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world stock market, us stock market
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3/19/01 Investment House Daily
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Investment House Daily Subscribers:
TONIGHT:
- Market gives the pre-FOMC rally we were looking for late last week.
- Weak volume rally setting investors up for disappointment again?
- FOMC meeting tomorrow has hope springing eternal.
- Subscriber Questions.
- Team Trades.
Rallying ahead of the FOMC.
Last Wednesday and Thursday we were looking for another possible rally into the FOMC meeting as the talk of a three-quarter point rate cut again surged ahead of the Fed. Friday was not the day, but today the markets shook off the usual round of negative Monday news and put together a respectable rally. Specifically, Corning warned that it was not seeing the recovery in sales as fast as it thought it would and chip analyst Kumar donned the cap of economist and declared that the Fed was 125 basis points behind the curve and that the economy would be in a full blown recession in the second half. As a result he concluded that Intel could fall to the upper teens before it started to recover. Oh well, with Time and U.S. News and World Report putting the bear on the cover we suppose it is time for everyone to get into the economics game.
Low volume a recipe for further downside?
The point gains were impressive, but the volumes were not. NYSE volume was off 27.5% as Nasdaq volume fell 15.6%. We have seen these low volume bounces fail again and again. Why do they fail? Because the low volume indicates that the real money players are not getting in on the action. Many fund managers are sitting in 30%, 40%, even 50% or more cash. If they wanted to buy, if they felt compelled to buy, we would see that in the volume as they would be working to put that money into stocks. Instead we have seen the opposite, i.e., distribution. Instead of buying on up days, they have been selling on down days: they start selling into rallies and really get serious as the rally stalls.
As discussed over the weekend, this action of weak rallying in the big name techs continues to build in overhead supply with each short rally higher. What happens is that investors rush into the brand names when they see any buying, but there is no big money backing the moves. The stocks run out of steam and start to fall again, and that leaves yet another layer of disgruntled shareholders that are ready to unload the stock once they get close to breakeven.
Too much hope setting up more selling?
To us that means the markets are again setting up for another disappointment when the Fed cuts by 'just' 50 basis points tomorrow. On January 30 and 31 the market moved higher in hope of a 75 basis point rate cut. It did not happen and the market suffered a very ugly February, and after a weak bounce in March, the selling intensified. With the weak volume moves today, it sure looks as if the same type of move is setting up.
The March FFF contract is pricing in a 50 basis point cut tomorrow. When it comes to actual meetings, the near term contract is very accurate in predicting the cuts, especially inside of 10 days before the meeting. There is still the possibility of 75 basis points in cuts, but you have to look at the April contract for that. Since there is no April FOMC meeting, that is fueling the speculation of a 75 basis point cut tomorrow. Based on a strict reading of the FFF, however, it is inaccurate to read 75 basis points in with respect to Tuesday's meeting. That is where the hope creeps into the equation and clouds judgment. That is where you can get into trouble.
On the other hand, you can think with a clear head and turn others' emotional actions into an advantage. That is what we are doing. Today we were waiting patiently for the story to set itself up. We had some upside plays (RESP made the move we were looking for) and downside plays, but the big move is just setting itself up in the event the Fed cuts 50 basis points or less. The weak rallying into the meeting further sets up the fall. We hope it keeps on moving up Tuesday ahead of the announcement. We will get the announcement, and if it is 50 basis points or less, take short positions. Last time the market was steady for about 15 to 30 minutes before it started to slide. We are not going to wait that long, but it shows that there is some time to make the play without having to gamble on what the Fed is actually going to do.
The Fed can always surprise us with a 75 basis point move, and if it does, we won't be racing in to short the market. We will have to see how it shakes out, and if we see stocks breaking out to the upside on such news, we will definitely follow them up. Indeed, we would do that regardless of what the rate cut move was if we saw stocks breaking out on good volume. That is the beauty of being able to see what is going to happen first and then acting confidently and quickly once we see the market start to turn down after the news. The market can always surprise us with a strong move up even with just a 50 basis point cut; as we said, we will play such move with our breakout stocks, but we won't be convinced it won't turn back down after an initial surge, and we will be waiting for that move.
The Fed can always surprise us the other way as well, i.e., with a 25 basis point cut. There is some school of thought on that as well given the strong housing market, construction spending, rising consumer sentiment, etc. Basically, everything we have been pointing to in saying the economy was not as weak as most were saying. Problem is, the Fed is looking at the market despite what others are saying. It knows a 50 basis point cut will be bad enough; a 25 basis point cut would be horrific for the market. The Fed would be trying to say that things are better than the markets think, but the markets have no faith in the Fed at this point and the result would not be pleasant.
THE MARKETS
The indexes look to be setting themselves up for another turn down if the Fed does not deliver a 75 basis point cut. There is nothing evident that sentiment has changed to the extent that a 50 basis point cut will trigger a rally. Lest we sound too bearish, there is always the chance a 50 basis point cut (150 in total in less than 90 days) would do the trick and send the markets higher. We will have to see it to believe it, but it can indeed happen. If it does, the stocks that will lead will be those that have held up during the bear and are in good patterns. That means picking them off as they break out of their patterns. That is the best way to play the moves higher as these stocks typically give the best runs when a bull move resumes.
