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world stock market, us stock market
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8/30/01 Investment House Daily
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SUMMARY:
- Selling intensifies as early bounce attempt fails miserably.
- Consumer is indeed starting to sag as dollar reverses recent positive course.
- Gloom is high, but fear is not yet high enough.
- Tuesday represents a whole new chapter.
- Do you hang onto any of the losers you have left?
- Team Trades
No one willing to test the upside waters just yet.
The market tanked early as anticipated, then made a brief attempt to rally. That was run over by a Mack truck heading south, and everyone piled on. Volume jumped above average on the Nasdaq and the NYSE as the sellers beat the post-Labor Day rush and sold hard before the holiday weekend. All indexes crashed even lower toward the March and April lows.
The brave went long on some defensive stocks: food, restaurants, biotechs, healthcare. Basically the stocks we have been looking at as the few long positions left in the market at this stage of testing the prior lows. As everything sells off, investors seek 'safety,' whatever that is. Believe it or not, several of these stocks still look good even after today, good enough for us to earnestly look at making some solid upside money with them even tomorrow heading into the weekend. Many stocks were selling on higher volume, but several of our stocks and our picks tonight were gaining on higher volume.
Consumer is in fact starting to sag in spending.
The total, all eggs in one basket gambit the Fed and the government have made on the consumer is very close to failing. "What?" say the pundits? "GDP showed consumer spending up 2.5%. How can you say the consumer is weakening?" Today's personal income and personal expenditure numbers tell the most recent chapter of the consumer saga.
Personal income was up 0.5%, better than expected and the highest in nine months. Man that looks good, and it is. But we also have to realize that this number is in part a result of many lower-income jobs being eliminated. That leaves more higher level jobs with higher pay. Fewer jobs at higher pay means income rises simply because lower paid employees have been put on waivers. What was heralded as good news is really in part just a function of math.
Then there is personal expenditures. That was up just 0.1%, in line with expectations, but well off the 0.4% rise last month. It is clear that all consumers, those with and those without jobs, are spending less. Higher incomes (just part of the rise is due to math) and lower spending means more consumers are saving. Specifically, the savings rate jumped to 2.5%, the biggest jump in over two years. Some put a positive spin on it: the consumer is 'keeping his powder dry for later consumption' one analyst said. Yes, that is true. But that is hardly a positive. This is EXACTLY how recessions really get underway: the consumer stops spending and starts saving for the rainy days to come. That has been on of the problems in Japan for years; Japanese consumers simply are not spending.
We have been saying for over a month that the consumer is slowing down, and this is a very serious and potentially ominous development for our economy, one whose hopes have been pinned by the powers that be on the consumer. The consumer IS NOT going to bail out the economy, especially if the dollar continues to weaken. The government caused this mess by again meddling with free markets; now the government needs to take the necessary action to get the business side of the economy going. The trickle down effect of consumer spending and a weak $600 tax 'rebate' is not going to do it. There is talk in Washington of additional tax cuts, but once again the time frame will not help a thing. This is an emergency, and we need immediate, retroactive action taken to jumpstart capital investment.
Dollar index takes a quick plunge.
After trying to firm up for two weeks, today the dollar turned back down hard today. It did not break below the bottom of its recent trading range, but this was the biggest move of the consolidation, and it was from the top of the range to the bottom. Not a good sign.
The ECB (European Central Bank) cut interest rates 25 basis points earlier today, but that had no impact on the U.S. markets or the dollar. As we noted last night, we would see more central banks cut their interest rates in response to the weakening dollar, but the ECB did not go far enough as reflected by the reaction in the world markets. The markets tell volumes about whether the policymakers are taking the necessary steps, and it is pretty clear that the market, the final arbitrator of all actions, thinks the actions are not nearly enough. Indeed, the Fed is still 50 basis points from even starting to get the Fed Funds rate where it needs to be in order for all of that money supply to be released in the form of loans. It is behind the curve despite 7 rate cuts; it simply is not getting the rate to where history tells us it needs to be for businesses to find it economically conducive to borrow for investment in their businesses. It drives you insane by the stubbornness, but the Fed is being ruled by the old school inflation fearing Phillips' curvers, something that has led us to this recession.
Chatter that 'capitulation' is here once again on every analyst's lips.
After a good old fashioned ass-kicking like the market has had this week, the gloom was high today on the financial stations. Again we started to hear the 'capitulation' word out there with many saying that today was capitulation or that the 'capitulation process' was happening.
If everyone says it is capitulation, you can bet it is not. First, just look at the sentiment indicators. The put/call ratio was 0.94 today; up, but not up enough. The volatility indexes have moved up this week, but they are grudgingly giving up ground. They are nowhere near where they need to be to signal a reversal to the upside. Bulls are somewhat diminished and bears are somewhat higher, but they too have not hit those extreme levels that lead to reversals. Despite the analysts' gloom, investors do not seem to be scared about what is going on just yet.
