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us stock market, understanding the stock market
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3/12/01 Investment House Daily
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Investment House Daily Subscribers:
TONIGHT:
- Third leg is off and running as the Dow breaks 10,300.
- Last week's negative close gets a push with more bad news.
- Mixed signals at the close, but the momentum was downward.
- Play the market that is presented. There is money out there.
- Subscriber Questions
- Investment House Seminars
Heavy downward action as volume rises.
Over the weekend we pondered the advent of the third leg down on the Nasdaq, and today the Dow gave some confirmation of that as it broke below 10,300, a level that acted as pretty salty support in its trading range. All major averages and most of the secondary averages notched sharp losses on higher volume. The Nasdaq hit another low not seen since 1998, the S&P 500 firmly entrenched itself into bear territory, and the Dow started what could be a descent to the year lows at 9750 once again.
Sounds pretty gloomy. Indeed the financial stations seemed to be in shock at the close as the Dow was threatening a -500 point day before it rallied 44 points in the last three minutes. Even that loss did not top the Nasdaq's drop on a percentage basis; but, it did have shock factor to see the Dow drop from 200 down to 300, to 400, to 475 points down. The call-in shows after hours, however, were back to telling investors to buy tech at these levels. That may work out, and in several years great gains will be made.
But things are still in flux. Two Fed rate cuts totaling 100 basis points could not keep a rally going, and the gains many stocks enjoyed starting January 3 have not only been wiped away, but the stocks have again been halved. When we saw the rate cuts fail to provide any lasting momentum or even a floor, it was time to just let the big names fall and see where they land. It was time to let them start to heal if they would before buying back in. There is nothing to keep these stocks from halving again. Is $22 a good price for JDSU right now? $40 looked pretty good in February when it bounced up off of that one-time support level. $11 would look even better.
A bad finish to last week gets a push.
Cisco and Intel had a hard impact on the market last week, and we noted that those finishes to the week often lead to down starts to the next week. We also noted there might be some analyst comments that would not help matters. Baron's had some negative things about CIEN over the weekend, and that added to the woes. Okay for us as we have had CIEN as a continuing put play, but it did not help the market overall. Has anyone ever heard a positive story from Baron's reported? No one moves stocks to the downside like Baron's.
It wasn't all Baron's, and we are poking fun at them. Ericsson also warned that its handset sales would be 'considerably lower" and said it would suffer a loss as opposed to the gains previously expected. The downward bias in the market received a definite shove.
'Bargains,' VIX, bounces, A/D line, etc.: mixed indicators at the close, but momentum is still down.
It was looking like a 500 point Dow loss with just minutes left in the trading. It bounced with three minutes to go and shaved 44 points from the low. The QQQ and S&P 500 also managed a weak bounce at the close. The VIX closed just over 35, a point that has initiated some anemic rallies of late. Talk of bargain prices after the close. These have pointed to oversold bounces of late. Will they do so now?
Probably the most telling was the VIX. It has led to three bounces each time it has hit 34 to 35 in the past two months. But this time it is being overwhelmed by other indicators that are swamping the indexes to the downside. As we discuss them, keep thinking that these are good things: the Dow had to break and the flushing out had to occur to break this cycle of optimism building in overhead supply with each weak rally.
The A/D line was impressive to the downside. 4.4 to 1 on the Nasdaq and 3.48 to 1 on the NYSE. That is a lot of downward pressure on the indexes. It is good as lopsided selling often is a signal of a reversal; we just don't think it is there yet. Why? Because the bounces at the end of the session were weak. All the Dow did was come back to test its breach of 10,300; it may very well tap it on any type of recovery tomorrow and tank toward 10,000. The SOX (semiconductor index) tried to rally but it failed horribly and rolled over in the last few hours. It could easily dance downward from where it closed in no-man's land. Volume was up but not huge, indicating that sellers were dumping shares but not doing so at a frantic pace. Indeed, it was all sellers and no buyers. When the markets get to a cathartic bottom you often see high volume on a smaller overall loss with up and down volume pretty closely matched; that shows that buyers are stepping in and buying as fast as sellers are selling, indicating that buyers are starting to overtake sellers. That did not happen today. The put/call ratio closed at 0.91; very close to getting there, but not at that 1.0 or better close that signals reversals. All of these factors may work to overwhelm the VIX reading; indeed, the VIX may have to hit 45 to 50, the points where it hit in the reversal in 1998 before it gives a meaningful bottom signal.
