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us stock market, stock prices
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7/31/01 Investment House Daily
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SUMMARY:
- Market almost gives a pleasant surprise, but closes well off the highs.
- End of month volatility or real buying. Yes.
- Economic news viewed as good, but important indicators languish.
- Subscriber Questions
Market starts to rally but fades at the end.
It appeared as if the market was going to take what appeared to be just another small bounce the prior week and make it something important. All indexes were rallying on good volume and the Dow and S&P were above their 50 day MVA and their down trendlines. With two hours left, however, they all rolled over and sold back with the Nasdaq's techs taking the biggest drop from the highs. An old pattern asserted itself as investors are still fighting about whether the economy is going to recover and help push stocks higher ahead of it.
If the gains were held, it would have been a very important move as the indexes would have potentially broken that pattern of rising a couple of days and then selling and they would have done it in a big way. The late selling was not a good sign for the day's action, but it also does not mean that the move was for naught. The indexes turned what looked to be topping action into another session of gains on once again, higher volume. The A/D line was again positive, though the late selling pared that back quite a bit. The pattern of stronger volume on up days versus down days and the continued positive A/D line show once again that the small and mid-cap stocks are moving to the upside even as the overall indexes struggle. It is not an easy market, but it is not a dead market.
End of month action or something else?
There is always some shuffling going on at the end of the month as managers buy and sell stocks to get their portfolios all gussied up for their monthly reports. That no doubt played a roll in the buying and then the late selling. Then there was the economic news that was up and down. That had some buying (judging from the treasury market) on the basis of more likely Fed rate cuts.
There was, however, buying on rising, and in the case of the NYSE, above average volume. That continues a pattern, albeit not solidly established, of accumulation: more buying volume on up days versus lower volume on selling days. Look at the volume the previous two sessions on the Dow and S&P: NYSE up volume led down volume even on down days. Moreover, the advance/decline line continues hold up even as the indexes struggle and move slightly downward.
While unpopular in the current climate of negative comments, the idea that there is some accumulation ongoing is in our view unmistakable. It is just not taking hold in all of the institutions at the same time. That is obvious as the Dow and particularly the Nasdaq continue to struggle in downtrends since topping out on their runs off of the bottom back in May. That is what is going on now: institutions are buying still, but they are not buying all of the big names on the big indexes that move when the large cap stocks move. The fact that the indexes are not moving higher further ingrains the idea that no stocks are moving. As we have been seeing for weeks, that is not the case.
As we reported Monday, three big brokerages lowered their views on the S&P 500 for 2001. That is part of that ingrained idea that the markets are not going anywhere. When the brokerages give up on the market, that is just another indication that the market has indeed bottomed. Remember, these were the ones telling everyone AMZN was a strong buy when it was at $200, down from $300. They were way too bullish back when the market had topped, and now they are way too bearish now with many saying the market won't recover until 2002. What we think is going to happen is that there will be a lot of earnings surprises in the next couple of quarters and the market will be anticipating that ahead of time. The accumulation we see ongoing now is laying the groundwork for that.
THE ECONOMY
Consumer spending and income beat estimates by 0.1%.
A 0.4% gain in spending and a 0.3% gain in incomes paced the economic news today, and that apparently had investors feeling pretty good about the consumers' ability to carry the economy until the rest of the sectors catch up. That is a tall order given that the other two reports did not give any indication that the rest of the economy is catching up or that the consumer is going to hang in there until the bitter end.
Chicago PMI pathetic.
In June Chicago manufacturers surprised everyone with a solid improvement in their index. Well, that was wiped away today with a weak 38.0 reading, down from the 44.4% reading in June. Manufacturing in the Midwest crumpled up like a cheap suit, and that casts doubt on what looked to be a recovery in that sector. We do have to note, however, that inventories that make up a significant portion of the index were the lowest since 1982. They get worked off and that allows the factories to start producing again. That is good, but the rest of the index needs to improve. Tomorrow we get the national report, and it is said the Chicago report is a good prognosticator. We hope not.
Consumer confidence slides.
On the back of a fitful stock market and thousands and thousands of more announced layoffs, consumer confidence fell to 116.5 versus an upwardly revised 118.9 in June (from 117.9). That made the drop look worse than it was, but it was still down whichever way you cut it. Consumers are still pretty confident looking out 6 months, and that keeps them buying the bigger items and it will also encourage them to spend and not save their tax rebate/cut/deferred tax hike or whatever you want to call it. Looks as if that is something that we will have to keep hoping for while we look at numbers for July that are less than expected. That was our fear we stated over the weekend and on Monday: July was not a good month.
Weekly retail sales okay once again.
