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us stock market, understanding the stock market
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2/15/03 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: NPSP
Market recovers from mid-morning selling on sharp afternoon short rally as terror threat reduced.
The market rallied higher early then ran out of steam as anticipated. When the Dow and SP500 turned negative right at lunch, however, the shorts had another opportunity to cover. When that got underway it snowballed and turned into a sharp last-hour rally as there was a rush to get neutral before the long weekend. That caused the unwinding of many short positions and the push up to the close and we did not get the continued push lower ahead of the long Presidents' Day weekend.
What was the cause? There was a lot of parsing of the UN speeches back and forth and how the market moved up and down during that time. Some credit the hawkish stance of the US and Britain for the rally as that means war is going to occur sooner. At the same time others said it was the opposition that caused the rally as that pushed war prospects further down the road.
What really happened? The indexes were getting closer to a bounce point in the downtrend and they got an early trigger in the form of an unofficially lessened terror alert. After the populace in the large cities got pretty much wound up by the orange alert, high chatter, credible leads, suggestions to buy plastic sheeting, etc., Thomas Ridge suggested Friday that we should not go to the extremes of taping windows, etc. Why? Because some of the information they had received from credible sources was not so credible but was most likely a fabrication no doubt designed to terrorize us without doing anything. Ahead of the weekend the terror threat was the overriding drag on the market. When that was repealed to a certain extent the market came up for air.
Looking at the market internals, even with the price surge higher, volume was lower and breadth was narrow. Small and mid cap stocks lagged far behind the large caps that snapped back in the continuing downtrend that has been ongoing for the past month. Most are still in their downtrends. The action was definitely short covering as we have seen though the indexes managed to move up more than they have in the downtrend thus far. Nasdaq moved through its 10 day MVA with the other large cap indexes running up to theirs on the close. As noted, the smaller cap indexes did not come close yet, indicating that the action was indeed shorts covering their positions on the usual short targets, i.e., the large cap stocks.
THE MARKET
The large cap indexes continued the bounce that started Thursday. An early run higher was given back, but as soon as DJ30 and SP500 turned negative on the slide lower, another round of short covering emerged. The market traded in a range for two hours and then spurted higher in the last hour as more short-term shorts covered ahead of the weekend as the terror threat was unofficially yet officially reduced.
NYSE breadth was narrow, well below 2:1 that would indicate some strength on the move. When the big indexes rally but breadth is narrow, that indicates a lack of broad buying that is found in longer term advances (i.e., greater than a few days). A lack of swelling volume on a move up indicates the same. Volume on Nasdaq and the NYSE fell on Friday's substantial price gains. Even with the short covering there were fewer buyers on the advance than in the prior selling. Such a sharp price advance on narrow breadth and lighter volume does not instill a lot of confidence.
Nasdaq did manage to clear its 10 day MVA on the move, with the DJ30 and SP500 closing right at their 10 day MVA. That has acted as resistance on the move down, indicating just how strong the downtrend has been. We were looking for the selling to hold out through the weekend, but it appears the indexes are ready to bounce a bit higher on this rotation, led by the heavily sold large caps that often garner the most short sales. Indeed, the small cap SP600 and the mid-cap SP400 lagged on Friday's bounce, posting just half the gains of the large cap indexes. There was no surge of buying in those issues; they were tagging along and are still well below their 10 day MVA at the close.
Thus even though Thursday was not a one day wonder, Friday did not yet indicate a change of market character. It is true that rallies often start with short covering, but those that have more staying power usually start with more volume and breadth. They also have some decent upside patterns; we looked far and wide and there are very few solid upside pattern ready to lead the market higher. Nasdaq rode the Dell earnings coattails Friday, but while impressive in that Dell can continue to expand its earnings, they are not indicative of a renewed expansion of earnings for the tech market overall. This bounce in the downtrend is moving higher than prior bounces on that earnings news, and that is a change in the action. Prices moved higher, but they were not supported by any volume or breadth and the vast majority of stocks are still in their downtrends. That will have to grow before there can be a threat to the change in the trend.
