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5/01/01 Investment House Daily
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Investment House Daily Subscribers:
TONIGHT:
- Stocks start weak and move higher midday in classic bullish action.
- Volume lighter overall, but key stocks breaking out on higher volume.
- Is this the beginning of the bull or the end of the bear?
- Manufacturing still slumping, auto sales weaker, but construction remains strong.
- Subscriber Questions.
- Team Trades.
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THE SUMMARY
The indexes showed a classic bullish pattern today: flat to lower open, some indecision or softness early on, and then a solid, steady rise on through the close. The action was most pronounced on the Nasdaq where that index opened lower, tested the 50 day MVA (2083.03) in the first hour, and broke over its opening price 2.5 hours later. That set the foundation for a rally that lasted the rest of the session. As the session wore on, the rally became more entrenched. Very positive price action.
Volume lower.
Volume on the Nasdaq and the NYSE contracted on the gains as the indexes continue to show mixed price and volume action. Overall the Nasdaq and NYSE showed good price/volume action as the rally began. Over the past week there has been some weakening of that action as the Nasdaq showed two very mild distribution days as the index moved sideways on below average volume. It then showed accumulation on Monday as the Dow and S&P 500 sold off on higher, though still below average volume.
The low volume has been livable while the Nasdaq moved sideways, but now that it is trying to break over the recent high at 2202.86, it has to have some institutions start into some serious buying; otherwise it will run into trouble at that resistance point. Likewise for the Dow as it moves up to its most serious level of resistance, the 11,000 level. It needs buyers at that point. Volume the past week on this move up has dropped. Likewise on the Nasdaq. The S&P 500 is at resistance right now and it too has made it to that level on low volume. Without institutions stepping up to the plate they will have difficulty.
Some continuing good signs: key, quality stocks continue to break out of some good bases. Today we saw THQI and TTWO explode out of bases. NVDA raced ahead again on climbing volume after successfully testing its breakout. ACS shot higher on heavy volume, extending its breakout as did WLSN. There are several more solid bases in waiting (e.g., EDS, EBAY), and other stocks testing the breakout and preparing for another move (KMP, SONC, etc.), consolidating after breaking support (e.g., SEBL) or moving up over key resistance (e.g., BRCD, MERQ). There is a lot of action occurring on very solid volume as institutions move into stocks as they breakout of sound bases or clear resistance. In the absence of overall volume as the Nasdaq tries to move higher out of this low volume consolidation, these stocks look to be the predecessors of a more intense move up just as we were seeing the Nasdaq 100 stocks lead the moves down before the overall market started to tank
Where do we stand right now?
We have talked of bear markets and how they tend to proceed. They tend to move in patterns just as stocks tend to move in patterns: shorter have two legs, longer have three legs. The move out is often preceded by a sharp rally and then one final plunge lower. We have brought this up during the past month in order to keep us hones and to not let our emotions get carried away. After a 12-month bear market, the first real rally that appears to have some legs can turn into another test of the lows.
But, as we have also been emphasizing each night in each report, you have to invest with your head based on what the market is showing you now. If the numbers are there you take positions on the leading stocks as they make their moves. To hold back fearing a potential fall is not investing with your head but based on emotion that 12 months of bear market engrained. We have been seeing the moves in stocks such as NVDA, GENZ, ACS, THQI, TTWO, WLSN, etc., and that means it is time to get in. Fearing a bull trap (where the bulls get caught in a final test of the lows) and thus not entering investments when the signals are there is like forever putting off buying a computer because they are only going to get faster and cheaper.
The on again, off again volume we have seen the past week is a signal of potential trouble after a good start higher in early April. We have said for the past week that when the indexes started to move out of the consolidation (the Nasdaq in particular), it needed to come on strong volume. It has not yet, though Monday's move was not bad. The leaders are putting up good volumes; the rest of the market has to follow. At this point that is the one factor that has started to erode, but it is one of the most important.