Overall market stats:
Sentiment: Today there was much talk about the images of bears on the covers of Time Magazine and U.S. News and World Report. The idea is that this marks the bottom of the bear market as it is now something that the common media is admitting to. True, when a particular stock hits the covers or is featured in articles in the common media, its run is usually over. The theory basically is that once everyone knows something the news is fully disseminated and the smart money is using the rush by the latecomers to get out quietly. On the downside, the smart money is using the last outflow of sellers to accumulate shares on the cheap.
There is no question that now that the bear is becoming well known to every person in the U.S. that it is closer to the end than it was, but other indicators have not fully confirmed this, e.g., the bull/bear indicator. Moreover, even though it may be recognized, that does not necessarily mark the bottom. The bull appeared on the cover of Time five times during its massive run; the first few did not mark the top.
VIX: 33.35; -1.94. Volatility fell on the rally, retreating from over 35 where it closed Friday. Again, the 35 level has led to very weak bounces the past two months, and we have a feeling this one will fade if the Fed cuts just 50 basis points tomorrow.
VXN: 73.60; -2.63. Not telling us much today; indeed, it has yet to build up a history to correlate index moves. We will continue to report on the moves, however, to keep you up to speed if it does start to develop.
Put/Call ratio (CBOE): 0.57; -0.51. Massive drop in put action in a light rally ahead of the FOMC meeting. Indicates not too much short covering today as overall option activity on the CBOE fell to 1.254 million down from Friday's 1.829 million. Calls were simply way out in front of puts today, indicating that sentiment is still predominantly bullish.
NASDAQ:
A late day surge took a meek bounce much farther in the last hour as buyers came in, speculating on the Fed action coming tomorrow afternoon. As noted, weak volume did not instill any confidence in us that this bounce means anything. If no significant changes occur tomorrow, we don't see it doing much more than setting up for another downside move. Yes the index is oversold, but today's action looked pretty suspicious and pretty familiar. If it does cut 75 basis points we could get that shift in investor sentiment. Great. We really do hope that happens, and we will play our breakouts if it does.
Stats: Up 60.27 points (+3.2%) to close at 1951.18.
Volume: 1.776 billion shares (-15.6%). Up volume rose to 1.264 billion shares while down volume dropped to 480 million shares. Despite the reversal of fortune with the down and up volume, overall volume collapsed, even for a Monday. Weak volume rallies followed by higher volume selling. That has been the pattern, and we anticipate more of a catalyst for that pattern tomorrow with the FOMC announcement.
A/D and Hi/Lo: Advancing issues took over control today, but it was not a runaway. Advancing issues led 1.44 to 1. New highs rose to 32 (+7) while new lows fell to 283 (-97).
The Chart: http://www.investmenthouse.com/cd/$compq.html
Finally got the pre-FOMC move we were looking for late last week as the index moved back over the 1920 level where it had tried to build some support before Friday's drop. Volume was weak on the move, giving it no real power; when an index moves back over an important level we want to see the move on strong volume. If there is not volume, the move is more likely to fail.
Dow/NYSE: The Dow formed an intraday double bottom at 9790 and then raced up in the last three hours to test 10,000. It did that with 40 minutes to go in the session (high at 9992.66) and then sold back to the close. 10,000 is a very significant level for the Dow at this point. It had support at 10,300, and when it plowed below that last Monday it gave it a brief test Tuesday before blowing down through 10,000 the following session. Another meek test failed horribly. Today's lower volume test of 10,000 is a classic 'kiss good-bye' in the making. It could now tap 10,000 again and then tank unless something turns the sentiment tide and gets the big money back into the buy side.
Stats: Up 135.70 points (+1.4%) to close at 9959.11.
Volume: NYSE volume slumped to 1.122 billion shares (-27.5%). Monday's total volume was lower than Friday's down volume (1.269 billion). Up volume was ahead 872 million to 243 million shares.
A/D and Hi/Lo: NYSE advancing issues at least took back the lead 1.77 to 1 (decliners were ahead Friday 2.06 to 1). New highs rose to 113 (+36) as new lows fell to 94 (-20).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow rallied late in the day, but after testing 10,000, it could not break through. The weak volume is not a positive sign for a breakout tomorrow unless the market is pleased with the Fed's action. We do not think it will, and therefore anticipate selling from this level.
S&P 500: The big caps joined in the late session surge, closing just below some resistance at 1175. Volume was lower on the move, giving it no real power at this point. As with the other indexes, the move appears to be nothing more than speculation on a more generous rate cut than should be reasonably expected. The market appears to be setting up for another downside move that we are looking to play.
Stats: Up 20.28 points (+1.8%) to close at 1170.81.
