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us stock market, trend trading stock
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7/02/01 Investment House Daily
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Investment House Daily Subscribers:
TONIGHT:
- Indexes continue their recent divergent ways.
- Economic news still looking better and all of the sudden there are some converts.
- Warnings rampant, and some techs get hammered after hours while blue chips shook off their warnings.
- Subscriber Questions
- Team Trades
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THE SUMMARY
Indexes go their own ways.
The Nasdaq was running up the past week while the Dow and the S&P 500 were selling down. They looked ready to swap horses, and as we thought over the weekend, the Nasdaq started to sell, and that gave life to stocks in other sectors of the economy. MMM warned, but it rallied over $3. Some Nasdaq stocks warned after the close and they were clocked for $3, $6, and even $16 losses. What does this show? One, investors are still very nervous about tech earnings and the prospects for a tech recovery. Second, it shows that the better than expected economic numbers are having an impact on investor psychology as investors are willing to shrug off warnings in light of the idea that the economy is getting much better and will be much better in the second half.
Indeed, the improving economic reports we have been really talking up the past 2-3 weeks added another to the fold today with the NAPM (National Association of Purchasing Managers) improving much more dramatically than expected (44.7 versus 42.5 expected). This brought some converts out of the closet, and they were saying 'golly, we now think we ARE going to see a recovery in the second half of this year.' Remember, Bob Pisani, Maria B and company on CNBC had already 'buried' the idea of an economic recovery for the second half of 2001 just last week. The point is the same one: don't listen to the news media. These people were not reporting the news, they were editorializing as they always do. It is okay, but we have to recognize it for what it is.
Warnings hit with fury now that the quarter is closed.
Warnings are coming out fast as companies were waiting to see how the quarter actually turned out before having to warn or breathe a sigh of relief. The fact that so many waited is really a good sign: it was close enough to warrant waiting to see how the numbers actually shook out. We don't want to sound like a broken record, but this is a history lesson we are hearing now; the real story is what they say in the coming two weeks about the future.
But also, we need to think about something else. We think we are going to hear more positive comments going forward. Tonight VRTS said it still had visibility as always. That is no big deal; just because you can see a wreck coming does not make it better than not seeing the wreck (it does, but you get the idea). The important fact was that it saw firming. Unpredictable to a certain extent still, but definitely firming. We are going to see those kind of statements, some stronger positive statements, and some more negative statements over the next few weeks. It is our view that we will see more optimistic statements. Maybe not in total numbers, but more than last quarter. Moreover, we expect the CEO's to be in better moods: six rate cuts, tax cut, better economic numbers; they will be looking to the future based on what has been happening in the economy.
Now for those negative statements we have to remember something historical. Yes businesses are the best at doing their business; otherwise they are out of business. That does not, however, make them the best economic forecasters. We like to talk with them because they give us insight to business conditions and many of them are very good at predicting their future business. Still, as with anyone human, they can get in with too much emotion that clouds their vision. Here is the point: Historically, the aggregate of business leaders miss the first turning signs of the economy. They are focused on their business, and they can miss the signs that are out there. Again, in the aggregate, business leaders miss the first signs of economic upturn. Some individuals are able to look at the bigger picture and they see the turn. We will be hearing positive things from those.
THE ECONOMY
Interesting facts about economic recoveries.
We spend a lot of time looking at history for facts that help us understand the present and the future. When we take a position as we did the past week and over the weekend about where we feel things are heading, we like to provide factual basis for it. There is no 'gut' feeling here, but a conclusion based on analysis of facts. To show that, we include the factual basis for our position. We all know that opinions without explanation are cheap; we hear at least a dozen a day. We put our reasoning out in the open for all to see and refute or agree with. The goal is to get everyone thinking about what makes markets and stocks move higher and lower so they can make good decisions for their own account. Not every play is for everyone. But if you understand why we are getting into a stock, then you can analyze your portfolio and see if it is good for you.
NAPM surprises to the upside.
Some other facts that we have come across: each time the NAPM has recovered 3 points off of its low it has accurately forecast economic recovery with a lead time of about 1.7 months. In January the NAPM hit 41.2%. Today the June reading came in at 44.7. That is a 3.5 point rise off of the low. While a 44.7 reading still shows a contracting manufacturing sector, this historical gauge is a real positive for the economy and thus the market over the next several months.
In addition to the overall upside surprise with the number, the new orders component rose 3% and it is almost at the 50 level which would show an expanding manufacturing picture for the future. Increasing new orders leads to increasing production and then new hiring. To make things even nicer, the prices paid component continued to fall indicating no inflation pressure at this point.
Personal income slows its rise as spending picks up speed.
