world stock market, us stock market

* * * *
3/14/01 Technical Traders Report
* * *
Technical Traders Subscribers:

TONIGHT:
- Dow finally joining in on the slaughter as the Nasdaq tries to hold the line.
- Is the Japan shoe falling?
- No word from the Fed as it is in its 'quiet period.'
- Sentiment indicators getting there, but one major one is still too bullish.
- Economic news the past two sessions is not inspiring confidence.

More calls for an oversold bounce.

Each round of selling elicits another round of calls for an oversold rally ahead. The logic: if things were oversold before the last round of selling, they are really oversold now. That is true, but as we have said before, there is not really any level of selling that automatically generates buying. We see relief rallies that blow off some pent up demand by those who just cannot help themselves, but that does not change the picture: the major indexes continue to suffer distribution, i.e., dumping of shares by institutions.

This is now very apparent on the Dow. It has suffered numerous distribution days over the past month, and it they are at a crescendo now. Tuesday tried to rally back on higher volume, but that just set up a better selling point for the majority, the sellers. When the smoke cleared the Dow had broken support at 10,000 while the Nasdaq suffered the lightest selling of the day. That led some to say that techs were doing 'okay.' Well, when compared to the Dow, they look almost good. But of course they look good: the techs are off 60% while the Dow has yet to get very close to bear market status. It has to fall below 9400 for that to happen. Thus, when the techs are not falling but the Dow is, they look better. In reality, the Dow is just now getting sold down; it is losing its status as the index that can withstand the storm.

The corrective medicine needed?

As long as the Dow was holding up there was not much panic on the market. After all, if investors had a place to hide there was no need to get out of the market. Bear markets, however, usually end exactly because there is nowhere to hide: selling takes down all sectors and flushes out all the final sellers, clearing the way for a steady advance.

Problem is, as we saw in the Nasdaq today, there are still buyers ready to rush in at the next perceived bottom. When you have buyers out there ready to buy because there has been 'capitulation,' by definition that means there has been no capitulation. There can be reflex bounces after a particularly severe round of selling (as we saw Tuesday), but we are still in a downtrend with selling on higher volume. We would like to see the Dow down to at least 9700 (at this pace, no sweat), and it may even go lower. 9750 has been hit twice this year, and if bear markets that last this long are consistent, the Dow needs to head much closer to 9,000. Looks as if it is getting that way.

Japan coming to roost?

Last summer we were concerned that Japan's 'recovery' as heralded in many magazines was no recovery at all. That recovery has been a joke, but it was not really a concern here because of our 'white hot' economy. Arrogance, arrogance. Two weeks ago we stated that if the Nikkei dropped to 12,000 there would be some serious bank trouble because asset values would be so low banks would have to start coming up with money to balance reserves. The Nikkei has popped 12,000, and that brought out the international debt rating firm Fitch. Fitch listed 19 Japanese banks, including the largest bank in the world (Mizuho Holdings), as being troubled. Why? Decreasing share prices, lingering asset problems, performance and prospects for the future. Fitch was talking trillions of yen of losses.

This was not a 'real' crisis yet; the banks have not yet started rolling over. They are, however, demonstrating the next logical leg in an economy that is not recovering but is imploding after years of underperformance. What Japan is experiencing, but what is not being said, is deflation. Fitch used the phrase 'lingering asset problems' as a euphemism for deflation. Deflation, something we also talked about over the summer, means falling real asset prices. With inflation, you pay more and more for assets, but the value of the currency is dropping; thus it takes more and more currency to pay for the asset. With deflation the asset is worth less; you buy a house for $400,000 and a year later it is worth $300,000 in real dollars.

Signs of worldwide potential deflation? Commodities prices, threatening a breakout in December, have tanked. They broke their uptrend in December, tested it in January and plunged to he 200 day MVA. It broke that, tested it early this month, and have plunged since then. The CRB closed at 218.09, and if it breaks 217.50, it has taken out support. Commodities prices are leading indicators in that they tell us that the cost of the basic building blocks of everything are losing value. That is good if economies are in good shape and able to use the cheaper commodities in goods that are readily sought by consumers. It is good if oranges are dropping in price, but demand is still strong. The Fed has a lot to balance. It is not just whether or not there is inflation, but fundamental issues of stability in world asset prices. We were concerned in the summer about a worsening situation, and the situation has definitely worsened. The U.S. is not the stalwart it was in 1998 because of the purposeful weakening of the economy. We quoted the old Chinese proverb back in early November, and it has been leaving a sour taste in our mouths: may you live in interesting times.

