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us stock market, trade stock
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7/28/01 Investment House Daily
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Investment House Daily Subscribers:
ALERT SERVICE. Get a tap on the shoulder when the stocks on the report make the moves we are looking for.
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Friday was a so-so day in the market from looking at the indexes, but our stocks were moving and we were sending out several alerts on the alert service for each newsletter. OPMR, SLVN, SMTC, MCHP, MIL, DV, RFMD, WFMI, CECO, and MIKE were all solid movers. We find them and then alert you to the move. Not bad.
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SUMMARY:
- No inspiration on Friday as the market marks time on lower volume.
- Good earnings outlook helps those companies who see something in the future.
- The news was in the economic numbers, but they too did not inspire any action.
- Rebate checks starting to hit the economy.
- Breakouts still coming, but we are sticking with taking profits when they are there.
- Team Trades
In this market you have to watch your profits and keep losses small.
Late last week we were discussing how the market would rally for two to three days and then sell. That keeps us looking to when we need to take some profits even on those stocks that are making solid breakouts. The reason: even stocks that break out on strong volume are subject to the selling that comes about as the market continues to battle in its trading range. Now we know that stocks often sell back to test the breakout point (pivot point) after it is made (about 50% do that), but as many are falling below the breakout point a few sessions or more after the big breakout move.
So, we are taking some profits when the move starts to stall out, e.g., a close well off the intraday high after a solid move higher the previous few sessions or a gap higher followed by immediate selling. We are doing several things when we do this. One, we just sell the position outright. Now on breakouts from ascending wedges or on bounces up off of support (particularly when investing with options), we are mostly selling out when the move slows. If we are holding stock positions (which is what we are trading a lot given the up and down market conditions) on stocks that breakout of strong patterns such as cup with handle, double bottom, flat base and the like, we are either selling part of the position after the initial breakout run before the test that may be coming, or we sell calls on the entire position with the intent to buy them back at a lower price if the test of the breakout is successful, i.e., the stock starts to run back up after holding above the breakout point. If it fails the test and falls back below the breakout, we enforce our stop loss rules and let the calls just continue to lose value until the stock shows signs of bouncing higher; then we close them out.
After two higher volume rally days, the market stalls. The end of the 2-day move?
The trade on Friday may indicate that Wednesday and Thursday's stronger moves higher on rising volume have run their course. The Nasdaq climbed up and touched its recent down trendline on its session high but could not break over that level. The S&P 500 touched its longer term trendline on its high as well. Both finished higher on the session, but volume was lighter. The Dow turned lower before it even tested its downtrend that started in May. We could very well see this last move turn lower.
Problem is, there are no higher highs being made as the indexes have bounced up off of the recent tests of the year lows. They rally 2 to 3 sessions and then the selling starts. It is not typically high volume selling, but the point losses are no less painful. While up days occur on higher volume indicating continued accumulation, if the indexes fall again toward the recent lows, it will be very hard for them to bounce yet again. We said last week that they needed to put some distance between themselves and those levels; if this move is already failing, another test is likely. If it gets that low, whether it bounces again is problematical.
Thus, while we continue to see continued signs of accumulation, there has not been that catalyst to send the market as a whole higher. Of course, we are not expecting a thousand point move on the Nasdaq in a month, but we do need to see the downtrend broken with continued buying strength. We continue to see individual earnings and guidance standouts. QCOM was the latest to join the ranks of ORCL, RFMD, MSFT, PSFT, BRCM, CY, NSM, etc., but the moves are more or less specific to that stock (though the semiconductors had overall success on the NSM and CY statements). We continue the grind in the overall market, and that keeps us trading/investing as outlined above. While we believe the economy is in the process of recovering and the market has seen its lows, we still must watch our investments with the same caution we always do.
THE ECONOMY
A mixed bag of economic news keeps investors puzzled.
GDP lower than expected, hanging onto positive territory by its nails.
0.7% gain in the Q2 GDP (first report, revisions to come) was 0.2% lower than expected, and with subsequent revisions it could fall to negative. No surprise; the economy was in the toilet (relatively) in the second quarter as the Q2 earnings have reflected. That was the smallest gain in 8 years, but it was a gain. Business investment was just nothing, falling 13.6%. Real interest rates have got to fall lower to make it attractive to invest. On the positive side, consumer spending rose 2.1%, lower than before, but still very good. Inflation was also barely breathing in Q2 as energy prices fell, and that puts more disposable income in consumers' pockets that does not have to go to buying gas. Also, inventories fell more than expected, and the way GDP is figured, that contributed to the lower rise. In this instance, lower GDP as a result of lower inventories is a good thing. With revisions to come we may get the first negative GDP quarter in years; remember, we are still in a relative recession in any event.
June new homes still strong.
