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4/07/01 Investment House Daily
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Investment House Daily Subscribers:

TONIGHT:
- Markets pull back on lack of economic direction.
- Fed and Congress betting all their chips on the consumer
- Light volume selling, but that is not really a comfort.
- Earnings season gets underway with Yahoo!, but we don't expect shouts of glee.
- Subscriber Questions.
- Team Trades.

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THE SUMMARY

THE ECONOMY

Once again it comes down to the bottom line, and businesses are suffering. It is the key, so we are starting here.

Unemployment numbers confirm what weekly jobless claims had already told us.

Unemployment rose to 4.3% which is the highest in 20 months, but the real unsettling news was the 86,000 drop in non-farm payrolls. That is the largest drop in 10 years, especially shocking in that the experts were looking for a net gain of 58,000 jobs. Moreover, it was widespread and not just manufacturing: the service sector lost 19,000 jobs where it added 227,000 jobs in February. Retail and transportation suffered while construction and finance wrangled out tepid gains of 18,000 and 17,000 respectively. On top of that, average hourly earnings rose to 4.3% annually, jumping right back up to the January levels that had everyone concerned about potential inflation.

As we said Thursday, the weekly jobs claims have been telling the story as layoffs mount up. While the 4 week average of new jobs shows a net 144,000 gain per month as reported Friday, the 4 week average of jobless claims is about to go critical. They have not hit the 400,000 to 500,000 levels that typically show recession, but they are close enough to smell it. From that perspective we have to be concerned about consumer confidence. We said it a year ago: consumers were not going to worry about things until they started losing jobs. That job loss started in December and it is increasing. As we discuss later, there is a lot being wagered on the consumer right now.

As far as inflation, however, these numbers show nothing. Yes wages have not succumbed yet to the loss of jobs, but that is simply a function of job cutting proceeds. The temporaries are laid off first (a big rise in those), then the lower salaried employees. With fewer employees that command higher salaries on the payroll, simple math tells us that wages are not spiraling out of control.

Demand at low levels as the economic cycle ebbs lower.

And good reason they are not. In his interview with CNBC, GE CEO Jack Welch said he has not seen demand this poor since 1991. That was telling enough, but then he noted how bad things were when he took over in 1981 and how he will have started and ended his leadership at GE in similarly poor economic times. From the horses mouth, yet falling on deaf ears at the Fed and the Congress.

The Economic Cycle Research Institute tracks economic cycles and we have been reporting on its findings every two weeks. Its new report is out and while inflation indicators continue their plunge that began in April 2000, the economic cycle itself has continued down, choosing the recession level as opposed to the higher 'slowdown' level. This index projects the economic activity 10 months in the future, and it is telling us that the Fed has dropped the ball and that the economy is heading into recession. It shows no V bottom in the economy unless something major happens.

Fed looking the other way, and Congress is in the twilight zone.

The Fed, however, continues its rosy, upbeat view of things, as Dallas president McTeer Friday opined that things were not bad and he expected 1% growth in the first quarter. The Fed has been bolstered by the consumer confidence numbers and retail sales that are holding up fairly well. The position is not totally without merit as Friday it was reported that consumer credit rose $13.5 billion in February (a 10% annual rate) and that wholesale inventories fell 0.1% in February after January's 0.4% decline. That is good news, but the stock to sales ratio remained flat at 1.29 months as wholesale sales also dropped 0.1%.

What the Fed and the Congress (now that the Senate sliced and diced the proposed tax cut) are putting all of their chips on is the consumer. Just about every indicator in the economy is in the tank other than those related to the consumer. Sure the consumer is two-thirds of the economy, but we said a year ago that when jobs were on the line that is when confidence would fall. Jobs have been decreasing at an accelerating pace after trying to hold up early in the year. They appear to have resumed the downward trend. Consumer confidence has been falling with them. Only fools would expect confidence to climb if the jobless rate continues on its track.

It is sickeningly ironic that both the Fed and the Congress are betting the future of the economy and their reputations on the consumer. The consumers they are counting on are the same ones that showed the drive, productivity and hard work that made the expansion work after they were given a chance with the tax cuts back in 1981. Those consumers and entrepreneurs made the expansion work; they made the Fed's job a milk run and they gave the Congress trillions of dollars to squander on pork and worthless programs as they fattened up the government. Now that the Congress has gone on a spending binge and is jealously holding onto our money hostage and the Fed has bungled the economy with its Y2K fiasco, they have turned to the one constant in the economy: the entrepreneur, the worker, the consumer. "Hold hands and buy an SUV." That sounds similar to "Let them eat cake."

We have often talked of the arrogance of our elected and un-elected officials, and their recent wager highlights this. There has been talk about President Bush talking down the economy; from our standpoint, straight talk about a problem is refreshing. Did the Fed's cheerleading in 1974 with the Greenspan brainchild 'WIN' buttons do any good? Did giving taxpayers a $100 rebate help the economy? No! Will the Fed's cheerleading (no less than 4 Fed officials were out last week talking up the economy; when was the last time that many were speaking at once?) keep consumers happy? NO! JOBS keep consumers happy and confident. Talk to ANY CEO at a major company and ANY small business owner. They are saying the economy is as bad as they have seen it since the last recession and the drop has been faster. That means fewer jobs. That means lower confidence. That means recession if there is not immediate action.

