world stock market, us stock market

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3/15/01 Investment House Daily
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Investment House Daily Subscribers:

TONIGHT:
- Holding pattern for the techs while the Dow and S&P 500 give a meek bounce.
- Earnings warnings and announcements after hours not showing a lot of negative impact.
- Economic data still mixed ahead of Greenspan speech and PPI on Friday.
- Subscriber Questions.
- Team Trades.

A real nowhere day.

The indexes were up and down, but there was not much change when all was finished. The Dow moved back over 10,000 on weak volume while the Nasdaq bounced early but did not have any punch, and after fighting to hold positive it dropped steadily to the close. Going by the prices alone, the Dow and S&P 500 looked stronger while the Nasdaq looked the weakest. Factor in the volumes and where they closed relative to recent action, however, and the tables turn.

The Dow managed to climb back over 10,000, a support and psychological level. But it closed 66 points off of its session high and volume dropped significantly (-12%). The bounce was weak, and we are looking at playing the DJX to the downside once it drops back below 100. The S&P 500 provided similar action as it too closed well off of its high on lower NYSE volume. We are looking at OEX puts as well when it breaks lower again.

The Nasdaq was a bit different. It gapped higher, rose a hair more, but then spent the rest of the session selling down. We were looking for the Nasdaq do give us a pop, but this one had no punch to it at all. We never like these gaps higher as they usually result in selling given this market. Remember, when any index opens substantially higher on a gap move, we usually see it give us a pullback no matter how strong the move is. If it is strong, it will give back 25% to 30% of the move and then resume the run on a volume spike. If it just keeps sliding back down, we have to wait to see if it is going to set up another bottom pattern intraday (usually a double bottom) and then starting to run from there. However, if it gives back more than 40% we have to view the gap higher as suspect. Today it just bled back all day.

So, no compressed spring exploding higher today. What did happen was a below average volume slide back down to just above its recent floor at 1920. That maintains the building pattern in the index, and the low volume indicates there were not a lot of sellers on the slide back down to that level today. As we know, lower volume pullbacks to support are the preferred forms of selling as it shows that big institutions are not dumping shares. Thus, the support has a better chance of holding, and the longer the Nasdaq can build on this level on the right price/volume action, the better the odds for a bear market rally to the upside.

After hours action not bad on ADBE and ORCL earnings.

Warnings and earnings after hours have not dampened what appears to be some post-close modest rallying. ADBE beat its earnings estimate by 5 cents, and though it lowered estimates on second quarter revenues, that did not seem to bother after hours traders. ORCL met its lowered expectations and popped up on the news, but then fell back when it said visibility was still low and its applications sales numbers were quite lower than expected. It is hovering near where it closed. CPQ warned again and was plowed lower, but then it recovered well and was trading close to flat. Other stocks continued to drift higher after hours; they spiked on the ADBE and ORCL news, but then fall back. Still, they were moving higher and continued to do so.

Nasdaq drifting higher after hours.

The after hours action indicates that the tech stocks still want to rise off of the 1920 level even with mediocre news. In turn that shows that there is some pent up demand that can still provide a bear market rally from here. With the FOMC meeting on Tuesday, if we get decent economic numbers in the morning, i.e., a PPI that does not show increasing wholesale prices will help bolster the hope that the Fed may lower rates by 75 basis points. As we have seen in the past, that hope can provide a couple to three days of rallying ahead of the actual event. In addition, we have Michigan Sentiment survey results again and triple witching expiration. These could all give us a surge on a Friday ahead of the FOMC.

On the other hand, if the 1920 level breaks tomorrow and the index cannot climb back up and move ahead on strong volume, the recent attempt at bucking the overall market and actually trying to build a floor loses strength, something that each such attempt has done the past year. Unfortunately, there are no neon lights flashing that signal a bottom. We watch the price/volume action of the overall market, of individual indexes, individual stocks, and then look at economic news, sentiment gauges, and world events. About all anyone can say at this point is that the Nasdaq is trying to buck real weakness in the Dow, S&P 500, and the mid-cap and small-cap indexes, but it has yet to show it is ready for a real move. There are some good patterns developing in former leading names, but they slid back today after attempting moves early in the day. At where it closed today, it would only take one bad news story to send it below 1920 and some more selling with the Dow and S&P 500.

THE ECONOMY

Jobless claims hold steady, kind of.

Jobless claims rose 5,000 to 375,000, but that was actually no gain because the prior week's report of 370,000 new jobless claims was revised higher to by 5,000 to 375,000. Gets really confusing following this stuff, huh? You can hardly ever trust the raw headlines that you see; today jobless claims were reported as flat, i.e., no gain and no loss. But you had to know that the reported number was higher than the previously reported number that was revised higher. In any event, the real number to watch today was the four week moving average.

