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world stock market, us stock market
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8/20/01 Technical Traders Report
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SUMMARY:
- Weak attempt at recovery, but volume is simply not there.
- Light rally ahead of the Fed. Just setting up for a further fall?
- Leading economic indicators improve for fourth straight month as economy tries to struggle to its feet in spite of dollar.
- Subscriber Questions
Indexes rebound after a week of selling.
After getting the air let out last week as the Nasdaq and S&P 500 closed below the July test levels, the major indexes gathered themselves today and rebounded. It was a typical trading session of late: up and down throughout the morning until the move found firmer footing late in the session and made the definitive move.
Problem is, investors forgot to show up. Volume was even lighter than on Friday on the Nasdaq and NYSE. The 'rally' had no punch whatsoever. It appears to be in the classic sense a reflex bounce after a lot of negative sentiment and selling. The lighter volume shows there was no real buying interest ahead of the FOMC meeting on Tuesday. Again the market has failed to return to accumulative ways. After steady accumulation during the test, investors went flat and then started to sell shares. That has not changed as of yet.
Setting up for a fall?
While summer Monday's are always light on the volume, until volume spikes higher on some buying, we cannot assume that the downtrends have been broken. Indeed, today's light volume buying was more or less going to happen some point early this week after the selling and extreme negative sentiment last week.
Without volume buying, however, any move up that runs into resistance most likely will not pack the punch to break through and hold the move. And if the market is disappointed by the Fed action, the combination of resistance and disappointment will most likely push the indexes back down. If the market can continue to drift up tomorrow ahead of the FOMC meeting, that would be a perfect set up for selling on the news when the Fed disappoints.
Will the Fed disappoint? As discussed over the weekend, the market is showing it needs something, and the nearest relief is the Fed. It has factored in 25 basis points and is still distributing; it is saying in plain language that it wants, yeah verily needs, more help than just 25 basis points. Problem is, the Fed is always behind the curve and with the continued improving economic numbers, the interest rate hawks will be very difficult to convince that the Fed should cut more than 25 basis points.
The fear is that too many cuts now will lead to overshooting the mark and will require tightening later. There is also the scuttlebutt that the Fed is just looking out for the financial markets. These two arguments are interrelated. If the Fed ignored any signals and just cut, cut, cut, there would be a problem. Why? Because the cutting is not stimulating the business side of the economy. Jacking up demand and the money supply without getting the production side of the economy going has inflationary potential with more demand and money chasing a stagnant pool of goods as none are being manufactured right now. Then there is the argument about the Fed just rescuing the financial markets as if that is bad in and of itself. Like it or not, the financial markets play a major role in our economy. They attract trillions of foreign investment dollars, and that gives companies the funds to invest in the research and development that made the U.S. the technological king. The Fed would like to preserve that, and keeping the financial markets healthy is a worthy goal. But, the goal is only attainable if the industries are healthy as well. No activity on the business side is not the picture of health.
In any event, the market again is our focus. It is showing that the rate cuts in the can and those anticipated (25 now, 25 later) are not enough to turn the economy back up. The market is discounting future growth. Its recent widening cracks are clear signals that what has happened and what is planned is not enough EVEN as the economic numbers continue their slow improvement. The market discounts months in advance. Even with the short term improvement in economic reports, the market is not building in better times down the road; in fact, it is distributing, indicating its lack of confidence in the path being taken. In our opinion, rate cuts may not be the best way to get the economy where it needs to be (tax incentives to stimulate the business side to match the consumer side stimulus - - hey, let's have a balanced plan for grins), but if those are not coming, rate cuts will do the trick, though the market is telling us it will take longer using them.
