us stock market, understanding the stock market

Note: Due to some illnesses among the staff, we are sending out the market summary first followed by the plays late this evening. Thank you for your understanding.

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8/18/01 Stock Split Report
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Stock Split Report Subscribers:

ALERT SERVICE

When the major indexes broke support, the alerts helped us get onto some good plays to the downside. Friday the S&P joined the Nasdaq below the July support, and it was a clean break. We issued an alert to enter positions and sent two more letting people know we were riding it below our initial target, and then a later one letting everyone know we were taking some partial profits. When the break support, the index puts can be a great way to make some money when everyone else is in a panic. The QQQ worked out well before it, and now we are looking to see if the Dow will join them.

Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertssr.htm

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Starts September 12 with Market Basics, covering the basics on reading the market, individual stocks, volatility, futures, options, and a lot more. Then we jump to Technical Analysis to get you in on the ground floor to understanding why the market and stocks move the way they do. This information will knock the scales from your eyes.

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SUMMARY:
- Ford stalls and the indexes dive below support. A bit of a late recovery, but no reversal level volume.
- Why won't the market rally?
- Strong dollar or weak dollar? The 'debate' has a very simple answer.
- Have we changed our outlook of the future? Yes and no.
- Team Trades

Thursday's rally was fool's gold for the major indexes.

Thursday night we said the rally sure did not look real, and Friday it proved it. Was it Dell that tripped the selling lever? It gave a homely view of the future, warning for about as far ahead as it could without looking silly. That did not help, but we all knew Dell was not going to all of the sudden say it was growing sales, margins, etc. No, the real shocker was Ford. It warned it would not make the current quarter nor the entire year. The rebates, incentives, etc. had come home to roost. Why such a big deal? Investors are looking at a triumvirate of strong economic pockets as the savior of the economy: housing, consumer retail buying, and the good old roadster. Retail spending has been softening, but is still ahead of last year. Housing was strong again on Thursday, but permits were down for the second straight month and home loan applications have fallen dramtically, something that seems to be ignored in the 'out of sight, out of mind' attitude out there (an attitude that we hate to say was pervasive when the market and the economy were throwing off signals of the collapse to come back in early 2000). Auto sales have been reported to be on a near record pace. The Ford news kicked out one of those legs on the three-legged stool, leaving just two left that are wobbly themselves. Investors were ready to sell.

Not that the news was really what it was made out to be. The big issue re autos all along was profitability, not the number of units sold. Remember, sales are reported in dollars, not units. Units have been flying out the door with incentives luring consumers to buy, buy, buy. This was not necessarily a rapid and unexpected cooling of demand, but Ford's inability to reduce costs and raise prices. A common problem all across the U.S. and across all industries. So, it was not really Ford, but then again, investors viewed it as another sign that something is wrong that the interest rate cuts and tax rebates are not fixing.

As a result the futures plunged, and on the open, the indexes did the same. Our OEX play made a tidy sum today alone as we took some profits and kept the rest open for next week (we expect some downward follow through on Monday what with it being analyst day and plenty of angst to whip up), and the QQQ play was not bad either.

The OEX broke support early and of course the Nasdaq was already starting below support it breached the day before. They tanked, tried to base, but then tanked again in the afternoon. The Dow even broke 10,200. When the Dow broke, it almost immediately reversed and the entire market rose toward the close. Only the Dow, however, closed above support. Nonetheless, after the S&P's fall and the Dow's flirtation below support, the Dow is now a marked index. It looks ready to fall.

Was it a reversal after a panic in the selling? No. Volume was non-existent. There were a lot of sellers, but there was not massive dumping of shares. The fact that it was double witching Friday where volume is usually increasing, the lack of volume was most apparent.

The S&P now joins the Nasdaq below the July lows, and the downside threat increases. The Dow turned back up once again, but its string of higher lows is history, and that deserves a lot of attention as we head into next week.

ECONOMICALLY SPEAKING, THINGS SEEM BETTER, BUT NO MARKET RALLY. WHAT IS UP?

This is a huge topic to cover, but we will try and break it down a bit. There is something major afoot right now that started three weeks ago. First, we have to understand the market. It is the collection of all of our thoughts, emotions, and reasoning. It takes all of that and pools it together, and then sets prices for equities, commodities, bonds, you name it. That collective knowledge is very powerful and usually very correct. When the market is talking, it is best to listen. It is changing its story right now. Now, let's take a look at recent history.

The market surged in 1999 on an abnormal inflow of investment capital. Before that the market had enjoyed very solid gains as the result of the great investment boom fueled by the tax incentives and hands off policies of the 1980's. The Fed had started grousing about 'wealth effects' and 'potential inflation', but the market ignored it because the market understood that there was no problem; until the Fed started tinkering, something it had not done, the market took the mild setbacks on talk of 'irrational exuberance' in stride. Earnings were expanding and technology was taking hold.

