world stock market, us stock market

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8/29/01 Investment House Daily
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SUMMARY:
- GDP is not negative! Buy! Now sell!
- SOX falls as anticipated as the Dow and S&P undercut near term lows as they head for a test of the year lows.
- AMD has no good news and SUNW does not deliver any positive 'Cisco-like' news as many hoped.
- Labor Day weekend just two days away; not many wanting to go long.
- Any nasty post-Labor Day surprises ahead of us next week?
- Team Trades

GDP inspires a small pop ahead of more selling.

Gross domestic product was not negative and that had some feeling better. Of course it was down 5.5% from Q2 2000 at a meager 0.2% growth rate, the lowest in eight years. That was hardly reason to pop the corks. Indeed, it took about 20 minutes to figure that out, less than that for the semiconductors to start selling. Before the overall markets started to peel back, the SOX was heading lower and we issued the put alert on that index. Within 30 minutes we were up $7 on our option positions.

That is the kind of market we have right now. There is simply not a lot of good news to send it higher, and when it does move higher on what appears to be good news, the jumps higher are met with overwhelming selling action. The 'Cisco' rally has suffered the same fate as the Microsoft and Intel rallies earlier in the summer. The news is pretty good, but it is not nearly enough to indicate a real turn in the economy. This is particularly true with the relatively recent and new threat of the weaker dollar. More on this later.

The GDP was good and bad. Despite the 'whew, we are not in recession at least' chatter, the fact of the matter is that we are in a recession by any measure of reality and by the measure of pain across the United States. Indeed, the foreign economies have fallen into recession even faster than we have; they started after we did (all except Japan) and they vaulted ahead of us. The U.S. consumer has made the difference and that is in part due to that strong dollar giving the U.S. consumer commanding purchasing power; the consumer feels he still has plenty of buying power due in large part to the dollar. As the dollar has been slipping, however, we have seen a contemporaneous softening of the consumer.

The consumer still looked good in the GDP report, however, up 2.5% for the quarter (+2.1% prior quarter). The increase was primarily due to demand for cars and trucks. Inventories were down again as well, a plus, but it was a marginal one as sales continue to stink. On the negative side, exports were way down as a result of that softening world demand. Further capital spending was revised down another 1% from even the first Q2 report.

We may sound like a broken record, but it is painfully obvious to anyone that looks that the problem is not consumer consumption but lack of business consumption and investment. That can be resolved easily, but too many think tax cuts for businesses are a bad thing. The feeling is that the surplus is dropping too fast for any more tax cuts, and that is trouble. No, that is good. It gets money back to where it needs to be: in the hands of those that make the most of money. The government wastes money; no one will argue with that except those in Washington who spend it. The fact that the government has less money to waste is good; we wish the government had 50% less money than it has now. That would mean it could not be so darn big and intrusive. Do you know you have to work from January 1 to May 2 just to pay for the taxes you turn over to the Feds? Soon you will have to work half of your time just to pay your tax bill. That is insane.

There were limits in the Constitution on what the Feds could take. Those have been dramatically eroded during the past 70 years; it is NO coincidence that this started with the economic upheaval of the Great Depression that was in large part caused by failed attempts at controlling the economy that we chronicled in detail over two years ago. The Feds tried to control the economy then just as they have tried to do the past three years. The results were catastrophic back then, and they have been no picnic thus far. Remember what we said last night: for the first time in decades we now have a world-wide recession. That has serious ramifications if we do not do what is necessary here at home to right the ship that the government has swamped. Immediate action is needed, and that does not include sending more money to Washington.

SOX was flashing a selling signal once again.

As discussed last night, the SOX is a key element in the market. It was still rising as the other indexes started falling earlier in the week. We saw it hit resistance and start to fall; it was set up for more downside, and thus the rest of the market as well. It started down first today, leading the way for the other indexes to fall. The Dow and the S&P were not long in following, both breaching recent lows and closing at their lowest points since April. They have now joined the Nasdaq firmly below the July lows, and look to be ready to head lower for more of a full blown test of the prior lows.

Volume expanded on the Nasdaq selling, but not on the NYSE. Somewhat of a curious development, but it does not alter the landscape much. There have been two recent distribution days on the Nasdaq, and that is enough for the rest of the market. Moreover, lighter volume selling has not done much to stop the selling; there may not be a lot of dumping of shares, but the sellers are the ones in control right now.

Ready for a move back up now that new interim lows have been reached?

The last time the Dow and S&P broke below the lows, they moved right back up again as buyers saw it as an opportunity to step in; another low could have meant a bottom. Thus, we may see them pop back up right after this move. Maybe. A few different things are happening this time.

