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6/02/01 Technical Traders Report
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Technical Traders Subscribers:
TONIGHT:
- Market continues its bounce, but volume remains low.
- Some positives, some negatives: market equivocal in the short term.
- More clouded future warnings from Cisco, but others reaffirm their profits.
- Economic numbers weak, but in a state of flux.
- Team Trades
THE SUMMARY
Markets recover from weak economic news, but it was not powerful.
For the second session the major indexes moved higher after the early selling in the week. There were some positives, but there were no major moves that altered the selling early in the week. What we are left with is a market that is still trying to move higher, but last week's action made the move much harder. The Nasdaq managed to move back over its 50 day MVA, the S&P 500 continued its bounce up off of the 50 day MVA, and the Dow tapped at its down trendline on the low and bounced higher once again.
Volume was lower on the Nasdaq and the NYSE, not instilling a lot of faith in the late-week moves. The bounces were good to see after the first of the week, but the indexes left themselves a lot of work ahead if they want to resume their upward trends.
Short term the market provides few answers.
There continue to be many stocks that are moving higher out of good patterns on solid volume while other stocks continue to build excellent patterns in anticipation of the breakout moves. That is always a necessary ingredient for any rally to continue. In addition, the Nasdaq managed to climb over its 50 day MVA on the Friday close, a milestone it needed to cross as it comes into this week. The Dow found support for now at the down trendline connecting the September 2000 and February 2001 highs, and the S&P 500 is still holding above that 50 day MVA. The advance/decline line edged higher at the close of the week as well. This rally started and continued on breadth. If it is to make it from here, the A/D line needs to continue its slope higher. Those are the positives.
On the downside, the Dow, S&P and Nasdaq all finished the week below some resistance levels that they spent a lot of time and effort breaking out above the past few weeks. Those will provide some hefty resistance this week. On top of that, the Nasdaq price/volume action has lost some of its luster, showing an outright distribution day last Wednesday after some churning the week before. The lighter volume gains Thursday and Friday did not show buyers storming back in on this dip. The lack of volume leaves the market susceptible to news stories, and we can bet we are going to get some more on Monday from analysts as well as the continuing worries and actual stories about earnings coming out ahead of the July season. This has been the preoccupation the past week, and we are going to see more of it.
That leaves the markets on unstable ground for now, making the short term problematical. Again we have specific stocks that look good and continue to move well on strong volume more or less indifferent to the overall index moves, but even those are impacted by continual overall market weakness if it persists. The worry that the second quarter will be just as everyone originally expected, i.e., worse than the first quarter, has investors on edge as they wait for the next SUNW or CSCO. When theory become reality, the status quo gets upset no matter how much it was expected.
Longer term we still like what we see even with the weak economic news that was out last week. We have specific reasons for some optimism that we voice later. For the short term, however, the market appears to have at least temporarily lost its will to move up no matter what, and when that happens it tends to be buffeted by every news story that comes out. We are sticking with the stocks that break out of the solid patterns on strong volume. They ride the ups and downs out better.
Cisco out again on Friday.
In its SEC filing last Friday, CSCO continued its lament about the poor economic conditions, its inventory writedown of $2 billion, and its continued lack of visibility. That was not hitting the market very hard on Friday after the close, but almost no one was trading Friday afternoon anyway, so it was hard to get a handle on just how potent that news was. It is sure to be a topic for Monday discussion.
This continues Cisco's current struggle in the networking business to get rid of its inventory and start selling new equipment. Problem for Cisco, the overall economy is still weak and especially in the technology end. A poll of chief information officers at 1,100 companies indicates that IT spending grew at only 5.2% the past 12 months, the first time every a year's worth of growth in this area was not double digit. A third of the CIO's blame the slowdown on weaker corporate profits. Telecom gear, data networking gear, and computer hardware are the two areas the CIO's indicated they would spend their money, while infrastructures were the lowest. There is just a lot of inventory still to clear out first.
