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us stock market, trend trading stock
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3/21/01 Investment House Daily
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Investment House Daily Subscribers:
TONIGHT:
- Dow pillaged again as the Nasdaq shows some interesting moves.
- SOX appears to be the key to the techs.
- Rates are lower and there is money in the economy, but that is not helping corporate America right now as warnings continue their daily march.
- CPI a bit higher than expected, but well within 'acceptable' levels.
- Subscriber Questions.
- Team Trades.
Dow takes it on the chin again.
The one major index immune to much of the selling over the past year is rapidly approaching bear market territory of its own. After moving sideways for almost two years, the Dow has cracked open the past week, plunging through the lows of its trading range on strong selling volume. We saw severe price/volume problems with the Dow back in February as it sold on rising volume and attempted to rally on lower volume: classic signs of distribution that can lead to further, intense selling. That is exactly what has happened, and the Dow has given us repeated downside plays using its proxy, the DJX.
Today share dumping continued as the index broke below the low of its range. At 9487, the Dow is just 86.78 points from 9400.22, the point that marks a bear market from its intraday high of 11,750.28 hit back on January 14, 2000. The index has fallen 1,548 points in since its intraday high on February 6, and it has done so on heavy volume. As we have said for a few months, the Dow had to crack to get the fear up and drive out investors from those areas that were still providing refuge. The Dow is being hammered now and it is taking health care, drugs and other 'defensive' sectors with it. With those sectors removed from the 'safe haven' list, investors are finding it harder and harder to just buy a sector to escape the selling. It remains a market of stocks for gains to the upside; those stocks are coming from many different sectors as you can see from our upside plays on the reports. Overall, the selling helps the rest of the market as this may be the obvious shoe that had to fall to cleanse the markets better.
Is the Dow finished? The fight with the short sellers is intense. Short sellers rush in and sell stocks, betting that they are going to move lower. When there are a lot of short sellers, there is a lot of stock for sale, and that pressures them lower. They are betting there will be no buyers rushing in to snap up the shares at a lower price. So far it is working. The selling volume and the price losses indicate it is not done. It is approaching some potential support at 9350, but as we have seen on the Nasdaq and the S&P 500, when the sellers start working over sectors on an index, support levels have not meant a lot. Right now there is no indication the selling is relenting. We can expect it to give us one of those feeble bounces to test resistance or when short sellers take some profits, but without significant buy side volume, the break below the trading range indicates more selling ahead before it finds bottom.
Watching the SOX.
Last night we talked about the SOX (Philadelphia Semiconductor Index) as being in a real tug of war between the bulls and the bears. It has been forming a large W pattern (a.k.a., double bottom) from last September with the middle of the hump in late January. At the bottom of the W it has been also forming a head and shoulders pattern with the left shoulder in December, the head in late January (the hump in the W), and a left shoulder in early March. It is now at a critical, critical juncture: it has to hold above 530 to 535 (the neckline of the head and shoulders pattern; 535 on the close) or risk the serious downside discussed last night. It breached that level intraday twice recently (February 28 and March 1), but rallied to close over it. That set up the neckline, and it is now fighting to hold above it.
Individual, leadership caliber stocks in the SOX (e.g., NVLS, VTSS, MU, AMAT, KLAC) are fighting hard as well. While the rest of the techs have burned, these stocks, while not racing to the moon, have actually risen. It has been a choppy, knuckle-busting fight, but they are hanging on. As the Nasdaq sold down a bit more today, the SOX managed a gain. We will discuss the positives in today's Nasdaq move in the 'Markets' section, but the fact that the SOX is trying to trace out a bullish pattern and several of the leaders are trying to do so as well is a real positive. We have seen these moves fail, however, so we have to stay flexible. That is why we are adamant about making sure the SOX breaks 535 on a rush of selling before we short it from its current position. If it breaks it could be lucrative to the extreme; if it does not and we jump the gun, it could make you scream as the short squeeze begins to rage.
