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world stock market, us stock market
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7/25/01 Investment House Daily
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SUMMARY:
- Indexes flirt with recent lows and then rebound on higher volume.
- Just about when investors were throwing in the towel today, the market turned.
- Rebound yes, but how strong?
- A sense that things are getting better, but no catalyst yet.
- Subscriber Questions
- Team Trades
Dancing on the edge again.
For the second session the major indexes (well, the Dow was not really in jeopardy today) flirted with their recent lows, the last real point of hope for many market watchers. We have to admit that those levels are important to us as well as their failure means a deeper test of the March and April lows. After selling down on rising volume Tuesday, the indexes did what they have done subsequent to each such distribution day in the past two weeks (2 distribution days): they rose on higher volume.
This continues to be an important aspect of the market even as it continues in its recent downtrend: though it has shown two distribution days in the past ten sessions, the market overall has shown good price/volume action, i.e., rising on volume that is higher than the volume on the days that is sells off. That shows us that despite the recent downtrend, investors, including institutions, are accumulating stocks when they have these pullbacks. Why the accumulation? Because of a solid if not verbalized belief that the U.S. economy is going to recover sooner than later as a result of the fiscal and monetary policy actions that have been taken and are being taken.
Indeed, we are seeing a divergence just recently in opinions. We sense somewhat of a weakening of overall confidence in the country over the past 2 to 3 weeks based on the earnings warnings, the actual earnings that are very downbeat or ambiguous about the future, and the downtrend in the market on this test of the prior lows. On the other hand, there is that belief that the economy is going to recover either this year or early next year. The former has put pressure on stocks in the short term. The latter keeps institutions accumulating shares when we have these tests of the lows. When the selling days are immediately followed by stronger volume up days, even if not powerful surges, we have to take note that there is accumulation ongoing.
Sentiment indicates a market rebound.
We always look at sentiment gauges as a measure of just about when we are getting ready for a turn up after some selling. There is the put/call ratio that we noted last night jumped up once again on Tuesday's selling. There is also that internal sentiment that if you take the time to analyze and quantify it, you can really get a handle on what is going on.
Today we were all watching the Nasdaq trade closer and closer to the July intraday low as the morning wore on. The anxiety level was getting higher; you could feel it. I was watching many stocks come ever so close to stop loss points, looking as if they were beaten. It was as if you could feel the anxiety of the entire market as the indexes jumped up and down around these levels. Stocks were falling toward important levels, the indexes were falling toward critical levels, and you could feel your whole body tighten up.
At that point, realizing that I was getting caught up in the fear, I told the rest of the staff to get ready for some type of bounce. Nothing specific, just the same feeling that occurred back on 7-11 when the indexes slipped to their lows since the rally off of the bottom. It was not a revelation, just some self examination so to speak. The Nasdaq then went on to form a small reverse head and shoulders and moved higher. Not a big day, but in our book a pretty important day.
What do we do with this now? Well, there were a few stocks we were taking positions on with this move, but not a lot. We wished we had taken more in retrospect. Our intention: accumulate some good stocks that have pulled back or that are breaking out just as the institutions are doing. Our goal: ride them up 2 to 3 days, take some profits on some, and let the rest ride. That is exactly what we have been doing to maintain a cash flow and still position ourselves longer term for the future. Several stocks tested support levels, and they are ready to buy or add to positions.
How strong a move?
As we said, not a big move, but important. The sellers were kept at bay another day as buyers came onto the floor. The higher volume shows more buyers were in the market today than sellers Tuesday. The move, however, was also assisted by some short covering as the indexes did not roll over and drop below those support levels. That had the shorts closing some positions, and that helped drive the indexes higher in the afternoon.
Thus, it was not a really powerful move. Still, this is the pattern we have seen: selling, a reversal day, then a stronger rally that ultimately gives way to some more profit taking or consolidating. We feel at some point the pattern will be broken, but in a positive way. With the improving economy, the fact that the market will not roll over but is buoyed by these periodic accumulation rallies underscores our belief that there will be an important, solid, upside move as the economic numbers continue to improve.
Economy getting better, but where is the catalyst?
As noted, there is that sense that the economy is laying the groundwork for recovery (to us it is more than just a feeling as we look at improving numbers), but there has not been that catalyst to set things in motion to break this short term downtrend and start the next serious leg up. Earnings have as yet been no catalyst. Soothing words from ORCL, MSFT, RFMD, PSFT, and others has had no staying power as investors cannot get over how bad things were in Q2 and the corporate lack of cajones to say things are starting to pick up (we have seen some such statements from software companies and the smaller semiconductors, but the big guys have been very gun shy of joining them).
