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us stock market, trend trading stock
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6/27/01 Investment House Daily
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Investment House Daily Subscribers:
TONIGHT:
- Fed cuts 25 basis points, the markets hiccup and then continue what they were doing.
- Think small for bigger returns: Indexes look weak, but note the again resilient A/D line means small and mid-cap stocks are on the rise again and are all over the reports.
- More important economic news tomorrow after the Fed: will it continue to show strength?
- Team Trades
THE SUMMARY
The indexes were all to the upside ahead of the Fed announcement. As typical, they sold back just before the news. When the news came out re 25 basis points, the first reaction was down: the hope for 50 basis points was gone and all indexes sold. Then they rebounded as we anticipated. The Nasdaq held onto its rebound, the Dow and the S&P could not.
The post-announcement movement told a big part of the story. The Dow and S&P sank right back down, unable to follow through on the Tuesday's attempted reversal. The Nasdaq held onto much of its gain, though it traded off the high late. This continued the recent action: the Nasdaq outperforming the large cap dominated Dow and S&P. The Nasdaq is no lightweight, but its techs are performing just a bit better.
Volume was slightly better on the Nasdaq (but still below average) while the NYSE volume tapered a bit. That is the kind of price/volume action we prefer to see, but the indexes are wallowing in no-man's land above levels that recently held as support but are dicey and below resistance that is just overhead. Investors are getting the idea that the economy is improving and that they should be investing, but there was a lot of standing around after the announcement as traders and investors did not know what to do.
The real story continues to be the small and mid-cap stocks, however.
Tuesday we noted something interesting on the market 'internals': the A/D line on the NYSE and the S&P 500 was positive even as the Dow and S&P 500 were down. Today the same result. What does that mean? The big cap stocks as reflected in the indexes are doing nothing, but there are many more stocks moving up than down. That means that the small and mid-cap stocks that do not make up the major indexes are rising.
We continue to find solid pattern after solid pattern in these smaller issues. Now smaller does not mean that institutions are ignoring them. Indeed, there are many, many funds that are small and mid-cap investors. Thus, these meet all of our criteria for investing our hard-earned dollars: superior sales, superior earnings, institutional support, great patterns.
Moreover, many of these stocks are in sectors that will tend to lead as the economy recovers: retail, financial (insurance in specific), builders (coming back strong), and some small software companies. Even with a glut of hardware, there is still a need for better software to run the machines.
These stocks can give us solid and even faster returns than many of the big caps. They set up good patterns and explode on massive volume as institutions and retail investors jump in. The key is to get in on the breakout or on the subsequent test. These stocks are everywhere and they appear as stock split candidates, pre-splits, bounce plays, you name it. So, even as they moan and groan on the television news stations about the indexes, we see gold behind the scenes just as there was back in April and May. Back then the market was rallying, but the indexes had nowhere near the strength of the small and mid-cap stocks that were in the lead. They are still in the lead now, and they had a good day today and are setting up for even better moves ahead.
THE ECONOMY
Fed disappoints some, makes sense to others.
The Fed cut the expected 25 basis points but kept its outlook on the economy the same, i.e., the risks were to the downside. Indeed, it issued the very same statement it made the last time. What does this tell us? The Fed is still concerned about the downside and will be ready to step back in inter-meeting if the economic numbers that have just recently started to firm start to weaken again.
Yes the cut was just 25 basis points meaning the Fed feels it is getting closer to the end of the cycle and that it feels it is ahead of the curve, but it also means that the Fed will be very ready to step in with another 25 basis point cut at the first sign of trouble. It is ready to extricate itself from rate cuts, but it is not going to do so until it sees real improvement in the form of companies with concrete, empirical evidence that business is really picking up. As far as the Fed is concerned, that will be the last sign that its work is done. Until then it will be ready to step in and cut again. The fact that it went 25 basis points this time around does not mean it will automatically wait until the August meeting. It feels it now has bought itself some room to act again if things weaken up a bit after this recent firming, and it can do it at any time. Pretty shrewd when you think about it.
Of course, if you do not think the economy is improving, today's smaller cut was bitterly disappointing. We would have preferred 50 basis points just to let it be done, but we were forecasting better economic numbers, and those have been starting to surface. If the momentum can continue, perhaps the Fed did enough and did it fast enough. The irony is, the Fed was the one that stomped the economy down in the first place and necessitated the dramatic round of rate cuts (275 basis points in less than 6 months). Talk about creating a crisis and then rushing to the 'rescue.' Just one more great save by the 'maestro.' We only hope it is truly a save. Tampering with the economy and the market is a dangerous game. The Fed was playing with the lives of millions, setting many retirements back a decade or more.