Personal income rose by 0.2% in May versus the 0.3% anticipated. Not as great, but still positive. Spending rose a higher than expected 0.5% (0.3% expected and 0.5% in April). This is some cause for concern if the consumer debt is still rising and consumers run out of gas before the economy can recover. The Fed is pumping up the money supply and admonishing banks to free up that money to prevent this from happening.
Another interesting historical fact: cash moved to money market accounts has risen 15% in recent months as investors move money out of stocks and park it. In the past, except for one occasion back in the 1960's, when cash in money market funds climbed 10%, the indexes rose on average 21% in the following 12 months. The point: a contrarian indicator because it is a sentiment indicator, telling us what the crowd is doing. The crowd is usually wrong.
THE MARKET
Overall market stats:
VIX: 20.29; -1.34. Volatility is very low, indicating apathy in the market, and that can lead to selling. But, pessimism over the economy is very high still, and that is a counter to this. We would like to see higher volatility, and its low rate means we have to watch closely for other signs of cracks. We do not, however, make it our primary indicator.
VXN: 43.97; -1.52. Falling even on a down close in the Nasdaq. This is considered low by many, but backdated data shows it has falling well into the 30's and still allowed massive runs ahead.
Put/Call ratio (CBOE): 0.62; +0.04. Not much change in action, but it remains above the 0.4 level that can show complacency.
NASDAQ: Tried to rally but then gave us the selling we though was coming. After 5 winning sessions it was due.
Stats: Down 11.82 (-0.5%) to close at 2148.72.
Volume: 1.517 billion (-26.7%). After Friday's wild ride, falling on lower, below average volume is good. 807 million to the downside versus 702 million to the upside.
A/D and Hi/Lo: Decliners took back over at 1.43 to 1 (advancers led 1.75 to 1 Friday. New highs fell to 97 (-180) as new lows rose to 61 (+21).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq was due to sell back a bit as we thought, but it was not severe. It gave back a nice gain and closing near the lows of the session. That is bearish, but the price/volume action was positive as volume dropped sharply on the selling. The candlestick pattern was a tight doji, and that usually means a move higher is topping out. The low (2140.65), however, tapped the simple 50 day MVA and the index finished off that level. There are two forces working here: profit taking urge after a nice move higher versus support at the 50 day MVA. It would be great if it held here, but we have the warnings after the close that just pummeled some techs, and we could see the index test down to 2100 to consolidate this move. Coming out of this bottom it is going to be up and down, but the trend is going to be up.
Dow/NYSE: After giving up on Friday, the Dow reversed its attitude with a nice gain even as MMM warned about Q2. The economic data won out today, but volume, though average, declined sharply.
Stats: Up 91.32 points (+0.9%) to close at 10,593.72.
NYSE Volume: 1.111 billion shares (-35.8%). Whopping drop on the gain, but the antics on Friday had things all mixed up. Volume was average; a mild positive. Up volume led 695 million to 400 million shares.
A/D and Hi/Lo: NYSE advancing issues maintained the lead, but it narrowed to 1.08 to 1 (1.7 to 1 Friday). New highs fell to 153 (-45) as new lows rose to 22 (+5).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow plunged early, but then caught support above 10,400 and started to run higher. It hit 10,638.87 on the high, but then it once again fell to close below the 200 day MVA (10,597.28). It is still below the short term down trendline that started in May and below the long term down trendline at 10,725 (the 50 day MVA is at 10,715.29). It is still smothered by heavy resistance, but it is holding firm above 10,400. Again that is a key level as that is where the index tested the move up out of its double bottom in April. It also roughly represents the bottom of an earlier trading range. It is a battle right now, but we saw Dow stocks respond favorably to positive economic news. That makes us believe that overall the index is rising over the next several months, but it is news driven in the short term.
S&P 500: The S&P ran into its own overhead resistance today, but that was after putting in a nice show on average NYSE volume. On the high (1239.78) it ran right into the 50 day MVA and closed down about 3 points from there. Not bad, but that level coincides with its last top just 8 trading days ago (1240.24). 1240 to 1250 is resistance, and the S&P is having a hard time with it. Today's move did clear the short term down trendline from May, but the index has to get over 1250. Will it bound between 1200 and 1250 until earnings start coming out and some positive comments from some of the big caps about the future. We will continue to monitor the A/D line, however, to see how it performs. It was weaker today on an up day, and that is somewhat of a concern as advancing issues were leading on the down days. The smaller stocks seemed to take a breather today along with the Nasdaq. Coincidence? Probably.
Stats: Up 12.32 points (+1.0%) to close at 1236.72.
