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us stock market, trend trading stock
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8/14/01 Stock Split Report
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SUMMARY:
- Retail sales better than expected and Bank of Japan cuts interest rates, but market says 'so what'?
- Bond market, dollar, and commodities are no longer so positive about the economic recovery.
- Indexes hit minor resistance and turn lower on slightly stronger volume.
- Earnings are about as expected, but giving stocks a good boost after hours.
- Subscriber Questions
- Team Trades
Continued consumer spending fails to ignite market.
July retail sales were flat (up 2.2% year over year) compared to an expected 0.2% drop, and that along with the Bank of Japan's interest rate cut had stocks in the pre-market trading higher. On cue the indexes opened higher and did their usual seesaw action for an hour, and then rolled over and sold down. Gee, a chip upgrade on Monday could not light a fire, and now continued consumer strength (at least relative to the rest of the economy) failed to produce a spark. Dog days of summer indeed.
Why wouldn't better retail sales keep the market moving higher? Well, it is just as we have been talking about the past week. Consumers have been spending and spending and spending for the past 10 years. That has not changed. Consumers have kept on spending right through the slowdown. Yet, that has not resulted in a recovery or much of a slowing in the slowdown/recession. As we discussed last week, consumers are not buying servers or new telecommunications systems, nor will consumer spending that remains roughly constant cause businesses to go out and buy new servers, telecommunications systems, factory machines, etc. It would take a huge jump in demand to prompt that, and that is just not happening even with the $42 billion in tax rebate checks hitting the retail market.
I've fallen, and I can't get up!
What has changed? Business spending has dropped off of a cliff as business demand and investment has been choked off by tight money and a Fed bent on slowing down the economy. It got the slow economy, but it never impacted consumer demand, the primary Fed target. It did shut down or choke off a lot of technology investment and research as it put thousands of businesses out of business. There is no venture capital available and that directly impacts all of those startups that can make quantum changes in our technology. Remember Apple Computer's roots.
What we have now is a business sector that was producing for both the consumer and business demand, but now the business side has been shut down. Cisco's CEO gets chided for it, but he was accurate in his comments on how fast the fall took place (though we were reporting on the signals of the slowdown starting in February and March of 2000). The business side did show signs of life April through June, but it softened that month and July has been a disappointment. As discussed below, some of the signals of strengthening are no longer showing that.
Right now there is NOTHING we see that is stimulating the business side. Energy prices have dropped, but that is not stimulating investment, that is just moving the knife off of the jugular vein a bit. The Fed is playing the demand game, hoping the consumer spending can 'trickle down' to the business side. How can it do that given that business had built up infrastructure to meet consumer and business demand and now business demand is gone and consumer demand has held steady? Business needs business stimulus just as the consumer needed consumer stimulus to keep spending. The tax rebates are thus far holding consumer spending roughly steady. Without the rebates the consumer might already be done. Business needs real stimulus as well. After all, it was the government (via its non-governmental entity the Fed) that engineered the recession; the government should now do what is necessary to get us out of this manufactured recession. We are so sad we were right about the Fed overshooting its mark and causing a recession. However, it never fails.
Bonds no longer so positive about an economic recovery.
A month, two months and even further back, the bond market was indicating that the economy was heading toward recovery later this year. Primarily, the yield curve was returning to where it should be, i.e., long term bond rates higher than shorter term rates. Before that, shorter maturities had higher rates, indicating that the strength was the here and now and that the economy was going to weaken in the future. Thus there would be no pressure on rates in the future as business activity would be lower.
The yield curve has not returned to its inverted state, so it is not a siren blaring night and day that something is wrong. What is happening? All maturities have sinking yields as bonds rally. The 2-year treasury note hit its lowest since it was first issued in 1972. The long end of the curve has rallied as well, and yields are falling there as well. No inversion, but both ends are evidencing the belief that the economy is not going anywhere right now. The 2-year is rallying on the firm belief that at LEAST 50 more basis points of cuts are coming. The long end yield is getting clobbered because if the economy is slow, there is no demand for money. Again, this is not a neon sign, but it is a warning to heed.
