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world stock market, us stock market
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8/28/01 Investment House Daily
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SUMMARY:
- Market reverses on lower consumer confidence.
- No good news to bounce indexes over resistance, and they fall on higher volume once again.
- GDP tomorrow most likely will not help the mood.
- Dollar still trying to improve.
- Subscriber Questions
- Team Trades
Market has no confidence in consumer confidence.
There are a few things holding the economy and the market up: housing, retail consumption, and consumer confidence. While they continue at decent levels, they are showing signs of weakening. Existing home sales are down for two straight months as are building permits. That is not really unexpected after several years of strength. Periodic up and down cycles in any area of the economy are normal. Problem is, every economic policy in the U.S. and indeed the world has placed all of the chips in a massive bet on these areas. The other problem? Each one of these economic keys lives or dies on the consumer. Today the consumer showed a few cracks, and the market did not like it.
As we have said before, you cannot get a better gauge of the health of any economy than from its financial markets. While the confidence numbers were not as bad as they appear on the surface, the significance of any weakness in the consumer was demonstrated by the market response today. The market knows that the policy makers are pinning all hopes on the consumer to stretch out the weakness long enough to let the capital side of the economy recover. Years of spending, massive job losses, and a weakening dollar (higher import prices) are having their impact. The big question is whether consumers will keep spending enough, even at a lower level, to make it to recovery. In any event, the course taken is a longer road to recovery, a recovery that would not be an issue but for foolish actions over the past two years.
Indexes turn and fall on the news in faster trade.
The indexes were not the picture of strength the first thirty minutes, but they were sorting it out, starting weak and then moving into positive territory. Immediately upon the release of the consumer confidence data the indexes reversed. They were already at resistance, but they were making an attempt to move higher. The news pushed them down and then the sellers stepped on them with higher volume. In other words, the slight turn at resistance that we saw on Monday did just what we did not want, i.e., turned into heavier selling on higher volume.
Institutions were selling a lot more shares today than they were on Monday. Still, volume was lighter than the buying on Friday, a silver lining, but a faint one. When you are waiting for a follow through day to a reversal, you want to see any selling on lighter volume. You do not want to see selling increase with share dumping. It should be a time where the last profit takers are getting out of the way, and there should not be a lot of them. When volume swells on selling, that shows more sellers are coming into the market to dump instead of buyers coming in and accumulating shares. That can kill a rally in a hurry.
The turn down continued the downtrends in the Nasdaq and the S&P 500. The Dow sold down triple digits and fell to its down trendline, holding just above that level. Trade on the Dow has been very volatile both up and down. That can be good or it can be bad. Looking at the overall pattern, we are no longer seeing that series of higher lows, but now we are seeing a series of lower highs as it continues to re-test support at 10,200 and 10,120. The falling Nasdaq and S&P 500 are pulling it lower as well.
THE ECONOMY
As noted, the headline confidence number was lower and July was revised lower as well. That never helps. August confidence slipped to 114.3 (118 expected) while July was lowered to 116.3 from 117. The big drag was the present situation that fell to 55 points in August. Dreadful. That put the hammer on the market. But, the numbers were not all that bad.
Future expectations rose, the third month in a row above 90. According to the Conference Board, the 90 level is a critical level, and the three months in a row above that number in future expectations is a positive signal as they tend to build on one another. Problem is, will the consumer continue to say 'wait until next year', or will it eventually say, we WILL just wait until next year? For now the numbers are still very good if looked at in isolation. They are weakening a bit, and that is some concern. Not as much as the market made of it, but you cannot ignore the market's response. It is the final arbitrator.
Retail sales for the week higher than expected. Redbook measured sales for the week at +0.4%, up 2.7% year over year. That was much better than expected, and it gives some support to the camp that believes the consumer is going to carry us all to safety in this economic wreck. The Mitsubishi survey measured just a 0.1% rise in sales for the week, but that too was better than expected. Hanging in there for now.
GDP out in the morning. It measures 0.7% growth in the early Q2 readings, but since then inventories have weakened, the dollar has weakened, and the economic picture has clouded a bit. Many are fearing a slip into the first negative quarter, step on in the textbook definition of the recession two-step. Compare that to a 5.7% growth rate in Q2 2000, however, and you see that we really are already in a de facto recession. Even though the actual GDP figures many not meet the technical definition, the job losses, manufacturing implosion, etc. all demonstrate recession-like pain. Thus, we don't think we will get any pop to the upside out of the number; if the number is negative, it may just help usher in a bit more selling.
