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12/14/02 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Friday: None issued
Buy alerts issued: None
Trailing stops issued: None issued
Stop alerts issued: BBOX; GILD; ROOM
You can sign up for Technical Trader alerts at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Friday the thirteenth continues the low volume selling.
- Deflation fears rise based on the PPI, but the PPI does not support those fears.
- Sentiment in Michigan is better than expected.
- Large caps, large cap indexes look sniveling, but small caps and breakout stocks hold fast and even improve on the session.
- Subscriber Questions
Bah, humbug and Christmas is still 12 days away.
No relief Friday from the selling as the indexes and large cap stocks continued to slump lower. Volume was low again though more large caps fell on increased trade along with the NYSE. Many large caps and the large cap indexes threatened breakdowns, passing through the exponential 50 day MVA and testing the simple 50 day MVA on the lows. The indexes have been using the exponential 50 day, but can use the simple 50 day. Regardless, they are running out of rope to work with.
We hate to point to a specific story or event as 'causing' any particular market move. In most instances a trending market does not takes its cues from investors' day to day moods. Sure there are times when a market is weak and yanked around by news. Most of the time, however, the 'reasons' why the market did or did not move are concocted for news headlines as analysts grope for an answer to the financial anchor's query 'so what happened in the market today?' Thus when we hear that the selling was the result of continued Iraq war worries, Al Qaeda worries, and small pox vaccination worries, we don't put any stock in that. Those have been there all along; when things get slow and some answers are needed to the 'why' questions it is easy to trot those out.
The 'why' reasons, however, can have an impact in a thin market, kind of having an effect once they are stamped 'official' when put in a story. On top of that there were more valuation downgrades with two big brokerages starting coverage on several chip stocks with negative ratings. This run off the October low has most analysts petrified. They don't dare endorse it as that would go against the new conventional bear market wisdom and put the firm at risk for being too bullish. Over two years of a declining economy and they cannot yet accept that things might be improving and that the market prices that improvement in ahead of time. It runs, it rests, then it runs again IF things remain positive economically. Thus far they are still pointing to a very solid recovery despite the re-emergence of the deflation talk.
THE ECONOMY
PPI weaker than expected; deflation banter crops up.
We talked about deflation a bit back in the summer when it was not in vogue. The economy was having some serious shortcomings cropping up again. That had us on guard. Late summer to early fall, however, started to show improvement in key areas and we became more sanguine about the economic future. Of course it was bout that time that deflation became the buzz topic. That died a bit when the stronger economic numbers reported what our surveys had been showing in late summer and early fall. Friday's PPI number brought out the 'deflationers' once again.
The worry? The PPI fell 0.4% when producer prices were expected to hold flat following a 1.1% October gain. The idea is that falling prices are a sign of deflation. With CNBC running a week-long series on Japan, the deflation comparisons were running rampant. Sell everything you have while you can still get a good price!
The truth? As we said before in the late summer, falling equity prices and falling bond prices are a sign of potential deflation. They usually move inversely, but when moving together, when plunging lower, they are indicative of deflation as no one thinks money will be in demand (hence lower rates) and companies won't be making money (thus lower stock prices). What has happened? Bond yields stopped their skid; the yield curve is back the way it should be, i.e., longer maturities yielding higher returns and shorter maturities lower returns. We said before that there was overinvestment in bonds as well (financial advisors overstocking their clients' portfolios with bonds just as the did with stocks in the boom), and that drove rates artificially low; a rebound was inevitable, and the improving economic conditions just exacerbated that move. Improving economic conditions mean money will be in more demand in the future and thus higher rates. On top of that commodity prices continue to improve with the commodity index hitting a 4+ year high Friday. Commodities are very economically sensitive, and the steady improvement off of the October 2001 low underpin the economic recovery.
Then there are the numbers themselves. They continue to show that businesses suffer from a lack of pricing power, but they have suffered that malady the past four years as the economy roared but there was disinflation ongoing as a result of great productivity increases and the competition that free markets engender. A weaker economy makes it hurt businesses more because they don't have the volume business, but is it really a sign of deflation? Indeed, are prices really plunging as the sackcloth and ashes group on the tube would have you believe today?
October prices were up 1.1%, the largest gain in ages. When you take out cars (-3.6%), energy (-1.8% after being up the month before), and computers (-2% and have been falling for years), prices rose again in November. Looking year over year, prices were up 0.9%. That is a dramatic improvement from May when year over year prices were down 2.8%. That, not coincidentally, was around the time we were seeing problems in the economy. Prices have since started to improve. As with all economic indicators, they are not out of the woods, but they are improving. When we look at the trend since summer and look at what was behind the November numbers, we don't see the same deflation demon that has again come into vogue.
Michigan is feeling better with an 87.0, better than expectations reading.
The preliminary Michigan sentiment reading that takes in all of 200 or so responses tells us how we are feeling as a nation came in higher than the 85.0 expected and the November 84.2 reading. Current conditions was up again (matching the Conference Board survey) to 95.9 from 93.1 in November. Expectations for the future rose solidly as well to 81.2 from 78.5. All in all a solid report. Confidence is good but consumers cannot hold the economy up forever.
THE MARKET
The Nasdaq joined the SP500 and DJ30 below the exponential 50 day MVA as the semiconductors led the techs in selling. Large cap stocks took the heaviest hit once again as they struggle to hold the line during this consolidation of the move from the October low. The large cap indexes and some key stocks continued edging to the completion of the head and shoulders patterns, the SP500 and DJ30 testing the simple 50 day MVA on the lows. At the same time the large caps struggle, the small caps (though not really showing it overall Friday) continue to outperform.