So, as the indexes approach resistance (the Dow and S&P 500 are there while the Nasdaq is trying to take on an interim top), if they do not make a convincing break on high volume they could, and we repeat could, start to roll over. Both the NYSE (Dow and S&P 500) and the Nasdaq have shown two very mild distribution days each the past week as the first signs of trouble on this move. If they reverse at resistance on higher volume, then we have to take action in closing out short term positions and seeing where this thing shakes out. That does NOT mean the rally will be over, but that would be the third distribution day in a week; that is a danger sign and it is best to view that from the sidelines if you are interested in bullish positions if it starts to slide on higher volume. The indexes have NOT done that yet so don't get in a panic. Just keep an eye on volumes and know the resistance levels in the indexes and in the stocks you own. Take action as necessary if you see a reversal off the intraday highs on high volume. If we see that we will close out our short term positions and then assess our longer term ones. That is the cost of stepping in when the numbers show you it is time; you have to be ready to step back out if the numbers start to show there is more selling coming. With stocks such as GENZ, NVDA, WLSN and the like, we believe it is worth it; otherwise we would just be watching and wishing.
THE ECONOMY
The NAPM was higher than last month (43.2), but lower than expectations (44). Manufacturing improved for the second month, but it is still far from expanding; it is contracting at a slower rate. Now that is a confidence builder. New orders were up a hair as was production, while exports were lower and employment was down for the seventh month in a row to 38.1. That along with the weekly jobless claims show where all of that confidence has gone.
Autos were down double digits, coming in weaker than expected. It just seemed implausible that they would maintain the record pace given the tremendous surge in jobless claims and the very low confidence. This is one of the sectors that was showing strength, and now it is fading. That leaves housing and construction.
Construction spending rose a higher than expected 1.3% when it was expected to rise a mere 0.2% as compared to the previous month's 0.9% gain (revised up from 0.6%). As noted, this is one of the holdouts in the economy; indeed, it is a major holdout. If businesses and individuals are still willing to commit dollars to longer term projects, the view toward the future must be decent. Indeed, this will positively impact the first quarter GDP number when it is factored in.
FFF contract. Now that we are 14 days away from the May 15 FOMC meeting, we can start looking at the futures contracts for an idea of what it is showing us. Right now there is a 50% factor built in for a 50 basis point cut on 5-15. The 25 basis points is a lock. After that, the June contract is pricing in another 25 basis points at that meeting. That is too far away right now for this to be accurate. As we move inside 10 to 12 days before the May meeting, however, the contract is very accurate. We will see how it responds moving forward. We think there will be another 50 basis points at this juncture. There is still too much weakness in manufacturing and in the consumer, and jobless claims continue to rise. Moreover, energy prices remain very strong. That is just too much strain on a recovering economy. Thus we feel the Fed will slice another 50 basis points off and then kick back and see how it goes from there.
Tax cut. Well, it is not what anyone wanted, but that is often the sign of the best compromise: when no one leaves the table happy the deal was a true compromise. Unfortunately it was not sold as an upfront economic relief package so some real good could come of it right now. Still, it is an insurance policy for the future as lower marginal rates are a good start. If we can later (in a year) add a slash in the capital gains rate to say 0%, that would be a real legacy for our children and grandchildren. We will have helped ensure prosperity to come. The market liked it, and that was one of the catalysts for the move. It could have been more; it could have been less.
THE MARKET
There is still some fear out there, but it is waning a bit. We heard those phrases on the television such as 'missing out on the rally,' 'forcing mutual funds to get in.' Well, as discussed above, we have been seeing individual stocks racing up lately, but there has not been a flood of institutional action this last week.
Overall market stats:
VIX: 27.59; -0.60. Volatility continues to head south as the markets continue to rise and approach resistance. 26 to 24 would be something to watch for if price/volume action on the S&P 500 as measured by the NYSE does not improve.
