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us stock market, top stock pick
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7/05/01 Investment House Daily
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TONIGHT:
- Another post-holiday slump as investors prepare for earnings.
- No good news today to drive stocks higher.
- Warnings after bell will not help the mood Friday.
- Employment report will rattle some even though it is really old news.
- Keep an eye on the longer term as markets get volatile right before earnings.
- Subscriber Questions
- Team Trades
No festive mood on the street.
Investors came back from the fourth and were ready to sell stocks. This is a pattern that has developed since last Labor Day, and something that appears to be associated with overall negative sentiment with respect to the stock market. We said the markets were 'poised' to move, and they sure were - - to the downside. Tech and biotech were just about the worst performers. Tech winners in this market are so specific; staying with the older names can be tough as they are subject to selling each time warnings or earnings fears hit. We were looking at possible positions with BRCD and BRCM, but never saw anything today that made us want to jump in. BRCM looked good for coming sessions at the close (a shooting star doji above the 50 day MVA), but the AMD warning after hours lopped $1.50 off of its closing price. That still leaves it above its 50 day MVA, but the old-line, big names continue to be risky around earnings time. Heck, leader NVDA was hammered today as it tried to regain its feet but then failed. It is not a good sign for techs when leaders fall.
No good news.
While things were looking somewhat promising on the Nasdaq on Tuesday though iffy on the Dow and S&P 500, the mood was somber from the outset and only got worse. A $7 networking stock (Marconi, MONI) warned its earnings were going to stink. This could not have been a surprise to many though the company did say a while back that things were improving. That set the tone. Jobless claims were up for the week, and though nothing sinister was in the report, that of course did not help matters. Then all session long it was simply depressing hearing the continued parade of negative comments on the market and on the economy.
Indeed, commentary about the networking and telecom recovery started the bidding at 2003 for the 'recovery' in the sectors, and then 2004 was bandied about. Anyone for 2005? The news has to report the juiciest piece of information, so MONI got the headlines for the day. Again, however, a networker warning on earnings was not really a surprise. It just is hard for investors who are already gunshy to deal with the warnings when they actually come. The action shows that investors are still not ready to believe in an economic recovery at this point and we will have to weather the start of earnings before investors get sold out enough.
After hours warnings from big guns AMD and EMC.
AMD reported earlier it was going to miss its number but that it was seeing some stabilization in its business. Tonight it announced it would not come close to the 27 cents expected but would only make 3 to 5 cents. Note, however, that AMD still says that it is having record unit sales (its business is picking up), but it is in a price war with Intel, and that is slicing into its profits. No pricing power is a familiar theme. Chips and practically all of the 'guts' of a computer and other tech devices are dropping dramatically in price. Thus prices continue to fall. The lack of pricing power touches on all industries, so we do not believe we have any inflation worries for now, and that allows the government more room to work on the economy (like a capital gains tax elimination to get corporate investment up).
EMC also warned big, saying expect 4 to 6 cents versus 17 cents. Storage is tech, and tech has no pricing power. You can buy equipment for at least 30% of what it was just a few months ago. Look at PC prices; we have been monitoring Dell desktop pricing. You can get a 1 gig chip with 128 megs of RAM, CD-RW, etc. for under $700 - $800. Unreal.
These stocks and others were getting crushed after hours. Again, investors are looking not necessarily for improvement, but as we saw with XLNX, maybe just not as bad as thought. AMD and EMC announced the opposite, and they are being hammered.
What to take from this: A few industry experts stated that this is simply as bad as it is going to get. Remember, it appears that the economy is on the upswing once again. Sure no one believes it or at least they did not seem to do so today (but look at the future expectations of the consumer and the non-tech business sectors), but the numbers indicate there is the belief in better times ahead. That, however, won't help tomorrow as the indexes will head lower if something dramatic does not happen overnight. Don't count on it.
THE ECONOMY
The economic news was either good or not really bad at all, but the reporting gives it the worst possible spin. We need to get back to the future.
Example: 'Jobless Claims Soar in June' announced one headline. Yes, jobless claims were up to 399,000 from 392,000 prior. That is a 7,000 job loss or a 1.8% gain in jobless claims. Last week the number fell to 392,000 from 404,000. That is a 3% drop in jobless claims. That news was well-received, but it did not get the same degree of positive treatment as the rising claims number received negative treatment. Another big plus that was hardly mentioned? The 4-week average fell to 407,500, down from 416,000 and continuing the trend lower. The trend has started to be downward as the economy starts to recover. We said we would get up and down numbers, but the trend would be the story. The trend is tossed out when it makes better news to report otherwise. It is a negative climate out there in the reporting business right now.
