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9/24/03 Investment House Daily
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Investment House Daily Subscribers:

MARKET ALERTS:
Target hit alerts issued Wednesday: CYTO; SWIR
Buy alerts issued: NXTL; AMI; SOX
Trailing stop alerts: MLHR; INTC; BEV
Stop alerts: If it broke near support we closed it out. For those that did not we will see if they bounce from near support. AVNX; LNUX; FSII; SKYW; LSI; ARTG

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SUMMARY:
- Market finds second reason of the week to sell, this time on volume.
- Indexes break recent support as volume surges on late selling.
- Giving the big winners some room but cutting others if break near support.
- Subscriber Questions

OPEC production cuts provide the fuel for the fire.

The market is looking for reasons to sell. For the second time in three days it found reason to sell on news that taken to the extreme could harm the economy but that in reality probably won't. OPEC surprised the world with announced production cuts of 900K barrels as opposed to maintaining the current quotas. It is something of a 'who is the boss' statement after the US and Russia met in Florida earlier to map out plans to take some of the world oil dominance out of the Middle East. They are also worried about US control of Iraqi oil, with Venezuela making the lame argument Tuesday that Iraq could not attend because it was not a UN member. Of course, Qatar and Kuwait were not UN members when they first joined OPEC. It is a power struggle for world oil and OPEC, particularly Middle East OPEC, is losing some of its grip on world oil prices.

If the US and Russia are successful, the 900K won't matter that much in the big picture. It was an excuse, however, for those getting nervous to sell just as the currency issue was the excuse Monday. Unlike Monday, the selling was on much stronger volume as the big money sold as well. When you start seeing the market selling on news that could impact the market at some point in the remote future, you know that it is getting nervous and ready to pullback further. Anything could potentially impact the economy and thus the market. The virulence of the selling on some lukewarm news indicates seasonality (i.e., September selling) is trying to exert itself.

There has again emerged some intraday volatility with the up and down action day to day, but the trend had held. Now there is higher volume selling as the indexes pop the near support that had been holding and Nasdaq broke the steep up trendline that started from the August low. Not a major breakdown, but selling was across the board, the reasons for the selling were lame, volume jumped and support broke. After looking ready to continue the move higher for a few more sessions and then give an orderly and timely pullback, Nasdaq now looks ready to sell to the 50 day MVA and trendline connecting the March and August lows. That is not a major breakdown either, but we don't necessarily want to ride upside positions to that point, and that is why we unloaded several today that were breaking near support.

THE ECONOMY

The economic rhetoric is heating up as all candidates tune up the engines for the 2004 election year. One of the things that is interesting, as always, is how the same data is used (or ignored) to come up with vastly different conclusions. One candidate said the tax cuts should be repealed in toto, another for those making over $200K per year. The money should then be used for any number of spending programs including one to 'create jobs.' That one was quite interesting. There was no elaboration on how the money would be used to 'create jobs', but if you are going to raise the taxes on the income brackets that create the jobs in the economy one can only assume it is some type of busy work job creation such as painting the Golden Gate Bridge as in the 1930's.

At least 70% of the jobs created in the US come from small businesses, and most small businesses are truly small being partnerships, sole proprietorships or subchapter S corporations. In those entities the business earnings are passed right through to the owners. It is apparently very hard for many to accept, but those with incomes greater than $200K create most of the jobs because those are the people that run the small businesses. If you remove their business incentives by in part raising their taxes, you put a crimp in any job creation that is to come. One amusing point we continue to hear is how the current stimulus will pass and the economy will slump again. That is not the case as the data is showing real increases in areas that had been dormant, but it also points to a major flaw in 'busy work' jobs: once the money for those is used up where are those workers going to go for work? The Golden Gate Bridge Painting Company? That was the government. In short, they go back to work for the government through unemployment lines because the busy work does not create businesses that create jobs. It does, as proved by the New Deal and Great Society packages, create a class dependent on the government. That is what some in Washington want, but not was envisioned and contained in the US Constitution. Constitution week is coming up. Everyone should read it and try to find in it where it says the federal government should be in the medical business, housing business, etc.

Another interesting point is how there has been a denial that the economy is recovering. As data point after data point comes out, however, it has been harder and harder to deny there is recovery. So, the argument had to shift to acknowledge some recovery, but to claim it is a bad recovery because the jobs are not there and that the recovery will fail without jobs. Jobs will be there and are showing up, but they are not the jobs that were terminated because of the fundamental changes forced on businesses by a government that allowed interest rates to be jacked up and kill the golden goose that was paying for all of the hundreds of billions of dollars worth of new programs initiated during the boom. People are going to have to go to where the new jobs are as they did in 1982 and again in the early 1990's (I did this along with many of my contemporaries). I remember Al Gore when running for VP saying we were going to have to retrain ourselves for the jobs in the new economy. That is exactly what has to happen again as the US economy, the world leader, morphs into a new more efficient economy as has done for over 200 years. This is EXACTLY what you want to happen because we are now the leader and not following Japan as everyone was bellyaching about in the 1980's.