Why not? Well, as with the capitulation talk, there has been the consensus that the March and April lows set the bottom for the market, and it is now just testing those before it heads back higher. That is what we have heard from 90% of the analysts on the financial stations. We fall in that category (full disclosure). So, if you are an investor who has taken a shellacking in some stocks and are still holding them, the thought process is 'well, heck, I will just hold them until this thing turns up off of those March and April lows and just recoup my losses.' Simplistic, yes, but you get the idea: if you know there is a bottom and you know where it is, you are not going to get too scared if it is only another 10% lower. If the bottom could be 500 on the Nasdaq, then you would get some cold sweats going. 700 on the S&P would make investors queasy. 6,000 or 7.000 on the Dow . . . you get the picture.
Right now there is no fear because the prior lows are viewed as the bottom. Investors have to have their trees rattled, their faith shaken. As shocking as it may seem, investors still are not scared; they have been taught by Charles Schwab, Merrill Lynch, et al to 'stay the course' no matter what. With the bottom just 10% away, they figure they can just ride it out.
That is why it will most likely take an undercutting of the March and April lows (that is 9100 on the Dow, about another 8%; 1619 on the Nasdaq, another 10%, and another 5% on the S&P 500) to get investors scared. A classic double bottom occurs when the right leg undercuts the left leg; that scares those that hung on and rode back down to that previous low. When it does not hold, they finally figure there is no telling how low it will go, and then the last sellers get out and the market is free to rise. That is the psychology; they have to get scared. They have not been worn out; it now appears they have to, after all of this selling, be jolted out of the market. Unless the indexes just fly down to the lows in just a few more days, we don't feel the fear will get there until the lows are undercut.
THE MARKET
A further plunge toward testing the lows as volume climbed above average for the first time in weeks. The market is very oversold, but oversold conditions are hard to judge; the market can keep getting more and more oversold each leg down before it snaps back up in relief. Keep sensible downside profit targets; don't get greedy. We had some good gains today and took them. When short covering comes, it comes fast.
Overall market stats:
VIX: 28.08; +2.35. Making a better move finally, but it has been as hard as pulling teeth. Even with all of the gloom and capitulation talk, the index is still below the MINIMUM level of possible reversal, 30. As we have noted, it usually takes 50 to 60 to get a real move going. A lot of way to go, but if fear crescendos, it grows exponentially.
VXN: 52.28; +3.00. Making a much larger percentage move, but still a long way from the 68 and higher levels that have led to the prior turn off the low in April. Same story as the VIX; it is going to take more selling down toward that low to spike that fear and get the last holders to sell out.
Put/Call ratio (CBOE): 0.94; +0.09. Getting closer to another close over 1.0, a signal that a turn could be at hand. In the spring it took three readings over 1.0 on the close to get the VIX and VXN to catch up to the fear level the put/call ratio was showing. It is not there yet as we can see.
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:
We were looking for the Nasdaq to hold at its recent low of 1817 for a reflex bounce back up that we could play. It tapped the low and jumped back up, but that lasted about 10 minutes. It folded below those levels on strong volume. Very oversold and will bounce, but may have to hit 1750 first.
Stats: -51.49 points (-2.8%) to close at 1791.68.
Volume: 1.735 billion shares (+18.5%). Volume shot above average for the first time in weeks. Institutions were dumping shares unabashedly. Down volume led 1.375 billion shares to 334 million (total volume Wednesday was 1.464 billion). High volume selloffs can signal 'capitulation.' As we have said, however, the other planets have not lined up with this yet. We could get a bounce, but we do not think it would be the real thing.
A/D and Hi/Lo: Declining issues did not quite double up advancers (1.89 to 1). Not pretty. New highs fell to 45 (-3) as new lows rose to 193 (+50).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq tried to bounce, but there was no mercy out there today. It undercut even its recent low at 1817 and was in freefall with all others. It found some support at 1780, bouncing off that level twice to finish slightly off of its session low (1777.11). It too looks to be in for a full test of the April low at 1619.58 though we can have a short covering rally at any point; three hard selling days has the index oversold and that usually leads to a bounce higher. It may test 1750 first before trying a move higher to 1817.
Dow/NYSE:
The Dow ran right up to 10,120, the previous intraday low it just broke, and then tanked. A nice test of resistance that was a good point to take new put positions. That was about all it was good for as it tanked on rising, above average volume NYSE volume.
Stats: -171.32 points (-1.7%), its third triple digit loss in as many sessions, closing at 9919.58.
NYSE Volume: 1.169 billion shares (+19.8%). Distribution, i.e., institutional dumping of shares in full force. The prior distribution days we saw earlier in August foretold the story. Down volume was 941 million to 218 million upside shares. Heavy, but not capitulation-level volume.
A/D and Hi/Lo: NYSE declining issues spiked to 1.9 to 1. Heavy, but again not capitulation numbers. New highs actually rose to 113 (+11) as new lows shot up to 102 (+46).
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow undercut the 'hump' in the double bottom pattern that formed in March and April (9947.54), clearing the way for a further move down toward a test of the low at 9106.54. After three sessions of triple digit losses on rising volume, the index will be ready at some point for a relief bounce. Problem is, relief bounces are hard to gauge for bounces. The index cannot, however, maintain such a steep decent without a reflex bounce. So, be careful with the shorts taken when the Dow rolled over at 10,120.
