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3/13/03 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Thursday: ERES, AMZN but we let them run
Buy alerts issued: XLNX; BCGI; EXPE; EBAY; LLTC; ADVP
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:
- Powerful blast higher on no real major news story.
- Retail sales lower as last week's store sales indicated.
- Broad advance on strongest volume of the year.
- Subscriber Questions
Smoldering market catches fire.
Wednesday night we discussed why we were resisting the temptation to go short because of the war premium built into the market and the external forces that could send the market right back up. We felt that when the trigger was hit the market could run several hundred points. While we felt it was getting close, we did not have a line on the Thursday action.
We had placed several upside bets already, however, as we have seen and reported on certain items that stubbornly indicated that the market was not yet going to implode. Gloom was high, though not at extreme levels. It was enough, however, to set the stage for a move. As we have harped on, there have been several patterns that simply refused to give in during the selling. When the market is going to implode, most all stocks in good patterns throw in the towel and join the selling. That was not happening across the board. The Nasdaq was acting similar to the SP500 at the October low, holding onto key levels and keeping its pattern together. When we ran through the semiconductors last night and saw several continuing lateral moves while the market sold, we put them on the reports immediately as it looked as if an upside move was imminent in those stocks.
The trigger was rather innocuous. Late Wednesday the CIA reported as we did that certain Iraqi military heads were discussing abstaining for a fight with the U.S. If the military won't fight, there is no war. More than that, capturing Hussein becomes much easier as he is more likely to be turned over by the military. You can bet that has come up in the conversations between the U.S. and Iraqi military leaders. That combined with the on again/off again UN resolution all indicated that war was near and war may not be that big of an event.
Despite all of the action, however, the rally does not change the broader landscape. This may have been the war rally come early, but as we have been saying, after the war there are a lot of other problems out there. Oil is still not resolved with Venezuela producing but not what they say they are, with questions about Hussein and his oil fields in the event of war; that still has lingering impacts that are keeping oil prices higher for now and continue to tax the economy. Of course the economy itself is still at issue; there are slight improvements in some reports but the recent shutdown ahead of war will have a strong impact. The improvements are modest and the negative influences are strong. On top of that Congress is in a tizzy because of the budget and tax cuts. Some want to do the right thing and cut the budget while providing taxpayers with incentives to invest in the U.S. while others want to put everything on hold rather than cut a dime of spending. In other words, the market has to deal with the status quo after any war.
THE ECONOMY
Retail sales fall 1.6%, the largest since November 2001.
Snowstorms received much of the blame as sales were down across the board (apparel -3.6%; building materials down -7.5%). No doubt the storms had a big impact; we heard and saw that in last week's reports. The breadth, however, indicates the war worries are also keeping consumers cautious. If you are somewhat concerned about the future with a war, etc. (and recent polls have indicated this is the case), then there is absolutely no reason to go out in a snowstorm unless you need food or medicine. Take out autos and sales were down 1.0% (-0.1% expected).
It is not all sackcloth and ashes. January was revised to a positive 0.3% from -0.9%. Ex-autos was revised up to 1.2% in January. In the big picture that shows that consumers in January, just as in December, were spending ahead of the pace economists expected. Thus, sans the war slowdown over the past 6 weeks, the consumer was still spending. With businesses starting to dip their toes in with some spending, the underpinnings continue to be resilient. The big question is how much damage has been done by the pre-war shutdown and the sustained higher energy prices.
Jobless claims fall but remain above 400K.
420K were reported a drop from 435K prior (revised down from 440K). That was in line with expectations (for once), but it is nothing to be happy with. Jobless claims remain above 400K. Indeed, the 4-week average rose to 419,750 from 410K the prior week; it has trended higher the past month. Continuing claims rose as well, up to 3.5 million from 3.48 million. It is clear that jobs are not near the creation point. No wonder as business spending is tepid at best and consumer spending has declined, accelerating that decline recently.
THE MARKET
What Wednesday lacked in breadth Thursday made up (2.6:1). Volume screamed higher (1.8B Nasdaq). It was not all short covering as the breadth indicates. Still, shorts were being squeezed hard early, mid-day, and then late. This marks the second day of the new rally attempt that started Wednesday. We will know next week whether it has more legs if the institutions come back in and show a similar rally. That somewhat marks the transition from short covering to long term buyers.
Until then this is just a big, swift rally with the large caps and DJ30 clearing the 18 day MVA and Nasdaq running up just below the simple 50 day MVA. Indeed, it is just too darn much, too darn fast. During the bear market the rallies have been sharp and swift, then fade out, dying a slow death as they just bleed back down and resume the downtrend. This has been a familiar pattern as the indexes get oversold and then just cannot stand it, exploding higher. They hit resistance and then run out of gas as whatever pent up demand is spent as quickly as a sailor on shore leave in a brothel after 6 months at sea.