Action, not lip service. The Fed could not talk down the markets; it had to raise rates 6 times to stall the bull. The Fed was on the right track in trying to save what it destroyed, but it is now taking its eye off the ball based on the recent statements that have been peppering the newswires. It is back to talking up the economy. WIN! The senate has gone into Wonderland. Lincoln Chafee, republican/Rhode Island stated that it would be bad for the country if the senate passed a tax bill that was decided by a vote from VP Cheney. Is it better for the country that we wade right into recession? Was not Clinton's tax increase passed by the vote of VP Gore? This is the type of drivel that we are being fed by our representatives on both sides of the aisle. The sad thing is, if we stand for it, we are going to suffer the consequences. They will not. They will still get their salaries that they raised, their pensions, the lavish Washington balls and parties while we foot the bill. This is a wakeup call, but we doubt that most citizens are listening. Instead they will wake up some day and realize they are out of a job and look to the government for a handout.

Summary

The economy was looking stronger. It looked as if it was going to pull up out of the dive. The latest round of data, however, while still showing decent consumer confidence and buying, are at great risk because of the continuing rise in weekly jobless claims. Confidence cannot afford to fall any further. If it does, there goes the housing market and the auto market, two areas that are trying to hold up. All of the chips are piled up on one number, the consumer. The wheel is spinning. Tough odds without some help from the Fed and the Congress.

The Senate and House bills have to be reconciled. During that process the tax cut can be beefed up once again. Let your senators and House representatives know your thoughts, and do it emphatically.

http://www.senate.gov/

http://www.house.gov/

THE MARKETS

The volume that was lacking on Thursday's rally showed us there was a lack of overwhelming buying sentiment. The lack of volume on Friday's selling was better than out and out dumping, and it leaves the door open for further rallying. That would take something the market has lacked thus far, however, and we also have to remember the markets are still in a downtrend. This week earnings season gets officially underway with YHOO reporting on Wednesday after the close. All of the speculation will start being put to rest. We have seen some surprises on the software side and in other areas, but we know many will not make the numbers, lowered or otherwise.

The big question will be whether the markets can find some footing for a rally, i.e., whether they are washed out enough on bad news to stage a bear market rally that has more than a day or two to the upside. This market needs to draw in some people in a nice rally over a few weeks and then go down to test the lows one more time to form a more solid double bottom to rally off of. The Arms Index says there will be a significant bottom by May 4. That is enough time for the markets to rally higher, fail, and test the lows one more time. That would build a more substantial based to rally from.

Of course, the indexes could simply rally on from here without stopping. The Dow and S&P 500 have set up credible double bottom patterns that could sustain a new bull run. If earnings news is palatable to investors, that could be enough to spur them higher in a real rally or a bear market rally. Watching the price and volume action at the end of each session will tell us which we are dealing with on a move higher. We can see bear market rallies give positive confirmation and then fail as we saw back in June 2000. You cannot be sure of what you have until the move is well down the road. So, you execute buys based on what the market is telling you at the time. You continue to use strict stop loss rules to protect against breakout failures as we have seen in some of our recent plays. In other words, you continue to be on alert. If it is a real rally there will be breakouts that we can continue to play.

Friday's fall was on lighter volume, but we have seen many selling sprees start on lighter volume after a high volume run higher. This is especially true when the indexes are right at resistance as they were as of Thursday's close. They fell back from resistance as expected; now we see if they can mount another run at resistance and on what volume, or they fold on higher volume as they have done in the past. There is still significant work to do for a move up that lasts, but that does not mean it will be until July until that happens. The groundwork can be completed in three weeks if investors are ready for it.

Overall market stats:

VIX: 36.76; +1.79. Volatility drifted higher as the session wore on, though it remained well below the 40 level hit earlier in the week. On a percentage basis, volatility moved more than the indexes themselves. That indicates there is still a healthy amount of anxiety in the market as options traders are quick to jump into the action on whatever moves are made.

VXN: 79.56; +3.27. This volatility indicator spiked to an all-time high Friday, reaching 80.45 on its high early in the session. It revisited that level late in the session, but the late rally on the Nasdaq sent it back down. Still, it closed at its highest point ever prior to Friday's session. These levels have indicated rallies in the past on the Nasdaq. Is another one so quickly in the offing? Both volatility indicators look promising.

Put/Call ratio (CBOE): 0.81; +0.11. Put action increased on the CBOE and it did on all of the other options exchanges as well (0.90 overall). As with the volatility indicators, put buyers remain skeptical on the future of the market. Total volume of options was down, however, indicating that there was not excessive fear (964,000 versus 1.576 million on Thursday).

NASDAQ: Gave back almost half of what it gained Thursday as it could not mount a move over resistance at the 10 day MVA and down trendline running from late January.

