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world stock market, us stock market
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3/03/03 Stock Split Report Update
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Monday: None issued
Buy alerts issued: IMCL; RNBO
Trailing stops issued: None issued
Stop alerts issued: None issued
You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- Early good vibes about terrorist capture give way to same old concerns.
- Strong housing construction offset by weak national manufacturing, spending.
- Breakout attempt fails for large caps, but smaller issues starting to show relative strength.
- Subscriber Questions
Early rally attempt fails as facts of life return re economy, war.
Can't start a war? Next best thing is to snag a major terrorist and show the world that the free nations can prepare for war and still continue the long-term battle against terrorism. Whether it was that news or the Iraqi destruction of a few of its missiles and the Turkey refusal to let U.S. troops base from within its borders is the continuing fancy of the market. In any event, the market was up early on a stronger Europe and lower oil prices.
That did not last long, however, as the status quo basically remained in effect: U.S. still ready for war but no war starting. After a strong surge higher, reality hit just about the time Nasdaq hit the simple 50 day MVA when the ISM report came out lower than expected, barely registering any expansion for February. That stalled the move. It tried to hold for a bounce mid-morning, but it was not a good try. The indexes failed and continued to sell the rest of the session led by chips (they lead up, they lead down) and techs in general. The smaller cap issues definitely performed better, holding up well as the NYSE A/D line barely turned negative.
The failed breakout from the range and subsequent reversal left the indexes right where they have been: in the middle of the recent trading range, selling on lower volume but not breaking down.
THE ECONOMY
February ISM survey limps in over 50.
50.5 versus 52 expected and 53.9 prior. The market was running to highs when the news hit. The Nasdaq turned over at the simple 50 day MVA on the news and things went downhill all session. Businesses cited higher energy prices and continued uncertainty regarding war as keeping a lid on optimism (this is basically a business confidence survey similar to the consumer confidence survey). As proof, new orders fell to 52.3 from 59.7 while employment really stunk at 42.8, down from 47.6 (meaning more employees losing jobs). Prices paid rose to 65.5 from 57.5 on the back of higher energy prices. As we noted last week, there is a real chance of higher consumer prices even without much economic improvement as those higher commodities prices take their toll. Chicago PMI may have been higher, but the rest of the nation did not enjoy the gains of the mid-west.
Personal spending fades 0.1%, income up 0.3%.
Spending was 0.2% below expectations, savings 0.1% less. Auto sales tanked in January along with other durable goods, falling 5.7%, the largest monthly drop since February 1990 when they fell 6%. That harkens back to the last recession, indeed when it was deep in that recession. Still, when you factor in that the large part of the drop was in auto sales, the fact that spending fell just 0.1% is not that bad. We have seen for the past 1.5 years that consumers tend to shift their buying habits month-to-month, going after autos one month, then non-durables the next. The more disturbing part of the report showed that wages dropped 0.2%, giving back the December gains and showing the largest drop since July 2002. That has a stronger impact on retail sales as they account for 56% of personal income and influence buying decisions the most. Thus the report is in line with the nervous but still consuming consumer, showing some more weakness but not a collapse in spending.
Construction jumps 1.7% to record high.
Expectations of a 0.5% gain were way off. Residential housing continued to dominate construction spending in January, up $452B. Those funds continue to prop up the economy. Without housing the numbers would be weak as non-residential construction fell $157.9B. Seems if it is not in housing, there is no desire to build.
THE MARKET
The indexes opened slightly higher and rallied well. We waited to see how the ISM report would be received, but with the news re the terrorist capture helping fuel the market, we anticipated a pullback and then entry point. The ISM came out and we got the entry point, but we also spent the day watching the pullback continue as the Nasdaq run up to the 50 day MVA and roll over, lead lower buy semiconductors that reversed at 300 and fell back below their down trendlines.
Basically there was nothing new to move the markets. The covering downside players did before the weekend and possible war prospects was countered with new shorts put out when no war came and the status quo remained. Without the chip stocks showing some of the strength they did at the end of last week the large cap indexes were in trouble, and they showed it. The selling was not intense, however, with only Nasdaq losing more than 1%. SP500, DJ30 were modest losers.
The best action of all was in the smaller issues. They were down, but much less. NYSE advancers managed to edge ahead in the last hour until the final 20 minutes; still, the A/D line was very modest to the downside as was volume. Many smaller issues just took a breather on the session. While the small and mid-cap indexes are still in their own trading ranges as well, we are watching them to see if they start some relative out-performance. They often recover first in any market recovery preceding an economic recovery. While the economic data does not give a resounding endorsement of a stronger economy ahead, the market will be the first and best indicator, and the smaller cap issues are often the canaries for any improvement.
