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us stock market, stock watch
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5/30/01 Technical Traders Report
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Technical Traders Subscribers:
TONIGHT:
- From bad to worse as all indexes dive for cover on higher volume.
- Market reeling from downgrades stating the obvious and going a bit to the extreme.
- Many 'no names' doing very well, thank you.
- Hit the downside quick as the action the drops are fast.
- Subscriber Questions
THE SUMMARY
Indexes show they don't have a lot of fight in them after strong rallies.
The close on the lows Tuesday was a portent of weakness today. No index tried to hold up, and after a rally attempt with an hour or so to go, they once again found their way toward the session lows on rising volume. Market internals were woeful. Sellers, sellers everywhere. No let up in sign for the morning as the indexes appear ready to continue their drop, intent on giving up everything down to the gap up point and maybe more.
Facts supporting what we already knew continue to scare the pants off investors.
The SUNW news was not a real surprise; it never said the second quarter would be any better. And we have yet to hear from the likes of INTC, AMD, MU, NTAP, and the scores of other companies that said the second quarter was looking to be a bottom. Again, bottom means bottom; i.e., the lowest point. That does not mean that a bottom in Q2 will show higher profits than in Q1. Simple logic, yet simple logic is lost when things get all emotional.
The SUNW news was fact, at least part of it. Again, SUNW was not expected to deliver. As we noted, it has a suspicious 'Lucent' aura around it just as NT did. After the fact we had the speculation from those who forecast a recession and darn sure want to make that prediction a correct one. Now they cannot control the economy just as a mutual fund or two cannot control the market if it wants to move the other way. Still, they helped whip up some good old downside fear. Morgan Stanley downgraded scores of stocks in the tech sector, claiming that the optical companies may not see anything better until the third quarter . . . of 2002. They did say they could recover by the fourth quarter of 2001, but that was a footnote.
Then Merrill Lynch said there was a 'global' IT recession even though the U.S. market was getting better. Merrill went on to say there "could be some softness in the June quarter." Well knock me down. As we said before, this has been pretty much expected, and a bottom is generally lower than prices on the way down to that bottom. That garnered today's award for stating the obvious as if it were a revelation.
Lehman's analyst made some sage comments: with the SUNW announcement and the continued weakness that we have seen all along, it would probably be Q4 before techs showed increasing gains. That is pretty much what most have been saying all along. That is no change, and if we do look down the road as we should, buying stocks as they breakout from good bases, that gives us the edge.
Again a few brokerages are not going to dominate the market if it wants to move up or down. They can get things started one way or the other, and now there are those seeds of 'doubt about a second half recovery' as Tom Costello mentioned a few hundred times today. Let's see, second quarter profits are going to be lower as we knew, but that means that the rate cuts, tax package, strong consumer won't have the same impact they were going to have three weeks ago. Makes no sense, but at times the market just makes no sense. It already looked suspicious on Friday as we reported, and it has turned belly up on us for now. Best to go with the flow, jumping on some of those put plays we bird dogged, stick with the quality, and cut and run any suspicious plays quickly. We said it would not be a straight shot up; today's action, however, puts the indexes back several paces in their attempts at a recovery.
Who are these no-names?
Despite the shellacking the techs and most of the market seemed to take (and gave rise to some good put plays we were tracking), there is a long list of stocks on the reports that held up well even today. Some moved higher while others continued their quiet business of forming their handles in anticipation of a breakout. Will they succeed or will they fail? That remains to be seen, but for now they are going about their business as if the turmoil today did not exist. Indeed, this is what we saw with certain stocks even as the bear market raged.
WMS made the breakout today, CECO continued its move, RE started the strong move we were looking for last night, and BMET bounded higher again on very strong volume. In addition HI still looks good, ESRX took a day of rest, and NVDA, AMGN, SGR and LLL still look ready for a rebound the first chance they get. Scores of stocks are still in the handles of their bases, ready to move higher: WFMI, DGX, WMI, EWBC, IRM, BLPG, LTBG and others on the reports.
So, the focus was on the tanking of the big techs, the Dow and the big names, but as we have seen during the rally, it is mostly the small guys that have been busting to new highs out of great patterns as the former big names tried to recapture past glory. They may not hold; the selling may become too intense and the collapse. That is always something we have to watch for when the selling starts. We also watch for them to breakout on heavy volume, however.
Market internals are weakening, but we still see many of the stocks that did a lot of heavy lifting in the rally still holding up. The key will be whether they can hold on and breakout when the conditions improve or if they are going to cave in with the big names.
