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us stock market, trade stock
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5/12/03 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts issued Monday: VTAL; PCNTF; CNCT
Buy alerts issued: POWI; BCR; BRCM; MDCO; DRIV
Trailing stops issued: None issued
Stop alerts issued: None issued
Indexes follow Friday setup with nice gains.
Futures were slightly negative but not selling off as a CSCO upgrade and neutral Treasury Secretary comments regarding the dollar offset each other. That set up our favorite 'soft open' scenario where some sellers use a prior up session as a selling point given some possibly negative news. What we like is that those sellers are typically few in number, and once they are gone the indexes often snap right back and build throughout the session. That is precisely what happened Monday as stocks started lower then reversed in the first half hour and rallied all session. That continues the bullish intraday action exhibited in this rally: down early, rallying into the close.
Volume was up, particularly on Nasdaq, but it was also not blowout. A good, above average volume surge does indicate that accumulation continues as the market rises on rising volume and then eases back on lower volume. That shows more buyers than sellers in the market overall. The leaders were rising on strong volume as well, a further indication that buyers are still buying in numbers that for now are easily exceeding the number of sellers.
THE MARKET
Another solid session with some rising volume and solid breadth, though the small and mid-caps took a back seat after leading the prior moves along with Nasdaq. That is something that we have chronicled about this rally: the small caps have come to life and tend to lead the moves back up after pullbacks. Then the large caps make up some lost ground as the bounce back up continues. That action continued Monday after the smaller cap issues and techs started things back up Friday.
It was not a huge session. The point gains were impressive, breadth was solid, and volume rose. The numbers were not blowout. They were adequate to get the job done, i.e., rising volume on a rally off a nice, orderly test of the breakout by Nasdaq and SP500 from their cup with handle patterns two Fridays back. This continues the solid price/volume action that shows more volume on the up sessions and lower volume when the market sells.
In addition to the continuation of the nice cup with handle breakouts, Nasdaq and SP500 look as if they finally put some distance between the close and the December and January high, respectively. The indexes had tapped at those levels for a week, unable to make the break. Monday they did so with solid though not outstanding upside volume. That now sets the stage for Nasdaq to test 1550 to 1560, and maybe even 1575. SP500 takes aim on the December intraday high at 954.28.
Market Sentiment
Volatility continues to decline and we still have several questions about how the market can rally even as volatility falls and remains at levels considered in the low end of the 'normal' scale. Volatility is a secondary indicator. By that we mean it is based on intangibles such as investors fear or greed. Those are inherently difficult to quantify in the continuing shifting sands of investor sentiment. What might be a significant level during a bull market could be less significant in a bear market or even at different times in the same bear market. We do not ignore it or any sentiment indicator when it reaches extreme readings, but we also know that it can continue at low or high levels for long stretches with no impact on market action. The same can be said for other sentiment indicators as well as more technical indicators such as stochastics or MACD. After reaching critical levels they can run laterally at that level for months or even make the prescribed turn but have no impact on the stock or the market.
It is always key to keep abreast of the sentiment indicators but not let them control your investment decisions. They are warning flags that make you look hard at the primary indicators such as price/volume action, patterns, and leadership. Keeping them in mind and reviewing them also keeps you honest with what you are looking at in the primary indicators: are you glossing over rising problems in leadership breakdown that the low VIX might have been warning about? Thus keep them in the analysis, but do not use them to time your investments because the WHEN is the key. They are not good timing instruments, just confirmations of what the primary indicators are showing you or are alerts to be on the ready in case something starts to break apart.
Finally, the current level is not historically the lowest volatility has been even as the market continued to surge. Two weeks back we discussed listed other times when volatility was lower but the market still rallied well past those times when volatility had already hit was would be considered low. Again, the timing issue comes into play.
VIX: 21.42; -0.62
VXN: 32.58; +0.49
Put/Call Ratio (CBOE): 0.76; -0.06
Nasdaq
Continued the Friday rebound, rising on solid volume, breaking 1522 and putting some distance between it and that level.
Stats: +21.25 points (+1.4%) to close at 1541.4
Volume: 1.78B (+14.06%). A solid surge in volume, well above average but not the super volume seen on the cup with handle breakout. Rebounds from tests of prior strong breakouts, however, do not require blowout volume but simply a strong surge. That is definitely what Nasdaq provided Monday as buyers continued to step back in after the dip to test the breakout.