Redbook reports a 1.6% increase in sales, but it was not across the board. Discounters enjoyed the increases while the departments stores fell in sales. The overall number is what counts, however; does it matter if consumers spend a billion at Wal-Mart, Target, Best Buy, Costco, and BJ's versus Dillards, Nordstrom, Dayton-Hudson, Sears, etc.? No. The money is hitting the economy, and that is what is important.
The Fed, rate cuts, and bank lending.
We are getting reports in that are proving to be very interesting and very frustrating. When the Fed was raising rates, member bank loan portfolios were carefully reviewed for questionable loans during the 'freewheeling' lending that was going on as the U.S. experienced unprecedented yet inflation-free growth. Banks had their chops busted by the Fed if their loan ratios and loan quality were not spotless. Then the rate hikes crashed the economy along with the unexpected spike in energy prices (it is always the unexpected that dooms monetary policy to failure) as there was just no money available, so no one wanted to invest.
Well, a month ago Greenspan was before Congress stating in pretty clear terms that the banks needed to lend the money that the Fed had pumped into the money supply. Greenspan then said the same thing in a speech to bank leaders. The banks, however, are not being so generous. Heck, they just got pantsed by the Fed for 'risky' loans and now they are gun-shy to loan to solid companies that have had a bad year brought about by none other than the Fed crashing the economy. So you have a bad year because the Fed rate hikes killed off the economy, and now that the Fed has taken action and has made money available, banks that the Fed chastised are reluctant to loan the money to you because you had a bad year and they may risk further Fed censure. Now is that an ugly revolving nightmare for businesses or what? That, however, is apparently what is going on. The Fed wants them to lend but they are reluctant to do so because of the Fed. That is a very, very real problem that is keeping all of that money from finding its way back into the economy even though the purse has supposedly been opened.
The point: this shows how easy it is for the Fed to kill an economic rally with a big club of interest rate hikes, but it is very hard to just put the hammer away and then let the economy prosper. Think of it this way: if you hit something so hard you knock it out, it does not matter how much water or other comfort you provide as the patient is out for the count and cannot take advantage of it.
THE MARKET
Well, today qualified as a follow through to the rally that started anew last Wednesday on the Down and the S&P 500. The Dow gained 1.2% on rising, average volume. Not a strong follow through at all, so we cannot put a lot of faith in it. The volume was marginal at average, the gain was marginal at 1.2%, and the A/D line was nowhere near where you want it (at least 2 to 1). Still, today's action was a surprise, and maybe the market will continue to surprise us with another stronger follow through on Wednesday or Thursday. Why is this important? Because as we saw institutions start buying again last Wednesday on higher volume after Tuesday's selling, we have to see them continue to buy a week or so later to show staying power in the accumulation. This is part of what we have been talking about in regarding seeing the accumulation in the market overall.
Overall market stats:
VIX: 23.86; -0.17. Very slight drop in volatility on a decent gain in the S&P. At low levels, but at this point not showing us much of a forecasting tool.
VXN: 48.35; -2.24. Down as well on the gains in the Nasdaq. This has still not set up any reliable correlation yet.
Put/Call ratio (CBOE): 0.60; +0.03. Not a big gain, but a gain on an up day in the market. Not a lot of believers in any upside move out there in option land, and that is good as they are on the whole usually wrong.
NASDAQ:
A nice move gave back 30 points from the high. The tech index continues to struggle mightily on the easiest of moves. There is just so much drag from the old line techs: every time they try to make the move higher they are slapped right back in your face.
Stats: Up 9.29 points (+0.5%) to close at 2027.13, 30 points off of its high at 2057.10.
Volume: 1.622 billion shares (+21.3%). Rising volume on an up day, but the close well off the high took the luster off of the move. Up volume led 3 to 2 at 986 million to 613 million shares. There was not as much selling volume as there was buying volume even as the stocks sold off late.
A/D and Hi/Lo: Advancing issues were back in front by a sliver at 1.06 to 1. that is not an inspiring ratio. New highs did rise to 175 (+42) while new lows rose to 116 (+9).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The techs started a bit higher and then ran to 2057.10 on the high. From there it double topped and fell to close near the session low, barely managing to hang onto a half percent gain. On the high it hit just below the 50 day MVA (2067.52) and then reversed. The pattern: a 'tombstone' doji below resistance (the 50 day MVA), and as the name implies, that is not what you want to see for an upside move, especially after the index has climbed for four sessions and could not hold onto some hefty gains for the session. The big techs get run up and then down; we are looking at a possible put on the QQQ for a quick gain before the index turns back higher.
