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us stock market, understanding the stock market
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9/06/01 Investment House Daily
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SUMMARY:
- Other than a Microsoft hiccup, the market does not even try to bounce.
- INTC causes a stir after hours by simply saying things are not going to be worse than expected in Q3. Now that is sad.
- Despite today's drop, the market is still not there yet.
- NAPM services hit a low for the index as jobless claims move back over 400,000.
- Subscriber Questions
- Team Trades
Not even an attempt at a bounce.
Wednesday night we carefully analyzed the candlestick patterns, the intraday reversal, the higher (though not really heavy) volume, and concluded that the indexes could give us a bounce up to near term resistance. Well, unless near term resistance was lower than Wednesday's close, the indexes did not come close. They were down at the open and then really tanked later. What a bounce.
There was a mid-morning jump when the Department of Justice stated it would not pursue a Microsoft breakup. The indexes popped higher on the news, but the DOJ is still going to try to limit MSFT's business activity, and the move higher flared out fast and the selling resumed. MSFT moved positive on the news for a few minutes, but then finished the day well in the red.
As MSFT faded, the indexes followed. The OEX and SOX puts initiated with Wednesday's alerts raced back into the money and piled up some nice gains (+$5 on the OEX puts and +$9 on the SOX puts). It is tempting to chase put plays to the downside, but the risk is the same as chasing plays to the upside: they get extended, and just as you buy in they turn back on you. The Dow just closed below its recent lows and the support of the middle of its double bottom pattern. It is ready for downside action from here as it just moved up three sessions and has now broken down. Even the OEX could give us some more down to the lows, as it too has broken back down after trying to rise for a few sessions prior to today.
Intel affirms lowered Q3 guidance.
After hours INTC affirmed its Q3 estimates, saying that business looks as if it will continue to follow seasonal patterns. Gross margins were going to be a bit lower, but earnings and revenues would be just below the midpoint of the expected range.
With that lukewarm statement, INTC, the QQQ, and other big cap tech stocks rose after hours. Everything was higher, but not racing to the upside. When it is boiled down, Intel basically said "yes things still stink, they just stink the same and not more as some thought." Nonetheless, after hours traders were buying, apparently on the belief that a steady stench was a sign that the stench was abating.
This looks to be another in a line of semi-positive stories from companies: MSFT, INTC, CSCO, MSFT (again), and INTC (again). They have led to minor bumps higher, but then the selling takes over as the market does not see any further evidence of real recovery.
As always, the market has to be the final judge. It is very efficient at handicapping the future as we saw in March and April of 2000. It saw the coming economic slump even as most economists and our beloved Fed feared a 'white hot' economy. We will see how it responds here, but we think it will be a minor bump before the lows are fully tested.
Not quite there yet.
Why? Well, because the market just is not ready to turn yet on this kind of news, at least not a lasting turn. The sentiment indicators are not there, the volume is not there. We feel things are getting close to coming to a head, but when you see the VIX at just 32 (it needs to be near 60) with the S&P just points away from its low, you realize there is some more selling to do.
Indeed, we are disappointed that the indexes rallied off the lows on Wednesday. It would have been better to just sell straight down and get investors squirming a bit. While they may intellectually believe that the bottom will hold, if you are approaching a brick wall at 100 mph, you are still very concerned as to whether the brakes will work. It is very similar to playing chicken; who will flinch first.
That leads us to believe there is more downside on the S&P and thus the OEX puts. The Dow also has some room to fall as it has been holding up the best. With today's move, it may be ready to really make a run toward the lows. It may take a 300+ point one-day loss on the Dow to make some headway. 400 would be better. Of course, if you go 400, why not 500? There is precedent, and on a percentage basis, that would be a much smaller loss than it was back in October 1987.
In our view the market is not done selling yet, and if we get a rally tomorrow on the INTC news, we will look for the opportunity to short it once again.
THE ECONOMY
Disappointing NAPM services and jobless claims.
The services NAPM did not rise to an expansion as it did in June nor did it even match the NAPM's gain. Instead it tanked 3.4 points to 45.5, much worse than anticipated (49+) and indicating the slowdown is still spreading. This is the lowest reading since the index has been calculated.
Jobless claims rose to 402,000, 'down' from the prior week's 405,000 (revised upward from 399,000). What we have seen each week is an upward revision to jobs lost. They are rising again, but probably lagging the turn in the economy. The 4-week average rose but was still below 400,000. Six one way, half a dozen the other. They are very close and not showing a lot of improvement, but they are not showing a lot of deterioration either.
Retail sales mixed. The discounters were up 6% overall while the department stores were down 4% overall. Consumers are trying to save money, going to the discount stores. That is another sign of what we have been seeing in a retrenching consumer of late. They are not gone, just pulling back, worried about the future.