New home sales were up 16.3% year over year while supply of new homes fell below 4 months. That means the market is tight and that prices are rising. Low inflation leads to lower mortgage rates, and that is fueling the housing market.
Sentiment falls but is still looking better.
Michigan sentiment came in at 92.4 (92.6 in June), but still well above the 5 year low in February (90.6). The current conditions were the sore point, falling 3 points to 98.6. Choppy stock market and recent layoffs the reason for that drop. The six month outlook, however, continued to improve, rising to 88.4 from 86.9 in June. Consumers continue to think things will improve down the road, and that keeps them spending.
On the downside consumer debt continues to grow with credit card purchases and home equity loans, and the rising jobless rate may impact this. Still, we must remember that we believe the market has bottomed and that the economy is already starting up. That means we may not have the falloff that many are fearing.
Rebate checks already hitting the stores.
Despite predictions that the rebate checks would be used for savings or paying off bills, true to form they are already hitting the economy. Wal-Mart has reported it is seeing rebate checks spent in its stores with a lot going to consumer electronics. If WMT is seeing that, you can bet that electronics discounters such as Best Buy will see those sales move up as well. $300 to $600 buys some decent DVD/surround/speaker systems. These rebate checks may be a one-time shot for the economy, but they are staggered, and they will have an impact. Let's hope that it is enough to buy the rest of the economy time to continue its work on strengthening.
THE MARKET
Overall market stats:
VIX: 24.73; -0.42. Slight down on a slightly up day in the S&P. Not bullish right now, but then again, it still has not set up a solid correlation.
VXN: 51.77; -0.95. As with the VIX, down slightly on a slight rise in the index. It too, however, is not forming any real correlation as the Nasdaq continues in its downtrend and is not really diverging with the VXN.
Put/Call ratio (CBOE): 0.45; -0.09. Falling toward that 0.4 level that indicates complacency. The ratio was spiking higher with ease, and the last two sessions it has dramatically dropped off. We want it to keep above 0.4.
Short interest: As the Nasdaq continues its downtrend from May the short interest on the index has hit record highs at 4.01 billion shares. NYSE short interest is high, but not at record levels. What does short interest mean? It is a contrary indicator, and when it reaches extremes it can indicate meaningful turns in the index as when most are betting on the market falling, it usually rises. Early last week we heard several mentions on the financial stations about investors just deciding it was time to short the market. Last time that happened the game was over to the downside as the indexes started their climb from the lows. That would be very nice in this instance and it would dovetail with the accumulation patterns we still see in overall volume.
NASDAQ:
Stats: Up 6.11 points (+0.3%) to close at 2029.07.
Volume: 1.583 billion shares (-10.2%). below average volume on the day, typical of Fridays in summer. Up volume led at 867 million shares versus 639 million to the downside. Typical summer volume, but we still prefer to see gains on rising volume as we saw Wednesday and Thursday.
A/D and Hi/Lo: Advancing issues held onto their lead at 1.15 to 1 (1.38 to 1 Thursday). The Nasdaq A/D line has trended up the past few sessions, but cannot take out the June high as it trades sideways more or less with the indexes. New highs rose to 131 (+10) as new lows dropped to 36103 (-6).
The Chart: http://www.investmenthouse.com/cd/$compq.html
At its high (2039.15) the Nasdaq tapped its down trendline that started in May, and fell back 10 points to the close. A very choppy session, and the bell just seemed to ring when the index was positive. As we noted on Thursday, the Nasdaq is still in its downtrend, and until it can take that out and proves that there is really accumulation ongoing we have to be careful. We will still invest, but we have to take profits when they are there and not let losses get away from us. We have to watch what happens early in the week. If we get that early week selling we have seen, once again we will be on watch if the index can hold above 1935 or so.
Dow/NYSE: Two upside days were apparently enough.
Stats: Down 38.96 points (-0.4%) to close at 10,416.67.
NYSE Volume: 1.024 billion shares (-15.9%). Volume slunk back below average on the selling, what we like to see, but also it was a summer Friday. Up volume still led at 625 million shares to 368 million on the downside. Pretty decent action for a down day.
A/D and Hi/Lo: NYSE advancing issues still led on the down session at 1.27 to 1 (1.65 to 1 Thursday). The NYSE A/D is flat-lining the past 4 weeks. New highs rose a whopping 1 to 96 while new lows fell to 28 (-17).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow turned back at the 18 day MVA Friday, but it did manage to close in the top of its range after trading down to 10,375.29 on the low. It continues its downtrend and failed to test even the 10,600 level or the 200 day MVA (10,571.43) on this trip. We will have to see if Friday was just a momentary downturn before it turns back up to test that down trendline that is currently right at the 200 and 50 day MVA (the 50 day is at 10,573.06). We really liked the moves on Wednesday and Thursday, coming on rising, above average volume. As with the Nasdaq, we would prefer it keep distance from the early July low of 10,120.02; it did manage to turn a higher low (10,203.69) four sessions ago when it tested that level, so that is one positive to look at. Not a huge one, but we will see if the price/volume action is going to win out.