Before Cisco came out, we heard news from Flextronics that it will meet its Q1 and Q2 forecasts. FLEX was up on the session, but it was no blowout of buyers chasing it. Seems that we continue to have companies indicate they are going to hit their numbers, but when some of the big names such as SUNW and CSCO continue to flounder, the overall impact is negative. That ignores the ability of the smaller, agile and faster growing companies to continue their impressive profits growth even as the giants in tech stumble and flounder, victims of their own size and growth. They cannot keep the profits going because they nave to have massive buying to do so. The smaller guys can hit the niches and really do well (e.g., NVDA, SDS, ACS, etc.).
THE ECONOMY
The economy continues to be the final arbiter of the market. At this stage no one is sure what is going to happen, and Friday's numbers did not help clear it up for most.
Unemployment falls.
The unemployment rate fell to 4.4% Friday, the first drop in 8 months. That had many feeling better along with a non-farm payroll number that was down 19,000 as opposed to an expected 29,000 job drop. Indeed, the huge April number at minus 228,000 jobs was revised to a loss of 182,000 jobs; not a breakthrough, but much better than reported. Construction jobs jumped 31,000 after losing 78,000 in April. Service jobs climbed 42,000 after a 78,000 drop in April. Those numbers look better, but there are still many problems. Manufacturing tanked by 124,000 jobs, bringing the loss for the year to 470,000. That translates to a negative 0.2% growth rate, and it foreshadowed the NAPM that came out at 10:00 am. Moreover, much of the job creation is in the summer jobs area; those are temporary, and thus not a lasting fix for the economy. Still, they get more money into the hands of those spending teenagers.
NAPM continues to plunge.
The manufacturing sector continues to reel as its activity gauge fell to 42.1 in April versus an expected 43.5 that would have been a slight increase. This makes 10 straight months of contraction in manufacturing, something we were ranting about back in the spring of 2000 as we saw things slowing but the Fed and its entourage of 'yes men' economists ignored. New orders fell again after rising last month. About the only good thing to say was that the prices paid index fell, meaning no inflation pressure at all. Heck, with an economy bordering on going into negative GDP (as some Fed officials are hinting at), there can be little fear of inflation in the current picture.
Some bright spots.
Construction spending climbed 0.3% as expected; again no great surge, but it has been a constant. Retail sales were stronger than originally reported as well, rising 1.1% in April versus the 0.8% gain previously reported. The stock to sales ratio, however, actually rose to 1.43 months versus 1.37 months, a 26-month high and a further indication that there is a lot of work to do with the current store of goods on the shelves.
Auto sales were also better than expected with GM reporting positive sales growth and Ford and Chrysler reporting losses less than expected.
And the Economic Cycle Research Institute stated that its inflation gauge fell to 106.1 in May from 107.3 in April. There is no hint of inflation anytime soon despite what some are warning on the television every day. The key: keep an environment where business can invest and keep its profits in order to be productive and meet demand. In other words, cut back on regulation and let supply and demand work. That was the recipe for the 20 year expansion and it will work again.
What does all of this mean?
Notice how the economic reports are more and more inaccurate of late? Constant revisions, and we mean major revisions. The April non-farm payroll numbers were off by 20%. That is a huge statistical miss. Then, the March numbers were revised from a 53,000 job loss to a 59,00 job GAIN. The work week was revised to 41 from 40.7; again, that is a huge statistical miss.
We saw this before: when the economy was topping in the spring of 2000 the estimates kept coming in much higher to the upside than the actual numbers. Economists were conditioned to growth, not to look at the numbers and spot the trends. They assumed growth and explained away anything that did not fit the model. Well, we saw monthly numbers jumping up and down and estimates revised each month. Volatility in any market or in any dynamic entity such as an economy indicates there is change occurring. At that point, after a huge economic run and the Fed trying to sit on the economy, the change was going to be to the downside.
We saw non-farm payrolls jump in February and then pull a 100,000-plus reversal from the government's first reported numbers in March. Then we saw it plunge in April. Now it was still down in May, but it was a 160,000 job jump from April. Durable goods orders are up in March and down in April. Factory orders are up and down. Car sales are stronger than expected. The only constant drag is manufacturing right now, and it is sucking wind.
