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us stock market, trend trading stock
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8/25/01 Investment House Daily
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SUMMARY:
- Cisco news helps jumpstart a stalled rally in a big way.
- A turnaround? We will know more soon
- Economic numbers still mixed.
- Subscriber Questions
Market "limps" into the weekend with big gain.
Thursday night we thought Cisco would give the market a bump and that might help the market limp into the weekend in decent shape. We did not feel it could last through the session, and had even greater doubts about this week. We could not have been more wrong about Friday's action, but we will have to wait and see about next week. There were good things on Friday, but they were not overwhelming. We also remember the Intel and Microsoft rallies; they started out a ball of fire, but then ran into trouble when the dollar ran into trouble. There is a bit of news on that front as well.
A turn around at hand? Time to dissect what the market is saying once again.
Volume showing some improvement.
It was not a blowout volume day as volume did not quite reach average on either the Nasdaq or the NYSE. Still, after price/volume action reversed at the start of August and started a series of distribution days, the advance on stronger volume, stronger than the recent selling volume, was a good sign. The same action occurred Wednesday last week, with even stronger volume the session after the indexes broke to new lows.
One day of higher volume on a gain is not much to get excited about as we saw back in the early spring with failed reversal after failed reversal. Two days of stronger action close together is a better sign, especially when the volume on the up sessions starts surpassing the volume on the down sessions. On the Nasdaq, there have been three stronger days of volume on up sessions: 8-16, 8-22, and Friday. Except for the selling on August 8, the volume on those sessions was greater than the selling volume. Plus, that higher volume occurred on three of the past seven sessions. Just as increasing distribution days are a sign of further selling ahead, improving price/volume action is a start of reversing that action. It is not a sure sign of reversal, but it is a start.
Dollar index trying to firm and find bottom.
All of this trouble started when the dollar broke decisively below its March 2001 top at the start of August. It then crashed through its 200 day MVA and the stock indexes suffered as well.
For the past seven sessions, however, the dollar index has traded laterally in a tight range along the May 2000 interim top and the September 2000 interim bottom. Previous tops and bottoms can act as support, and the dollar is trying to hold the line. That is a positive development, but it does not mean that the dollar is ending its slide. This is the ongoing story that we believe underlies much of the market's problems as big investors are concerned where the dollar might go and how that will impact the market.
Poor patterns and not a lot of leadership.
On the downside, the recent steep downtrend has left a lot of stocks that looked ready for leadership (e.g., some semiconductors) back down at the bottom of their ranges. They started to move higher toward the end of last week, but they are still just making up the ground they lost recently, trying to once again get ready for another try at breaking resistance.
We have to remember the Intel and Microsoft 'rallies.' Some positive comments by Intel's CEO about an upswing in the latter part of the year sparked one short rally higher that subsequently sold off. Microsoft also spawned a short rally when it said Q3 results would come in stronger than expected and reaffirmed its full year expectations. Both rallies failed, and the Cisco rally is based on the same type of commentary: the CEO said almost in an offhand manner that the changes it was making in its organizational structure were coming at a time when its business appeared to be stabilizing. Not moving higher, just stabilizing.
At the same time, some of the leaders of the past several months, namely financials in the form of regional banks, S&L's, and the smaller financial services sector are showing wear. As noted Thursday, they were showing some cracks. Friday many solid performers sliced through support on stronger volume. That does not usually imply normal rotation out of a sector, but institutions getting rid of the shares completely.
If the selling was dumping, it can mean a few things. One, that the big money is moving back to other areas where it perceives better value. Technology? It was the big winner across the board Friday, but we also note that even with the impressive point gains, volumes on individual stocks were very mixed. Further, the Nasdaq 100 A/D line continues to tank even as the NYSE line continues to improve. That does not indicate that techs are ready as a group to take command, especially with the poor patterns we see.
Two, institutions were using the rally to get completely out of some sectors that have been winners and may be considered too pricey, and then are just banking the money for now. Several solid regional banks were downgraded on valuation calls, and that has really hurt stocks in this bear market. It whacked several homebuilders and drug manufacturers in the past month, and it could have the same effect on the regional financial stocks. In addition, as noted, volumes on individual tech stocks were not overwhelming Friday, with many rising on lower volume.
Still need to see follow through this week.
There is enough ambiguity after Friday to keep solid conclusions at bay. As stated after Wednesday's move off of the lows on rising volume, we have to see the institutions buying into stocks again this week. Friday's action was very nice, but it was close on the heels of Wednesday's reversal. We need to see that big, rising volume this week, and we need to see it move above average on the moves higher. That lays the foundation for any move higher.
Even with confirmation we have to remember the lack of great patterns out there to lead higher, and while say the semiconductors might spurt higher on some of the trading plays that we initiated last week, they still have to deal with resistance at the top of the trading range. Does not mean they won't make it, but we have to be ready either way. The Nasdaq and the S&P are still in downtrends that started in May. The Dow has turned around again over its downtrend. More of the same the market has showed us the past three months.