THE MARKET
No detour on the way to the bottom today. The selling continued, but volume was disappointing in that it was lower. We want to see rising selling volume as that is another indication that sellers are running toward the exits. The S&P is close to its lows, the Nasdaq is taking aim, but the Dow is still 700 points off. Again, it looks as if the lows will be undercut before fear spikes high enough for a meaningful turn. If we get a rally off of the INTC earnings affirmation, we will watch for the opportunity to sell it.
Overall market stats:
VIX: 32.48; +3.52. The strongest jump in months as volatility spiked higher on the S&P's move closer to its lows. A solid move, but to put it in perspective, the VIX hit 41.99 back in March before that bottom was set. In other bear markets it has taken readings of 50 to 60 for a lasting turn. Getting there, but not there yet.
VXN: 62.01; +3.28. Nasdaq volatility climbed sharply once again, but as with the VIX, it still has work to do to get to a turning point. In April it hit 83.56 on that turn in the market, another 21 points. This is one of the reasons we keep saying that not all of the indicators have lined up. We always watch the primary indicators (price and volume, leading stocks) the closest, but you want to see confirmation in the secondary indicators along historical norms. They are not there yet.
Put/Call ratio (CBOE): 0.98; +0.01. Once again knocking at the door but not going in. The index cannot break over and hold the 1.0+ close. We probably need two more big spikes that close over 1.0 that roughly coincide with major spikes in volatility to give a solid signal of a good rally.
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:
MSFT gave it 5 minutes of life before it rolled over and sold off once more. Volume was solid, but it did not increase on the selling. The Nasdaq is right at the last level where it could pause before running down to the low.
Stats: -53.37 (-3%) to close at 1705.64.
Volume: 1.888 billion shares (-3%). The selling was strong, but the volume was lighter. We want to see selling volume jump higher as investors rush toward the exits. Down volume was impressive at 1.645 billion shares (1.3 billion Wednesday) versus 223 million upside shares (7 to 1). That is lopsided action, but we still want to see overall volume rising, indicating that everyone is getting in on the selling.
A/D and Hi/Lo: Declining issues zoomed ahead to 2.3 to 1 (1.75 to 1 Wednesday). New highs held steady at 48 (+0) as new lows rose again to 95 (+51). The internals are horrible, and that is a good sign; we want to see negative extremes to weed out the sellers and leave plenty of upside room when a rally starts.
The Chart: http://www.investmenthouse.com/cd/$compq.html
Closed at a new low since April, holding above its last low that it spent some time at before the April low (1619.58). The Nasdaq is in an incredibly steep decline that started the first of August. Today's move made the slope of descent even greater. Oversold? Yes, but it can get even more oversold and we hope it does. It is just 86.06 points off of its April low, a level that can be reached in a day (it tanked 109 points the day before the April bottom). We would prefer to see the test on a day other than Friday, but you cannot always call the shots the way you want them. What we look for is a tap at or below the April low and then a reversal and close near the high of the trading range on far and away the largest volume in months. Again, if we get an INTC bounce, we will look to sell it if we get selling after an early bounce and again later in the session if the bounce holds into the afternoon; setting up downside for Monday.
Dow/NYSE:
The Dow closed below serious support today, setting the stage for more selling after three sessions of lukewarm gains.
Stats: -192.43 (-1.9%) to close at 9840.84.
NYSE Volume: 1.322 billion shares (-5.6%). Volume was strong, but softer than Wednesday's selling. 1.109 billion downside shares versus 215 million upside shares. Clearly selling; what we want to see is massive selling volume.
A/D and Hi/Lo: NYSE declining issues jumped up the lead to 2.11 to 1 (1.5 to 1 Wednesday). New highs fell to 70 (-25) as new lows jumped to 165 (+39). As with the Nasdaq, internals are bad. Extremes are good.
The Chart: http://www.investmenthouse.com/cd/$dja.html
9885 snapped today as the Dow closed below the floor it was trying to establish. This move after three sessions of small upside gains opens the door for a move down to 9600 as a first level where it might try to hold the line. That is not much support, and it could easily fall farther toward the low of 9106. Now INTC and MSFT are Dow components, and their news may team up for an early rally. We will see if 9885 stops it or the recent highs near 10,000. If they do, we look to play the downside.
S&P 500: A massive breakdown on the big cap index that started Wednesday and followed through today. We were looking for a possible rally to the upside after the two doji's, but the index used all of its upside energy trying to recover. The buyers were overwhelmed, and the index is making hasty tracks toward its low at 1081.19 (just 25.21 points away). It is looking at a full test and undercut right in the face. INTC and MSFT could lead to a pop in the morning, maybe into the afternoon. We are looking for that as another opportunity to play the index down to the low or beyond.
Stats: -25.34 (-2.2%) to close at 1106.40.
Volume: NYSE volume was again above average, but lower at 1.322 billion shares (-5.6%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Employment numbers are out before the open, and unemployment is expected to tick higher to 4.6% while non-farm payrolls rise to 50,000. Widely followed, but widely inaccurate in telling us anything about where the economy is today. Employment lags the economy both up and down. If it is a surprise for the better, it could combine with the MSFT and INTC news for a decent run higher.