With that said, what will tomorrow bring? At the close there was still a lot of downward momentum, sprinkled with buyers. For instance, on the Nasdaq, with less than a half hour to go up volume went from 44 million shares to 105 million shares. While still a pathetically low figure, it was up almost 2.5 times in the last half hour. That showed that there were some buyers out there ready to come in after a slaughter. What that means to us is that we could see some initial downward pressure in the morning followed by a rally attempt; that old 'oversold' condition the market has been suffering through for months. We feel that will not last and will give us entry points on some more downside plays.
Don't get greedy on the downside.
As for downside plays, remember that while we can ride a trend down, we need to recognize that if there is a bounce it could turn to a short squeeze where there is a rush to cover as prices firm, and that acts to drive prices higher. That is why we like to play puts on stocks and indexes when they bounce down from resistance or break through support: there is a lot of downward momentum at that point and less chance of getting caught in between. Bear market rallies can be sharp, strong, and fast. That is why we play the trend down, but when we see upside action, we do not hang around. Don't try to make it all back in one or two trades. When you have taken losses and are working them off, chip away at them. One, two or three will really race out for you (the OEX puts from last week--$21 to $68 today), but as with all trades, trying to squeeze out another half point on a trade that has run its course can wreck a good batting average. We take our profits and look for the next opportunity. There are still several of those out there that we are looking at tonight.
Playing the market presented: smell the fear.
We have been continually talking about upside breakouts and bounces off support in the leading stocks and downside breakdowns and bounces down from resistance in the declining stocks. Why? Because those are the easiest plays in this market and they are both out there. When markets get emotional, it makes trading actually easier. When the buyers were stampeding in late 1999 and early 2000, riding the greed was easy. Now that the fear is rising (take a look at the stats cited above), it is easier to play that fear. The fear is separating out the plays: certain sectors and stocks are being treated favorably and are moving steadily higher; other sectors are being trampled as sellers are starting to stampede toward the exits a bit more. That is momentum.
It may shock and scare you to look at the fall, but you are ahead of the curve because you understand what is going on: the urge to run for the door on techs and run to 'safer' stocks is momentum we can make money on. Instead of the rush to get into tech stocks, there is a rush to get out of them and to find safe havens in other stocks. Control your emotion. Today looked bleak, but we were excited because we had a lot of great plays to the downside. We had three chances to play on the QQQ, but simply entering one trade in the morning would have yielded the same result by the close because the trend was there caused by the fear emotion. We hate to sound cocky, but when the emotion gets to running either way as strong as it is, that is the easiest time to make money in the market.
The markets are reaching for bottom in this third leg down. The Dow is breaking down, and that was needed. The put/call ratio is rising as more are playing puts (the opposite was occurring in the spring of 2000 as things topped out), so we are going to be reaching a bottom or a climax to this fear run in the fairly near future. But as we saw, this kind of emotion can run for several days or weeks before it ends. Thus we can continue to play the upside and downside as emotion ramps up and takes control over the crowd.
THE MARKETS
Heavier selling. Broken support levels. New closing lows. Not a pretty day, but some of what apparently is necessary blood-letting is underway. We have been talking about it and playing it for a couple of weeks, and the move appears to be on. There might be some interim momentum, some serious supports were broken today.
Overall market stats:
VIX: 35.11; +5.76. Heavy selling on the Dow and the S&P shot the VIX to short term reversal levels. It could very well make a run at it, but as we indicated above, there are several factors we feel are overriding a meaningful turn here. We would love to see it shoot to 45.
