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6/13/01 Investment House Daily
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Investment House Daily Subscribers:

TONIGHT:
- Tuesday's rebound very short-lived as stocks tried to rally but reversed course.
- Lower volume on the selling equals just no buyers.
- Economic news is not great, not bad, but Beige Book puts a bullet in the day.
- S&P 500 breaks support, but small and mid-cap stocks keep the internals looking decent.
- Stick to the targets in choppier times until we see if the trading range bottoms hold.

THE SUMMARY

Executive summary: Reversal dies fast as S&P 500 breaks support.

What looked to be a very bullish reversal on Tuesday died 2.5 hours into the session. The market was rather weak at first, but all major indexes were holding on in a range and looked to be setting up for an afternoon move higher. Some less than inspiring retail sales numbers did not help things, but a revision of the April numbers to the high side gave some hope. Then at the bottom of the range the Fed released its Beige Book that gave a history lesson of May and April's continued weakness. No surprise there as we all know that April and May were slow. However, that was the final reason not to buy today, and that sent the indexes down in a 45 degree dive to close at the session lows. The S&P 500 broke below 1250 and its exponential 50 day MVA again, undercut the recent low, and is now threatening to take out its last vestige of support (1232) before 1200.

A very frustrating day that left many at a loss (literally and figuratively) as to what comes next. Perhaps the bottoms of the ranges will hold; there are not many sellers, but there are just no buyers right now. PPI is out tomorrow along with jobless claims, and while the PPI most likely will show no signs of inflation, the jobless claims will more than likely be as high or higher. That should be no surprise, but investors are not in a humorous or rational mindset right now. Despair was high once again, but volume was not. Remember, this market has shown its best resiliency when the frustration and despondency set it. Today the gloom was fairly prevalent. There is not much impetus to the upside that anyone can see, and of late that has brought upside moves. We do note that the new highs gained while new lows fell, and the A/D line was not nearly as bad as the losses on the indexes. Again, the small and mid-cap stocks were working while the big names were falling. We are keeping focused on those stocks that held up well in a cruddy day: BGEN, OCLR, UTX, BMET, and the basing stocks that are still in their solid cup with handle patterns. It is a bit harder to make the big gains right now, so be happy to take a profit when the targets are hit.

Reversal fades on low volume as no buyers step up to the plate.

Tuesday's rally off the lows reversed right back on investors today as technology took the big hit when the slide downhill began. Many stocks maintained their positions in their patterns, and on this day that was a very good thing. We even had some breakouts, but they did not have a lot of company. We saw many stocks start the moves we were looking for, but then gave the gains up; again, many were still in good shape, and we may see these 'shooting star' doji's offer some upside potential for those that were tough enough to hang on today.

The main problem today was no buyers. Selling was on lighter volume in the overall indexes, so we know there were not more sellers out than there were buyers on Tuesday. Those buyers that did step in Tuesday left the market today. Without their input the market simply slid lower. No dumping of shares overall, but a slide lower. That does not mean there was not some individual distribution of stocks, particularly tech stocks. Take a look at BRCD and MERQ. They were up and doing well early on, but that made them targets; they were sold off sharply on higher volume. It is tough being a former leader trying to recapture glory. On the other hand we see the leaders keep moving higher as THQI and ESRX added to their gains. These are the stocks that people want a piece of, and even on an overall cruddy day, they managed to move up. The indexes looked bleak, but many stocks were moving higher or holding up well in their patterns. Those deserve our focus.

THE ECONOMY

Retail sales not bad, not great.

May sales came in at +0.1% (+0.3% expected) and +0.3% ex-autos (+0.4% expected). These were okay, but the bigger news was the upward revision of April sales to +1.4% from +1.1%. The revision was what investors were focusing on early in the session. While not huge, retail sales were still on a positive growth path.

Fannie Mae says home sales still strong.

FNM stated that though overall sales will be down, they will still be close to hitting a record in 2001. Existing home sales even increased their pace during April, and FNM stated it believed that further increases in long-term rates are going to be limited. If true that will help keep this one stalwart of the economy in good shape.

Treasury Under-Secretary says economy improving.

This has been the Fed's and the administration's tactic of late: talk up how the rate cuts and tax cuts are going to help. We think they are right, but after the rally got underway in April and continued in May, the focus has shifted to the short term re Q2 results. Anyway, he says there will be an increase in Q3 and Q4 to a level of 3% growth by the year end. Again, we have to agree with this general theme though the actual percentage growth is a guess.

Beige Book tells us a history lesson we already knew.

The Fed told us that April and May economic activity was unchanged or slower in all districts with manufacturing down or simply remaining weak. New construction also leveled off. It was generally a summation of what the numbers have been showing us. Yet, the market really hated it. As we said, the focus for now is on the very short term Q2 numbers, and the April and May summary did not give any indication that Q2 would be better. This is common knowledge, but as with the Fed easing cycle in the spring, investors are hoping for something they are not going to get, and that does not have good short term consequences. When the numbers did not magically improve in the Fed's report (would we have believed it if the Fed gave a glowing report?), the market gave up that false hope.

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

End Part 1 of 2

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