Market Sentiment
Sentiment indicators fail to show any indication as they remain stagnant over the past several months.
VIX: 34.09; -0.06
VXN: 45.83; +0.17
Put/Call Ratio (CBOE): 0.72; +0.13
Nasdaq
Tapped the simple 50 day MVA on the high and then rolled over to close back down in the range.
Stats: -17.23 points (-1.29%) to close at 1320.29
Volume: 1.249B (-7%). Volume remained lower and well below average, indicating very modest overall selling though chip stocks were selling on rising volume.
Up Volume: 258M (-732M)
Down Volume: 972M (+644M)
A/D and Hi/Lo: Decliners led 1.28 to 1. Very modest downside breadth as the selling was focused in a few large cap sectors.
Previous Session: Advancers led 1.04 to 1
New Highs: 64 (-16)
New Lows: 54 (-14)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Nasdaq gapped up to the exponential 50 day MVA (1343) and then rallied to the simple 50 day MVA on the high (1353.31). As soon as the ISM data hit Nasdaq peaked and fell the rest of the session, failing to hold the short term MVA (1323, 1325). This put the techs pack in the center of their range that is roughly 1300 to 1350. It was not a good tech day, but it was not dumping though a key tech sector (the chips) suffered some distribution. Nasdaq continues to work laterally as it has the past 6 weeks, keeping a tight range on lower, below average volume. Typically that indicates a consolidation ahead of another breakout attempt. It has refused to sell, and with some falling oil and gold prices along with a stabilizing dollar it may as we suggested over the weekend be setting up for its next upside attempt. Given the Monday action, however, that won't be tomorrow unless something major happens.
S&P 500/NYSE
Rallied to 850 on the high and reversed to fall back in the range on low volume.
Stats: -6.34 points (-0.75%) to close at 834.81
NYSE Volume: 1.184B (-9.25%). Very low, below average volume on a reversal, showing not much real stock dumping.
Up Volume: 405M (-415M)
Down Volume: 747M (+274M)
A/D and Hi/Lo: Decliners led 1 to 1. Dead even as the index pulled back. Again, this shows the relative strength of many smaller issues that held their ground and advanced as the larger cap stocks sold. That is a strong indication that the downside move had few takers, i.e., that shorts were again not able to sell hard.
Previous Session: Advancers led 1.5 to 1
New Highs: 74 (+1)
New Lows: 56 (+14)
The Chart: http://www.investmenthouse.com/cd/$spx.html
The large caps opened basically flat and then rallied sharply to the top of the recent range at 850. Unfortunately, that put it right in the teeth of the late January range from 850 to 860, the next level it must traverse. Still, that was not the major problem; the ISM news put a sellside bid in the market, and with that the index had no stomach to take on the resistance. It was not a downside feast, however, with large caps moving up off their lows (832.74; I know, not much) and holding well within the recent range on the close.
DJ30:
The blue chips were in the crosshairs, being large caps. They too tried the early rally, clearing the 18 day MVA (7940) on the high (7981.46) but then they too ran out of gas and closed below the 10 day MVA (7890). The blue chips posted the least stellar upside move, not even making it to the top of the range at 8000 before turning lower. It is very hard to look for much leadership from the Dow; it is thoroughly enmeshed in its lateral range from 7750 to 8000 as it continues to struggle with its 18 day MVA.
Stats: -53.22 points (-0.67%) to close at 7837.86
Volume: 1.184B (-9.25%)
The Chart: http://www.investmenthouse.com/cd/$indu.html
TUESDAY
With no war or invasion, investors turned their sights back on the same old problems and the economy (which is also one of the same old problems). At first it looked as if the rally scenario was going to play out, but when the ISM hit and was barely expansionary, there was no economic news to drive stocks in the absence of a war. With no good economic news and more of the same on the war front, the market did what it has done for the past month: moved back down in the range after testing near the top end on low, noncommittal volume.
While the semiconductor selling was on rising volume with some of those stocks, the overall action was more consolidation on lower volume. As Dick Arms of the Arms Index noted Monday, the Dow has moved for 25 sessions in this range, a very long period of consolidation that is trying to set up the right shoulder of a reverse head and shoulders pattern that started forming with the July low. While that is nice for the Dow, it is hardly the leader in this market. The other indexes do not have as clean a pattern (particularly Nasdaq as it has outperformed and tried to break higher earlier) though the SP500 sports the reverse head and shoulders as well.
Arms thinks this is a long term bottom being put in on the 3 year bear market. We are not convinced of that as the market is still in a downtrend, but as indicated over the weekend, the consolidation action in conjunction with other market forces of oil, gold and the dollar indicates to us that there is going to be some type of upside move.
