|
|
us stock market, stock watch
* * * *
6/14/01 Stock Split Report
* * *
Stock Split Report Subscribers:
TONIGHT:
- Hear the popping? Those are trading ranges snapping to the downside.
- Pathetic showings on the indexes as Q2 fears dominate the financial world.
- JDSU warns yet again, this time without the fanfare.
- Economic news again not bad, not great.
- Subscriber Questions
THE SUMMARY
Executive Summary: Indexes break down out of their trading ranges on higher volume.
This was the scenario that opens up more downside potential on the indexes, but we also have to realize that there has already been 5 to 7 days of some pretty hefty price losses (even if not on strong volume). That can mean the indexes are ready for a reflex bounce back up to test the levels they just broke below. Moreover, with JDSU warning yet again after hours, the indexes could run down to the next potential levels of support at 2000 on the Nasdaq, 1200 on the S&P 500, and around 10,500 on the Dow, and then they bounce from there to test the bottom of the trading ranges they just broke down from. At that point if the current market sentiment remains, the test will fail and give a great entry point for downside plays.
That is the short term scenario. There is still negative sentiment, and after a short term bounce that most likely will take back over. That leads to more selling and the indexes get even more wrung out to the downside. Then when the next round of more upbeat earnings outlooks comes out, the market will be in position for another hard move up. As for the leaders, even they were falling today, indicating the selling is progressing to the point where any stock that has enjoyed success is being taken down. That means the leaders (THQI, ACS, SDS, etc.) will try to seek their 50 day MVA's before they start back up. The timing should be just about right, and that could give us some great entry points on these stocks when they make the move back up off of those levels when the market gets through with the near term selling and starts focusing on the future again. In the interim we be patient, play the shorts on the failed tests of the bottoms of the trading ranges, and pick up the leaders when they turn back up from their key support levels.
The indexes have fallen for several sessions now. Can they get up?
A very weak showing on the major indexes as they fell on higher volume. Indeed, the NYSE volume cracked above average for the first time in a month, and it did on selling. This is what we did not want to see from the upside perspective, i.e., selling below the bottom of the trading range on stronger volume. That indicates that mutual funds finally decided the time was right to start unloading shares instead of accumulating them, and they did it at a key point. The breakouts on all of the indexes are still in tact, but it would appear after today's action that there is little doubt that they will test those breakouts at the very least.
On the Nasdaq, that is 2000; the S&P 500, 1200; the Dow, 10,400 to 10,500. The big question is whether they will continue straight down or try to bounce first. With the JDSU news we could see more selling in the morning before a rebound attempt to test the break down from the trading ranges. We will wait for that to fail before we enter the downside plays.
All three indexes completed some form of a head and shoulders pattern today, the most pronounced on the S&P, somewhat on the Nasdaq and the Dow. If the pattern holds true to the textbook definition, the indexes should fall as far below the 'neckline' as they head was above the neckline. On the Nasdaq the neckline is at 2080 and the head is 248 points high. That would put the Nasdaq at 1830 or so on the downside if 2000 does not hold (the point of the breakaway gap in April). The S&P head and shoulders would take it down to 1185 if it completes the pattern fully. The Dow, 10,394, an old support level we cited in the past. As we know, just because the pattern completes, it does not guarantee a tumble. The SOX set up the pattern in March and April, but after breaching the neckline, it reversed and rallied hard, never hitting the low the pattern forecast. These are just points to look at in the event of further selling.
THE ECONOMY
Another round of status quo economic numbers fails to provide any spark.
Jobless claims were down to 428,000 from 440,000 last week (that number was revised higher from the 432,000 originally reported). Will this number be revised as well? Probably; the Department of Labor and other government agencies have had a hard time getting numbers right of late, and that is an indication that there is continued change in the economy. Retail sales were revised higher for April, favorable for the economy, while jobless claims were revised higher, and that is not favorable. The theme, however, is that they are still over 400,000 and starting to rival numbers back from the 1992 era. The 4-week moving average rose to 424,500 from 415,500 the prior week. Continued claims actually fell to 2.93 million as the prior week's figures were, you guessed it, revised higher to 2.98 million. The unemployed are still having trouble finding jobs, but as we said, that will be the case until companies really need the extra help. Right now they have excess capacity and want to put that to full utilization before bringing on more overhead in the form of new employees. Remember, however, that despite all of the negative stories surrounding the employment numbers, they are now a lagging indicator for the recovery as companies will wait as long as they can to hire back help.