Fed is very quiet.

No words from the Fed of late after its members mused about the resilient U.S. economy this spring. True, they are in their quiet period and the Fed never talks much if at all during that time, but the lack of Fed members out on the stump as the economic numbers weaken and the stock market falls seems to add emphasis to the circumstances. Greenspan loves this; all eyes are on the Fed. He was so proud about his club's secrecy when he last spoke to Congress.

If we had two more weeks before the FOMC meeting we say an inter-meeting rate cut was a lock if the Dow broke into bear territory. Nonetheless, the Fed has a target, and if it is hit it may simply act at that point regardless of the proximity. Not a high probability, but if the Dow hits 9500 we are going to be on Fed watch.

Will it be 50 or 75 basis points? It should be 125 basis points with a statement that is its target, so get to it. That would make sense, so that is out of the question. The FFF says 100% for 50 basis points and 66% for 75 basis points. We don't expect 75 basis points unless the Dow hits bear territory. It won't be, as some say, the Fed reacting to the market. It will be the Fed once again acknowledging its views that there is a wealth effect and a recession effect on consumers. If it believed in the upside, certainly it has to believe in the opposite on the downside.

Sentiment indicators closer, but no cigar yet.

Sentiment is always secondary. Price patterns and volume tell the real story. Right now the last two are showing distribution. Sentiment acts as confirmation of turns, but we also look at it to tip us off to an impending move. Last night the put/call ratio closed at 1.01, closing over the 1.0 level that has marked past bottoms. We noted that it could have been due to corporate selling of puts to buy back shares given that the market was rallying that day: if the market is bottoming, that is the time to sell puts. Today the put/call ratio, on a day that saw all major averages sell on rising volume, fell back down to 0.92. A respectable number, but on selling it fell while on buying it rose. That simply means we have to take the indicator with more caution.

The last sentiment indicator holdout is the bull/bear ratio. Bulls have been in the low sixties and high fifties for months, while bears have been in the 20's. You want to see bulls below 50, preferably down in the 35 to lower forties; you want to see bears over 30. Even though the gap is narrowing, bulls are still above 50 and bears are still in the twenties. To us this shows that while the market is getting there, it does not appear to be at that point yet. Indeed, many money managers today noted there is no rush to the exits. We know that not everyone is a 20 year investor right now; they may say it because their stocks have tanked to very low levels, but they did not buy them with the intent of riding them out for twenty years. Remember, investor horizons have shrunk from 5 years to 3 years to 6 months. Those on the tube saying they are in for the long haul are talking about this coming Labor Day.

THE ECONOMY

And suddenly the frost is back on the roses.

January inventories rose an unexpected 0.4% after no rise in December and an expected increase of just 0.2%. This was a surprise and disappointment after wholesale inventories were reported as unexpectedly lower. Year over year inventories were up 5.8%. This rise was the largest increase since October 2000, or when the slowdown was really becoming apparent. The inventory to sales ratio rose accordingly to 1.37 months, the highest since March 1999 and December's 1.36 reading.

Not much of a rise, but it is going the wrong way. The real problem is that if numbers are not strengthening, that could mean there is still a bottom to be found. There can always be single month blips and this could be one; but it simply adds to the uncertainty and potentially to the length of the potential recovery.

THE MARKETS

Overall market stats:

VIX: 34.60; +3.87. Does this mean another rally tomorrow? Each time it touches 35 (36.57 today) there is talk of a rally. That was a one day wonder on Tuesday. The problem: they are trading on the VIX as an absolute, but it is just a secondary indicator. Sure we play it for short term plays, but those tuning into CNBC think it signals a bottom. No, it lends support to a potential bottom, but it is not the determining factor.
VXN: 73.61; +0.94. Not much of a spike on the 'fear,' but it did hit 75.29 intraday. Still looking for the correlation.

Put/Call ratio: 0.92; -0.09. On a down day it falls and on up days it rises. Looks as if some companies were betting on a good bottom to sell some puts on, but it did not last. Still, we say good overall volume on Tuesday, and just because the markets did not rally today does not mean that the indicator is erroneous. Bottoms on a market bear this extended do not end in one day. As they say, they don't ring the bell at the bottom. Still, they do start putting up signs, and this is one that we like to watch. Now we need to get some solid price and volume action.

NASDAQ:

The Nasdaq was down hard but it recovered and held on surprisingly well, rallying back to positive, selling back down, and then rallying again to cut its losses in half. Volume was higher, but the drop was not as severe; that can indicate an interim floor being put in.

