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us stock market, trading system
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5/21/03 Stock Split Report Update
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Wednesday: None issued
Buy alerts issued: LXK; MAT; FFIV; TLB
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:
- Another late rally keeps indexes flat.
- Greenspan fails to provide any insight into Fed's deflation views, dollar decline.
- Market in definite consolidation mode.
- Subscriber Questions
Another rally back to flat.
Now that the market has shown it has entered into a consolidation phase valuation downgrades continue to flow. Morgan Stanley downgraded biotech in general Wednesday while other leading stocks (e.g., SSYS) were targeted as simply being too successful. That is the life of a leading stock that is growing earnings and sales at a strong clip and thus attracts a lot of investment dollars. It is the continual target of value based analysts who view value as some set figure etched in stone in the halls of Wall Street as opposed to the truth: what a willing buyer will pay. When a stock is growing its earnings faster than its competition, has a bright future, and the market is pricing in future economic growth, buyers are willing to pay more for it.
In any event, the market had to deal with analyst calls, Greenspan evasiveness, more mad cow concerns, more terror concerns, etc. Just another typical day for stocks. Right now investors are using news as a reason to take some gains. When the market is rallying investors either ignore such news or they view it as a reason to buy. Thus it was another day of volatility as the sellers tried to push the market lower but buyers were able to rally it back in the afternoon. In the end things were flat again as neither side could gain the advantage. After such a large run that is not bad action.
THE ECONOMY
Greenspan speaks to Congress, says little.
There were the usual questions regarding what stimulus would be better, whether deflation was a real worry, what level the dollar would be best at, complaints about having to actually work. Greenspan gave the usual answers, failing to contribute anything to the current issues he supposedly possesses the answers to. He repeated the mantra that the economy would recover, but the when and how much were still unanswered questions. That was surely worth the time and expense of all in attendance. He did nothing to further illuminate the Fed's 'lack of inflation' (a.k.a. deflation) statement from the last FOMC meeting. All he said was that inflation may be too low.
That is fascinating in itself. We are now worried about deflation (the lack of inflation in Fed speak) from slowing the economy too much when there was never really any inflation even when the economy was 'white hot' back in 1999 and early 2000. The Fed was so worried about inflation arising (at least that is what it told all of us) that it raised interest rates to prevent inflation from showing itself even at the cost of reducing the prosperity. It never did show up, mind you, but the Fed was acting preemptively in order to save us all from that horror. Think of it this way. You worry about a burglar coming to steal all of your valuables from your home and leaving you destitute. Instead of putting in some new locks and a security system to help you be more vigilant, however, you get so obsessed about not wanting a thief taking your goods that you give away or destroy your valuables just to keep the thief away. You end up destitute because of your own acts related to the obsession, and the irony is that the thief was not even going to come to your home. Thus the Fed ended our prosperity when it tried to engineer a 'soft landing' when none was needed, and as usual, things have gone too far and now we worry about deflation instead of inflation, a position we would not be in but for some very poor choices with respect to monetary and fiscal policy.
Greenspan also had the chance to illuminate some of the currency issues and explain how the dollar valuation worked and where it was on the relative scale of value compared to other times in history. That would have helped quell some of the worries, but Greenspan punted on this when asked about it. Greenspan tends to answer what he wants when it suits him. He speaks openly about fiscal policy at times even though that is not is area, and at other times he hides behind the fence acknowledging it is not his domain. When he does speak openly about fiscal policy, the dollar, etc., at the same time he is playing mystery games as to what the Fed will or won't do.
Is no one seeing this? Obviously not Congress. Greenspan today stated that earnings may be weaker this current quarter but the quarter was looking stronger. How was the quarter going to be stronger if earnings were going to be weaker? Did anyone call 'BS' on this? Nope. They just kept trying to get him to say something to further their political agenda. Greenspan could have said the best way to jumpstart the economy was to socialize housing and all the committee would have asked is what the average square footage should be. Waste of time and money. That, of course, is on top of the trillions lost in the inflation snipe hunt where the Fed drained the economy of money in early 2000 and then gut-punched it one more time with a 50 basis point hike in May that year. The rest is unpleasant history with the sharpest GDP growth rate drop in memory that followed the start of the worst bear market since the Great Depression. Of course Greenspan believes that his rate cuts will do the trick, but again, he does not know when or how strong the recovery will be.
THE MARKET
Look at the charts and it is easy to see the market is in a pullback after the nice run higher. A quick drop to touch support and a resumed rally, or a more prolonged stay? The intraday action shows the volatility that accompanies a consolidation. Before the Monday drop and subsequent to that drop the market ran up and down intraday in a fairly tight range. This is the volatility we discussed last week that is not shown in the VIX because the trading range is fairly narrow. This action results when there are fewer buyers willing to buy given the higher prices and sellers entering the market to take profits and to try to sell short to push the market lower. There are not enough sellers to really push the market lower and there are enough buyers still stepping in on the dips to offset that modest selling. The result is the action we see: attempts to sell and then some buyers entering to move the market up to the close.
