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world stock market, us stock market
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6/23/01 Stock Split Report
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Stock Split Report Subscribers:
TONIGHT:
- Lackluster finish to the week when Persian Gulf goes on alert.
- A gloomy outlook continues with more warnings and poor chip industry surveys.
- Another look at bear market charts of the past.
- Subscriber Questions
- Team Trades
THE SUMMARY
Not much flair to close the week.
After some accumulation days on Wednesday and Thursday, the woeful Q2 earnings from MU along with a series of warnings from high-profile MRK along with SYMC, MANU and TIBX kept the market in check all session. The Dow was pretty much a lost cause with Merck weighing it down, but it was moving up in the last hour and the Nasdaq cut a 20-point loss to 4 points and was looking for a positive close when the announcement of a high alert status in the Persian Gulf precipitated a quick sell off in the last half hour that pretty much put a lid on the session.
It was not a bad session, nor was it a good session. Volume fell after two days of gains on above average volume. That is what we like to see if there has to be selling; no one was really interested in dumping stocks overall, though the drug sector had more than its share of sellers with MRK's warning and potential manufacturing problems at Schering-Plough (SGP). After two sessions on good volume, no one wanted to commit before the Fed meeting this week. Friday's in the summer can be real sleepers, and this Friday was in character.
Still a lot of gloom about the future as news is good and bad.
The glass is half empty or half full. There are those who look at the current lack of demand for pretty much anything technology and also in some other sectors and just cannot picture how the economy can pull out of it in a quarter or two. There are others who see the signs of change and think that there are better times ahead. We fall in the latter camp, but we temper that with an idea that we have voiced before, i.e., not all sectors will recover simultaneously. And indeed, that is the way recoveries usually work: some sectors start ahead of others; hence, the retail, financial and home builders (once again) are making some of the best moves as a group based on a belief that the economy is going to get better sooner than later with the Fed rate cuts and tax cuts taking effect in Q3 and Q4. The fact that those sectors are looking better already belies some of the negative views on the future.
Again, high levels of gloom often precede turns for the better. We have seen a lot of gloom and still are, but we are also seeing some signs of better economic times ahead: home building still strong, building permits on the rise again, Leading Economic Indicators on the rise (good for 3 to 6 months down the road), jobless claims trying to fall, regional economic reports improving. There are seeds of growth, robins on the yard as we have said in the past. It is early in the season for this new growth and it is fragile, but it is new growth.
With all of the negatives of late, it is easy to overlook these signs of a turn back up. Friday more news about the chip sector seemed to push the potential for that sector's recovery even further back. In May orders for chip gear dropped 3% from April levels, and down 75% from May 2000. Micron's very weak Q2 earnings seemed to outweigh its claims of brisk demand thus far this quarter (3 weeks old), but none of the chip stocks were slaughtered; they just did not go anywhere, and that can be considered a good thing given the overall slow session and the bad news flying all around it.
Just an oversold bounce that is about to lose its steam again, or signs of real strength? May be premature just now for a real recovery. Looks like a good time to review some past bear markets and compare with what is going on right now.
Bear market chart review.
In the past we have discussed past bear markets and how this one compares. The shorter and shorter bears since 1973-1974 definitely reversed their trend this time. Shorter bears tend to have two downlegs, longer have three. This one has had three. The 1973-1974 bear had three.
Let's look at 1973-1974. That was a 21-month event, but as noted, hit had three downlegs. The economy today is not great, but that one was really bad: sky-high energy, inflation was out of control even in an economic downturn, U.S. industry and business lagging the world badly, and a pathetic dollar. Today energy costs are higher, but not near the percentage of GDP they were in 1973 and 1974. Inflation? Some are worried but all leading indicators seem to be holding that inflation is not something we have to worry about anytime soon. U.S. industry is still the model for the world today even with the slowdown as it has incorporated so much technology over the past 10 years. Indeed, Mr. Greenspan believes the high productivity rate the U.S. has enjoyed will not abate even with the economic slowdown. That helps on the inflation front as well. The dollar is very strong. Some say it is too strong and will hamper the economic recovery. We have said it before: what is worse than that is a weak dollar that makes U.S. investments less attractive to foreign investors. They want to convert their yen, euros, rubles, etc. to dollar investments, and that helps our industries and markets. Economically, times are much different now; we are in much better shape for a recovery.