For all of the potential problems on the large cap indexes, there are several leading large caps holding up well. Moreover, there are many smaller cap stocks that are really performing well as we see on the report. That is part of a seasonal trend that typically sees smaller caps start to outperform larger caps at the start of a new year. The idea is that smaller caps have more growth potential for the coming year, and that makes them good to stock in mutual funds. There is in reality some truth to this as smaller companies are much more flexible than their large counterparts, able to fill niches in the market as they appear.
Thus there continue to be several positives in the market: economic improvement, seasonal trend, breakouts holding up. That bigger picture is positive, but overlaying that is the price action the past two weeks that has reversed the good move up through the last half of November and formed the potentially bearish head and shoulders pattern that can lead to a further drop. The pattern has not been completed, however, and until they are these patterns are notoriously fickle. Of course, it does not help that several brand name large caps are sporting the identical pattern (MSFT, IBM, KLAC, CSCO).
Sentiment Indicators
VIX: 32.12; +1.31
VXN: 50.92; -0.13
Put/Call Ratio (CBOE): 0.87; +0.1
Nasdaq
Popped the 50 day MVA for the first time since breaking over that level in mid-October. Volume was weak again but the Nasdaq is looking over the precipice.
Stats: -37.13 points (-2.65%) to close at 1362.42
Volume: 1.429B (+0.87%)
Up Volume: 159M (-652M)
Down Volume: 1.248B (+673M). All sellers.
A/D and Hi/Lo: Decliners led 2.25 to 1. The A/D line has taken a real turn from the solid performance where even on the down sessions it was very mildly negative.
Previous Session: Decliners led 1.03 to 1
New Highs: 44 (+5)
New Lows: 41 (+1). Good to see the new lows holding steady on the selling.
The Chart: http://www.investmenthouse.com/cd/$compq.html
After testing the 50 day MVA (1372) early in the week and bouncing on low volume, Nasdaq closed below that level. Volume was still weak, but low volume has not stemmed the selling. Not only did it close below the 50 day MVA, it closed below the recent closing lows, opening the door to test the last real holding point near term at the July and September interim highs (1354) and the simple 50 day MVA (1346). A breakdown from those levels pretty much leaves a question mark as to where the index finds bottom.
S&P 500/NYSE
Still moving lower, taking out the recent lows and thudding to the simple 50 day MVA. Not much more downside room but still has some support.
Stats: -12.10 points (-1.34%) to close at 889.48
NYSE Volume: 1.248B (+1.9%). Volume edged higher though was still well below average volume. The NYSE has undergone technical distribution, but the volume has been very low compared to the buying on the way up, and that indicates there is no major selling ongoing.
Up Volume: 339M (-286M)
Down Volume: 910M (+311M)
A/D and Hi/Lo: Decliners led 1.96 to 1. Continues to turn worse on the downside after showing such excellent action up until last week.
Previous Session: Advancers led 1.15 to 1
New Highs: 32 (-8)
New Lows: 29 (+1)
The Chart: http://www.investmenthouse.com/cd/$spx.html
The large caps cannot find any interested buyers, falling to the low for the week. The move put it down to the simple 50 day MVA (889), a level it an still hold and keep from completing the head and shoulders pattern. A test down to next price support at 875, however, is not out of the question. The pattern looks bearish in spite of the overall improving economic condition.
DJ30:
The large cap indexes are tracking together, the Dow falling down to test the simple 50 day MVA (8409) as volume edged higher. This takes it to the low for the week and looks to have completed a very weak right shoulder. It holds here or it is a quick ride to 8250 where there is some price support.
Stats: -104.69 points (-1.23%) to close at 8433.71
Volume: 1.248B (+1.9%)
The Chart: http://www.investmenthouse.com/cd/$indu.html
THIS WEEK
The key will be whether the indexes can hold at this one last support point or just go ahead and break down. The consolidation was looking positive as late as Thursday, and Friday was still not a breakdown though the indexes showed unpleasant action. We went about business and closed positions that had broken support on the session. The overall economic outlook may be positive, but we are not going to nurse plays that are breaking down as the market shows less promising action. Many plays held up just fine; while the market was not as solid as it was at Thursday's end, there are still many stocks from all areas holding up quite well even after Friday. Closing some of those positions out may come back on us if the market makes a quick rebound, but you have to base your decisions on what the action in the stock is.
Given that the indexes are on the edge we are continuing to look at downside plays along with those upside plays that are still forming excellent patterns and those that have already broken out and are currently in nice tests of the breakout. There has already been some substantial selling down to this point, and often in this action there is a rebound right after important support is broken. With the continued economic improvement (the economic numbers last week were just fine) we are still viewing this as a pullback/consolidation of the solid move higher. Remember, volume on the upside buying was very solid while the volume on the downside has been mostly on lower and lower volume. This is a thin market that is being pushed around by valuation concerns.
Despite the bearish head and shoulders patterns in the large cap indexes, we are not of the mind that the market id going into a major tanking from here. Thus we are looking at downside plays that are in trouble in and of themselves. In other words, the downside plays are stocks in continuing downtrends or have broken down and are failing a test of that move. We are not too wild about trying to catch onto what very well may be the tail end of the selling in stocks that rallied up to their highs in late November where one more significant test lower may send them running back up. Indeed, the trend is still up right now, and we never like to step in contrary to the overall trend. Our downside plays focus on stocks that are trending against the market, i.e., have been in downtrends already and are set up to continue them. If the indexes break down and then fail a test of the breakdown, that will change our view and get us into more downside action on the bigger names, but we will get into those after the breakdown and test of the breakdown fails; that is the best entry point for downside plays because there is less chance of that nasty reversal.
Overall the last two weeks seem negative after such a good run, but the lower volume and lack of breakdowns in leading stocks that have formed up good patterns and broken higher runs counter to the idea that the indexes have broken down.
End Part 1 of 3
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