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us stock market, trade stock
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7/23/01 Investment House Daily
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SUMMARY:
- Monday weakness and another flip flop.
- More earnings fail to inspire on a summer Monday.
- Indexes sell off late on lack of an upside catalyst.
- Buying on the dips?
- Book to bill ratio for semiconductors won't provide a catalyst.
- Subscriber Questions
- Team Trades
Weak start to the week.
In the morning futures were up and things looked good. But as we know, looks can be deceiving in this sideways market, and it did not take long before the morning hope faded to just another day of selling. Early morning earnings did nothing to inspire buying, and without buyers, the sellers led the session.
Volume was not high, and the selling was very mild until the last hour when the pre-earnings sellers started their usual practice of selling before earnings announcements (a mere 1600 this week with T, AMZN, and TXN being the heavyweights out after hours). If there was buying interest at all, it could have easily offset the selling pressure that was again on low volume. Buyers were not interested, however, and their absence made it easy for the sellers to push the market to its lows on the close.
Again this was yet another example of the up one day, down the next action the indexes have shown as they try to establish a floor off of which to rise after testing the move off of the March and April bottoms. Today did not instill a lot of enthusiasm that the indexes would build that floor, but the volume was again incredibly low on the selling. As of yet, the buyers have been more numerous on the days of buying, and that has kept the indexes from really plunging lower. Now the Nasdaq is no picture of health with its lower and lower highs since May, but it is not as of yet plunging lower. It is going to face a major test perhaps at the 1950 level (roughly) if it cannot rally again in this range, but it has not shown the violent selling that would mark a real plunge ahead.
The Dow and S&P 500 had similar sessions, selling late and closing on session lows, but also on lower, below average volume. The lower volume does not make the losses on the session any less painful, but it does show us that the snap-backs we have been seeing will most likely continue to occur. The indexes also have some tests coming if they cannot find the buyers to support them with some accumulation on these pullbacks, they could have some problems. Thus far, however, they have been able to find the buyers to accumulate on these lower volume pullbacks.
Buying on the dips? Are you serious?
Everyone is focused on the tech sector. Oh sure, there is some casual mention of other sectors being hurt by the economic downturn, but the real juicy stories come from the tech sector as there is such a huge disparity between Q2 earnings expectations and prior earnings. It is more fun to say 'but look at the huge decrease in earnings from a year ago' than to look at a decent gain in earnings on a less sexy stock.
In all of the hubbub, however, one thing is being missed. Specifically, those stocks that are performing well relative to the market, i.e., education, builders, drugs, health services, regional banks, asset management, and niche retailers, are pulling back of just consolidating in their patterns a bit more on the selling days and then rumbling higher on the up sessions that have occurred after the down days.
This 'buying on the dips' has dropped out of favor in the market overall and in investors psyche after the scorching in the tech sector when things came to an end. The one thing that is driving the sectors listed above: the idea that the economy will recover in the future based on the 275 points (and the Fed looks to round it off to a round 300 in August), a tax cut, and signs of some life in companies reporting Q2 earnings. As long as that remains the underlying theme, we will see accumulation in these sectors in anticipation of the economic recovery.
Will it last forever? Of course not as we saw with the Fed. But for now, these stocks are still pulling back on lower volume and then moving back up. Friday we saw some builders fall on rising volume, but today that selling was tempered by very low volume as they held above near term support levels. They are slowing the descent after the initial selling; that is a good sign that near term support will hold and give us another buying point when the stocks bounce up off of that support on rising volume. With these stocks, buying on the pullbacks to support has provided excellent entry points; we have been buying on those bounces back up as well as the breaks over resistance. As long as the stocks sell back on overall lower volume, the pullback is orderly, and the stocks then start back up at support levels (10, 18 or 50 day MVA; prior price highs or consolidation levels) on good volume, we are happy with the action and are comfortable in taking some more positions. We may ride them long term or we may (as we have done as well of late) sell part of the position when it starts to peter out on the move higher; we bank some profit and we keep our longer term prospects alive as well.
THE MARKET
Overall market stats:
VIX: 26.13; +1.16. Back up on some selling, but as we noted over the weekend, the VIX is not showing us any real forecasting guidance right now as the VIX and the S&P are just hugging each other.
VXN: 54.72; +1.08. Mild gain on the selling just as Friday's loss was mild on the session gains. Still not showing us any divergences or inverse pattern right now as the Nasdaq tries to move laterally.
Put/Call ratio (CBOE): 0.52 (-0.30) reported on the CBOE seems a bit light for the selling that went on, but it comes after options expiration last Friday, so it should be somewhat lower.