Market Sentiment
VIX: 37.1; -1.35
VXN: 48.38; -2.59
Put/Call Ratio (CBOE): 0.98; -0.2
Short interest ratio: NYSE short interest has been on the decline since the first of the year after hitting a 5 year high in early January. It tends to rally when the market sells off, peaking right at the point a market starts to rally. The peak in January did not precede a market rally. Now it has dropped back to the mid range for the past 5 years and continues to decline. That is not indicative of the kind of short covering fear that signals a substantial turning point.
Sentiment did not reach extremes on the selling though the put/call ratio closed over 1.0 three times. Indeed, other than the put/call ratio that was impacted by some large spreads the past week, the sentiment indicators have been very tame in the selling. That is a reflection of the wait and see attitude and may mean that once the uncertainties of war, etc. are removed the market will be free to move higher. Historically, however, those events are accompanied by significant increases in these indicators, and that has not happened.
Nasdaq
Dell's earnings had a few big names moving up on some volume from the depths of their downtrends. Volume was lower and breadth was weak, however, even as it cleared the 10 day MVA.
Stats: +32.73 points (+2.56%) to close at 1310.17
Volume: 1.313B (-1.27%). Lower volume on the gain and still below average. There may have been more buyside action, but it was not sweeping past the selling volume.
Up Volume: 1.103B (+595M)
Down Volume: 190M (-576M)
A/D and Hi/Lo: Advancers led 1.66 to 1. Given the price gain, breadth was very narrow. Again, this shows the move concentrated in a few big names as opposed to any groundswell of buying.
Previous Session: Decliners led 1.45 to 1 after decliners led over -2:1 before the reversal.
New Highs: 57 (+17)
New Lows: 85 (-64)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Continued the move up after the deeper test Thursday, clearing the 10 day MVA (1302) and moving toward the 18 day MVA (1319). Volume continued below average as it has been all month though volume was higher the past two sessions. The index has upward momentum, and if nothing happens this weekend on the terror front it can give some more upside pop before running out of steam, perhaps to the 50 day MVA at 1350.
S&P 500/NYSE
A sharp price jump up toward the 10 day MVA on lower volume.
Stats: +17.52 points (+2.14%) to close at 834.89
NYSE Volume: 1.353B (-7.8%). Volume was lower on the gain though still above average and along the lines of the early February volume when the SP500 was selling down hard.
Up Volume: 1.064B (+546M)
Down Volume: 291M (-643M)
A/D and Hi/Lo: Advancers led 1.78 to 1. Decent breadth but again, given the magnitude of the rise, hardly commensurate.
Previous Session: Decliners led 1.44 to 1
New Highs: 23 (+1)
New Lows: 85 (-119)
The Chart: http://www.investmenthouse.com/cd/$spx.html
The large caps surged in price in a follow through to the Thursday reversal. The last hour push moved it just below the 10 day MVA (836) on the close. The 10 day MVA has acted as clear resistance on the downtrend thus far, but it looks as if that will be broken at least intraday this week as the index closed at the high and continues to have solid momentum. There looks to be rather solid resistance at the 18 day MVA (848), and it looks as if it will be tested.
DJ30:
Similar action, surging to the 10 day MVA (7910) in a strong price gain on so-so volume. Several Dow stocks moved on rising volume as some buying accompanied the short covering in their downtrends. The 18 day MVA (8025) is near resistance along with the late January range from 7950 to 8150.
Stats: +158.93 points (+2.05%) to close at 7908.8
Volume: 1.353B (-7.8%)
The Chart: http://www.investmenthouse.com/cd/$indu.html
THIS WEEK
That majority of stocks are still in their downtrends even with the late week advance. Some stocks were able to move on rising volume, most did not. The bounce higher has not had much volume or breadth behind it. That could grow, and if there is no terror attack this weekend the relief could push more money into the market. As noted above, however, some of that relief was already expressed in stock prices Friday after the terror alert level was unofficially reduced by Ridge. There are a few stocks already in good accumulation patterns that can take advantage of any further upside, however, using that to push them to breakouts or to continue their breakouts.