What happened in 1999 did change the landscape. It went from one where there was reasonable investment in reasonable ventures and technology to wild speculation on anything that could put together a half-page business plan. What fueled this? The Fed's injection of billions of dollars into the system in anticipation of potential liquidity problems associated with the millennium. As it turned out, the only liquidity problems were what to do with all of that cash made available to banks that no one needed. Banks did the smartest thing they could: they invested it in the stock market. All of the sudden, there were billions of dollars ready for the market; when the green light went on in October 1999, the buying was incredible. An 80% gain in just months.

The Fed was alarmed. After all of the grousing about speculation and then its initiation of rate hikes, the market was spurting ever higher. It knew it was going to put money into the system for Y2K years in advance of actually doing so, and it knew that would potentially set of an investment spurt. Ahead of that it was laying the groundwork, 'jawboning' the market at first, and then having to actually start raising interest rates. It cloaked that move as a need to fight potential inflation using a bunch of 'new' inflation indicators that in reality were simply measures of economic prosperity. They were not measures of inflation at all, but the Fed somehow sold this baloney to the economists who worshipped the 'maestro' as if he had engineered the technological boom. Utter BS. However, that was the genesis of the rate hikes, and as the events unfolded, the Fed was in a pickle: no inflation at all, economy still moving higher, and it was running out of time before Y2K.

It had to act anyway, however, because it had been raising rates, and if there was a liquidity crunch, the financial markets could panic. So, in a historically colossal blunder it went ahead and injected all of that money into system. The result was that incredible surge in equities. Well, the Fed had no choice; it had to keep raising interest rates because now it may have actually believed there was a threat of inflation because of the massive surge across the board. It recalled all of the Y2K money in March 2000. It also ratcheted up its rate hike campaign, culminating with that 50 basis point hike (most believed even then the Fed was not done, but we saw that it had to over, and it was. It waited too long, however, to start lowering rates). At the same time we were writing daily about how the economy was already faltering under the rate hikes. It was showing up in ALL reports, but the weakness was dismissed because the overall numbers were still high. The one-two punch of yanking all of the liquidity out of the market and stomping on the economy with unnecessary rate hikes tanked the stock market because it foresaw the economic problems ahead.

The market was smarter than the analysts. It started distributing in February and March 2000. The bond yield curve was inverting, meaning that shorter term rates were higher than longer term rates. That means the bond market expected the economy to be weaker further down the road. Our reports tracked this closely, noting the problems. We were interviewed in newspapers and radio talk shows about the effect of these high-volume selling days. We were saying the market was speaking, but no one was listening. Then it plunged lower, well ahead of the general realization that the economy was tanking. Stocks already knew this had to happen and they were selling off as big money left the market. Months ahead of the crowd catching on, the market had done a lot of its damage. Ten months before the Fed cut rates it had started a massive selloff. Too little and too late, the Fed's subsequent rate cuts could (1) not stop the selloff, and (2) not revive the economy fast enough. The result: a three-leg bear market, the most recent leg bottoming in April.

So what is going on now?

The market is speaking again. After the Fed started cutting its rates, liquidity moved higher, and there were signs of good economic activity. The bond yield curve reverted to where it should be. Very good news. The market rallied as well, the Nasdaq up 25% in a month and one-half. Then came a test of the lows, but during that there were still very solid signals that stocks were being accumulated. Up until about three weeks ago that was the case. Then something changed. What?

Economic news still okay.

July was a weaker month for consumers, and it was reflected in the economic reports. The reports had been improving, but in July they were so-so and earnings for Q2 were pathetic. No problem, however, because that is how it works in turns back up in the economy: up and down, but trending up. Indeed, the recent economic reports indicate that indeed the economy continues its slow turn higher. Jobless claims continue to fall as do continuing claims, confidence is still high, housing is okay, retail sales are holding up pretty well, leading indicators are rising, manufacturing appears to be stabilizing. This is not the drag on the market. In fact, they were indicative of a recovering economy.

Money supply is up.

Money supply has been ramped up sharply this year, though it has shrunk the past few weeks (remember that time period). Liquidity is necessary for an expansion: there has to be money to loan, borrow, and spend. Banks have been too slow to open the spigot, but the Fed is on them to do so (though it was the Fed that chastised the banks in 1999 and 2000 for their 'easy money' ways). Unfortunately, liquidity may be necessary, but it is not sufficient for an economic expansion. Still, with the firming economic numbers and rising money supply, things were looking better.

Then there is the dollar.