Tonight we are looking at a group of chips that show promise if the SOX breaks higher. Because they are fighting with significant resistance levels themselves, we have to look at them for plays both ways. If they break resistance on strong volume, that is at least a short term positive we can make money on. If they break down, we can jump on the SOX and these stocks to the downside. And, as the stocks have been holding up as a group better than other techs, they are the leaders. That means up or down. We will take advantage of whichever way it does move.
Lots of money, but earnings warnings show nothing has changed for U.S. business yet.
The Fed is not just cutting interest rates. It was jeered Tuesday for its third 50 basis point cut in 76 days. We would have liked more because it would not have hurt a thing, but we recognize the Fed is cutting faster than it usually ever does. The other side of the equation is money supply. The Fed is rapidly expanding money supply to help get the consumer to buy and get the inventory backlogs cleared up. That is a fine line: too much money without enough supply can lead to a price jolt if production does not accurately anticipate when inventories will be used up and there is a significant lag between that time and the time new production hits the market.
Still, the Fed is working behind the scenes as well as in the spotlight of rate cuts. Money supply over the last two months has risen 7.6%. That is huge. Over the last three months it has risen 11%. That is huge. The Fed is pumping up liquidity. Now what is needed is some tax incentives to get investment back into production, technology, i.e., back into what makes our economy run. If we can get that, things look a lot better than many are giving the economy credit for. Yes it needs help, but it is not on life support. If the Fed continues to do the right things and the Congress can get a solid tax cut in the mill in a hurry, we think things are better than most do. Yes, a lot of ifs for a divided Congress.
The parade of warnings continues on a daily basis. This has led First Call to opine that earnings won't bottom in the second quarter, maybe not even the second half. For now that is keeping investors on the sidelines as they have no hint that the Fed rate cuts and liquidity being pumped into the system is benefiting corporate earnings.
Today it was COMS, Dallas Semiconductor (DS, a put play we have been running), Deere, etc. Tomorrow it will be others. That is keeping a lid on optimism and keeping investors from discounting the rate cuts into stock prices. That will happen at some point, but that point is not right now. But, there are signs of promise. Micron Technology (MU) today delayed its earnings announcement until later in the month. Did that tank the stock? No. It was moving up after hours because it also made some very critical points: first, it would be profitable in the quarter; second, the PC chip backlog is gone. That is huge. The bad news: the telecom chip sector is still jammed.
THE ECONOMY
The Consumer Price Index (CPI) rose 0.3% overall for February versus an expected 0.2% rise. This measures the rise or fall in prices consumers pay for a basket of goods needed for living (food, tobacco, transportation, energy, housing, etc.). Thus, it is a direct measure of inflation. The core CPI rose 0.3%, in line with expectations. The core rate removes food and energy prices, two very volatile components, in order to get a better view of the overall trend in prices. What we have seen over the past six or more months is that prices have been rising well below historical levels while energy has been racing ahead.
While the overall CPI was up more than expected, inflation at this point is no real concern. We said in the past that when there is a slowdown, prices rise because of the overhang in demand for goods. The slightly higher overall reading appears to be just the last vestige of this. For the moment the greater risk is deflation versus inflation what with a sinking economy, sinking commodities prices, and falling gold prices. Again, inflation could be a problem if there is a quicker rebound than expected and demand continues strong while production is caught napping. That is not an immediate worry, so any blame placed on this number for the selling today was just scapegoat hunting.
THE MARKETS
Overall market stats:
VIX: 36.39; +1.35. The VIX moved higher again, but it is not spiking nearly in the proportion it was when selling seemed a bit more intense. Still, with the Dow and S&P 500 continuing their selling, we could very easily see volatility move toward that 45 or greater level we want to see.
VXN: 71.34; -3.00. Keep an eye on this. Today the Nasdaq was down, but volatility dropped significantly. This is one indication that again the Nasdaq is trying to hold the line as the other indexes sell harder. It has done much of its selling perhaps, and it attempting once again to bottom. It failed last time, but it is still fighting.