The terror attacks are just one part of the equation. Iraq is the big item that the market has been dealing with, and Friday's barbs between the U.S, French, and other countries at the UN simply raises the level of uncertainty for the market. The best thing for the market is not to have this Iraq situation drag out too long. The market needs resolution to that issue. Friday did not seem to provide that on its face, though if the U.S. feels it is clear that the French and Germans are not going to go along at all that might get the US to go ahead and move.
The Friday move did not have a lot of push behind it as it was primarily short covering. The indexes are making a further push up in the overall downtrend on this bounce, and all other things being equal it has the look that it would fail after testing a bit higher. With all of the anxiety regarding the terror attack, if there is no attack that could provide more upside momentum for the short term, though as we indicated, the big game is still the Iraq war, and after another surge the market would still have to deal with that. We will have to wait and see what happens over the long weekend, but we don't anticipate any major attack given the Ridge statements, something the market seemed to be taking into consideration Friday.
What we are planning on doing is looking at some of the upside patterns that are really solid, i.e., leaders that have held on well and used the selling to test breakouts, consolidate or otherwise complete patterns. Those are starting to provide good moves back up as we saw Thursday and Friday; leaders tend to lead, and these were starting their moves ahead of most of the market. As a word of caution, there are not too many of those. We can see the beaten down stocks rally back some, but they have for the most part been in steady declines without even moving laterally to consolidate some of the losses.
On top of that we see many stocks making lower volume bounces in their continuing downtrends, still below resistance. Some of our plays from Thursday and earlier in the week were setting up quite nicely Friday and could get set even better for a move down with another bounce early this week.
Support and Resistance
Nasdaq: Closed at 1310.17
Resistance: The 18 day MVA (1319). Price resistance at 1327 from the late December low. July, August, and September interim highs at 1345. 1357, the 1998 bear market low. Exponential 50 day MVA (1349).
Support: The 10 day MVA at 1302 and price support at 1300. 1250 after that is another point where some lows have held.
S&P 500: Closed at 834.89
Resistance: The 10 day MVA (836). Price resistance at 840 to 850. The 18 day MVA (848). The bottom of the October consolidation range at 875. The exponential 50 day MVA (873).
Support: The September 2000/May 2001 downtrend line at 815. After that 800.
Dow: Closed at 7908.80
Resistance: The 10 day MVA (7910). 8000 is price resistance. The 18 day MVA, the other short term MVA (8025). 8250, the bottom of the October consolidation range.
Support: Soft support at 7750 held on the Thursday comeback, then 7500.
Economic Calendar
2-19-03
Housing starts, January (8:30): 1.775M expected, 1.835M December
Building permits, January (8:30): 1.800M expected, 1.887M December
2-20-03
Initial jobless claims (8:30): 386K expected, 377K prior
PPI, January (8:30): 0.4% expected, 0.0% prior.
Core PPI: 0.1% expected, -0.3% prior.
Leading economic indicators, January (10:00): 0.0% expected, 0.1% prior.
Philly Fed, February (12:00): 11.0 expected, 11.2 prior.
2-21-03
CPI, January (8:30): 0.3% expected, 0.1% prior.
Core CPI: 0.2% expected, 0.1% prior.
SUBSCRIBER QUESTIONS
Q: When you indicate a "buy" point in your report that is identified as a "downside" play, does this refer to short selling the stock at that "buy" point? Since you have a buy and sell point, I was under the understanding that it was a buy point to short-sell the stock and buy it later at the lower price target. Is that correct? Thanks for your help.
A: We usually are buying puts when we play the downside as we like to trade options on many plays as our total risk is defined going into the trade. Thus on a downside play that has a 'buy point' that is referring to buying the put option. We have looked at changing the 'buy' point to 'enter'. Let us know what you think to make it easier to understand.
SEMINARS ON CD
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End part 1 of 2
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us stock market
understanding the stock market
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