S&P 500: As with the Dow, the OEX hit resistance at the previous low (1150) and turned and ran down on above average NYSE volume. As noted, it is just 3 to 4% away from the low (1081.19). The S&P, the big cap index, is heading toward its low faster than even the Nasdaq. Looks as if it will be the first to undercut. It would be better if all were ready to pierce the lows at the same time; at this rate the S&P will have to wait a while for the Dow to catch up, and that could lead to a substantial undercut of the S&P low.
Stats: -19.53 points (-1.7%) to close at 1129.03.
Volume: NYSE volume jumped to 1.169 billion shares (+19.8%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
Summary: The test of the lows is on. The Dow made a complete test of its lows back in 1974 before it turned. Looks as if the S&P will be the first one to do it. In 1974, the last three-leg bear market, it only took one index to completely test the prior low to turn the whole market higher. We are going to see history in the making once again.
TOMORROW
Consumer sentiment, Chicago PMI, and factory orders are all out after the open tomorrow. The economic news has not been great this week, and it has been helping to gut the market. Factory orders and the Chicago report are supposed to be better; not reversal numbers, but better. Sentiment is expected to fall a hair; expect a hair more than expected. We doubt Chicago will post better numbers.
In any event, the last reports of the week are just a prelude to Tuesday, a whole new chapter in the book. September is called the worst month in the market, but August this year would be hard to beat. Things are definitely not the norm this year; there was no rally into Labor Day that set up the fall we had last year. The numbers on the techs have been stripped down; there are more downward revisions to come, but the bombshells have been dropped despite what Dan Niles says. Everyone knows things are crappy and are not getting much better if at all right now. So, maybe no new shocks next week.
Still, there is a test of the lows coming on one or all of the indexes. What no one knows right now is whether it will be a successful test, i.e., one that rallies into the bull run or just the prelude to another leg lower. The economy is not helping right now, but it is not tanking. The dollar is the wild card in our opinion. It has to continue to firm, and holding in the current range would help. We will keep an eye on volume (we want to see heavy selling volume) and the sentiment indicators (we want to see them rush to the extreme ends of the scale as the prior lows are approached. That will give us an idea that the bottom is getting ready to hold or not. The ARMS index says we have a bottom coming in the next 15 days or so; it has been right for as long as its data has been kept.
What we do is just watch the market in its downtrend for signs of change. Not a lot of great patterns in what one would consider leading sectors, and that will hamper any recovery attempt. Do we hang onto those stocks we should have sold, hoping for a bottom at the previous lows? At this point some say 'don't sell them; it's too late.' Well, the real question is, if this thing does turn, will this be the stock that will make me the most money? Many, many of these techs that people are hanging onto won't survive a test of the lows and won't come back for a long, long time. We believe in putting your money in the stocks that historically show the greatest propensity to return the largest gains when the market turns and rallies. These are stocks with the right earnings, sales, and patterns. We want a winner that can double, triple, and more in the next bull run. We want a stock that we don't have to sell for a long, long time as it leads the market. Those are our focus when the market turns, and that is what we cover in our seminars.
Tomorrow could be a treacherous day. There won't be much volume as many fund managers are not going to be at work tomorrow. If a rally starts, that could lead to short covering rally with some intensity. Low volume days can be unpredictable. We will still look at good breakouts from some promising patterns from biotech and other sectors, and we will look at further ripe downside action, but we won't push it. As we said, starting Tuesday we could have a whole new chapter with all of the fund managers back in the office and ready to work.
Support and Resistance Levels
Nasdaq: Closed at 1791.68.
Resistance: 1935 to 1940 stopped the last move higher. Much higher in the range, 1985 to 2013 is pretty congested.
Support: 1750 is next in line, but there is not a lot of support there. The low is 1619.58.
S&P 500: Closed at 1129.03.
Resistance: 1165 to 1170. 1183 is next, then 1200.
Support: The low is 1081.19.
Dow: Closed at 9919.58
Resistance: 10,000 may act as resistance. Then 10,120 and 10,200. After that, 10,400. 10,600 is strong resistance.
Support: 9775 to 9800 is potential support. The low is at 9106.54.
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): 0.2% actual versus 0.0% expected and 0.7% prior.
Chain Deflator-Prel., Q2 (8:30): 2.2% actual versus 2.3% expected and 2.3% prior.
8-30-01
Initial Claims, 8/25 (8:30): 399K actual versus 400K expected and 400K prior (revised from 393K).
Personal Income, July (8:30): +0.5% actual versus 0.3% expected and 0.3% prior.
PCE, July (8:30): 0.1% actual and expected versus 0.5% prior (up from 0.4%).
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.
SUBSCRIBER QUESTIONS and TEAM TRADES
Because of the severe weather in the Houston area (yes, more floods possible as well as tornados), we are battening down the hatches once more and cannot get team trades or subscriber questions out tonight. We apologize for the inconvenience.
End Part 1 of 2
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world stock market
us stock market
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