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THE MARKET

A reversal of the reversal, but on lower volume overall. Some of the big tech names fell harder than the rest, and that hurt the Nasdaq and the S&P 500 the most. What we have here is a reversal of outlook. In April and May investors were willing to look out to the future, i.e., Q3 and Q4. Now that the end of Q2 is approaching, however, they are focusing short term and losing their nerve. No one wants to buy the big names and when there are no buyers, it does not take much selling pressure to send them lower.

All indexes finished on the session lows. The Dow and the Nasdaq are still in their trading ranges, and even the S&P 500 still is as well, at least on an intraday basis. It closed at a level below its closing low in the range (1245.67) though it held above the intraday lows in the trading range (1240 and 1232). Not a lot of comfort in that, however, and a violation of those levels makes 1200 seem a pretty easy mark to reach. The Dow and Nasdaq can still hold on, but it looks as if the very bottom of their ranges will be tested to see if they can manage a rally once again off the bottom of the range. There is not much to drive the market higher, but then again, there has not been much to drive the market at all the past two months. That is what has made the market go up: everyone was (and is) expecting it to fall, but no one was really selling hard. They still are not.

Overall market stats:

VIX: 24.39; +1.41. Moving back up in the middle of the 20 to 30 range where 30 is considered pretty high volatility. Another quick move up of 2-3 points with some selling down to the bottom of the range would be great. Maybe then all of the contrary indicators would line up and spark a rally to the top of the range.

VXN: 57.64; +3.51. Big pop on the day as the selling grew heavy in the afternoon. Still a long way to go to get to the point where it could be considered an indication of a turn, but a move over 60 would catch some eyes.

Put/Call ratio (CBOE): 0.59; -0.28. An even more massive drop in the put/call ratio on the CBOE after Tuesday's 0.17 point jump to 0.87. Very strange action as it moved counter to the other sentiment indicators. This could be an indication of the fact that there are no new sellers as the sellers have already sold for the moment (there may be some very bad news that sparks major selling, but sellers have not come out heavy even with the big warnings from JNPR and NOK.

NASDAQ:

Stats: Down 48.29 points (-2.2%) to close at 2121.66.
Volume: 1.547 billion shares (-9.7%). Well below average and still indicating there are not a lot of sellers out there. Just fewer buyers today, and that means a downside close. This is a classic trading range action: low volume, no real selling or buying.
A/D and Hi/Lo: Decliners led again at 1.18 to 1 (1.17 to 1 Tuesday). New highs rose to 109 (+23) while new lows fell to 51 (-15).

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

The Nasdaq tried to make a move up but ran into trouble at 2187 (the high on the session) and finished at the low. It was not an impressive move as it broke below its 50 day MVA (2154.72 at today's close). The morning appeared to be setting up for an afternoon rally, but then short term news sank the index. It is still in its trading range (bottom at 2052 to 2077) and there are not a lot of heavy sellers except in the big name, former leaders. We really wanted to see the index hold and move up, making another higher low. It can still do that, but it will have to do so immediately to avoid the bottom of the range. With the big names showing weakness, we must continue our focus on the techs that are in the good patterns and that are continuing to show leadership. The big names run up and down on one news item to the next; that is the treachery of a weaker pattern with all of those sellers overhead. A time to be patient and let the plays come to us and take profits when the targets are met if we see weakness at that point.

Dow/NYSE: At lone point this afternoon the Dow was up 26 points. In 5 minutes it was down 50 after the GE/EU discussions were released and the Fed's report hit. News driven.

Stats: Down 76.76 (-0.7%) to close at 10,871.62.
Volume: 1.064 billion shares (-6.6%). Down on the selling again, and as with the Nasdaq, there was no out and out dumping of shares. Just the same type of action we have seen of late: rising on higher (but not impressive) volume, and falling on lower volume. There is not enough volume to break it out of the range to the upside, but so far there has not been enough to push it down to lower levels out of the range either. Down volume was 657 million shares versus 384 million to the upside.
A/D and Hi/Lo: Decliners edged ahead by 40 at 1.02 to 1 (advancers led 1.03 to 1 Tuesday). Not big swing there. New highs rose to 129 (+9) as new lows fell to 32 (-10). As with the Nasdaq, we saw improving internals as the market sold down. Some of the smaller caps at work once again.

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

The Dow is still in its trading range, but it is doing what it can to try and drop out of it. It was positive until the afternoon when it really gave up and closed just above its session low (10,866.52). It tried to make the most of Tuesday's reversal, but the late news on GE and the Beige Book seemed to take the fight out of investors. Lighter volume on the selling again, but that is the trap for now: not high enough to move it either way. At this time that appears to be the best it will be; the real fear is it slipping out of the trading range and heading down below 10,700. The 50 day MVA and down trendline are still neck and neck at 10,810.31. Thus far that has held as support. If they go it could get ugly though the simple 50 day MVA and 200 day MVA are lurking below at 10,722.50 and 10,638.17, respectively. If those are taken out, it gets interesting as they say. As it is still in its range for now and close to the bottom of that range, we are not inclined to play some puts just yet. If the range is broken, we will definitely look that way.