We are thinking it may be 2 or 3 economic reports that all of the sudden show some expansion (not much, but some) in a few areas will solidify that sense things are getting economically better. Then some of these company prognostications will come out better, and they will suddenly be viewed as more credible.
That is the real problem now. There is the feeling the economy is going to get better, but the question is when. Nothing speaks as well as actual events, and improving economic reports coupled with some continued improving guidance will make the difference. We definitely feel this will happen this summer.
THE ECONOMY
Speaking of the economy, existing home sales remain strong. They fell 0.6% (5.33 million annualized units) in June, but that was still higher than the 5.30 million expected. A very solid number.
Also, mortgage applications jumped higher while the purchase index jumped 4.7% and refinancings shot up 14%. Low mortgage rates, i.e., low interest rates, i.e., low inflation are so important as we have learned the past 20 years.
OPEC cuts production by 1 million barrels per day in a move to shore up prices. Remember back in the late summer 2000 when we were saying that OPEC's actions in cutting production were just going to backfire on it if it did not back down quickly? Well, higher prices really slammed the brakes on the U.S. economy along with the rate hikes, and OPEC did not react fast enough. Today's action was foolish, but with the rest of the world economies slowing so much, today's uptick in oil prices most likely will not last.
THE MARKET
Overall market stats:
VIX: 26.70; -0.93. Mid range, and not showing us much to indicate a move either way right now.
VXN: 55.19; -2.43. Dropped on the late gains, but as with the VIX, it is not setting up that divergence with the index that would give us signals of direction.
Put/Call ratio (CBOE): 0.81; +0.06. Note that the put activity rose even on gains in the overall indexes. Not a lot of believers out there, though some of the action was short covering, or selling puts that were bought by those shorting the market. Still, the overall high number shows that fear in the market remains high.
NASDAQ:
Danced with the demons and then rallied as it followed the Dow and S&P higher. It lost the least on Tuesday, and it gained the least today. The Nasdaq is definitely struggling the most among the big three indexes.
Stats: Up 25.08 points (+1.3%) to close at 1984.32.
Volume: 1.674 billion shares (+4.7%). Not a powerful day as up volume slipped in at 884 million shares versus 779 million on the downside. But, it was a selling day before the buyers stepped in, so the positive volume finish, even if a narrow margin, is good. Overall higher volume on an up day following a selling session on rising volume is also a good sign as it indicates more buyers than sellers in the overall market.
A/D and Hi/Lo: Advancing issues took back the lead at 1.08 to 1 (declining issues led 1.85 to 1 Tuesday). Not powerful, but a reversal off of the earlier drubbing. New highs still fell to 79 (-5) as new lows rose to 157 (+4).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq tested its recent low at 1934 on today's low (1942.58) and then rallied from there. We wanted to see this level hold, but we have to also recognize that the index is still in a downtrend from the May high, and it has yet to overcome that downtrend. On the positive side, volume was again up on the session, continuing the trend of positive price/volume action. So, there are positives and negatives; the Nasdaq is trying to consolidate for a move up, but the chart looks ugly. Again we have to look at the price/volume action which shows accumulation, and we believe that will win out.
Dow/NYSE: The Dow was the leader today as it traded in the green all session. After lunch it led the whole market higher with solid earnings from SBC.
Stats: Up 164.55 points (+1.6%) as it went about trying to recoup the over 300 points in losses from the two prior sessions. Closed at 10,405.67.
NYSE Volume: 1.255 billion shares (+4.6%). Unlike the Nasdaq, NYSE up volume was way ahead of down volume at 924 million to 318 million shares. Above average, rising volume on a gain in the market. A good recovery from Tuesday's selling.
A/D and Hi/Lo: NYSE advancing issues were back in the lead at 1.62 to 1 (declining issues led 2.2 to 1 Tuesday. New highs climbed to 71 (+3) as new lows fell to 56 (-16).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow jumped right back up today as it did not drop back to revisit 10,200 as it did Tuesday. It maintained positive territory and led the other indexes higher. It is still struggling below its 200 and 50 day MVA (10,572.53 and 10,584.50) that it fell through last Friday, so there is a long way to go. Still the index held where it had to for now, and it moved higher once again on stronger volume. Good action for now, but we will need to see it over the moving averages and break that downtrend for good.
S&P 500: As on Tuesday, the big cap index matched the move of the Dow, this time to the upside on another rise in NYSE volume. Immediately following a distribution day, the S&P turned back up on even stronger, above average volume. As with the other two indexes, it is still in its downtrend, but it too was able to turn up where it needed to, and it did it on stronger volume. The tests will be at 1200 and again at the 50 day MVA (1221.78), but that is nothing unusual.
