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us stock market, trade stock
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3/20/01 Investment House Daily
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Investment House Daily Subscribers:
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.
NASDAQ:
Rolled over after the Fed announcement and plunged to a low not seen since November 1998. Volume rose again on selling. Not a huge gain, but it did rise. Things are not really getting better right now as mutual funds are net sellers of stocks, not buyers.
Stats: Down 93.74 points (-4.8%) to close at 1857.44.
Volume: 2.018 billion shares (+13.7%). Down volume was 1.690 billion shares versus a mere 260 million to the upside. Selling all around. Volume was below average, a small silver lining.
A/D and Hi/Lo: Declining issues flipped back in front 1.64 to 1 (advancing issues led 1.44 to 1 Monday). New highs actually rose to 35 (+3) as new lows fell to 185 (-98).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The index sold down to a new 52-week low once again today on stronger volume. The slide continues, and we are going to see if there is anything here to bounce. Primarily, the SOX will be a focus as many are looking for leadership from these stocks. If the index breaks 535 on strong volume, that is not good for the Nasdaq. If it does, we expect the Nasdaq to continue to drop to 1750; it may do so anyway. After the selling today we may see it sell down lower in the morning and try to bounce from there. At this point, however, it appears as if Nasdaq will try 1750.
Dow/NYSE: The Dow performed as expected, though it was not what a bull would want. It tried to punch through 10,000 in anticipation of the Fed action, but that move failed and it fell through potential support at 9,750. That is a fuzzy area, however, and it could find support anywhere from 9700 to 9750.
Stats: Down 238.35 points (-2.4%) to close at 9720.76.
Volume: NYSE volume moved higher once again on selling, rising to 1.233 billion shares (+9.5%). Down volume came in at 885 million shares versus 333 million to the upside. Yet another day of institutions selling stocks rather than buying stocks.
A/D and Hi/Lo: NYSE declining issues moved back ahead 1.35 to 1. New highs rose to 126 (+13) while new lows fell to 62 (-32).
The Chart: http://www.investmenthouse.com/cd/$dja.html
A test of 10,000 and then a plummet to 9720. The Dow closed near support that it found in March and October 2000. Perhaps it will find support here, but the momentum is down and the index closed on its low on heavier volume. It was not blowout volume as we have seen on some of the selling, but that is not really a good thing. Volume was above average, and we usually like to see heavy, heavy volume on selling with a recovery from the session lows. That did not happen today, and that is a portent of more selling. The Dow is easily capable of selling down to 9350. That would be a bear market on the Dow. Will it stop there? Picking bottoms in this market is not healthy; if 9350 does not hold the Dow could fall to 8100 if the character does not change.
S&P 500: The big caps hit another 52-week low on higher volume as they mirrored the other two indexes. It also tested some resistance and rolled over, finishing at its session lows. That means more momentum to the downside. There may be attempts to bounce, but the downtrend is still firmly in place with no change in the character at this point. The Fed failed to provide any catalyst to change direction, so good old economic activity will have to hold up. There is plenty more risk to the downside, but there is a lot of support at 1085 to 1100.
Stats: Down 28.19 points (-2.4%) to close at 1142.62.
Volume: NYSE volume jumped to 1.233 billion shares (+9.5%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
After the Fed there is the Consumer Price Index before the open tomorrow. Will that do much for the market? The Fed has already told us it is ready to act, and the CPI only tells us whether there is room for the Fed to continue to act aggressively. In other words, the CPI is a measure of potential inflation; if it is low as expected that means the Fed has even more of a cushion to lower rates as it said it is going to do. If it is higher, that tightens things a bit, but the Fed has said it is not worried about inflation; it fears further slowing. Thus, we don't look at this providing a catalyst as it did once upon a time.
That leaves the market to its own devices in determining its direction. There is no question the momentum is down; any bounce up at this point is suspect as there has been no change in character indicated by any price, volume, or any other indicator. Thus we have to continue to look at the trend to make us money, playing the downside on those stocks and indexes breaking lower and bouncing off of resistance. We still see certain stocks moving higher, however, such as CPN, AN, LOW, and others. They are a small, determined group that has been out performing the market. There are others that continually set up good patterns and move up and out of them for solid, quick gains.