This does not mean that powerful rallies don't mark the end of long downtrends. We have seen the indexes drain lower on very light volume. Those looking for 'capitulation' (a word that should be stricken from use in relation to financial markets) would not have seen the bottom. As we discussed over the weekend, low volume tests after violent, high volume lows are very good and often set up the upside. We also noted that markets bottom when things look really crappy. That is what happened back in the early 1930's when the Dow exploded off of its test of the lows and never looked back. There is a lot of potential here for strong upside, but we have to let it take shape and provide a follow through.
The point is that the market is still in a downtrend, still has all of the same worries, and still must deal with all of that overhead supply. The Nasdaq remains the key index as it held up well above its former lows while DJ30 and SP500 danced a deadly dance with their lows. The bearish patterns remain with the bright spot that Nasdaq held up and formed a bit of a double bottom while many stocks managed to hold their patterns when the major indexes sold.
Market Sentiment
Never hit capitulation highs, but they mostly did that in the prior lows. This pullback was low volume and low anxiety though there was much disgust and dissatisfaction with the market.
VIX: 35.93; -3.06
VXN: 44.98; -2.52
Put/Call Ratio (CBOE): 0.75; -0.14
Nasdaq
After the intraday test below the February lows to set up the small double bottom, Nasdaq blasted higher on volume.
Stats: +61.53 points (+4.81%) to close at 1340.77
Volume: 1.809B (+17.91%). Strongest volume in three months driven by short covering and some institutional long buying.
Up Volume: 1.657B (+820M)
Down Volume: 138M (-492M)
A/D and Hi/Lo: Advancers led 2.55 to 1. Strong upside breadth.
Previous Session: Decliners led 1.1 to 1
New Highs: 46 (+19)
New Lows: 68 (-75). New lows dropped dramatically. Someone asked about new lows and how they should rise as the indexes test lows. Actually, if the market is showing strength on the test, new lows should not jump significantly because the majority of stocks should be holding above their prior lows if the market is truly stronger. A 400 to 500 new low level indicates that stocks are breaking down below their prior lows in too great a number. They did not reach the levels hit on the prior lows (NYSE was starting to make it interesting, however). It needs to be watched as the market drops to test those lows as an indication of the resiliency or remaining strength.
The Chart: http://www.investmenthouse.com/cd/$compq.html
Thursday Nasdaq gapped higher after the gap lower Wednesday that set the stage for this move. Nasdaq set up a pretty much textbook double bottom over the past month, gapping lower and undercutting the February low on the right leg. That acts to scare out the last sellers ('here we go again, heading lower!'). When the sellers are gone demand outstrips supply and prices rise. If there are no more short sellers and prices start to rise after key support is broken, that gets the shorts' attention and they start to cover. One thing leads to another as covering causes further price rises and thus further covering, and on and on.
Nasdaq managed to clear the short term MVA and the January/March downtrend with ease, blew through the exponential 50 day MVA (1331), and came to rest below the simple 50 day (1343). The 200 day MVA is also immediately ahead at 1352 and the January 2002/January 2003 downtrend at 1360. A strong, broad move with semiconductors leading, but there is immediate overhead that will act to test the move and perhaps make it sidestep for a few sessions. That is okay as long as it holds and then rallies back through those levels giving a strong follow through session.
S&P 500/NYSE
Blew through the short term MVA on strong volume.
Stats: +27.71 points (+3.45%) to close at 831.89
NYSE Volume: 1.743B (+13.14%). Volume was the strongest in 3 months, matching the 12-20 volume. There was some strength in the move.
Up Volume: 1.433B (+679M)
Down Volume: 307M (-470M)
A/D and Hi/Lo: Advancers led 2.62 to 1. Strong upside breadth, the first in a quite a while.
Previous Session: Decliners led 1.35 to 1
New Highs: 40 (-2)
New Lows: 82 (-245)
The Chart: http://www.investmenthouse.com/cd/$spx.html
After undercutting the July lows, SP500 found legs and rallied over the short term MVA (10 day 821; 18 day 827) and back into the February consolidation range (820 to 850). The upper end of the range is also marked by the exponential 50 day MVA with the simple at 859. Still in a downtrend, still that larger descending triangle, but room to run upside on this rally even if it is just a bounce to test higher in the downtrend.
DJ30:
Very similar to the SP500, the blue chips undercut the July lows and then reversed. They added to that Thursday with a strong move over the short term MVA. They remain in the same downtrend and the same downside triangle, but they are in the process of letting off some of that pent up war steam. The exponential 50 day MVA is at 8000, the simple at 8818. That is in the middle of the February consolidation, the first real test for the blue chips as they try to rebound.
Stats: +269.68 points (+3.57%) to close at 7821.75
Volume: 1.743B (+13.14%)
The Chart: http://www.investmenthouse.com/cd/$indu.html
FRIDAY
PPI, inventories, production and capacity utilization, and preliminary Michigan sentiment are released Friday. As noted Wednesday and now after such a strong move, economic reports will have some impact on the market. Not nearly as much as the continued ring around the rosy regarding the on again/off again war, but as the market improves, it will also eventually need to see economic numbers improve. This is still too early for these to make a lot of difference; the market can rally when the economic outlook is crappy. Eventually there has to be confirmation.