VXN: 76.25; +5.55. 79 turned it back up two weeks ago, so it has some more work to do if that holds. We would prefer to see more overall selling to really get things going. Enough of the water torture; let the dam break.
Put/Call ratio: 0.91; +0.08. This is getting there, but we don't want to sound too hopeful. It threatened at 0.94 and 0.95 in December and never made it to close over 1.0.
NASDAQ:
Again the Nasdaq led the way down, dropping 6.3% and closing below 2000. It was overshadowed by the Dow with its huge point drop and breaking support, but the damage was again severe. The index crashed on stronger volume with individual stocks doing the same. Again, it looks as if there is more downside from here until perhaps it finally shakes out the last sellers down at 1700 to 1800.
Stats: Down 129.40 points (-6.3%) to close at 1923.38.
Volume: 2.152 billion shares (+7.8%). Back above average volume on selling (only the fifth above average volume day since February 1), and yet another day of distribution. Down volume led 2.014 billion to 105 million. That is a crushing day of selling. As said above, we want to see up and down volume closer for a return. There were no buyers today.
A/D and Hi/Lo: Hideous. 4.4 to 1. This is getting to cathartic levels. New highs fell to 37 (-17) while new lows exploded to 325 (+131). Back in September we saw new lows hit the 400 to 500 level.
The Chart: http://www.investmenthouse.com/cd/$compq.html
Broke below 2000 as if it was not there. The index continually pops possible support levels as if they were thin string, and that is a sign of a very weak market. Now everyone is focusing on 1700 to 1800 (some 1500). Just as greed will push a stock above its upper channel and cause it to crash back down, fear can push a stock or index temporarily below support. Still, we do not think the Nasdaq has hit bottom at this point. It may overshoot the next level and shake out the last sellers. We will just have to watch and look for the signs of reversal.
Dow/NYSE: Its biggest loss on the Dow since last April 2000. Higher volume as well. Broke the support at the bottom of its recent trading range at 10,300.
Stats: Down 436.37 (-4.1%) to close at 10,208.25.
Volume: NYSE volume moved up to 1.231 billion shares (+13.3%) as volume moved back above average here as well. That indicates more distribution, i.e., institutional selling of stocks. Down volume crushed up volume 1.122 billion shares to 104 million shares. Same story as the Nasdaq.
A/D and Hi/Lo: NYSE decliners leaped ahead to 3.48 to 1. As with the Nasdaq, these are reversal levels, but they have to be in conjunction with other positives. We have not seen it yet. New highs still led, however, 102 (-54) to 89 new lows (+49).
The Chart: http://www.investmenthouse.com/cd/$dja.html
Blew through 10,300, the bottom of its trading range. Next stop is 10,000, though it may try to test 10,300 at some point as we saw it try to move up in the last few minutes of the session. It really needs to get down to the 9700 level in our opinion. At today's rate that is only a couple of sessions.
S&P 500: Keeping the Nasdaq company in bear territory, the big caps popped potential support at 1200 as if it did not exist, dropping on rising, above average NYSE volume. As with the other indexes, another day of distribution as investors were heading for the exits. 1185 did not even give it a lift when it dropped right through it. As with the Nasdaq, an index that does not have respect for potential support is not well, and it could find its way down to the 1130 level as the other indexes drop as well.
Stats: Down 53.25 points (-4.3%) to close at 1180.16.
Volume: NYSE volume moved back above average at 1.231 billion shares (+13.3%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Retail sales come out tomorrow, and the talk is whether a stronger number would actually do some good for the markets. As we said over the weekend (in less than eloquent terms), at some point good economic news will be perceived as good news for the market. Right now we have a market that does not think the Fed is up to the task and that no real help is coming from a tax cut right now with no retroactivity this year. Consequently, they are not factoring in growing earnings just yet.
The here and now looks for more downside. The Dow broke down out of its trading range while the S&P and Nasdaq broke to new 2-year lows again. All on higher volume. We know that stocks and indexes often test breaches of support. Thus we might see some selling continued downside momentum in the morning, though futures are not tanking tonight. There are always downgrades or some other story to add to the gloom, but after today's bath we could see a reflex move back up. Just as a stock tends to suffer profit taking after a big run, after a big selloff there is some pause and bounce back up to catch breath. We will use that to reload to the downside if things still look weak, i.e., a lower volume bounce up.