Dow/NYSE: The Dow found bottom at 10,400 this time and rallied triple digits again, giving it a follow through to last Wednesday's up session. It could not, however, break that down trendline or the 200 day MVA.
Stats: Up 121.09 points (1.2%) to close at 10,522.81).
NYSE Volume: 1.141 billion shares (+25.5%). Volume was back up to average on the move higher, a good sign and contributing to the confirmation of last Wednesday's move. Up volume led again at 678 million versus 437 million downside shares.
A/D and Hi/Lo: NYSE advancing issues led again, improving to 1.54 to 1 (1.16 to 1 Monday), keeping the string alive on both up and down days of late. New highs jumped to 163 (+54) versus 26 new lows (+5).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow attempted to break its down trendline today and crack over the 200 day MVA (10,573.81), but it could not hold the move and closed 72 points off of its high and back below those levels. Still, we cannot complain about the move at all. Last night we suggested that the index could find some unexpected strength given the NYSE positives, and it did it without any really good economic news. This move after appearing to slow down was a good sign. The fact that volume improved again on buying was a good sign. It was not a powerful follow through, but it was another episode of institutional buying that could prove able to break that downtrend. If it can do it tomorrow on rising volume, that is a super positive and gives the Dow a shot at resistance at 10,750.
S&P 500: We said the S&P needed to break the down trendline and do it on some big volume. Well, it did break the down trendline that started last September, but it gave back two-thirds of the session move as it hung on at the close. What was a strong confirmation move finished as just a gain on rising volume. What we wanted to see was a move over that 50 day MVA (1219.48) as well, and while that was accomplished intraday (high at 1222.74), it did not last. Still, the downtrend has been broken though more inauspiciously than we wanted. As with the Dow, we want the move to continue in the next session or so on stronger volume.
Stats: Up 6.71 points (+0.6%) to close at 1211.23.
Volume: NYSE volume was up to 1.141 billion shares (+25.5%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Auto sales are out before the open, another indicator of the consumer's appetite for consumption at this point. Then the NAPM is out at 10:00, and that is what we really want to see along with construction spending. NAPM picked up last month, but with the Chicago number, estimates are dropping like flies. As we said last night, July just did not seem from the numbers we were polling like the month that the economy moved sharply ahead.
The futures are a bit down this evening. We would like to see a slightly softer open turn into a rally that carries the Dow over the down trendline and pushes the S&P above its 50 day MVA. Or, we would like to see that on Thursday. Either day will do for us, but we would like to see another strong confirmation day in the next two sessions. Again, that would show us that institutions are jumping in on the buying one more time and thus continuing the accumulation we have been seeing. It is tenuous and a series of bad economic news could reverse the course, but for now that is what we are seeing in the numbers.
This action in the market does not leave us a lot of choices, but that does not mean the choices are bad. So many want to continue to play the old line tech stocks that have been kicked, trampled, and run over, but that is a tough game. There are still stocks that are in great patterns, making great moves, splitting, running into their splits, etc., but they are not the household names of the past. That, however, is how the market works: bull runs give way to corrections and bear markets, and from those new leaders without household names emerge. Economically sensitive stocks improve first, then the others start their moves as well, usually off the radar screen of most. RLRN, BPFH, CHS, PMTR, RSC, BJ, ESRX, and CEFT (just to name a few) are not household names, but they are performing very well. You have to stay open to what is working to be successful.
Support and Resistance Levels
Nasdaq: Closed at 2027.13.
Resistance: The down trendline is at 2035. Then the 50 day MVA is at 2067.52. 2100 is mild resistance. Then 2160 to 2200. Then 2250.
Support: Still want to see 2000 hold, but again, that is wishful thinking. First test of the bottom is at 1934.67. The low is 1619.58.
S&P 500: Closed at 1211.23.
Resistance: Cleared the down trendline today, but still has the 50 day MVA at 1219.48. After that, 1240 to 1250.
Support: 1170 held on the recent test. The low is 1081.19.
Dow: Closed at 10,522.81.
Resistance: The 50 day MVA and 200 day MVA are almost coincident at 10564.64 and 10,573.81, respectively. The down trendline is right at today's close. After all of that, 10,750 is the real test.
Support: 10,400 did hold this time around. 10,200 still looks to be the most solid support. 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): +0.3% actual versus 0.2% expected and 0.2% prior.
PCE, June (8:30): 0.4% actual versus 0.3% epxected and 0.3% prior.
Chicago PMI, July (10:00): 38.0% actual versus 42.5% expected and 44.4% prior.
Consumer Confidence, July (10:00): 116.5 actual versus 118.5 expected and 118.9 prior (revised higher from 117.9).
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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