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understanding the stock market, top stock pick
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9/30/03 Technical Traders Report Update
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Tuesday: None issued
Buy alerts issued: RHAT; CTAS; PLT; CMVT
Trailing stops issued: None issued
Stop alerts issued: None issued
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. To subscribe to the Daily alert service you can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Low volume is the upside's Achilles heel as market rolls over on high trade.
- Financial shows overreact to lower economic numbers that indicate a breather in the solid recovery, not a reversal.
- Back to the 50 day MVA and beyond on rising trade.
Monday low volume bounce sets up higher volume selling.
The indexes tried an early afternoon recovery after selling early. That early selling was purportedly caused by lower than expected consumer confidence and Chicago PMI results, but if anything the economic data added a bit of urgency to the selling; it did not cause the selling as evident by the indexes rallying steadily after the morning dip until the final hour. No, the market started correcting last week, and after a lower volume relief bounce Monday it was ready to sell again and the economic data was the latest excuse for the sellers to come back in. As noted Monday, that low volume indicates fewer buyers, and those few are easily routed when the sellers feel it is time to start selling once again.
That is exactly what happened Tuesday as the low volume relief move fizzled quickly. We wanted another session or so upside, but the quick reversal just shows how ready the market was to sell. Classic bearish action: selling on higher volume, low volume bounce, sellers swarming in and using the bounce to sell again. Intraday it was the same story. A solid midday rally attempt had no volume and was swatted back down when the sellers and volume pushed it back. Rising volume selling and the fade to the close; two signs of weaker action.
The market was trying to mount a rally when rumor spread that the Fed was perhaps intervening on behalf of the dollar. That helped the bounce pick up speed as some took possible intervention favorably. The Fed was not intervening on behalf of the dollar; that would have been a huge shift in policy and would have set off a White House/Federal Reserve war and sent a panicked message to the rest of the world. That is neither appropriate nor warranted. It was the Bank of Japan selling Yen and buying dollars that spiked the dollar higher. In any event, intervention is no remedy. It just shows a real problem that needs to be dealt with. Intervention is a band-aide, and it is one that does not stick long. If the cut it is trying to cover does not heal, the band-aide won't work.
In the end, market forces won the day as stocks continued to slide lower in the correction that began last week. Nasdaq is back at the 50 day MVA for another important test, but SOX is already breaking below that level along with DJ30, SP500, and the SP600 that was never able to recapture its 50 day. More downside appears on the horizon.
THE ECONOMY
Lions and tigers and bears? Give me a break.
You would have thought another recession was declared Tuesday if you listened to the financial stations and their spin on the consumer confidence and Chicago PMI numbers. One less than bright bulb read her copy with a suitable lament, calling the two reports 'bearish.' All I can say is if an expanding Chicago PMI report (51.2) is bearish, this is one great economy. Anything over 50 means expansion. After 5 months of an expanding expansion (i.e., consecutively rising readings above 50), the district took a breather. Just as with stocks, no sector can grow at a faster and faster pace month after month. It has to take a breather just as the market has to take an inevitable rest. It took a one-month break and still managed to expand. Bearish? Cut the mellow dramatics and report facts. Sure it was lower than the 57.0 expected, but we all know that once analysts convert, they swing too far to the other side. After all, if they made the switch from contractionists to expansionists then, damn it, the economy should expand faster and faster each month. Welcome to reality. It was lower but the trend is still very, very much expansion along with the New York NAPM that showed expansion in September.