Up Volume: 1.461B (+249M)
Down Volume: 300M (-31M)
A/D and Hi/Lo: Advancers led 1.75 to 1. Solid and continuing the pattern of stronger upside breadth.
Previous Session: Advancers led 2.21 to 1
New Highs: 206 (+58)
New Lows: 6 (-13)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Started soft and then led higher as the large names made the most hay in the market after the smaller names were in the spotlight last week. Nasdaq put some distance on the December high at 1422 and did so on expanding trade. Relative strength was breaking out as well. Now we look for next resistance that can come in at 1550 to 1560, but 1570 to 1578 from the June 2002 high and the May 2002 low provide the next significant resistance point. After a run to that point Nasdaq would be in real need of a rest, but with more money coming in we just keep that point in mind as we watch leadership and the price/volume action.
S&P 500/NYSE
It was a struggle in coming, but when it happened the large caps made it look fairly easy to take out the January high. Volume was the disappointment.
Stats: +11.7 points (+1.25%) to close at 945.11
NYSE Volume: 1.358B (+4.66%). Volume increased, but it was relatively light and barely made average. Not stellar, but a rising volume gain after a strong breakout and subsequent test is very good action.
Up Volume: 1.16B (+139M)
Down Volume: 204M (-70M)
A/D and Hi/Lo: Advancers led 2.33 to 1. Solid advancing breadth yet again though the smaller and mid cap stocks trailed the large caps in the Monday action.
Previous Session: Advancers led 2.91 to 1
New Highs: 290 (+68)
New Lows: 4 (+1)
The Chart: http://www.investmenthouse.com/cd/$spx.html
Tested lower early, held well above the 10 day MVA (927) on the low, and then the rally was on. SP500 paused a bit at 935, testing back down from that level early in the session, but then it made a clean break and never looked back. Rising volume on the move up off the breakout test is a solid indication that buyers still outnumber sellers in this rally. It was not blowout volume and to be honest we wanted to see more. It put a good cushion between it and that January peak, but the volume keeps us watching with caution. The next level of resistance is the December intraday high (954).
DJ30:
The blue chips lagged but not buy much as they too led the small and mid-caps Monday. Volume was solid but not huge. IBM provided a solid boost with a $1.45 gain as the Dow continues to remind everyone that it has more tech components. This move was a successful test of the ascending triangle breakout, and now the Dow has 8800 to 8875 to worry about as it continues, along with the other indexes, to take down resistance points one at a time. It is not a straight shot through them; they are working for their gains. That is the best kind of recovery: rally, consolidate the gains slowly, then rally some more. The indexes have set a good foundation and they are building upon that.
Stats: +122.13 points (+1.42%) to close at 8726.73
Volume: 1.358B (+4.66%)
The Chart: http://www.investmenthouse.com/cd/$indu.html
TUESDAY
The economic reports start in force Wednesday and will flood us with data at that point. Right now the market is moving on its own. After two solid upside days on the bounce the index still has momentum, but it will be looking for a breather after another session to session and one half of gains. That is how this market has been rallying, very similar to many of the stocks that are leading the charge.
As always we don't want to jump on stocks that are too extended after a move such as this. There will continue to be stocks breaking out of bases even after the rally has resumed for two sessions simple because stocks breakout in waves; some test their breakouts as others move up and start their moves. Thus there will still be stocks to buy, but we don't want to chase those that have used the past two sessions to rally. We let current plays work for us and then look to move into those stocks providing breakout entry points or pullback entry points (different sectors are moving up at different paces with some testing back while others have started back up).
The market made the move that we anticipated back in the Wednesday report, and we have entered new positions, let others ride, and have taken some gains. We will continue to do the same as long as the market continues to show strong leadership (basically the stocks we have entered that are still moving up and not breaking down) and solid price/volume action (strong volume on up sessions, declining volume on down sessions). There are those such as Doug Cliggott reading the market as overbought and setting up for a more violent fall based on the bond market action (he sees the markets telling divergent stories), those that are new raging bulls, those that are continuing bears, and just about every degree in between. All that tells us is to be selective, be patient, and let the good stocks provide good entry points and move in. We will let the market tell us who is right and let those on the tube worry about what fair value is. A market is made up of buyers and sellers. At some times the buyers are willing to pay more than at other times. We don't pretend to be smarter than all of the buyers and sellers that make up the stock market. We are happy to look at their tracks in the sand and act accordingly.