THE ECONOMY
The economic news did not get any better this past week as it continued to show some bright spots, but then continued weakening as well. Friday was the same story with new home sales up and durable goods orders down.
Durables goods fell 0.6%, a bit higher than anticipated. They were down 11.2% from same time last year. Semiconductor sales fell 42% while capital goods orders fell 17.6%. These are hefty drops. Inventories fell once more, but shipments fell as well, so the inventory status has not improved significantly. That means there is still no incentive to ramp up production. At some point Washington will have to face the story: consumers are going to be hard-pressed to sustain their buying at current levels for the extended period it will take to pull the manufacturing, telecom, networking, and other recession-locked sectors out of the mud.
Unfortunately, Washington is betting on the consumer, and it won't act until it is clear that the consumer is not sustaining the buying level it has held. It cannot with growing layoffs and banks that are STILL too stingy in loaning all of that money that is now in the system. Again the Fed has to take some of the heat as it still has 50% of the banks on restrictions after it cited them in 2000 for making too many 'risky' loans. There are so many contrary forces at work right now, so many incongruent positions taken by the same agencies, it is no wonder things are stuck in neutral with the U.S. worker and consumer having to bear the burden because of it all.
New home sales surprised to the upside Friday, coming in with a 4.9% gain in July (950,000 annual units) compared to June's 2.8% gain. Expectations were for a decrease to a 918,000 annual pace. That was the biggest one-month jump since December 2000. Sounds good, but June was revised down to 906k from 922k and May was revised down to 881k from 907k. Not all reports are to be taken at face value. Indeed, permits have been down for two months running; unless there is a large inventory of permits (something that builders have not done as they have kept their inventories low), the pace has to slow down unless we see another jump in August as we saw in May after permits fell in March and April. On the good side, those new homes need furniture, washers, dryers, refrigerators, garage door openers, etc. That helps keep sales going for a bit longer.
THE MARKET
A good Friday following a higher volume gain on Wednesday. Friday gave us more volume indications than we thought it would, but again, many techs did not jump on stronger volume. The biggest volume went to those leaders in regional banks that dropped. Is it a start of another run higher or just a pause in the downtrend. We are looking for follow through this week as we continue to ride short term plays higher and prepare for downside if the stocks and indexes hit resistance and start to fall again.
Overall market stats:
VIX: 22.29; -2.63. Still falling faster than it is rising. Volatility and the fear it implies remain very low. These are not at levels that instill a reversal, but again, the index is not setting up very good correlations right now with the S&P 100 index.
VXN: 47.70; -1.59. Still falling and still far below reversal levels in the 70 range. As with the VIX, this does not indicate much fear, nor is it setting up any correlation.
Put/Call ratio (CBOE): 0.56; -0.08. Another fall, but this is expected on a gain. Still, the ratio tends to plunge down from its 0.7 and 0.8 levels, and is half of what it was when it spiked to close over 1.0 a week ago. It is very volatile as well, and as indicated in the past, at times it takes more than one close over 1.0 to make a real turn, particularly when there are other factors at work in the market such as the dollar.
NASDAQ:
Stats: +73.83 points (+4.0%) to close at 1916.80.
Volume: 1.496 billion shares +3.2%. The second higher volume session on a gain of the week, though volume remained below average. After the distribution of the prior weeks, the slight firming in positive volume is good, but we need to see that follow through next week on above average volume. Up volume was way out in front at 1.263 billion shares versus 211 million on the downside.
A/D and Hi/Lo: Advancing issues were decidedly out in front at 1.7 to 1. Very solid, but we need to see an even better ratio next week if we get another strong gain on rising volume (2:1 or better is preferable). New highs fell to 77 (-21) as new lows retreated to 100 (-46).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Cisco news did more than just carry the index to the weekend; it gave the Nasdaq its best gain in six weeks when we got the other news of stabilizing conditions in tech land. It was a good day, but it was not a great day as the A/D line and volume were good but lacked the big punch. In any event the index is still in its short term down trendline and it has to have some follow through next week to show if institutions are interested still. Resistance still at 1935 to 1940 and again at 2000.
Dow/NYSE:
Stats: +194.02 (+1.9%) to close at 10,423.17.
NYSE Volume: 1.067 billion shares (+6.8%). Good volume, but still below average. As with the Nasdaq, the second up volume day on a market gain in the last three sessions. Possibly institutions are starting to buy again, but we need to see more next week. Up volume led 762 million to 289 million shares.
A/D and Hi/Lo: NYSE advancing issues enjoyed the lead again 1.73 to 1. This has been the constant in the market other than the downtrends in the indexes. New highs fell to 156 (-22) as new lows fell to 38 (-11).
