world stock market, us stock market

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6/7/01 Stock Split Report
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Stock Split Report Subscribers:

TONIGHT:
- We got the weaker open and then the rally we were looking for.
- We really think they don't get it.
- Retail sales weaker, jobless claims higher, inventories higher, and, oh yeah, a tax cut.
- Subscriber Questions
- Team Trades

THE SUMMARY

Market gives us bullish action but is light on the volume on the Nasdaq while a bit stronger on the NYSE.

Wednesday we said we thought we would get the pullback to support and then a move higher on the session as we believed the move on this leg was not over. That was the exact scenario today as the indexes were weak and then cued into the better news from BRCM, AMD and NSM and rallied on the back of the semiconductor sector. A lower start and a strong close. That is the bullish price action that we love. That is bullish action even in the face of lighter overall volume that we are experiencing as summer gets underway.

The rally also proceeded even in the face of weaker march retail sales, higher jobless claims, and higher inventories. Rallying in the face of bad current news but also on the prospect of better times in the future is another bullish attribute. Not a novel concept, but to the analysts who were talking even as the day was over, it seems to be a leap of logic (or commons sense) that they just cannot grasp.

Chip analysts overall refuse to embrace the future.

What do we mean? We have been writing about the continued gloom over Q2 results, and how the 'fear' is that the won't show any improvement. Well, to accept that as a real concern, we had to believe that Q2 would be better. But all of the companies we have heard from that are talking about Q2 have said that it would be the bottom. Bottom is the bottom, i.e., the worst. We should not and are not expecting it to show better numbers. Indeed, most sane people are not. It is the daily parade of talk show guests who are looking for that. They are going to be disappointed and they are spreading unwarranted gloom.

Then there are those after the close today (Joe Osha) who were panning INTC's statement that the second quarter would hit the range of estimates and that the second half would be seasonally stronger. He wanted to see actual growth in sales, actual improvement, etc. or else things would just 'come back to roost.' Osha said there is a 'disconnect' (that must be in the semiconductor analyst handbook as a key buzzword to toss out; see comments of Dan Niles on XLNX and several other chip stocks in the past) between what INTC is saying and what its customers are saying. This has been the theme of these analysts: we won't believe it until we see it, and as Osha and many others have said (and have been wrong thus far) to sell into any strength. Osha also was panning AMD's statement that things were going to get better or return to 'normal' in the fourth quarter. Osha said AMD conveniently did not mention that Q2 would be bad, apparently implying that AMD was hiding something. He also said that these companies have 'no visibility' (again, see the chip analyst handbook for this and other common buzzwords) and so how can they know what is going on.

Okay. First, there is a simple, big picture economic concept that seems to be missing from all of this analysis: economic improvement = more sales = better earnings = better stock prices. AMD, INTC, BRCM, NSM, XLNX, etc., etc. are looking to the future and giving us their guidance. Investors are looking past Q2 and pricing in better times now. That is the way the market, any market, works. As we said the other night: if you wait for that confirmation in the numbers, you have missed the boat, or at least the first few that have left the dock. If the rally continues there will be more, but the idea is the same. And the idea is a simple, fundamental economic principal. Yet, we continue to see the analysts looking only past their noses and either refusing or unable to see the big picture or apply what they see to the real world.

Second, how can anyone say there is no visibility when the companies themselves, the guys on the front line, are coming out and telling the world (and thus risking lawsuits and all the attendant ramifications in this lawsuit happy world) that things are looking better? The companies in the business are saying they have more visibility; why do the analysts refuse to believe this? Sure, one or two saying things look great when everyone else says 'no way' is not a signal with much reliability. That is the old 'everyone is out of step but my Johnny' syndrome. But when we see one after another in the same sector come out and say they see things are improving, bookings are bottoming, etc., we have to take note. The group is telling us something. Further, the guidance lower from the chip companies is not the same magnitude as previous revisions. The speed of the decline is slowing; another sign of a bottom coming. Many analysts, either because they are foolish or cannot admit they are wrong, refuse to give this any weight.

