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world stock market, us stock market
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5/19/03 Stock Split Report Update
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Monday: None issued. There were some good moves despite the carnage, and we decided to let them keep going as they obviously had something the rest of the market did not.
Buy alerts issued: PWN
Trailing stops issued: DSPG; VTAL; ADTN; CECO
Stop alerts issued: Cleared out many breaking support. ZQK; MXIM; XLNX; IART; LLTC; MER; THOR; ADSK
You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- Signs of topping give way to actual downside as indexes post sharp losses.
- Not so strong dollar policy keeps US economy walking the tightrope.
- Lower volume little consolation for large point losses.
- Subscriber Questions
Negatives converge to put the brakes on the rally.
The market was showing signs of topping as Nasdaq struggled with a 15% move over its 200 day MVA and key stocks started to move up and down in some individual volatility not picked up by the overall market volatility indications. These were already indicating that the market was starting to struggle, and when other factors hit the market Monday, they provided plenty of reasons for nervous investors to sell.
Those items included some old and new issues. Treasury secretary Snow was out Sunday saying there was no change in the strong dollar position. That headline remains the same. Problem is, the definition of a strong dollar is changing from one where it was assumed the US would do whatever it took to keep the dollar strong to one where the market determines the strength, and as long as it is perceived as solid and the fall 'modest' as Treasury Secretary Snow put it, the dollar is considered strong.
On top of the dollar there was a Supreme Court ruling that was viewed as negative for the drug and healthcare industry. The Court did not address the merits of the case, just denied the drug industry's motion for an injunction to prevent enforcement of a Maine law requiring drug companies to offer their drugs at lower rates to certain individuals. All the Court said was that the companies had not carried their burden to get the injunction, not whether the law was constitutional. It was viewed as a negative, however, as the law can now go into force and others could pass their own versions. That hammered the drug and related stocks, strong forces in the market.
The weakness in drugs exacerbated the selling mindset, and when Saudi Arabia's ambassador confessed his 'gut feeling' that 'something big' was going to happen regarding a terrorist attack, the market was stuck to the floor like a piece of gum stuck to your shoe on a hot summer day. The indexes finished on their lows with -2:1 breadth showing weakness across the board. The major indexes broke along with the small caps broke near support, though the mid-caps did manage to hold the 18 day MVA. About the only bright spot was lower volume, but it was a pretty dim bulb. In the big picture, if volume stays low that helps limit the overall selling binge. The key is lower volume and the leader's ability to hold support as the rest of the market sells harder, and then bouncing from their support and again showing leadership.
More on the dollar.
If it seems the market was overwrought about the dollar, it was and it was not. There are two schools of though regarding the dollar: keep it strong to prevent any disinvestment in the U.S. versus let it weaken and thus help exporters and multinationals. That usually means manufacturers. Bush is clearly in the latter camp with his two Treasury nominees being from old economy companies who always harp about the need for a weaker dollar to boost sales. In the old days that had some merit when manufacturing made up more of the economy and when there was no so much foreign investment in the U.S.
Today services make up 80% of the economy, so a surge in manufacturing exports is not going to give the economy any big kick. One might argue that every little bit helps, but if that 'bit' is offset by other areas, it may not help at all. What happens if the dollar gets too weak in the eyes of foreign investors is that they decide to sell out their U.S. investments and move their cash elsewhere. That means they sell U.S. assets, not only putting downward pressure on those assets, but further pressure on the dollar as well as dollars are converted for other currency. Those dollars come home, increasing the supply of money, lowering the value of the dollars, and setting the stage for inflation as more dollars at home chase the same amount of goods due to the stagnant economy (even with some upturn in revenues from multinational companies).
Monday those viewing the negatives of the weaker dollar were selling based on that. The problem is what level is just right or too low? Much as with the Fed trying to gauge what rate level is best to stimulate the economy or slow it down, by the time you see some of the desired effect, you have usually gone too far in the wrong direction and the impacts are much worse than hoped. This happened in the early 1990's when Bush I's administration tried to talk the dollar down in, you guessed it, an attempt to get the economy going again. Same problem resulted. Once they got it heading lower, much like the Energizer Bunny, it kept going and going. Sure the economy eventually pulled out of the recession, but it was slow, drawn out, and jobless.
