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4/10/01 Investment House Daily
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Investment House Daily Subscribers:

TONIGHT:
- Definitely looks like a transition in progress as indexes break above 2 months of resistance.
- Nasdaq confirms last week's reversal.
- Strong moves on high volume, but where are the stocks breaking to new highs?
- Fed not interested in inter-meeting rate cut and suggests the economy has bottomed.
- Bonds take their worst beating since January 3.
- Team Trades.

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THE SUMMARY

Markets bull through resistance on strong volume.

Monday it looked as if the indexes were trying to transition over into some buying. They were at the critical juncture, i.e., the previous resistance that had turned them back each rally attempt in the last two months. They could go either way. Today they finally broke through as all three major indexes brushed aside resistance on vastly improved, above average volume. It was kind of exciting to watch.

In addition to all indexes breaking near term resistance, the Nasdaq provided a confirmation move of last Thursday's reversal. The index moved up 6.1% on 2.2 billion shares, above average volume and a 52% increase from Monday's anemic showing. Advancing issues led 2.4 to 1. These are solid confirmation numbers, and many stocks advanced on impressive volume.

Where are the great stocks breaking to new highs?

We had our share of breakouts today, but they continued to be from unknown stocks. Now that is not a bad thing because after bear markets new leaders emerge. There are just not a lot of such stocks breaking out just yet. There were great moves by the former leaders, but unless they reversed their downtrends and gapped above that line on heavy volume, we cannot put much faith into the moves. They are still deep, deep in their bases and have a lot of overhead supply. Any weakness and they are jumped on harder than a trampoline at a ten year olds birthday party.

With more upside movement over the next week we may see some of the basing stocks that have held up much better than the big name techs breaking into new high territory. There are many massing at the borders; what they need is some relief from the waves of selling that has kept them at bay. If we cannot get these stocks that have held up well in their patterns while sporting excellent fundamentals, the rally will be in trouble. Lack of leadership has ended each rally attempt thus far. It did not matter that there was a good confirmation day with a strong A/D ratio; there were no leaders as there were in the summer 2000 rally. We have to see some leadership caliber stocks in decent patterns (ACS, THQI, LLL, NVDA, etc.) breakout in order to give this attempted move some direction and support.

Without leadership, just a bear market rally? Would that be all that bad?

If the market does not get any leadership it is destined for a bear market rally that will ultimately fail. Even if it does get leadership, however, that does not mean any further move up is more than a bear market rally as well. The biggest names and still the biggest caps on the Nasdaq are big name tech stocks; these are going to weigh things down if they cannot pull V bottom reversals here. A tall order given the damage done, but not impossible.

That does not mean they won't make a go of it if they can. Investors still seem eager to buy into these stocks after serious rounds of selling. When the pent up urge to buy gets a chance, these issues are snapped up. The market had been very oversold. Monday the analysts jumped on the chips again, but they did not seem to mind. Today Cypress Semiconductor said it would come in light and it was up on the session. The market could rally without major breakouts for a couple of weeks or more. Definitely tradable if we are smart and use trailing stop losses, and it could give the emerging leaders a chance to complete their bases. Then when the rally fades the emerging leaders form the handles to their patterns and shake out the sellers that bail out thinking the market is going to plunge again and don't see the patterns in front of their eyes. The stocks in good patterns hold up better than the others with a lot of overhead supply. The falling big names scare investors again and they bail. About that time all of the sellers of the leaders are gone and when the selling pressure abates once again, the breakout.

That is a scenario that has happened over and over in the market for decades. Some are saying that the recent double bottom patterns on the Dow and S&P 500 are enough for the long term bottom. As we said before, they are a bit short in duration, but we are not going to fight the tape. Today was a confirmation of the Nasdaq reversal last week. Today showed the Dow breaking out of that double bottom pattern and the S&P 500 breaking its down trendline as it looks to breakout of its double bottom itself. The numbers are showing us this has the potential to be a rally that carries the market out of the bear or it could be a nice rally as we had last summer. While we anticipate a test once again, we have to acknowledge the numbers the market is showing us.

Which stocks do we look to?

Do we rush to the past beloved names? Not wholesale. We saw some reverse and gap over down trendlines. It is not a breakout, but it is the strongest reversal signal we know. Those are worth looking into (e.g., BEAS, ADBE). They changed their character in a hurry, but buying starts abruptly when the market is so beaten down. We also stick with the stocks with the strong patterns that are looking ready to breakout over resistance. GENZ blasted off today as did TFX. NVDA, LLL, THQI, and ACS continue to look strong as well. There are many we are tracking on the reports that we are patiently awaiting to breakout.