From our perspective, the market is not ready for a real move higher right now, at least one that lasts. There is not enough fear; we know that will bring in more emails about how negative investors are, but we are looking at averages and indexes that quantify fear levels and give historical levels where turns occur. To get the market rebounding for good without more fear on strong selling, the economic news would have to be very good indeed.
We have not seen that the past two weeks. We have seen continued improvement in some areas and disappointments in others; that is typical of an economy that has most likely seen its worst times. The question is, when does the move higher start? Nothing coming from companies indicates it is time, though companies are always more negative about how things are than reality. The fact that CSCO, MSFT, and INTC see some decent signs is the start. The improvement in the NAPM is a big plus. At some point it is all going to come together and the market will reverse sharply on strong volume and then follow through on that move a week later with another big gain on very heavy volume. It is getting close.
Until then we have to get to that point. The indexes have been selling hard. They are oversold by most accounts, but they need to get more oversold. We have been wanting continued selling without a relief rally in between to release the pressure on sellers. We want high anxiety so to speak. We want to see Bob Pisani standing on the NYSE floor shaking his head saying 'this is awful' with no mention that it may be capitulation.
Tomorrow we are looking for two moves: a bump higher on the open that carries for a half hour to an hour or maybe even into the early afternoon. S&P futures are up 3.50 and Nasdaq futures up 16 after hours on the INTC news. We simply do not think that will last. Then we look for the second move, and that is back down. The Dow may turn at 9885 or somewhere before 10,000. The OEX may try 572 before failing. Unless something really bizarre happens, things are not ready for a sustained rally just yet, and we will use the upside to reload for more downside action.
Support and Resistance Levels
Nasdaq: Closed at 1705.64.
Resistance: 1750. 1817 (mid-August low), then the down trendline at 1840. 1935 to 1940 stopped the last move higher.
Support: 1700 is the last mild support before the low at 1619.58.
S&P 500: Closed at 1106.40.
Resistance: 1125. Then 1150, followed by 1165 to 1170.
Support: The low is 1081.19.
Dow: Closed at 9840.84
Resistance: 9885, followed by 10,000. Then 10,120 and 10,200. After that, 10,400. 10,600 is strong resistance.
Support: 9775 to 9800 is potential support. 9600 may also try. The low is at 9106.54.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
9-4-01
Auto Sales, August (8:30): 6.1M versus 6.1M prior.
Truck Sales, August (8:30): 7.1M versus 7.3M prior.
Construction Spending, July (10:00): -0.1% actual versus 0.0% expected and -0.7% prior.
NAPM Index, August (10:00): 47.9% actual versus 43.2% expected 43.6% prior.
9-5-01
Productivity-Revised, Q2 (8:30): 2.1% actual versus 2.0% expected and 2.5% prior.
9-6-01
Initial Claims, 9/1 (8:30): 402K actual versus 395K expected and 405K prior (revised from 399K).
NAPM Services, August (10:00): 43.5% actual versus 49.1% expected and 48.9% prior.
9-7-01
Nonfarm Payrolls, August (8:30): -50K versus -42K prior.
Unemployment Rate, August (8:30): 4.6% versus 4.5% prior.
Hourly Earnings, August (8:30): 0.3% versus 0.3% prior.
Average Workweek, August (8:30): 34.2 versus 34.2 prior.
Wholesale Inventories, July (10:00): -0.2% versus -0.2% prior.
SUBSCRIBER QUESTIONS
Q: How can I get an intraday quote of the VIX?
A: eSignal and other real time services provide this. The information is also available on the web. If you have an online account, you can get the quote (symbol is usually $VIX) with the online broker. You can also get it at http://www.astrikos.com/public/vixwatch.html
TEAM TRADES
AMGN: Well, we have been looking at biotechs as potential long plays that could last more than a couple of days. We bought some AMGN back in May, got a $7.50 move out of it, and then sold it late and only made $4 on it; better than if we had held on, however, as the stock dropped over $12 from where we sold. It has been fighting its way back, and today it made the move we were looking for on above average volume. It was a strong volume move, but not a big gain. Still, AMGN tends to make a couple of big moves in two days, then move laterally before continuing. We are catching it on the move out of its lateral consolidation of the past two weeks.
As for the details, it was not really a mind bender. The stock made a big move early, but we were waiting for the initial surge to end. The stock reversed course almost $2, found support at 64.50 (nothing special about that level), and then ran back up toward the buy point (65.92). At 12:05 it hit the buy point once again, and the alert was sent. The volume was good (92% of average) and it was moving against the market as anticipated. The buy was made (stock), and the stock moved sideways the rest of the session. It dropped 50 cents in the last half hour, but overall, we like the move and are looking for two strong moves higher where we will more than likely take some profits on part of the position.
End Part 1 of 2
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us stock market
understanding the stock market
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