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world stock market, us stock market
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4/02/01 Investment House Daily
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Investment House Daily Subscribers:
TONIGHT:
- No April Fool: warnings and downgrades abound as expected.
- World political events help subdue markets.
- Semiconductors smash through support in a big negative for the market.
- Manufacturing improves as construction zooms: markets still don't know what to do with good economic news.
- Subscriber Questions.
- Team Trades.
Investment House Online Seminars:
For more details and to sign up:
http://www.investmenthouse.com/signup1.htm
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THE SUMMARY
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New quarter, same tune: stocks sell ahead of expected poor earnings.
Stocks did not have any momentum heading into the session. We said the market was still news driven, and today's action showed that has not changed. American Express warned before the open along with a handful of internet software companies, and Lehman Brothers downgraded a basket of biotech stocks. Micron Technology was getting roughed up from a New York Times article suggesting that chip inventories were still very high. On top of that political conflict with China once again reminded us that the cold war is not over.
Despite the bad news the indexes attempted a run out of the gates. The Dow was up almost 115 points two and one-half hours into the session, the S&P 500 was following it, and even the Nasdaq tried to come back from an early morning dip. Like clockwork, however, the indexes ran into support and rolled over. The Nasdaq was the poster child again, logging a 3.1% loss (it made a comeback late in the session) and plowing below the 1794 level that had attempted to act as support. We called the neighborhood of 1750 as potential support back when the Nasdaq completed its head and shoulders pattern in February, and it would appear at the very least that it will give that level a look.
Uncertainty hurt the indexes today. Uncertainty about upcoming earnings, i.e., who will warn tomorrow morning? Uncertainty about the political climate. This was no recipe for recovering stock prices, and they all sold off.
Volume lower, but not for the semiconductors.
Nasdaq and NYSE volume was significantly lower on the session, but that is hardly a comfort these days with selling that starts meekly and then gets downright ugly. We think we can expect some more selling given the pre-earnings worries and political tensions. Moreover, the technology sector received a severe blow today as the SOX (Philadelphia Semiconductor Index) broke below the neckline of its head and shoulder pattern in a big way. The neckline was at 535 with some intraday trades at 515. It left no doubt: it broke below 500 and had to rally from the 490 level to scratch its way back over that level. Individual semiconductor stocks sold on high volume. This leading sector in the technology sector decisively completed the bearish pattern.
From here the potential drop is a bit unnerving. After completing such a pattern the expected drop equals the pattern height. The pattern high is 763. The pattern low is 535. That is a 228-point spread, and that would put the index down to 307 if it sticks to a textbook fall. The SOX closed at 503.17. That is a massive drop, but the Nasdaq has almost completed its thrust downward based on the same type of pattern. Can it recover at the same time the semiconductor index falls another 200 points? We don't believe that is the case.
Head and shoulders patterns are tricky, but in a down market they are effective for shorting. The SOX may drop another 207 points (that is 42% from the neckline at 535), but the head and shoulders pattern is not one of our favorites for accuracy in predicting the future. In any event, given today's overall light volume on the major indexes, we think we might see a test of the 515 to 535 level before the index starts another serious down leg. A test that fails is another invitation to shorting the index and the stocks within it.
THE ECONOMY
Good news dashes some more false hopes.
After Friday's Chicago NAPM there were those who were hoping for a lower NAPM number, even below 40, that would prompt the Fed into another interim rate cut. That did not happen by a long shot. The NAPM rose for the first time in three months the index had risen, coming in at 43.1 versus February's 41.9 reading and an expected 42.3 reading. Remember, however, that it is still below 50. That means the manufacturing segment of the economy is still contracting, but doing so at a slower rate in March.
That disappointed some traders who were looking for a possible interim rate cut after Friday. To us that was just foolishness and set them up for disappointment and contributed to some of the selling today.
Construction spending at record highs.
More and more this appears to be a bifurcated economy. The technology sector is mired in inventory troubles that have no clear end in sight. On the other hand the housing market remains solid for now, consumer confidence is improving, and construction spending is at record levels. These last areas are either lagging the economy or it is about to turn around for everyone but the techs.
Speaking of construction spending, it rose 0.6% in February to an annual rate of $834.2 billion. That is a record high for the economy. That is well above the 0.4% expected, and is on the heels of a 2.2% increase in January (revised upward from 1.5%). Construction is strong, but then we have to balance that with what has happened recently in places such as Austin, Texas where Intel decided to leave a downtown building it was constructing just partially built (i.e., steel girders sticking up in the skyline). Again, technology corridors are being hard hit along with manufacturing areas. Will the rest of the economy join them or pull them out? Right now they are showing signs of pulling as opposed to folding.
Money supply racing ahead.
As we noted over the weekend, the Fed is not sitting around and just cutting rates. It has been pumping up money supply. That can have inflationary implications as discussed Saturday, but after starving the economy for funds as it jacked up rates, the dollar masters are flooding the economy with money. M3, the broadest measure of money, climbed $250 billion in the last three months. As the Fed has cut rates, it has opened the floodgates to money, hoping lenders will not be too stingy with their funds.
