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11/09/02 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts issued Friday: None issued
Buy alerts issued: KLAC
Trailing stops issued: None issued.
Stop alerts issued: LNCR; PFGC
SUMMARY:
- Healthcare gets whacked, but the rest of the market drifts toward support on lighter volume.
- Earnings mostly over but WMT, AMAT, DELL to report
- Market setting up for the next move up.
- Subscriber Questions
Despite healthcare woes, market acts relatively tranquil.
One of the leading market sectors during much of the bear market, healthcare and health services, is getting destroyed. While not much worked during the bear market these sectors were amazingly steady. Now that the rest of the economy is showing signs of recovery, investors, particularly big money funds, have been rotating out of these stocks. As the stocks broke out of their last bases over the past few weeks, they have then sold off, reversing on stronger volume as institutions used the surge higher to unload shares. The selling continues and the stocks break down. That action was very evident Friday as THC, UNH, HCA, et al were slaughtered, the catalyst being THC's continued woes and Prudential's downgrade of the hospital sector.
It was not all disaster for the medical and health stocks though many fell, victims of collateral damage. We moved out of many of these stocks already as they were showing trouble signs, but other medical sector stocks had some trouble as noted, and those that are on the report need to recover early in the week or we are just getting out as a precaution. Drug stocks were almost completely unscathed as the republican win is seen as a positive for drugs and pharmaceuticals.
It is never good to see leading sectors break down when the market is trying to recover, but you cannot just say 'failed breakouts from leaders so the market is in trouble.' What we are seeing is a sector that climbed and climbed through several bases during the bear market when the economic prospects fell and fell, the idea being even if the economy stank people would still get sick, still get old, and thus need health services. They were in late bases at the end of runs that lasted two years and more and had doubled, tripled, quadrupled in value. Now that there are signs of economic recovery as the market looks ahead, other areas are getting the institutional interest as the next leadership areas.
The point: the breakdown of these stocks does not in our opinion herald the end of this move off the double bottom after 3 legs down in the bear market. Money is not leaving these stocks and then leaving the market. Money is rotating out of these stocks and into other areas such as retail, telecom (wireless), data storage. Rotation is not only good for your tires, but it is good for the market as well. The statistics prove it: as these stocks have broken down over the past few weeks the market has risen 5% and more. Money is not leaving, it is just migrating.
Rotation apparent in the market action.
Even as the health services stocks imploded, the overall market fell on lighter volume, both Nasdaq and NYSE. That is the second straight selling session that has occurred on lower volume. Many of the best performing stocks of late used the last two sessions to drift lower toward near support on lower volume. Even as THC (Tenet Healthcare) burned lower on 114 million shares when its average volume is 8 million shares, NYSE volume fell. There was no mad rush to the exits. Indeed, the pullback of the recent leaders is just what we want.
THE ECONOMY
Not much on tap until Thursday and Friday when jobless claims, PPI, industrial production, Michigan sentiment and the like come out. That leaves the market on its own mostly, though WMT and DELL report earnings this week.
It will be time for the market to have digested the news on the election, the Fed rate cut, and the UN resolution. In our view that means it will be time for the market to start another move higher.
THE MARKET
Another choppy session that headed lower to close in the bottom portion of the day's range. When the smoke cleared, however, the indexes held near support, sold on lower volume, and most of the recent best performers suffered just mild losses. The indexes had a lot to digest last week, and the manner in which they did it was very good. The indexes had rallied hard, consolidated, and then broke higher again on strong volume. They took a breather late in the week, testing near support on lower volume. They look ready to head back up.
Sentiment Indicators
VIX: 33.56; -1.72
VXN: 52.01; -1.89
Put/Call Ratio (CBOE): 1.05; +0.17. Thursday the ratio jumped to over 0.8. Friday it surged over 1.0 on the close even as the trade was even milder and the A/D line was better. This typifies the continued anxiety in the market; at the first chance option speculators are running into puts to grad the downside. At this juncture, however, the market is not showing signs of selling off. As we said before, the continued skepticism acts as fuel for the market: investors are being pulled reluctantly into the market instead of rushing in all at once. That keeps a steady supply of money to come into the market and continue driving it higher.
Nasdaq
Filled the Monday gap, selling back on even lower volume and holding the 10 day MVA on the close. Solid performance.