Jobless claims out before the open.
Will the number of claims fall for the third straight week? We want to see the trend continue as at the least it will bolster confidence that the economy is improving. That is the key: we need to see continuing strengthening in the economic numbers just as we have been seeing the past two weeks.
Oil and gas prices continue to fade.
One of the big drags, indeed another tax on the economy, has been higher energy prices. The supply continues to grow with gasoline stocks rising as well. This is much needed. As noted, higher energy is a tax on consumers and a major drag on the economy. It is not inflationary as we saw: it slows the economy and thus stifles any price pressures as corporations continue to have no pricing power. Another irony: during this whole time did we get any real help from the federal government? Not a bit. It could have reduced or eliminated the federal tax on each gallon of gasoline we buy, but doing that would reduce revenues that our leaders are so hungry for. The thought of losing a source of revenue is enough to make many pop blood vessels. Once a tax is imposed, it stands a 99% chance of never being repealed. Just look at the telecom tax imposed in the Spanish-American war. It was not repealed until the late 1990's.
THE MARKET
Again, the major indexes are not inspiring right now, but they are not where the action is. Small and mid-caps and the other leaders on the reports represent the good action.
Overall market stats:
VIX: 23.57; +0.22. Hit 25.10 on the high, but still closing in the low end of the range. Not moving up at all as the S&P continues to struggle.
VXN: 51.89; -0.92. Similar to the VIX, Nasdaq volatility continues to stagnate at levels that have led to selling in May.
Put/Call ratio (CBOE): 0.66; 0.00. No change on the ratio as traders could not decide which way to take things before and after the Fed cut. Still in the higher end of the range, but not spiking any higher of late.
NASDAQ: Up, down, and back up. Not a powerful day, but it finished closer to its session high than its low on slightly stronger volume. Nothing special here today.
Stats: Up 10.12 points (+0.5%) to close at 2074.74.
Volume: 1.718 billion shares (+3.7%). Up volume on an up day, but it was still well below average. Up volume led 1.044 billion to 655 million downside shares.
A/D and Hi/Lo: Advancing issues widened the gap even further, but it was not spectacular at 1.27 to 1 (1.20 to 1 Tuesday). New highs rose to 130 (+4) while new lows dropped to 57 (-42).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq was up, but it was hardly inspiring. It continues to struggle just below the bottom of its previous trading range (at 2077, high today 2084.41) that is also marked by the 18 day MVA (2088.43). The index rallied, has corrected back, and is attempting to find support at 1990 for another move higher. Problem is, it has no catalyst thus far to break through that resistance to at least make another run at 2250. Right now it is locked in a pretty tight trading range between 1190 and 2077 as it tries to hold its ground. The better economic news helps, but it needs some big names to give it some hope. ALTR affirmed its guidance after the close and said it thinks there is 'stabilization' in North America. We are assuming it is talking about the chip market and not tectonic activity. If so, that is good news, but there have not been many believers in good news just yet. That is something that will be coming as economic reports continue to improve.
Dow/NYSE: The Dow tried to follow through on Tuesday's reversal off of support, but after the Fed announcement it lost its starch.
Stats: Down 37.64 points (-0.4%) to close at 10,434.84.
NYSE Volume: 1.144 billion shares (-4.5%). NYSE down volume led 657 million to 463 million shares to the upside. Lighter volume on the selling and on a Fed announcement day. Unusual, but if we have selling, we will take it. Not impressive.
A/D and Hi/Lo: NYSE advancing issues continued to lead even on a down day once again at 1.43 to 1 (1.37 to 1 Tuesday). Again, we see the A/D line improve on a 'down' day in the Dow. It is not the Dow stocks that are moving. New highs rose to 140 (+15) while new lows fell to 46 (-1).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow could not shake off the Fed. It opened lower but then rallied to 10,531, just about where it hit Tuesday on the high and right at the lows it was tapping at a week ago. That is as far as it got as it tanked to test 10,400 again (10,408 on the low), rallied, and then tanked again. The index is dancing with 10,400, and it is dancing on a narrow ledge. This point represents the consummation of the head and shoulders pattern as well as the level the index tested after making the strong move out of its double bottom pattern in April. If it fails here it is looking at 10,200 in the face if not 10,000 (the middle 'hump' of the double bottom). It is acting as if it now wants to follow the S&P 500 and test the lows for a bigger double bottom pattern that somewhat matches the 1973-1974 bear market. In that bear market, the Dow tested all the way down to the level of the left leg while the S&P 500 pulled up short and then started back up.
