world stock market, us stock market

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9/20/01 Investment House Daily
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SUMMARY:
- The best of the best: Americans fill warehouses with relief goods.
- Wednesday's late rally followed by pitiful showing as the Dow hits a new year low.
- Volume sharply lower, volatility sharply higher. A bottom appears to be ever so close, but Wednesday appears to be just stage one.
- Economic numbers fairly poor even before the attack.
- Greenspan says long term outlook is good even though short term impact is expected.
- Country needs news of strong economic recovery package.
- Bottom is getting close, but continue to move in slowly.
- Subscriber Questions

A truly great citizenry.

As you recall we reported just a day or two after last week's attack that blood banks across the country were full and were turning people away, urging them to return in 10 days or so. Well, in yet another of the many, many signs of the U.S. capacity to pitch in and get involved to help out, the Salvation Army had to tell donors that its New York and Washington, D.C. warehouses were full.

Wednesday's recovery falls flat.

The sharp, fear-driven rally during the last hour Wednesday got off to a rocky start as early news about more potential terrorists in the U.S. rattled early markets. The indexes tried to immediately rally and had recovered a lot of lost ground, but the follow through we were looking for was not there. The indexes hit their session highs after the first half hour, and then made a series of lower highs before falling to new lows in the last half hour. It was disappointing, but the work on the bottom continues. Wednesday looked to be a good indicator of a bottom in place, but as we said at the time, we need to see the follow through session for confirmation. We said we do not want to let our desire for a bottom to get the best of us. That is why we are keeping the cash involvement in the market at minimums, making trading plays on the indexes and acquiring the stocks we like bit by bit.

Volume drops sharply as the Dow hits a fresh low while Nasdaq and S&P 500 hold at Wednesday's lows.

The selling was coming in waves again mid-day, and it intensified in the last hour; opposite action of Wednesday. Volume, however, was not intense after Monday's and Wednesday's high volume selling. Moreover, NYSE volume darn near surpassed Nasdaq volume; once again the selling in the 'speculative' Nasdaq stocks was less intense historically than the selling on the more staid NYSE stocks. This is historically a sign that the speculation is finally being worked out of the market, and once the 'fluff' in the Dow is worked off, the selling can turn to buying. Remember, the Dow held on much longer and was in much better shape than the Nasdaq or the S&P 500 until just recently. Bear markets do not usually end until all elements of the market are hit. When sellers are finished roughing up the Dow, there will be more room to rise.

While the Dow hit a new low for the year, the Nasdaq and S&P 500 did not sell below (or just a fraction below) Wednesday's lows. That may not seem like much of a difference, but we are looking for points where the indexes tend to hold the line in selling. As the Dow churns lower, the S&P and Nasdaq are trying to hold around the lows in the 1998 bear market. If they can hold here, great. Things are looking like bottom is at hand, and we look for those levels where they could make the move.

Wednesday's starting panic was real, and today there was more of that late in the session, but it was somewhat more like despair. There were more redemptions today, volatility shot higher again, etc. The elements of a bottom and turn back up continue to align, bringing solid upside closer. We may talk a lot about 'fear' and 'panic' levels right now, but we do so to quantify what historically results in a turn out of selling. Just as we have to monitor how complacent investors may be when the market has been running to the upside for a long time, we have to be cognizant of those signals that historically lead to a resumption of buying and the waning of selling.

Looking beyond the next curve in the road.

It may be small consolation that the market holds at the prior bear market, thus wiping away all of those gains, but we have to think of the upside, what positives there are to come. My wife and I discussed today how we were going to use the new section 529 rules to fund our children's college funds as much as we could; when this market turns and starts to rally as this big bear market gives way to the next big, awesome bull market, those funds invested when we see the market follow through could potentially pay the entire way for an ivy league education (if that is what you want; personally, I want to be closer to my kids when they go off to school, and we don't live in the northeast).

We are keeping our eyes on the next ten years. One of our subscribers wrote today asking about a particular stock and whether it was a keeper at a certain price. In the exchange that followed I stated that I wanted to hold stocks 5 years, 10 years or more. I like to buy a stock and just add to it as it hits each next logical buy point to the upside (breaks resistance, tests the 50 day MVA, etc.). The point: things look bleak to downright crappy in most of the financial eyes out there. Looking longer term, we are on the cusp of the best buying opportunity in years and years. Ten years from now, funds invested in quality stocks when we see the next follow through session will amaze us at the returns, particularly if we augment those gains with prudent covered call sales when those stocks temporarily peak out, play the stocks when they are ready to announce splits and then actually split, and incorporate prudent option strategies in our portfolios. Those are all techniques we use and teach in the seminars, and they are the ways to really build wealth when the turn that appears to be near at hand shows itself.

