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us stock market, trading system
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4/04/01 Investment House Daily
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Investment House Daily Subscribers:
TONIGHT:
- The fear was there at Tuesday's close, but the higher open higher killed it off before it could get really ugly.
- No bounce from the SOX, at least not up.
- Rumors fly early and Greenspan disappoints some.
- VIX and VXN hit points that indicate the indexes may make one of their weak moves higher after the recent slaughter.
- Positive earnings hits and affirmations after hours have things looking much better.
- Subscriber Questions.
- Team Trades.
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THE SUMMARY
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Fear is gone with a simple higher open.
Tuesday you could feel more fear, and as we said in that report, the last thing we needed was an attempted rally. Well, there was no real rally, but the indexes opened higher, and that seemed to wash the scent of blood from the trading floor. Yes it yo-yoed back and forth all day after that, and received absolutely no help from the SOX (clean miss on that one), but the fear level was replaced by the same old gloom of 'gee, when is this going to stop?'
Not even rumors of a Lucent or other major technology company bankruptcy could get the fear running back up. Of course, LU denied that rumor and that splashed some water on that fire, but it certainly did not tank the futures. Rumors of margin calls hitting investors hurt the market because it was said that investors were not selling, just putting more cash in. The fear on the floor was that investors were still not ready to bail out which would mean more selling necessary. At this point, however, after the Nasdaq is down 70%, the S&P 500 is in a bear market, and the Dow in practical terms is in a bear market, why would margin calls all of the sudden be a big concern? Most everyone we have talked to has been off margin for months and months, whether they wanted to be or not as their online brokers sold their shares without advance notice. Probably why that rumor did not have a lot of impact; it just doesn't intuitively make a lot of sense.
Greenspan spoke on trade today, and believe it or not, while he was speaking the markets rallied off of their early session dip to positive territory. When he was done, they rolled right back over. Seems that the hope people have been attaching to FOMC meetings (hoping for more rate hikes than reason was saying would come) was again at play today as they hoped he would say something that would indicate more immediate Fed action. It did not come, and the markets sold right back down. Not only did Greenspan not offer any words on the economy, but a trio of FOMC members said while the economy was not as wild as a frat house on Saturday night, it was not in a recession and getting stronger. That did not give much hope for those looking for yet another interim hike. You note that we have not said much about that of late. Why? Because it is a dead issue right now with a 52% chance of a 25 basis point cut inter-meeting.
Fear may have dissipated, but the market looks ready for one of its little bounces.
The fear element may have dissipated, but not before sending the VIX to 40.25 and the VXN to 77.84 on their highs. Those are levels associated with the recent attempts at rallies we have seen over the past month when the Nasdaq made a run from 2091 to 2243 (early March), and 1800 to 1980 (late March). On the S&P 500, that gave us the move from the 3-22 low of 1081 to the high of 1183 on 3-27. The Dow: from a low of 9106 on 3-22 to a high of 9960 on 3-27. Those are some strong rally numbers to take advantage of
Good earnings news after hours recharged some foundering stocks. Dell reaffirmed its earnings estimates after the close and that charged up some semiconductors involved in the PC market, not to mention the QQQ, CSCO and other networkers. Speaking of CSCO, it dumped a router (really a switch) that was not selling as hoped, and CIEN jumped on that news as it is perceived to have a better product and the reason CSCO junked its product.
Then PRGN, an enterprise software company, met earnings expectations when it reported after the bell. Software stocks jumped on the news with the likes of CHKP, SEBL, VRTS, and MERQ looking much better. Why? Because the fear, particularly after all of Monday's warnings, was that the big names (not just the internet names) were next. PRGN is a very good company, and it is a much more accurate barometer for these stocks than the internet software stocks. On top of that BBBY (Bed, Bath & Beyond), one of our favorite retailers, beat the street yet again in the retail sector, and that bodes very well for retailers even in this supposedly disastrous quarter.
Will this really trigger any rally?
All of this had stocks up nicely after hours and looking solid. There has been a lot of gloom out there and some good news is bound to unleash a bit of buying demand. The after hours action was indicating this, but as we know, after hours action can be deceiving. It may be just enough upside action to set stocks up for more downside trades, but as we have been saying the past few sessions, the indexes need to have a rally here to set up another test or just to go ahead and make a run for the gold. The former is more likely than the latter, but we have to go with what the stocks and indexes show us when looking at the numbers. Until the downtrends are broken, we cannot really afford the luxury of buying and forgetting. And with the opportunities currently present, we don't want to do that.