Consumer sentiment fell the lowest level since before the Iraq war at 76.8 versus 80.6 expected and 81.7 in August. This always gets a lot of headlines, and if it gets low enough, i.e., down in the 50's, it could then be a problem. Even during the height of the long stock downtrend and recession, consumers continued to buy. They have been on a tear since the Iraq war with spending increasing another 0.8% in August. History indicates that unless confidence gets very, very low, consumers tend to spend. There are multitudes of data that indicate consumers will continue to spend: more disposable income due to tax cuts, lower interest rates, housing refinancing. This is not the transient stimulus it is made out to be. Consumers are paying lower taxes each month and that means more take home pay. Some were saying Tuesday that there would be further slowing due to the lower refinancing. Well, there is going to be another burst of activity this month as rates dipped to the lowest in three months this week as interest rates made a quick fall. That will suck those in who wanted to act but missed out on the last interest rate jump. You definitely don't want confidence to keep tanking and end up at those critical low levels, but it is not the doom it was made out to be on Tuesday. As with other areas, sentiment took a pause of sorts as consumers are concerned about jobs and other matters. Many we talk with are concerned that there is going to be a move to take away some of their tax cuts based on what they are hearing from some presidential candidates. That issue was not covered in the sentiment survey, and our leaders should put that in their pipes and smoke it.
Retail sales still strong despite purported weaker confidence.
Redbook reported chain store sales increased 3.4% last week over the prior year, another solid showing after the 3.6% boost the prior week. Overall sales for September fell 1% from August. That set off more talk of 'weakening' consumption. Again, it is more of a pause in a solid uptrend. The BTM/UBS Warburg survey reported a 0.4% drop in sales week over week. That was still up 4.4% year over year after a 4.0% year over year gain the prior week. Again, a weekly pause in an otherwise solid improvement and advance over last year.
Summary: an overreaction to a rather normal pause in consumer activity.
The daily, micro-dissection of economic and market data has created a lot of myopic commentators. Time horizons have shrunk from years to months to days (they skipped right over weeks). The Tuesday data that was called 'bearish' and 'weak' was just a single data point in a trend. Moreover, as we have discussed, it was not weak. Think about the macro overlay and you will see things clearly.
Every year there is a rush to buy as students go back to school. This year there was an improving economy, good monetary stimulus, and tax cuts as well to aide in the consumer and business activity. We saw both areas rise year over year in addition to the typical seasonal rises as the back to school season approached. Now we are in between the back to school season and the holiday season.
When I was growing up, every year at this time my father would come home and lament how slow things were at work. After hearing this for a few years I concluded that something caused business to slow down at this time of the year. I looked around and asked some questions and found that most businesses slowed at this time of the year. It was that lull between one spending period (back to school) and the next (the big holiday season). Consumers had spent and were pulling back in preparation for the holiday season and the spending orgy that would bring. That translated into a slow period for roughly six weeks. My dad, worried about raising a big family and all that entails, was something like the analysts that look at each piece of data that comes off the ticker and tries to find the meaning of the economy in that one piece of data. In short, they overlook the theme the big picture is showing. That theme is a seasonal slowdown. This year that theme has the added bonus of being much stronger even as it settles into a bit of a seasonal lull.
Thus over the next month you are going to hear a lot about how the economy has stalled, how the lack of jobs are going to choke off any recovery, about how we are in for the crapper economically in 2004. Then we are going to hear that weekly sales are still good and improving as the holiday season starts. We are going to hear about businesses making purchases at the end of the year to take advantage of those tax incentives. We will hear them but they will be shrouded by the fog of doomsayers. All of the sudden the holiday sales season will be a surprise in its strength. Then we get a jobs report in January, maybe even December, where there was significant job creation. You see, we get immune to trends and tend to look at the latest data point as being the trend. Thus we, as a whole, are typically surprised when things get better or worse (as in 2000 when the economy collapsed from 'white hot' to stone cold in a short time). It always pays to step back and see where the data points fall within the bigger picture. When you do that the data released Tuesday does not look nearly as bad as made out to be.
THE MARKET
A lower volume Monday bounce dumped right back to the 50 day MVA and lower Tuesday as volume jumped. That is not the action of a market ready to rebound and move higher. It is not the action of a market that is in a steady consolidation. It is the early action in a market that is starting a more significant correction. It took most of September to get here, but it looks as if the short September slide will continue on into October. At the same time it is the end of the quarter where the mutual funds were selling to lock in some gains and buying some other names to paint a pretty though somewhat misleading picture of their investment actions during the quarter. When that pressure is over starting Wednesday, that could provide some relief. Could.