Two things to note. First, volatility in numbers signals change. Second, economic reports often are their best or worst right before a they get worse or better. We saw that in 2000: the economy could not have shown any stronger numbers and economists were crowing with glee just before they started sliding. Now we see manufacturing at recession lows and every economist (not every one, but almost all) shaking his or her head and uttering oaths. The numbers at their worst, they are showing great volatility, and the economists are gloomy. This is the opposite of the spring of 2000. We expect to see the volatility start turning into steadily improving numbers.
THE MARKET
Overall market stats:
VIX: 23.96; -2.00. Dropped pretty significantly on the rise. Seems to be quick to fall and slow to rise, indicating more apathy than fear.
VXN: 57.19; -2.48. Similar to the VIX at this point: slow to rise, quick to fall. Shows some apathy and that is reflected in the difficulty the index is having.
Put/Call ratio (CBOE): 0.53; -0.18. Put activity really fell on the CBOE, but overall on all option markets it held roughly steady at 0.70. That is still a good overall indication. Overall option activity on the CBOE was very tame at 728,555 (960,400 Thursday).
NYSE Short Interest: Short interest continues to climb, hitting 4.99 Friday, the highest since October 1999, just before the indexes started a big run. There are a lot of people out there who are bears on the market. This is an indicator of fear, and when there is fear there are usually few sellers left.
NASDAQ: Another weak volume bounce, but it rallied late to break back over its 50 day MVA.
Stats: Up 38.95 points (+1.8%) to close at 2149.44.
Volume: 1.522 billion shares (-15.1%). 1.117 billion shares to the upside versus 353 million to the downside. Good buying action, but just not as many buyers jumping in the market. We want to see volume rise on the up days.
A/D and Hi/Lo: Advancing issues maintained their lead at 1.36 to 1 (1.42 to 1 Thursday). Not great, but turning the line back up again. New highs fell to 123 (-3) as new lows fell to 18 (-20).
The Chart: http://www.investmenthouse.com/cd/$compq.html
After some undecided action in the first half of the day, the Nasdaq started to build a bit and rallied to a positive close. It took three shots to break over the 50 day MVA, and when it did, it stuck, though it had to bounce off of that level in the last half hour. It was touch and go, and we watched to see if it would end the day above or below it. When it broke over that level and held, that gave it a chance for a move higher. We have to see buyers come back in this week, however, or we have the same old story from last week. After digesting some gains last week the index needs to turn it higher again on stronger volume. If it continues to rise here it will have made a higher low as it tries to work through its continuing lateral consolidation, and that is positive action. As noted earlier, there are stocks moving up out of good patterns on stronger volume. Another positive that can move it higher. For now the index remains choppy with undertones of strength.
Dow/NYSE: The Dow was up again as well, but it could not hold above 11,000 after reaching that level with just over an hour left in the session.
Stats: Up 78.47 points (+0.7%) to close at 10,990.41.
Volume: NYSE volume fell to 1.015 billion shares (-17.3%) after a slight advance on Thursday. Thursday NYSE volume was originally reported by the NYSE as down, but turned out to be slightly positive, a good day of price/volume action for a change. Friday was just light volume all around, and the index really needed strong volume to hold above the 11,000 level. There were simply not enough buyers there to hold it up. Up volume edge down volume 528 million shares to 457 million shares.
A/D and Hi/Lo: Advancing issues held their ground 1.47 to 1 Friday (1.47 to 1 Thursday as well). New highs fell to 104 (-6) while new lows rose to 23 (+1).
The Chart: http://www.investmenthouse.com/cd/$dja.html
Friday the Dow tapped at the down trendline connecting the January high with the September high (10,835.49), and then bounced higher to close. That is the action we wanted to see off of the down trendline, but we also wanted to see it on strong, above average volume. Perhaps it will build into that as this week wears on. The index hit a high of 11,021.57 with just about an hour to go in the session, but it could not hold on as the buyers were not inclined to jump in hard at the close. So once again we see the Dow getting squeezed a bit from the bottom and from the top. It is holding just above the price consolidation in May as well as the down trendline, and it has the 11,000 level pushing down on it from above. We hate to keep saying the indexes are at critical places, but they have simply not made the definitive move one way or the other yet. Again, we keep seeing positive undertones such as a good A/D line, good patterns, and the lack of a technical breakdown. As with the Nasdaq, we will need to see a move up on much stronger volume before too long or the route of least resistance may turn out to be down.