After trying to fall earlier in the year when jobless claims started a steady drop, it has now re-established its uptrend, rising to 364,250 (well above the 356,000 level last week), the highest level since July 1998. The trend is now firmly higher. Still, the level is well below recession levels (500 to 700). The problem, however, is the sharply reversal in the trend from starting to fall last month to racing to a 2.5 year high. The economy really needs to see that strength the Fed is talking about (and indeed, we were seeing ourselves until the past three weeks) to avoid this number spiking higher. This is another sign that the Leading Indicators we reported on last week were correct in suddenly pointing lower and threatening recession. When they drop that rapidly once again as we saw with other indicators dropping in September through October, that really concerns us that the Fed is well behind the curve in staving off recession. Consumer sentiment is still locked in a battle with consumer spending. So far so good; but, if weekly jobless claims (a leading indicator as opposed to the unemployment report) continue on this pace, there is little doubt that the dropping sentiment will win out over signs of continued consumption.

Philly Fed report shows less weakness.

This measure of business activity in the east came in at -23.5, a bit better than the -25 expected. In other words, activity was weak, but not as weak as expected. Break out the champagne. Even with this 'good' news, the prices paid component rose from 13.1 to 15.2, indicating potential inflation. We keep seeing this pop up in all of the reports, but it is important to understand that in slowdowns we always see this increase as we have explained in previous reports: demand continues while supply has been cut down heading into the slowdown.

Inflation? Not by most standards.

While you cannot dismiss signs of higher prices in each report that comes in, it is comforting to look at the traditional indicators of inflation: gold and commodities. Gold tried to spike higher, but has been cascading lower the past three sessions. Appears as if those who said the rise was based on complex leasing arrangements were correct. Commodities continue to tank; really tank. Today it broke that support that we referenced earlier in the week, and it is plunging. And the dollar is flying higher the last few sessions. A strong dollar is very good for the U.S. right now from a financial market standpoint: the last thing we need is foreign investors nervous and ready to pull dollars in favor of investments elsewhere. If the dollar is strong they will want to keep their investments in dollar-based investments. That is huge, especially given the current state of the U.S. economy and the financial markets.

THE MARKETS

Overall market stats:

VIX: 32.63; -1.97. Volatility continues to hold above 30 as the Dow and the S&P feel their way around for direction. We have a feeling the VIX will rise over the next few sessions as the Dow and S&P seek lower levels. Again, it needs to ultimately hit in the 45 to 50 range for more of a final bottom as opposed to the interim 'bottoms' that the 35 level has given.
VXN: 75.93; +2.32. Still rising on lackluster selling on the Nasdaq. That is something we like to see: no real technical damage on the day but negative sentiment rising significantly. That is what we want: fear rising but the index in good shape to rally. That is what gives rallies at this point; V bottoms are going to be very hard to come by.

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:

As noted above, a drop but not one that was technically damaging at this point. It was disappointing to see the attempted move up fail so quickly, but the higher gap was a red flag after a strong sell off. When we saw the gap higher to start things off, we knew we might not have to close our remaining put plays as we were thinking we might have to do last night if this move up got underway in earnest. If this 1920 level can continue to hold, the Nasdaq has the potential to buck the trend with a better bear market move than we have been seeing. We have to see a stronger high volume move and the better looking stocks racing ahead on strong volume as well. Otherwise, more of the same as we have seen: jumps higher that fizzle at resistance. We can play it either way, but we need to be ready for closing short positions on strong moves.

Stats: Down 31.38 points (-1.6%) to close at 1940.71.
Volume: 1.965 billion shares (-8.4%). Volume slid back below average on the selling, indicating there were not a lot of big sellers out there. Down volume was well ahead again, but lighter at 1.357 billion shares versus an almost steady 561 million to the upside.
A/D and Hi/Lo: Decliners continued to lead, 1.12 to 1 (2.52 to 1 Wednesday). New highs rose to 29 (+6) while new lows fell to 165 (-122). Again, these levels show no real dumping.

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

We pretty much said it earlier. The Nasdaq is trying to set a move off of the 1920 level. It is still an uphill battle, but there was momentum higher after hours and there is a real fight going on at 1920. It will have to clear 2030, a level that is now holding it back as it bounces from 1920 to 2030, but can we not play that move as well? The index closed at 1940.71. A move to 2030 is 90 points, and the QQQ can give us a good move up to that point if we get one of those slow opens that starts to build. What we would really like is a move up off of 1920 that starts to build. That gives us a great run to 2030, and perhaps to the breakout.

Dow/NYSE: A weak move back over 10,000 on light volume. The Dow showed 9 lives for awhile, but we think they have been used up.

Stats: Up 57.82 points (-0.6%) to close at 10,031.28.
Volume: NYSE volume sank on the attempt at moving higher (1.229 billion; -12%). This is right at average. Up volume did lead 725 million to 493 million shares. Not a powerful move back over resistance.
A/D and Hi/Lo: NYSE advancing issues came out on top 1.14 to 1 (decliners led 3.02 to 1 Wednesday). New highs rose to 69 (+16) and new lows fell to 49 (-70).

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

Wednesday it broke 10,000, and today it made a run back at it. It managed to claw back over, but volume was not impressive. This is not what lasting reversals are made of. We are looking for the Dow to fail on this move and head back lower into the 9700, preferably lower range. And, we want it to happen fast; no lingering drop, but a scare them fast drop.