Key indexes that just broke or tested their 50 day MVA Friday were doing the same Tuesday: SOX, SP500, DJ30. Such a quick return to the scene of the crime is not good. If you hang around on the edge of a bad neighborhood long enough something bad can happen. They look ready to test lower as breaching that level typically begets more selling. Then there is the small cap SP600, one of the leaders in the market rally to this point. It never did reclaim its 50 day MVA Monday, and struggled below that level again Tuesday. It is set to test lower as well.
The market may not get much to cheer about the rest of the week. With the Chicago PMI slower expansion being labeled 'bearish', there is little margin for error. Economic data must not only be good, it has to be better. Much as stocks being 'priced to perfection,' economic data is at that stage with investors needing to see blowout numbers to push them into buying. We suggest that is not going to happen with the ISM even though it will be solid, and not with the ISM services though it will be solid, and certainly not with the jobs report on Friday. That is where they real problem lies as most people have been fed the one-dimensional view of the economy vis- -vis jobs: employer payrolls is the gospel. That may work in ordinary times, but we are at an inflection point, a change in the makeup of the economy brought about by the very economic upheaval that led to the jobs loss. That ushers in new and different jobs for new and different businesses. Unfortunately that is only indirectly and crudely measured by the government (hey, its government work after all). That sets the market up for disappointment in October even as it approaches critical levels that are already starting to give way.
Market Sentiment
Volatility is actually on the rise, coming off the lows (an actual double bottom on the VXN). Before you get too excited we want to say it is still at levels very much at the low end of the range, nowhere near levels typically associated with bottoming or for that matter, topping.
The put/call ratio jumped over 1.0 on the close, an indication of some excess speculation on the downside, but that indicator typically takes several 1.0+ readings when there is heavy selling underway in order to spur a reversal. When there is mild corrective action that high 0.90 to 1.0+ reading can indicate a near term bounce. With the distributive action occurring we do not believe that is the case this time.
VIX: 22.72; +1.05
VXN: 32.83; +2.17
Put/Call Ratio (CBOE): 1.06; +0.22
NASDAQ
Gapped lower and sold to the 50 day MVA where it closed after breaching that level intraday.
Stats: -37.62 points (-2.06%) to close at 1786.94
Volume: 1.889B (+12.54%). Another big volume jump on a selling session, more indication that the big money is unloading stocks. Now whether it was just month/quarter end selling remains to be seen, but the market leaders are showing serious stress.
Up Volume: 367M (-918M)
Down Volume: 1.511B (+1.128B)
A/D and Hi/Lo: Decliners led 1.51 to 1. Could have been a lot worse and was early on, but much improvement even as the index rolled over and fell in the last hour.
Previous Session: Advancers led 1.58 to 1
New Highs: 83 (-19)
New Lows: 12 (+2). Very modest new lows list, but if it breaks the 50 day MVA that could change.
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Nasdaq is back at the 50 day MVA (1787) and just over the March up trendline (1765), selling on rising volume again. That rising volume at the 50 day MVA can mean buyers are stepping in, but with an index it is not that clear of a picture. There was selling and down volume far exceeded up volume; hard to argue there was massive buying ongoing at that level. We anticipated a test of the 10 or 18 day MVA (1836) before the abrupt turn, but it a showing of weakness it gapped right back down and sold to this key level. Lots of ice here (50 day, trendline, July highs at 1776), but it is starting to crack with the distributive selling and though it may try another bounce at this level we think it will ultimately break them and work on a continued correction toward 1700 through October.
S&P 500/NYSE
Back below the 50 day MVA on a strong volume surge. Cracked psychological support as well at 1000.
Stats: -10.61 points (-1.05%) to close at 995.97
NYSE Volume: 1.497B (+13.47%). Volume jumped on the break back through the 50 day MVA, an indication that big money was selling and not buying at this important level.