Stats: -17.43 points (-1.27%) to close at 1359.28
Volume: 1.607B (-8.89%). Volume peeled back again on the selling, falling to average levels. The Nasdaq is showing good price/volume action once again.
Up Volume: 450M (+167M)
Down Volume: 1.133B (-335M)
A/D and Hi/Lo: Decliners led 1.3 to 1. The selling lost what little intensity it had Thursday, another very good indication that this was just a profit taking pullback to support.
Previous Session: Decliners led 2 to 1
New Highs: 33 (-4)
New Lows: 29 (-2)
The Chart: http://www.investmenthouse.com/cd/$compq.html
The selling backed off both price-wise and in volume as the Nasdaq tried to rally early but settled for a low volume pullback to the 10 day MVA (1359.55). The move filled the gap down to 1360 on lower volume as discussed in the Thursday report. It is now sitting on near support as well as the interim highs from July and September, a perfect point to find support for the next move up. The key on the next move higher will be clearing the August high at 1426, thus making a higher high, a necessary part of digging out of the hole. Failure to take out that August high leaves it in a double top, a potentially negative topping pattern.
S&P 500/NYSE
The large caps undercut the 10 day MVA, but found a floor at the 18 day as volume backed off.
Stats: -7.91 points (-0.88%) to close at 894.74
NYSE Volume: 1.435B (-0.79%). Backed off, not much, but it fell again on another down session. THC traded 114 million shares when its average volume is 8 million. Take out the excess and trade fell 10%. No share dumping Friday other than THC and others in its sector.
Up Volume: 370M (+99M)
Down Volume: 1.069B (-115M)
A/D and Hi/Lo: Decliners led 1.46 to 1. As with the Nasdaq, the selling was much narrower.
Previous Session: Decliners led 1.9 to 1
New Highs: 17 (+1)
New Lows: 36 (+14)
The Chart: http://www.investmenthouse.com/cd/$spx.html
The large caps could not hold the 10 day MVA at 900 and sit on top of the late October consolidation range, but did the next best thing, testing the 18 day MVA on the low (891.62) and rebounding somewhat. Volume edged lower and was still below average on the session as there was no outright dumping. GE did not help as it broke back down to the bottom of its recent range. It was disappointing the index could not hold above the 900 level, but it was not a breakdown. Looks ready to start the move back up.
Dow:
Held up well, closing at the 10 day MVA on lower volume.
Stats: -49.11 points (-0.57%) to close at 8537.13
Volume: 1.435B (-0.79%)
The Dow settled back to the 10 day MVA (8529.19) on the close after testing 8500 on the low (8498.92). Volume settled back with it, dropping further below average after the strong volume moves early in the week. The close left the Dow sitting right on tom of its recent consolidation range, a good point to start a recovery after this pullback. It is important that the Dow clear 8750 and then 9100 (roughly the August top) on the next move higher.
The Chart: http://www.investmenthouse.com/cd/$indu.html
THIS WEEK
Not much economic news until the end of the week. There are some more important earnings (AMAT, DELL, WMT) that start on Wednesday. AMAT has already indicated tings are not going well for it at the same time AMD says the recovery has started and the semiconductor association calls for 20% growth in 2003 and another 20% in 2004. DELL has already hinted strongly that things look good for it (repeat, it), and WMT is always strong though it is saying things are lagging a bit for the month.
In short, the market will be on its own in the first part of the week, and it is in a good position to be on its own. It has shown a propensity to rise in a void of news. After getting hit with the elections and the surprise rate cut, it had more to digest. That is what Thursday and Friday were all about, and it is important that the market did not drive off a cliff worrying about it. Yes it sold off and anxiety jumped (the put/call ratio shooting higher), but it did so on low volume, it held near support, many, many stocks simply tested their breakouts, and the anxiety kick shows that fear that actually helps drive rallies.
We continue to view the action as positive. Given the history over the past 3 years, each time the market sells and some leaders break down it is nerve wracking. It is easy to say that things are going to go back down because that is the conditioning the past three years have wrought just as the upside the prior three years conditioned everyone to believe the market was only going higher. The market action, however, is what we have to go by, and after some distribution two weeks back there was strong upside volume last week as the market broke out of the consolidation range and then lower volume on the down sessions. The pullback late in the week was orderly and breakouts outside the health services sector held up. We were taking positions on the pullback, and will look at more when the market rallies back as we expect it will this week. Not much crystal ball reading, just looking at what the market is doing.