S&P 500: The S&P 500 did not have a lot of room to work with as noted last night, and today it made it all that much harder for itself. It broke 1250, a level that had held on the last move down. It made its lowest close in the trading range today though it is still above the intraday lows at 1240 and then 1232. The big caps are in trouble, and it is showing up in the index. The key is the small and mid-cap stocks that are showing the good patterns. We continue to look at those on all of the reports. If the big cap index breaks down from this range, 1200 looks to be the next stop.

Stats: Down 14.25 points (-1.1%) to close at 1241.60.
Volume: NYSE volume fell to 1.064 billion shares (-6.6%) on the selling. Again, not a lot of sellers, just not many buyers.

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

TOMORROW

PPI (producers' prices) is out before the open along with initial jobless claims and business inventories. Investors are now looking for improving economic numbers given the view that the Fed is winding up its rate cutting: if the Fed is not going to aggressively cut, then let's see the economic improvement. That is what they are thinking, but they are not going to see it in Q2 earnings reports or Q2 economic numbers necessarily. We are seeing some Q2 economic news look better, but it is not the quantity yet that will satisfy those spooked by the Q2 earnings warnings.

That keeps the market on edge. The key is whether it can hold in the trading range it has developed the past month. Right now it is in an all out threat to those levels as far as the mood on the street. As far as the selling pressure, it is really not that heavy. Price and volume action remains decent, and that is a sign that the range will hold for now. If the indexes slip below the bottoms of the trading ranges on higher volume, however, there is more downside, and we are going to play the indexes lower with puts at that point.

But, that leads us back to the stocks that are working, the small and mid-cap varieties. As noted, they continued to hold up well in today's action as a whole, and some even broke out (e.g., DMRC, ORLY) while others are taking aim on doing the same. These are providing the best opportunity as the whipsaw action we see in the big name fallen leaders is not as prevalent. We still must be careful: we are seeing most of these breakouts hold up, but some are failing. That is always a caution flag, and it starts us looking at potentially shortening our profit goals on the breakouts. We are still seeing good enough moves to let them run for us, but we are also going to insert stop losses if we hit the target or get close to it; we do NOT want to let any gain slip away from us. The market is showing some weakness, and even the best breakouts will not hold up if the selling starts in earnest. For now the selling has been on weaker volume; the buying has not been on blowout volume by any stretch, but it has been stronger. If that changes and the indexes crack below the bottoms of their ranges, even these smaller stocks will feel the pressure. While they present the best upside patterns in overall market weakness, 3 out of 4 stocks follow the market. If we see the major indexes break down, use stop losses to protect positions or just sell if they move starts to reverse on you. Protect what you have when things get a bit choppier.

Overall we remain positive on the market longer term as there are good things going for it. What we are seeing here is short-term nervousness about Q2 which will be bad. Investors hope for better and then get disappointed. The futures were up after the close, but now they have weakened. We hope to see some weakness in the morning that tests close to these support levels and then a strong move higher. Yes we have seen that before, but that will be action we like for a move back up in the range. If they bomb through the bottom, at least we will know where they are heading and can take advantage of that.

Support and Resistance Levels

Nasdaq: Closed at 2121.66.
Resistance: 2194 may be some resistance at this point. Then 2250 - 2264.
Support: Simple 50 day MVA at 2091.57. After that the recent low before the last move up was at 2077.98. Before that it was 2052.14.

S&P 500: Closed at 1241.60.
Resistance: 1270 and then 1286 (its last high). Some resistance at 1300, but 1315.93 is the recent high it needs to plow back through.
Support: Right at its simple 50 day MVA (1239.48) and the intraday lows in its trading range (1240 and 1232). If they can hold, great. Otherwise, 1200 is down there next.

Dow: Closed at 10,871.62.
Resistance: As noted, 11,000 could act as some resistance, but after its break above that level a month ago, it has traded on both sides without much hesitation. Then 11,196.53 (the last top). After that, 11,350.
Support: The down trendline and the 50 day MVA (10,810.31 at the close) are still close together. The simple 50 day MVA and the 200 day MVA are below at 10,722.50 and 10,638.17, respectively, and both could combine to provide some good support if the selling continues.

Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.

6-13-01
Export Prices ex-ag., May (8:30): 0% versus 0% prior.
Import Prices ex-oil, May (8:30): -0.5% versus -0.5% prior.
Retail Sales, May (8:30): 0.1% actual versus 0.3% expected and 1.4% prior (up from 1.1%).
Retail Sales ex-auto, May (8:30): 0.3% actual versus 0.4% expected and 0.8% prior.

6-14-01
Initial Claims, 6/9 (8:30): 425K versus 432K prior.
PPI, May (8:30): 0.3% versus 0.3% prior.
Core PPI, May (8:30): 0.2% versus 0.2% prior.
Business Inventories, April (8:30): -0.1% versus -0.3% prior.

6-15-01
CPI, May (8:30): 0.4% versus 0.3% prior.
Core CPI, May (8:30): 0.2% versus 0.2%.
Industrial Production, May (9:15): -0.3% versus -0.3% prior.
Capacity Utilization, May (9:15): 78.0% versus 78.5% prior.
Mich Sentiment-Prel., June (10:00): 91.0% versus 92.0% prior.

Good Investing!
Jon Johnson and The Stock Splits Report Staff

All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Online Investment Services, LP or its paid consultants and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on our related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of Partners of Online Investment Services, LP or its paid consultants may, in some instances, include securities mentioned herein and on our web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors.

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