Volume: NYSE volume tanked to 1.111 billion shares (-35.8%). Still average, but a steep drop.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
The Nasdaq started to roll over a bit today and it got a push after hours with ISSX warning. Those web security firms were just pounded after hours. Then again, Nasdaq futures were 21 points above fair value about 2 hours after the news hit. Ah the after hours market. Factory orders are out 30 minutes into the session, and those might give some immediate direction, but on pre-holiday sessions, those early moves can give way to short term profit taking.
After some very good sessions, the Nasdaq and the small and mid-cap stocks took a bit of a pre-holiday vacation. That is normal action. The interesting part is that the Nasdaq bounced up off of the 50 day MVA today. Will that level hold? There has not been anything really magical about that level over the past two months, so we are not going to make a lot out of it. The index made a good move up, showed a doji on the candlestick chart, and it may head back down toward the 2100 level. That would be normal action. The Dow and S&P have a lot of overhead resistance, but they seem intent on a little upward action here. The holiday, however, puts it all into question to a certain degree as investors and managers will be heading out the door early for a mid-week holiday. Lighter volume can mean sharper swings either way.
We are not going to guess. We have said we like what we see in the market and the economy overall, so we are picking our shots with good stocks for both the short term and longer term. There are some good pre-split plays developing that I am really interested. There are also breakouts of course. One of the things we did when we developed our method of investing was to allow ourselves to see the move first and then invest. That way we are not guessing about particular direction each day when the market is choppy.
Tomorrow we will look for the momentum moves such as pre-splits and then also breakouts that are based on overcoming resistance on big volume. On days before holidays these can be very nice, but we have to watch volume on breakouts; we want it strong or we have to be very diligent with the position to see if volume does come in on a further move higher. On momentum plays, we can ride them and then get out when it stalls. We will also keep looking at selling some covered calls on our stock holdings that appear to be topping short term, taking some money in while they do their routine pullback to near term support.
Support and Resistance Levels
Nasdaq: Closed at 2148.72.
Resistance: 2160 to 2200. Then 2250.
Support: Looking for 2100 to hold. If selling starts anew, 1990.
S&P 500: Closed at 1236.72.
Resistance: 1240 to 1250 where the down trendline and 50 day MVA (1240.39) are. Then 1285.
Support: 1200. Head and shoulders bottom and the breakout support from the double bottom pattern is right at 1182.
Dow: Closed at 10,593.72.
Resistance: The 200 day MVA stopped the index again (10,597.28). Still resistance at 10,700 and again it is not really clear up to 10,800, but that is the road it has made. 11,000 is possible resistance after that. Then 11,196.53 (the last top). After that, 11,350.
Support: 10,400. Then 10,200.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
7-2-01
Auto Sales, June (0:00): 6.4M versus 6.4M prior.
Truck Sales, June (0:00): 7.1M versus 7.2M prior.
Personal Income, May (8:30): 0.2% actual versus 0.3% expected and 0.3% prior.
PCE, May (8:30): 0.5% actual versus 0.4% expected and 0.4% prior.
Construction Spending, May (10:00): 0.1% versus 0.3% prior.
NAPM Index, June (10:00): 44.7% actual versus 42.5% expected and 42.1% prior.
7-3-01
Factory Orders, May (10:00): 1.5% versus -3.0% prior.
7-5-01
Initial Claims, 6/30 (8:30): 393K versus 388K prior.
NAPM Services, June (10:00): 47.0% versus 46.6% prior.
7-6-01
Nonfarm Payrolls, June (8:30): -40K versus -19K prior.
Unemployment Rate, June (8:30): 4.6% versus 4.4% prior.
Hourly Earnings, June (8:30): 0.3% versus 0.3% prior.
Average Workweek, June (8:30): 34.3 versus 34.3.
SUBSCRIBER QUESTIONS
Q: I notice that when you recommend options to be bought on a stock you usually by in the money options. Is there a reason for this? I haven't had a lot of luck with options, they usually didn't get up to my price and either ran out or I paid too much and time wore them down. Doesn't the same happen to in the money options?
A: When you buy out of the money options, you are paying for time value and volatility; there is no intrinsic value, i.e., the part that is in the money. It is all speculative. In the money options have intrinsic (or 'book value') as part of their price. If you buy out of the money and the stock goes nowhere, on expiration your option is worth zero. If you buy in the money and the stock goes nowhere, at expiration your option is worth the in the money portion. That is one reason we like in the money options. There are many more and we discuss them in detail in the Options You Can Use Seminar. Seminars are starting up again on August 1 and we will have a link to sign up available soon.
End Part 1 of 2
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us stock market
trend trading stock
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