We have to remain cautious of any renewed optimism to the upside. The futures indicate a gap higher on the open. We are not in the mood to chase gaps in this market because they usually lead to selling. What we will do is be ready for out breakouts to do just that, for our pre-split momentum plays to gap higher and then test support for another move up, and let some stocks and indexes in downtrends to once again set back up for short positions. This may be different if a bear market rally has started, or as the Arms Index indicates, a significant bottom is about to be put in. But, we don't want to be the guinea pig for that possibility. If we get a real bottom, we will see it in the price/volume and the stronger stocks. We won't miss anything by not being the first in line to try that upside.
THE ECONOMY
No matter what happens in the economy or the stock market, do not expect help from your senators. Today they voted 'tentatively' to cut at least $500 million from the proposed tax cut that is already too small and too late as it is. The vote was 53 to 47. These budget surpluses are part of the economic problem as they are taking investment money out of the system and holding it for a 'rainy day.' Governmental budgets do not function the same as household budgets. This type of saving only hamstrings the economy and its potential. The idea of giving $300 to everyone did not work to help the economy in 1973. Even Humphrey proposed a $1000 giveback in 1968. Our math may not be accurate, but that is about $3000 today. The House magnanimously passed a repeal of the death tax, but it takes effect in 10 years. Does that help those who have small businesses and die between and then? Of course not. It won't matter, however, because the senate is expected to vote it down. To the elected officials who are supposed to have our best interests in mind, is not a question of doing right by the American citizens, but an issue of the federal government wanting to grow itself bigger and bigger with our money that it does not need. It is a question of partisan politics of the worst kind: allowing U.S. citizens to suffer for political gain.
This will be a major blow to investors and those hard workers who make the economy work. One of the important legs of economic recovery was a serious tax cut. It is not going to happen unless something changes dramatically. The very news of this has the potential to snuff the life out of any attempt at economic recovery. If no tax relief is coming, there will be spending plans shelved by businesses and consumers. The economy is barely holding its own. Without serious money injected into the system for investment, we are now very, very concerned it will not make it. Write your senators today. Tell them to lean on the other senators. This is a tragedy in the making for the economy.
THE MARKETS
More selling, more buying, more selling. Volatility today marked the battle between the bulls and bears. We would have preferred another blowout to the downside to send people screaming into the streets, but it did not happen. With the after hours good news, it appears as if the bulls will have the upper hand in the morning. Beware of stocks and indexes that gap higher in bear markets.
Overall market stats:
VIX: 39.07; -0.26. Hit 40.25 on the high both early and late, holding in a high range. Still, it has not hit the truly high levels of 62 as it did back in 1998 for a day, and that did not give the sellers the final boot out the door. It does, however, look good for an interim bounce in the Dow and S&P 500.
VXN: 76.37; +1.25. Hit a high of 77.84, both early and late as did the VIX. This is the level that has sparked the recent mini rallies discussed above. We anticipate it to do the same now.
Put/Call ratio (CBOE): 0.73; -0.23. Put activity again pulled back from the threshold, leaving us to once again wait for fear to spike higher and race over 1.0 on the close. At the same time, we have to also remember that this is a longer bear market, and it is not only scaring people out on these big drops, but it is wearing them out as well over time. Investors are opening their first quarter statements now, and they may get on the phone and say 'now is the time to rethink these investments.' Option activity overall pulled back to 1.315 million from 1.65 million Tuesday.
NASDAQ: The Nasdaq made a game of it, but after Greenspan was done there was nothing left to rally for so it sold down 75 points before bouncing 20 points in the last half hour. That was nothing more than a reflex bounce after a 45 degree drop all afternoon, but it got a boost after hours with the earnings reports. Looks as if it will be an up open, but in a bear market that means be careful.
Stats: Down 34.20 (-2.0%) to close at 1638.80.
Volume: 2.464 billion shares (-4.25%). Downside volume was lighter at 1.714 billion shares versus rising upside at 702 million shares (164 million Tuesday). Not the same level of distribution as Tuesday, but still high volume on the selling.
