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world stock market, us stock market
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7/21/01 Investment House Daily
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TODAY:
- The indexes hang on in their ranges, trying to find a catalyst.
- Mixed economic and earnings bag keeps stocks range bound.
- Overcoming bad news and hanging on is not a bad thing right now.
- Price/volume action remains decent overall.
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- Team Trades
The sideways week.
There was not a lot of excitement overall last week, but the end result was not bad. The market had to deal with some negative outlooks from some big names and a lack of convincing economic news, and it still was able to come out on the upside. More than that, each of the major indexes continued to hold the line and hammer out some support at the lows, potentially setting in another floor from which to move higher. They are by no means in great looking patterns, but they are also showing us some positive signs that once they get a positive catalyst, they are going to move higher.
Looking for a catalyst.
They had plenty of reasons to sell, the most obvious of which were earnings warnings outlooks from big names such as IBM, MSFT, and NT. IBM has a lot of overseas exposure and the stronger dollar does not help it. After giving the market a major boost two Thursdays back, MSFT said Q3 would be light though it affirmed the year. That did not sit well with investors Friday, and that was the main cause of the negative closes on the three majors.
Economic news had some black spots as well that did not help any bulls. First Call has been out saying how Q3 warnings were at a record pace and that analyst estimates were going to have to come way down for the rest of the year. That implies no economic recovery as fast as previously thought. Then the Philly Fed index came out at -13 and change, much worse than the expected -2.9. A very volatile indicator, but it was well off pace and countered the Chicago PMI, previous Philly PMI, and the overall NAPM that was improving. That had a lot doubting the viability of an economic recovery. Then Greenspan came out and basically shrugged his shoulders as to when a recovery might really take hold, and that is not what investors wanted to hear. After enduring a year and a half of jawboning and moaning about the economy, rate hikes that tanked the market and the economy, and 6.5 months of more intervention (at least on the positive side this time), investors wanted to hear a bit more.
These factors kept pressure on the market, but they did not overcome the market. Each time it sold down, it came back. Wednesday when the indexes sold down on stronger, above average volume on the heels of the IBM news, it did not look good. The market had just confirmed the prior Wednesday's reversal day the day before, and then it sold off with even more vigor. Well, Thursday, the market came right back on even stronger volume. Friday it shook off the MSFT news, and even though it closed negative on the session, no major damage was done and they all would have closed positive or very close to that but for MSFT's losses. Thus, overall, the market was holding up despite the continued warnings from big names. That keeps the market in the hunt for something to drive it higher.
Why hold up at all?
Well, despite some of the warnings, there are also many affirmations of earnings and some forward guidance is firming up. EBAY continues to make money in any kind of economy, RFMD is looking at 10% sequential growth, SUNW does not see things as bleak moving forward, DELL will meet its numbers and is growing market share despite a 2% drop in global computer sales, and several smaller semiconductors see things shaping up for the last part of the year (BRCM, ELNT, et al). It is not overpowering great news, but it is the kind of news you get when an economy that has taken a plunge in GDP growth from 6% to flat in a three quarter timeframe.
Speaking of economic news, while it does continue to come in mixed, there continue to be signs of a turn being made. The Philly Fed was down on Thursday, but the Leading Economic Indicators were up for the third month straight, jobless claims were down again making it several more weeks down versus up of late, housing starts were up sharply, and the Economic Cycle Research Institute had another improving report out Friday. Even the Philly Fed had a very positive silver lining that we believe overshadows the overall report: the new orders index was much higher. It was still negative, but at -5.7, that is much better than the -30 readings earlier in the year, and it continues the move toward the positive side of the ledger. Once orders turn, the whole dynamic turns, and the trend is definitely up.
It is an improving economic outlook that historically leads to market rises. The continued signs of improvement, despite much of the gloom being spread around on a daily basis, keeps the market acting in a positive manner, i.e., decent price/volume action and stocks that continue to break to the upside out of good bases. It is no mystery why the stocks doing so are those that tend to do the best when an economic recovery is finding its footing. It is no surge higher and higher, but in coming out of a bear market of this length it is always a matter of moving higher and then filling in after the move before the next leg. Then we will have that catalyst that sends things decisively higher.
Look at the A/D line and the refusal to sell back hard. The A/D line and the indexes are moving laterally, refusing to give in after round and round of bad news. Something is at work because the market had more than enough reason to sell last week if the mood was to dump stocks. It held on, and that is a positive in building that next floor to move off of.
THE MARKET
The Dow ended the week higher while the Nasdaq and S&P 500 ended lower. No index moved much during the week, however, leading some disheartened. Again, it was more of the fact that the indexes avoided a big selloff and continued to build something of a floor above the recent levels where they tested their move up from the year lows. The Nasdaq is still in its most recent downtrend that started May while the Dow and the S&P 500 have 'broken' theirs. It was not a break that reversed the trend, however, but more of a lateral move that took then beyond the downtrend. While unspectacular, these breaks can be just as solid as the index moves laterally, builds a foundation, and then moves up when it gets the catalyst it has been awaiting.
