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us stock market, trade stock
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9/20/03 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Friday: None issued
Buy alerts issued: FMTI
Trailing stops issued: ANAD
Stop alerts issued: AQNT; FDS
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- Expiration Friday a sleeper as market pauses in the breakout move.
- Rotation resumes.
- Market on its own with a dearth of economic data and earnings warning season starting this week.
- Next two weeks traditional period for funds to lock in gains.
- Stick to the plan and don't chase low volume moves as market extends its gains.
Expiration Friday comes and goes without any major pullback, capping a solid week.
The market did indeed continue its one day up, one day down action, but again the upside move was much stronger both in price gains and volume. The market marched up from its breakout test to expiration and the held onto the gains ahead of the weekend. There was no economic data, a few downgrades, a few earnings warnings. None of it was enough to cause a major shift. Volume came in lower, breadth was flat, support held on the lows and provided a modest bounce. No rush toward the exits, just a slow, lower volume expiration session. Not a bad session given expiration and the nice run higher for the week.
It was a good week. The market had fallen to near support after the breakout move from the summer consolidation. From there it rallied on solid price/volume action, accelerating on the upside sessions as the week wore on. We really like successful breakout tests that show solid volume surges on the way back up. That proves up the breakout, showing that after a brief round of profit taking following the initial move, big money came right back in and started buying on the lower stock prices. That shows money waiting for opportunities to come in.
Rotation comes to the market again as financials, retail, cyclicals stir again.
The large caps perked up late in the week, actually leading the Thursday rally. That action saw some dormant sectors came to life. After months of languishing, big financial stocks (e.g., GS, MWD, C, JPM) jumped up on sharp volume increases. Retailers had been downgraded by the big brokerages a month ago because the move in retail was over given it was now clear that an economic recovery was transpiring. They considered them early cycle and they were now done. Many fell to their 50 day MVA over the following few weeks. When that happened, those that had missed the move and had then downgraded the sector saw the opportunity they had tried and successfully created. They started to buy and then upgraded the stocks. It is an old and sleazy game the big names play: if you are not smart enough to see the move (the 'this time it is different' mentality) and miss out, use your name and billions in the accounts you control to manufacture an entry point. Then you buy on the weakness and then let on to everyone that this is a great new buying opportunity that somehow reset the cycle that you felt was already finished.
Thus as talk of techs being overvalued and otherwise ahead of themselves continued, they took a breather Friday. Small caps also lagged noticeably last week as some of the big cyclical names started to move again. Early in the year we wrote often of how the small caps would lead the move because they are typically the harbingers of good economic times. We were watching them as well as taking our own business surveys and concluded the economic recovery was underway. The subsequent data bore that out, but the smaller caps were flashing the early signal. Financials and cyclicals then come to life as the next levels of economic beneficiaries. Money does not leave the other areas completely, but new money is put into new areas along with some rotation money. There are some convinced techs are going to fall and are moving some money. In a way that can be self-fulfilling if some selling leads to more and more. There are enough fund managers out there, however, that are not exposed to tech as much as they want to be. A pullback would not get too far before they started buying.
That is the rotation cycle that is so positive in a rising market. Money moves to other areas as actively traded funds and hedge funds move around frequently, looking to capitalize on the short term trends. That pulls money from some areas and they fall back to support much as the retailers have done. At the 50 day MVA or so other funds looking to put their money to work see those stocks at that level in an overall rising economy and uptrending market and step in to scoop them up at that value price (e.g., GPRO last Wednesday). The end result is that money moves to new areas in the market while new money comes in to pick up stocks that have made the pullbacks that fund managers eager to get more exposure to the market desperately seek. That is how uptrends build upon themselves even as the correct internally.
THE MARKET
Friday's lower volume and modest losses for an expiration session were indicative of just another day of rest in the move. We were expecting more follow through early and then some pullback toward the close. In reality the market sold but them managed to recoup a good chunk of the losses to close in the middle of the day's range. Support held on SP500 and produced the rebounds, a good sign as buyers came in at that level to pick up a few positions. A flat A/D line, lower volume, and modest losses showed no increase in sellers, just a day off on the part of buyers after two strong upside sessions that pushed stocks higher off of the 18 day MVA and extended the prior breakout. As we noted before, that is very solid action, the very action we love to see in individual stocks as it shows continued strong interest in buying and accumulating stock positions.
VIX: 19.07; -0.23
VXN: 29.74; -0.01
Put/Call Ratio (CBOE): 0.68; +0.17
NASDAQ
Gapped slightly higher but edged back in some up and down expiration trade that was low for an expiration Friday.