That is hardly a ringing endorsement to a low dollar policy. It is ultimately inflationary as outlined above, and if worried about deflation, it can work to offset that. To us, however, the potential carnage to an economy that is in large part based on foreign investment to fund the debt, it is a dangerous game to play. It could exacerbate problems by causing some inflation as it typically does but failing to generate the expected economic boost given the small percentage manufacturing plays in the US economy. As one economist put it, it smacks of desperation when you talk down your own currency to try and boost your economy. You are more or less admitting you cannot generate the recovery. As Bush I saw in the early 1990's, it can go too far and make things a lot worse before they finally get better. To us, encouraging what got us where we were before the bust, i.e., encouraging what works, is the best method. That involved giving US as well as the rest of the world incentive to invest in the US based on strong growth initiatives that promised greater returns. That keeps everyone happy, including our trading partners who don't like to see us monkey around with our currency. Some lessons, however, are never learned. There are positives to a weak dollar, but in the present context, those positives are overwhelmed by the potential downside.
THE MARKET
Volume was lower during the Monday selling, but with large point losses, breaking near term support, and big downside breadth the market reversed most of those items that made it stronger on the move up other than the volume pattern.
In a nutshell, most stocks sold (-2:1 breadth) and moved below near support. Volume was mixed with some selling on higher volume, others just following the crowd on lower trade. Leaders sold, for the most part (IDBE, SSYS, AMT moved higher), but held support because they were so much further ahead than the rest of the market. The key over the next few sessions will be how well leaders continue to lead, i.e., hold support and then move back up. If they break support on volume, they are most likely going into their next consolidation or basing period, and that could be another month or so as we have seen before they are ready to move higher again. That would continue the rally followed by gradual consolidation pattern that has marked the move off the October bottom. Overall that is good news for the market as it keeps it in check, not letting it get too extended. That also reduces the number of solid plays, however, as stocks move into a consolidation pattern.
In the big picture we see this as the start of a consolidation after Nasdaq made it to 15% over its 200 day MVA, leading the market higher. Lower volume is overall a good sign for the health of the market. The next sign will be how those leaders perform as they continue to test support. If they hold up at near support, then the rally can continue sooner. If they slip below those levels and do not recovery rapidly, the likelihood is that a somewhat longer consolidation will follow. Again, the action thus far indicates another consolidation coming and not a major breakdown.
Market Sentiment
Naturally there was some rise in sentiment indicators given the 3% drop on Nasdaq. Volatility levels are still quite low, however, buried in the low end of the 'normal' range. The put/call ratio shot higher, but it has been a less reliable indicator during this bear market.
VIX: 23.04; +2.03
VXN: 31.1; +0.08
Put/Call Ratio (CBOE): 1; +0.46
Nasdaq
Gapped lower and was holding the 18 day MVA until the late word from Saudi Arabia pushed it below that level.
Stats: -45.76 points (-2.97%) to close at 1492.77
Volume: 1.68B (-5.74%). Lower though still above average volume on the selling. No distribution but this is one of our main focal points along with leaders.
Up Volume: 232M (-526M)
Down Volume: 1.421B (+435M). Volume was lower, but it was dominated by sellers.
A/D and Hi/Lo: Decliners led 2.34 to 1. Downside breadth expanded for the first time since the last trouble spot in the market in late March and early April.
Previous Session: Decliners led 1.42 to 1
New Highs: 118 (-51)
New Lows: 12 (+1)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Nasdaq was doing okay, holding the 18 day MVA (1499) as it moved laterally in the afternoon. A late selling spurt on the Saudi news, however, pushed it below the 18 day MVA on the close. The lack of distribution was a bigger picture positive, but that has to be followed by holding at the next support levels (January high at 1468) and continued lighter selling.
S&P 500/NYSE
The large caps were pummeled, the second largest percentage loss of the major three indexes. Volume was lower but it too broke near support.
Stats: -23.53 points (-2.49%) to close at 920.77
NYSE Volume: 1.361B (-8.46%)
Up Volume: 146M (-662M)
Down Volume: 1.207B (+525M)
A/D and Hi/Lo: Decliners led 2.44 to 1
Previous Session: Advancers led 1.05 to 1
New Highs: 195 (-49)
New Lows: 8 (+5)
The Chart: http://www.investmenthouse.com/cd/$spx.html
Gapped lower and sold all session, breaking near support with relative ease as large drug stocks really weighed on the index. It closed below the 18 day MVA (925), making 911, the July top, step up. That level has been rather porous in the past, however. The September 2000/March 2002 down trendline at 901 and the 50 day MVA (900) are the next solid levels.
DJ30:
Turned and fell hard as well, slicing the 10 and 18 day MVA (8552) though volume was lighter on the blue chip index as well. It closed near some support at 8500, but the 50 day MVA (8385) and the 200 day MVA (8325) are the next solid support levels if it cannot reverse after a push lower early Tuesday.
