us stock market, stock trading pick

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6/18/01 Investment House Daily
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Investment House Daily Subscribers:

TONIGHT:
- Another light volume Monday in early summer dominated by downgrades.
- Nasdaq breaks down below the next support level, hurt by semiconductor downgrades late in the session and ahead of ORCL earnings.
- ORCL thinks it hit bottom last quarter and things are improving right now.
- Speculation rising once again about the next company that will miss Q2 revenues. ORCL was two weeks ago, and now MSFT is added to the list.
- Q2 worries continue as the fear over earnings gets excessive.
- The key is patience and good patterns as even today several of our stocks moved higher.
- Fed Funds Futures contract pushes over 50% probability of a 50 basis point cut.
- Team Trades

THE SUMMARY

Light volume Monday with no news but downgrades.

It was hard for the market to do much of anything today. It appeared that it was going to attempt a bounce up after breaking down below its recent trading range, but that gave way quickly for all indexes other than the Dow. It was a familiar story: a weak attempt at a rally followed by selling down to the session lows at the close. That is not the stuff bull rallies are made of, and today's action sets up the Nasdaq for further downside action even though it has closed down 7 sessions in a row and will try to bounce soon. Today some of the usual Monday downgrades really hurt the index later in the session. Indeed, Salomon said that it would take until 2004 for tech earnings to recover to 2000 levels. With no good news out there anyway, this kind of doomsday scenario was pretty much a guarantee of a poor session.

Before we move on, let's think about the Salomon call. 2000 earnings levels (before the crash) were very high. Of course, the Nasdaq was at its high as well. By saying this, Salomon is implying that techs will not be good for anyone until they recover to their former earnings power. But, that is as wrong as saying the Nasdaq won't be worth investing in until it recaptures its past high. We know that is malarkey; the index can rise to 4000 and be up 100% and still be over 1,000 points from its old high. This type of talk just fuels misconceptions about stocks and the market.

The Dow managed a positive close, but volume was not what you want to see, nor was the intraday pattern: a series of lower highs, unable to follow through on its earlier rise. The big cap index mirrored the Nasdaq's weakness, it too closing right at its session low.

Nasdaq breaks even lower and takes out an important level, but ORCL gives the next round of good news.

The techs tried to rally, but there was just too much molasses on the index and it soon turned negative for good. There was just no buying interest ahead of ORCL's numbers. Then MU comes out on Thursday with its earnings, and Joe Osha over at Merrill wanted to beat the Christmas rush, so he downgraded the stock ahead of its Q2 numbers. Remember, MU stated a couple of months ago that it believed Q2 would be the bottom for its business. For the moment that is not holding any water, but that may be different come Thursday.

In any event, that late-day call hurt the techs. The were holding above 2005 level where it gapped up to back in April, but the third bounce down to that level hesitated as it tried to move up, and then it failed and the Nasdaq fell another quick 15 points. That was about the time the downgrades came out, and a market that was already weak just gave up. Once again this is all related to speculation on Q2 earnings being poor. Heck, there should not be any speculation; they will be poor. But in the summer, any excuse to sell after a move higher (April and May run) is a good enough reason to sell. Investors are not looking ahead in this 'what have you done for me lately' mentality. With nothing but declining earnings and more to come shortly at the end of Q2, that is not a scenario for stellar gains.

The break and close below 2005 hurts the Nasdaq as it is now below the point where it gapped higher on that big breakaway gap. That eliminates that level as a floor, and it makes it much easier to fall down to the next support at 1961 or even down to 1852. None of these now are solid support by any means. They are simply levels that could slow down the fall and give a turn back up with the right news.