NAPM Services report shows expansion once again.
Another report that was swept under the rug: the NAPM services index moved back over 50, coming in at 52.1% from 46.6% in May. It was a sharp reversal and was the first close over 50 since the 61.1% reading in December 2000. Much was made of the event when services started contracting, but now it has reversed course and looks to be heading higher with the NAPM, the manufacturing report.
Boat show sales higher, big ticket software orders up.
Here in Houston there are two boat shows a year, one in the spring and one in the summer. This is one of the indicators we throw into the mix to determine just how the economy is performing. Through the spring show in late January/early February, things were still grim. The lower end boats that make up most of the market were not selling. The higher end boats were holding their ground. That is usual for economic downturns. Overall boat sales were way down. The recent summer boat show marked a change in results. Several area dealers beat last summer's results and noted much more optimism. Indeed, while bad weather kept attendance down through the week, the weekend sunshine brought out the buyers with their checkbooks. Sales were good across the board.
Talking with some local software salesmen we have also learned that orders for the big ticket software packages are just now starting to pick up steam. A lot more activity is how it was described to us. We have believed that software would be one of the areas to pick back up in technology as companies had to stay competitive and efficient. New software is one of the best ways to do that.
These are still very much positives for the economy as they continue to show the continued improvement across the board. This is not just housing holding up in the face of weakness across the board as it was before; this is now some real improvement. It keeps us looking to the future, but we have to deal with the current refusal to look beyond earnings that are really going to stink.
THE MARKET
The market is just not ready to buy off on the improving economy scenario just yet, not with AMD and EMC warning of really poor earnings to come this month. They could buy into lower earnings, but the big drops are more than they are ready for. Have to adjust to the idea that yes things are very bad. But, for many areas of the economy, they are at their worst right now. It is just a matter of getting through this period without major damage for the next move higher.
That is the 'interesting' part. The indexes have retraced their moves off the bottom and are at a point where they could find support and move higher. We have talked about the chart patterns compared to other bear markets earlier. The indexes are still above those critical levels (at least if we are looking for a move higher from here), but look as if they want to at least test those levels again. The Nasdaq looked poised to move higher on Tuesday afternoon, but after today and the warnings after the bell from AMD and EMC, it is going to move lower in the morning. The Nasdaq has about 100 points to play with here. Not ready to move higher just yet without some more testing of that 1970 to 1990 level. The Dow and the S&P 500 appear to be ready to do the same.
What we are doing is continuing to be patient and just stay away from the vast majority of tech stock, especially those in bad patterns. They are jerked back and forth based on the news of the day, and we are going to have a lot of news the next few weeks. There are some leading techs in specific areas and with specific catalysts (pre-splits, rolling ranges) that make good longer term targets and also shorter term trades, but we have to realize there are a lot of other sectors out there that we need to look at for growth. We have been talking about them the past few weeks and they are well-represented on the reports.
The gloomy tone can make you miss some really good investment opportunities even as the economy starts to recover. We continue to see stocks that respond well in economic upturns continue to move up (e.g., builders, some financials, education). Those lead and we cannot let the tech gloom keep us from making smart investments that will pay off for us.
Overall market stats:
VIX: 22.72; +1.77. Volatility rose, but is still very low. Not helping at all right now.
VXN: 49.44; +4.30. Sharp jump, and it will jump higher tomorrow, at least intraday if not up to the close. Still, however, it is at levels that are just off the low of the year.
Put/Call ratio (CBOE): 0.66; +0.02. No surge in put buying on the selling, something that has usually accompanied all sharp selling bouts. We will see if it responds better tomorrow as the selling picks up tempo.
NASDAQ: While there was no damage on Tuesday, today was a different story as the Nasdaq went from looking ready to try a move higher to a big question mark.
Stats: Down 60.69 points (-2.8%) to close at 2080.11.
Volume: 1.304 billion shares. Up from Tuesday, but still well below average volume. 1.088 billion to the downside versus 199 million to the upside. No buyers today.
A/D and Hi/Lo: Decliners really took charge today at 1.72 to 1 1.15 to 1 Tuesday). New highs actually rose to 64 (+9) as new lows rose to 76 (+27).
