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us stock market, stock watch
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Tech Traders 3/20/01 Market Summary
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Technical Traders Subscribers:
Continuing Plays: The stocks continue to hold up this week on the report, and featured below are some of the best of those. Put plays are also continued; please see our note on them in that section.
RE (Everest Re Group Ltd--$63.50; -0.19; optionable (RE)): Insurance
http://biz.yahoo.com/p/r/re.html
STATUS: Remains in the tight lateral consolidation that is the handle of its cup base. Volume is still below average and down slightly at 247,000 (avg. 476,181). Want to get a move up soon, and this final move down to the 18 day MVA may do the trick. The stock tested the 50 day MVA Monday on the low of 62.50. Initial profit target on a breakout: 75-78.
BUY POINT: Breakout: 67.88 on volume of 714,000 or better. Stop loss: 67.38-67.63. POSITION: Breakout: Stock and/or July $60 calls to buy (RE GL; 12 open interest).
http://www.investmenthouse.com/ct/re.html
(Click to view the chart)
BKLY (W.R. Berkley Corp--$46.31; +0.56; no options): Insurance
http://biz.yahoo.com/p/b/bkly.html
STATUS: Made a move up from support (18 day MVA, 45.36), which was small on the lower volume (208,200; avg. 347,545). That isn't the price/volume action we'd like, but the stock is ready to move on a volume surge. Looking for a breakout from the cup with handle on strong volume. Initial profit target on a breakout: 54-56.
BUY POINT: 48.88, on volume of 521,000 or better. Stop loss: 48.38-48.63.
POSITION: Stock.
http://www.investmenthouse.com/ct/bkly.html
(Click to view the chart)
STZ (Constellation Brands--$68.12; +0.03; optionable (STZ)):
http://biz.yahoo.com/p/s/stz.html
STATUS: Reached up toward the high in its recent consolidation (70.50), hitting up to 70.27 before retreating to close with a doji. The stock is still holding strong over its 10 day MVA (68.03; 18 day, which the stock hit at Monday's low, is at 67.14), and volume was down but remained solid at 183,500 (average 135,500). We will see if we get a bounce off of the doji on support, looking for the breakout for positions. STZ shows strong money flow, buying and relative strength. Initial profit target: $81-$85.
BUY POINT: Breakout-70.63, on volume of 180,000 or better. Stop loss: 70.13-70.38.
POSITION: Stock and/or July $70 calls to buy (STZ GN).
http://www.investmenthouse.com/ct/stz.html
(Click to view the chart)
PUT PLAYS: We continue to look at put plays, now in the added context of a market downturn after the 50-point interest rate cut. As always, keep reasonable loss cutting rules in place, be ready to close positions quickly if necessary, and make sure you see the downside move, along with the market going down as well, and then enter.
New Put:
ADBE (Adobe Systems Inc--$32.81; +1.06; optionable (AEQ)): Computer Software & Services: Application Software http://biz.yahoo.com/p/a/adbe.html
STATUS: Showing a doji at the top of a three-day run, which placed the stock back over the 18 day MVA (30.15). That action suggests a turn back down, and in a declining market, ADBE is primed for a turn back down to the 25 range. Watch the 18 day MVA for support unless the move down is strong.
BUY POINT: On a move down from here on continued strong and rising volume in a selling market, May $40 puts to buy (AEQ QH).
http://www.investmenthouse.com/ct/adbe.html
(Click to view the chart)
Continued Puts:
SOX (Philly Semiconductor Index--$577.76; +36.50; optionable (SJX)):
STATUS: Turned down from the 10 day MVA (579.79) as expected, and looks ready to undercut the neck on the head and shoulders pattern the index has formed since December (first shoulder; second shoulder is this month). The neck is at 535, making our target on a successful completion of the pattern in the range or 307.
BUY POINT: Below 535 on continued strong volume, April $600 puts to buy (SJX PT).
DJX ($97.21; -2.38; optionable (DJV)):
STATUS: Headed back down from the 100 level (high was 100.20), hitting a low of 97.18. Volume was just over average and rising, and on a move below 95 on continued selling in the Dow, we will look at buying puts. Initial profit target on that move: 86-81.