Stats: -3.85 points (-0.2%) to close at 1905.7
Volume: 1.907B (-5.62%). Still above average but backed off on the slight pullback, just the action you want to see when stocks take a breather.
Up Volume: 886M (-554M)
Down Volume: 994M (+481M). A dead heat.
A/D and Hi/Lo: Advancers led 1.07 to 1. Another dead heat.
Previous Session: Advancers led 1.61 to 1
New Highs: 382 (+9)
New Lows: 4 (-1)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Nasdaq held basically flat, closing in the middle of the intraday range. It tested the early September high (1888) on the low (1896) and managed to bounce back in the last two hours and recover two-thirds of the loss. Nothing spectacular, but showing buyers ready to step in some ahead of the weekend though some of that action was also related to shorts closing out before the weekend. Nasdaq rallied well for the week with sharp, higher volume moves and pauses in between as it moved up off the 18 day MVA test. This was Nasdaq's second bounce off the short term MVA since testing the 50 day MVA (1772) in early August. That test came after the breakout from April to July. It has shown its leadership and strength in resuming the climb up the 18 day MVA, and it can have a couple more tests and rebounds before it needs a more serious correction.
As Nasdaq runs about 150 points off of these tests of the uptrend support, and then tests back about half of that gain, a couple more such runs puts it at 2050. As discussed Thursday, that is the big point of resistance from the double top in December 2001 and January 2002 that started the last leg in the long downtrend. Pretty interesting how these recurring movement patterns actually do recur. The market moves in certain cycles when it sets up a trend, and stepping back from the day to day action that is what we see setting up. There are some other factors that will bear on this discussed below, and Nasdaq is also now once again 25% above its 200 day MVA, a point where it struggles. Looks as if it could have 3 or so more days of the current upside bounce from the 18 day MVA before it comes back for the next test of that level.
S&P 500/NYSE
Large caps tested near support and bounced back to recoup much of the session losses.
Stats: -3.28 points (-0.32%) to close at 1036.3
NYSE Volume: 1.452B (-2.75%). Volume was still solid, most likely attributable to expiration Friday. It did back off on the modest pullback, however, just what you want it to do when there is selling.
Up Volume: 660M (-484M)
Down Volume: 772M (+439M)
A/D and Hi/Lo: Advancers led 1.22 to 1. Very good to see the A/D line up even as the index itself sold down. Another indication there was no real selling involved.
Previous Session: Advancers led 2 to 1
New Highs: 286 (+1)
New Lows: 7 (-2)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Traded fractionally positive early, but then lost it and never came back to green. Still, it held support at 1030 to 1032 on the low (1031.89) and rebounded solidly from there. Again, that is an indication of support and buyers willing to step in on pullbacks to support levels. A solid week for SP500 as it tested the breakout the prior week and rallied back up off that level on very solid trade. The large caps started to come to life, helped by financial stocks that have been dormant for several months. Next resistance is 1050 from some prior lows October 2001 and May 2002, but the heavy artillery is at 1100 to 1150 where SP500 double topped December 2001 through March 2002.
DJ30:
Stats: -14.31 points (-0.15%) to close at 9644.82
Volume on the Dow 30 shot higher on the session as the blue chips churned at the Thursday high. Again the blue chip index struggles more than the other large indexes, but it doggedly hangs in there, ready to follow where others lead. It is interesting to note that despite the talk of the cyclical stocks starting to perform better, it was stocks such as IBM and MSFT helping the index along. On the low DJ30 managed to hold the September highs (9609), the point it just cleared on higher volume Thursday.
THIS WEEK
Earnings warnings starting to show up.
No economic data until Thursday. That leaves the market on its own, subject to analyst calls and most importantly, earnings warning season. Friday saw a trickle of such activity with EXPD, a stock that looked to be in a good technical pattern, announcing an earnings shortfall. The results of the news were not good even though it made a massive recovery off of the session low. A closer look at the pattern, however, reveals distribution over its base, one reason we have stayed away from the stock despite the price pattern. Bases that appear to be bullish in price pattern can actually be bearish when you look at the accumulation as the big money is moving out of the stock, not quietly into the stock.
While there is earnings improvement in stocks overall, there will be stocks that have built in anticipation of better earnings that they are not going to deliver yet and they will have to fess up soon. That will hammer those stocks, and depending upon the names, could start to pressure other stocks. We have tightened up the stops just in case.
Gain taking season approaches as well.
Historically the two weeks following the September expiration are a period when some mutual funds lock in some gains so they can post them in their quarterly report and be assured of some gains to show on the annual report. It is another one of those self-fulfilling trends in a way as there is an expectation that stocks will sell so they want to beat the clock and lock in some gains just in case there is selling. It can start a snowball effect and thus the September effect.