The dollar index tried to make another move out of its recent range, but it folded and sold back. As noted, it is trying to firm up here for a move higher; it has not been able to put it together thus far, and these false starts do not help. What is going to happen? The rest of the world is into recession already; they are not lagging the U.S. slowdown but they are in there right with us. There are no pockets of economic strength in the world, no economies to look toward for help. In 1998 it was the U.S. As we have been saying for 2 years, this time the U.S. won't be the backstop and that is a problem.
Central banks are worried about the dollar as well. A weaker dollar means fewer exports to the U.S. and that will prolong their slumps. So, expect a lot of rate cuts around the world over the next month. It has already started, and it will pick up speed. Interest rate cuts will weaken their currencies vis- -vis the dollar and keep their good relatively cheaper. Also, if the dollar continues to fall, other countries will step in to support the dollar even if the U.S. does not. That will help the dollar despite the laissez faire attitude of the current administration if the other countries act when they want to and don't get bullied by the U.S. As the dollar is the de facto world currency, it actually stands to benefit from some weakness as global fear sends global investors to the dollar. With all of the other economies tanking, are they better investments? No. So, that is why we have been seeing some strength in the dollar even as it has been weakening. It is telling us that other economies are getting scared about their own situation, and they are looking for quality.
THE MARKET
Hit resistance levels and with the confidence numbers lower than expected, the indexes turned down once again on higher volume. Could be a quick demise to the rally attempt.
Overall market stats:
VIX: 24.02; +1.58. Finally broke free a bit to the upside, but it is still pathetically low for any type of reversal. It needs to be at least over 30, and 40 to 60 would be better. Yes, way off.
VXN: 48.74; +1.52. The Nasdaq hit resistance and dove lower on higher volume. Volatility, however, did not match the drop. It is still showing no fear. Foolishness.
Put/Call ratio (CBOE): 0.73; +0.13. Higher once again, but not high enough. This thing needs to race above 1.0 with options players saying 'buy puts, buy puts, buy puts' until they are hoarse. That is not happening, and it seems it won't happen until the indexes test or slightly undercut the prior lows.
Sentiment indicators are secondary. They can show signals of what to expect when they reach extremes. They do not replace primary indicators such as price and volume, especially when the sentiment indicators are mixed as they are now.
NASDAQ:
No indecision today: the consumer confidence leg of the recovery was shaken, and the techs decided to turn lower once again and keep the downtrend going.
Stats: -47.43 points (-2.5%) to close at 1864.98.
Volume: 1.434 billion shares (+20%). Down 20% Monday, up 20% today. Down volume crushed up volume 1.131 billion to 278 million shares. Distribution days early in an attempted rally usually kill it off; not always but usually. On the positive side, the volume was not as high as last Wednesday's and Friday's buying volume. Relatively today was not so bad, but more sellers did enter the market on the news.
A/D and Hi/Lo: Declining issues added to their strength at 1.72 to 1 (1.25 to 1 Monday). New highs fell to 59 (-21) as new lows rose to 114 (+24).
The Chart: http://www.investmenthouse.com/cd/$compq.html
After tapping at the middle down trendline Monday and showing a doji, it tried to move higher early until the confidence number hit. The selling then came on higher, though still below average volume. It could turn, but it has continued its short term downtrend, and it looks as if it is going to head back toward the recent low at 1817. The July lows have now formed resistance, and there is no stomach in the buyers to go in and try to rally the index over that level, at least not right now. The rally attempt that started last Wednesday is still technically alive as the Wednesday low (1817) marks the bottom. In other words the index can pull back to that level on light volume and still give us a follow through. If volume crescendos, however, that is another story.
Dow/NYSE:
Did not try too hard to hold up, reversing from resistance and falling toward support at 10,220.
Stats: -160.32 points (-1.5%) to close at 10,222.03.
NYSE Volume: 983 million shares (+15%). Down volume was 701 million versus 272 million upside shares. Volume remains below average, but is climbing on the selling. As with the Nasdaq, the volume was still below average and lower than the buying volume last week.
A/D and Hi/Lo: NYSE declining upped the lead to 1.52 to 1 (1.3 to 1 Monday). New highs fell to 111 (-22) as new lows rose to 50 (+15).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow turned down hard, falling close to support at 10,200 (10,214.34 on the session low). 10,200 to 10,120 represents the range where the Dow has been spending more and more time of late. Instead of making higher lows, it has started to slightly lower lows and lower highs. It is descending toward a showdown at 10,200 to 10,120. Problem is, the more times it spends at these levels after smaller and smaller bounces higher, the more likely the chance it will fail. In addition, the Nasdaq's and S&P's travails below the July lows are dragging the Dow lower as well. For now we watch and see if the index is going to close below those lows once again. That will most likely mark a test of the prior lows.