Do we give up on the downside? No. There are still stocks that are in pain (e.g., BGEN) that could not join the fun today. Others have moved up to resistance on anemic volume and could turn right back down regardless of what the overall market does. Moreover, we have to remain alert as to resistance points on the upside moves. There is all of the sudden a lot of hope springing up as we discussed before. Hope that things may be better than they are. The indexes made bold moves today, but there is still resistance ahead; this bear market has been long and hard, and recovering won't be a simple matter. Today we had to close out some short positions; tomorrow morning may give us another chance to close a few more if it looks as if they are going to cross resistance on us. MOT may splash some water on the enthusiasm early in tomorrow's session.

THE MARKETS

The Fed (Poole) basically said there would be no inter-meeting cut and that the economy was better than most thought. Monday they were abuzz over tax money coming out of the market; today they said it was already out of the market. Last week they all said there was no capitulation; today they were saying last week was capitulation. This is the kind of hope that rushes in to fill the vacuum when oversold markets are sparked higher. On the other hand the markets showed us good numbers for the foundation of a rally. Long term? Short term? We have to see if the leaders step up to the plate. They did last summer (SDLI et al), but the rally still ended and more selling came. No one feels like going long right now, at least a lot don't. When the numbers say it is time to do it but your stomach says don't, you have to focus on the numbers. You also have to keep your head. Don't get caught up in the hope. Enter solid positions when the stocks make the break out of solid patterns. Follow the gains up with trailing stop losses just in case we have a reversal as we saw last summer. If high quality (and that does not necessarily mean well-known) stocks start breaking out in numbers, that is a very good sign. Stay focused on what is important and tune out the emotion that you are bombarded by on the tube.

Overall market stats:

VIX: 33.20; -3.44. Sold down hard today on the break over resistance by the S&P. It is still above 30 and that suggests that apprehension is still there. We want to keep it there.

VXN: 74.40; -0.78. Nasdaq volatility hardly scratched again today even with a massive gain on the index. If the pattern holds, it will fall tomorrow. Volatility is still relatively high on the Nasdaq 100 as well.

Put/Call ratio (CBOE): 0.59; -0.36. Put buyers were well out of the picture today as overall option activity rose to 1.45 million (up from Monday's 1.04 million). Not much short activity even on the selling side. This was a buying day.

NASDAQ: Broke over and held above (by its teeth) the 18 day MVA. It has not been over that MVA since early January.

Stats: Up 106.32 points (+6.1%) to close at 1852.03.
Volume: 2.203 billion shares (+52%). A massive volume spike back above average. Upside volume was way out in front, 2.016 billion to 162 million.
A/D and Hi/Lo: Advancing issues led decliners 2.4 to 1. That is a confirmation-caliber ratio. New highs rose to 90 (+25) while new lows fell to 143 (-99).

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

The index gave us the further move, jumping over the 18 day MVA (1848.78). That is territory it has not seen for over two months. The move came on a gap above the down trendline on solid, above average volume. This is a follow through day to the Wednesday reversal or, if you want, Thursday's positive close. From here the next real test is 2000. Another two days could easily reach that level at the rate it is running. After such a strong move, however, we may see some profit taking early in the morning, particularly after MOT's hideous earnings report after hours. We want to see the index hold at the 18 day MVA, but that does not give the index much room to maneuver. If it does sell back in the morning, we want to see it surge to close over the 18 day MVA. The last thing we need is another day of distribution immediately after a confirmation day. That would show the sellers are still out there waiting for each rally to weaken a bit before jumping back in to sell, sell, sell.

Dow/NYSE: The Dow broke out of its double bottom pattern early and it made a great moves all session on strong volume. In fact, its move was so successful it hit its 50 day MVA and down trendline on its high and pulled back from there.

Stats: Up 257.59 points (+2.6%) to close at 10,102.74.
Volume: NYSE volume jumped to 1.349 billion (+26%), back above average.
A/D and Hi/Lo: Advancing issues jumped further into the lead at 2.11 to 1 (1.75 to 1 Monday). Again, this is a solid ratio for the start of a rally. No new high/new low information tonight.

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

Today the Dow had the fuel as buyers poured into its stocks top to bottom. The index broke out of its double bottom pattern and then rammed into the 50 day MVA and its down trendline at its high (10,155.24) and pulled back to close. It is clear it is going to have some trouble with that level and then it has to deal with resistance at 10,300. All in due time. The index enjoyed a massive move today, and we could see it pull back a bit in the morning before making another run at that level. It may take a day off, it may take another crack at it again. We need to keep an eye on good stocks breaking out. We can also play the DJX to the upside on the pullback and the move back up.