One constant throughout the past decade is the strong U.S. dollar. It has served us well, attracting investment to the U.S. and allowing U.S. consumers to consume more and more goods from here and abroad. A constant, that is, until three weeks ago. At that point the dollar started to weaken against most currencies, particularly the EU. Remember, the dollar held up through all of the rate cutting and is just now faltering. Treasury Secretary O'Neill supposedly came out in support of a strong dollar on Thursday. He never said what was needed, i.e., a firm, unequivocal statement that the U.S. firmly believes that a strong dollar is in its best interest. Instead he gave a lame statement that surely there were other topics to cover, implying that a strong dollar policy was a given. Is it though? He did all but wink and nod. Is this bad? Big debate in the U.S., but not a hard puzzle to solve given the numbers.

What do we mean? Well, look at what we outlined above: yes the economy tanked on a foolish Fed gambit and miscalculation, but it was starting to recover, and the market along with it, after a bust. Then three weeks ago, the accumulation in the market started turning to churning and then to distribution. Bond yields started to fall again on the prospect of a weaker economy down the road and the need for more Fed rate cuts. We may even soon see some pressure on the yield curve as it might try to re-invert. What caused this? What happened three weeks ago: the dollar started to weaken.

It is just not a normal up and down move. It is a sharp drop, and it coincides with the current administration's failure to effectively quell the speculation that it will act to keep a strong dollar. The failure to take a strong stand to quell the speculation has led to even greater speculation. The dollar continues to fall. Short-sighted protectionists say this is a good thing, but it never just ends when things are where you want them. There are no anti-lock brakes for economic gambits. You start the slide of a currency, and if you do not act quickly to stop it, later you will be unable to convince anyone you mean what you say about a strong dollar. The idea: if you wanted a strong dollar, you would have acted when it started to slide. Seems strange, but that is the psychology, and it has repeated a few times in history, most recently in the early 1980's when the administration smugly felt it could engineer a softening of the dollar to just where it wanted it. It did not, and it hindered us throughout the eighties. Same type of smugness that the Fed exhibited in its rate hike campaign. Look how precise the Fed was: it precisely tanked the economy. We used the analogy of a supertanker full of oil and under a head of steam. Once that supertanker gets moving, it needs a lot of room to stop, and it is so unwieldy that if it gets anywhere near anything else, it is a crash waiting to happen.

So, is a strong dollar important to the U.S.? Look at the best barometer we have: the stock market. It has started to distribute and two of the three major indexes have slipped below support and look as if they could completely re-test the prior lows. Why does the market care? Because a weak dollar could lead to disinvestments in the U.S. as investors go elsewhere for growth and stability. There goes the stock and bond markets. Then dollars abroad come home and we really do have a problem with inflation. As long as the economy continued to improve, the market was going to bounce from somewhere before the March and April lows. The mistakes being made with the dollar are raising the risk of a failure higher and higher. The markets are speaking, but the short-sighted are not listening. And by golly, the market usually speaks the truth. Time to get on the phone and email to our representatives and let them know they are flirting with real disaster that would make the prior two years look like pretty rosy times. The sad irony? Without all the nonsense that preceded it, this dollar debate would be academic or would not even be a debate at all. Now it is a life and death struggle for the U.S. economy.

Have we changed our outlook? Yes and no.

We have received many emails about whether we have changed our outlook on the future from one of calm confidence that the economy will recover and the market ahead of it to something direr. 'Gloomy' is a word we have been seeing a bit. We still remain confident the economy will recover and the market will lead it higher. There are simply more risks out there today than there were three weeks ago, and we are seeing those added risks weigh down the stock market. The fact that the indexes broke support on the test indicates that recovery in the market will be harder and take longer, and may also mean that the recovery may be less than desired. But there is more to this change in tone. It could get really bad if we make the same mistakes of the past now that the markets and the economy are already very weak. Here are some thoughts on what I mean.

During the rate hiking fiasco, we had the luxury of an economy that was still solid and held a huge technological lead on the world. That was a nice cushion. Now that cushion is gone. We have to do what is necessary to get back on the right track as we are running out of time: lost technological lead and technological infrastructure (millions of minds developing new technology each day are now out of work, a hideous waste) is hard to recapture, and the baby boom generation, now in its prime to contribute to our standard of living, might be over the hill before we get back on track, and that may doom us to 'has been' status or at least not the dominant status we had. It is a matter of timing, and time is not on our side.

Given that, when I see the incredibly partisan and biased fighting between our leaders, it is getting apparent that Congress is not going to take the steps needed to correct this problem in time. It is a race against time, and our greatest resource, the baby boomers, is going to be gone. The real population centers will be in Asia and South America, and we needed to be so superior in technology that we would be the default choice for those two hungry technology consumers.

Now we have the dollar problem. It will not help if the dollar continues to fall. Do not be beguiled by the rhetoric to the contrary. Those are self-interested parties cloaking themselves in the flag, and what they want trades short-term gain for longer-term instability. Playing Russian roulette with our currency and economy right now is incredibly foolish. We have done it before and it is not the way to work out of this mess.

End Part 1

us stock market
understanding the stock market