Thus, 25 basis points will be a disappointment. The Fed could shock us, and we hope it does, but that is not the reality of the situation or how the Fed operates now. A 50 basis point cut would signal the Fed is not finished doing whatever is necessary, i.e., that it has not adopted a "we have done our job, now sit back and watch" attitude that is attributed to it now. No, it has clearly reverted to a stodgy, Philip's Curve view of the world, a world that only existed for 7 years out of the entire history of economics. Unlike one analyst on the television tonight, we do ot believe that whatever the Fed does tomorrow will be positively received by the market. It has really one choice to generate a positive response, but it the odds of that size of cut are very, very long. Accordingly, we view a continued rally into the 2:15 p.m. ET announcement as a good set up for selling on the news.
THE ECONOMY
The news today was the Leading Economic Indicators, a report that looks at conditions 6 to 9 months down the road. Today it was up 0.3% once again, its fourth straight monthly gain, matching the 0.3% rise the prior month. Slow and steady, but an increase nonetheless. That puts us four months of gains, and that is building quite a tide of improvement in the future. However, the gains are not dynamic, and they point to steady, not rapid increases.
This slower gain projection is understandable given the other factors impacting the economy, namely the weakening dollar. Yes a weaker dollar can help manufacturing, but also factored into the LEI's are the financial markets, and with a weaker dollar financial markets are at risk.
THE MARKET
Lighter volume on the rise, as all indexes gained right at 0.8%. Monday's are always light, but recall that Friday's double witch volume was extraordinarily light as well. Could it be that the old indicators are not working anymore? Just checking to make sure you were reading carefully. In fact, we have been looking for some of the traders and analysts to once again say that the old rules just are not applying to this market. That would be a refreshing sign, but it has not arisen. For now we continue the downtrends from May, unable to again generate higher volume on up sessions. That tends to set up the market for a fall as it runs into resistance. For example, the OEX closed at 599 today, right below the 600 level we have earmarked as resistance. It could send the OEX back down for another put play on that index. This is an example of 'reloading' on the puts as discussed in the weekend report when the indexes and their stocks rise back up to resistance.
Overall market stats:
VIX: 25.14; -1.60. Volatility, after showing somewhat of a gain on Friday, slid back down on modest gains in the S&P. Volatility was already low, and today keeps the lid on it. There does not seem to be much fear in the market. It may take a fall below the prior lows to change that.
VXN: 51.64; -0.38. Slight gain, slight fall. Volatility remains light even as the index undercuts its July lows. Volatility is indicating a lack of fear, but there continues to be no correlation between the index and the VXN that makes a good predictive tool.
Put/Call ratio (CBOE): 0.59; -0.48. Put activity plunged today on the market gains. After closing over 1.0 (1.07) Friday, there were not put players in the market. There has been speculation that the put activity is based on put sellers, not put buyers, i.e., those selling puts and playing the lack of volatility in the market. They bank on time to erode the value of the put they sold and a flat market is good for that. The difference in the reading between Friday and today may indicate this is not be the case, but just maybe. Friday was a selling day with a lot of gloom in the market and put activity was high. Today was an up day and put activity was low. That would fit the normal idea: buying puts on the fear days and not on the up days. Now consider that maybe the put sellers were closing out positions on Friday as the market undercut its recent lows, a signal for long positions to get out. Either way, however, buyers or sellers, put activity was high. Option investors were nervous either way, and that is the signal: option investors as a whole get riled up and spike the ratio. As noted over the weekend, however, it can take just one or several closed over 1.0 to spark a rally; it took three in the spring, and the VIX had to hit the 60's as well.
NASDAQ:
Low volume bounce after a week of pretty hard selling. Closed on its high, so we may see it try to rise more tomorrow early. As indicated, could be a setup unless the Fed really surprises the market, something that is needed.
Stats: +14.34 points (+0.8%) to close at 1881.35.
Volume: 1.166 billion shares (-10%). Below average and the third lowest volume day of the year. Up volume led 662 million to 478 million downside shares. The light volume does not give us much confidence in the move as even today there were fewer buyers than there were sellers on Friday.