S&P 500: Broke its 18 day MVA and its down trendline today on strong NYSE volume. A good move, but the next test will be the true one as it tries to break out of its double bottom. The breakout is at 1183.34. After such a huge day and the Motorola earnings joke it may test the 18 day MVA before moving back up (1154.90). We will look for a bounce from that level for some aggressive plays on the OEX, and we will also look for a breakout of the pattern for confirmation of this move and a point for additional positions.

Stats: Up 30.79 points (+2.9%) to close at 1168.38.
Volume: NYSE volume surged back above average to 1.349 billion shares (+26%).

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

TOMORROW

Once again no real economic news tomorrow (export/imports). The big news is Thursday with jobless claims, PPI, and retail sales. Friday the markets will be closed, but Michigan sentiment and business inventories will be out that day. The markets are either deciding that the economy is not that bad (or that the Fed is not going to cut before May) or they are rallying on false hope that earnings will be better than thought. Motorola sure did not help that hope. It needs to be something more, i.e., they do not care right now and see stocks as good buys based on the economic conditions. Whatever the case, institutions were in on the action today. We want to see that continue with a breakout from the S&P 500 and more solid, high volume moves from the Nasdaq. Institutions have dipped their toes several times only to be overwhelmed by the remaining funds that are selling into rallies.

Tomorrow's action will be key. Will the market reverse and sell on higher volume as it has in the past, or will it continue to show bullish action. That action can be either a low volume pullback (understandable after such a run) or a continued move higher on rising volume. We have to watch any selling carefully as we want to avoid getting caught in selling that starts of innocently and then races ahead. We will watch for support levels to hold on any Motorola related selling, and then a move up. Motorola is not real news; it has been and still is in trouble. Still, investors will transfer its woes to other tech stocks. Or will they? If investors are at a point where they believe the bad news is priced in, they may just continue buying these stocks.

That is the risk in this from our point of view. Sure the bad news may be priced in for now; the indexes have been sold sharply. Will that still be the case two weeks from now when a real crusher hits the street and the markets have been moving more or less up during that time period? That is where the danger of a false hope rally is exposed. That is why we stick with the stocks that have formed better patterns and are breaking out on high volume just as they should. That is why we also will continue to look at good downside plays where the pattern is still weak. The indexes have changed character a bit; the nice, predictable downtrend has been at least temporarily interrupted by today's events. It may re-establish the pattern or it may start an upside pattern or new trading range pattern. We will let them find themselves and then take advantage of them. We had to close some of those positions today; others are at the crossroads and we may have to close them in the morning if we get some selling pressure that gives us some better exit points but does not lead to wholesale selling. We won't begrudge closing them out with less profit or a bit of a loss if this turns out to be a real rally.

Support and Resistance Levels

Nasdaq: Closed at 1852.03.
Resistance: 2000.
Support: 18 day MVA at 1847.75 would be good. 1750 after that.

S&P 500: Closed at 1168.38.
Resistance: Breakout from the double bottom pattern at 1183.34.
Support: 18 day MVA at 1154.90 and coincident down trendline.

Dow: Closed at 10,102.74.
Resistance: 50 day MVA and down trendline at 10,102.74. Then 10,250 to 10,300.
Support: 992.53.

Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.

4-11-01
Export Prices ex-ag., March (8:30): -0.1% versus -0.1% prior.
Import Prices ex-oil, March (8:30): -0.1% versus -0.1% prior.

4-12-01
Initial Claims, 4/7 (8:30): 383K versus 383K prior.
PPI, March (8:30): 0.1% versus 0.1% prior.
Core PPI, March (8:30): 0.1% versus 0.1% prior.
Retail Sales, March (8:30): 0.0% versus -0.2% prior.
Retail Sales ex-auto, March (8:30): 0.2% versus -0.3% prior.

4-13-01
Business Inventories, February (8:30): 0.3% versus 0.4% prior.
Michigan Sentiment-Preliminary, April (10:00): 91.0 versus 91.5 prior.

TEAM TRADES

TFX: We were watching this one last night as it was on the verge of breaking out on Monday. Just over two hours into the session eSignal popped up an alarm that TFX had hit 45.30 on the ask. The breakout was at 45.50, but we set it lower so we could take a look if it got close. Volume was excellent; TFX was almost at its daily average of 102,000 when we tuned in. Someone turned on the 'buy' light because as we were watching it jumped from 45.30 to 45.80 in a matter of a few minutes and on a huge volume spike. We figured it would come back to test the breakout, so we put a buy stop in at 45.55. It did indeed test the breakout, but it only went down to 45.60. We checked the status of our orders with about an hour to go, and it looked strong. We debated moving the order higher, but decided at that late juncture to wait until closer to the close and perhaps pick it up on a test in the morning. Well, the stock sold down to 45.40 with about a half hour to go. That is when the trade was made. It bounced back up and closed at 45.66. Great volume, good gap higher.

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End Part 1 of 2

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