If this is a short pullback we will know soon as buyers will enter with force and send the leaders and the indexes higher on volume. Right now we are looking at 4 sessions of pullback, hardly much of a consolidation. The indexes are poised at a good point, however, to rebound if they are going to provide a quick move. The Russell 2000 and SP400 both moved up off their 18 day MVA Wednesday, and obviously many of their component stocks did the same. As we have mentioned before, the leaders start to move before the rest of the market. We don't really consider Wednesday a banner day for leaders breaking higher. Most of what they did was recover from the Monday and Tuesday selling but did not put together a lot of volume. If they start moving ahead again on strong volume that would indicate the rally is ready to resume after just a short pullback.
Our belief is it will take a bit longer to work out the excess from the rally. Nasdaq ran to 15% over its 200 day MVA and on cue started to struggle. It has pulled back 5% off of its high at 1552 and is now 10% over its 200 day MVA. Unless Nasdaq is going to run higher than the average historical norms, it would need some more time to let the 200 day MVA rise toward current prices. That usually means more lateral and somewhat lower consolidation. That would really be much better for the index as well because as we have noted about this rally from the October low, it has been staid and steadier than prior bear market rallies, taking its time to rally and rest, rally and rest as opposed to one big shot higher that burns out. Thus we are not getting too excited about a quick move back up and that is why we closed many positions earlier this week. We may be wrong and if we are we get back in to those stocks that are moving well. If not we wait and pick our shots when they appear.
Market Sentiment
No real sea change in sentiment. The weekly survey of investment advisors shows that bulls stopped climbing, but they did not fall much if at all. Bears stopped falling, but they too did not show any real gains. These lethargic sentiment levels do not help a market that is struggling, but as we have noted before, they don't automatically condemn it. Volatility can hover at low levels while the market continues to run. Eventually it will combine with other forces to correct the market, but as with Greenspan, when is the question. Sentiment indicators are typically not great timing devices.
VIX: 23.21; -0.16.
VXN: 30.88; -1.34
Put/Call Ratio (CBOE): 1; 0
Nasdaq
Another rally back late closes the techs with just slight losses.
Stats: -1.22 points (-0.08%) to close at 1489.87
Volume: 1.587B (-6.43%). Volume backed off to below average as Nasdaq spent another session of consolidation.
Up Volume: 728M (+72M). Very evenly divided volume ratio matches the consolidation action.
Down Volume: 814M (-205M)
A/D and Hi/Lo: Advancers led 1.14 to 1. Advancers leading on a down session shows the underlying strength.
Previous Session: Decliners led 1.11 to 1
New Highs: 84 (0)
New Lows: 9 (+1)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Nasdaq is carving out some support at 1475 as it moves laterally, tapping that level the past two sessions. It paused below that level on the way up in April and early May, a point that is just over the January high (1467), so there is a shelf there for it to try and hold. Volume backed off as Nasdaq showed another doji as it continues to hold a lot of its gains as it works to consolidate the move higher. This would be the ideal point for it to hold and work laterally, keeping the January high as its support. With stocks such as MSFT nose diving, however, the index will be hard pressed. It can handle one or two such collapses, but no more as it is an index made up of large cap techs. It is showing good consolidation action for now but the large caps will have to hold support as well.
S&P 500/NYSE
Managed a modest gain on declining volume. Holding steady right now is not a bad thing at all.
Stats: +3.69 points (+0.4%) to close at 923.42
NYSE Volume: 1.443B (-3.12%). Volume backed off as the SP500 was basically flat. No accumulation, no real distribution.
Up Volume: 951M (+263M). Interesting that upside volume was in the lead and solidly so.
Down Volume: 478M (-325M)
A/D and Hi/Lo: Advancers led 1.5 to 1. Breadth was pretty inconsequential.
Previous Session: Advancers led 1.3 to 1
New Highs: 250 (+65)
New Lows: 7 (-6)
The Chart: http://www.investmenthouse.com/cd/$spx.html
SP500 held over 911 again, managing to rally off the lows in the afternoon session to close with a small gain. That continues the intraday bullish activity other than the Monday dump lower, and helps build for the next move higher. Unlike Nasdaq, SP500 has a lot of upside room to run. It is roughly holding the breakout from its cup with handle formed this year, and the SP500 has outperformed Nasdaq this week. Perhaps it is time for the other indexes to assert themselves more just as the RUTX and SP400 are doing right now, take a leadership roll, and give Nasdaq a breather. While the large caps may not provide that push as they continue to consolidate below the 18 day MVA, it looks as if those two smaller cap indexes will be ready to step in.