A/D and Hi/Lo: Advancing issues shaved decliners by 1.04 to 1 (a mere 72 issues). Decliners led 1.95 to 1 Friday. New highs rose to 137 (+18) while new lows also fell to 147 (-5).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq tested lower in the first hour (1854.96), found footing, and rallied to close on the high. That is typically bullish action but for the incredibly low volume. In anticipation of the FOMC meeting tomorrow we may see this bullish trend today continue to lift the index higher. If the Fed does what is expected, that lift may turn to a drop after the news comes out.
Dow/NYSE:
Has once again bounced higher off of 10,200, but made a lower high this last time around. It is the lone major index of the three that has not closed below its July lows. We are looking for it to continue its move higher toward 10,400 where it may run into resistance and then suffer at the hands of the FOMC meeting.
Stats: Up 79.29 points (+0.8%) to close at 10,320.07.
NYSE Volume: 891 million shares (-9.2%). Volume continued to fall and hang well below average. Gains on light volume don't get us excited in terms of longer term moves to the upside. Up volume came in at 509 million versus 372 million downside shares. This is very low volume and absolutely no conviction to the upside. For certain it has not reversed the distribution days we saw the prior two weeks.
A/D and Hi/Lo: NYSE advancing issues jumped back in front as would be expected, 1.33 to 1 (decliners won Friday 1.68 to 1). New highs rose to 185 (+10) as new lows fell to 60 (-7).
The Chart: http://www.investmenthouse.com/cd/$dja.html
We pretty much summed it up above: a bounce up off of 10,200 once again, but no volume on the move puts the move in the suspect category, and near term resistance, the closest being 10,400, is a real threat to send it back down. The Dow has held up the best, but it is also in a descending triangle now, having made a lower high on the last move up from 10,200. It looked much better, but then faltered and could not turn higher. Lot's of overhead resistance and not a lot of upside catalysts other than unknown surprises. Hard to bet on a positive surprise at this point. Down is the path of least resistance after testing resistance at 10,400 to 10,500. Unless it can get some accumulation volume going, we are going to use any rise tomorrow to get ready for more downside plays.
S&P 500: Not a bad move at all from a price standpoint as the big caps moved back up after breaking and closing below the July lows last Friday. NYSE volume was lower as noted, and that makes the move more like relief from selling. Note that it closed right at potential resistance at the 1170 level (give or take a few points). It could test above this level tomorrow (1183 is a possible next level of resistance) ahead of the Fed announcement, but again, unless there is some other catalyst, we cannot see a 25 basis point cut adding upside fuel. As noted above, we would use that as an opportunity to prepare to reload for downside positions.
Stats: Up 9.44 points (+0.8%) to close at 1171.41.
Volume: NYSE volume was again lower and below average, this time on buying. Still has not washed away those distribution days of the prior weeks.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Over the weekend we were talking about a late rise in the indexes Monday that carries over to Tuesday. Again, in our opinion that would prime the markets for a fall as they get the disappointing news in the form of a 25 basis point cut. It is our belief that the market is expecting 25 basis points in cuts, and the market is crumbling with this expectation. Thus it is obvious that the market needs more than 25 points, and the market as we know is a very good handicapper for the economy as 2000 showed us.
As discussed in the weekend report, we usually take positions just after the news hits, having our orders ready to go (just hit 'enter') or our brokers on the line. That way if the Fed does the improbable, we can avoid getting jerked around. Greenspan has testified before that it is good to 'surprise' the markets every once in a while, and as long as he has not rescinded that statement (he has not) and as log as the market is in dire shape, that is not out of realm. It is a low probability, but it could happen. So, we are going to take positions immediately when the news has been confirmed and then let the market work. Last time the market tried to rally and our brokers were calling in a lather about selling. We did not get ruffled and held on; sure enough the negative sentiment took over and dragged the indexes down and we profited handsomely on the QQQ, OEX and SOX. We will also look for our put plays on individual stocks to make us some money.
On the other side of the coin, we will still see investors rotate to the winning sectors and defensive sectors even on a 25 basis point cut and disappointment selling overall. That will push those winners even higher. We have consistently seen the stocks in good patterns break higher out of those patterns. That is a consistent move that we can play, but we have to catch the moves and then lock in the 10% or so we get on that move.