NASDAQ:
The kind of day that gets investors depressed, but when looking at the Nasdaq you are looking primarily at large cap techs, and there is not a lot of good things going on right now for large cap tech. We continue to focus on those other sectors that are still performing well for now.
Stats: Down 40.81 points (-2.0%) to close at 1988.56.
Volume: 1.351 billion shares (-17.6%). Below average volume on a selling day. Down volume led 877 million to 462 million shares. Rather moderate selling, but we have to see how buyers respond as the index approaches its recent low.
A/D and Hi/Lo: Declining issues stretched the lead to 1.54 to 1 (1.11 to 1 Friday). Not heavy, but increasing in intensity. New highs rose to 125 (+9) as new lows jumped to 107 (+46).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The big names on the Nasdaq did not perform worth a darn today even with a CSCO upgrade before the open. As the big names faltered, the index was dragged down with them in a bearish intraday pattern of jumping higher early, pulling back to about 20 points down for the majority of the session, and then getting sold off in the last hour. This is the pattern: it is either up with a rally at the close, or it is down with selling at the close. Thus far the up volume has outpaced down volume for the most part, and that has kept the sideways accumulation pattern working and kept the index in the upper half of the gains since April. It could be heading for a test of the recent low at 1934. We don't want to see it down that far, and we may just see it turn back up before then. We still believe we have seen the lows for the year; the question now is will the index continue this building action we have seen. Despite the 2% drop today, the lower volume so far is at least a positive. Mondays in the summer a typically low volume, however, so we need to keep an eye on volume and on the recent low.
Dow/NYSE: Could not crack the 50 day MVA or hold over the 200 day MVA as the index just sold down again on the back of MSFT, MMM, GE and company.
Stats: Down 152.23 points (-1.4%) to close at 10,424.42.
NYSE Volume: 973 million shares (-17%). Volume peeled way back again on selling, falling below average and providing the lone silver lining in the action today. 703 million downside shares to just 264 million shares to the upside.
A/D and Hi/Lo: NYSE declining issues overtook advancers today at 1.62 to 1 (advancers led 1.03 to 1 Friday). New highs rose to 91 (+14) as new lows fell to 50 (-11).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow opened above its 200 day MVA (10,575.90), ran a bit higher to 10,595.60, and then started to sell. Note that the 10,600 level held it back yet again on the high, and the market then showed the bearish action is has shown on just about each down session it has had of late. For the most part, if it is up, it shows bullish action; if it is down, it shows bearish action. Today's action took the index down close to a potential support level at 10,400 (it held at 10,394.72 on June 26 and several times before that). The lower volume suggests the selling may end, but with a typical light summer Monday trade, we have to wait and see how things turn out. We don't want to call it too early, and today's strong move down may continue with more momentum, but there is the potential here for a reverse head and shoulders at the 10,400 level. We will see. It is important, however, for the index to hold in the 10,200 range if it does try to head lower from here.
S&P 500: The big cap action mirrored that of the Dow and the Nasdaq, heading for the session lows in the last hour of trade. NYSE volume dropped back below average on the selling, a good sign, but the index is not far away from that recent low at 1168.46 as it tested the move up off of the March and April lows. The index does not have a lot of room to work here, and it has been unable to make a new high of late. That is always a bearish sign, and after moving laterally we would obviously want an upside resolution. But, there is an old thing that is OFTEN forgotten in the gloom of a selling market: the low volume shakeout. What happens is a stock or index consolidates showing decent price/volume action, and then drops on lower volume. Unnerved, the last sellers hoping for the next rally give up. However, there were not many sellers left (hence the low volume). If that was the last of the sellers, the buyers then come back in. We will see. At this point we are not anticipating a sharp jump, just a continuation of the move we have seen where the S&P sells back and then buyers come in and accumulate shares.
Stats: Down 19.61 points (-1.6%) to close at 1191.03.
Volume: NYSE volume fell once again on the selling to 973 million shares (-17%). We will see if this lower volume selling, higher volume buying continues after Monday.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
No real economic news other than Mr. Greenspan goes to the hill again to spread less than good cheer. Don't expect anything more from him; we can always hope he will try to 'clarify' his remarks last week where he basically shrugged his shoulders about the prospects of economic recovery, but as we have seen over this year, hope gets you nowhere. Hard numbers are the key, and tomorrow there are not any economic numbers though we will see the earnings numbers continue to issue. We need some positive upside catalysts, but we also need to realize that those will most likely come from those sectors that are already doing well (e.g., DGX reports tomorrow).