Now Ashkok Kumar did come out today and saw that he now sees an absolute bottom in the chip sector one quarter away. Great that he is now acknowledging what more and more companies are saying. It was not but a month or so ago he was not believing what INTC, AMD and MU were saying. Now that the ledger has grown substantially, at least he acknowledged that change. And then there is Jonathon Joseph who by his calls has established himself as the most prescient chip analyst out there. He came out and said the boat was leaving a month ago. He is slowly, ever so slowly, being joined by others.

So a bit of ranting, but with a reason. Trust yourself and trust fundamental, logical concepts. Don't trust the analysts in a sector. They tend to ignore economic patterns and focus on minute details that don't really matter much in the big picture. In this case that is an improving economy in the second half and beyond, and history shows us that chips lead tech in recoveries. Trust your common sense. So much of the world is based on really basic, common sense principals that get all convoluted when analysts and other professionals get involved. Heck, I practiced law for 8 years; I know how something simple can be twisted into an octopus.

THE ECONOMY

Jobless claims jump higher once again.

Jobless claims ran up to 432,000, the highest level in 8 years. That was more than the 418,000 expected by the 'consensus' and up 13,000 from the unrevised 419,000 from the prior week. The 4-week moving average rose to 413,500 from 402,500. Continuing claims rose to 2.99 million from 2.78 last week. This continues to show that those laid off for now are having a hard time finding jobs. That is how it works, however. Announced layoffs have been tapering now, but the actual job losses trail: the layoffs are announced, and then it takes a few weeks to months for those announced layoffs to actually become layoffs reflected in the weekly numbers. So, even as layoff announcements start to drop we will see weekly claims rise. Another factor: companies will not start hiring until they do see actual improvement and need the help. The chip makers can say that they are seeing a bottom, but it then takes the turn back up to start hiring. Thus, jobless claims now LAG the recovery. As we said, the numbers will get to be the worst just before there is improvement. We think we are getting close.

Same store retail sales disappoint.

Cooler weather is blamed for the weaker retail sales reported today from WMT and the like. WMT will still hit its quarter numbers it said, but analysts were negative on the group. The biggest drop was in the teen market; that is blamed on stale products by many. Whatever the reason, there was not much buying as consumers decided to slow down the buying a bit. We view this as a temporary lull. We expect to see more buying in the next month.

Wholesale inventories rise, not fall.

They were expected to fall 0.1% but they rose 0.3% in April versus a 0.1% rise in March. That is the highest level since December 2000. We need to see inventories work their way down, and they have been doing that, but April was an uptick. As we have said, there will be rises and falls in the numbers as the economy makes the turn. We are seeing one month up, one down, but underlying that we see companies starting to see some better things in the future. This is how it works over and over. As with the traders who were saying in April that this bear market was different and that the old indicators did not work anymore (and the market turned just as the echoes of these utterances died out), those who say that this economic downturn is different and the like are equally wrong.

Consumer credit surges.

Now the bad news was easy to find today. We had to do some searching to find stories on consumer credit, a sign of whether the consumer is still active. The retail sales numbers got the headlines, but a lot of that was weather related. Consumer credit shot up beyond expectations, rising to $13.9 billion when just $8.6 billion was expected and $7.5 billion in March (revised up from $6.1 billion). This is a very important gauge because it shows that consumers are still comfortable with taking on debt; that belies the same store retail sales released today.

Tax cut signed into law!

Today the tax cut became law, and even though it is not as big or as investment-incentive loaded as we wanted, it is a cut and has some stimulus associated with it. That will have positive impacts on the economy, and the economy has grown well after each of the major tax cuts in the past 20 years. It is essential to keep low inflation and a healthy investment environment for business and individuals. The tax cut will help, and we may see some more items tacked onto a minimum wage bill that is sure to be introduced. A capital gains reduction or elimination would be a very nice companion. Even as it was signed into law, however, we had the spenders saying it might have to be rolled back. Like the chip analysts, they just do not get it.