VXN: 65.46; -3.25. Volatility on the Nasdaq 100 is hitting lows not seen since the index was created (59). It has crashed through the bottom of the range that started in early March. Does that mean the index is going to sell off? No. volatility shows fear, and it is showing less fear in the market right now, but with all we hear in the financial rags and television stations, there still is fear out there. Just dissipating a bit as you would expect.
Put/Call ratio (CBOE): 0.64; +0.15. Put activity rose even on though the indexes climbed. Probably had a lot to do with the early weakness. The fact that put activity was higher on some light selling still shows there is some fear out there. Total option activity fell to 1.055 million (1.219 million Monday).
NASDAQ: Opposite action from Monday: started soft, rallied, but did so on lighter volume. Not bad, but still in the need of institutional support.
Stats: Up 52 points (+2.5%) to close at 2168.24.
Volume: 1.922 billion shares (-5%). Volume slipped further from average on a solid price gain. That is not the best action, but it was not distribution or a massive falloff in volume. Still, with the two previous distribution day last week, we need to watch for a resumption of higher volume selling as a sign to take care of short term positions. 1.481 billion shares to the upside with 425 million to the downside.
A/D and Hi/Lo: Advancing issues still lead, though a bit down at 1.56 to 1 (1.65 to 1 Monday). New highs fell to 120 (-28) as new lows fell to 28 (-1).
The Chart: http://www.investmenthouse.com/cd/$compq.html
Again, very positive price action as it tapped the 50 day MVA on the low (2088.61) and then broke higher and rallied the remainder of the session. The test of the 50 day MVA was important and we were glad to see it hold, though we would have preferred to see higher volume on the move up. It now faces a real test that will require more institutional buying to get through (2202.86); this is the intraday high it hit two weeks ago as it peaked after its move off of the April bottom. It must break free of this level and clear 2250 on high volume over the next several sessions. It is acting right, just wavering a bit here. We have to watch how it handles these two levels. We do not want to see any reversals off of these points on sharply higher volume. That would mean sellers are jumping back onto the sell side at these overhead supply levels.
Have not seen that yet, so we are preceding with good plays making good moves while we have our brokers watch for the tell tale action of topping if it comes. We don't have to bail on that day, so no sense of panic. Just being ready. Remember, the last part of the day sets the stage for the next morning. Could get a rise and then a pullback if buyers don't jump in. Something to be ready for with short term positions. Overall, however, the Nasdaq continues to look very solid.
Dow/NYSE: The Dow jumped back in the game, but on lower volume after Monday's higher volume selling. It is again at resistance and needs some buyers.
Stats: Up 163.37 points (+1.5%) to close at 10,898.34.
Volume: NYSE volume slid back again on the gain, falling to 1.165 billion shares (-8%). The Dow is struggling a bit as well with its price and volume action. 792 million upside shares to 363 million to the downside. As the index approaches resistance, volume action takes on major significance.
A/D and Hi/Lo: Advancing issues once again led, rising to 1.6 to 1 (1.26 to 1 Monday). The NYSE A/D line continues to raise a good sign. New highs fell to 113 (-32) as new lows rose to 16 (+5).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow is right at resistance again, just under the 11,028 level and the sludge of closing prices between where it closed today (10,898) and that level. This is the critical, critical level for the index. If it can punch through on some volume and successfully test it, there is plenty of upside. If it cannot and starts to sell on higher volume, it will seek some lower support point. We would hope the 200 and 10 day MVA's that are converging right now (10,616 and 10,620.74, respectively). If there is higher volume selling, however, it could seek 10,300. That simply means we protect our short term positions that are influenced by the Dow (if any) and watch for that support. The aggressive can play the DJX to the downside on a high volume reversal. A strong break over 11,028 could put us into DJX calls.