Stats: Down 42.69 points (-2.1%) to close at 1972.09. Back to the teen years.
Volume: 2.147 billion shares (+2.5%). More distribution with 1.544 billion shares to the downside and 560 million to the upside. But, the higher volume with narrower loss and holding above its recent lows could be a good sign.
A/D and Hi/Lo: Decliners jumped back in front 2.52 to 1 (they led 4.4 to 1 Monday). That is an improvement as the Nasdaq held its ground compared to the other indexes. Still, decliners continue to trounce advancers on the down days while advancing issues struggle to lead on the up days. New highs fell to 23 (-12) while new highs rose to 287 (24).

The Chart: http://www.investmenthouse.com/cd/$compq.html

The techs held their ground well today, all things considered. KLAC, NVLS and others actually rose. Those are stocks that have been showing the best patterns and action of the former high fliers. Moreover, it has been holding the line at 1920 and above over the last three sessions as if fights with its down trendline that started back in early September. Higher volume with smaller losses with the low holding a firm line often signals a turn back up. Think of it as a spring being compressed: the Nasdaq is being squeezed in a small range on heavier volume. If 1920 is firm support, it should spring upward. This makes things very interesting. There will be a rally that is fed by short covering. The techs look as if they want to be the leader in that rally as the Dow sells down into bear territory. Be ready to cover shorts on the tech stocks if they start breaking resistance. For now, however, we have no verification of this new look. We have seen other promising reversal attempts crash, but this one is trying to put in a bit more of a bottom before its move.

Dow/NYSE: Today it went ahead and broke down, tossing the 'outrider' theory to the scrap pile for this move at least. It broke below 10,000 on heavy volume and big price losses. Such breaks are significant: the wall has been broken and it is never as strong.

Stats: Down 317.34 (-3.1%) to close at 9973.46.
Volume: NYSE volume was up again to 1.379 billion shares (+0.8%). Down volume destroyed up volume 1.213 billion shares to 151 million shares. Heavy selling as we saw on the Nasdaq when it was selling hard. More distribution as institutions dump Dow stocks.
A/D and Hi/Lo: NYSE decliners continued to lead 3.02 to 1 (1.26 to 1 Tuesday). New highs again fell to 53 (-20) while new lows rose again to 119 (+47).

The Chart: http://www.investmenthouse.com/cd/$dja.html

The Dow broke 10,000, rallied back above it, but hit the wall at 10,200. It then fell back down, tested 10k again, and then rolled back. The heavier volume on the break shows the break was solid, and now the real threat is to the year lows at 9750. But, that is probably not the end; we are looking for a bear on the Dow, and that would mean a slide below 9400. As we noted above, bear markets usually end when there is nowhere to run, i.e., when all of the indexes hit that bear status. That gets the last sellers out because the market no longer appears to be the best place to put their money.

S&P 500: The big caps hit another new low on the close and intraday (1155.35 intraday) on higher volume. It is still looking at 1130 square in the eye given the higher volume cascade down, but if the Nasdaq is going to attempt to make a stand, the big caps could very easily catch some support from that move. However, techs make up only 20% of the S&P now, so they would not be that much of a help.

Stats: Down 30.95 (-2.6%) to close at 1166.71, the second worst showing of the big three.
Volume: NYSE volume edged higher again to 1.379 billion shares (+0.8%).

The Chart: http://www.investmenthouse.com/cd/$spx.html

TOMORROW

Despite the carnage today, futures after hours were not extremely weak. However, we saw the same on Tuesday night, but news came out and trumped the move. That can happen on any day, however, so we have to look at what is working and then adjust if any news hits the fan.

As noted in the Nasdaq discussion, we are seeing that index trying to compress for a spring higher as the Dow and S&P still struggle in pretty savage higher volume downtrends. As the latter two held up while the Nasdaq sold, we could very well see a reversal of roles as the Nasdaq is way ahead of them to the downside. That does not mean we see a lasting move for the Nasdaq, but now we actually see a pattern forming that could lead to a short term rally that is tradable. The problem we had with the other calls for an oversold rally is that they are relying merely on the fact that oscillators show oversold conditions, but as we said, a stock can continue to become more and more oversold and you don't know when the bounce will come. The Nasdaq is holding tough at 1920. It has moved laterally and thus crossed its down trendline from September and the one starting in late January. Not a powerful move, but a building move.