Put/Call ratio (CBOE): 0.86; +0.25. Put buyers were back out today after disappearing Tuesday. Good to see them jump back in, but we want to see that ratio close above 1.0 several times.
NASDAQ:
The techs tried to hold the line a week ago at 1920. It could not handle it. After a quick bout of selling, however, it is once again showing some resistance to selling. Can it handle it this time or is it just setting up for further falling? We will watch and be ready.
Stats: Down 27.21 (-1.5%) to close at 1839.23.
Volume: 2.110 billion shares (+4.66%). Distribution, yes, but we also note that the gap between up volume and down volume shrank dramatically (1.07 billion downside, 976 million upside today versus 1.690 billion downside and 260 million upside Tuesday).
A/D and Hi/Lo: Declining issues increased their lead to 2 to 1 (1.64 to 1 Tuesday). New highs continued to slide, down to 21 (-14) while new lows exploded to 397 (+212).
The Chart: http://www.investmenthouse.com/cd/$compq.html
Yes today was another day of distribution on the Nasdaq, i.e., big institutions selling more than buying. Still, we note that the even though volume increased, the up to down volume ratio improved and the point loss shrank. When an index is rising or selling, if the moves up or down narrow on rising volume, that is a sign of change. To the upside it means that while there are still more buyers than sellers (the index moved up), the buyers are losing strength as the price gains are smaller; there are more sellers coming in and pressuring the buying. To the downside (today), it means that even though the sellers were in the lead (the market sold down), there were buyers in there buying those shares, and that kept the losses from ballooning. Indeed, we saw a lot more buying on the Nasdaq today than in recent history. There could be a bounce here.
What kind of bounce? For now we are still in a downtrend and still have not breakout or real change of character. That means we may only get a bounce up to what has been resistance, that is, the 10 day MVA up at 1950. If that is all we get, that merely resets the put plays. If the SOX breaks significantly higher and its leading stocks join it, however, we may get more out of the move. It may be limited to the SOX stocks, but we can make money off of that. When the move fails, we can flip the plays once again. Right now we are not ready to out and out short the techs overall until they move up and test resistance again. They appear to be trying to set up to do that right now.
Dow/NYSE: The Dow crashed close to bear market status, and it appears it is just a matter of time before it does so.
Stats: Down 233.76 points (-2.4%) to close at 9487.00
Volume: NYSE volume moved ahead again on more selling, rising to 1.314 billion shares (+16.5%). Down volume continued to clobber up volume, 1.005 billion shares to 303 million shares. As compared to Tuesday, the selling mushroomed.
A/D and Hi/Lo: NYSE declining issues held the lead 2.57 to 1 (1.35 to 1 Tuesday). New highs fell to 91 (-35) while new lows more than doubled to 140 (+78).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow continues to break through support as it approaches its own bear market. It appears to be only a matter of time before it hits that point (9400.22). Today it closed on its low once again, and that continues the downward momentum possibly to tomorrow morning. Still, there have been two heavy days of selling, so we anticipate some form of relief bounce higher. Will that end the selling? Not from what we see. We may see a bounce up to 9500 to 9650, but we think the move ends there. What does that mean? Reload on the DJX puts and run it down again when it tries to bounce but then starts to roll back over.
S&P 500: The big caps suffered the second worst selling on the session as it broke sharply below 1150 on sharply higher NYSE volume. It is still holding above a very congested trading range from 1085 to 1100 where it traded back in April to June in 1998. That is a target level right now, but as we have noted before, in this bear market selling, there is little head given to support levels as long as the news remains the same. As with the Dow, there has been two heavy days of selling, so we could see a relief bounce in the next session or two. However, we would not anticipate that taking the index much above the 1150 level. As with the Dow, that would be a time to reload the OEX puts.
Stats: Down 20.48 points (-1.8%) to close at 1122.14.