The index, however, is due for a bounce higher after 7 days of selling and some very good news from ORCL will help. Most likely will not carry it out of the doldrums without others coming to bat as well with better looking futures, but ORCL will help. Specifically, ORCL said it thinks the quarter just ended was the bottom and it is seeing improving business right now. Right now. SLR missed its number, but it said it sees more business opportunities developing right now as well. The market needs some more positive guidance going forward, and we mean some real solid guidance. That will get investors thinking about the future other than through the glasses Merrill and Salomon are looking. MU on Thursday is the next step.

Speculation on the next big earnings miss, but the real key is what MU and others will say.

Two weeks ago it was ORCL going to miss its numbers and really hurt the tech sector. Well, ORCL did not come close to blowing things out of the water, but it did not miss its numbers with a win on the earnings front and a slight miss on the revenues. Moreover, it gave very positive guidance moving forward. So, ORCL not going to provide the negatives for you? Okay, pick another big name, one not too obvious. Let's see, how about MSFT? Yes, let's start the rumor mill on MSFT not making its number.

In our opinion that is what it is: rank rumor. That is what it was on ORCL, and no sooner than stoies come out saying that ORCL will probably make its number, rumors about MSFT come out. The bears have to keep the pot stirred with some potential disaster waiting in the wings. Keep the turmoil and uncertainty alive as long as they can. Economic times are going to improve and their game will be over.

The key to us? Well all along we have been saying it is the economy, and we will eventually need to see improving numbers. Right now we are still looking at pictures from the rear view mirror. In other words, the economy will start improving before we see it in the lagging numbers the government keeps. So, what do we use in the interim? Well, ORCL got the ball rolling. MU comes out with earnings on Thursday, and MU was one of the companies a couple of months back that said things were getting better. MU will be a key as to the future. The Leading Economic Indicators due out on Wednesday will also be key as they look 6 months into the future, not two months back. They are expected to rise 0.2% versus a 0.1% gain the prior month. We are looking for a 0.3% rise; any upward surprise will be good news, and if MU can come through with some more upbeat guidance, that is a good 1-2 punch.

All part of the continued Q2 earnings worries as gloom is getting excessive.

Why no buyers? Because the pervasive mood is that Q2 will be bad, and there are not many wanting to take positions before the speculation becomes news. BUT, and we mean BUT, just as with the overall market discounting for future events, investors will start taking positions before the news is fully out. That is always the case. That is why this selling down now is going to lead to a move back up when the news starts to trickle out that things continue to improve. The anticipation of bad news will pave the way for those that start to buy in anticipation of the good news. It is a cycle as old as the market.

Do we think there will be a recession? We are in a recession. The economy has dropped from over 6% growth per quarter to 1% or lower per quarter. That is a recession in effect if not in fact. We are going to skate close to a textbook recession, but to do that both the second and third quarter would be negative or the third and fourth quarter. We don't think that is going to happen as we see positive growth, accelerating growth, resuming before the end of the year. We have already had a recession compared to where we were. That is really what has made this slowdown so painful. I think anyone would have taken a 3% decline in GDP growth down to 3% (remember the old Fed 'target' rate of 3% or 3.5%?) as opposed to the almost 6% plunge we have endured.

Still, we continue to believe that the economy is going to recover and that this action is short term. Perhaps we get a lower test of the April low, but even with the telecom and networking collapse and the panic selling we saw in those sectors today, that DOES NOT mean that the entire tech sector much more the rest of the economy are going the same route.

Indeed today we saw some just ridiculous selling again in telecom and networking. Those sectors are epitomizing the fear in the market right now, and the selling going on there is very much the same as what we saw in March and April in the market overall. These sectors have already hit new lows well ahead of the indexes. There is major overcapacity in these areas, and they are way out in front in the selling, but they are NOT representative of the entire economy. They are the worst part of the economy right now, but they are being viewed as the proxy for the economy overall. That is absolutely incorrect. This is getting as overdone as the selling in April before the rally started. We are getting closer to a turn, but the Nasdaq has made it very hard for itself right now by breaking below 2005.

The key: remain patient and invest in good patterns.