S&P 500: The S&P 500 rose as well, but it rammed into resistance at the close and it did so on lower NYSE volume. Not much power behind the move, and as with the Dow, we have to watch for potential selling from here if the institutions do not step in. It needs to clear 1270 on a solid increase in volume. If it can, the S&P 500 looks very, very good. Critical resistance for this index as well. If it cannot clear it, we will look for support at the 50 day MVA and 18 day MVA's at 1218.27 and 1216.70, respectively.
Stats: Up 16.98 points (1.4%) to close at 1266.44.
Volume: NYSE volume fell 8% to 1.165 billion shares.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
The last part of the day tends to color the open the next day. The futures are up after hours as are stocks. That, however, tends to be as fugacious. We much prefer to see days such as today as they build as opposed fading. Still, if institutions feel this is the time to put money into the market at this resistance level, we could see the things take off. That would be great.
Price/volume action has not been stellar, and combined with the resistance, an early open could turn around. We will be patient as always, letting the stocks come to us. Heck, we may get a chance at some of the recent breakouts for additional or new positions. Watch short term positions with options on any big move to the upside in the morning. If it is here to stay, there will be a bit of a pullback and then a resumption of the move. We have some good gains on short term option plays, so if we get a big move early, we won't cry if we get taken out after we slide our trailing stops higher as the stocks open higher.
That is short term. Let's look at the big picture for a minute. The Fed is cutting rates, the President and Congress compromised and cut taxes, inflation is low, commodities are stabilizing (no deflation), and money supply is rapidly expanding. We have stocks breaking out of good patterns. We saw investors leaving the market with mutual fund outflows, bears on Time and Newsweek, short sellers in vogue, the VIX spiking high, the put/call ratio over 1.0 on three occasions, bears rising to 46%. Get the picture? Stocks are factoring in better times down the road. If we get another volume surge on a breakout over these current resistance levels, we may not have to worry about that retest of the lows. But do not get cocky. We are going to keep a close eye on the market right now. Things look good, but the market has a way of turning a sure thing into a sure disaster. Keep focused, take advantage of the plays as they present themselves, know your goals.
Support and Resistance Levels
Nasdaq: Closed at 2168.24.
Resistance: 2202.86. 2250, then 2290 to 2300. It is very congested in this range (thicker ice).
Support: The 50 day MVA is at 2083.03. The 18 day MVA is at 2023.63. After that, 2000.
S&P 500: Closed at 1266.44.
Resistance: 1270.
Support: The 10 day MVA is at 1233.96. The 18 day MVA is at 1216.70 and the 50 day MVA is at 1218.27 (convergent with 50 day MVA).
Dow: Closed at 10,898.34.
Resistance: Real congestion remains from 10,750 to 10,900. Then 11,028.
Support: The 200 day MVA and the 10 day MVA are converging (10,616 and 10,620.74, respectively).
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
4-30-01
Personal Income, March (8:30): 0.5% actual versus 0.5% expected and 0.3% prior.
PCE, March (8:30): 0.3% actual versus 0.2% expected and 0.3% prior.
Chicago PMI, April (10:00): 38.9 actual versus 40.0 expected and 35.0 prior.
5-01-01
Auto Sales, April (0:00): 6.4M versus 6.4M prior.
Truck Sales, April (0:00): 7.5M versus 7.7M prior.
Construction Spending, March (10:00): 1.3% actual versus 0.2% expected and 0.9% prior (revised from 0.6%).
NAPM Index, April (10:00): 43.2 actual versus 44.0 expected and 43.1 prior.
5-02-01
Factory Orders, March (10:00): 1.4% versus 0.4% prior.
5-03-01
Initial Claims, 4/28 (8:30): 390K versus 408K prior.
NAPM Services, April (10:00): 50.2 versus 50.3 prior.
5-04-01
Nonfarm Payrolls, April (8:30): 25K versus -86K
Unemployment, April (8:30): 4.4% versus 4.3% prior.
Hourly Earnings, April (8:30): 0.3% versus 0.4% prior.
Average Workwee, April (8:30): 34.2 versus 34.3 prior.
End Part 1 of 2
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