Volume: NYSE volume slumped to 1.122 billion shares (-27.5%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
The FOMC is the big news. The question is whether the markets continue to rise or start to sell ahead of the news. That always puts the investor trading on that news in a dilemma: should I go ahead and get into a position before the news if I see a rally start to fade early? The problem with that is if the Fed pulls a surprise and cuts rates more than anticipated. What will we do? We are pretty confident of our read on the Fed, and if we see an early rally start to slump, we won't be too tardy in taking some partial positions on that slump. Why? Well, if the slump intensifies ahead of the announcement, we could have a handsome profit ahead of the news and even sell out for a gain while we wait for the announcement. Then if it hits as we anticipated, we can watch what the market does and react accordingly.
Our plan is to let our brokers know ahead of time what we are planning to do. Indeed we went over some of the game plan today as we were looking at and taking some positions in today's session. In a nutshell, we are looking for a continuation of today's move up early tomorrow. We want to see it last up to the announcement; that builds in a lot of room for a fall. If it rallies but starts to fade early, we will look at partial positions (at least) on some of our put plays such as the OEX, SOX, DJX, and QQQ. The indexes are sometimes easier to play on these moves as they are not impacted as greatly by news affecting individual stocks. Also, they appear to be right at resistance, and after an early rally could succumb to the overhead. We also see some potentially lucrative short trades in LEH and others, however, and we cannot ignore the potential of an individual stock as well. At the same time we are looking at a bevy of potential breakouts even on the 'bad' news of a 50 basis point cut. If we see them make the break on strong volume, we like them to the upside. The theory: if they can breakout on strong volume on 'bad' news, that is powerful. And let's face it, 150 basis points in rate cuts in 76 days is a strong flood of liquidity in the economy, and if these stocks are breaking out on the right volume, they should continue to benefit as the economy improves.
Support and Resistance Levels
Nasdaq: Closed at 1951.18.
Resistance: 2030 to 2050. Then 2250 to 2300. 2400 to 2500.
Support: 1750
S&P 500: Closed at 1170.81.
Resistance: 1175 is potential resistance. Then 1215 and 1265.
Support: 1130
Dow: Closed at 9959.11.
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.
3-20-01
Trade Balance, January (8:30): -$33.0B versus -$33.0B prior.
Treasury Budget, February (2:00): -$44.0B versus -$41.7B prior.
FOMC Announcement (2:15)
3-21-01
CPI, February (8:30): 0.2% versus 0.6% prior.
Core CPI, February (8:30): 0.2% versus 0.3% prior.
3-22-01
Initial Claims, 3/17 (8:30): 368K versus 375K prior.
Leading Indicators, February (10:00): -0.2% versus 0.8% prior.
SUBSCRIBER QUESTIONS
Q: Is there any clean and easy way to short the DOW such as the QQQ affords with the NASDAQ?
A: The Dow has a tracking issue similar to the QQQ on the Nasdaq 100 and the OEX on the S&P 100. It is the DJX. The DJX' value is roughly 1/100 of the Dow. It has an option chain that trades just like the option chain on the QQQ and OEX. We don't play to exercise the options, but to buy and then sell the options for profit. With fairly clear support and resistance levels on the Dow right now, there is a lot of appeal to trading this index and the options on it. The spread is a bit wider than on the QQQ, but it is very liquid as well.
Q: It would be very helpful if you could please list the index the stocks are in so we would know which index the stock probably follows, i.e., SCFS, Seacoast Financial Services, NASDAQ or NYSE?
A: As a rule of thumb, four or more letters is a Nasdaq stock while three or less letters is a NYSE stock. The AMEX also has three letter stocks, so the only real confusion is whether a stock is on the NYSE or the AMEX. So, the only real potential area for confusion is between NYSE and AMEX stocks, but that is usually no real difficulty in dealing with in investing or trading. The only time it comes up in our trading is the need to include the AMEX on our eSignal feed so we can get the index tracking issues, many of which trade on the AMEX.
TEAM TRADES
Today we were looking for upside and downside plays, and both were out there. The indexes gave early double tops and dropped, and some of our stocks dropped from resistance giving additional downside plays (e.g., IGT). We saw some strong moves to the upside, however, that caught our attention early: a small pre-split on the Stock Split Report (TWRI), and basing stock that broke higher today and cleared resistance (RESP). Pre-splits provide great momentum on the up days, and TWRI was no exception today.
TWRI: We are always somewhat leery of thinly traded stocks, but TWRI has been continually exploding upward over the past four months, and we had been watching it move sideways this month after another explosive move to begin March. Friday it looks as if it was starting another move up after testing its 18 day MVA. 34.50 had been holding it back, so we were looking for it to take out this level. We put in an alarm at 33.50 to give us a heads up if it was heading in that direction. With about 15 minutes to go the alarm went off. It jumped past 34 about 10 minutes later and then hit 34.38. We saw the bid move to 34.69 with no trades, but as the stock was moving, put in a limit at that level for a small position. That was sufficient, and the stock continued to rally up to 35.75, but it fell back to close at 35.25. Not bad, and volume was up sharply. This stock tends to move about $5 a pop, so we are looking at a move to 37 as a first target; if it stalls there we will exit and be happy with a decent pre-split move.
For a review of frequently asked questions, please use the link below:
http://www.investmenthouse.com/1questions.htm
End Part 1 of 2
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world stock market
us stock market
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