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world stock market, top stock pick
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11/19/02 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Tuesday: Held off on AVID as it was such a strong move.
Buy alerts issued: LUK; MTB; HYSL
Trailing stops issued: None issued
Stop alerts issued: BDK (did not like HD news); BSTE
You can sign up for Technical Trader alerts at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Downgrades aplenty.
- Greenspan says the economy will get better if it does not get worse.
- Dow, SP500 hold the 18 day MVA, Nasdaq holds 10 day MVA on lower volume.
- Subscriber questions
Tuesday becomes Monday.
Usually downgrades are trotted out first thing Monday morning so every one can see that the brokerages were working over the weekend to come up with these sage market calls. Tuesday has now become the day of choice for downgrades, however. I suppose with cutbacks on Wall Street there is not much working on the weekend to come up with these great calls.
Whatever the reason UBS Warburg, Raymond James, Merrill Lynch, and others with lesser name recognition were at it big time. If a stock had the nerve to poke its head up out over its high for the past 4 months it was getting slapped with a valuation downgrade. Up 15% in a couple of months? Valuation downgrade. 20%? My gosh we had better beat everyone to the punch because you know someone is going to do it. The Monday morning analyst meetings must simply be a review of the WSJ or IBD new highs list over the weekend as they decide which stocks to downgrade. We can see it now: you take A through J, I will take K through Z. Let's see who can get the most. Or it is 'you take the retailers and internets, I will take the chips and banks.'
It really has come the full circle. The super, super strong buys as stocks were spiraling down have given way to the politically correct (literally given fear of new regulation) valuation downgrades now that stocks have shed 50%, 70%, 90% of their original prices and have had the audacity to rally up off of the lows. On any given day any stock, regardless of how strong its earnings are now and how strong they are projected to be, can and most likely will get a downgrade if it has popped up over some resistance and is showing relative strength.
The key is whether the stock can weather the label slapped on its shares or if it sinks into oblivion. Some can handle it, some cannot, and in this still weak market it is difficult for many to hang on. The list today was long and included many well known names: AMZN; EBAY; CREE; MSFT. Heck, even entire sectors were downgraded in a 'one for good measure' approach. Now we are not saying the downgrades are the cause of the market's woes. Indeed, leading stocks are always hit at one point or another with a valuation downgrade. It is a matter of whether the market is able to shake them off or not. There is no question, however, that the new mantra of downgrade first, upgrade last (or never) digs potholes along the way for a market stumbling to catch its balance. Moreover, it is not really analysis but more like the kid's arcade game where you try to smash the rat's head when it pops up out of the burrow. Yes there are stocks we don't like, but those are stocks that are in downtrends or have broken through support on big selling volume. We like stocks that have good earnings, good sales, good accumulation, good money flow, and that are breaking over resistance as that gets them free and clear of overhead resistance. Again, if the stock is strong it should overcome the downgrade after some initial weakness. In this market it is still 50-50 whether a stock can.
THE ECONOMY
Consumer prices still modest as PPI does not flow through.
CPI +0.3, core (ex food and autos) +0.2, in line with expectations. Part of the PPI problem was a rise in energy prices and that was reflected in the CPI as well. Those have already faded as the geopolitical risks have subsided. It basically showed there is no inflation risk, but a little inflation would not hurt. It would give businesses some pricing power and thus improve the bottom line. In the cause and effect world of stock pricing, a projected better bottom line means higher stock prices. Modestly rising prices that we had in the 1990's (disinflation) is a lot better than the other 'd' word. While that is still a risk right now, the overall picture continues to improve gradually. If it can gain some strength we can put the deflation bug to bed.
Trade deficit narrows slightly ($38.0B from $38.3B).
August was the record and September was the second highest level, so it was not much of a drop. This is a point of worry for many because they feel if it gets too high it will result in disinvestment in the U.S. and that will drive down the dollar and thus the market and the economy (or vice versa). What it also shows, however, is that U.S. consumers are still buying imports, still spending dollars. In this climate where the concern is just keeping things going for now, it should be applauded that the consumer is still so strong.
Let's face it; the rest of the world fell into recession after the U.S. did. Remember those smug looks on the EU representatives' faces when they were meeting in 2000. They were almost giddy that the U.S. was finally getting hit. Smiles turned to frowns as Europe slid down after the U.S.; as the U.S. goes so goes the rest of the world. It has taken hostilities in the middle east to keep oil prices higher or else they would be way down given the low level of world-wide economic activity. The fact that the U.S. consumer is still buying foreign products is a good thing for the entire world economy. It won't rescue the world just as it won't rescue the U.S. economy, but it is buying some time to get other aspects of the economy moving.
Greenspan suggests economy ready to move ahead.
