trading system, option trading

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4/03/01 Investment House Daily
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Investment House Daily Subscribers:

TONIGHT:
- High volume dive on all averages as the SOX pointed the way down Monday.
- Questioning the usefulness of indicators and other signs that a bottom is trying to form.
- SOX led to the downside and it looks as if it wants to make a quick bounce.
- Breakdown on the Nasdaq looks ominous and good at the same time
- Car sales down but not as much as expected.
- Team Trades.

Investment House Online Seminars: Checking out a potential new time and date.

The Nasdaq and S&P 500 found new closing lows for the past 2 plus years today as selling was broad and heavy. The SOX ran up to 515 and turned around and sold back down. The Dow and S&P 500 turned south hard and fast. Software companies such as CHKP and MERQ tanked. So what is the good news? Investment House subscribers knew this was going to happen and were able to play the downside move. How did they know? Following the writings of Investment House analysts. You too can learn to read the market this way and position yourself to take advantage of the market whether it is moving higher or selling off. Learn to focus on the winners and the losers as they BOTH can make you money at the same time. Today we had the DJX, CHKP, OEX and QQQ making us money to the downside. We also had ADVP working for us to the upside with its high volume move higher today. Crushing selling going on, but we found plays to the upside.

Get the confidence you need to continue to make money in even this market. The fear is high, the downtrend is in place. We have said it before, this trend is as easy to play as the upside trend of late 1999 and early 2000. To do it, you need to have the tools. At our Seminars, we teach you those tools that you can immediately use to start taking advantage of the market's excesses. Sign up today and reserve your seat before they all fill up!

Speaking of seats, we are thinking of opening seats for a Saturday morning seminar series in conjunction with the previously announced schedule. If you are interested in such a time frame, please advise us as soon as possible so we can arrange it if the response is high enough for that day.

For more details and to sign up:
http://www.investmenthouse.com/signup1.htm

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THE SUMMARY
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Heavy selling as the SOX breakdown led the indexes lower.

This will be the worst few days of earnings warnings we will experience for quite some time. Warnings are flying as fast as the Washington/Bejing rhetoric, and investors are spooked that a big name might be next. They are avoiding the crowds and selling in advance, apparently reasoning the exit door is only so big.

Today we saw a rush toward that exit just as the Nasdaq broke to new lows that brought back visions of the fall of 1998. Put volume on the CBOE jumped as the put/call ratio closed at 0.99 on that market and 1.005 on all options markets. The advance/decline line imploded on both the Nasdaq and the NYSE with decliners on each well above 3 to 1. Nasdaq volume exploded as seller rushed in.

Then there are the short sellers. They have as much airtime as the FOMC members had back when they were hiking rates every few weeks in an effort to end prosperity. Short sellers get mentioned (blamed?) for every ill there is today. Short sellers are just taking advantage of a situation just as buyers were taking advantage of the situation back when the Fed pumped billions of unnecessary money into the system back in 1999 ahead of the Y2K meltdown. They are vilified and idolized depending upon whom you talk to. The constant: they are getting a lot of attention. Short selling is in vogue.

Then the commentator gloom. Nasdaq to 1500, 1400, 1300, lower? Take your pick, you will find someone out there advocating it. "No end in sight" said Tom Costello from his lonely post in front of the soft glow of electric selling at the Nasdaq wall in Times Square. Comments from traders questioning the usefulness of existing indicators was particularly intriguing. Remember back at the top in March 2000 that traditional indicators did not apply anymore to this new economy? 'Throw that rulebook out the window' when dealing with the new economy was the phrase of the day. Bam! The final nail in the coffin, the pin that popped the balloon, the straw that broke the camel's back. Pick whatever clich you want. Now apply it to today's situation: the old rules no longer apply to this bear market; worst bear market ever; the Nasdaq is following the Japan lead. These are the comments you hear every day.