Dollar is weakening.
Sure is peculiar isn't it? The administration says it is not pursuing a weak dollar policy, yet the mere fact that it reaches the level for a need to discuss it often has that very impact. There are some things you do not say if you do not want certain things to happen. With the dollar at high levels, if you want it to stay high you say nothing. If asked, you say what Treasury Secretaries Ruben and Summers doggedly said: "A strong dollar is in the U.S.' best interest." No question about that.
A new administration comes along, and it is tested by those who are interested in either a continuing strong dollar policy or a weaker dollar policy. The current Treasury Secretary gave both sides something to argue over, and the result has been the beginning of the erosion in the dollar. It is gradual, but it is unmistakable. The short-sighted say this is good as it will help U.S. manufacturers sell goods overseas. But as we discussed before, 60% of all physical dollars are overseas. If the dollar loses its perch as the top cat, those dollars start coming home as they are sold for other currencies. Investments in the U.S. leave and more dollars are converted. That kills the financial markets with disinvestments in the U.S. and then inflation hits as trillions of more dollars come home to chase the same amount of goods (or fewer if this recession hangs around and businesses do not get cranked back up). Then we have stagflation: inflation while the business side continues to languish. Hello 1970's. Thanks, but no thanks.
One has to believe that the current administration wants the dollar to fall. The dollar market is sensing this. The dollar index broke below its 200 day MVA today. The Euro has gained over 6 cents against the dollar when no one believes it should be gaining at all based on the outlook for the EU. This is a very troubling trend; once it starts it is next to impossible to stop. The last time the U.S. did this was in 1983, and it took until the early 1990's to get the dollar out of the tailspin. Danger, danger, danger.
Commodities in the tank.
Earlier in the year, commodities actually started moving higher. Commodities are very, very economically sensitive. When the economy starts to pick up ever so slightly, commodities prices start to rise. Well, that has stopped. Commodities broke down and are trending down once again. This is good and bad. It is bad because it shows that the budding recovery is slowing down for now, something that the bond market is also showing. It is good because manufacturers that are still in the dumpster and cannot raise prices are at least able to offset that somewhat with the lower raw materials prices. A dubious positive indeed.
Stick with the winners.
All this means that we need to stick with those stocks that have been and are performing in this type of market. NVDA grew revenues 50% in a bad economy and has been running back up. After hours it jumped higher with its split announcement and good earnings. Banking, construction materials, paper, business services, real estate - - all strong sectors in this economy that we are covering on the reports and that continue to improve and were breaking out today.
THE MARKET
The major indexes all tried to move higher, but each one hit resistance (some minor, some substantial) and then turned lower for the session. Even the SOX hit the 50 day MVA and retreated. Volume was still below average, but it rose on both the Nasdaq and the NYSE. Another day of distribution, the third in the last six sessions. One more in the next couple of sessions could mean that the indexes are going to bust through the July lows. Some saving graces: volume was still very low overall, and some positive earnings from AMAT, BEAS, and NVDA after hours have stocks moving higher and the futures markets up nicely.
Can any gains hold? The lack of buyers in the market has kept all rally attempts contained. If the indexes cannot rally and hold the gains on this news, we have to watch for a breakdown. We have the FOMC meeting next Tuesday (August 21), and 25 basis points is priced in. The market really needs 50 basis points; the economy really needs 50 basis points. Unfortunately, they won't get it. Unfortunately, expectations may rise for a 50 basis point cut, and those expectations (hopes) will be dashed. If we see that unrealistic expectation rising this week and on Monday, we are going to be shorting the market as the news hits and we will be shorting the market if it breaks those key support levels. On the other hand, we will continue to go long in those stocks that continue to perform.
Overall market stats:
VIX: 23.01; -0.23. Volatility continued to fall even as the S&P 100 dropped on the session. Looking at the chart closely today, there is still no correlation between the VIX and the OEX.
VXN: 48.44; +0.95. A slight rise on a drop in the Nasdaq. That is as expected, but as with the VIX, no useful correlation.