There was talk of this after the Friday close and as noted in discussing Nasdaq, after another few upside sessions it would be ready anyway to come back to test the short term MVA (i.e., the 10 day moving average but most likely the 18 day moving average as it did just recently). No doubt if that is all that happens those touting this fund selling effect will claim that was it. While there is some historical record supporting this, we note that funds have been accumulating stocks right up to the September expiration. They were not coasting into the expiration on lower volume gains but on higher volume accumulation sessions as the market tested its recent breakout from the summer range and then rallied back on volume. It would thus seem unlikely that all of the funds would be ready to immediately turn and sell those stocks they just purchased. Again, another strong surge up for 2 or 3 more sessions on this bounce off the 18 day MVA will pretty much cap this bounce and need to test the 18 day once more. If that happens then maybe there will be some selling to lock in gains, but unless volume jumps on the selling that would still just be a normal pullback in the uptrend.
Stay with the plan.
We use volume in our investing because that is the best indication that there is strong backing for a stock that is advancing or declining. When a stock has a lot of big money pushing it one way or the other, it is much less likely to reverse the move suddenly. It can still happen of course, but investing when in the market you try to gain as many edges as possible, and following good accumulation patterns with big money backing, leadership stocks, stock split stocks (pre-announcement, pre-split, and post-split), strong trends, etc. give you an edge. If you can put several of these positive attributes together you have a solid play indeed.
There have been some of our plays that have edged higher on low volume, moving past the breakout point but without strong breakout volume that indicates there is a big money push to get in the stock. Some just meander along, some crash back, some wander higher and then finally explode to the upside as well. If we have a strong breakout we don't mind a stock that continues to move up on somewhat low volume; it has already made the break on volume from an accumulation base and we can let it work for us. If it slides higher on low volume, it can turn hard on us at any time because there was no really strong big money backing on the drift higher.
Thus there are plays were we just back off despite the fact they move higher. If they have a good accumulation base we will keep an eye on them and let them set up the next buy point and see if the can get the volume on the next move and thus show the big money is ready to come on board again and really start it on the run. The problem we are trying to avoid is mismatching strategies. We look for stocks with big money behind them and ones that we can hopefully ride for a long time but that will also make strong, serious moves for us over the shorter term. The attributes of those stocks are stocks in good bases with good institutional support.
We play a lot of options to capture that initial 20% or so gain, and we also buy stock to capture that as well as longer term capital gains to build wealth. We set initial targets and will take an interim gain when it hits that target (unless it is still roaring higher), but we want to make some great short term gain and also hold stocks for a long time. We buy into leaders that are emerging, and could turn into the Dells, Ciscos, Intels, Microsofts, etc. of the new millennia. We don't know if they will, but they are showing the attributes that could put them in that elite status. Thus though we take some early gain to pay for the position and lock in some profit, we let the rest move ahead and then add to them at appropriate times. The combination of option and stock buys work very well for turning a quick 15% or 20% stock move into a 70% to 100% short term option gain while providing longer term growth with the stock positions. We can then use the stock positions to sell calls against when the market goes into downturns or corrections, or even when that stock we know so well makes its runs up the short term MVA.
The game plan is both short term gains and long term appreciation. We have many stocks that we have multiple positions on, taken as the stocks made the next base or good buy point. Those long term winners can provide us gains even when the market turns down during corrections when we sell calls against them. To implement that game plan we typically use our price/volume methodology. There are times we will take just a momentum play (pre-splits are one area we do that), but we know going in that is what we are doing. We don't cross up our strategies and try to make it into something it is not. When a stock does not work as we want it to, i.e., does not show the volume on a move, we usually back away from it because that is not the game we are playing. That does not give us the edge we are trying to give ourselves.
Room for a bit more, then a pullback.
The strong rebound from the breakout test was just as we wanted. Now Nasdaq has another 2 to maybe 3 solid upside sessions in this run (they won't necessarily occur back to back, but may take a breather in between) before it is ready to test back. That, of course, is barring the unforeseen that can upset the apple cart such as a major earnings warning, etc.
Heading into this week we will continue to look for solid breaks higher in the form of breakout tests (there have been many of those as they are mirroring the index action), tests of the trendline, and of course new breakouts as money rotates around the market. We are going to start easing back on creating a bunch of new positions given the advance in this bounce up off the 18 day MVA is potentially halfway over. We don't want to catch a lot of stocks just as the market is ready to come back and test the near support. There will be stocks, however, that are getting new money as the market rotates, and they still have plenty of upside as they are just starting their moves.
End part 1 of 3
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