Things are starting to get interesting from a sentiment standpoint. The put/call ratio is getting close, supports have been broken on the Dow; there is fear out there. Indeed, did anyone catch the various financial roundtables after the market close tonight? We heard on each one at least one expert advocating that investors sell their tech stocks now to get them down to no more than 15% of their portfolios. While it is true that JDSU, GLW, etc. could be cut in half from where they closed today (that can happen to any stock), is there some undercurrent here to get the last sellers out of the techs to allow them to bottom? Interesting indeed.
For now the downside is where the momentum is, but as always there will be bumps higher; there could also be a bear market rally. Thus we continue to look for those plays that break down through support and those that bounce down from resistance (not a lot of those today as the selling has been strong of late). Keep the breakouts and other upside plays on the screen; even today we had upside movement in those, though it was not a great upside day. Still, the leaders sold back on light volume late in the session when everything was tossed. That is a positive. When we do get these bounces, momentum plays such as pre-splits run well. Keep flexible in your plays and take this fear and then the relief rallies for what they will give you.
Support and Resistance Levels
Nasdaq: Closed at 1923.38.
Resistance: 2250 to 2300. 2400 to 2500.
Support: 1750
S&P 500: Closed at 1180.16.
Resistance: 1265. Then 1285 to 1300.
Support: 1130
Dow: Closed at 10,208.25.
Resistance: 10,300. 10,750. Then 11,020 - 11,028. After that, 11,400.
Support: 10,000. Then 9750.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
3-13-01
Retail Sales, February (8:30): 0.3% versus 0.7% prior.
Retail Sales, ex-auto, February (8:30): 0.1% versus 0.8% prior.
3-14-01
Business Inventories, January (8:30): 0.0% versus 0.1% prior.
3-15-01
Initial Claims, 3/10 (8:30): 370K versus 370K prior.
Export Prices ex-ag., February (8:30): 0.2% versus 0.2%.
Import Prices ex-oil, February (8:30): 0.3% versus 0.3%.
Current Account, Q4, (10:00): -$117B versus -$113.8B.
Philadelphia Fed, March (10:00): -25.0 versus -30.5
3-16-01
PPI, February (8:30): 0.1% versus 1.1% prior.
Core PPI, February (8:30): 0.1% versus 0.7% prior.
Housing Starts, February (8:30): 1.6M versus 1.651M prior.
Building Permits, February (8:30): 1.697M versus 1.697M prior.
Industrial Production, February (9:15): -0.2% versus -0.3% prior.
Capacity Utilization, February (9:15): 80% versus 80.2% prior.
Michigan Sentiment-Preliminary, March (10:00): 87.0 versus 90.6 prior.
Options expiration, March.
SUBSCRIBER QUESTIONS
Q: Could you please explain what you mean by buying the April $40 puts in DS? I would imagine if you expect it to go to 26-27 that you would buy the option closer to the expected strike price. I 'm having difficulties understanding the strategy. Please explain thanks.
A: The reason we were looking at the April $40 puts on DS is because those puts were in the money based on where the stock was trading, and those puts gave us a better delta so we would enjoy more movement in the option when the stock fell. If we bought out of the money put options at the $25 level, the delta would have been very low and we would not have made as much on the move that we anticipated and that is happening now. The play was to watch for its test of the 200 day MVA to fail and then pick it up on the fall. That is what has happened thus far.
Puts are traded on the same theory as call options, just the chart is inverted: buy in the money to get the better delta and thus better movement when the stock starts to sell off after trying to break resistance and failing, or after breaking support. With calls to the upside, we would look for support to hold and the stock to bounce or the stock to break resistance on high volume. We will cover this in depth in our seminars starting in April.
End Part 1 of 2
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us stock market
understanding the stock market
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