Volume: NYSE volume jumped again to 1.314 billion shares (+16.5%), well above average volume.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Given the close once again right at session lows, the momentum is down, and barring change, that leads to early weakness. If one is looking for a bounce or trying to get a bit more out of some short term puts, that is not a bad thing. There have been two heavy selling days on all three major indexes, and indeed the small and mi-cap indexes have been pulverized as well. Thus, a bounce is likely.
Other reasons: MU and its statement about chip inventory looking better. MU was rising on the news after hours, and it was contagious with other semiconductors. This may work to break some of these stocks over resistance and make them upside plays. If it cannot, then we can surely anticipate some more selling from our perspective as this is the best news these stocks have had in a while; if it does not move them they are doomed to fall some more.
How sharp a bounce? On the Dow and S&P 500, we are not that wild about playing against the trend and capturing some upside. It can be done, but the Dow could turn back down in a wide range (9500 to 9650); playing a bounce down without a solid line of resistance is a bit trickier. What we are planning on doing with the Dow is letting it rally and then show us it is rolling over. We might even be able to let it close and take positions the next morning; there is a lot of downside room here. The S&P looks a bit clearer with 1150 being a clear barrier. Aggressive traders can play a move up; the rest of us can catch it when it rolls over.
Of course, we could always get a breakout on strong volume, and man are we ready for that. At this time, however, it is showing absolutely no attributes of a sustained move. The Nasdaq is showing signs of selling less and less, but that is not a breakout. The SOX is actually forming a potentially bullish pattern (as it also works on a bearish pattern), and that is at least a move to the upside that can be played when and if it occurs. The Dow, S&P 500, and Nasdaq do not have such patterns right now. Thus we have to look at each bounce with skepticism.
If we do get a relief bounce we will keep an eye on volumes in the chips and other key stocks. On the up days the pre-splits tend to run well and the already bullish patterns perform well. We don't like to go chasing the stocks in poor patterns even if they can give good bounces; they are highly volatile and you can get on the wrong side too easily. On the up moves we stick with the stocks that have more than just the potential to jump on the up days; again, we look for something that gives the edge, e.g., a good pattern, pre-split momentum and the like. Then we look for the trend plays to give us new entry points; as the trend is down, that means we look for the put plays to set up again at resistance and then play the trend back down.
At some point there will be a rally. It could start explosively as bear market rallies do. At that point we move out of short positions. We won't let them turn sharply against us. A good way to gauge this is to watch for breaks above resistance; those are changes in character even if it is short term. The trend plays are more forgiving. We have seen the market try to rally, but on lower volume that fails at the resistance points. Then the selling starts again and it can rescue you from a trade that was moving against you. That is why we like entering when resistance holds; we can then use that as our exit point if the trade starts against us. It is clear and black and white. If the stock or index breaks that resistance, that is no longer our play that we wanted and we should be out. Same with breaks below support; the support becomes our sell point if the stock turns back up and breaks back through. If it cannot, that is the reload to the downside point.
Support and Resistance Levels
Nasdaq: Closed at 1830.23.
Resistance: 2030 to 2050. Then 2250 to 2300. 2400 to 2500.
Support: 1750
S&P 500: Closed at 1122.14.
Resistance: 1175 is potential resistance. Then 1215 and 1265.
Support: 1085 to 1100.
Dow: Closed at 9487.00.
Resistance: 10,000. Then 10,300 and 10,750. Then 11,020 - 11,028.
Support: 9350. Then 9000.
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): 0.3% actual versus 0.2% expected and 0.6% prior.
Core CPI, February (8:30): 0.3% actual versus 0.3% expected.
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: Can you take us through a shorting of a stock? Any one would do such
as your put selections. Also, how would you do this on line, or is it strictly by broker only? Thanks.
A: Lots of interest in puts as we saw last night, and rightfully so. We usually do not short stocks per se which is borrowing and then selling shares of a stock you do not own. You then buy it back at a lower price and pocket the difference with what you sold it for. We have done it, but the liability is unlimited if the stock starts to rise.
End Part 1 of 2
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us stock market
trend trading stock
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