S&P 500: The big caps, as the Nasdaq, were up on the session but on lower NYSE volume. It managed to finish in the top of its range for the session for the third straight gain, but the candlestick pattern is a loose doji, and that has marked the top of a few moves higher as the S&P has trended down since May in its test of the march and April lows. We note that it too tapped its down trendline on its high (1209.26), and pulled back over the last 2 hours of the session. At least it held pretty tough at that level, not bouncing down hard from the trendline. What do we need to see? A high-volume move over that down trendline without testing that July low (1165.64) again.
Stats: Up 2.89 points (+0.2%) to close at 1205.82.
Volume: NYSE volume was down on Friday at 1.024 billion shares (-15.9%). Not a bad day, but the candlestick pattern is troubling again.
The Chart: http://www.investmenthouse.com/cd/$spx.html
Summary: The indexes need either a catalyst to start the buying again or just start the buying again. We don't care what stars it, we just want to see the buying on higher volume. Wednesday and Thursday were very good days following Tuesday's distribution day (higher volume selling). We need see that continue.
THIS WEEK
A huge economic week is coming with personal expenditures, Chicago PMI, the government's consumer confidence report, auto sales, construction spending, NAPM, factory orders, NAPM services, and the employment report. As usual, most will be focused on the employment report, but there are several other more important reports, particularly the NAPM construction spending, and factory orders. None are expected to be better, so if we do get a couple showing surprising strength, that could be a positive catalyst that the market is searching for. You see, as we have been saying, the market bottoms 3 to 6 months ahead of the economy. If some economic reports come in better than expected, you will have mutual fund managers, investors, you name it putting two and two together once again. That could move some of that money into the market.
All of the fun starts on Tuesday with the Chicago PMI and consumer confidence. That leaves Monday without much economic news, but rest assured that some analyst or brokerage is brewing up something over the weekend. Usually it is a downside story, but with some improvement in the economy, at some point someone will come out with a positive story on Monday.
What we continue to watch for but not hang upon is a move that lasts more than 2 to 3 days. As noted, until we can see that and see these indexes take out their down trendlines we have to remain extremely cautious in our investing. We are parking some money in stocks on breakouts and solid split candidates and letting them work their way higher, but for cash flow purposes we are taking profits on the bounce plays and breakouts as they appear to start topping on the move. That way we use solid plays for both longer term gains and shorter term cash flow needs.
Support and Resistance Levels
Nasdaq: Closed at 2029.07.
Resistance: Down trendline at 2050 and the 50 day MVA at 2071.26. 2100 is mild resistance. Then 2160 to 2200. Then 2250.
Support: First test of the bottom is at 1934.67. The low is 1619.58.
S&P 500: Closed at 1205.82.
Resistance: Down trendline at 1207. The 50 day MVA at 1220.44. After that, 1240 to 1250.
Support: 1170 held again on the recent test. The low is 1081.19.
Dow: Closed at 10,416.67..
Resistance: The 200 day MVA is at 10,571, the 50 day MVA is at 10,573.06, and the down trendline is at 10,550. Lots of resistance there. If it can take those out, 10,750 is the real test.
Support: 10,400 has a chance of holding, but 10,200 has been pretty 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.
7-31-01
Personal Income, June (8:30): 0.2% versus 0.2% prior.
PCE, June (8:30): 0.3% versus 0.3% prior.
Chicago PMI, July (10:00): 42.5% versus 44.4% prior.
Consumer Confidence, July (10:00): 118.5 versus 117.9 prior.
8-1-01
Auto Sales, July (8:30): 6.4M versus 6.4M prior.
Truck Sales, July (8:30): 7.4M versus 7.6M prior.
Construction Spending, June (10:00): 0.1% versus 0.3% prior.
NAPM Index, July (10:00): 44.5% versus 44.7% prior.
8-2-01
Initial Claims, 7/28 (8:30): 366K versus 366K prior.
Factory Orders, June (10:00): -1.0% versus 2.3% prior.
8-3-01
Nonfarm Payrolls, July (8:30): -50K versus -114K prior.
Unemployment Rate, July (8:30): 4.6% versus 4.5% prior.
Hourly Earnings, July (8:30): 0.3% versus 0.3% prior.
Average Workweek, July (8:30): 34.3 versus 34.3 prior.
NAPM Services, July (10:00): 51.0% versus 52.1% prior.
End Part 1 of 2
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us stock market
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