Japan and the rest of the world are still a problem.
Japan reported its weakest business sentiment in nine quarters Monday, and that is just another rock tied to its economy as it tries to keep from drowning in the economic slowdown it refuses engage as is necessary. Then we look to South America and troubles such as Venezuela and realize that foreign economic troubles are not that far away. We had a bad feeling back in the summer that as the U.S. economy went, so would the world. It is happening, and we are in no position to rescue the rest of the world this time. We can only hope that the strength we have been seeing in the U.S. economy is growing and not just a holdover from better times.
THE MARKETS
A weak, almost obligatory run at resistance, and then a turn and run to the downside. Last week and over the weekend we stated we thought this would happen, but we hoped we were wrong as we wanted to see the Nasdaq hold at the 1800 level for as sustained rally over the next 2-3 weeks. Looks as if that will have to wait until more bad news comes out and investors can gauge whether it is as expected, worse than expected, or better than expected. Once that certainty is realized stocks can possibly make a move up. If guidance is still in the toilet, however, it would be short.
Perhaps that will fit the plan. A rally after the bad news is factored in for now that takes the indexes higher, but then fades after no new catalyst appears. Then when least expected we receive an earnings surprise or projection to the upside. For now, harsh reality, but harsh reality is making us some good money while we wait for that recovery.
Overall market stats:
VIX: 34.75; +0.93. Volatility did not race off the scale even with the political turmoil. It was a day where the indexes were trapped in molasses, and they just sagged lower and lower all day. Volatility reflected this lack of anxiety. It has held over 30 for the past three weeks, showing that just because you get a reading over 30, you don't necessarily get a reversal rally. It looks as if it will take spikes into the 50's and 60's.
VXN: 72.22; +0.09. Jumped to a high of 74.15 late in the session as the Nasdaq broke below 1794. It tailed rapidly, however, as the index made a late rally. It is still not at the 78 level that has keyed its 2-day rallies of late.
Put/Call ratio (CBOE): 0.75; -0.01. Put activity actually fell as the indexes bounced off resistance and the Nasdaq fell to yet another multi-year low. Utterly amazing the lack of fear. Overall option activity ticked slightly higher to 932,000, but that is still very low.
NASDAQ: The rally that was technically in play but had no spirit in the move technically failed today as it undercut 1794.21 and its key index (SOX) crashed down through support, completing its head and shoulders pattern. The only redeeming element today was the lower volume, but as we have seen in the past, that is not necessarily a cure for the selling.
Stats: Down 57.29 points (-3.1%) to close at 1782.97.
Volume: 1.846 billion shares (-13.6%). Lighter volume on selling is better, but no cause for relief in this index. Declining volume was 1.436 billion versus just 340 million to the upside.
A/D and Hi/Lo: Decliners shot ahead of advancers 2.66 to 1. Once again we fail to see the aggressive A/D line to the upside while the downside shows us the power. Not good. New highs rose to 74 (+6) while new lows jumped to 389 (+168).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq bounced twice at 1800 and once at 1795, but then it broke down, selling below this level that tried to act as support over the past few weeks. It ran all the way down to 1769.66 on the low and recovered to close just below the previous support level. The break was not on high volume, so perhaps it will be able to recover with some decent news. Problem is, we anticipate more bad news as pre-warnings continue, software makers come clean, and the situation with China goes through its paces. Thus we may see a test of 1800, but if it turns down from there it is another short.
Dow/NYSE: The Dow ran up to 10,000 and turned right back down once it hit that resistance. It tapped at its recent lows and moved right back up from there in the last two hours to close once again above 9750. It continues to be weak and we think it is going to fall.
Stats: Down 100.85 points (-1.0%) to close at 9777.93.
Volume: NYSE volume fell back to 1.255 billion shares (-2%), but was still above average volume. that continues the trend of selling on higher volume established the last three weeks.
A/D and Hi/Lo: Declining issues pulled ahead 1.57 to 1. No new high or new low information this evening.
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow did not definitively show it was heading in one direction or the other, but it was unable to overcome what appears to be real resistance at 10,000. It tapped that level on the high and fell back. It tested 9700 several times before moving higher at the close. It is still weak in our book and we are looking for more downside, perhaps after yet another test of the 18 day MVA at 9935.88.
S&P 500: Tapped the 18 day MVA on the high and fell yet again. Volume was lower but still above average. It continues to try and find support at the 1135 level, but as more earnings warnings and tensions with China remain heightened, we feel there is more selling to go before it can attempt a more meaningful move higher.
Stats: Down 14.46 points (-1.2%) to close at 1145.87.
Volume: NYSE volume remained above average but fell 2% to 1.255 billion shares.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Factory orders are out tomorrow, but we are not anticipating much from them to move the market. If they are stronger than expected there will be complaints about no rate cut; if weaker the cry will be about a weakening economy. Neither, however, will impact things too much with earnings warnings hitting the wire, actual earnings around the corner, and China still a wildcard.