Put/Call ratio (CBOE): 0.74; +0.01. Absolutely going nowhere over the past several sessions. Put activity is cruising along, but it is not spiking higher. This is not an indication of fear at this point.
NASDAQ:
The techs tried to rally, but there was no real interest. The tumbled back down from resistance at 2000 in typical, uninterested trade.
Stats: -17.72 points (-0.9%) to close at 1964.53.
Volume: 1.232 billion shares (+7.5%). Still well below average, but another day of selling on higher volume, the third in six sessions. Another day of the same Wednesday or Thursday could be a sign of deeper trouble ahead. Down volume led 781 million to 425 million shares.
A/D and Hi/Lo: Declining issues nudged back into the lead at 1.02 to 1 (advancers led 1.21 to 1 Monday). New highs fell to 118 (-24) as new highs rose to 94 (+3).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq rallied early, but ran right into some minor resistance at 2000 (1998.59 on the high) and then turned back down, continuing the downtrend. No good news was good enough to offset the lack of interest. Stocks rolled over and started stair-stepping down in a day-long downtrend. It looks as if the recent lows (1934 in July and 1915.99 just three sessions ago) are going to be tested again, and this time with an even weaker rally attempt beforehand. Perhaps the earnings after hours will spark a rally; it did so in those stocks. Again the question is, will it hold? We are going to keep our eyes out for another distribution day. Those looking for contrarian signals take note.
Dow/NYSE: The Dow was positive most of the session, but the trend was down all day, and it gave in at the close. It was down just a bit, but it was down on rising volume in bearish intraday action. It held above 10,400, but that is about it. Another distribution day on the Dow, three out of the last 10 sessions.
The NYSE on the other hand showed dramatically improving A/D ratio and new highs moved higher and new lows moved lower. This shows once again that the SMALLER stocks are the ones to be in. We are all over those on the reports.
Stats: Down 3.74 points (-0.04%) to close at 10,412.17.
NYSE Volume: 964 million shares (+14%). The third distribution day in the last 10 sessions; better than the Nasdaq, and not the fast distribution days that usually lead to more selling. Still, it is a signal to watch. Up volume did beat down volume, 496 million versus 454 million shares.
A/D and Hi/Lo: NYSE advancing issues actually increased their lead to 1.57 to 1 (1.16 to 1 Monday). New highs rose to 202 (+26) as new lows fell to 30 (-7).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow may have been unable to hold its gains for the session, but its lateral move allowed it to hold above 10,400 and the down trendline from the May top. That is good news, but it is offset by some slightly higher volume selling. The Dow came close to the 50 day MVA on its high (10,517.52; high 10,478.81) and then turned back down for the session. A very narrow range the past two sessions, unable to gain traction higher. In early August that sent the index back down to support. Is it going to send it down to test 10,200 again so soon? It has made a few higher lows, but the highs have been lower as well. It is pinching together right above support. Which leg will win? Conventional wisdom says the longer leg (in this case the down leg) wins out. We will keep an eye open for the breakdown, but the Dow has been hard to count out since it rallied off the March lows.
S&P 500: The S&P hit some resistance as well on its high (1198.79) at 1200 and the 18 day MVA, and then it turned down for the session. Intraday action was bearish as well with a steady downtrend to the close. If the past three sessions are the extent of the move up off of support this go round, the S&P is primed to break below the 1170 level that the index has been toying with. If it does, we are shorting the index.
Stats: Down 4.56 points (-0.4%) to close at 1186.73.
Volume: NYSE volume was below average but up. That makes two distribution days in the past 5 sessions. We will see if we get another one; that could push it down.
The Chart: http://www.investmenthouse.com/cd/$spx.html
SUMMARY: The indexes are rally playing with fire. There is no buying interest in the overall market to push the indexes higher, and they keep hanging around very important support levels. If they cannot move off of these levels with some definitive action, they tend to break down below them and head lower.