Today we saw techs looking like junk overall and the big caps suffering again as well. Yet, there was KG, LOW, FISV, OCLR, BBBY, ELN, THQI, and ORLY, all plays from the reports and all moving up today. The key in times such as these: stick with the stocks with the numbers and the solid patterns, and let them make the moves we want. Make them prove to us they are worthy to buy. That has been the best plan of attack, and we are also just taking some profits when our targets are hit as well. When in doubt, take some profit. We don't always close out the entire position, but we will take some profit and let the rest ride some more if all looks good.

THE ECONOMY

No economic news today, but we do want to comment on the Fed meeting next week. The economic news last week was viewed as poor. That has moved the FFF contract up to a 50% chance of a 50 basis point rate cut next week. When the meeting is less than 10 days away and the measure moves and holds over 50%, it has a very good track record of accurately predicting the size of any Fed action. 25 basis points are baked into the cake right now. The big question is the other 25. Will the Fed go 300 points so soon? The LEI's will tell us more this week. From the comments we have heard from the FOMC members, the Fed appears to believe that things will get better later in the year.

THE MARKET

Selling resumed again in tech land, and as noted, it was just panic selling of telecom and networking sectors. The ORCL news is helping after hours, and guidance is that things bottomed out in the last quarter and are now improving and there is more upside than downside. LVLT warned today, but it is in telecom, and telecom is in the tank. As we said, other areas will rise even as telecom and networking continue to sink. It looks as if the good guidance has started with a big name. Just as with the market, there needs to be some follow through this week with MU. Semiconductors tend to lead technology out of the doldrums, and MU is a big name that cannot let the market down.

Overall market stats:

VIX: 25.83; -0.50. Volatility is not going anywhere. It is either very accurate or very wrong. It is simply not showing us much as it is right in the middle after hitting 27.31 on the high today.

VXN: 56.40; -4.15. The Nasdaq was really in trouble today, but its volatility measure tapered off all session after hitting 60.04 early in the session. 68 would be getting to a 'high' level, but today it lost ground even as the techs took it on the chin.

Put/Call ratio (CBOE): 0.64; -0.28. Friday's action was expirations driven, but we cannot discount the previous sessions, however, where the ratio was in the 0.8 range. Today's drop was a bit surprising given the selling we saw in networking and telecom, but again that was just two sectors and not the whole market. Still in the higher part of the range where it has been hanging out of late.

NASDAQ:

Stats: Down 39.80 points (-2.0%) to close at 1988.63.
Volume: 1.568 billion shares (-25.6%). Volume dropped, but Friday was options expiration day, so volume was revved up. Today it was back well below average, but down volume was way out in front 1.321 billion to 233 million shares.
A/D and Hi/Lo: Decliners exploded to lead 2.22 to 1 (1.31 to 1 Friday). New highs rose to 71 (+14) as new lows rose to 120 (+17).

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

The techs closed below 2005, the point where they gapped higher on April 18. The close below that level opens the door for further weakness as that floor of the gap up point is now broken. As noted above, that makes 1961 to 1852 as the next levels to look to, though they are not 'solid' support by any stretch. As we have seen before, if the sellers are there, the index will fall. Right now with ORCL's news the futures are up nicely. Will any resulting rally hold? Again, the Nasdaq has a tough road now that it has broken below its trading range. 2050 is a tough resistance point now on up to 2100 to 2150. The Nasdaq will need more good news form other companies such as MU. If it again stalls at 2050 without further good news, the downside is open to play again.

Dow/NYSE: The Dow rode the back of UTX and HON today, but that was about it. It made lower highs throughout the session, not good action. But ORCL and SLR may help IBM, MSFT and INTC tomorrow. Will it be enough? Probably not without more good news.