For one, AMD delivered some guidance today that was just not inspiring. It is another reason the SOX could not recover. Second, GLW announced layoffs of 1,000 in its fiber optic unit. Then SUNW had its mid-stream, avoid the Christmas rush or whatever conference call update, and unlike CSCO, it has nothing good to say. Instead of a 2 cent profit it is not looking for a profit at all. The hope had been it would deliver another 'Cisco boost' to the market by saying things were looking up. "Hope is a bad thing" said Morgan Freeman in "The Shawshank Redemption." While we do believe that hope is a good thing, in the stock market hope IS a bad thing. It leads to mistakes.

The QQQ was trying to bounce up after hours until the SUNW news hit. They reversed and headed back down, leading one to surmise that the open tomorrow will be lower. The indexes may try to bounce after that as buyers once again step in thinking the worst possible news has once again come. What that does is give us some further downside on our put plays on the SOX, DJX and QQQ. Then we are going to look at taking some profits after the first leg down in the morning. Maybe not all of the positions, but taking some money off of the table after this type of run to the downside is not a bad plan.

Then we will let the indexes bounce higher. We are thinking that they may try to re-test the lows they just broke below as the few buyers step in to pick up some 'values.' That is where we will be watching as that is where we will look at taking more put positions on them if these levels turn the indexes back down.

And, we think they could turn down again after that brief bump higher. The reason is there are only two days prior to the three-day Labor Day weekend. There is not a lot of incentive to take a lot of long positions ahead of that weekend with the indexes selling down. Indeed, we would view any upside ahead of the weekend as a chance to take short positions going into next Tuesday.

Recall last year that the week after Labor Day was ugly. A nice rally into the holiday was met with chip sector downgrades that kicked off the second downleg of the bear market. While most of the bad news is already in the market, could we see some more malingering in the form of "last year we said things were crap and they still are" from the analysts? There is nothing (particularly with AMD's comments) to get analysts hyped up. Perhaps Jonathon Joseph and the more bullish analysts will have something good to say; they will most likely be countered, however, by those that have nothing good to say. All in all, that means the trend is still down for now.

THE MARKET

The Dow and the S&P broke below and closed at new lows since April. The Nasdaq did not hit a new post-April low today, something to note. It may be ready to head back up to test the recent lows after some early morning selling on the SUNW news. That also means that the Dow and S&P may try to test the recent breaks below the lows after some early morning selling as well. We are looking to play the QQQ on the bounce back higher, but we are going to use any test of the prior lows by the Dow and S&P as a chance to reload some downside plays if the moves back up stall at those lows.

Overall market stats:

VIX: 25.73; +1.17. Rising again, but just edging up and nowhere near what would be considered high fear levels. It needs to be at a very minimum above 30, and that is sometimes 30 points less than it needs to be. A long way to go, and this selling to a new recent low on the S&P was not enough to spike it higher.

VXN: 49.08; +0.34. Barely moving on another 1.7% selloff on the Nasdaq 100. As with the VIX, it has a long way to go to get to the 68 and higher level that marked the last turning point in April.

Put/Call ratio (CBOE): 0.85; +0.12. Rising again (+0.13 Tuesday), but it needs to spike higher to close over 1.0. There has already been a close at 1.07; another one will be a good sign.

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:

The selling continued, and it did so on slightly rising trade once again. It did manage to hold above its recent lows, and after the SUNW disappointment is washed out in the morning, it could be ready to run up to retest those lows it broke earlier. It is a bit ahead of the Dow and the S&P in the selling, and that combined with the idea that the Dow and S&P may try to immediately test the lows they just broke give the Nasdaq a good shot at a tradable bounce here.

Stats: -21.18 points (1.2%) to close at 1843.17.
Volume: 1.467 billion shares (+2.3%). Slightly higher but still below average volume on the selling. Down volume led 976 million to 460 million, not nearly the rout that was Tuesday. The numbers are evening up, the sellers running out of steam. That portends at least an attempted bounce toward the prior lows.
A/D and Hi/Lo: Declining issues led 1.35 to 1, well off the 1.72 to 1 lead Tuesday. New highs dropped to 48 (-11) as new lows rose to 143 (+29).

The Chart: http://www.investmenthouse.com/cd/$compq.html

The Nasdaq continued its plunge off of Monday's doji, tapping down on the low (1833.65) at the lowest of the downtrends out of the May high. That down trendline is joining up with the recent intraday low at 1817.70 (a level of some slight support from back in March). In addition, after plunging to the session low in a straight line down in the first hour of trading, the index moved laterally the rest of the session, rising and falling in range, building a floor. Those factors indicate that the index may be ready to try a bounce back up to test the 1934 to 1940 range. That would be quite a move, and it may be more than the index can muster, but it looks as if it will try to make a move. Most likely that will happen after a morning flush out of the SUNW news that was hampering the QQQ after hours. We may see a test back down to 1830 or so before it tries to move higher.

Dow/NYSE:

Knifed through the recent lows early on, and then drifted slightly lower the rest of the session. Light volume, so not much intensity; may get another quick test of the lows just broken.