The Chart: http://www.investmenthouse.com/cd/$compq.html
This was a dismal day from the sentiment standpoint. After an ugly round of selling up to lunch, the selling started again on the close. Closed at the low and then pummeled after hours, it looks like a lower open. At some point the bad news is going to be priced in. It is getting there now as investors get the final adjustment in expectations. But is there going to be a big rally? Well, we want to see it hold at the 1973 level on the low if not higher. If it does there is very good odds that the better economic news will carry some of the tech sectors higher, e.g., software, retail, smaller banks, builders, drugs, health services, etc. But, the key will be ignoring the old leaders for the most part. We talked about ones we were watching last week. Those will suffer tomorrow on the heels of AMD and EMC. We are going to watch for where this index finds bottom. If it runs below 1973 on high volume, we will have to see just how far it wants to test (1900 to 1861). We still like the analysis that the index has reached its lows and this is just a test of the move off of the bottom; consistent with other similar bear markets. We have to see how it reacts to the non-Nasdaq warnings from EMC and AMD.
Dow/NYSE: The stall turned into selling, and the Dow faces 10,400 once again.
Stats: Down 91.25 points (-0.9%) to close at 10,479.86.
NYSE Volume: 932 million shares. Significantly higher than Tuesday, but still below average volume. 616 million to the downside and 306 million to the upside.
A/D and Hi/Lo: NYSE advancing issues fell behind, but not horribly, at 1.23 to 1 (1.18 to 1 Tuesday). New highs rose to 99 (+4) as new lows rose to 51 (+31).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow did its selling early in the session, and then bounced from 10,460 to 10,500 as it tried to once again find support at 10,400. Selling in the last 15 minutes knocked it back from 10,500. The Dow is trying to hold above 10,400 once again, the point of the April test of the move out of the double bottom. If that does not hold, we look at 10,250 as a pretty solid level of recovery. We still stick to our scenario that the indexes have hit the lows and are now testing those lows as the worst of the earnings seasons becomes reality. Again, major the indexes are not reflective of the overall market as the A/D line remains relatively healthy even on what appeared to be a rougher round of selling.
S&P 500: The S&P beat a hasty retreat from the 50 day MVA off of Tuesday's doji pattern. Volume rose but remained still well below average. If it does not accelerate, that gives more confidence the recent lows will hold (1203), but as with the other two major indexes, there is not a lot of room to maneuver. Again, we the reaction to heavyweights AMD and EMC will tell more of the story as the big caps have struggles to rise, but have been rising until this correction that tested the move off of the bottom. It would appear that the real test is just ahead.
Stats: Down 15.21 points (-1.2%) to close at 1219.24.
Volume: NYSE volume rose to 932 million shares, but still below average.
The Chart: http://www.investmenthouse.com/cd/$spx.html
Summary: One thing to note. Thus far the volume has been lower on the selling than the recent buying. The key will be if the market can work through the selling related to the recent earnings warnings fast and without piercing the near support levels. It is also important to remember what is happening overall: we are right in front of what are going to be the worst earnings reports in a long time and a very high level of pessimism even as the economic numbers are making their turn.
FRIDAY
The employment numbers are out tomorrow, but they will be overshadowed by the earnings warnings. Still, they probably won't help as the unemployment rate will more than likely, but watch for non-farm payrolls to rise against expectations of a fall. Seasonal and service sector will be the reason. These reports reflect what has already happened. Employment lags the economy, but at this point that may not matter.
There is not a lot of upward momentum for the morning session, and Friday is even stranger given the mid-day market closing. We will watch for breakouts of those solid sectors and those momentum plays for upside. We will even look at some put plays on stocks that are showing a failed test of resistance, but we are not going to get too wild to the downside as the indexes are close to levels that could act as support. That is why we look for those stocks that have breached support, tested it, and are looking to head lower from there.
We are heading into earnings and as we saw today, there is a lot of news out there that has to work its way through investors. With the economy improving and companies most likely at the bottom, we remain positive on the market as everyone else is negative. We are not 'trading' the market as much right now; we are buying quality stocks breaking out (whether pre-announcement split plays or whatever) or making momentum runs (pre-splits). When the momentum plays show any sign of topping we sell or put a stop loss underneath. On the solid breakouts in sectors that are doing well (builders such as BZH and LEN, smaller financial, retail, software), we are buying the breakout and then selling calls AT THE PRICE WE BOUGHT THE STOCK (that is, in the money) when they top out and start the test. If the breakout fails, we sell the stock as it pierces the pivot point or stop loss point and then buy back the calls or let them simply expire. That protects us from the downside as we have sold the intrinsic value plus time, and that pretty much is greater than the fall back to the pivot point. We have locked in the profit as the stock has made its breakout run and starts to test the breakout. If it bounces up off the breakout, we buy the calls back and let it run up and do it all over again the next time it starts to top. We cover this strategy in detail in the Covered Calls and Protecting Your Downside seminar, and it is a GREAT way to protect your stock buys in a market that is trying to get its feet under it. Buy the leaders as they breakout and then protect yourself.
End Part 1 of 2
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us stock market
top stock pick
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