Step back. Take a deep breath. This bear market is different from others? We are heading to a Japanese meltdown economically based on this? Last we checked, we were not even in a recession as of yet. Growth was still positive and we still see signs of strength in housing, construction, consumer sentiment. Sure the Nasdaq foretold the weakening economy to come, but we are seeing a lot of the slowdown limited to technology and the slowdown brought about when the money supply was siphoned off and investment dollars for technological research and infrastructure expansion suddenly disappeared. Same as Japan? Japan is an island, both physically and economically. It isolated itself from the rest of the world, allowed virtually no foreign investment, used massive government subsidies to support business, and refused to acknowledge that things were at risk when it started to fold. Even today it still will not admit its economy is dead. Contrast that with the Fed cutting rates 150 basis points in 76 days, pumping money supply up by $250 billion over the last three months, and is sure to cut rates another 50 basis points in May. No guarantee it will work, but it usually does.

So how is this one different? Most have not seen a bear market and those that have seem to have foggy memories. This is a bear market and indicators still work. As we have been tracking each night, however, the indicators HAVE NOT indicated a turn yet. Too many bulls still versus too few bears. A put/call ratio that cannot give us a cathartic blowout to the downside, volatility below historic turning point levels. Indicators not working? Unless they are calculating them wrong, the indicators have not given the signal that fear has been hit.

What this means to us is that we are indeed getting closer to flushing the system of the last sellers. When the traders on the floor start to question what they know to be true, when they start to think things are different, we could be getting close. When the seasoned veterans lose faith it certainly appears that fear is in vogue along with short selling. When everyone is playing the downside (not there yet, but getting closer) just as they were playing what was believed to be the unstoppable upside in 2000, the pendulum is getting ready to swing.

Buffett has been buying.

Warren Buffett has been buying insurers, apparel, and his usual list of economic staples. We have a few mottos, one of which is if you know someone really smart who really knows what he or she is doing, watch closely. Buffett has been buying stocks since October. Not technology; he never buys technology because he says he does not understand it. But, he has been buying stocks that will perform in an improving economy. Buffett is patient, but he won't live forever; he wants to see results, so he buys at the right time. Seems to us that Mr. Buffett believes better economic times are ahead this year.

SOX components look ready for a short, quick bounce.

The SOX broke lower first. Today it sold again, but its loss was a lot less today than the other indexes. Moreover, several components showed life today, bouncing up and holding the line at support with doji's. Look at KLAC, NVLS and AMAT (covered tonight): they are at the bottom of their $10 trading ranges and showed doji's on that support. When an index slows its selling, it could be ready for a bounce. When the selling had been vicious and most expect more selling, look for a bounce.

What other evidence are we looking at? Investors have been dumping shares on anticipation of bad earnings and warnings preceding those earnings. That has started with gusto, and we expect to see more such selling tomorrow in other sectors as some more warnings come out. Software is not out of the woods yet, and there is that lingering fear that a big name is going to warn this week or next week.

Still, there can only be so much selling at once before a rebound is attempted. We expect to see the SOX try to toe the line and we are looking for trading bounces in some key stocks that are in well-defined trading ranges. Trading bounces; NOT long term investments. Still, a $10 move to the top of the range in this market is beautiful. Selling pressure is still high so we have to use trailing stops, but we believe there is enough negative mojo out there to fuel a nice bounce in these well-established trading ranges. The SOX leads up and down. Sure there may be more selling in the semiconductors before it is all over, and other stocks may not even make a move up while the semis move up, test resistance, and then fall; but that does not mean we ignore opportunity when it is there. Pick up that $100 bill if you see it just laying there on the ground.

THE ECONOMY

Factory orders lower than expected, but auto sales better than expected.

Factory orders dropped 0.4% in February versus expectations of a 0.2% gain. In January's orders were revised down to a 4.3% drop from a previously reported 3.8% drop. Still, even though a bit lower, that is a solid rebound from January's drop. Moreover, manufacturing inventories were lower. The economy continues to show steady improvement despite the earnings warnings we are seeing. But heck, we knew this was coming.

Auto sales were down, but not nearly as bad as anticipated. Ford sales were down 12.6% while GM sales fell 4.6%. Sounds like a lot, but the decline was once again much less than expected just as last month. Want perspective? In 1999 car manufacturers sold 16.8 million units, the second highest level ever. That was eclipsed in 2000 with 17.2 million units. In the first quarter of 2001, the industry is on an annual clip of 17 million units. Even with the expected slowing in industry it is on almost record pace. Sure incentives and low interest rates are bringing people in, but hey, that is what low interest rates are going to do. That is why the Fed is lowering rates.