Stats: -185.58 points (-2.14%) to close at 8493.39
Volume: 1.361B (-8.46%)
The Chart: http://www.investmenthouse.com/cd/$indu.html
TUESDAY
The scheduled economic news remains light, but with commentary about the dollar, terrorist attacks, and increased terror activity coming from all points at all times, anything goes. Those are mostly indications, however, of a market that has rallied well, was running out of steam, and looking for a reason to sell.
With the indexes closing on their lows and below near support, we anticipate further downside on the open. The question will then be whether they hold next support and rally back on solid volume, indicating this was just a short term blip. That is possible, but with the severity of the point losses the likelihood of an immediate rebound that has real staying power is remote. The market ran hard and could use a bit more of a breather.
That does not mean there won't be continued positive action. Leaders tend to ply their trade rather well even in a consolidating market. No doubt most will need some consolidation of their own, but they do tend to move ahead of the rest of the market. Again, how stocks such as SCSS, SSYS, NTES, SSYS, ERES, EBAY, SOHU, etc. perform the rest of the week will tell more of the story. If they level out and move more or less laterally on lower volume, that is a positive.
As for Tuesday we will be watching how far the market sinks and whether it can check up and hold at support through the session. It is no time to get hasty and jump in thinking it is time to buy on the dips. Maybe it will be, but this has the look and feel of a consolidation that will be more than a one or two day pullback and bounce back. We will be protecting positions and looking for opportunities downside as well as upside as those will continue even in a consolidating market.
Support and Resistance
Nasdaq: Closed at 1492.77
Resistance: The 18 day MVA (1498). The 10 day MVA at 1517. The December intraday high (1522). Some resistance at 1550 to 1560. 1570 to 1578 (June 2002 closing low, May 2002 high). Down trendline from the May 2001/January 2002 intraday highs around 1583.
Support: The August 2001/January 2002 down trendline (1486). The January high (1467). The exponential 50 day MVA (1442). The March and August highs (1426 and 1427).
S&P 500: Closed at 920.77
Resistance: The 18 day MVA (925). 935 (November and January peaks). The 10 day MVA (933). 954 (December intraday high). 965 (August 2002 peak).
Support: Price tops at 911 (July). September 2000/March 2002 down trendline (901). March and April highs (896 and 905). The 50 day MVA (900) and the 200 day MVA (883).
Dow: Closed at 8493.39
Resistance: The 18 day MVA (8552). The 10 day MVA (8601). November and January highs (8800, 8870). December high (9044).
Support: The 50 day MVA (8385). The 200 day MVA (8325). 8522 and 8520, the March and April twin peaks.
Economic Calendar
5-19-03
Leading Economic Indicators, April (10:00): 0.1% actual, 0.0% expected, -0.2% March.
5-20-03
Treasury Budget, April (2:00): $52.0B expected, $67.2B March.
5-22-03
Initial jobless claims (8:30): 435K expected, 417K prior.
SUBSCRIBERS QUESTION
Q: I know that you mentioned Eresearch Tech (ERES) in your answer to a subscriber question. I have been looking at this stock recently and wondered where you saw a good entry point? I see that they have a 2:1 stock split coming up on 5/29 and stocks tend to have a pre split run during the two weeks leading up to the split. Is now a good time to get in or should I wait for a better entry point. I was looking at the Sept 30 calls. Please let me know your opinion.
A: ERES is one of the market leaders as evidenced by the fact that it moved up Monday when the rest of the market was down. It has made a stellar run from its November low, almost tripling. That is why we focus on the leaders: leaders run ahead of the market. Nasdaq is up 40% from the October 2002 close; ERES is up 200% from November.
We also really like pre-split plays because as you note, they tend to run into the split, particularly leaders such as ERES. Right now, however, it is not the best time to enter a new position as ERES has just rallied off the 18 day MVA after falling back to that level after a valuation downgrade stalled the last strong rally off the short term MVA. It acted as a strong stock should, however, holding near support, moving laterally on lower volume, then surging on stronger volume starting last Thursday. If it tests back toward 32 this week, holds, and then starts to rally on rising volume again, that would be the entry point we would look for heading into the pre-split run. We would take some positions then and then see how it moves as it gets closer to the split date.
SEMINARS ON CD
http://www.stockseminarsonline.com
This is Jon Johnson's own site devoted exclusively to seminars designed to teach you what you need to know about the stock market and stock movement and how to take advantage of those moves without incurring the usual high costs of travel and related expenses usually associated with seminars.
End part 1 of 2
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world stock market
us stock market
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