Business inventories static.
This was not the news that was wanted. Inventories were flat a 0.0% when a -0.1% reading was anticipated. This is really disappointing as the prior month saw a 0.4% drop (revised from -0.3%) that gave some promise that capacity was being worked off. The steady inventory level raised the inventory to sales ratio to 1.44, the highest in quite some time. Inventories continue to stagnate and are an albatross around the economy's neck.
Producer Prices tame.
Producer prices, a.k.a. wholesale prices, rose just 0.1% in May versus a 0.3% anticipated rise and a +0.3% reading in April. The core rate (without food and energy) rose 0.2%, in line with expectations. This is pretty good news and it reinforces what we know from history. When an economy slows down, we see some signs of 'inflation' as the demand overhang appears to give rise to higher prices. But, as demand slows and inventories stagnate (as we saw with the inventory number today), prices slack off as well. The Fed said there was no pricing power in the U.S., and these numbers show that to be the case. That is not good for profits short term, but we know from the past 20 years that low inflation and low regulation are the keys to a prosperous economy and hence better earnings.
GE gets the EU cold shoulder.
The EU does not want GE and HON to merge. Basically what the EU wanted was GE to buy HON and then parse up HON and sell it off. So, there would be GE left and parts of what used to be HON held by different companies. Why did the EU want this? Because the EU is already way behind the U.S. and feels even more threatened by any combination that could make strong U.S. companies stronger. It is all part of Europe's continued protectionist attitude. But, let's not get carried away. The U.S. is pretty quick to act in its own interest as well. Recent examples include the potential steel regulation and the global warming treaty. Indeed, part of what is going on with GE may in fact have something to do with the jousting over these two areas. It is a political world, and the only ones that suffer are the citizens of those countries engaged in the politics.
What is ahead?
There is a lot of talk right now with Q2 earnings coming up that the economy is not going anywhere. The reason? Because Q2 earnings are not going to be any better. We watch and listen with some disgust to the same people who just 1.5 months ago were saying that we had to look down the road to the third and fourth quarters for growth, that it would not happen in Q2, who now say they are 'disappointed' that Q2 is not looking better. They are not holding true to their own statements about how we had to look for the rate cuts and tax cut to take effect and that Q2 was a throwaway quarter. That is a lot of the problem we have now: even the saner heads are giving in to their fears of hopelessness.
This is a shorter term phenomena in our opinion, brought about by the onset of earnings warnings season and then actual earnings that we all know will be poor. But, as much as you anticipate bad events, when they actually unfold people always cave in to emotion. Thus we have the selling ahead of the numbers.
What is going to happen is that we are going to be so sold out when earnings start to come in and some again reiterate that they see the bottom, etc., that we are going to have another violent move higher. They are wringing out the market right now, trying to sell stocks down to where their 'values' match this quarter's earnings. When some companies again come out and say that things are actually at bottom or right there, someone will all of the sudden say 'gee, we should be pricing in the future, not the past quarter.' Then the market will be so oversold it will be ready for the bounce just as it did the last time a bevy of companies stated things were getting better and that the third and fourth quarters were going to show improvement. Oversold on irrational fear will lead to a good move back up when the reason for the fear dissipates. Will it be during the warnings season or after earnings actually are announced? If not sooner, we feel we will for sure see it when the earnings start coming out.
Finally, don't forget the story we have been telling about the economic numbers. When they seem the worst, they probably are. In other words, we could be very near the point where we start seeing a change in the numbers. While some are just awful, others are showing some firming as we saw today. We heard a couple of pretty savvy economists today say the same thing: the bad economic numbers are becoming more obvious, and that often means the turn is coming. That will give the market some fuel when it happens in the not too distant future, and we can get some great trades on the leaders that test the 50 day MVA. You heard it hear first.
THE MARKET
The trading ranges were broken to the downside. That sets up more downside potential, but after several days of selling at some point we have a reflex bounce. Thus, we are patient and wait for stocks to make that bounce and see if the move fails at resistance, i.e., the bottom of the trading ranges just broken. If they (indexes and individual stocks) fail that attempt to move back up over those levels, we use that as the entry point for put plays. Let the move set up and make the play at the right time. Don't go chasing a market to the downside after 5 to 7 days of downward pressure.
