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us stock market, trading strategy
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7/30/01 Investment House Daily
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SUMMARY:
- Very quiet Monday. Almost too quiet.
- Negative views on S&P earnings for the rest of the year.
- A few more companies like the future, a few more don't, and Barron's says AMD is near a turnaround.
- Team Trades
Quiet Monday.
A tight trading range and low volume marked the action where the major indexes all closed slightly lower. Three brokerages lowered their S&P 500 earnings estimates for the year. 'Oh well,' said the market; this is something that has been more or less anticipated. A few stocks said things were still murky for the future while after the bell MRVC said it saw the bottom. On top of that, Barron's said AMD may be ready to turnaround soon. None of that was enough for investors to act one way or another.
It was a typical low-volume summer Monday as investors drifted, awaiting the economic news that will most likely do whatever driving there is in the market this week. It is the continuing story: 6 rate cuts, a tax rebate, some companies saying things are bottoming, and some better economic news has investors thinking that the future will be better, but they seem to still need more confirmation that this is actually happening.
Just drifting today waiting for something to buy or sell on.
The major indexes continue their downtrend from the May highs, and that has many investors in negative moods. Look at why: even with smaller and mid-cap stocks still performing fairly well, many breakout, run up a few days, then pullback to test the breakouts. Nothing wrong with that in a solid market, but many continue to pullback below their breakout (pivot) points, erasing the gains. Sure others bounce right back up from the breakout test, but wit this market you don't know which ones are going to do that. Consequently, as we discussed over the weekend and last week, we have tended to take at least some profits after that move of 3 days or so when the stock looks as if it is running out of momentum. There are some we are holding we did not do that on and wish we had.
Selling the stock or selling calls after the short term move up is the way we have been generating our cash flow for living expenses. Still, as we have been discussing, the price and volume action in the market overall shows for now that there is accumulation ongoing as more than a few institutions are betting on an economic recovery and they are getting positioned for that. Look at how many of them have changed their portfolio allocation mixes to more stock over the past couple of months. That corresponds with the accumulation days we have been seeing.
Obviously, however, it has not been accumulation that chases stocks in general higher and higher. Stocks are bought on higher volume for a few sessions and then they go into the drift lower until the next buying round begins. And remember the charts: the indexes are still in their downtrends so we know the accumulation is spread out into small and mid-cap stocks as well. The big caps are in a downtrend after peaking in May on the move off the bottom.
Even with that, the prospects of a recovering economy keeps us taking and holding positions for the longer term as well. We need to generate cash flow to live, but we also need to invest for the longer term when the stocks make the moves out of bases so we can take part in the recovery that precedes the obvious news that the economy is going to recover. That is important in our view of investing as the stocks in good patterns with good earnings and sales lead all stocks when there is a turn back up. In a choppy market, it also gives you a better edge as the other stocks deep in their bases move up just to get hammered back down by the sellers who bought in higher and just want to get out.
THE MARKET
Quiet days on low volume are hard to read. There has been a lot of talk about the saying 'don't short a dull market,' but as we reported over the weekend, that is what a lot of investors are doing. That is a contrary indicator, but as we know with all contrary indicators, they provide guidance but don't ring a bell as to a turning point in the market. At some point the pressure builds up enough, but there is not standard pressure level that has to be reached.
In the interim we look at price and volume and the chart. The volume was down on today's selling which is what we want but as we have seen, that does not mean there will be no selling. Stocks have jumped on higher volume and then sold off sharply on low volume. Hence the downtrend even as price/volume action shows some accumulation ongoing. Moreover, we have seen the typical action of late: a move up on stronger volume for two to three sessions and then the start of a pullback. The past two sessions have shown doji patterns on the big three indexes. This signal shows that the market opened and closed close to each other, i.e., that the buyers and sellers were pretty evenly matched. If it occurs after a move up, it indicates that the sellers have caught up with the buyers and that there may be some selling in the next sessions. That corresponds to the downtrend that is ongoing; if the pattern holds, the big indexes will sell down for a few more sessions. That is why we keep saying it is important for some significant news to emerge and break these downtrends, i.e., break the current pattern.