Stats: -131.13 points (-1.3%), another triple digit loss, and a larger percentage drop than the Nasdaq. That is unusual. Close at 10,090.90.
NYSE Volume: 968 million shares (-3%). Lighter volume on the selling, with downside shares at 675 million versus 284 million upside shares. Not vicious selling, and that may lead to a quick test of the break below the recent lows.
A/D and Hi/Lo: NYSE declining issues led again, but fell to 1.18 to 1 (1.52 to 1 Tuesday). New highs fell to 102 (-9) as new lows rose to 56 (+6).

The Chart: http://www.investmenthouse.com/cd/$dja.html

Today the Dow broke below and closed below the recent low of 10,120. It closed off of the intraday low (10,075.61), but could not rally back over the prior intraday low. It was not looking strong at the close; it had to rally in the last hour to finish off the low, not a bullish sign for tomorrow. Still, after some possible selling early on, we may see buyers step back in once again now that the Dow has broken below the recent lows and try to push it back up from these value levels. At this point we feel that the action will be more like the Nasdaq's: a move back up that fails this time at those prior lows. There is just not the indication in sentiment that the bottom has been reached. We will use any test that stalls as a chance to take some downside positions for the next move lower.

S&P 500: Today the S&P had the lowest percentage loss after having the largest of the three majors on Tuesday. It too knifed through its recent intraday low (1153.32) and support at 1150, though volume was slightly lighter than Tuesday's selling. Much like the Dow, its intraday pattern was poor with it making the session lows not at the start of the session as did the Nasdaq, but in the last hour of trading. A sign of weakness. Even with that weakness, the S&P may follow suit with the other indexes, selling a bit more in the morning, and then trying to rally to test the recent low it just broke. This time as with the Dow, we don't think it will successfully break back above that level for good unless something newsworthy changes the outlook. As with the Dow, we will use that to reload on some downside plays.

Stats: -12.95 (-1.1%) to close at 1148.56.
Volume: NYSE volume fell on the selling to 968 million (-3%).

The Chart: http://www.investmenthouse.com/cd/$spx.html

Summary: We need to keep everything in perspective. All of the major indexes have now closed below their recent closing lows. They are still above their March and April lows. There are still economic numbers that are improving: the ISI survey was up for the third straight week (the consumer once again), LEI's have continued to improve, etc. They are not stellar, but they are not tanking. Basically, the sectors that have been in recession still are, and the sectors that have been doing well still are. There is simply not a lot of movement, and while that is precarious from a consumer driven standpoint, it is not showing the end. The U.S. dollar index has continued its lateral movement, trying to break higher. Today it did move up again, and it is oh so close to breaking to the upside. That is a big positive. The Cleveland Fed also issued a report telling its manufacturing sectors that a weak dollar was bad for them in the long run. That is some common sense. Moreover, the ARMS index, an accurate predictor of market bottoms for the past few decades, has hit the reversal level, and that indicates a bottom in the next 17 days or so.

What we are seeing now is simply a deeper test of the March and April bottom than the economic indicators were showing back in May and June. They have stagnated and the dollar issue arose. That upset that cart and caused the distribution that we have seen. It is apparent that we are getting a further test of the year lows than it looked like we would since the dollar became suspect. That, however, does not mean the economy is going down the tubes. EVERY recession or bear market they say the Fed is 'pushing on a string.' EVERY recession or bear market they say 'things are different this time.' The constants: they always say this stuff and they are always wrong.

The big question is when does the market finally turn back up. It has tried but has been unable to deliver the follow through that lasts. This time around it could not even deliver follow through. Leading patterns are in shambles, and that is a key to sustained moves higher. We are looking more at perhaps a full test of the March and April lows. At this point we are in a downtrend, and while that may not be what everyone likes, it is a way to make money. The SOX play today was great as were other downside plays. It is a fact, but it is one that will not last forever. We still believe that we are on the cusp of a great long term investing opportunity to the upside. When we see the turn happen, and we will see it again, we can take some great stocks (e.g., GE, IBM) that are going to be great earners for us as well as the new leaders that will be flexing their muscles when the market starts. Their patterns and earnings history will point them out to us. We can ride them higher for a long time, getting appreciation and extra cash from covered call sales on them. We cannot lose sight of that, though most in the market will just as the turn is being made; that is how it works historically.

So, while we play the downturn, do not lose sight of what is going on long term. As we have noted in several reports, we are not committing all our cash to the market; we are hitting precise plays upside and downside, getting some profits and then banking them. As the subscriber question noted last night, we can still make great money doing just that. We are not letting a play turn heavily against us. When the upside shows itself, that is the time to commit more money to the market for the long term. We are not there yet, but it will show itself before too long.

End Part 1 of 2

world stock market
us stock market