Support and Resistance
Nasdaq: Closed at 1541.40
Resistance: Some potential resistance at 1550 to 1560. 1570 to 1578 (June 2002 closing low, May 2002 high).
Support: The December intraday high (1522). The 10 day MVA at 1500. The August 2001/January 2002 down trendline (1498). The 18 day MVA (1476). The January high (1467). The March and August highs (1426 and 1427). The exponential 50 day MVA (1422).
S&P 500: Closed at 945.11
Resistance: 954 (December intraday high). 965 (August 2002 peak).
Support: 935 (November and January peaks). The 10 day MVA (927). The 18 day MVA (917) and price tops at 911 (July). September 2000/March 2002 down trendline (906). March and April highs (896 and 905). The 50 day MVA (892) and the 200 day MVA (882).
Dow: Closed at 8726.73
Resistance: November and January highs (8800, 8870). December high (9044).
Support: 8522 and 8520, the March and April twin peaks. The 10 day MVA (8557). The 18 day MVA (8490). The 200 day MVA (8323).
Economic Calendar
5-13-03
Trade Balance, May (8:30): -$41.0B expected, -$40.3B April.
5-14-03
Retail sales, April (8:30): 0.4% expected, 2.1% March
Retail ex Autos (8:30): 0.3% expected, 1.2% March.
5-15-03
New York PMI, May (8:00): -11.5 expected, -20.4 April
Initial jobless claims (8:30): 440K expected, 425K prior.
PPI, April (8:30): -0.5% expected, 1.5% March.
Core PPI (8:30): 0.0% exected, 0.7% prior.
Business inventories, March (8:30): 0.2% expected, 0.6% February
Industrial production, April (9:15): -0.3% expected, -0.5% March
Capacity utilization, April (9:15): 74.6% expected, 74.8% March.
Philly Fed, May (12:00): -6.0 expected, -8.8 prior.
5-16-03
Housing starts, April (8:30): 1.750M expected, 1.780M March
Building permits, April (8:30): 1.700M expected, 1.692M March
CPI, April (8:30): -0.1% expected, 0.3% March
Core CPI (8:30): 0.1% expected, 0.0% March
Michigan sentiment preliminary, May (9:45): 87.5 expected, 86.0 April.
SUBSCRIBER QUESTIONS
Q: On Friday morning, CNBC gave an advisory that Trimtabs.com was indicating that the market would sell off next week do to liquidity problems. Seems that due to a large number of offerings of new stock, they feel that there will not be enough buyers and/or money to absorb the new issues. Seems something like 8 billion dollars worth of stock if I understood correctly. My question is, what do you know about these people, and is their call a legitimate one. I would appreciate and value your call concerning this matter. Also, I am very impressed with you insights on the market. Very informative. Thanks.
A: Thanks for the kind words. Trimtabs issues these reports every time there is a greater than usual number of new offerings coming to market. This could be in the form of IPO's or additional offerings from existing exchange companies. The idea is, as you point out, somewhat intuitive in that there has to be enough demand in the market to buy the stock that is hitting the market. Either the new issues will suffer, existing issues will suffer, or the whole market will suffer as this stock hits the street and pushed up the amount of available product so to speak.
There is some basis in this if you look at stock split plays. As a stock moves into its split it tends to run higher and then back off when it splits as there is much more stock on the market and trade has to be greater to drive shares higher. Of course the price is lower so it is not an exact correlation: a $50 stock split to $25 still takes the same amount of money to impact the price the same percentage. Still we would often see stocks fall right at the split as more stock was on the market. That is not always true, however. One thing we saw in the bear market was stocks actually rallying higher as the split became effective. Basically investors wanted the stock and rallied it higher even though there was 'more' stock in the market. The stocks were rallying on a perceived economic improvement, and big money was moving in at the split and driving it higher.
We have seen many of these Trimtabs calls on market supply. They are very short term calls (the one you reference discussed the next two weeks as being lower). Sometimes the market moves lower, sometimes it moves up. Intuitively it makes some sense. In real life there are many more variables. Primary is the demand for stock, something the Trimtabs calls suupsedly take into account. Right now institutions are accumulating stock. There is still $2 trillion on the sidelines. If insitutions want to continue to buy good stocks they have plenty of capital to do it.