Support and Resistance
Nasdaq: Closed at 1359.28
Resistance: 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 (1525.92).
Support: 1357.09, the October 1998 bear market low. The 10 day MVA (1359.55). July, August, and September interim highs at 1345. The 18 day MVA (1331.39). The 50 day MVA (1300.08). 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 894.74
Resistance: July, August and September interim highs at 909 to 911. Some resistance at 921. Price resistance at 950. 965, the September 2001 closing low along with the August 2002 high. Then price resistance at 990.
Support: The 10 day MVA (899.45). The September 2000/May 2001 downtrend line at 890. The 18 day MVA (889.95). The March down trendline at 882. The 50 day MVA (882.37). 875 is some price support. 850 to 855 (the October 1997 and Q2 1998 lows). The first March down trendline 800. 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 8537.13
Resistance: 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 (9264.99). 9500 from June and July lows.
Support: The 10 day MVA (8529.19). 8500, former price points and tested Friday. The 18 day MVA (8421.28). The exponential 50 day MVA (8330.45) and then 8250. The simple 50 day MVA (8172.95). 8000 (August low at 8043; September 2001 intraday low at 8062).
Economic Calendar
11-13-02
WMT earnings
AMAT earnings
11-14-02
Initial jobless claims (8:30): 400k expected, 390k prior.
Retail sales, October (8:30): -0.2% expected, -1.2% prior.
Retail sales, ex autos (8:30): 0.2% expected, 0.1% prior.
Dell earnings: after the close
11-15-02
Business inventories, September (8:30): 0.0% expected, -0.1% prior.
PPI, October (8:30): 0.3% expected, 0.1% prior.
Core PPI (8:30): 0.1% expected, 0.1% prior.
Industrial Production, October (9:15): -0.4% expected, -0.1% prior.
Capacity utilization, October (9:15): 75.7% expected, 75.9% prior.
Michigan sentiment, November preliminary (9:45): 82.0 expected, 80.6 prior.
SUBSCRIBER QUESTIONS
Q: With QLGC as much as $5 over the strike price on the covered call play initiated in the 8/17 report, what is the risk of the call being exercised? An American option can be exercised at any time. But in actual practice, are calls exercised only in the expiration month?
A: You are correct that in our system an option can be exercised at any time before expiration unlike the English system where they are exercised on the day of expiration. Thus anytime an option is in the money, the odds of it being exercised increase. The odds of being called out are greatest closer to expiration because there is less time value associated with the option. Example: A stock is trading at $45 and an investor thinking of buying the stock in the future purchases a $45 call option for $2. There is no incentive to buy the stock then as it would be the same as buying the stock for $47: $2 for the option plus $45 per share. Say the stock runs to $50. The option is now worth $7 ($2 time value + $5 intrinsic value). The incentive is to go ahead and sell the option and have a $5 gain as opposed to exercise the option and have a $3 gain (buy the stock at $45 & sell for $50 less the $2 option cost). If the stock stays at $50, as expiration approaches that $2 time value that was paid for the option evaporates until at expiration there is no time value just intrinsic value. In other words, at expiration the option is worth $5 because it is $5 in the money and there is no time left so no time value. At that point the incentive for the option holder is equal: sell the option for a $3 gain ($5 option value - $2 cost) or exercise the option, buy the stock at $45 so you can sell at $50 and again make $3 (50-45-2=3). If the option was bought with the intent of ultimately buying the stock, then at expiration there is finally some incentive to exercise the option.
The most common situation is a market maker that buys the option to make a market in it and has was unable to sell all positons before expiration. He or she won't exercise it before expiration due to that time value cost he has in it (more lucrative to sell the option if he can). Only if the option gets deep in the money and he feels the stock may head back down will he exercise it before expiration; in other words, if he thinks it will fall he will try to capture the higher value by exercising if he cannot sell it. Usually a market maker can sell it. If not, then he gets close to expiration, and rather than let the option he bought expire, he will exercise it and take whatever gain he can.
Thus, while the chance of being exercised ahead of expiration rises the deeper in the money the option gets, the incentive to exercise really picks up close to expiration. If we see the stock is $5 or so in the money and we can get a good premium on another covered play, we can buy the option back at a reduced price (no time value) and then sell the other call and get that next premium.
End Part 1 of 2
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