Now let's consider the charts. Three downlegs in each index in 1973 to 1974. That means a selloff, some leveling out or a move higher, another selloff, another move laterally, and then a final selloff. That is exactly what happened back then. That was bottom, but not until the indexes made one last attempt to rally off the lows over a two-month period, and then fell back down to test the low. On the rally up off of the first low, the S&P 500 climbed 20%. When it started to fall, the S&P 500 never made it back to the low, but it found support at a point it made a brief rally off of right before it hit the low. The Dow went all the way back down and tested the low before it started to move up.
Now back in March the S&P 500 made a 9-day double bottom along with the Dow, and both started up. At the time we stated it would be preferred to have a broader double bottom to build a more solid base for a bull rally. The index gave a confirmation move, however, and we saw leading stocks breaking out, so we had to go with the hard numbers as opposed to what we thought would be a perfect scenario. Since that time stocks have been breaking out of sound bases and moving higher. Of late there have been more failed breakouts as the S&P peaked at 1315.93 and has rode back down to test 1200 (the March low was 1081.19). The move up from the low was 21.7%, very similar to the 1974 move. It has now retraced 8.5% of the move from the peak on the rally off of the low.
The S&P is looking very similar to the 1974 pattern. With the Fed having aggressively cut rates, a tax cut coming, and an economy that has fallen from its lofty peaks but has still not turned in negative growth yet (will Q2 be the first? It will be close.), we see more upside potential than downside ahead. The index is trying to hold here, but we may see more downside with the Q2 earnings actually coming. But, we think we get a rally out of that before earnings season is over if not before that. Why? Investors see the news that they feared, but they also realize it is a history lesson and then start looking to the future. If we get some decent guidance and further improvement in the economic numbers, things start looking much better.
The Nasdaq has performed similarly after its April 4 low of 1619.80. It moved up to a high of 2328.05 (a 43% gain), has moved laterally and has slid down to 1973.70 on the recent selling (a drop of 15%). It too is trying to find support around the 1990 area, the point of the breakaway gap back on April 18 after a significant retracement. A great place for it to hold and turn back up, but it has significant overhead resistance at 2077 to 2100, and it might head lower first and form more of a double bottom pattern before moving higher.
Another thing to note: many of the big name techs have already retraced their gains over the past two months. SUNW, CSCO, CIEN, JNPR, AMCC, VTSS, EMC, NTAP and others have beat the Nasdaq to the test of the April low. This weekend we heard some analysts saying that it was a good time to start buying the likes of CSCO and SUNW. It could be that these names have made their double bottom lows and are ready to turn back up soon. That would help support the Nasdaq close to the current level (1990?) for a real move higher. That, however, remains to be seen.
Summary: The S&P and the Nasdaq are setting up a classic end to the bear market if it has not already ended. We have seen a good, confirmed rally, and breakouts on top of that. The rally is still alive even with the retracement as it has not undercut the low on the April 10 reversal session (1771.68). Again, while the mood is overall gloom, we like the way the indexes are still developing for the longer term. The economic news is starting to improve for now and the indexes have risen, pulled back and are trying to hold at near term support for another rally to carry them higher. Again, they may need to pull back some more near term, but we still like the way things are setting up for the longer run this year. The key is the move ahead. Bull markets spring from bear markets, and the moves have been made and are being made to set the next bull market off.
THE MARKET
A lazy day that fought up and down on the MU news and some other earnings warnings, most notably MRK. After all the thrashing about, it was not a bad day until the military scare late in the session pushed things down for good on the close. Lighter volume on the selling kept the good up volume days on Wednesday and Thursday in tact. Improving economic news will be the ultimate catalyst for all of the market to move higher: better economic times equals higher earnings and higher valuations.