This kind of action gets some disheartened. They want to see everything racing up. that is not going to happen this time around for a few reasons. First, this is the longest bear market we have had in a while, and it takes time to recover. Second, the consumer has remained strong throughout, so while that has kept the economy afloat and will play a continuing roll in the recovery, it won't lead to an explosion of pent up demand that usually occurs after consumers have stopped buying for several months.
Still, this is very positive action. The indexes are building that floor we have been talking about, and even if the overall gains are not spectacular, the action is positive and the breakouts we see from several sectors continue to occur and move higher. Some will run, pullback and look threatening, but then recover. Much the same as the market, but the performance is much better than the overall market.
Overall market stats:
VIX: 24.97; -1.50. Volatility on the S&P continues to fall, and this level is leaning toward bearishness. But, as we have said in the past, you need to see the relationship between the index and volatility set up that inverse relationship. Right now that is not happening as the two lines are meandering back and forth across each other without that strong inverse relationship.
VXN: 53.64; -0.95. Much as with the VIX, the VXN and Nasdaq are moving close to each other, compressed together and not setting up that inverse relationship where one is high and the other is low. That does not give us anything to go by. From the looks of it, low volatility at this point is acting much like low volume on a consolidation: a good thing.
Put/Call ratio (CBOE): 0.82; +0.06. On all options exchanges the put/call ratio climbed even further to 0.87. This shows very high levels of pessimism among option players as a whole, and as with any other sentiment indicator, when it reaches extremes it is usually time for a change of direction. It is still not at absolute extremes (closes over 1.0), but on a day when there was not a lot of carnage in the market, the fact that the put activity is so high is bullish. We want to keep that continued level of skepticism as that keeps some money on the sidelines and does not use up all of the upside ammunition in one burst of buying.
NASDAQ:
Finished lower on Friday, but after gapping much lower and testing close to 2000 again, the index looked pretty decent on the close as it rallied back and the selling was on lighter volume.
Stats: Down 17.22 points (-0.8%) to close at 2029.37.
Volume: 1.641 billion shares (-13.6%). Volume fell back below average on the selling, something good on a down day, but not unexpected on a Friday in the summertime. Still this continues the overall good price/volume action (but for Wednesday's selling) seen of late as the Nasdaq tries to work its way laterally for the next move higher. Down volume led the way with 925 million shares to 624 million to the upside.
A/D and Hi/Lo: Declining issues led, but at 1.11 to 1, not convincingly (advancers led Thursday 1.41 to 1). New highs dropped to 116 (-58) as new lows fell to 61 (-35). The selling was not virulent.
The Chart: http://www.investmenthouse.com/cd/$compq.html
Again the chart is not one of great exuberance. It is still fighting the downtrend that began in May after the nice jump off of the low. It has corrected back and is now trying to find legs for a move higher. It is overcoming a lot of bad tech earnings and prognostications as it hangs on. Three times it tested 2000 last week (2006.80, 2003.95, and 2009.56 on Friday), but bounced up off of that level each time. Of the three major indexes, it is the most ambiguous, but it also has the heaviest weight to drag around in the form of recovering tech stocks and the cellar-dwelling telecom and networking sectors. 2000 would be a good place to hold, but 1950 and above is okay. It still needs to take out 2100 with some authority for a more sustained upside move, but it is trying to build a lateral base right now in order to do so.
Dow/NYSE: Was down for the session, but was able to rally back to close above the 200 day MVA on a down session, something it has not done in a while. Lower volume and a bounce back to close in the top of the intraday range is a good sign.
Stats: Down 33.35 points (-0.3%) to cloase at 10,576.65.
NYSE Volume: 1.171 billion shares (-13.3%). Volume remained slightly above average on the selling, but backed off substantially on the session. We were not too worried about Wednesday's distribution day as the index finished in the upper portion of its intraday range; in other words, buyers came back in when the index hit its low. Friday something similar happened, though not as dramatic. Down volume led up volume 632 million to 505 million shares.
A/D and Hi/Lo: NYSE advancing issues actually maintained their lead Friday at 1.03 to 1 (1.4 to 1 Thursday), not bad for a down session. New highs fell to 77 as new lows rose to 61 (+17).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow continues to move laterally and slightly higher as it fights to move back over near term resistance at 10,600 (the 200 day MVA is at 10,5770.70; the 50 day MVA is at 10,613.53) before it can tackle more formidable resistance at 10,750. As noted earlier, it has moved laterally and slightly higher on decent price/volume action. This type of action is in most cases positive, base-building action that leads to upside breakouts. As long as we get improving economic news and no major earnings shocks or world events, we continue to anticipate an upside breakout to test 10,750 and beyond on the Dow.