We think we might get an early test of some of the lower resistance levels, i.e., the 18 day MVA on the Dow, 1150 or 1155 on the S&P, and 1800 on the Nasdaq. After such a whacking, the SOX may try a bit of a rebound to 515 itself. Then we expect a continuation of the selling that was showing up today as the Nasdaq broke below its recent trading range. What we will do at that point is reload some put options and try for another ride down. Today the Dow and S&P were like clockwork, and we are looking for more of the same on the indexes.
We are also looking for some software stocks to start selling. Today they did relatively well compared to the other stocks. We believe part of the reason was that many were expecting bad news, and when it did not come out right away there was relief. After hours the internet software companies started warning and we think it will continue tomorrow with more enterprise software makers coming clean. We feel that will give us more downside to play.
At the same time specialty retailers look decent to the upside as do some insurers, while recent great movers for us pull back on light volume to set up perhaps for the next move. With all the tech trouble, even WCOM still looks like a play as it tried to rally today but was pulled back with the overall selling.
Plays to the downside as the indexes still struggle with the economy, earnings, and political pressures. Plays to the upside as the niche players continue to perform. We said we liked this market sentiment, and we enjoy getting to pick to the upside and the downside for our gains. It is still a market where we have to be realistic about profit objectives to the upside and to the downside, but if you keep using trailing stop losses and play the moves down from resistance for the downside plays and up from support or breakouts on the upside, there are solid and consistent gains to be made.
Support and Resistance Levels
Nasdaq: Closed at 1782.97.
Resistance: 1800. 10 day MVA is at 1875.
Support: 1750.
S&P 500: Closed at 1145.87.
Resistance: 10 day MVA is at 1156.55. The 18 day MVA is at 1172.66. The down trendline is at 1175.
Support: 1085.
Dow: Closed at 9777.93.
Resistance: The 18 day MVA at 9935.88.10,000 is the next level, and the down trendline is at 10,230. There is resistance from price lows at 10,300.
Support: 9750 is some support. 8750.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
4-2-01
Auto Sales, March (8:30): 6.6M versus 7.0M prior.
Truck Sales, March (8:30): 7.2M versus 7.5M prior.
Construction Spending, February (10:00): 0.6% actual versus 0.4% expected and 2.2% prior (revised from 1.5%).
NAPM Index, March (10:00): 43.1% actual versus 42.5% expected and 41.9% prior.
4-3-01
Factory Orders, February (10:00): 0.2% versus -3.8% prior.
4-4-01
NAPM Services, March (10:00): 51.5% versus 51.7% prior.
4-5-01
Initial Claims, 3/31 (8:30): 362K versus 362K prior.
4-6-01
Non-farm Payrolls, March (8:30): 70K versus 135K previous.
Unemployment Rate, March (8:30): 4.3% versus 4.2% prior.
Hourly Earnings, March (8:30): 0.3% versus 0.5% prior.
Average Workweek, March (8:30): 34.1 versus 34.2 prior.
Wholesales Inventories, February (10:00): 0.1% versus -0.3% prior.
Consumer Credit, February (15:00): $95.B versus $16.1B prior.
SUBSCRIBER QUESTIONS
Q: What price is Nasdaq going to be if QQQ hits 34-35, i.e., what is the conversion formula? Thanks.
A: The QQQ is valued at one-quarter of the MNX (the 'mini' NDX, or Nasdaq 100). In turn, the MNX is one-tenth of the Nasdaq 100. So, the QQQ would be one-quarter of one-tenth of the Nasdaq 100, or 2.5% of the NDX. Thus, the QQQ does not convert to an overall Nasdaq price. Realtime systems such as eSignal track the MNX, NDX, QQQ, etc. Some charting programs also do these as well.
The MNX is an option on the Nasdaq 100 that is cash settlement. In other words, there is no buying the MNX as you can with the QQQ. If you were to sell puts on the MNX and it went against you, you are not put the MNX, but you are required to come up with cash to settle the position similar to trading S&P futures.
TEAM TRADES
DJX: The Dow did as expected today, tapping at 10,000 and falling. That meant the DJX, one-one hundredth of the Dow, tapped at 100 and fell. That was our cue on DJX puts as outlines over the weekend. When the DJX rolled back from 100 and quickly broke the twin tops from earlier in the day at 99.50, it looked to us as if the selling was on. We were looking at May 104 puts for the play, but any in this area would have done well. When the index started to fall, the options were 5.6 by 6.1. That made the spread a tenth of a point wider than we were used to paying on the DJX; perhaps the market maker was anticipating selling and trying to get some eager fish to bite. We put in an order at the spread we have been paying, 0.4, making the limit at 6. Perhaps they were fishing because the fill was made. Then the plunge started and the Dow was selling sharply. The options made it all the way up to 7.8 on the bid, but we decided to hold on for more selling given all of the tensions in the world and the possibility for more earnings warnings.
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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