THE MARKET

We were not giving up on the move Wednesday night, and despite the 'slew' of semiconductor warnings after hours (that was according to CNBC; LSCC and TXCC comprised the 'slew'), we remain positive on what we see. The problem with the tube is that it tends to focus investors too much on the next hour in the market. As we said last night, we knew the morning would be softer, but that we believed we would get the reversal intraday. That goes along with a broader view of the economy that even though we might see worse numbers in the immediate future, we are going to see better numbers in the future.

The market is factoring in this, but volume has not been huge. Early summer light volume for now, but we see bullish price action in the indexes. Again we have some important levels approaching, and typically the indexes need volume to break through. It is interesting to note again that once the negative sentiment manifested itself again in the put/call ratio, short interest, and analyst gloom (Baron's VIX call), the markets started back up exhibiting the bullish start weak, finish strong price action. That and the lead from the small and mid-cap stocks have been the real constants in this rally higher.

Overall market stats:

A comment about volatility: Much has been made of volatility this week. It is a secondary indicator, so give it the weight it is due. Moreover, as we discussed in our seminars, volatility DOES NOT always set up a correlation with the market. The levels between 20 (low) and 30 (high) are general guides. They are not hard and fast rules. Moreover, the market at times has NO correlation between index moves and volatility measures. Thus, we did not put much weight on this indicator in light of the other primary indicators and secondary indicators that were in line with one another while volatility was out of step.

VIX: 21.61; -0.77. Still in that low range, but today not as much was made of it. The news was wearing thin, and more importantly, it just was not holding water when compared to the action in the market.

VXN: 52.70; -1.64. Still relatively flat indicating some complacency. But as we have seen, this has not been an very accurate indicator of late.

Put/Call ratio (CBOE): 0.73; +0.05. This ratio has continued to climb to levels that show high anxiety among option traders, and that is usually a sign that investors are overall queasy about the market and its chances to move higher. That continued fear is what we like to see. Short interest dipped slightly on Tuesday's rise, but was back up today. It is still at highs not seen in over 1.5 years just before the Nasdaq took off to the upside. Option activity rose to 1.037 million on the CBOE (1.015 million Tuesday).

NASDAQ: There was bullish action on the index though volume was lower. Good on one hand, not what was needed on the other. But looking at the individual movers, we see good volumes on strong moves higher. That is good to see. There are big buyers on key stocks still. We still think it will need more volume to take out the recent high at 2328.05, but on lighter summer volume, if we can get stronger up days versus down days, that could be enough.

Stats: Up 46.27 points (+2.1%) to close at 2264.00.
Volume: 1.662 billion shares (-6%). Up volume led 1.259 billion shares to 380 million to the downside. This volume was not what we wanted on an up day; at a minimum we wanted volume on the up session to top the volume on the down session Wednesday. That would give us the right price/volume action even though it was below average volume. Summer is hear and volumes may be lower. We at least want that good price/volume action. We also need good volume to break the recent top.
A/D and Hi/Lo: Advancing issues moved back into the lead at 1.27 to 1 (decliners led 1.36 to 1 Wednesday). That is not powerful, but it was a reversal day. New highs fell to 113 (-11) as new lows rose to 37 (+7).

The Chart: http://www.investmenthouse.com/cd/$compq.html

A softer open down at the 10 day MVA (2208.03; 10 day MVA at 2202.22) and then a rally up. Note that it bounced down off of 2250 about an hour into the session and then regrouped at 2230, one of the former tops on May 2 before bounding higher to take out 2250 again. It then tested that level twice in the afternoon, but held on. It was a classic day to look at and review how support and resistance levels work to impact intraday moves. As we noted before, this is bullish price action sans the good volume. We will take what we can get, but we would prefer to get everything we want. Given that rarely happens, we look to individual stocks that are moving higher still on stronger volume. That is a good sign. The next big hurdle is the May high at 2328.05. This looks as if it will be the second shot at that level. We like to see breakouts on the second try, the third at the latest. It will need volume to do it, so we are looking for the index to hit 2300 to 2328 on the move; we like the prospects for a move to 2500, but we know that 2328 will most likely act as some resistance and our short term option plays may be impacted. When in doubt, we will close them out if the move starts to falter.