DJ30:
Similar action as the blue chips again tested toward the 50 day MVA (8395) on the low and rallied back for a slight gain. As with the SP500 that keeps the intraday action with a bullish flavor. Volume shot higher on the Dow as MO soared on a favorable court ruling and MSFT tanked on volume. The 50 day MVA needs to hold, and we can expect some more lateral action before making the next attempt higher.
Stats: +25.07 points (+0.3%) to close at 8516.43
Volume: 1.443B (-3.12%)
The Chart: http://www.investmenthouse.com/cd/$indu.html
THURSDAY
Jobless claims are out but again we are not anticipating much improvement as jobs are not being created. The big issue is whether jobs are still being lost as last month showed. Aside from that there are the same issues (terror, economy) that investors can look to if they want to find a reason to stay on the sidelines. Given that there is a long weekend ahead, we are more or less anticipating volume to continue to decline Thursday and Friday as investors see no real reason to get into new positions with the current moderate pullback and a long weekend.
That can exacerbate the volatility we have seen intraday though in the big scheme the relatively tight range keeps overall volatility limited. What we are going to watch are stocks such as GRMN, SCSS, SINA, SOHU, EBAY, YHOO, etc. and see how they respond to the pullback. Many are set up to bounce, and if they get some solid volume on a rebound that could indicate the broader market will be following shortly. In any case, if they start to make that kind of move we will be ready to pick them up. When leaders go on sale after a pullback, it pads the brokerage account.
That said, again we are not expecting a rapid rally back up. It may happen because what you expect is often not what the market delivers. The run has been solid and sustained. A more sustained consolidation would be in the nature of this rally to now. Again, we exited many positions early in the week given what has happened to this point and what we were seeing. We will move into the leaders as they recover even if the overall market lags; that is the usual scenario anyway. It is just that we do not feel there is an overall sustainable surge off of this level. It may try it, but again, Nasdaq is still 10% over the 200 day MVA. That puts a cap on the rise. Again, stick with some recovering leaders if they show the moves and we should be in good shape.
As for existing positions, as long as they are holding the near support levels we are going to stick with them. This applies mainly to stock positions as options tend to lose value over time. Longer term options (2, 3 and more months out to expiration) are not as impacted and we have some time to see if a rebound comes sooner than later. For shorter term we were exiting early in the week and we will exit more if no bounce comes soon. Even a low volume bounce can provide a good exit point for these. Remember, the longer a stock sits and goes nowhere, time works against options you buy as well as volatility. As volatility falls that component of the option price will fall as well and that is another impact on your option value.
Support and Resistance
Nasdaq: Closed at 1489.87
Resistance: The 18 day MVA (1497). The 10 day MVA at 1508. 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 1580.
Support: The August 2001/January 2002 down trendline (1486). The January high (1467). The exponential 50 day MVA (1445). The March and August highs (1426 and 1427).
S&P 500: Closed at 923.42
Resistance: The 18 day MVA (925). The 10 day MVA (929). 935 (November and January peaks). 954 (December intraday high). 965 (August 2002 peak).
Support: Price tops at 911 (July). March and April highs (896 and 905). September 2000/March 2002 down trendline (899). The 50 day MVA (902) and the 200 day MVA (884).
Dow: Closed at 8516.43
Resistance: 8522 and 8520, the March and April twin peaks. The 18 day MVA (8542). The 10 day MVA (8570). November and January highs (8800, 8870). December high (9044).
Support: The 50 day MVA (8395). The 200 day MVA (8328).
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): $51.0B actual, $50.0B expected, $67.2B March.
5-22-03
Initial jobless claims (8:30): 420K expected, 417K prior.
SUBSCRIBERS QUESTION
Q: Some stocks have many entry points on your list. When the market sells off it is
good time to look again . Which entry point shall I use the original [buy point] or
the new one? Thanks
A: This is a new one and a good one and we will look at it in the context of a stock that has made the move we wanted and is pulling back. There are quite a few report plays in that position right now. The primary consideration on a pullback from a good move is whether the stock is able to hold support. A strong stock will use the pullback to shakeout the short term holders, and when demand outstrips supply (i.e., the sellers are gone), the stock moves back up. The buy point on that can vary depending upon your category of risk. Some want to see the stock move back over the previous high before the pullback so it clears potential resistance at that last high. That is fine as it does clear resistance, but it also can cut off part of a nice gain for a strong stock that is ready to make another run.
If the stock is a strong mover with good accumualtion and price/volume action, we are inclined to step in when we see the stock make the bounce on rising volume. That signals to us that support has held and that big money is moving in to buy the stock on this pullback. We want to move in when that big money makes its move.
Thus, we would be inclined to look at the buy point closer to the price as the stock starts to bounce. Those points are typically picked as they allow the stock to clear resistance before the initial buy is made. That may be a bit too high as well, however, and you could give up a portion of a nice gain as outlined in first method. The key is having a solid stock that is moving well and thus won't be so deterred by the prior resistance. Indeed, it most likely has held close to that point on the pullback. Then you want to see that solid bounce on volume and moving in at that point.
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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