BUY POINT: On a move below 95 on strong and rising volume.
POSITION: May $108 puts to buy (DJV QD).
QQQ (Nasdaq 100--$40.35; -2.75; optionable (QQQ)):
STATUS: Almost made it to the 10 day MVA (44.55), but turned down from a high of 43.81 on strongly above average volume (104 million; avg. 63 million), posting a new closing low. On a continued move down from here, we will look at put positions once again. Initial profit target: 36-34.
BUY POINT: On a move down on continued strong volume, May $48 puts to buy (QQQ QV).
OEX (Standard & Poors 100--$581.93; -15.73; optionable (OEY)): S&P 100 options
STATUS: Time for the typical bounce back up after a move down, but the index moved farther on volume that was above average (1.2 million) but lower than Friday's stronger selling volume that didn't pack as much of a punch. We will look for a continued move down (the index hit a new low) on the possibility of further selling on the rate cut.
BUY POINT: On a move down on continued strong volume.
POSITION: Lower: April $585 or $590 puts to buy (OEY PQ or PR).
http://www.investmenthouse.com/ct/$oex.html
(Click to view the chart)
MERQ (Mercury Interactive--$39.13; -0.50; optionable (RQB or RBF)):
http://biz.yahoo.com/p/m/merq.html
STATUS: Tried to stick a move over the 10 day MVA (41.80), but pulled back down. Volume was strongly above average at 7.3 million. On a retest of the 10 day MVA, we will look for a failed test and move down, for an initial target of the March low (35).
BUY POINT: On a move down from 41-42 on continued strong volume.
POSITION: May $55 puts to buy (RQB QK).
http://www.investmenthouse.com/ct/merq.html
(Click to view the chart)
THE SUMMARY:
TONIGHT:
- Third time is not the charm for the market and Fed rate cuts.
- Hope of a larger rate cut gave us the opening we were looking for.
- Fed ready to cut again, and we anticipate an inter-meeting cut.
- Sellers hit the indexes again with more distribution.
- Subscriber Questions.
- Team Trades.
Third rate cut did not bring improvement on first day of spring.
As expected but not as many had hoped, the Fed cut rates another 50 basis points making it 1.5% in cuts less than 90 days. Remember, the Fed was raising rates at this time last year, hiking rates 175 basis points in six moves. In typical Fed fashion, it hiked rates the most at the end of its war on prosperity: it got impatient when it appeared its hikes were not working and jacked them up 50 basis points in May. That broke the economy's back, and the market knew it. The market has been decimated since that time as has the once powerful U.S. economy. Now the Fed is desperately attempting to reverse the train it pushed downhill. It won't admit a thing, but talks about the carnage it wrought with a detached arrogance, blaming the fall on the very industry and enterprise that helped the economic boom.
The market continued to give the Fed and its actions a raspberry. With its total bungling of the economy and its reluctance to act last fall when it was painfully obvious action was needed, the Fed has scuttled what little faith U.S. citizens had in it. This is unprecedented in history: the Fed cuts rates 150 basis points in three rapid moves and stocks suffer renewed selling with each Fed action. The market foretold the economic slowdown. That was rational action after sizing up what was happening with monetary policy and the economy. Is the market acting rationally now? It is easy to say it is not, but overall, the decisions of millions of investors tell the tale.
The Fed told us as much today. It admitted that there was a 'negative wealth effect' when it expressly stated that "declines in equity wealth" were part of the problem the economy was experiencing. Thus, despite all of the baloney the Fed was feeding us since 1998 about not targeting the stock market, today it admitted that it was inexorably tied to the economy's performance. Little consolation that if finally admitted what everyone on earth already knew.
Using reason not emotion gave us what we wanted today.
We can harp on the Fed all we want, but that won't change the current situation it created. What we need to do is recognize what it is doing, what the reaction will be, and then act accordingly. That is precisely what we outlined last night, and it paid off big for all of us today. We really hope you took advantage of the events because this was some of the easiest money you will ever make.