The argument goes further and says the tax cuts are hampering the recovery. Cart before the horse. There would be NO recovery but for the tax cuts. The consumer remained strong. Businesses were in the slump, and we found out just how important that was when the economy went into recession even with a strong consumer. The only reason the economy is recovering now is because businesses are starting to invest again, in large part due to the tax incentives and lower marginal rates they have as a result of the tax cuts (remember, over 75% of the businesses in the US are small; they are not Exxon, GE and Microsoft). That buying power is starting to unleash, and that is what is starting the economy. Jobs are being created as new businesses are being created, but the economy is not at the point where there are net jobs created. It is still too early. We have said time and again that won't happen until year end. In the interim we do note that the same number of people today say they don't have a job as back in 2001 in the official recession even though corporations have cut payrolls by about 2 million. In any event, without the tax cuts to stimulate the economy and start businesses on the road to investing and thus recovering, the economy would be a huge, huge mess. The market would be in the toilet still, business activity would be dormant, there would be even more job losses, deficits would still be growing because tax receipts would be falling faster as more businesses went bankrupt.

What is happening now is another 20 year metamorphosis in the US economy where it will emerge stronger and more agile, just as it did in the early 1960's and in the early 1980's. The 1960's were killed by too much spending and threw us into the horrific 1970's. The same thing happened in the 1990's when boom was turned to bust with massive federal spending and federal intervention to slow the very economy that was making all of that spending possible by generating those huge tax revenues. The economy is trying to make the leap to the next stage and keep ahead of the rest of the world, but there are too many would be kings that can only see next week as opposed to the next decade and beyond. Al Gore told the lumber industry workers thrown out of work due to the President removing millions of acres from harvest through executive order that they would have to re-educate themselves to fit the new economy that no longer needed those jobs. Those that would stifle trade and free markets and thus our economy with trade barriers in order to keep certain manufacturing jobs in the US need to realize that we should encourage those out of work to retrain for those medical job shortages that already exist and other areas that are growing as opposed to clinging to jobs that won't come back or if they do will be very costly to the economy. Re-employment savings accounts would be a great incentive to do this, but they are opposed every step of the way. Unfortunately it is far too easy to beat the protectionist drum and rally the masses against change than it is to have vision and have a positive view of the future, a future that we find very exciting as the potential for positive change is huge. If we turn back now, however, we condemn our future to a long, painful 1970's like economy where we lose ground to the rest of the world as we did to Japan and OPEC in that decade.

THE MARKET

Tuesday we noted there were too many bulls and revisionist bulls coming onto television and saying that they were in fact bullish back in February and March (they just didn't announce it to the world; seems even with the scandals Wall Street still cannot live by the honor system). We noted the market had run hard and far and now everyone in the analyst business was converted and that was a dangerous situation and that we had to look at the market indicators very hard at times such as these.

Those indicators were pretty positive Tuesday as the indexes and leading stocks moved higher on rising volume once again. They reversed Wednesday on even higher volume with some major point losses. The up and down action was overall positive as the market continued to trend higher with good price/volume action. Wednesday that was tossed back in the market's face with a big selloff on the strongest volume since the start of September. Nasdaq broke the August up trendline and the 18 day MVA that had bounced it higher in the recent volatility. SOX torpedoed lower. SP600 (small caps) broke the 18 day MVA after making the lower high. To state the obvious, those are not good signals.

They are also not the indication of a total meltdown. There were certain decisive qualities about it, however: sold to the low on the close; selling volume increased as support was breached; volume overall jumped; the near term trend was breached; it came on the heels of a solid resumption of the move higher on Tuesday; leading stocks sold on higher volume. Nasdaq now looks as if it will test the trendline from the March low, a point that is just below the 50 day MVA. That is not a horrid drop, but a 7% drop (roughly) from the Friday high, the peak of this run. It is not a pleasant drop either, and that is why we were selling positions today and buying SOX puts. Given the run higher, that is not a big drop and as we have noted in the past, the 50 day MVA is a good support level for a strong uptrend. Indeed, it is just another Wednesday away (60 points). If it holds there the uptrend from the March low is still in place.

Market Sentiment

Note comments above regarding the bullish problems confronting the market.

VIX: 21.22; +1.75
VXN: 29.36; +2.38

Put/Call Ratio (CBOE): 0.88; +0.02

NASDAQ

Nasdaq made a couple of attempts at holding different support levels, but they were half-hearted and it broke its August up trendline on rising volume.

Stats: -58.02 points (-3.05%) to close at 1843.7
Volume: 2.216B (+18%). Techs were stung with a big price loss and on the highest volume since the start of September. That indicates that the accumulation this past week was met with a lot of determined institutional selling Wednesday. Lots more sellers than buyers.