Overall market stats:
VIX: 22.50; +0.59. Still in the low end of the range as the indexes bounce in a narrow range between resistance and levels trying to hold as near-term support. It is an indication that there may be some weakness here, but we also have some change in the air with the better price/volume action last week.
VXN: 51.84; -0.22. The Nasdaq was back and forth all session, and volatility tracked it more or less. Again, the index is at levels hit in May when the Nasdaq topped twice and started to sell back. The Nasdaq as well is being pinched between resistance and near term support.
Put/Call ratio (CBOE): 0.69; +0.02. Not a lot of put activity on the session even with the overall gloom. Still, the ratio is at a level at the higher end of the range as it has been for quite some time.
NASDAQ:
Stats: Down 23.92 points (-1.2%) to close at 2034.84.
Volume: 1.714 billion shares (-21.1%). After the upside days on rising volume Wednesday and Thursday, it was good to see the improved price/volume action continue as the index sold lower. Down volume led up volume 942 million to 753 million shares, to be expected on the selling. It is significant that Wednesday's and Thursday's selling were on volume that was relatively higher than the recent selling volume.
A/D and Hi/Lo: Declining issues took over on the selling 1.35 to 1 (advancing issues led 1.23 to 1 Friday). New highs fell to 115 (-2) as new lows fell to 80 (-20).
The Chart: http://www.investmenthouse.com/cd/$compq.html
It was an up and down session all day as the index tried to fight off a series of warnings from tech companies (TIBX, MANU, SYMC). On top of that, the Nasdaq drug sector was under pressure along with the NYSE drug stocks (Merck and company not helping out). It looked as if it was going to try and finish positive with about an hour to go until the military news hit the wire and tanked it down. It hit 2074.83 on the high, just below resistance at 2077 that represents the bottom of the recent trading range. The close dropped it below the intraday low of the trading range as well (2052.41). The Nasdaq is trying to hold at the gap up point at 2000, finding support around 1990 the past week as it also trades below 2077, the bottom of the trading range that it just fell out of. The good price/volume action gives it some life here for a move up, but the overall market sentiment is still very negative as Q2 warnings continue. At some point investors will get all of the earnings fear sold out and will be ready to move up. The reaction to the MU numbers was not bad at all.
Dow/NYSE: The Dow had little chance Friday with the MRK warning and subsequent stomping. It was down from the get-go and when it started cutting its losses with two hours to go, the military news hit and it tanked to session lows.
Stats: Down 110.84 points (-1.0%) to close at 10,604.59.
Volume: 1.189 billion shares (-23.1%). NYSE volume pulled back on the selling after two strong days of gains. It remained above average, but was significantly lower. Down volume led 723 million to 439 million shares.
A/D and Hi/Lo: Declining issues took the lead at 1.5 to 1 (advancing issues led 1.28 to 1 Thursday). New highs dropped to 117 (-39) and new lows fell to 40 (-5).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow is thus far hanging on above a level is trying to act as near term support at 10,563. Hanging on is the phrase. It has resistance at 10,750 in the form of previous prices and the down trendline from the all-time high. The MRK selling moved the index to close just below its 200 day MVA (10,617.80), but overall volume was lower. As with the Nasdaq, however, it has a lot of near term resistance to overcome and more negative news coming as more warnings will be out. It could find that 10,400 support range before trying to move higher. It is ambiguous right now, but we do like the price/volume action.
S&P 500: Same type of action on the big cap index as it sold hard and then tried to recover only to fail on the Persian Gulf news. It was a weak day even without the military news, but the lower NYSE volume was good. As with the other indexes, the S&P is trying to find some near term support, 1200 for this index. The price/volume action has improved and that provides some inspiration that the rally may pick up from here, but a lot of overhead resistance at 1232 to 1250 and no visible catalysts to get it going unless the Fed rate cutting is well received and there is further news of economic improvement.