In addressing the Counsel on Foreign Relations the Fed chief said that the economy was weighed down by the potential Iraq conflict and the loss of $8 trillion in stock market wealth give or take a trillion. He indicated again his belief that this was a 'soft patch' in the U.S. and overall world economy that was not a prelude to another recession, but as usual he hedged saying the weakness could mean the 'full cycle' has yet to be concluded. Another 'the economy is recovering and I think it will continue to do so as long as it does not go into recession' speech. Pabulum for the politicians.
THE MARKET
Tuesday the pre-market tone was somewhat negative with all the downgrades, i.e., pretty much the opposite of Monday. Stocks sold off then came roaring back. Problem is the roar was cut off mid-session and stocks struggled at the highs and then went again into selling mode. Two sessions where the bias to end the day was down is not very bullish. On top of that the NYSE struggled with some higher though still below average volume. Not very positive. On the flip side Nasdaq volume dried up and the indexes held at near support without a lot of breakdowns.
The market is not strong, but it is not a total noodle. HD is struggling, having resumed its downtrend and then announcing poor earnings and an even poorer projection for 2003. Older stores are being poached by LOW, TSCO, and even other HD stores. Service at HD, the item it touts in its ads, is terrible. Go into HD and try to get help. When you find someone you get the 'this is not my department' excuse without an attempt to even locate someone that does know a deck screw from a lag bolt. It had the wood put to it, but it was not alone. LOW and TSCO, two earnings warhorses, were hit hard as well. It is clear that HD's problems are its own doing and the life cycle of its stores, but in this market the leaders in the group were hit even as the laggard reported, not surprisingly, lagging numbers. This happened in education when DV, the sector laggard, reported crappy earnings and hurt even those doing very well. It is definitely a symptom of the market's continued soft underbelly: you can have the earnings, sales, and revenue growth, but if you get a bit out of whack with the value captains running the rating system, you are going to get slapped as hard as they can do it. Right now you either can get up and go on or you keep stumbling around. Tuesday the valuation boys took control of the action and it impacted the entire session.
Again, however, it was not a wipeout. The A/D line was modestly lower, the major indexes held near support, Nasdaq volume was lower, and NYSE volume crept up but it was still well below average. The indexes look very good with the Dow and SP500 holding above the 18 day MVA with doji's. That can mean they are ready to make a move up for another shot at the near term highs. As we said in one of the alerts today, it is a time to just be a bit patient and let the pullback work through as most stocks are holding up, mimicking the pullback to support on lower volume.
Sentiment Indicators
VIX: 31.36; +0.25
VXN: 45.52; -2.57
Put/Call Ratio (CBOE): 0.81; +0.16
Nasdaq
Held roughly at the 10 day MVA on the close as volume backed off to average levels. Techs have been the laggard the past two sessions; they lead up, they lead down. It needs to step up and lead higher now, and overall it is acting well. That failure at 1426 is still a big cloud, however.
Stats: -19.18 points (-1.38%) to close at 1374.51
Volume: 1.623B (-8.28%). Back to average levels as the Nasdaq lagged the other indexes. Helps ease the slightly higher volume selling Monday.
Up Volume: 435M (-360M)
Down Volume: 1.17B (+220M)
A/D and Hi/Lo: Decliners led 1.36 to 1. Still narrow on the selling.
Previous Session: Decliners led 1.38 to 1
New Highs: 39 (-21)
New Lows: 36 (-9)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Managed a late bounce to close right at the 10 day MVA (1377), holding above 1357 (the 1998 bear market low) and the July, August, and September interim tops at 1345. Volume dried up on the move, a good sign after the slight bump in volume on the Monday selling. Most techs sold back, but volume did not run away overall. So the pullback is not that bad in and of itself, but it has that immediate overhead barrier at 1426 that it has recently failed to pierce yet again. If the Nasdaq holds here or at the 18 day MVA (1358) down to 1345 intraday (those interim tops), it can make a higher low. That needs to be followed by a breakout over that 1426 resistance. Failure to make that higher low takes significant strength out of the move and the Nasdaq then has to struggle just to hang on.
S&P 500/NYSE
The SP500 held the 18 day MVA and rallied a bit off that level to close at the 10 day. It looks better than the Nasdaq simply because it has not performed as well up to this point.
Stats: -3.62 points (-0.4%) to close at 896.74
NYSE Volume: 1.322B (+5.13%). Volume edged up on the pullback but was still below average.
Up Volume: 516M (+8M)
Down Volume: 799M (+52M). Pretty evenly matched.
A/D and Hi/Lo: Decliners led 1.27 to 1. Very mild selling.