S&P 500: The big cap index held 1250 Thursday and then rose Friday. Volume was not great so we cannot get too excited, but the hold at the 50 day MVA and subsequent rise is a positive. It too has to deal with its own resistance at 1270. It has the down trendline connecting the September and February highs at 1260 (where it closed), the 18 day MVA at 1267.01, and the 10 day MVA at 1269.54 also acting as resistance. That is a lot of overhead. As with the other indexes, it is getting squeezed and will either bounce up or down.
Stats: Up 4.85 points (+0.4%) to close at 1260.67.
Volume: NYSE volume fell to 1.015 billion shares (-17.3%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
The indexes are again in at levels that can lead in either direction. They are not giving clear signals at this point but are showing indecision as the earnings warning season is upon us. If they are going to continue their rally, we would expect they would start doing so again after this last pullback. Shorter term things could get rocky as investors have been less willing to buy the selling for earnings fears and we have seen a shift in price/volume action. However, there remain good stocks moving higher and they are still holding their breakouts. That is key to the market. The big techs have enjoyed some strong moves and then have sold back down some. There are some in trouble and others hanging on for life; they may make it or not. The good advance/decline line along with the smaller stocks breaking out and holding their breakouts has been the backbone of the rally; if they fail it will be over. Right now they are not.
We expect more bad news from some brokerages on Monday. It has been almost a ritual of late: downgrade some stock that is already a mere shadow of where it was when it was a 'strong buy' last spring and summer. The pessimism about the economy is reaching a very high level as predictions of a recession rise every week. Again, we think this is very much like all the talk of the bear market: when everyone was convinced it was different and would never get better, it started to do just that. Now that everyone is convinced the economy stinks and will only get worse, it is probably at the bottom.
That will not save the market over the next few weeks. It is more focused on Q2 than what it was focused on just three weeks ago, i.e., the third and fourth quarter and beyond. We are going to have more companies 'coming clean' again for Q2, but we will also have some continuing to reaffirm estimates for the future.
We are going to keep our eyes on those good patterns that have continued to perform. The reports are stuffed with those plays: stocks in good patterns ready to move, stocks making moves out of good patterns, pre-splits, pre-announcement splits, rolling stocks, etc. They are still performing, and as we have said, as long as these leaders continue to perform the market is holding up.
Support and Resistance Levels
Nasdaq: Closed at 2149.44.
Resistance: 2232 and 2250. After that, 2328 where it stopped this last time.
Support: 2050 and then 1995 - 2005.
S&P 500: Closed at 1260.67.
Resistance: The down trendline connecting the September and February highs is at 1260 (where the index closed). The 18 day MVA at 1267.01, and the 10 day MVA at 1269.54. Those combine with 1270 as the next level of resistance. After that, 1315.93 is the recent high it needs to plow back through.
Support: 1250 is still holding for now. After that, possibly 1230 from some previous price bottoms. If that gives on strong volume, 1200 is more likely.
Dow: Closed at 10,990.41.
Resistance: 11,000. Then 11,400 to 11,450. The old high at 11,750.28 is looking pretty far away.
Support: Down trendline at 10,835. Then 10,750. 10,400 to 10,500 if 10,750 does not hold.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
6-04-01
Auto sales for May: 6.2M expected versus 6.4M priorl
Truck sales for May: 6.9M versus 7.0M.
6-05-01
Productivity, Q1, revised (8:30): -0.7% expected versus -0.1% prior.
Factory orders for April (10:00): -2.7% expected versus +1.4% prior.
NAPM Services for May (10:00): 48% expected versus 47.1% prior.
6-07-01
Initial jobless claims (8:30): 430,000 expected versus 419,000 prior.
Wholesale inventories for April (10:00): -0.1% versus +0.1% prior.
Consumer Credit for April (3:00): $8.6 billion versus $6.1 billion prior.
End Part 1 of 2
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