S&P 500: In a quick swoop the big caps closed once again below the July lows on rising NYSE volume, albeit lower volume than last week's buying volume. It hit the down trendline and then tanked today, closing in on the August intraday low at 1153.32. Another test looks likely, and perhaps a new low on a move down to test the prior low of 1081.19.
Stats: -17.70 (-1.5%) to close at 1161.51.
Volume: NYSE volume rose 20% to 1.434 billion shares.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
GDP is out before the open, and the question everyone has is whether it will it show a negative reading for the first time in ten years. Six one way, half a dozen the other. We are in a recession and so is the world. Hyper-technical definitions mean little when juxtaposed with reality.
The gloom level is getting high, but we still keep hearing on the television that the turn is at hand, hang in there, things will be better. As the sentiment indicators have been telling us, there is too much of this 'stay the course' attitude as the fear level is not rising. Without that real spike in fear, each rally attempt is getting pushed back. The most recent attempt is not dead, but it is very hard to invest in a rally that moves higher 4% then runs back down 3%. It has not confirmed itself, and until it does, we have to stick with the very best upside plays and take decent profits when they are there. We also play the downtrend as the put plays on the reports have been showing us. For now it looks as if the indexes are going to test the recent lows once again if something dramatic does not shift them higher. What they do at that level will tell us a lot. If the volume continues to increase on the selling, we look for a break and further downside, but there will be tests higher along the way that will set up more downside plays. That is where we reload those downside plays.
That makes us sound pretty gloomy, but it is hard to ignore the facts. The indexes are in a downtrend, the dollar has the market in a flux, not many great patterns, the almighty consumer is not as strong as hoped, and the fear level just is not very high. That is not the recipe for a strong move higher in the near term. We would love to be corrected on this with a strong rally, but we have to see it.
The way we are making money in this market right now is catching the breakouts when they occur when an alert is hit and taking profits after 10% to 15% or when the move simply slows down (maybe just at 5%) AND not letting a play turn negative on us. Nip it in the bud. It is harder to do this, but if the indexes are going to plow through the recent lows, we don't want to be long on stocks and options when they do so. Today we had downside plays (e.g., MMC) and upside plays (e.g., PII). We are focusing on a narrow group of stocks each day as we always do, making it a point not to get too spread out. We don't have a ton of money at risk in the market. We are trying to hit the easy plays, the great patterns that breakout, the ripe put plays that just broke support or topped out on a roll higher in a trading range. Several plays on the reports never hit our buy points; it is that kind of market. We don't worry about those and instead focus on those that do what we want. We see the move, send the alert, get in on the action, take what we can, move on. Boom, boom, boom. If we get in and the stock runs but then slides the next session, we don't panic, but will give it another session. At the same time, however, we won't let it tank on us if the breakout fails.
We are going to get that recovery at some point when the interest rate cuts and all of that money supply takes effect. The Arm's index is showing another bottom is coming in the next 20 days. Problem is, the recovery is being dragged out because of the internal problems build in by the Fed by putting half the banks on loan restriction, a Congress and administration that does not believe we are in recession and wants to spend ever more instead of allowing free investment in the country. There is a lot of burden put on the consumer to save the world (yes, that is what the U.S. consumer must do literally), and that takes awhile. Consumption has not dropped off, but the business side of the economy is no nearer recovery. The market will lead the turn around, and we have to keep an eye open for those signals. It could still do it on this rally, but there is a lot of sloppy ends that need to be tidied up (poor patterns, sentiment indicators are not supportive).
Support and Resistance Levels
Nasdaq: Closed at 1864.98.
Resistance: 1935 to 1940 stopped the last move higher. 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 1161.51.
Resistance: 1183 is still holding as resistance. Then 1200.
Support: 1150 has held as support before (recent low is 1153.32). The low is 1081.19.
Dow: Closed at 10,222.03
Resistance: 10,400. The 50 day MVA is at 10,445.78. 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): -3.0% from June.
8-28-01
Consumer Confidence, August (10:00): 114.3 actual versus 117.5 expected and 116.3 prior (revised form 116.5).
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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world stock market
us stock market
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