Thus we were more or less content to sit tight Monday and wait for our plays to come to us, and we will continue to do so. For now this is a consolidation move, and though the indexes are still in a downtrend and could just continue moving lower, the moves have not on the whole been dramatic. Downside when it occurs usually occurs rapidly. With the continued resilience in the range we did not want to let time work against us with downside option plays. We just need to be patient and let this consolidation either work or fail, and that in large part will turn on world events. With many small and midsized issues putting in good upside patterns and moves we are willing to accumulate positions in those stocks when they do make a solid move.
Support and Resistance
Nasdaq: Closed at 1320.29
Resistance: The 18 day MVA (1325). Exponential 50 day MVA (1343) and simple 50 day MVA (1353). 1357, the 1998 bear market low. The 200 day MVA (1368).
Support: Price support at 1300. 1250 after that is another point where some lows have held.
S&P 500: Closed at 834.81
Resistance: The 18 day MVA (841). Price resistance at 850 to 860. The exponential 50 day MVA (862), the simple 50 day MVA (871). The bottom of the October consolidation range at 875.
Support: Some price support at 825. The September 2000/May 2001 downtrend line at 803. After that 800.
Dow: Closed at 7837.86
Resistance: The 10 day MVA (7890). The 18 day MVA (7940) and 8000. A range of resistance here at 8000 to 8150 from the late January lateral move. Then 8250, the bottom of the October consolidation range.
Support: Soft support at 7750 held last week. If that gives up, then 7500, but a 7750 breach really opens toe door to test the low at 7197.
Economic Calendar
3-03-03
Personal income, January (8:30): 0.3% actual, 0.4% expected, 0.3% prior (revised from 0.4%).
Personal spending, January (8:30): -0.1% actual, 0.2% expected, 1.0% prior, (revised from 0.9%).
ISM, February (10:00): 50.5 actual, 52.0 expected, 53.9 prior.
Construction spending, January (10:00): 1.7% actual, 0.4% expected, 1.5% December (revised from 1.2%).
3-05-03
ISM services, February (10:00): 53.0 expected, 54.5 January.
Fed Beige Book (2:00)
3-06-03
Initial jobless claims (8:30): 400k expected, 417k prior.
Productivity, Q4 revised (8:30): 0.1% expected, -0.2% prior.
Factory orders, January (10:00): 0.4% expected, 0.4% December.
3-07-03
Nonfarm payrolls, February (8:30): 20K expected, 143K January.
Unemployment rate, February (8:30): 5.8% expected, 5.7% prior.
SUBSCRIBER QUESTIONS/COMMENTS
Q: [W]hen you give a buy signal for a stock and/or options, do you also write covered calls when the stock hits its target in anticipation that the stock will begin retracement/consolidation on upward bound stocks? How about when a stock hits a buy point, yet underperforms as some have done recently, will you write in the money calls; say 1-2 weeks out before you decide to take your money off the table?
A: Much depends on the type of market we are in as well as the strength of the stock. While some stocks have continued to move higher after brief respites, the majority of stocks continue to struggle in the ongoing bear market. When they get to the target we tend to take the gain and then look to see if there is a good entry point at some later time. This is particularly true with option positions as stocks can rally sharply and then sell and never come back.
That does not mean you cannot write calls in this market, particularly with the lateral move we have experienced the past month. A stock rallies up to resistance and then starts to falter. If it has been working laterally that is an excellent candidtate to sell calls on, let it fall back, and either buy them back or just let them run to expiration where the stock may or may not be over the strike price sold (and thus the shares would be called away from you).
For stocks that are underperformers, if they don't roll right basck over and we decide to hang on to see if the move builds, covereds are again good if the stock exhibits this rolling consolidation. At some point you will get caught short on this if the consolidation works and the stock breaks higher. If you buy the calls back when it looks as if the consolidation range is going to hold, however, (e.g., hitting support and again starting to move up or showing a doji) you lessen the possibility of getting caught in a sudden move up on a stock you wanted to keep.
On the downside, if the consolidation fails and you sold the calls at the peak, you don't have to worry about them as they will fall in value. What you have to worry about at that point is whether the stock can recover and you want to wait or whether you just want to sell the stock buy back the calls and look elsewhere. In those situations you often get a test of the breakdown, however, and you can get out of the stock at a better price when it rebounds up to test the breakdown. That is one of our favorite entry points on downside plays (failed test), but it is also a last chance to get out at least at a better price on upside plays gone awry.
It is never a bad idea to employ covered call methods during consolidations or other lateral moves; it puts your money to work hard for you while you wait for the next move higher.
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End part 1 of 2
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