One thing we have noted is that even as investors have rotated to some of these 'safer' areas, volume has not been huge, indicating that money continues to rotate out of the market. Investors overall are giving up, something that has to happen. Buy and hold is tough right now. You have to catch the moves higher and then capture profits in the form of selling outright or selling calls on positions.
Support and Resistance Levels
Nasdaq: Closed at 1881.35.
Resistance: 1935 to 1940, the July lows, will be the level to beat on the way back up. Before that there does not appear to be any clear level of resistance. Much higher in the range, 1985 to 2013 is pretty congested.
Support: Got the reflex bounce off of that potential support at 1869. 1785 is possible support below that, but it would not be much. The low is 1619.58.
S&P 500: Closed at 1171.41.
Resistance: Closed right at potential resistance today around the 1170 level (the July lows it just broke below). It could trade above that tomorrow ahead of the FOMC. Look for potential resistance at 1183 if that is the case. Then 1200.
Support: 1150 has tried to act as some support or resistance in the past. The low is 1081.19.
Dow: Closed at 10,320.07.
Resistance: 10,400 could be some resistance, but mild. 10,500 is stronger, and the 50 day MVA is at 10,488.86 to bolster that level. 10,600 is strong resistance.
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.
8-20-01
Leading economic indicators, July (10:00): +0.3% actual versus 0.3% expected and 0.3% prior.
Treasury budget, July (2:00): -$1.5B versus +$5.1B prior.
8-21-01
FOMC meeting results (2:15): 25 basis points expected. 25 basis points prior.
8-23-01
Initial jobless claims (8:30): 380,000 prior.
FOMC minutes, June 27 (2:00)
8-24-01
Durable goods orders, July (8:30): -0.5% expected versus -2.0% prior.
New home sales, July (10:00): 910k expected versus 922k prior.
SUBSCRIBER QUESTIONS
Q: I don't understand what this "buy up to 'price' " means. If I buy a stock at 19.60 and the target is 20.58, do I sell at 20.58? Is that a point at which you think it could [start a] re-test the breakout and go down? I know NOT to buy higher than 20.58, but do I hold it at that price?
A: The two targets are discrete: First ("a buy up to..."), we will buy on a breakout move up to 5% over the breakout price. That is just our standard target for buying ON THE MOVE, because once the stock gets over 5%, it has already made a good move and more likely ready to take a breather, and we don't want to buy at a point where the stock could then test the move and potentially take us out via a stop loss right off the bat on a simple test of the breakout (using a 7% stop loss). We'd much rather buy right at or just after the breakout to be assured of the maximum gain on this move, and that 5% gives us room to do that. Second, the target (the higher price) is how far we think the stock will go, either for the short term or for the long term--it is for the bigger picture. Sometimes you will see that we say "initial" target. That means that we think the stock will at least get that high for the present time, and we might adjust that higher once the stock gets over that initial target. Most of the time an initial target coincides with resistance levels if the move was not to a new high.
So you see that the breakout target ("a buy up to...") is separate from the initial target or some longer-term target. Once the stock gets to 5%, you can hold it by riding a pullback, or get out and then get back in when and if it starts to head back up after a pullback.
THE PLAYS: Removed several stocks again, making room for better-looking plays, as always. We are keeping the former on a watchlist: ERTS, LFIN, ARE, ASBC, COTT, ETN, CPC (looks good still), SCUR, NTIQ, POWI, CCBL, APC, APA, CWN, NMTC, EBAY (could still move down on the put), PMI, ZION, BSC (hit target), BBBY, EEFT, GP, SOTR, JCP, SLVN, MTG and CERN. Several of those still look good and we will keep a watch and update you. They are still on the alert system when and if the buy points are reached.
Note for reading plays: A "prior high" refers to the high at the start of a base.
All prices are current as of the close of trading Monday.
End Part 1 of 2
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