THE ECONOMY
Tomorrow we get some more economic numbers out that may counter or reinforce the attitude today that we are all going to hell in a handbasket. Initial jobless claims are due out before the open, and they are expected to hold steady at 407,000. Holding steady would be great versus the uptrend of the past few months. Above 400,000 is considered recessionary, but in past recessions the number has hit over 500,000. About all we could hope for now would be a slowing of the rise or a topping of the number as the economy is still weak in our view (yes, we remain very concerned about the economy as we have been since early in the year despite our poking some fun at the brokerage houses) and not producing a whole lot of new jobs right now.
Then there is the Chicago PMI due out at 10:00 ET. That is a measure of manufacturing output in the Midwest. These reports are closely watched as one of the keys to recovery will be an improving manufacturing sector as it was in an actual recession long before anyone was really taking notice. The Chicago report is considered a very accurate gauge of the nationwide report that will be out Friday. A sneak preview of Friday. Friday also gives us the monthly employment report, and even though that is considered the big jobs report, weekly claims give us the realtime story.
For now the economy is walking a tightrope. It is not giving rise to higher earnings overall in Q2, but we know that. The key is improvement in the indicators over the next several months. That will show that the rate cuts are doing their work and we can expect better earnings in Q3 and Q4. We will see up and down numbers just as we saw when the economy was rolling over in the spring of 2000 (though not many were noticing it despite our nightly commentary). That is the start; then they start getting better and better, outnumbering the aberrant down report. By that time the stock rally will be flying. That is what we all know we need to be looking for, but what we know is not what is in control of the market right now.
THE MARKET
Overall market stats:
VIX: 25.79; +1.11. Volatility is inching higher, but there is not a lot of fear as depicted by this indicator. 25 is about mid-range.
VXN: 59.62; +3.54. The big techs got crushed again today and volatility jumped up. It is still at mid-range levels as well even with the move higher.
Put/Call ratio (CBOE): 0.74; +0.01. Inauspicious move higher on some heavy selling in the market. We would have preferred to see it up in the mid-eighties today, but what we want is not always in line with reality. Total put activity rose to 1.388 million (1.065 million Tuesday).
Bull/Bear Newsletters: Bulls dropped to 47.4% from 47.9% the previous week. Not move there. Bears fell to 34 from 35.4 the prior week. They are heading the wrong way just as the market turned down. Bears were up over 40% not too long ago, a much more bullish reading.
NASDAQ: Continued its dive on higher volume. Key levels approaching as the big names lead the way down.
Stats: Down 91.04 points (-4.2%) to close at 2084.50.
Volume: 1.990 billion shares (+22.9%). Volume jumped back up to average levels on the selling, showing distribution on the Nasdaq. But, we had already seen the topping signs before this arose. Down volume overwhelmed up volume 1.79 billion to 190 million upside shares. Ugly day.
A/D and Hi/Lo: Declining issues surrounded and slaughtered advancers 2.52 to 1 (1.81 to 1 Tuesday). New highs slid to 81 (-43) as new lows rose to 47 (+17).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq gapped below the 50 day MVA on the open (2136.95) and never made a serious rally attempt. A move up with an hour to go failed, leaving the index near its lows for the session (low was 2077.98). There are some price bottoms at 2052 to 2057 where the index turned back up after the last Fed rate cut, but at this point that looks tenuous at best. After that the next level looks to be the point where the Nasdaq gapped up to on April 18 before the Fed cut rates that day. That was the breakaway gap that really solidified the rally. If it fails, things get problematical as to how low it goes.
Will it fail? The mood is negative right now and shorts are jumping back onto stocks. The reversal in the good price/volume action makes support levels suspect even though we have not seen the rapid fire series of distribution days; the momentum is down for now.
Dow/NYSE: If the Dow hit the brakes on the selling Tuesday, it stomped down on the accelerator today, dropping through 11,000 on rising volume.
Stats: Down 166.50 points (-1.5%) to close at 10,872.64.
Volume: NYSE volume jumped higher to 1.154 billion shares (+12.5%). Still below average, but the selling picked up steam. Down volume led 884 million to 259 million upside shares. Distribution days again on the Dow.
A/D and Hi/Lo: Declining issues took an even stronger grip at 1.78 to 1 (1.19 to 1 Tuesday). New highs fell to 82 (-60) as new lows rose to 37 (+7). No longer the good A/D line supporting the move.
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow popped below 11,000 today, the point it could not get over for many, many months and many, many attempts. That opens the door for significantly more downside though it has a lot of congestion down to the 10,700 level from price congestion in May, and the 50 day MVA is lurking in that level as well (10,718.11). There is easily risk down to that level, and the 10,400 to 10,500 range is not out of the picture at all. At this point we have to play what is there in the market to the downside or just step aside from these stocks until they get this round of selling out of their system. It would be highly unusual to see the Dow plummet to another double bottom from here given the breakouts it has made along the way, but it broke back below 11,000 without too much of a fight after months of trying to break above it. It could be a heck of a put play to the downside on any test of 11,000 and a failure to re-take the high ground over 11,000.