THE MARKETS

The Nasdaq broke to another October 1998 low while the big caps hit a new closing low for the past two years as well. The Dow sold down again toward a test of the recent low. Volume was high as was gloom. It looks as if the Nasdaq's third leg is not over, though on a percentage basis it should be there if it is to match the prior two legs on a percentage basis. A lot of confusion and a lot of fear in the air. Still, the downtrend is in place and the indicators, while close, have not hit the levels we are looking for. So any bounces have to be looked at with skepticism and played for the short term.

Overall market stats:

VIX: 39.33; +4.58. Volatility spiked to 40.70 on the high and closed at high levels. We are looking for it to hit above 50 to match the levels hit in 1998 (where it even hit over 60 intraday). Some more heavy selling on the S&P and Dow could do that. Anxiety is high. The last sellers need to swift kick out the door.

VXN: 75.12; +2.90. The Nasdaq volatility indicator hit 75.68 on the high. We are looking for it to hit the upper 77 or 78 level to trigger the next short term move. Some chip stocks look ready to bounce, and some early selling on the Nasdaq tomorrow could trigger a bounce for these chips.

Put/Call ratio (CBOE): 0.99; +0.24. Close, but no cigar today. We are looking for a strong close over 1.0. It is heading that way. Put activity has been on the upswing, and today there was a large swell in option activity on the CBOE up to 1.65 million. It was a mere 932,000 on Monday. We have seen 1.8 million on the CBOE back when the Dow was taking its initial plunge. It is close. Close. The last thing we really want now is a bounce; go ahead and clear them out while they are on the ropes.

NASDAQ: The Nasdaq broke below 1750 and any up trendline that may have been in place as if it was nothing (it was), cascading lower on high volume in the wake of about twenty earnings warnings from stocks that are now trading around $10 that used to trade around $150. Talk about getting the news priced in ahead of time. That did not prevent wanton selling of these stocks, but at these levels a 20% loss ain't what it used to be. The breach of support is ominous, but it also can act as a flushing action without heading down to 1300 as some suggest.

Stats: Down 109.97 points (-6.2%) to close at 1673.
Volume: 2.576 billion shares (+39.6%). Crushing downside volume at 2.382 billion to 164 million upside volume. That is a 14.5 to 1 ratio. We have not seen selling like this in a long, long time.
A/D and Hi/Lo: Decliners utterly destroyed advancers 3.78 to 1. New highs plunged to 35 (-39) while new lows exploded to 848 (+459). These are levels not even seen in the selling last fall.

The Chart: http://www.investmenthouse.com/cd/$compq.html

The break below 1750 was swift and strong. A strong break such as this bodes more selling ahead. It has sold below the 'hump' in the 1998 double bottom. Some are saying that means a test of 1500 or 1300, the lows of those 1998 legs down. Support levels are not something that hold a lot of water in an out and out bear market. What we see for now is selling on higher volume with some SOX components trying to bounce. That may lead a short term bounce.

Heading into the earnings we may get all sold out in the techs, meaning the selling may get overdone. They have been selling on fear of a big name warning, and if that does not happen there may be the realization there was a swing too far. We may see the bounce during earnings. Still, will it be enough to start a new and serious up leg? Earnings are not going to be great. About the only thing that could help would be that earnings were not as bad as thought. That would perhaps trigger some speculation about a faster turn to the upside. With companies warning of 10 cent, 15 cent and more misses, however, the odds of widespread surprises is remote. It does not appear to be time for the techs just yet for a lasting turn. We still most likely have to have that rally that fails and retests the lows. A rally once earnings are underway would be a logical point.

Dow/NYSE: It looked weak, it acted weak, it was weak. It cratered again on higher volume. It is now heading down to test its recent low (9106.54).