Up Volume: 390M (-1.078B)
Down Volume: 1.811B (+1.436B)

A/D and Hi/Lo: Decliners led 2.3 to 1. The A/D line on the recent move up was never really great. It was not bad, but the turnover Wednesday showed all techs were getting sold off.
Previous Session: Advancers led 1.68 to 1

New Highs: 280 (-34)
New Lows: 1 (-3)

The Chart: http://www.investmenthouse.com/cd/^ixq.html

Nasdaq broke the 18 day MVA (1854) that had held as support on the move higher. It also popped the August up trendline, the steeper trendline off of that low and it did it on a strong volume surge. It also dropped 3% in price. Those are major events. Unless there is a quick reversal, this action on the heels of an accumulation session indicates a deeper test toward the 50 day MVA (1784) and the March up trendline near 1750 (at this time; they rise each session as they trend higher). That is not necessarily terrible. If it holds that would keep it in the uptrend and over the July highs. You don't want to see it dip sharply below that level as that sets up a longer correction that has to work through that level that becomes overhead supply at that point.

S&P 500/NYSE

The large caps broke through the 18 day MVA and the August up trendline as well, doing it on strong trade. Very similar action to Nasdaq, but already back in the prior range and close to the 50 day MVA.

Stats: -19.65 points (-1.91%) to close at 1009.38
NYSE Volume: 1.543B (+19.16%). A big spike in volume as the large caps and small caps sold sharply, indicating big money selling.

Up Volume: 273M (-593M)
Down Volume: 1.283B (+852M)

A/D and Hi/Lo: Decliners led 1.96 to 1. Not terrible, downside spiraling breadth, but the selling was across the board.
Previous Session: Advancers led 1.7 to 1

New Highs: 164 (-25)
New Lows: 8 (+6)

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

The 18 day MVA tests held no more as the large caps were spanked hard. Not only the 18 day MVA but the March up trendline was broken as well. The 50 day MVA (1004) is just ahead, and that puts it squarely back in the summer range that ran from 975 to 1015. SP500 tested the breakout and was rebounding again, but the wave of selling Wednesday crushed that move. Now we see where it holds. It needs to hold the trading range or things could get really ugly.

DJ30:

Stats: -150.53 points (-1.57%) to close at 9425.51

The blue chips tumbled with the rest of the market though at a much more subdued pace. Dow 30 volume shot higher as well but it was not as severe as the other indexes. Again DJ30 lags the rest of the market. It is still above the top of its summer range (9353) and looks ready to hit the 50 day MVA (9356). Those are two important support levels merging. That should be some solid support, and how it reacts to that will give an idea as to its further direction. It will almost certainly attempt a bounce from that level, but will it be sustained or will it turn right back down in more selling.

THURSDAY

The market did little to help itself in the vacuum of economic data, so perhaps with the return of economic reports (durable goods orders, housing sales, and weekly jobless claims) it can do better. That data, however, is already baked into the market, and the market has made a strong move to take back some gains even in light of improving economic data. It had rallied hard and was piecing together another move even though it was extended. That move was slapped hard Wednesday and it appears the market has hit a critical mass, and once the selling started others decided it was time to lighten up as well.

The key now is where stocks will hold on the selling. DJ30 and SP500 are quite close to their 50 day MVA already. It would take another stout drop to put Nasdaq at its 50 day MVA (almost 60 points lower). The session was strong to the downside, but it is also in the context of an uptrending market that has been under accumulation. Thus the selling may not be overly intense as many institutions were buying stocks up through Tuesday. When those wanting to lock in gains for the Q3 and year end reports are done we could very well see those that missed a lot of the move step in and start buying. Longer term trendlines and the 50 day MVA are often points where that starts. Thus there could be a sharp but short period of selling where those wanting to lock in the paper gains do their business, get finished, and then those that feel they missed a chunk of the move step in at traditional support levels (e.g., the 50 day MVA).

How that plays out remains to be seen, but it was clear Wednesday that there was a significant group of institutions ready to sell and the back to back news stories re currency and oil was a good enough excuse to start. When some started to sell, others did as well, and the move snowballed Wednesday. We will see if they check up at the 50 day MVA and if the buyers make a significant move back in. If seasonal factors take over and keep pressure on the market we could see a further drop into October and a lateral move for the first three weeks before another move higher is attempted. If the market does hit the 50 day MVA, regroups and then rallies on back without any regard to what happened, that is a hugely bullish act. It would have ignored the seasonal dips as it did in August, an indication that something truly powerful upside was underway, i.e., a much stronger bull market than we anticipated.

Until that happens we have been watching how our plays are responding to near support. If they were breaking it today we were closing them out. If they were holding support, and many did, we left them alone. One sharp downside session does not automatically mean a deep sell off is coming. There were a lot of negative attributes to the selling, but leaders remained in their uptrends for the most part, holding near support even if volume moved higher. Others such as TSCO, ZMH, JBLU, UOPX, UNTD, AMZN, etc. barely flinched. If the leaders are not torn down by the time the indexes hit their 50 day MVA, the odds of a rebound at that point as opposed to further selling are greater.

End part 1 of 3

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