S&P 500: The big cap index gapped lower and closed right at the level of next possible support at 1250 where there are previous price supports and the 50 day MVA (1248.54). The index failed a late rally attempt and closed right at its session lows. That is not a good sign for this level to hold, though it could always test lower intraday and climb back up for the close. Problem is, there is not a whole lot to drive it back up other than buyers, and there buyers are very hard to find right now in the big cap stocks. Its next level below here is 1200 for a really defined level of potential support. The drop on all indexes has been sharper this time, not the lazy fall in early May. And the selling is picking up strength. Not a recipe for a massive rebound.
Stats: Down 19.85 points (-1.6%) to close at 1248.08.
Volume: NYSE volume rose to 1.154 billion shares (+12.5%). Distribution.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Selling at the close usually begets selling at the open, and today's selling was accelerating over the previous sessions. Another back from holiday slap in the face similar to last Labor Day that really put a bullet in the summer rally and sent the market plunging to new lows. Same thing here? Cannot tell from here, but the field has changed with 250 basis points in rate cuts, tax relief package, statements that the bottom will be this quarter. That is a far cry from last fall when things in the economy were just starting to get really ugly.
Stocks will once again start factoring in good news again when investors get over this round of selling. The big question is will this take us down to test the lows again. If institutions give up hope of a recovery in Q3 or Q4, it could. On the other hand we could be in for some trading range action as opposed to a plunge back down to the lows. The Nasdaq rose 40% off of the bottom and it has to digest some of those gains. Given the rate cuts, forecasts of a Q2 bottom, tax cut package, the trading range seems to be the more likely scenario. In any event, our stop losses have cleared us out of many positions we had initiated when the techs were running. We still have positions in breakouts such as BMET and the like, but the tech names that moved up 30% and more have long been cleared out by the trailing stop losses.
Now we continue to patrol the breakouts, the pre-splits that can give us momentum plays, and the put plays as the indexes and certain stocks show us entry points. Turn the page, play the other side as well as it is presented. We may even get a bounce in the morning as a reflex move after a pretty hefty round of selling. That may give us a chance to get into some more downturn plays as stocks test support they just broke through (now resistance).
Then if we get into a trading range, beautiful. Look for those bottoming signs, catch the move up. Look for the topping signs, exit upside plays, and catch the move down just as discussed in the Technical Analysis 3 seminar. Or, write those calls on the top of the range and ride it to the bottom of the range, buy them back and start it over again as will be discussed in the Covered Call seminar. Put the market to your use, not its use. There is a saying in baseball: play the ball, don't let it play you. If we hit the market when we want to and where we want to, we can take the advantage and turn it to our favor.
Support and Resistance Levels
Nasdaq: Closed at 2084.50
Resistance: 2232 and have to be put back on, along with interim resistance where it stopped this last time at 2328. Then 2500.
Support: Snapped the 50 day MVA easily. Now we look to 2050 and then 1995 - 2005.
S&P 500: Closed at 1248.08.
Resistance: 1270? 1315.93 is the recent high it needs to plow back through. After that there are some price consolidations at 1325 from February and October of 2000 and the summer of 1999.
Support: 1250 looked solid last night, but now the index closed right at that level. Maybe 1230 from some previous price bottoms, but if the volume remains strong, 1200 is more likely.
Dow: Closed at 10,872.64.
Resistance: 11,400 to 11,450. Then the old high at 11,750.28.
Support: Broke 11,000 without much fuss. 10,750 is next. 10,400 to 10,500 not out of the question at this point.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
5-29-01
Personal Income, April (8:30): 0.3% actual versus 0.3% expected and 0.5% prior.
PCE, April (8:30): 0.4% versus 0.3% prior.
Consumer Confidence, May (10:00): 115.5 actual versus 110.3 and 109.2 prior.
5-31-01
Initial Claims, 5/26 (8:30): 407,000 versus 407,000 prior.
Chicago PMI, May (10:00): 40.0% versus 38.9% prior.
Help-Wanted Index, April (10:00): 66 versus 66 prior.
6-01-01
Auto Sales, May: 6.4M versus 6.4M prior.
Truck Sales, May: 7.0M versus 7.0M prior.
Nonfarm Payrolls, May (8:30): -25,000 versus -223,000
Unemployment Rate, Mate (8:30): 4.6% versus 4.5% prior.
Hourly Earnings, May (8:30): 0.3% versus 0.4% prior.
Average Workweed, May (8:30): 34.3 versus 34.3 prior.
Construction Spending, April (10:00): 0.3% versus 1.3% prior.
NAPM Index, May (10:00): 43.5% versus 43.2% prior.
End Part 1 of 2
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