THE ECONOMY

Not much good economic news short term today regarding the consumer, but after such events as last week, you cannot expect much good short term news. Manufacturing continues to look better as the Philly Fed report was much stronger than expected (though still contracting). The key is that the Fed, Congress, and President keep making the right moves now to ensure this short term further sag in the economy does not continue. We might be in a recession, but if we get the right moves from our leaders both on the military and economic fronts, we will emerge quickly and stronger than we were. So far the moves have been the right ones.

Philly Fed at -7.3 versus -23.5 in August. Expectations were for improvement to the -14.6 range, but the sector, after a big downturn in August, is matching what most regions were doing before the attack: turning things around. We could lose this nascent recovery if not careful. That is why we need the economic stimulus to insure it continues to grow.

Housing market continues to soften as permits continue to fall as well.

August housing starts were down 6.9% (1.53 million annualized units versus 1.63 million expected and 1.64 million in July). This is a continuation of the weakness that was showing up in June and July. Housing is following permits; for the third month in a row permits fell, dropping to 1.56 million versus 1.58 million expected and 1.57 million in July (annualized). Without new permits, fewer and fewer new homes are started as the permits are used up. Back in the spring permits fell for two months straight, but then they jumped right back up. The downward trend has resumed and become more entrenched, and there is little doubt that the events of last week will have a stifling effect. Mortgage applications and refinancings were down last week, but as we noted last night, they were not massively down. Nonetheless, we can expect further weakness near term in this sector.

Jobless claims fall, but do not reflect last week's events.

Jobless claims fell to 387,000 from 431,000 the prior week and well below the 420,000 expected. That does not take into account all of the layoffs announced in the wake of the attack; we are going to see jobless claims jump higher. How much higher will depend upon how much stimulus the airlines receive as well as the rest of the economy. Jobless claims were tracking the 1982 recession, but this event is the wildcard. The main issue: more layoffs equals lower consumer confidence.

Greenspan, O'Neill and others address Senate Banking Committee.

Some big names addressed the Senate today, but the testimony and answers were of course not enough of a balm for the nervous markets. Indeed, the markets dipped lower and then really tanked in the last half hour, opposite action from Wednesday.

Greenspan received the most attention. He indicated that while there could be no doubt the attack would negatively impact the economy short term, we must not lose sight of the fact that the U.S. economy is the strongest and has shown heightened resiliency to downturns in the past twenty years. Thus while it will dip more short term, the longer term prospects remain good. Greenspan even went out of his way to contradict the Fed Beige Book report released Wednesday when he noted that consumer spending remained solid whereas the Beige Book stated that consumer demand for August and September was 'stagnant.' That is really perhaps not a contradiction: consumers were still buying pretty well of late, and even if buying was 'stagnant' at those levels, those are still pretty good levels. In other words, Greenspan put a more positive, the glass is half full spin on the numbers than the overall Fed did in the Beige Book report.

Greenspan said something that was not what we wanted to hear, but that is nothing new. He told members of the Senate to 'wait 10 days' before making any fiscal policy moves (e.g., tax cuts, reduction or elimination of the capital gains tax). He indicated the economy was starting to show signs of recovery before the attack, and suggested we should wait a bit and see. It is hard to imagine those events will not alter the pensive, tenuous recovery attempts up to that point.

Consumer may be tapped out without major help.

Apparently Mr. Greenspan is saying that the consumer is still holding up well, and we should give him/her time to continue to carry the load, especially with lower interest rates. One thing that keeps bothering us about this train of thought: the consumer balance sheet is already loaded with debt. Even if many consumers wanted to borrow more, they could not meet the ratios required to issue new loans. If the balance sheet won't take it, rates could go to zero and not make a difference for those consumers. Unfortunately, many consumers are high on debt and unable and rightly unwilling to take on more.

With that in mind, then fiscal policy aimed at those areas that have NOT taken on great amounts of debt would be extremely helpful. Specifically, business incentives and capital gains tax cuts. Capital gains tax cuts get people and businesses to sell items and take the gain; that money is then put back into other areas, i.e., it creates more buying in other areas. Business incentives push companies to buy capital goods; if a small business can get a $10,000 tax credit for buying business goods, you can bet a lot of businesses will buy new computers and other necessary business goods. It costs you money not to do it. Let's urge our senators and congressmen to do just that. The consumer may not be able to add much more buying power to the economy, but businesses sure can.