What we are looking for is more of a carryover from today's selling. We would prefer to see the indexes sell lower than try to rally out of the gates. There is more chance of a solid build higher off of that type of action as the last sellers are flushed out. Futures are up ever so slightly, but that can change easily. We saw some better news from the likes of CA, but the weight of TXN's statement that the 'downturn is not over.' Of course, the statement that came before that was 'there are some signs of stabilization.' The part picked up on was the latter of course.
So the outlook in the morning looks negative over 12 hours away. Will there by an upside catalyst that turns things back up in the recent trading range? It may not be an overt news story; it may just be the buyers coming back in at a level they have bought two times previously and pushed the indexes back up into their recent ranges. That is what happens when the institutions are accumulating shares at a certain level. There has not been any great news, but there has not been any cataclysmic news either. What we need to see if the economic environment continuing to improve, and that news won't come until later in the week unless Greenspan gives us a surprise tomorrow.
That leaves us looking at a lot of stocks that have pulled back today or are still in their consolidations (e.g., AEOS, FITB, IFIN, MRCY) that we would like to get in on when they resume their moves higher. Again, we think it is just a matter of the accumulation starting up again. We are taking long term and short term positions on these stocks, i.e., selling part of our position when it looks as if it is topping (closes on a doji after a solid run, or closes well off of its high after a strong run) and riding the rest back down on a test of near term support in the form of the 10 or 18 day MVA.
We can also sell covered calls on the positions when they show the same topping signs. We like to sell next expiration (August for now) in the money calls as we can get the fastest moves from those options. When the stock hits our target support level or our target profit level, we buy the calls back and wait for the next move up off of support. We love that method of making cash on our holdings that we feel are going to continue to move higher after each inevitable test of support.
Support and Resistance Levels
Nasdaq: Closed at 1988.56.
Resistance: 2100 is mild resistance. Then 2160 to 2200. Then 2250.
Support: Closed below 2000 today on lower volume. 1970 range is next, but recent low is 1934.67. The low is 1619.58.
S&P 500: Closed at 1191.03.
Resistance: 1225.15 is the 50 day MVA. Then 1240 to 1250.
Support: 1200 did not hold today. Recent low is 1168.46. We want it to hold above the 1150 level on any test. The low is 1081.19.
Dow: Closed at 10424.42.
Resistance: The 50 day MVA at 10606.12 held again today. 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.
SUBSCRIBER QUESTIONS
Q: If a stock is not acting right, . . .should you sell before it hits the Stop? Otherwise you can lose $4000 on each trade that goes south to the stop or below the stop. This market is so challenging right now, that you must try to minimize losses. Thanks, in advance for your help.
A: The market is challenging and the name of the game is to preserve gains and to minimize losses as you pointed out. Indeed, there is no reason to stay in a position until it hits the stop if the play just does not work out. As long as the stock continues the pattern that we entered into the play for, we tend to give it a little rope if it is in a good sector; it can still perform for us if the price/volume action remains solid and it looks good otherwise. If it is questionable and you cannot answer 'yes' to the question 'would I buy this stock right here?', then it is time to get out regardless of whether or not your pre-set stop loss has been hit.
TEAM TRADES
GMCR: This is a smaller stock that trades on less than 100,000 daily average volume, but it had a good pattern (a flat base that had ascending wedge-like character), reflects a popular product and is in a good sector. Some of the Stock Split Reports subscribers may remember the incredible moves GMCR gave us back in November, December, and January when it was heading into its split. Well, it is doing it again. It was covered on The Daily last week, and was noted in the weekend report. The stock opened Monday in the tail of the pattern, after three days of dojis on low but rising volume. We took notice at 11:25CT when the buy point of 36.30 was hit. Volume had well exceeded the average minimum breakout volume (88,000), so we had a breakout going. We checked out the bid and ask on stock since there are no options available (36.35 by 36.36), but GMCR immediately started to pull back after hitting a high of 37.47, and dropped back for a test of 36.02 by 11:48. It bounced back up on volume in the range of 430,000, and that was our chance to get in at a good buy point. Bid and ask were at 36.06 by 36.19 and figuring it was going to bounce put in an order at the ask. That was still below the buy point, at least. Got the fill at about a minute later. By 12:18 things were leveling out; in fact, a descending wedge was forming and that was disconcerting, but the stock resolved that after holding above its 5 minute MVA, testing that support on a few little bounces then surging up just before 1:00. As it turned out, GMCR ran to a high of 37.65, then pulled back to close the day at 37.30. On the huge volume, we are looking for a continued breakout.
End Part 1 of 2
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