Stats: Down 292.22 points (-3.0%) to close at 9485.71.
Volume: NYSE volume rose to 1.386 billion shares (+10.4%). This was a day of distribution, i.e., dumping of shares. We want to see the index test the recent low on falling volume and then rebound.
A/D and Hi/Lo: Declining issues crushed advancers 3.19 to 1 (1.57 to 1 Monday). Again, no new high or new low information this evening.

The Chart: http://www.investmenthouse.com/cd/$dja.html

The Dow is plunging back down after bouncing from its recent low (9106.54 intraday) just as we expected when the bounce started. The big question is whether it is going to just test these levels and start a recovery or if it continues its plunge lower. It is distribution now, and that indicates further selling. However, the Arms ratio is again over 1.5. It has been around since the 1960's. It read over 1.5 in 1970, 1974, 1980, 1982, 1987, 1997, and now here in 2001. Each time it has hit over 1.5 it has meant a major bottom on the Dow. We want to see the volume on a test of that level lighten up a bit and then give us a typical follow through or confirmation that we like to see. For now it appears as if the Dow will keep selling for now at least until it makes that test.

S&P 500: The S&P 500 melted right along with the Dow, closing at a new multiyear low and racing toward its recent intraday low of 1081.19. 1135 proved to be lacking as a support level, and as with the Dow, it faces a real test ahead. We need to see a lower-volume test of that low and then a follow through to the upside with all of the accouterments of a follow through and a confirmation.

Stats: Down 39.41 points (-3.4%) to close at 1106.46.
Volume: NYSE volume surged higher above average to 1.386 billion shares (+10.4%).

The Chart: http://www.investmenthouse.com/cd/$spx.html

Summary: With all of the talk of tests and follow throughs and bottoms, it is easy to conclude that we are saying a bottom is at hand. That is not what we are saying. There is still a downtrend, there is still distribution on all indexes, and what looked as if it was the end of the third leg on the Nasdaq's bear market received new life today with a burst of selling pressure. This was the highest volume since the January rally and it could be the prelude to more selling or it could have been a cathartic event when viewed with the high A/D ratio and the new lows. That remains to be seen. Whether the Dow ahs indeed hit bottom as per the Arms index remains to be seen. For now we play what the market is showing just as we have been doing and doing quite well. There are some upside plays and there are downside plays. Look for reasonable gains on both types of plays without attempting to hit the home run. If this is a bottom or some meaningful rally, we will know in time to make some great money. Until then it has shown us nothing to the upside and we need to keep that in mind in all of our positions.

TOMORROW

We have watched the futures creep higher all night long after looking pitiful at the close. The Nasdaq is still 7 points below fair value and the S&P futures are 3 points below fair value. Yet, they have climbed ever since the close. The market is still subject to upset with new warnings tomorrow, but the futures show a willingness to recover. Not a lot to bank on, but something to note.

We are looking for more selling on the indexes early on. The Dow has a long way to sell down to its intraday low, but not its close at 9389.48. It could find some support there for an interim bounce, but at this point the momentum and the volume is down. The S&P 500 is just 35 points from its low (1081.19), so a real test of that level could very well happen tomorrow. Both the Dow and the S&P could test these points tomorrow. After such heavy selling, it is more difficult to judge how stocks will react: further downside or a bounce. We anticipate the combination selling early and an attempted bounce. They are well below resistance, however, so we do not anticipate any bounce down that is easy to play. The indexes are primed for more selling, and if the Dow and S&P bounce off of these levels and then collapse back through, that is another downside entry point.

As for the chips, as noted above, we see some upside trading potential in several of these. Several upside plays we were looking at pulled back slightly, leaving them in good shape for a move higher after the weight over overall market selling is lifted. Keep those alarms set and/or remind your brokers of what you want to do if they hit buy points.

The downside has been furious and kind to us as the put plays have been setting up beautifully. Still, just as with upside plays, it does not pay to get in on a move too late; you have to let it come back to an entry point and then make your move. There are still put plays on individual stocks that we see and upside plays that, as we said, held up well in today's selling. Be ready to enter when the points are met and not before, take reasonable gains when the move appears to be running out of steam, and bank money while we wait for the next great entry points up or down.

End Part 1 of 2

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