Talk of doing the patriotic thing: buy something or take a trip.

We just got back from a trip, but we are planning the next one right now to show confidence in our travel system (we are much safer now than we were a week ago; think about it) and to do our part to keep the money flowing in the economy. We are also going to buy that new clothes dryer we need instead of putting off the purchase. We need to get back to business the best we can. Multiply that by millions of U.S. consumers, and you have a tidal wave of economic activity. It makes a difference. We are going to come out of this so much stronger. We don't need to fear the future; think about 6 months or a year from now; all of that stimulus will be working magic on the economy, the markets, and our retirement and brokerage accounts. We all have a lot to look forward to. We are going to have all the excess wrung out of the market to set the stage for the next big bull run. Looking 10 years down the road, we are very confident of what the U.S. and the world is going to look like.

THE MARKET

A weak open looked as if it was going to give way to a continued rally from Wednesday. The weight was too much, however. Moreover, as Greenspan and company talked to the Senate, investors did not get the assurances of immediate fiscal stimulus coming. That had a seriously deleterious impact on the markets. The attempted rally rolled over and the indexes sold to their lows over the next two hours

This action is interesting in itself. Monday was a massive selling day on high volume. Tuesday was a nothing day, and many on the Street cited it as a disappointment, hoping that Monday was the washout day. Wednesday saw more selling and then a rally. Today, most of the commentary described the session as a 'disappointment.' That tends to set up rallies.

The economy is still the key, and investors are yearning for some strong, positive news along those lines. They did not get it today. The P/E ratios are getting there. The price is right, now all we have to do is get the E (earnings) back in line. Good stimulus will do that in due order, and the market will start anticipating that ahead of time. Looking at the indexes, the Nasdaq and S&P 500 held at Wednesday's lows even as the Dow fell to new lows. The Dow was the largest percentage loser on the session, another sign that the index that held up the longest is getting wrung out. We continue to believe we are right at a bottom. We may be off by a few hundred points here or there, but we are keeping our exposure at smaller amounts as we look for the follow through session.

All of the indicators are lining up. All the market needs is some good news about the war and/or news of a comprehensive economic stimulus package. That should do the trick.

VIX: 49.04; +5.80. Closed on the high and the high since the 60.63 intraday reading in the 1998 bear market. The rise has been ballistic this month. As it races higher it prepared us for a sharp rebound in the market.

VXN: 82.49; +5.56. Nadsaq volatility has already topped the levels of the 1998 bear market, and is closing in on the levels of April and December 2000 (93.17 and 89.55, respectively, rebuilt from existing data as there was no such index in existence at that time). As with the VIX, volatility has blasted straight up the past two weeks. These indicators are measures of EXTREMES. Extreme rises to extreme levels set up the psychology for sharp reversals.

Put/Call Ratio (CBOE): 1.27; +0.38. Put buyers zoomed past call buyers today, the third in the last four sessions where put buyers have been in the majority at the close. This is higher than the 1.20 spike in 1998, and the data is piling up for a bottom in the very near term.

Bulls versus Bears: For the first time since the 1998 bear market, bearish investment advisors outnumber bullish investors. That is huge as it indicates more advisors are finally giving up on the market. It is still not at extreme levels, but rapidly approaching them. Bulls were at 35.7% (35% is considered bullish for the market) while bears are at 37.6% (50% is bullish). It is getting there after years of extremely large percentages of bulls.

Nasdaq

The index sold down, but it held above Wednesday's low on lower volume. The reversal of Wednesday is still hanging in there.

Stats: -56.87 points (-3.7%) to close at 1470.93.
Volume: 2.082 billion shares (-15.4%). Volume fell as the market sold lower but held above Wednesday's low. Down volume led again at 1.458 billion versus 593 million upside shares. Holding above Wednesday's low on lower volume is a positive.
A/D and Hi/Lo: Decliners continued to lead at 3.08 to 1 (2.1 to 1 Wednesday). New highs were a mere 12 (-12) versus 507 new lows (-137). New lows fell, and that is the start of a good thing.

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

A new closing low but holding above Wednesday's intraday low (1451.31). Volume fell on the selling. We still believe we are in the process of at least a near term bottom on the Nasdaq. Lots of volatility, lots of volume, now holding above a prior low even though selling was sharp. We are still looking at an upside move and we are looking at the better tech stocks and those that tend to lead, e.g., semiconductors and the SOX. Note also that even though the Nasdaq closed below 1500, it is in easy striking distance and did not make a fresh low.

End Part 1 of 2

world stock market
us stock market