Stats: Up 18.84 points (+1.6%) to close at 1190.49. Nice recovery.
Volume: NYSE volume was higher and above average at 1.255 billion shares (+4.6%). Up volume was solid as the buyers were out.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Some good earnings from Halliburton (HAL) and increased guidance for Q3, GLW's decent earnings (still weak), and EDS and its affirmed guidance for Q3 and the year had things moderately positive after the close. The rally into the close was also a positive. Some wanted more volume (and, of course, we would not have minded that), but in a summer session, we got what we wanted with rising, above average volume on a buying day.
Momentum is to the upside for now, and if we do not get any bad news, we feel the indexes will do their usual, i.e., give us a bounce higher for a couple more sessions now that the indexes tested their recent lows and reversed again. Important numbers before the open: jobless claims for the week and durable goods orders. The bigger of the two is durable goods as that shows buying of bigger ticket items. It is expected to fall, but with the housing purchases that seems a bit negative to us. One thing to remember: the indicators that are lagging seem to be the negative ones, while the indicators that are improving are the leading ones. If you have a mixed picture, that is the way you want it.
What are we going to do? As we said earlier, we are going to jump on these moves higher off of support and try to catch a couple of sessions of upside gains and take some profits. We may hold onto some for longer term, but that will depend on how strong the stocks are moving on Friday. This has been one of the toughest weeks in quite a while, and that is one reason we like to sell some positions when they put in 2 to 3 days of good moves, selling maybe half the position and then hanging onto the rest for the longer term appreciation as the economy continues to improve. We see many stocks that have hit support and started back up. There are some add-to's on the 50 day MVA, and others started rebounding today off of shorter term support. Those can give us some very nice gains the rest of the week. With this market, that is our focus right now.
Support and Resistance Levels
Nasdaq: Closed at 1984.32.
Resistance: 2100 is mild resistance. Then 2160 to 2200. Then 2250.
Support: The recent low at 1934.67 is holding for now; it is not major, major support, but it has turned the market twice thus far. Now the index needs to put some distance between it and that level to give it real significance. The low is 1619.58.
S&P 500: Closed at 1190.49.
Resistance: 1200 is the immediate obstacle, and then the 50 day MVA (1221.78). After that, 1240 to 1250.
Support: 1165 to 1170 is trying to hold. As with the Nasdaq, it needs to put more distance between itself and that level to give it more significance. The low is 1081.19.
Dow: Closed at 10,405.67.
Resistance: The 200 and 50 day MVA are at 10,572.53 and 10,584.50, respectively. After that the next real test is 10,750. After that, 11,000.
Support: 10,200 is proving to be fairly solid. 10,120.89 is the recent July low. After that there is 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): 5.33M actual versus 5.30 expected and 5.36M prior (revised from 5.37M).
7-26-01
Initial Claims, 7/21 (8:30): 404k expected versus 414k prior.
Employment Cost Index, Q2, (8:30): 1.0% expected versus 1.1% prior.
Durable Orders, June (8:30): -1.0% expected versus 3% prior.
Help-wanted index, June (10:00): 60 versus 60 prior.
7-27-01
GDP-Adv., Q2 (8:30): 0.9% expected versus 1.2% prior.
Chain Deflator-Adv., Q2 (8:30): 2.4% expected versus 3.2% prior.
Mich. Sentiment-Rev., July (9:45): 93.7 versus 93.7 prior.
New Home Sales, June (10:00): 925K versus 928K prior.
TEAM TRADES
GGG is a manufacturing stock in an ascending wedge pattern, a pattern that formed after a cup with handle breakout. This is one of our favorite combinations of patterns and we expected a strong breakout. Volume didn't make it up to average until late in the day, when the buy point was hit at 2:54CT. The minimum breakout volume is 84,000 (average 62,000). Volume hadn't hit breakout levels, but we quickly looked at the options anyway, which were trading at 4.80 by 4.40. They just as quickly moved up to 5.00 at the ask; we put in an order at 4.80 just to see if we'd get a hit on a pullback; the move had been strong and the stock was likely to pull back briefly. It did just that, and the options pulled back to 4.80, but we weren't in time to get the hit before the final bell. We will see what GGG is doing in the morning, and try to get in on the breakout then. In retrospect, we should have put a personal alert in just below the buy point since it was so close to the end of the day; we would then have likely been able to spot the trend into breakout and been able to grab a position. Volume, however, was not quite up to breakout levels, so it's just as well, since we don't like to buy until our targets are reached. Sometimes it is tempting to depart from the plan. GGG closed at 33.82 on 78,000 shares.
End Part 1 of 2
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world stock market
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