A/D and Hi/Lo: Decliners continued to lead, but fell to 1.5 to 1 (3.78 to 1 Tuesday). New highs rose to 45 (+10) as new lows pulled back to a still high 718 (-127).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The chart does not give a lot of clues. It continued its selling after Tuesday's high-volume break below 1750. It showed us a loose doji on the close, something we have seen when the index has started its small rallies to the upside. The volatility signals that also, and the after hours news was good. Unfortunately, it will most likely lead to a gap higher in the morning, and that makes any upside move more difficult to play if we are so inclined. Still in a downtrend but looking for an upside move to the 10 day MVA at 1802.76. That is where the previous rallies died. It will have to break it on higher volume to change the character a bit. The new bluster from some better earnings may do it and give us the bear market rally we have been looking for. That is certainly playable.
Dow/NYSE: Interesting day. It was up, down and then rallied off of a late double bottom and closed higher on stronger volume. Maybe this is the test of the previous low at 9106. It did occur on higher volume and it was a doji pattern that shows a reversal. This could have established the bottom of the right side of a double bottom. Could have.
Stats: Up 29.71 points (0.3%) to close at 9515.42.
Volume: NYSE volume climbed even higher above average at 1.436 billion shares (+3.6%). Not the highest volume, but the highest since the 3-22 reversal off of 9106.
A/D and Hi/Lo: Declining issues maintained the lead over advancers (3.19 to 1 Tuesday). Again, no new high or new low information this evening.
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow looked as if was testing the March 22 low at 9061 as it reached down to 9375.72 on its low and recovered from there. But it was not a decisive tap and then race to highs on the session. It sold back after Greenspan finished his talk and had to rally late in the session to finish positive on the higher volume. We would have preferred a lower dip on a test, but there is no doubt the index was able to bounce up off of its lows and it did so on higher volume. From that perspective it was a positive day. But, how it performs from here is the key. To be a breakout of the pattern it must clear the 10,000 level on strong volume. Before that it has to take out 9750 along the way.
S&P 500: The big caps showed a very tight doji on the candlestick chart as it too tested the March 22 low (1081.19) on the session low today (1091.99) and recovered on strong volume. It did not make it back to positive territory, but overall it looked to be a positive session. It too appears to be attempting to set the bottom on the right side of a double bottom pattern, but as with the Dow, that does not tell us much until it can take out the middle of the pattern at 1182.17. Before it gets there it has its old nemesis, the 18 day MVA, at 1159.12 that has turned it back since this down leg started in February.
Stats: Down 3.21 points (-0.3%) to close at 1103.25.
Volume: NYSE volume again moved higher, but we are not as eager to say it was a distribution day today. Technically it was, but it made a run at the close and it looks poised to follow the Dow.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
The markets look ready to move higher, but anything can happen overnight. If they do make a move up, will it be something we can latch onto and ride? Perhaps, but we are going to do it with those stocks that continue to show the best patterns and breakout as the market moves up. Those have cleared out the overhead and can avoid a lot of unhappy investors that bought at higher levels. We can also play the momentum plays such as pre-splits that tend to run well when the yoke of selling lifts.
On the downside we will most likely see more put plays set up with any rally. Then we have to watch to see if the rally starts to fail as our entry point. That has been predictable at the 10, 18 day MVA's of late. If this is a real rally, it should take those out on the way to the double bottom breakouts in the Dow and S&P 500. One thing to watch: the SOX is no longer in a great position to race higher in support of the Nasdaq. It has undercut the left leg of the double bottom it was trying to form, and that could have acted as a shakeout of the last sellers, but it also completed the head and shoulders pattern, and it will have some real resistance at 515 and 535. That will act as an anchor on any move the Nasdaq attempts to make.
At this point we are still in a downtrend. We see high levels of anxiety, readings from some indicators that signal a turn as positive signs. Still, there are not a lot of leading patterns out there in great stocks to lead higher. That will be a drag on any rally attempt as well. Until we see the change in the market we are going to continue to play it as we have: upside on the breakouts and momentum days in the market, downside when the put plays set up and start to turn down. All the while we will be ready for the pleasant breakout surprise.
Support and Resistance Levels
Nasdaq: Closed at 1638.80.
Resistance: 1750, 1800.
Support: Snapped 1750 and could drop to 1500 or 1300.
S&P 500: Closed at 1103.25.
Resistance: 18 day MVA is at 1159.12. The down trendline is at 1165.
Support: 1085.
Dow: Closed at 9515.52.
Resistance: The 18 day MVA at 9849.22. 10,000 is the breakout level.
Support: 9106 is the intraday low it needs to successfully test. Then it is 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.
End Part 1 of 2
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us stock market
trading system
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