Further, history shows some very important details. First, all during the bull run, new IPO after new IPO hit the market, yet the market continued to move higher. What did that mean? It meant that when demand is high enough, it will absorb new issues. Thus Trimtabs is absolutely right that if there is more supply than demand the market will suffer. But it is the degree of demand that will determine how the indexes perform. There could be excess supply for the ENTIRE market to absorb, but we would most likely see the leaders continue to attract their share of existing funds. Thus even if Trimtabs is right it would be a short term effect and it does not impact the leading stocks to a great extent.
Finally, there is one statistic that flies the the face of an idea that new issues hurts the market. In all important market moves, the number of new issues directly correlates to market performance. New issues tend to become the new market leaders as they bring the latest and greatest technology to market. They tend to have stellar sales and earnings. When a market is healthy, the economy is or is going to be healthy, and new issues start to surface. History shows that markets tend to perform better the more new issues come to market. What drives the market is demand, and we have seen Trimtabs' calls correspond to market activity and we have also seen them not. The question is how much aggregate demand there is. Trimtabs does a good analysis of existing demand based on average shares traded, but that is a crude measure of latent demand.
THE PLAYS:
Good movers Monday: BCR; MDCO; POWI; DRIV; FDRY; FDX; FFIV; SSYS; THOR; LM; MRGE; NSM; OVTI; SEPR; TSCO; VTAL; UTHR
New:
Play Date: 05/12/2003
FLSH (M-Systems Flash Disk--$8.92; +0.54; no options): Semiconductor memory chips
http://biz.yahoo.com/p/f/flsh.html
STATUS: Reverse head and shoulders. FLSH is nearing the breakout of its 6-month base showing solid 7 to 3 accumulation (7 up weeks on rising volume to 3 down price weeks on rising volume in the base). That accumulation indicates that there are more buyers than sellers in the stock and it forms a solid foundation to move higher. It formed a very nice right shoulder, holding the 18 day MVA (8.16) on the low; that makes this a shallower shoulder than the left, indicating more strength in the pattern. It is right at the neckline breakout point and shows strong money flow as well.
Volume: 307.75K Avg Volume: 127.681K
BUY POINT: $3.06 Volume=195K Target=$3.94 Stop=$2.85
POSITION: - Stock (no option chain)
http://www.investmenthouse.com/ci/flsh.html
Play Date: 05/12/2003
SFNT (Safenet--$27.71; +1.94; optionable): Security software
http://biz.yahoo.com/p/s/sfnt.html
STATUS: Cup with handle. SFNT was a leader off of the October low, but the security software stocks all hit speed bumps and SFNT corrected back into this 4-month base where it gave back just under half its value. It has spent the last two months forming the right side of the base that shows solid 7 to 3 accumulation. Monday SFNT made a breakout move from the handle on solid, above average volume. It closed well off of its intraday high (28.70), but the pattern and volume indicated buyers. What we like about this play is that it can run up to the high in the pattern (32.21 in January) and still give us a nice return on stock positions. If it is strong it should move even higher and give us a bigger gain.
Volume: 488.857K Avg Volume: 262.59K
BUY POINT: $28.11 Volume=394K Target=$32.35 (initial) Stop=$26.14
POSITION: UUI IE - Sept. $25c (69 delta) or UUI IF - Sept. $30c (46 delta) &/or Stock
http://www.investmenthouse.com/ci/sfnt.html
Play Date: 05/12/2003
WCS (Wallace Computer Services--$26.93; +0.48; optionable): Printed forms and labels
http://biz.yahoo.com/p/w/wcs.html
STATUS: Flat base. You could call this a saucer or a flat base. Either way you look at it WCS moved between 25 and 26 the lat 3.5 months following a strong gap higher that moved it out of a 7-month double bottom. After such a strong move it needed some time to consolidate, and now it appears to have done just that. The current base shows outstanding accumulation at 6 up weeks on rising volume to 0 down weeks on rising volume; all buyers for the most part. The price/volume action is also very good within the pattern: stronger on the initial selling, then drying up as the stock moved laterally to well below average at the pattern lows. Then when it started up the past month volume started to swell to above average levels. Monday WCS made a strong volume move out of the pattern. It looks solid and is still a buy at this point.
Volume: 720.7K Avg Volume: 340.318K
BUY POINT: $26.12 Volume=510K Target=$31.35 Stop=$25.24
POSITION: WCS IE - Sept. $25c (76 delta) &/or Stock
http://www.investmenthouse.com/ci/wcs.html
End part 1 of 2
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