Bear market rallies can be intense and sharp. There are a lot of put interests open in the techs. That is a simple prerequisite of the start of the rally. We have made good money to the downside, and now we have to be prudent if a rally starts in Nasdaq. We will close positions if they start to turn against us and avoid the bigger loss waiting for the turn back down. If we get the rally we look to ride it with some of the stocks showing the most promise: some semiconductors (KLAC, AMAT, NVLS), some surprising old names (WCOM), and great momentum plays such as pre-splits. They are super when the upside momentum returns. There are others with good patterns that are pre-announcement split plays, leading stocks, etc. Focus on those with the best upside patterns in the bear rallies; those give the best moves.

We will watch resistance levels. They often end bear market rallies, but the first level can be broken in a sharp bear rally. As always, when the short term downtrends we are playing to the downside are broken, that is the last exit signal. When the index starts to show some signs of making a stand, better to exit now and bank some profit than let it turn against you and lose a gain. As for the Dow and S&P stocks, many are not looking stronger, but are selling on higher volume. Those continue to be put plays to the downside as those indexes continue to try and find bottom. Thus, we are also looking at OEX and DJX still to the downside.

As for news, if the Dow breaks below 9500, start watching out for a rate cut that could come at any time. The Fed has a target it is ready to act upon if it is hit; it may not wait for the Tuesday meeting if it happens. Below 9400 is the real level, but we are going to be on the lookout if it hits 9500.

Support and Resistance Levels

Nasdaq: Closed at 1972.09.
Resistance: Possible at 2050. Then 2250 to 2300. 2400 to 2500.
Support: 1750

S&P 500: Closed at 1166.71.
Resistance: 1215. Then 1265, followed by 1285 to 1300.
Support: 1130

Dow: Closed at 9973.46
Resistance: 10,300. 10,750. Then 11,020 - 11,028. After that, 11,400.
Support: 9750.

Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.

3-13-01
Retail Sales, February (8:30): -0.2% actual versus 0.3% expected and 1.3% prior (revised up from 0.7%).
Retail Sales, ex-auto, February (8:30): -0.3% actual versus 0.1% expected and 0.8% prior.

3-14-01
Business Inventories, January (8:30): +0.4% actual versus 0.2% expected and 0.0% 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.

TEAM TRADES

In transit and bad weather kept us from getting plays to you tonight. We did take some profit on some OEX and QQQ puts we had given that the Nasdaq again held above 1920 on its low.

For a review of frequently asked questions, please use the link below:

http://www.investmenthouse.com/1questions.htm

All prices reflect prices at the close on Wednesday.

NOTE: Stop losses are plotted at one-quarter to one-half point below pivot points.

Best Plays, Part 1:
1) BKLY: Looks ready to break from the handle.
2) ADVP: Showing a doji on lower volume.

BREAKOUTS:

New Play (from the weekend):

BKLY (W.R. Berkley Corp--$47.06; -0.13; no options): Insurance
http://biz.yahoo.com/p/b/bkly.html
STATUS: Holding the handle to its 10-week cup base, showing its second consecutive tight doji above the 10 day MVA (46.27). The low of 45.69 tested below that support, and a strong shot of volume (594,600; avg. 336,545) took the stock back up almost to the opening price of 47.13. On a breakout over the handle high of 48.75, we will look at taking positions with stock. Initial profit target: $55-$57.
BUY POINT: 47.98, on volume of 505,000 or better. Remains a buy on the breakout up to 50.38. Stop loss on the breakout: 47.48 47.73.
POSITION: Stock.

Continued Plays:

ADVP (Advancepcs--$46.56; -0.57; optionable (QVD)): Health Services
http://biz.yahoo.com/p/a/advp.html
STATUS: Continued to pull back from Friday's strong move up in the handle of the double-bottom as volume declined to average levels (763,700). ADVP showed a tight doji as volume reached its lowest in four days, the low testing the 18 day MVA (45.92). After three days of pulling back, the doji suggests a move up if the stock doesn't retest the 18 day MVA. Buying, money flow and relative strength are all outstanding. Initial profit target on the breakout: $58-$62.
BUY POINT: Over 50.32, on stronger, above average volume. Stop loss: 49.82 50.07.
POSITION: Stock and/or June $45 calls to buy (QVD FI).

DME (Dime Bancorp Inc--$29.90; -0.90; optionable (EIM)): Savings and loan
http://biz.yahoo.com/p/d/dme.html
STATUS: Dropped below the 18 day MVA (30.41) on stronger volume, the doji shown at the bottom of the day's trading range. DME failed on a breakout attempt from its recent short pennant, and is likely to test the 50 day MVA (28.96) before moving back up. No new positions.

End Part 1 of 2

world stock market
us stock market