Stats: Down 11.69 points (-0.9%) to close at 1225.35.
Volume: NYSE volume pulled back on the selling to 1.189 billion shares (-23.1%). Improving price/volume action helps, but still lots of resistance overhead.
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
A pretty big week ahead with the FOMC meeting results on Wednesday afternoon, existing home sales Monday, and durable goods, consumer confidence and new home sales on Tuesday. Final Q1 GDP, Michigan Sentiment, and Chicago PMI on Friday. A full week that can potentially show us more improving economic numbers. We think durable goods might turn slightly positive, and home sales might just remain positive with the rise in permits we saw last week. Consumer confidence may have hit a snag with the stock market's recent weakness.
The big event, however, will be the Fed. 25 or 50. Well, we were looking for 50, but the Fed will also be looking at the recent improvement in certain economic numbers (LEI, housing permits), and that may trigger just a 25 basis point move. Those expecting a 50 basis point cut might be disappointed, but if the Fed cites improving economic conditions but the continued vigilance for the need for further cuts in case weakness continues.
Mondays are usually light trade in the summer, and with the Fed meeting right around the corner, we do not see any reason to change unless we get some really bad news on Monday. We will probably get some analyst comments, though they were fairly active last week. With earnings so close, however, there will be some more commentary coming. Indeed, the entire first part of the week may be somewhat blas with the Fed meeting so close. Given that, we may see the indexes drift lower on light trade ahead of the announcement. We could see them fall to the near term support levels where we would like to see them hold and then start to rally on the news.
That is what we would like, but the short term picture is more ambiguous than the long term picture. As noted above, we like what we see developing. Sure the indexes could fall lower from here, but they are building a super solid foundation and pattern for a continuation of the move out of the bear market.
Friday did not give us a lot of strong moves higher, but there were a few new breakouts and more stocks moving into good position. Time to be patient and let the plays develop and continue to break higher; then we make our moves. The short term will be decided by whether the indexes break above this near resistance or break below the levels that have recently been trying to hold as support.
Support and Resistance Levels
Nasdaq: Closed at 2034.84.
Resistance: 2052 to 2077 is the bottom of the trading range, and the index bounced down from 2077 today. 2123.27 is the 50 day MVA.
Support: 1990 range is trying to hold, but it could fall to 1961. Then 1852.
S&P 500: Closed at 1225.35.
Resistance: 1232 to 1240 are the bottoms of the trading range. Then 1250.
Support: 1200 is the next level that is trying to hold. Head and shoulders bottom and the breakout support from the double bottom pattern is right at 1182.
Dow: Closed at 10,604.59.
Resistance: 10,750 to 10,800 (down trendline between the January 2000 all-time high and the September high is currently at 10,750). The 50 day MVA is at 10,770.12 as well. 11,000 is possible resistance after that. Then 11,196.53 (the last top). After that, 11,350.
Support: 10,560 is still trying to form as support. Then 10,400 is the point of consummation for the head and shoulders pattern and some previous lows.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
6-25-01
Existing Home Sales, May (10:00): 5.2M versus 5.2M prior.
6-26-01
Durable Orders, May (8:30): -0.4% versus -4.0% prior.
Consumer Confidence, June (10:00): 114.5 versus 115.5 prior.
New Home Sales, May (10:00): 900K versus 894K prior.
6-27-01
FOMC meeting results (2:15): 25 basis point cut expected.
6-28-01
Initial Claims, 6/23 (8:30): 420K versus 400K prior.
Help-Wanted Index, May (10:00): 65 versus 65 prior.
6-29-01
GDP-Final, Q1 (8:30): 1.3% versus 1.3% prior.
Chain Deflator-Final, Q1 (8:30): 3.2% versus 3.2% prior.
Michigan Sentiment-Rev., June (9:45): 91.6 versus 91.6 prior.
Chicago PMI, June (10:00): 39.0% versus 38.7% prior.
End Part 1 of 4
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world stock market
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