While this is not a good prognosis, the indexes have recovered from each test or momentary breach of these levels. The Dow is very quiet, and indeed, the Nasdaq and S&P as well. You do not want to get too aggressive to the downside in a market that is going nowhere. Frustration with the lack of movement leads to excessive pessimism, and that leads to rash actions. Just about the time you decide the market is going nowhere, and if it does the direction will be down, that is the precise moment it explodes in your face.
That is why we have not rushed to the shorting table. We have had some decent put plays, but we are really looking for a breach of major support before we load up to the downside. You can trade the indexes intraday when they open higher and then roll over and sell down, but 30% of the time the market moves higher the rest of the day. We prefer to let clear support be broken and then make the easy money. Or, if the hope for a higher Fed rate cut gets out of hand, that is easy money. Watch for the emotions of the other traders to get too far one way or the other and then play off of that.
TOMORROW
In the meantime we will continue to do what we have been doing and what has been working: looking predominantly away from technology and into those mundane banking, materials, paper, business services, real estate, and other stocks that despite all of the gloom in the market continue to move higher. Again today we had breakouts in several of these sectors on very strong volume. They may not be exciting, but they are moving steadily higher, and putting several of these ponies into your stable produces results.
Economic reports tomorrow include business inventories, industrial production, and capacity utilization. The first two are expected to improve, the latter to fall even further. There was not much happening in July; we will see how much inventories fell. None of these are much to move the market (even combined) unless they are much, much better than expected.
Tomorrow looks as if it may try to rally again. We are not going to badmouth any rally attempt as the indexes are trying to hold at support levels. We will watch and see if they can actually turn the tide on higher volume. If it fails, we may try to make some money on the short side with a day trade on the indexes. We will alert you if that is what we are going to do. At this point it would just be a day trade as they have not yet broken near support.
If it can rally, great. We will still look at the same stocks we have been looking at, and 95% of those have been in good patterns already and are outperforming the market. A rally would get the trading plays off and running and help the chips, both plays that may not have the best patterns but can move well short term for us. Otherwise we stick with what has been working and avoid the temptation to jump on the bandwagon of 1-day wonders that catch each rally and then tank back to the lows.
Support and Resistance Levels
Nasdaq: Closed at 1964.53.
Resistance: Tapped at 2000 and then tumbled below the down trendline. It ran into the middle of the resistance from 1985 to 2013 and it turned and fled.
Support: 1923, the point where the April gap started is possible support. After that it remains a crapshoot. The low is 1619.58.
S&P 500: Closed at 1186.73.
Resistance: 1200 was resistance today. The 50 day MVA is at 1212.34.
Support: 1170 is some support. After that it is jumbled; 1150 has tried to act as some support or resistance in the past. The low is 1081.19.
Dow: Closed at 10,412.17.
Resistance: Continues to hold just above 10,400. The 50 day MVA is at 10,517.52. 10,600 is resistance (10,583.98 is the 200 day MVA).
Support: 10,200. 10,120.89 is the recent July low. After that there is 10,000 to 9992, the middle of its larger double bottom pattern.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
8-14-01
Retail Sales, July (8:30): 0.0 actual versus -0.2% expected and 0.0% prior (revised down from 0.2%).
Retail Sales ex-auto (8:30): +0.2% actual versus 0.1% expected and -0.2% prior. NOTE: without autos and energy, retail sales were UP 0.6%.
8-15-01
Business Inventories, June (8:30): -0.3% versus 0.0% prior.
Industrial Production, July (9:15): -0.3% versus -0.7% prior.
Capacity Utilization, July (9:15): 76.6% versus 77.0% prior.
8-16-01
CPI, July (8:30): 0.0% versus 0.2% prior.
Core CPI, July (8:30): 0.2% versus 0.3% prior.
Housing Starts, July (8:30): 1.625M versus 1.658M prior.
Building Permits, July (8:30): 1.568M versus 1.568M prior.
Philadelphia Fed, August (10:00): -10.0 versus -12.2 prior.
8-17-01
Trade Balance, June (8:30): -$29.5B versus -28.3B prior.
Mich. Sentiment-Prel., August (10:00): 93.0 versus 92.4 prior.
End Part 1 of 4
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