We said it last week: the fear in this market makes it easier to trade much as the high bullishness and upside momentum made it easy to trade during the massive bull move. The trend is well in place, and it gives repeated chances to enter it. At the same time, investors are seeking those stocks that are showing outstanding earnings and growth even in this market, and those stocks are continuing to outperform the market. The new Up and Comers on the Daily and several of the pre-announcement split plays are examples of those stocks. When the relief bounces come, the pre-splits show great momentum. The fear rises and falls, and the market falls and rises in response. This allows us to get on the right side of the market to take advantage of those moves just as it did today. The high emotion in the market is a tool we can use to help us make money.
Tomorrow we expect more weakness at the open, but the pattern has been for a weak bounce after heavy selling. There was a lot of frustration selling today, and after a bout in the morning it may try to bounce. After the Fed move, however, the pattern of bouncing may have been temporarily interrupted as investors feel the need to further sell stocks on the belief that no further action is coming in the short term. Indeed, the short sellers are going to be out in force over the next two weeks trying to drive down some big name stocks. We saw IBM, one of our put plays, get hammered today. The short selling is going to try and drive some of the IBM's down, and that will pressure any bounce attempts. Thus, as we said, the pressure is downward for now, and we need to keep an eye on the SOX for a sign that a key sector is either further weakening or able to bounce. Until we get more clarification, we play the trend and we take advantage of those stocks that continue to provide the strength to the upside.
The market may just need to take a bit of time here to realize 150 basis points is a good thing. We are not willing to toss history to the side: at some point the Fed rate cuts and the tax talk will give us some serious rally. For now it is not here, but we will see the road signs.
Support and Resistance Levels
Nasdaq: Closed at 1857.44.
Resistance: 2030 to 2050. Then 2250 to 2300. 2400 to 2500.
Support: 1750
S&P 500: Closed at 1142.62.
Resistance: 1175 is potential resistance. Then 1215 and 1265.
Support: 1130. After that, 1085 to 1100.
Dow: Closed at 9720.76.
Resistance: 10,000. Then 10,300 and 10,750. Then 11,020 - 11,028.
Support: 9750 failed, though there is support from 9700. After that, 9350.
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): 50 basis point cut in Fed Funds and Discount Rate.
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: How do you start and finish a put play online? Do I place a sell at a stop limit?
Q: I am trying to set up a Stop Loss. I did a SELL ORDER and key in the stop loss target. However there are 3 choices: Limit, Stop and Stop Limit. Which one do I pick?
A: Both questions cover similar ground, so we are combining the answers. Starting a play is a buy order to open a position. In that respect it is just like any other order. To close it, you place a sell order, either one to be executed immediately (market or limit order, though we always use limit orders) or a stop loss or stop limit order. A limit order is a buy or sell order saying you want to buy at the price you enter or a better price. A stop loss order is an order to sell at a specific price. The order is triggered if there is a trade at the stop loss price. That is why we like very liquid options to be able to use stop losses; if a trade is not made, the stop loss is not triggered. If the price moves past your stop loss price without a trade and then trades at a lower price, your stop loss then becomes a market order and you are taken out at the next lower trade. A stop limit is a stop order to sell at a particular price. If the price of the stock or option falls through the stop limit without a trade, the next lower trade will NOT trigger a stop limit. You are saying you want to sell at that price and no other. A stock can gap below your stop limit price and then rebound and you are taken out on the rebound. A stock can gap below your stop loss price and rebound, but if there is a trade below your price, you will be taken out at that lower price. That is why we often cancel our stop loss orders when there is news after hours that is going to cause a stock or the market to tank on the open. We don't want to be taken out at the lows of the day.
TEAM TRADES
MERQ: We were looking MERQ for a possible put if it could make a move up to resistance, but then pull back. We were especially interested in its reaction to the rate cut. Before the announcement the stock made its way up over the 10 day MVA, which was at 41.75, hitting close to 43.50 before the rate cut announcement. Our target for resistance had been the 43-45 range, so we were ready. When the announcement came, May $55 puts were 14.875 x 15.625. The stock reached down a bit on the announcement, but bounced with the market, which we thought it might. The stock climbed back up over 44, but the market turned and so did MERQ, dropping rather hard just after 1:30 CT. At 1:35 the market took out its low for the day, and the 5 minute MVA for MERQ passed below its 15 minute MVA. Taking that as our cue, we went for the puts, which were at 15.50 x 16.25. The price went down and hit 15.375 x 16 as the stock fluctuated a bit, but the overall trend was in place, and the stock dropped back close to 38 before closing at 39. The options hit a high 18.375 x 19.125, and then closed at 17.50 x 18.25.
End Part 1 of 2
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us stock market
trade stock
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