S&P 500: The big cap index is showing similar action to the Dow: lateral movement up off the recent test of the March and April lows that has taken the index beyond the confines of the recent downtrend that started in May, but still just below the longer term down trendline that connects the September 2000 and February 2001 tops (it hit this downtrend Friday on the high at 1215.60). It is ready to move out of the bigger downtrend with just more lateral base building action. Meanwhile, price/volume action overall remains positive. The big caps have a lot of earnings worries to deal with still, but for now it appears to be gaining strength in the face of the bad news. Friday showed a star doji with the open and close prices just 0.24 points apart. The index looks ready to spring out of this lateral consolidation soon, but it needs a catalyst. Earnings are hard pressed to provide the spark, but there could be a surprise upside for the FUTURE lurking out there that could provide the impetus. Other than that, it is the economy that will make the difference. It still has to deal with the 50 day MVA at 1226.55 and then the general resistance at 1240 to 1250, but it is bracing for that move.
Stats: Down 4.17 points (-0.3%) to close at 1210.85. Not bad with the MSFT story.
Volume: NYSE volume fell on the selling to 1.171 billion shares (-13.3%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
Later in the week we get some pretty big economic reports, including existing home sales, new home sales, durable goods orders, Michigan sentiment, and preliminary Q2 GDP. Existing home sales softened a bit in many areas, particularly the south impacted by tropical storm Allison, and believe it or not, that will impact the national number. Houston existing sales were down 2%, but the number is still a very strong number. That is what we are going to see; a bit lower, but still strong. GDP will be basically flat to slightly positive. Durable goods orders are very volatile, and after two months of solid gains, we may see it pullback for this month. Continuing strong new home sales, however, will help keep the number at good levels.
Earnings will not slack off any with T, CHKP, KG, ROOM and others reporting earnings Monday before the open, TXN at 3:30 ET, and AMZN, AXP, LPNT after the close. Tuesday we see PSFT and QLGC after the close with DGX before the open. It will be another busy week with an eye on the guidance for Q3 and Q4.
This market is a place for those who are patient. That is one of the MOST important traits of any good investor or trader. Patience to let the pattern develop and the breakout occur before getting in, and patience to let the strong stocks work for you. That does not mean we sit by and let breakouts slip away from us. We are still selling calls after the first surge of the breakout on those stocks we are holding longer term (selling on the others that are bounce plays and perhaps ascending wedge breakouts when our targets are hit and the stock starts to top) and selling altogether if our stop points are hit. We just cannot let a play that does not work out as we wanted turn into a large loss.
We also have to watch for those stocks that race ahead and then reverse on high volume. we are not out of the woods yet by any means, and stocks are still subject to some sudden reversals. One example that we are watching closely is BZH. It has been on one of the reports and made a nice breakout last week, racing ahead for two sessions. Friday it gapped higher and then sold on higher volume. That is always something to watch out for; why all of the sudden selling? Earnings are early this week, and after a good move it could simply be that some are taking profits ahead of the numbers. Higher volume, however, shows big sellers. A prudent time to sell at least part of a position. Earnings should be stellar and we may get a split announcement, so we will be looking at some positions before the actual numbers are announced. Still, we have to be careful with existing positions to preserve the gains or be ready to take the risk.
So patience, let the stock make the move we are looking for, move in. The key is to let the stock tell you to buy and to sell regardless what the pundits are saying. We see improvement in the economy and the market is trying to firm up to follow that. We believe it hit bottom back in March and April and the economy is following it up as it historically does. With that in mind, we take positions when they show themselves.
Support and Resistance Levels
Nasdaq: Closed at 2029.37.
Resistance: 2100 is mild resistance. Then 2160 to 2200. Then 2250.
Support: Still trying to hold at 2000. After that, 1970, roughly. The low is 1619.58.
S&P 500: Closed at 1210.85.
Resistance: 1226.55 is the 50 day MVA. Then 1240 to 1250.
Support: 1200. 1150 after that. The low is 1081.19.
Dow: Closed at 10,576.65.
Resistance: The 50 day MVA at 10,613.53. After that the next real test is 10,750. After that, 11,000.
Support: 10,400, then 10,200, and then 10,000 to 9992, the middle of its double bottom pattern.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
7-25-01
Existing Home Sales, June (10:00): 5.37M versus 5.37M prior.
7-26-01
Initial Claims, 7/21 (8:30):
Employment Cost Index, Q2, (8:30): 1.1% versus 1.1% prior.
Durable Orders, June (8:30): 2.9% versus 2.9% prior.
Help-wanted index, June (10:00): 60 versus 60 prior.
7-27-01
GDP-Adv., Q2 (8:30): 1.2% versus 1.2% prior.
Chain Deflator-Adv., Q2 (8:30): 3.2% versus 3.2% prior.
Mich. Sentiment-Rev., July (9:45): 93.7 versus 93.7 prior.
New Home Sales, June (10:00): 928K versus 928K prior.
End Part 1 of 2
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world stock market
us stock market
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