Overall market stats:
VIX: 24.03; -0.70. Down on a mild day of selling is not really what you want to see, but it does show that there still is no correlation set up right now between the VIX and the movement of the S&P.
VXN: 50.50; -1.18. As with the VIX, Nasdaq volatility also fell on a day when the Nasdaq fell. That is not the normal action, though it was a very quiet volume day and the index traded in a tight range. Again, not a real correlation going here either.
Put/Call ratio (CBOE): 0.57; +0.12. Put action rose on a slight down day, but the action is nowhere near a reading of 1.0 on the close which is what we look for as a clearer signal for a turn back up. Indeed, the index has been in the 0.80 and higher level in recent history, but that did not break the current downtrend in the major indexes.
NASDAQ:
Started down today after three sessions of gains; following its typical pattern as it moves in its downtrend. With the big caps still foundering deep in their bases, it is hard for the index to make a lot of headway even if the smaller stocks improve. That is why we are looking at particular stocks as opposed to the index overall.
Stats: Down 11.23 points (-0.6%) to close at 2017.84.
Volume: 1.338 billion shares (-15.5%). Lower, below average volume on selling is best if there has to be selling. Down volume led but not by much at 727 million to 571 million shares. This is okay, but we have to still have to mind our positions as we have seen stocks tumble even on low volume overall.
A/D and Hi/Lo: Decliners took over 1.09 to 1, not a big lead, but it could be a transition day as the doji on the candlestick chart possible indicates. New highs rose to 133 (+2) as new lows rose to 107 (+4).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq gapped a bit higher, but the move could not hold. It made two more runs at positive territory, but in the last two hours it folded up and closed near the lows. Not really a tight doji, but more plain old selling. Light volume kept it at its 10 day MVA on the close, but once again we saw the index run into one of the down trendlines from May and then turn lower. It has to break this downtrend, but that is when it has to move over the 50 day MVA at 2069 and really it must move over 2100 and the late June high at 2180. That is a long haul for the index, and as we have been saying, it needs a real catalyst to do it in the form of strong economic numbers and/or some much more positive outlooks from some companies. The tide is building up some for this, but it needs to start really flowing. At this point the risk short term is to the downside after last week's late move higher. If we get some positive economic news this could turn the index higher up off of its lows in the 1930 range that the index seems to be drawn back to via the continuing downtrend.
Dow/NYSE: Another day of lower volume selling, but a doji on the candlestick pattern suggest more selling without some upside catalyst.
Stats: Down 14.95 points (-0.1%) to close at 10,401.72.
NYSE Volume: 907 million shares (-11.4%). Below average volume once again on the selling, and that is always good if you have to have the selling. Up volume actually led down volume 485 million to 416 million shares. The buyers did not go down easily today.
A/D and Hi/Lo: NYSE advancing issues continued to lead again even in a down session at 1.16 to 1 (1.27 to 1 Friday). That is not a major lead, but again, the NYSE A/D line climbed a bit even as the overall market sold back. That shows us there continues to be accumulation of other stocks that are not reflected on the major indexes. New highs rose to 109 (+13) as new lows fell to 21 (-7) in a down market. Not bad.
The Chart: http://www.investmenthouse.com/cd/$dja.html
Still in its downtrend s the Dow showed is a tighter doji on the candlestick chart that can mean a turn down after some gains. Again volume was very light and advancing issues led NYSE decliners while new highs rose and new lows fell. This was not a harsh selling day by any means. If the index was not in a downtrend we would be very positive about it. As with the Nasdaq, however, it needs to break that downtrend that is just below the 50 and 200 day MVA (10566.35 and 10,571.37, respectively). That is just one strong rally day away, but the shorter term chart indicators point lower. The index might find some unexpected strength here given the overall NYSE positives, but it needs some really good economic news. Otherwise it may just test 10,200 again.
