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us stock market, trade stock
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12/14/02 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts issued Friday: None issued
Buy alerts issued: None issued
Trailing stops issued: None issued
Stop alerts issued: DELL; KRON
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 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.
Support and Resistance
Nasdaq: Closed at 1362.42
Resistance: The 50 day MVA (1372). The 18 day MVA at 1407 and the 10 day MVA at 1403 are still teamed up. The August high at 1427 is the focal point. Price resistance at 1500 and the 200 day MVA (1477). 1574, the May low, is next.
Support: 1357.09, the October 1998 bear market low. July, August, and September interim highs at 1345. Some price support at 1300.
S&P 500: Closed at 889.48
Resistance: The 50 day MVA (899.60) and the top of the late October consolidation range at 899. The 18 day MVA (907.50). The July, August and September interim highs at 909 to 911. 921 is some price resistance. The early November high at 925.66 and key resistance. Price resistance at 950. 965, the September 2001 closing low along with the August 2002 high.
Support: The simple 50 day MVA (888.89) held on the Friday low. The bottom of the October consolidation range at 875 is some price support. The September 2000/May 2001 downtrend line at 862. The March down trendline at 844. 850 to 855 (the October 1997 and Q2 1998 lows).
Dow: Closed at 8433.71
Resistance: The October high at 8500 is some resistance along with the 50 day MVA (8517). The 10 day MVA (8589) and the 18 day MVA (8608). The late July and early September interim high at 8726 to 8762.14 (8745 closing). The early November high at 8800 is key. A range of resistance from 9000 on up to 9050.
Support: The simple 50 day MVA (8408.62) held on the Friday low. Then 8250, the bottom of the October consolidation range.
Economic Calendar
12-17-02
CPI, November (8:30): 0.2% expected, 0.3% prior.
Core CPI: 0.2% expected, 0.2% prior.
Housing starts, November (8:30): 1.690M expected, 1.603 Prior.
Building permits, November (8:30): 1.700M expected, 1.722M prior.
Industrial Production, November (9:15): 0.2% expected, -0.8% prior.
Capacity Utilization, November (9:15): 75.4% expected, 75.2% prior.
12-18-02
Trade balance, October (8:30): -$37.0B expected, -$38.0B prior.
12-19-02
Initial jobless claims (8:30): 441K prior.
Leading Economic Indicators, November (10:00): 0.3% expected, 0.0% prior.
Philly Fed, December (12:00): 5.3 expected, 6.1 prior.
Treasury budget, November (2:00): -$50B expected, -$54B prior.
12-20-02
Q3 GDP, final (8:30): 4.0% expected, 4.0% prior.
Chain deflator (8:30): 1.0% expected, 1.0% prior.
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SUBSCRIBER QUESTIONS
Q: With gold prices breaking $ 330.00 an ounce yesterday and the dollar losing its value where do you see the equities going? I do see the economy picking up some and I know we need to let the market tell us what its doing but it sure looks like the market is a long ways from recovering. Just wanted to get your feedback on this. Thank You.
A: Gold has been depressed for a long time and it is finally making another run. It made a run a year ago but that was a move based on actions of gold suppliers and producers and it faded. This move has the 'traditional' substance behind it, e.g., global tensions including Iraq war possibilities, Al Qaeda bio weapon threats, Iran's nuclear sites, North Korea reactiviating its nuclear program, and now Venezuelan unrest. Uncertainty about war causes gold to rise in anticipation of events. It spiked in 1991 on the Kuwait invasion as well. It did not take it long to fall back, however, once the parameters of the war became clear.
The market has also seen better days, but compared to the prior 30 months, it has seen much worse days. Since the October bottom up to a week ago it was looking fine. One thing that is hard to do is to try and wipe away what has happened before much like a professional athlete has to forget a mistake and go on with the game and try to make something good happen. Sure you have to know where past support and resistance points are, where the trendlines are in order to project how the market will react in the furutre, but you have to take the current market action for what it is without the overhang from the past. You are right when looking at the economic situation improving; the market has been taking that into consideration even as most thought the economy was weakening further. That is the trap that many analysts and brokerages have fallen into with valuation calls; fear of the past is making them fear the future without looking at what the market is actually doing. They are so tied up in where the market has been that they don't act when the market is looking healthier. That is why many missed out on the move up. If you wipe away that prior downtrend, the market the past three months looks pretty solid and there has been some big money made just in that move.
The same analysis keeps you always looking ahead. The action up to thie latter part of this week was still solid, a normal part of the pullback. While the economic picture remains improving and we think the market will continue to follow after this pullback, we cannot let individual positions get out of hand to the downside for a number of reasons. With options you have time against you and riding a position down can be okay if it is a normal pullback to near term support and the trend is still easily in place. If the action worsens such as falling below the near term trend we are playing with options, we have to decide to ride the position and take our chances or close it out and preserve what we can. Unlike stock, if the position breaks down, we don't have the luxury of time to potentially correct the decision.
Another reason related to this that most planners do not get into is opportunity cost. Even with stock in a long term account (say an IRA) we prefer to exit a position that is not performing if it breaks key support. Why? Because there are other fish that can make us money, regaining any loss and then adding positive gains while the other works through its woes. I have a friend that bought one telecom stock years ago because it was going to be a barn burner. It came onto the U.S. market and sold from the opening minute. I owned some on an overseas market on the move up, but when it went to the U.S. market and started to sell I was out fast. He held on for several years because it was a 'long term investment.' It was actually a long term loss. It went from 40 to 5. That is why we are watching this recent action with a keen eye and sticking with positions that are holding up well while weeding out those that are breaking key support levels. Let the better stocks work for you and cut the ones that are not acting well early so they don't hurt you and take away good gains.
End Part 1 of 2
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