 500/NYSE
Traded below the 50 day MVA and finally found traction for a move higher.
Stats: -8.08 points (-0.91%) to close at 882.15
NYSE Volume: 1.445B (+4.15%). Volume rose, officially a distribution session on the large cap index as volume again rose (this time to average) on another selling session. As the index was able to reverse we are not too worked up over this session, but it needs to improve that price/volume action during the consolidation.
Up Volume: 447M (-145M)
Down Volume: 980M (+198M)
A/D and Hi/Lo: Decliners led 1.31 to 1. Decliners held flat on the session after jumping over 2:1 early in the session. Once again very narrow selling overall.
Previous Session: Decliners led 1.3 to 1
New Highs: 8 (-18)
New Lows: 55 (+19)
The Chart: http://www.investmenthouse.com/cd/$spx.html
Undercut the 50 day MVA (874.50; 873.22 simple) on the low (867.91) and then rallied back to hold above the 10 day MVA (880.28). The recovery was needed as it keeps the large caps moving inside the range outlined by 900 on the high (on up to 911) and 870 on the low. The volume is still not what you want with down sessions coming on rising volume and up sessions on weaker volume, action that indicates there are overall more stock sellers than buyers in the market. The Tuesday action was a bit better and somewhat excusable given the intraday reversal after undercutting the 50 day MVA, but it still has not moved to positive or accumulative action. From here the index still has to complete its consolidation; another 2 to 3 sessions of lighter volume action would be positive.
Dow:
Nice action, tapping down just below the 50 day MVA and rallying back flat on slightly rising volume. Again the Dow looks to be putting together the best consolidation, helped by issues such as PG that has gotten back to basics.
Stats: +0.9 points (+0.01%) to close at 8368.94
Volume: 1.445B (+4.15%)
Tapped the 18 day MVA on the low (8198.04) and rallied back to close flat on slightly higher volume. The move took it below the 50 day MVA (8241.22) and support at 8250, and it was a good sign to see the Dow turn a 170 point loss into a flat session given the news on confidence. Again, the Dow is showing the best consolidation action of the major indexes, testing lower on mostly lower volume and then rallying back. Maybe the Dow is ready to lead. Nasdaq certainly was not up to the task Tuesday.
The Chart: http://www.investmenthouse.com/cd/$indu.html
WEDNESDAY
No economic news and earnings reports are getting thin and the earnings saturation is high as investors look to economic signals that suggest that the modest Q3 earnings improvement will continue. Inauspicious start Tuesday, and most are waiting for the big salvo of data Friday with the unemployment report, spending, income, ISM. Thursday is no slouch, however, with the Chicago PMI and preliminary Q3 GDP. In short, there is plenty of economic ammunition out there to drive the market. Wednesday, however, is going to be a sleeper as far as scheduled reports.
The lack of economic news Wednesday will give a peak into the market health somewhat as it will be able to move on its own without a lot of outside influence. It is still banging around in the range, and we suspect that it will try to continue to rise early in the session given the Tuesday rally off the lows. Given the hefty economic report card later in the week, however, an early move may give way to more testing of the range. We are always skeptical of stronger opens with or without cause (the open, that is), particularly so after the Tuesday move up that while nice, was less than inspired.
At this stage we have to be patient, letting the market move through its consolidation and either provide the breakout or fail. The recovery Tuesday was encouraging, but price/volume action is still poor. While we are not adverse to taking upside positions when they present themselves we looking at partial positions. If things work out we will complete the position at the next logical opportunity to get in, e.g., a test of the breakout or a test of the short term moving averages. Leaders will lead, i.e., start a bit early, before any overall breakout and those are the ones we will take a position on if they provide the move. if things work out we can always average up into a winner. If they don't, we have not committed our full position.
Support and Resistance
Nasdaq: Closed at 1300.54
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 (1548.81).
Support: The 10 day MVA (1290.43). There is a downtrend line from the March and May highs at 1288. The 50 day MVA (1272.66). The 18 day MVA (1268.83). 1200 (August closing low) to the July intraday low at 1192.42. The March/May downtrend line at 1188. 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 882.15
Resistance: The March down trendline at 897. The September 2000/May 2001 downtrend line at 899. 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 (880.28). 875 is some price support. The 50 day MVA (874.50). The 18 day MVA (870.04). 850 to 855 (the October 1997 and Q2 1998 lows). The first March down trendline 817. 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 8368.94
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 (9314.25). 9500 from June and July lows.
Support: The 10 day MVA (8304.37) is possible. 8250, the simple 50 day MVA (8220.52) and the exponential 50 day MVA (8241.22) are key. The 18 day MVA (8198.46). The second March down trendline at 8075. 8000 (August low at 8043; September 2001 intraday low at 8062).
Economic Calendar
10-29-02
Consumer confidence, October (10:00): 79.4 actual, 90.0 expected, 93.7 prior (revised from 93.3).
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): 400K expected, 389K prior.
Chicago PMI, October (10:00): 49.0 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): 0K 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): 0.5% expected. 0.4% prior.
Personal spending, September (8:30): -0.2% expected, 0.3% prior.
ISM Index, October (10:00): 48.9 expected, 49.5 prior.
Constructoin spending, September (10:00): 0.1% expected, -0.4% prior.
End Part 1 of 3
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stock trading tip
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