S&P 500: Big caps also managed a meek recovery today on lighter, average volume. As with the Dow, the index closed well off of its intraday high (1182.04), trying to hold at some potential support around the 1175 level. The lower volume does not give us much confidence it will do so. The index has finally hit bear market status the past couple of weeks, but it appears to still have more selling ahead of it as it plays more catch up. We think this one is rolling over as well; it may have to test 1200 first, but it looks weak.

Stats: Up 6.85% (+0.6%) to close at 1173.56.
Volume: NYSE volume slid on the gain to 1.229 billion shares (-12%).

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

TOMORROW

Another Friday, and another week with some great put plays, a few solid upside plays, and many good patterns that stalled or crashed. Ah the life of a bear market. What does it show us? We should not feel good when the market goes up and bad when it goes down just because it makes those moves. If we are on the wrong side, then we will feel bad. But what we have been seeing and playing, and we hope you have been as well, is that in this bear market the stocks and indexes are rising to resistance and then selling back. That is bear market action. We are still seeing strong patterns break higher, but those require extra caution (see 'Subscriber Questions') because in a bear market there are more breakdowns. We are still seeing solid gains, but the breakout process is just the last winnowing out of those going somewhere and those hanging on or falling back.

The key is to get on the right side of the action. Last night we were concerned about a move higher, but with the gap up, we had a feeling it was going to fall back down, and it gave us more entry points on plays we outlined last night. As we have been saying and playing over the past several weeks, the tech stocks rise into resistance on these continual 'oversold' bounces we see, and then they collapse back down. Today was another classic day for this play: VRTS, MERQ, CHKP and others moved up to resistance and then rolled right back down. We tell our brokers what stocks we think are going to hit resistance and fail, the point we are watching for that failure, and what we want to buy when it occurs. Or when looking at a breakdown, we tell them the stock, the breakdown point (opposite of breakout point on upside plays), and what position we want to play on the break. It is the same as playing upside bounces and breakouts, but we just are playing the current trend that is down and not up.

The tech stocks were trying to move up after hours despite any news that was coming out. That indicates there continues to be some floor building in the low 1900's. We have no delusions about this being the ultimate bottom, but as the Dow and S&P 500 and mid-caps sell down the techs are showing more resilience. It may be a false illusion and the Nasdaq may roll over as well. If we see a flat to weak open that builds but then reverses and sells off, that will tell us that this floor may be a trap door. If it starts soft and closes strong on rising volume, preferably above average volume, we think this could be the start of a decent run into the FOMC meeting that we can play the stronger tech stocks on the move (we still like the NVLS, KLAC despite their drops today; they are building lateral bases that can give good moves in a rally to the FOMC meeting. At the same time, we will watch to see if stocks continue to hit resistance on low volume and peel back. As long as that happens, the indexes are not going higher and we continue to play the downside when the moves fail. If we see stocks starting to break support again, the same applies: play the downtrend while it shows it is in force.

Support and Resistance Levels

Nasdaq: Closed at 1940.71.
Resistance: Building at 2030 to 2050. Then 2250 to 2300. 2400 to 2500.
Support: 1750

S&P 500: Closed at 1173.56.
Resistance: 1215. Then 1265, followed by 1285 to 1300.
Support: 1130

Dow: Closed at 10,031.28.
Resistance: 10,000. Then 10,300 and 10,750. Then 11,020 - 11,028.
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): 375K actual versus 370K expected and 375K prior (revised from 370K).
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): -23.5 actual versus -25.0 expected and-30.5 prior.

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: You state that we should put a stop loss in 7% - 8% under our initial purchase price. However on stocks that you are recommending lately like KLAC for instance, you state that the buy price is 46 3/8 on 10M shares and put a stop in at 45 7/8. This is much less than 7% - 8%. Why are you calling for such a tight stop? Is it the current market conditions or should we start putting in tighter stops on all new positions? By the way, I like your new format. It really helps when you state your buy price, volume at that price, target price and stop loss price. Those stats cover everything needed to place a nearly risk free trade! Very good addition to your letter! Thanks!

A: Over the weekend we discussed that we were starting to place stop losses on breakouts right up under the pivot point as a function of the market that we are in. The Nasdaq is in a bear, and now the S&P 500 has joined it with the Dow starting to spiral down as well. That makes it harder for breakouts to succeed. Everything can look super and the stock breaks out on strong volume. Then news hits and shuffles the deck again and some of the solid breakouts fail. That can happen in any market, but in a bear market investors are nervous and ready to sell. In a bull market we can give a little more rope with the 7% stop loss. Now that the other two major indexes are failing, breakouts have it even harder, so we are shortening the rope on them. As we never want them to fall below their pivot point anyway, we are not taking chances if the breakout falls to that level. It is too risky in this market if the strong volume on the buying is met with strong selling volume after a gain. On options we often just go ahead and close them out when the move starts to stall, mainly looking for the day it is going to close well off of its intraday high. When that happens we have told our brokers we want to exit the position when we are in options. We don't want to let a gain evaporate. In sum, it is a function of the market now that the Dow and the big caps are selling as well.

End Part 1 of 2

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