The Chart: http://www.investmenthouse.com/cd/$dja.html
This time the Dow broke the May down trendline and did not stop until it tapped close to the 50 day MVA on the high (10,440.68; 50 day at 10,445). It was a pretty impressive show as the index also cleared some resistance at 10,400; actually, on a close so close to the level, it is still in the process of clearing it. Still, the Dow continues to come back to life and perform the best of the three major indexes. Maybe it escapes here and turns higher; we will see if it can get the volume confirmation it needs next week and clears 10,500. first things first.
S&P 500: The S&P scored an impressive gain on the session after tapping at a new intraday low on Wednesday and reversing. As with the other indexes it is looking for a follow through session or two this week (1.5%, preferably 2% gain, rising above average volume, and an A/D ratio of 2:1 or better) and a break over the May down trendline that is roughly at 1190. Perhaps then it can muster a move over 1200 and the 50 day MVA at 1201. As noted last week, the selling down just makes the recovery to the upside all that more difficult and time consuming. And of course, it is still in its downtrend, and the trend has been strong thus far.
Stats: +22.84 points (+2.0%) to close at 1184.93.
Volume: NYSE volume rose 6.8% to 1.067 billion shares.
The Chart: http://www.investmenthouse.com/cd/$spx.html
Summary: We are going to remain pessimistic. That seemed to help things out in the last part of last week. Seriously, there is still little for us to get too excited about just yet. The major indexes pulled another reversal on the same kind of news we have seen in the past, and they still have to deal with some pretty hefty downtrends. They have been helped in our opinion by the dollar that tried to firm up last week. If that continues with the dollar, the markets will benefit. At this point there is nothing to indicate whether or not it will; the dollar is in a narrow trading range for the moment. What we have to do is watch the market this week and let it tell us what is going to happen. The market is very good at giving us messages about the future; it may be trying to shift gears here, but we will know more this week if we get a follow through or not. That will be the first step.
THIS WEEK
Again the big event will be whether the indexes can follow through on last Wednesday's gains. This is something that we have looked for time and again after each reversal this year. We have had some follow through and have enjoyed decent rallies off of them (January and May), but others have fizzled rather quickly. Indeed, even the two rallies dies out rather abruptly as economic conditions did not improve. What was a simple test of the March and April lows has now dragged out and is threatening lower as a result of the weaker dollar. Thus, we watch for indications that the market is ready to move higher overall as we continue to pick the narrow group of upside winners that tend to trend higher for more three sessions.
Friday was good enough where we continued to hang onto partial positions on our trading plays; we did take some profit just because with the indexes more or less in downtrends, we prefer to take some nice quick gains off the table when we have them. This is particularly true of Friday where we could have another round of doubters come out on Monday and say Cisco's announcement meant nothing, doom is still here, sell, etc. As to the downside plays, we had to go ahead and exit the partial positions we left open after Thursday. Again it was a situation where we looked back and should have taken the full gain when it was there. That has happened on about 60% of our positions that we have taken partial profits on. With those odds you would think we would learn to just take the gain and move on.
Once again there is a ton of economic news with an important report each day. If we get a series of good news, perhaps the rally can build on itself. We will see. We are going to continue to put downside plays on the reports (we really like index plays on the downside because the selling occurs so fast) if for no other reason than the indexes have not shown any staying power on rallies. We want to be able to jump in fast if the selling starts, get some good gains, and then see how things look. For now and until things change, this is a market of 10% to 15% gains on stocks, and 25% to 50% gains on options. There are not a lot of 100% gains on option plays of late, at least we are not holding them that long. When we do, we tend to see the gain disappear and not come back. We are looking to score enough runs to win, not pile on the statistics.
Support and Resistance Levels
Nasdaq: Closed at 1916.80.
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: 1820 and 1785 are potential support or at least a bounce level. The low is 1619.58.
S&P 500: Closed at 1184.93.
Resistance: 1183, just about where it is now. Then 1200.
Support: 1150 has held as support before. The low is 1081.19.
Dow: Closed at 10,423.17.
Resistance: In the process of moving through 10,400. 10,500 is stronger. 10,600 is strong resistance.
Support: 10,200, then 10,120 as well. Then 10,000 to 9992, the middle of its smaller double bottom pattern in March and April.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
8-27-01
Existing Home Sales, July (10:00): 5.30M versus 5.33M prior.
8-28-01
Consumer Confidence, August (10:00): 117.5 versus 116.5 prior.
8-29-01
GDP-Prel., Q2 (8:30): 0.0% versus 0.7% prior.
Chain Deflator-Prel., Q2 (8:30): 2.3% versus 2.3% prior.
8-30-01
Initial Claims, 8/25 (8:30): 400K versus 393K prior.
Personal Income, July (8:30): 0.3% versus 0.3% prior.
PCE, July (8:30): 0.1% versus 0.4% prior.
Help-Wanted Index, July (10:00): 58 versus 58 prior.
8-31-01
Michigan Sentiment-Rev., August (9:45): 93.3 versus 93.5 prior.
Chicago PMI, August (10:00): 40.5% versus 38.0% prior.
Factory Orders, July (10:00): -0.5% versus -2.4 % prior.
End Part 1 of 2
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