Stats: Down 64.64 points (-3.6%) to close at 1720.36.
Volume: 1.754 billion (-24.7%). Down volume led 1.512 billion to 223 million upside shares. A substantial volume decline that leaves open the door for a continuation of the rally that started Thursday.
A/D and Hi/Lo: Declining issues returned to the lead 2 to 1. It was a week of wide swings with decliners leading advancers and vice versa by 2 to 1 and 3 to 1 margins. New highs fell to 51 (-18) while new lows rose to 229 (+57).

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

Unable to break over resistance at the 10 day MVA (1785.14) and its coincident down trendline, the Nasdaq again ran into trouble and headed back down. The sharply lower volume suggests the sellers were not that perturbed by the employment numbers and were waiting to see what warnings Monday brings and the earnings week ahead. Price/volume action over this coming week will tell us more. A high volume break over the down trendline starting Tuesday would indicate we may have a bear market rally underway. Higher volume selling and we have to worry again about another new low.

As we noted Thursday, this third leg down on the Nasdaq is of equal percentages as the first two. That is a point where most three leg bear markets have turned. There are signs pointing to a turn all around, but they are not quite there yet. There is more work to be done with leading patterns, and there is the growing issue of whether the economy will fade into recession. Again, a rally over the next two to three weeks could set up a solid test and rebound.

Dow/NYSE: Back below the 18 day MVA but above 9750 on lighter volume. The Dow is flirting with a breakout of its short double bottom, but there is formidable resistance at 10,000.

Stats: Down 126.95 points (-1.3%) to close at 9791.09.
Volume: NYSE volume peeled back to 1.266 billion shares (-7.5%) but remained above average. Down volume was sharply in control, 1.010 billion shares versus 232 million to the upside. Volume was lower, but the sellers were clearly in control.
A/D and Hi/Lo: Declining issues jumped back ahead 2.42 to 1. As with the Nasdaq, the A/D line has swing wildly depending upon whether the day was an advance or decline. Another sign of high volatility that often accompanies changes in market direction. New highs dropped to 23 while new lows came in at 48.

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

The Dow was unable to even attempt a move toward 10,000 Friday, falling back below its 18 day MVA (9849.58). It was able to bounce up off of its low (9698) four times during the session; that is a positive and indicates it was trying to build a floor during the session. Perhaps buyers are coming in to support the index for another run at the resistance at 9992.53 (basically 10,000). We will look for a high volume move over that level for the breakout that will point to taking new upside positions on the index and stocks that breakout as well from solid bases. If it cannot and the selling continues, we will continue to play the DJX options to the dowside.

S&P 500: The S&P was no different than its brothers, falling back on lighter volume after closing just below resistance on Thursday's big advance. Volume remained above average, so the selling was not inconsequential. It attempted to find bottom at 1120 on three occasions and it did rally at the close. Still, it was in a downtrend all session. It has resistance continuing at its 18 day MVA (1155.16) and the down trendline at 1160 even before it gets to the official breakout point of its double bottom (1183.34). We note that the index turned down at its down trendline, however, and that is no change in character. The down trendline stays in place for now until it shows us a breakout on strong volume.

Stats: Down 23.01 points (-2%) to close at 1128.43.
Volume: NYSE volume was dropped off but remained above average at 1.266 billion shares (-7.5%).

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

THIS WEEK

Earnings will set the stage for the week with YHOO, SGR and others starting to tell us whether or not our worst fears are real or somewhat hyped. As for economic news we will have jobless claims and retail sales Thursday, with business inventories and the preliminary Michigan Sentiment Survey on Friday. These are key economic reports that in combination with the earnings reports could give investors a boost or a boo hoo. Seriously, there has been a massive amount of selling and the indexes continue to appear ready for a bounce of some sort, but they have to clear resistance.

Moreover, the technology sector does not appear that it will get a lot of help from the semiconductors, and that puts a limit on any upside move. Still, that may be enough for a bear market rally that will set up a better move a month from now. We need to see that break over resistance on rising, above average volume to have some comfort with such a move. Remember, we want to see institutions step in over a period of time, not just a day or two. That is why we look for the follow through day well into the rally as this shows institutions remain interested beyond the first few days of the rally. The indexes need a rally to help develop the patterns of leading stocks a bit more to be ready for a real breakout and bull run. If there are no leaders in good patterns, bulls don't have far to run.

If the move continues to stall, we have no problem playing more downside. Indeed, we took some downside positions Friday afternoon, made some money and then took some more at the close, setting up for a weak Monday. Those positions were more on a hunch with earnings season opening up on Monday than anything else, though the fact that he indexes sold back again at resistance had something to do with it as well. Many stocks are still primed for downside moves if the selling continues, but we do not want to overstay positions to the downside if selling volume remain light. There has been a lot of selling and signs that the indexes want to make a stand for some type of rally. Be light on the feet, take some decent gains and be ready for change. Could be in a transition time, and it is best to take some gains off the tables when you have them than overstay and get caught in the turn.

End Part 1 of 2

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