The market was not racing ahead, but it was not selling off before the announcement. Indeed, the market was at its high right before the announcement, and that set up the downside plays perfectly. Why was the market at its high? Because on a short term basis, the market acts irrationally; it overreacts. It was hoping, clinging to that 75 basis point rate cut that would somehow save the economy and thus the market. No one told them (though we discussed the same last week) that 75 basis points would not do a lot more at this point; investors just wanted 75 basis points. When it did not come, they sold it off. I was not even at my computer when the announcement came, but was on the phone with one of my brokers. When the news came several orders that were waiting for the news were placed. Some of the brokers panicked when they saw the market bounce, but we stayed the course and even added positions when it tapped at the high again but failed to take it out. This was a gift and we were jumping all over it.
Eventually the impact of what the Fed has done will hit the market and it will rebound. The Fed is flooding the economy with liquidity and that will spur even more activity than we are seeing now. Moreover, we are not as concerned about inflation nearly as much as we were two months ago: gold is down, commodities are in the tank and heading lower, and the dollar is amazingly strong given the rate cuts and the economy. The blip in prices last month was just what we said: when we enter a slowdown, prices rise because of the demand overhang. Things are working themselves out on the price side, but the real fear has to be deflation at this point. Is the Fed up to the task? It is taking the only actions it can, but that may not be enough. We need that meaningful fiscal policy in the form of a real tax cut that is retroactive to January 1 this year. And we also need a capital gains cut to go with the marginal tax rate cuts. Write your Congressmen and women today.
Fed ready to cut again.
"Persistent pressure on profit margins are restraining investment spending and, through declines in equity wealth, consumption." Add to that worry over the slump in U.S. manufacturing and weakness in overseas economies (both expressly mentioned by the Fed), and you have the Fed concluding "In these circumstances, when the economic situation could be evolving rapidly, the Federal Reserve will need to monitor developments closely." That is exactly what Greenspan said in December, and the January 3 rate cut came on its heels. If things do not improve dramatically in the economy and in the stock market, we anticipate a rate cut well in advance of the May 15 meeting. Indeed, the FFF market does in fact anticipate another cut prior to that meeting.
What we think we have here is a very reluctant market, and indeed that has been evidenced by the very prominent mutual funds that are sitting in 50% cash, waiting for a sign to buy. There are several things that are unprecedented in this market, one of the primary ones being the number of large institutions and the amount of cash they control. They literally move the market when they enter and leave positions. They have no faith that the Fed is on top of the situation and they are in a waiting game. That is one main reason the usual medicine of two rate cuts and now three rate cuts has not worked (though we cannot judge today's cut based only on today's knee jerk reaction): lots of money in the hands of several large funds is not going into the market. It is hard to determine what will shake the money free, but we have a sneaking suspicion that when there is a consensus on a tax cut that means business these managers will start more accumulation. A fourth rate cut will not hurt either. We are still not convinced that managers will wait for the actual economic turn as some pundits indicate, but they will start accumulating ahead of the actual news. That is the way it always happened.
THE MARKETS
Up modestly ahead of the news, down on rising volume after the Fed move. More distribution on all major averages. We anticipated this action, but what is next? All indexes broke below support levels on stronger volume. The SOX is close to completing a head and shoulders pattern very similar to the one the Nasdaq traced out December through February and is just 100 points from completing the anticipated drop from such a pattern. If the SOX breaks below 535 on strong volume, it could sell down to the 300 range if the selling follows through as it has been doing on the Nasdaq. That is downright frightening to contemplate. On the other hand, it has bounced up off of 535 three times in the past three months, and if it can hold the line here it has a better chance of building that big double bottom it has been working on since September.
Overall market stats:
VIX: 35.04; +1.69. The VIX hit that magical 35 level that many are looking at, indeed hitting 36.18 on its high and not even holding that level. 35 has not been much of a catalyst to the upside other than one day.
VXN: 74.34; +0.74. Not much movement here even as the Nasdaq lost almost 5%. It hit 76.02 on its high but it too could not hold. Strange action as the indexes closed on their lows.
Put/Call ratio (CBOE): 0.61; +0.04. Barely budged given the market selling. This is pretty incredible given the market. Institutions are selling stocks, dumping them, and yet there are few willing to play the downside. Denial.
End Part 1 of 2
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us stock market
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