Overall market stats:
VIX: 26.20; +1.81. Rising again on more selling, but not a dramatic jump, and it is still just on the high side of the halfway point between 'low' and 'high' volatility. As far as an indicator of a turn back up, it is moving in the right direction, but it has a long way to go.
VXN: 59.46; +1.82. Nothing compared to Wednesday's 3.51 point jump, the VXN is also not giving any sign of a turn soon as it is moving up slowly compared to the selling.
Put/Call ratio (CBOE): 0.89; +0.30. A big spike in put buying, but it was accompanied by some hefty selling as well. We like to see this indicator continue to shoot higher. We could conceivably get a close back over 1.0 tomorrow if the selling remains intense, but we think we are going to get an interim bounce first, and that will squelch the ratio a bit. Still, we can use that to take downside positions as described below if the move fails.
NASDAQ:
Stats: Down 77.59 points (-3.7%) to close at 2044.07.
Volume: 1.762 billion shares (+14%). Rising volume on a break below the trading range. That is a bad combination. Down volume crushed up volume 1.610 billion to 141 million shares. A total rout. Still watch for the reflex bounce after all of the selling, but the higher volume breakdown is a portent of some more downside as now institutions are dumping some shares.
A/D and Hi/Lo: Decliners blew away advancers 2.7 to 1 (1.18 to 1 Wednesday). An utter rout. New highs fell to 65 (-44) while new lows jumped to 84 (+33).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The techs broke below the last intraday low in the trading range at 2052. It tried to bounce off of that level late in the session, but that 20 point rally died in the last hour and the index closed on its session low. The break below that trading range makes 2000 seem like an easy shot. That is where the index gapped up to on the 92-point breakaway gap back on April 18. If that does not hold, the index will test in some form the April low at 1619.50. Does not mean it will get there, so don't get alarmed; it just means it could find 1850 or some level along the way as the prices are all stacked up in that level where it reversed. Moreover, we will probably see some rally attempts before then anyway; just as going higher is not a straight shot, going lower is not either.
Dow/NYSE: The Dow tried to stick at 10,750 for awhile, but it broke below that point in the first two hours and failed on three attempts to break back over it later in the session. The last failed attempt came in the last two hours as the index fought its way up off of the session low at 10,659.47.
Stats: Down 181.40 points (-1.7%) to close at 10,690.13.
Volume: 1.226 billion shares (+15.2%). As with the Nasdaq, the Dow broke down on rising NYSE volume, a sign of distribution or share dumping by institutions. Down volume really clobbered up volume 997 million to 219 million shares.
A/D and Hi/Lo: Decliners jumped up on advancers 2.32 to 1. The A/D line is showing the strongest action it has in a long time, and it is to the down side. New highs dropped to 59 (-70) while new lows rose to 51 (+19). A real deterioration in the internals on the NYSE.
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow did some major damage today. It broke that down trendline to the downside that it climbed over in May and then tested in late May. That was a serious breach, and it spells more downside for the index. It has the 200 day MVA at 10,635.35 that may try to act as support short term, but it would appear that if the Dow breaks below there that 10,400 is the more likely point it will seek. That is not that far away, and at test lower in the 10,000 range is not out of the question if the selling stays strong. But, we do not think that the bottom way back at 9106 is in jeopardy; little comfort as that is 1600 points away. For now we are going to focus on any bounce we get off of the 200 day MVA to see if it fails so we can play a bounce down from 10,800 with puts.
S&P 500: The big caps slammed down through the bottom of the trading range (1232) on above average NYSE volume as the big caps continued their lead to the downside. The index has broke just about every level of near term support, and has the April gap up point at 1200 as the next line of defense. After that it is 1182, the 'hump' in the double bottom pattern, i.e., the breakout point. That should act as support, and note that level would be the consummation of the head and shoulders pattern if the pattern holds true to form. The one bright spot: that is a 'mere' 38 points away. In any event, this gives us some great downside potential, but we are looking for the test of the breakdown below that 1232 level and then the turn back down for those downside positions. That way we are not caught chasing the downside action.
Stats: Down 21.73 points (-1.8%) to close at 1219.87.
Volume: NYSE volume jumped to above average levels for the first time in a month, coming in at 1.226 billion shares (+15.2%). The sellers finally came in to the market in earnest.
The Chart: http://www.investmenthouse.com/cd/$spx.html
End Part 1 of 4
|
us stock market
stock watch
|