Up Volume: 473M (-467M)
Down Volume: 1.011B (+655M)
A/D and Hi/Lo: Decliners led 1.04 to 1. Very modest downside breadth belying the weakness in the large caps. This was mostly a large cap selloff as the breadth indicates.
Previous Session: Advancers led 2.3 to 1
New Highs: 95 (+21)
New Lows: 12 (-2). No burgeoning new lows thus far, a good indication that most of the NYSE stocks are holding up at support. Indeed that is what we are seeing with most plays on the report.
The Chart: http://www.investmenthouse.com/cd/^spx.html
Wasted no time selling back below the 50 day MVA (1003) on a sharp volume increase as it also broke 1000. SP500 managed to recover off the mid-morning lows (990), but was selling off on the close. There is some support at 988 from a July 2002 interim peak, but we would not take that to the bank. 975 at the bottom of the summer range is likely, even on down to the intraday lows during the range at 961. The question we are asking ourselves is whether we have enough downside for a nice short of the OEX. Those lower levels could do it.
DJ30:
Stats: -105.18 points (-1.12%) to close at 9275.06
Sold to some support at 9250 on the session low (9230) and rebounded to close at an old down trendline from the May 2001/March 2002 peaks. It most likely will not hold there, but it is interesting that it found that old lone to close at. A test of 9000 and the bottom of the summary range looks quite easy here. The August 2002 high at 9077 is an important point for the index (as the August highs for the other indexes) as this is where the action started to turn, where Nasdaq first broke and made a higher high. Holding at that point and working laterally through would be the best action.
WEDNESDAY
The national ISM is out at 10:00ET and after the Chicago number it will receive much attention. We believe it will hold its strength better than Chicago, but doubt it will be enough to reverse the current downside bias.
Nasdaq at the 50 day MVA is going to be the focus. It could bounce again given the up trendline and 50 day MVA convergence, but before this is over we believe it will undercut this level. SOX looks ready to sell more but it is always volatile, but with SP500 already breaking lower as well the bias, the direction of least resistance, is lower.
Thus we will look at some more downside positions that are ripe to fall and button up other positions that are flirting with support levels. As the modest downside breadth indicated Tuesday, there are many stocks that were holding their own as the large caps sold off. There are more than a few that are still advancing, breaking out of good patterns or bouncing higher off of support. We will continue to look at the choice plays there but with the understanding that if Nasdaq breaks down below its trendline many stocks will follow the overall market trend. We will see how the drugs, medical appliance and related stocks continue to perform as they may receive some of the money taken from other sectors. We are disinclined to get into some of the more conservative upside plays as they will typically fritter along and post modest advances, and just when they could make a decent move the correction in the rest of the market is over and they fall as money rushes back to the true loves of investors, e.g., technology, biotech, nets.
Support and Resistance
Nasdaq: Closed at 1786.94
Resistance: The 18 day MVA (1836). 1860 to 1865. 1889 (early September highs). 1930 - 1935. Then 2000 to 2050.
Support: The 50 day MVA (1787). The July high (1776). The March/August up trendline (1765).
S&P 500: Closed at 995.97
Resistance: The exponential 50 day MVA (1004). The top of the summer range at 1015. The 18 day MVA (1012). 1030 to 1032 (early September highs) may act as some resistance. After that 1050. Then 1080 from February 2002 lows. 1100 to 1150, the early 2002 double top.
Support: 975 (December 1997 peak). 965 (August 2002 peak). 961, intraday lows in the summer range.
Dow: Closed at 9275.06
Resistance: The exponential 50 day MVA (9351) and 9353 (top of summer range). The 18 day MVA (9438). 9500 (June 2002 lows) is the top of the recent summer range). 9609 (early September highs) make act as some resistance. 9735. 9800 (April and May 2002 lows).
Support: 9250 to 9236, the early June intraday high. 9077, the August 2002 interim top. 9000, the bottom of the summer range.
End part 1 of 2
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understanding the stock market
top stock pick
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