Dow/NYSE: It was a struggle for the Dow as the day was dominated by technology and the Dow had a hard time shrugging off Wednesday's beating. It took a retest of 11,000 as we thought it might to bet it moving back up in the afternoon, and on higher volume to boot.

Stats: Up 20.50 points (+0.2%) to close at 11,090.74.
Volume: NYSE volume edged higher to 1.089 billion shares (+2.5%). Still below average, but again the Dow showed good price/volume action: up Tuesday on higher volume, down Wednesday on lower volume, and then a reversal off 11,000 and a move higher today on stronger volume. Up volume just edged down volume 553 million to 523 million, but on a reversal day that is expected.
A/D and Hi/Lo: Advancing issues were back in the lead, but not by a lot (1.08 to 1; decliners led 1.52 to 1 Wednesday). New highs fell to 135 (-38) as new lows rose to 28 (+8).

The Chart: http://www.investmenthouse.com/cd/$dja.html

It was a tough fight for the Dow with MO taking a hit on the big cigarette award, but it fit our view of the session: a needed test of 11,000 again and a reversal on higher volume. It did just that, moving up 80 points in the afternoon to close with the gain. The tap down to support and the rally back up showed us there were more buyers in the session as they stepped in at 11,000 and drove the index higher. They did so on higher volume than on the selling as well. Moreover, the candlestick chart showed us a 'hammer' doji after Wednesday's selling; that can mean a continued move up here. In combination we like what we see. Now all we need is the follow through. With the INTC conference call being more positive than negative all things considered, this may be part of the catalyst for the Dow to now make its second real run at 11,350.05.

S&P 500: The big caps managed a bit of a comeback today, again able to find and hold support at 1270 after reaching down to 1265.96 on the session low. The move came on higher (not by a lot) volume, and continued the very recent string of good price/volume action. It really needs to step right through Wednesday's high at 1286 for it to be in position to make a run at the May high of 1315.93. We think it will do it at this point given the reversal action off of support.

Stats: Up 6.93 points (+0.5%) to close at 1276.96.
Volume: NYSE volume edged higher to 1.089 billion shares (+2.5%).

The Chart: http://www.investmenthouse.com/cd/$spx.html

TOMORROW

Friday comes and without any major economic news. The news after the close tonight was the INTC mid-quarter conference call, and on the heels of that 'positive' news the Nasdaq futures were up in the range of 45 points. We have mixed views on that. First, many things can happen between tonight and tomorrow morning. Second, rip-roaring opens usually lead to weaker closes or worse, reversals. The key will be what the Nasdaq does at 2330, the May high, if it gets to that level. that is 65 points; not out of range but a stretch. That is why it could be a danger point as the Nasdaq would have run a long way to get there and then have to deal with the usual down news that Monday brings. As we said earlier, that is something to keep in mind on our option plays. If we get that good gain and we will be looking to bank some profits ahead of Monday given they are our short term positions. We may not sell all positions, but we could sell half and bank the gain ahead of the uncertainty of Monday.

Volume has not been magnificent. It has improved in its quality on the NYSE, but it is still below average volume. The Nasdaq is trying to recapture the right price/volume action as it continues to exhibit bullish price action overall. And again, we see stocks moving up and breaking out on strong volume, and those continue to feed this rally. Those continue to be our focus as more and more move up and break out such as NVDA (breaking out of that bullish cup with handle and then ascending wedge), KOSP, AW, PSFT, JAKK, LOW, ESRX, etc. We also have others setting up for the next move such as PDLI and LNCR, and then there is AMD bouncing up once again off of its 50 day MVA. Even though it is Friday, we won't ignore these plays if they present the breakout moves; the breakouts seem to be more or less immune to the 'bad news' that Monday's bring.

End Part 1 of 4

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