Nasdaq is the key and it is right at the 50 day and 200 day MVA. It is also right before a weekend. Shorts did a lot of covering Wednesday and Thursday. They would have liked to have waited until Friday, but there were too many potentially positive stories under the surface. Question is now that there has been a strong rally, will those that bought (other than the shorts that covered) fell the need to square positions before the weekend in the event something bad happens?
Not as much pressure to do that. The market has a large war premium built in, and it has not all been released. While there may not be a great urge to take on a lot of new positions at significantly higher prices than at the Thursday close, there won't be an overwhelming desire to unload them. Thus we anticipate the indexes to test the next resistance levels and the near downtrend and then start to hesitate ahead of the weekend. We don't expect a push to short stocks given the possibility of good news over the weekend. Any actions on shorting desires will be on hold until the weekend is over. If Nasdaq fails at the downtrend or the 200 day MVA, that will embolden some to try to put out the shorts again.
We will look at selective positions again, primarily those stocks that have held good patterns during the selling and are moving to the breakout. We will use pullbacks to enter stocks that have moved well and are simply retrenching on lower volume. We won't get really aggressive, however, until we see how successful the shorts are next week when the indexes hit resistance. If the market can deliver another strong follow through after a few sidesteps to rest, that will be the signal to move into more aggressive upside positions.
Support and Resistance
Nasdaq: Closed at 1340.77
Resistance: The simple 50 day MVA (1343). 1357, the 1998 bear market low. The 200 day MVA (1352). The January 2002/January 2003 down trendline at 1361.
Support: Exponential 50 day MVA (1331). The 18 day MVA (1310). The 10 day MVA (1305) and some price support at 1300. 1261 (the February low) and 1250 is point where some lows have held. After that there is not much before 1200.
S&P 500: Closed at 831.90
Resistance: Price resistance at 850 to 860. The exponential 50 day MVA (850), the simple 50 day MVA (860). The bottom of the October consolidation range at 875.
Support: The 18 day MVA (827). The 10 day MVA (821) and price resistance at 825. The September 2000/May 2001 downtrend line at 795 and some price support at 799.
Dow: Closed at 7821.75
Resistance: 8000 and the 50 day MVA (8015). The simple 50 day MVA (8118). A range of resistance at 8000 to 8150 from the late January lateral move. Then 8250, the bottom of the October consolidation range.
Support: The 18 day MVA (7778). The 10 day MVA (7709) and price support at 7750. 7532, the July low. The 7750 breach opens the door to test the low at 7197.
Economic Calendar
3-11-03
Wholesale Inventories, January (10:00): -0.2% actual, 0.2% expected, 0.8% December.
3-12-03
Trade Balance, January (8:30): -$41.1B actual, -$43.5B expected, -$44.9B December.
3-13-03
Initial jobless claims (8:30): 420K actual, 418K expected, 430K prior.
Retail sales, February (8:30): -1.6% actual, -0.5% expected, +0.3% January (revised from -0.9%).
Ex autos: -1.0% actual, -0.1% expected, 1.2% January (revised from 1.3%).
3-14-03
PPI, February (8:30): 0.6% expected, 1.6% January
Core PPI (8:30): 0.1% expected, 0.9% prior.
Business inventories, January (8:30): 0.2% expected, 0.6% December
Current account, Q4 (8:30): -$136.1B expected, -$127.0B Q3
Industrial production, February (9:15): 0.1% expected, 0.7% January
Capacity utilization, February (9:15): 75.7% expected, 75.7% January.
Michigan sentiment, preliminary, March (9:45): 78.0 expected, 79.9 February.
SUBSCRIBER QUESTIONS
Q: There are times a stock in the report hits a buy point but you do not enter (designated 'buy not issued' in the table). I like to set a buy point and then not worry about it, but that does not always work in this market. What is your process for entering?
A: We try to pick buy points that once hit with the right volume coming in the play has a good probability of performing as we want. In this market, though we set a specific buy point we want to stick with as it clears resistance (upside) or support (downside), it is not always an automatic buy or sell. We look at how the market is trading because as we have seen the market can gap one direction and then reverse. In this market we usually make moves toward the end of the session as that tells more of the tale of a move for the session and helps avoid getting caught in an early run higher that turns over on us. It does not always work out but it reduces those chances. Often we see a stock run up early then fade, but then recover in the early afternoon or toward the close if it is going to hold the move (or not if it was just a short pop higher). If it makes the recovery and volume is there, that is when we prefer to move in.
Today we were not jumping into a lot of positions early simply because the market gapped higher; in a downtrend that can be very dangerous. After we saw that hold we started picking off those stocks that can move fast even if the market is in a short bounce higher. Later in the session as the moves were holding we started taking additional positions.
SEMINARS ON CD
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End Part 1 of 3
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