Stats: Up 21.74 points (+0.2%) to close at 10,645.38.
Volume: 1.106 billion shares (-32%). Volume fell back down below average where it has spent most of the last several months. Not great price/volume action. Down volume led 682 million to 409 million shares.
A/D and Hi/Lo: Decliners led again at 1.35 to 1 (1.1 to 1 Friday). New highs rose to 94 (+14) while new lows rose to 66 (+4).

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

The Dow fell all session from its highs, but it did manage to close above the 200 day MVA (10,630.11). Not a powerful hold at that level as volume shrank dramatically on the session. However, during the summer, Monday's and non-expiration Fridays tend to be lower volume. The Dow continues to tread lightly as it broke below that down trendline that has converged with the 50 day MVA (simple and exponential at 10,783.38 and 10,792.46, respectively). That is some stout overhead resistance that will attempt to block any move higher. Any bounce higher tomorrow or later this week will be tested at that point. Unless we get some more positive guidance from the likes of MU and others that gets investors looking ahead again, it will have a hard time crossing over.

S&P 500: The big caps gave us an 'inside' day, i.e., where the index traded inside the range of the previous session. After selling down for the past two weeks, this could be a positive. Still, let's not get too excited. The index tested 1200 Friday, and today it did not approach that level in a relative sense. But, it traded lower all session and closed just off of its lows for the day. Not bullish action, but now we have ORCL with positive guidance moving forward. That will help, but the big caps have been the stocks that have felt the greatest selling impact during this last correction. They will have some tough sledding on any bounce when they reach 1232 to 1250. Again, unless we get some other solid guidance from companies such as MU on Thursday, those levels may prove to be good points to enter put plays to the downside.

Stats: Down 5.93 points (-0.5%) to close at 1208.43.
Volume: NYSE volume fell off the table after triple witching, coming in at 1.106 billion shares (-32%, or how much it gained on Friday's expiration action.

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

TOMORROW

Man was today's session gloomy. There was nothing but gloom and doom out there, and it was even heavier than last week. Then after the session CNBC had its bull session, and instead of disagreeing, the two they had were ready to leave us all crying in our beers as they talked of an economy that was not going to recover until 2002 at best, etc. We have not been overly optimistic on the economy, but at the same time we have been looking at more nuts and bolts and history. Maybe we are wrong, but we don't think so.

With all of the gloom here comes ORCL and beats its number. Lots of talk as to whether ORCL did so by cutting costs, etc. Moot point. The real issue was the guidance: ORCL thinks last quarter (the one just reported) was the bottom and that business is looking better right now. That is the big news, not quibbling about history. ORCL was up 8.5% after hours. SLR said it saw more business opportunities. CD sees itself beating views for the next couple of quarters. The better news is coming around, but no one wanted to hear it because it was easier to wallow in misery than to buy. That is okay. That cycle will end soon enough as the gloom plays out and is, we think, replaced by more positive outlooks for the future. That is where stock prices are driven higher: expectations of a better future, not the recent history. Remember when stocks ran up into earnings and then sold off if they were not quite good enough to justify the higher price? Now they sell off ahead of time and make the canvas ripe for moves higher if the guidance going forward is good. We think we are going to see bad numbers but good guidance moving forward with optimism about the future replacing worries about the past.

What do we have to do? Be patient. In this market we need to make the stocks prove to us that they have the mettle to get our investment dollars. As noted above, today's selling did not keep many, many of our newsletter plays from rising quite nicely. Superior patterns and superior fundamentals as we view them win out. In a tanking market they won't race ahead 30% in three sessions, but they will give us 10%, 15%, and 20% gains. That is great particularly in a market where the indexes are struggling. We are scouring the market for those plays, and they are making the moves. We are not being unrealistic in our targets, taking the gains or at least part of the gains off the table when our targets are hit. Stick with the good patterns, buy when the buy points are hit, stick to the stop losses, and bank gains when targets are hit or the move starts to run out of steam. Then we will get some better economic news and more positive, solid guidance from the companies themselves, and we are in business.

End Part 1 of 2

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