S&P 500: The big cap action was very similar to the Dow: up from the Tuesday close, but then selling off after the FOMC announcement. It too tried to rally, but it finished just off the lows of the session (1207.29). It has been trying to hold above 1200, the point it gapped up to back in April. It tested that level two weeks ago, rose, but now is back down again. It tried to reverse Tuesday, but that ran out of steam for today. We want to see 1200 hold, but we also note that the consummation of the head and shoulders pattern is at 1181. This is a good place to bounce, and as we noted in the weekend report, the 1974 - 1974 bear market saw the S&P test the previous low, but it did not sink all the way back down to that low before rebounding. The big cap index is not showing a lot of strength at this juncture as it tries to mull whether the economy will recover or not. Note that the 1182 level is the high in the 'hump' in the previous double bottom pattern.
Stats: Down 5.69 points (-0.5%) to close at 1211.07.
Volume: NYSE volume fell to 1.144 billion shares (-4.5%) on the selling.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
After the Fed the market will be looking for some other catalyst, and really the only thing out there is the economy and earnings. After the close today ALTR reaffirmed its earnings and stated that North America had stabilized. This came the day after XLNX (an ALTR competitor) warned. This had much of the chip sector moving modestly higher after the close. This is the kind of news that is needed, but there has to be a lot more of it. Jobless claims are out before the open, and while not the greatest leading indicator at this stage, we want to see it continue to head lower. The real number: continuing claims. Those indicate that the laid off workers are starting to find jobs. Might be early for that just now.
The chip news will help early on. We are going to beware of the gap higher and then selling after that. Then we will look for the move higher. On breakouts, we will look for them to test the move if they start out like a ball of fire, placing orders above the breakout point if they gap up over that level. That is a great way to pick up breakouts as they test the move intraday. One thing we do is break up our buy: buy some on the initial breakout and then also at the test (putting in a limit order above the breakout point by a quarter point or so. We also like to pick up breakouts in the last hour of the session if they are starting a late run or are pulling back to test the move. We picked up TUTR this way on its breakout.
In any event, we are continuing to look at many stocks that are still in very solid patterns despite how the overall indexes look. The advancing A/D line shows us that there are a lot of stocks moving higher even as the big indexes stall. The plays we have in the reports show this to be the case. Stick with the solid patterns in the right sectors in this kind of market. If you feel a run is ending and want to take some profits, do it. If it makes you sleep better having banked it, do it.
Support and Resistance Levels
Nasdaq: Closed at 2074.74.
Resistance: 2077 is the bottom of the trading range, and the index bounced down from 2077 today. 2116.53 is the 50 day MVA.
Support: 1990 range is still there and is trying to hold, but it could fall to 1961. 1852 is the next potential level.
S&P 500: Closed at 1211.07.
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 10,434.84.
Resistance: The 200 day MVA remains overhead at 10,606.48. Then 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 10,736.13. 11,000 is possible resistance after that. Then 11,196.53 (the last top). After that, 11,350.
Support: 10,400 is still in the hunt as support, and it was somewhat tested again today. If that does not hold, we have to look at 10,200 is in reach as is 10,000, the middle of the hump in the double bottom.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
6-25-01
Existing Home Sales, May (10:00): 5.37M (+2.9%) actual versus 5.2M expected and 5.2M prior.
6-26-01
Durable Orders, May (8:30): +2.9% actyak versys -0.4% expected and -5.5% prior (revised from -4.0%).
Consumer Confidence, June (10:00): 117.9 actual versus 114.5 versus 116.1 prior (revised up from 115.5).
New Home Sales, May (10:00): +0.8% at 928K actual versus 900K expected and 921K prior (revised up from 894K).
6-27-01
FOMC meeting results (2:15): 25 basis point cut as 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.
TEAM TRADES
CECO: Education is hot, and we were looking at CECO on the Stock Split Report last night. We were looking for it to test the 57 to 58 level, and the stock opened at 57.40 and started right back up from there. It was up over 58.50 in just the first half hour after testing the first high of the session at 58. We saw the bid moving higher, and by the time we got the order in the stock was at 58.75 by 58.90. We dropped in an order at 58.85 to see if we could get a decent trade. The stock moved higher for a few minutes, but then started back down and tested below our order. We are not sure how, but we were taken out after the stock moved down to the 58.75 level. Maybe it was late in begin reported, but it seemed strange. Anyway the stock moved higher over the next couple of hours and finished after four hours of lateral movement. Volume turned out to be excellent, and we are looking to just let this one do some work for us.
For a review of frequently asked questions, please use the link below:
http://www.investmenthouse.com/1questions.htm
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End Part 1 of 2
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