S&P 500: The big caps were up and down all session, and tried to scratch positive in the last hour but fell just shy. Volume was so low on the NYSE, however, that closing positive or negative was not the key. What did happen was the index showed a very tight doji (opened at 1206.48 and closed at 1204.54) after some decent gains last week. As discussed earlier, that can indicate short term selling ahead as the sellers caught up with the buyers. Also as discussed, however, the A/D line remained slightly positive and up volume was in the lead. The small and mid-caps continue to lead the market if you can call it that. Overall, however, the market controls the fate of 75% of the stocks. Thus we need to see the S&P break the down trendline that is where it opened today. We still need to see that high-volume move over that down trendline without testing that July low (1165.64) again. To get that we need very positive economic news.
Stats: Down 1.30 points (-0.1%) to close at 1204.52.
Volume: As noted, NYSE volume was down again 907 million shares (-11.4%) on the selling as up volume beat down volume.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
No real news today other than the same-old, same-old, and that had the market doing the same-old, same-old. Tomorrow, however, starts the economic news parade with consumer income and spending, the Chicago NAPM, and consumer confidence. All of them are important, but we have a feeling many will be looking at the NAPM number as it is supposedly presages the national report due out on Wednesday. We need some good news, but we are not sure that July was the month to deliver it just yet.
That leaves investing in that 'in between' territory we were talking about earlier. We need to generate cash flow as that is how we make our living, and knowing that stocks run up a few days and sell leaves us trading more short term than we normally prefer. At the same time, we still believe in the future recovery and thus are investing more long term in the stocks we have been covering on the reports: those that benefit when the economy turns up, i.e., retail, regional banks, construction related stocks, education. We are also are seeing the continued strength in healthcare-related sectors as well, not to mention what we saw late last week in semiconductors. Remember, units sales are strong, but pricing has been weak. Now we are seeing that spot prices continue to firm and DRAM prices are doing likewise. The stocks in the decent (if not great) patterns we had on the report last week are the ones that look the best. This is an interesting development in the market that is counter to what many are saying. That is, however, how things always turn; they just surprise the majority who were not looking for it or where not believing what they were seeing.
Support and Resistance Levels
Nasdaq: Closed at 2017.84.
Resistance: Down trendline at today's high (2039.01). The 50 day MVA is at 2017.84. 2100 is mild resistance. Then 2160 to 2200. Then 2250.
Support: We would like to see 2000 hold, and there is some support there, but that is wishful thinking. First test of the bottom is at 1934.67. The low is 1619.58.
S&P 500: Closed at 1204.52.
Resistance: Down trendline at 1205. The 50 day MVA is at 1219.82. After that, 1240 to 1250.
Support: 1170 held on the recent test. The low is 1081.19.
Dow: Closed at 10,401.72.
Resistance: The 50 day MVA and 200 day MVA are almost coincident at 10566.35 and 10,571.37, respectively. The down trendline is at 10,400. After all of that, 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.
SUBSCRIBER QUESTIONS
Q: When you buy a leap, do you buy in the money our out of the money just after the stock splits?? It seems that just after the split the options come back down to normal? Thanks.
A: Buying LEAPS is a strategy we do like as we can get more bang for our buck so to speak than buying shares of stock as LEAPS, being options, cost less than the stock. Also, LEAPS are treated about the same as stock, and we can write calls on them to increase our returns. We have control of more shares of stock with the same amount of money, and we can still write calls on them. That gives us more cash generating capability. We always look for ways to make our money work harder for us.
We like to buy LEAPS 4 to 5 strikes in the money, and that usually allows us to buy them at a price it would cost us to buy the stock on full margin (i.e., at about 50% of the cost of the stock). The price varies depending upon the volatility, but LEAPS, being longer term options (a year or more), tend to have less volatility than shorter term options.
As to when we buy them, we often do so when we would normally buy a stock, i.e., when it is ready to make a good move based on its pattern, earnings, revenues, etc. LEAPS are similar to stock, so we treat entry points the same. They split just as stock splits, so if you have 10 contracts of LEAPS and the stock splits 2 for 1, you have 20 contracts after the split. That gives us even more cash generating potential. We like LEAPS and we discuss them in detail in our Covered Calls and Protecting Your Downside seminar.
End Part 1 of 2
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us stock market
trading strategy
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