Previous Session: Decliners led 1.3 to 1
New Highs: 22 (-17)
New Lows: 28 (-5)
The Chart: http://www.investmenthouse.com/cd/$spx.html
Holding roughly at the 10 day MVA (897) after tapping the 18 day MVA on the low (893) and rebounding a bit to the close. Not bad action and slightly higher volume on the test lower and modest bounce is decent action as it showed a doji on that level and that can signal a potential move back up. It is sitting right on the top of its late October consolidation range, and that is a better point to hold the move for another shot at resistance at 911 and then 925. Bottom line: it did not sell off hard and it is holding near support, but it has to clear that near term resistance. Buyers and sellers are basically evenly matched right now and buyers need some impetus to rally.
Dow:
A tight doji right at the 10 day MVA. Similar to the SP500, it is holding up decently but needs a boot, a reason to buy.
Stats: -11.79 points (-0.14%) to close at 8474.78
Volume: 1.322B (+5.13%)
Blue chips recovered 30 points off the low to cut most of the losses, showing a doji right below the 10 day MVA (8490) after testing to 8400 intraday. Dow volume actually moved up on the recovery off the low, an indication that buyers were stepping in to pick up stocks on the selling. Indeed, even GE looks a bit better. Needs to make the move here to prevent falling back into the trading range and floundering around at best.
The Chart: http://www.investmenthouse.com/cd/$indu.html
WEDNESDAY
Saks Fifth Avenue surprised the street with stronger earnings and ADI beat the street by 3 cents and guided in line for next quarter. That put a bit of polish on an otherwise slow session, but it is doubtful the market will take these as heralds for a new buying spree. Housing and permits are out before the open, and while important, unless there is a significant change there most likely won't be a lot of push on the numbers. One concern is that after such a long string of gains the housing market will eventually soften up. The market, however, has been pricing that into housing stocks. They are well off their highs and still edging lower.
What will drive the market is not so much the here and now but what is going to be. The indexes are struggling now during this 'soft patch' in the economy and the selling that some of the downgrades have put on the market. It is noteworthy that thus far even with the downgrades and 'valuation' concerns being discussed, the indexes have not succumbed to heavy distribution. The Dow and SP-500 look better than the Nasdaq simply because they did not run up as far as the Nasdaq before this recent softness. They are working laterally again while the Nasdaq, the leader on the way up, struggles with its third try at the August high. Again, the volume has not jumped up and the selling the past two sessions has not been broad at all. The indexes have lost near term upside momentum, but despite the voiced concerns they have not started selling hard. There was a bit of complacency building in on the move, and the wall of worry being rebuilt now is a positive.
What we have to deal with now is waiting for the opportunities to develop. There are several stocks on the reports that have pulled back to near support and are showing good candlestick action (e.g., doji's) at that level, indicating that they are ready or close to being ready for a move back up. At the same time we still see those downside plays developing in certain sectors and we will pursue those as they start to break down with more authority.
Support and Resistance
Nasdaq: Closed at 1374.51
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 (1508).
Support: The 10 day MVA (1377) is possible support. 1357.09, the October 1998 bear market low and the 18 day MVA at 1357. July, August, and September interim highs at 1345. The 50 day MVA (1318). 1250 from some prior price lows. 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 896.74
Resistance: July, August and September interim highs at 909 to 911. Some resistance at 921 up to the November high at 925.66. Price resistance at 950. 965, the September 2001 closing low along with the August 2002 high. Then price resistance at 990.
Support: The top of the late October consolidation range at 899 is not totally broken. The 10 and 18 day MVA (897; 893). The 50 day MVA (886). The September 2000/May 2001 downtrend line at 883. The March down trendline at 871. 850 to 855 (the October 1997 and Q2 1998 lows). 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 8474.78
Resistance: The late July and early September interim high at 8726 to 8762.14 (8745 closing) and the November high at 8800. A range of resistance from 9000 on up to 9050. The 200 day MVA (9220). 9500 from June and July lows.
Support: 8500 from October high and the 10 day MVA (8491) are still not completely broken. The 18 day MVA (8449). The exponential 50 day MVA (8363) and then 8250. The simple 50 day MVA (8173). 8000 (August low at 8043; September 2001 intraday low at 8062).
Economic Calendar
11-19-02
CPI, October (8:30): 0.3% actual, 0.3% expected, 0.2% prior.
Core CPI: 0.2% actual, 0.2% expected, 0.1% prior.
Trade balance, September (8:30): -$37.0B actual, -$37.3B expected, -$38.50B prior.
11-20-02
Housing starts, October (8:30): 1.710M expected, 1.843M prior.
Building permits, October (8:30): 1.698M expected, 1.733M prior.
11-21-02
Initial jobless claims (8:30): 394K expected, 388K prior.
Leading Economic Indicators, October (10:00): -0.1% expected, -0.2% prior.
Philly Fed, November (12:00): -3.0 expected, -13.1 prior.
Treasury budget, October (2:00): -$51.3B expected, -$7.7B prior.
End Part 1 of 2
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