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money investment, investment help
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9/24/01 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERT SERVICE
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertdly.htm
SUMMARY:
- Dow finishes second worst weak ever.
- Volume surges on NYSE as old economy stocks are hammered.
- GE provides some rally fodder, but market needs more.
- Few positive economic signs, but that is no wonder.
- Subscriber Questions
Dow finishes a bad week with more selling, rallying to avoid a dubious record.
The Dow tumbled 14.26% last week as Friday brought no respite from the selling following the reopening of the equity markets. It was down over 300 points early before GE's comments rallied it higher. It still sold back, however, unable to make much of the news. The week was only surpassed by the 15.55% drop in July 1933 when the U.S. was involved in a world-wide depression. We have been looking at 7500 to 8000 to hold for the Dow. Friday it came within 63 points of cracking into the seven thousand range before racing higher; fear and Friday's triple witch options expiration can be thanked for the volatility.
The Nasdaq did not escape down five straight sessions and sporting a 16% loss. Higher than the Dow, but the Nasdaq was 67% off of its high when last week's thrashing occurred. Those stocks are getting sold out; sure some will not make it back to profitability, but there is not a whole lot more selling to do on the average Nasdaq stock.
Volume explodes on the NYSE.
Friday's volume did not match Monday's record, but without Monday it would have been a record all its own with 2.317 billion shares trading. Again, as compared to historical norms, NYSE trade was much higher than that on the Nasdaq even though the Nasdaq traded 2.588 billion shares (nowhere near record pace of 3 billion+).
It was the old economy stocks that have been the holdouts during the market selloff over the past 19 months that were giving it up. They had held out longer, but they are paying dearly just as the Nasdaq stocks did before them. We have noted before that when the final sectors of the market get taken down, bear markets can find their bottom. At this point we cannot be sure the Dow is through selling; again, 7500 could be the magic number, but we are dealing with fear induced by attack. There are positive steps being taken, but thus far not enough for the market.
GE provides some good news, but not enough.
The Dow was down over 300 points when GE announced that though its earnings would be lower this quarter due to the attack, it would experience double digit earnings growth this year and next. The Dow roared back almost 400 points to positive territory. The power of a truly U.S. bellwether moved the market in a big way.
GE, however, was not enough by itself. It was a shot in the arm for a weary market, but GE cannot overcome what has been going on. And as far as the market is concerned, there has not been enough done to counteract what has been transpiring.
We were already in a recession regardless of what the textbook definitions are. When you expect 'normal' growth to be 3% and a recession to occur when there are two quarters of negative growth, when you drop from 6% growth and above to 1.8% to 0.2%, you are in a recession. The recent events are only making that worse; we are not all of the sudden experiencing the impact of a slowdown. The economy locked up the brakes back in the fourth quarter after it had been showing that it was going to do just that all through the summer of 2000.
The Fed dropped rates another 50 basis points before the open on Monday. The Dow dropped 14+% and the Nasdaq 16% in five down sessions on the week. That is obviously not going to do the trick as far as the market is concerned. The market knows the consumer was failing and is now down in the bunkers, credit stretched to the max. The market knows that business spending has been down and because the consumer is maxed out on debt that businesses will have to pick up the torch.
That means the need for fiscal stimulus that is being discussed in D.C. in the form of capital gains tax cuts, investment credits, and accelerated depreciation. Indeed, President Bush received loud applause for that line in his Thursday speech. That would be a huge shot in the arm to the market: if the Fed will drop rates another 50 basis points on October 2 (the next FOMC meeting, and it most likely will) and Congress would pass economic incentives as it did in 1982, that one-two punch would assure a powerful positive economic response with no inflation as we saw in the 1990's.
Yet, Greenspan in his testimony to the Senate advised, almost admonished, the Senate to wait ten days before acting. Why? The market is telling us the Fed has not done enough (it has not as the Fed funds rate is still above the 2 year treasury; why borrow when you can put money in safe 2 year notes and make more money in interest?), that its latest 50 basis point rate cut was still behind the curve. The market knows there is a need for stimulus, but the Fed once again is behind the curve. How much damage has to be done before Greenspan will (1) get the Fed caught up with reality and quit the deflationary policies it has followed for the past two years, and (2) let Congress and the President do as they feel necessary on the fiscal side of the equation? It is bad enough he raised rates and hamstrung the economy at, what we were warning was and has turned out to be, the worst possible time to do so. Now that a weakened economy is teetering on the edge, he is once again standing in the way. As if 10 days will miraculously make a difference in the economy.
Sound a bit angry? Yes, and we apologize. Still, we could see it coming: when you tinker with dynamic entities that are not broken, unexpected consequences always occur. We are all suffering immensely from the attack, and the financial impact has been exacerbated by the 'weaken America' policies that preceded it.
THE ECONOMY
Economic news is not great.
It was no surprise to see that most economists and the weekly surveys of the economy were nearly unanimous that the U.S. is now in or will be in recession. That is not rocket science when you see flights with less than 20 people on the plane, hotel lobbies vacant, restaurants half full at lunchtime.
I got a haircut Friday afternoon (at the barbershop, not the market), and all of the cutters and customers were talking about how scared I must have been flying, how they were not going anywhere. That is the mindset that will keep us down. I responded I never felt safer flying because the federal government knew we could not afford another such disaster and thus would NOT let it happen. I have gone through the security at the airports: you had to drink out of any open drink, 2 and 3 year olds being 'wanded' by the metal detector, etc. It is doing its job as set out in the Constitution. We need to do our job: get back to work, go about our lives, support those with the great losses. That is how we do our part.
Dollar woes.
The dollar was up a bit Friday, but it has suffered the last two weeks. There is talk of repatriating dollars to the U.S. as they are converted to Yen, Euros, Pounds, etc. Again we feel this is a shorter term phenomena. Japan's economic outlook is much, much more bleak than here in the U.S. Moreover, even with Greenspan's admonishments, it appears the Congress is going to pass some solid fiscal stimulus. The U.S. is setting itself up for a recovery. The outflow in our opinion is still fear-based as there is stern talk about the war, but it is not time yet for action. That has uncertainty, and markets do not like uncertainty.
THE MARKET
The worst week in a long time sent sentiment indicators to extremes and brought out a lot of negative talk about the economy. As noted, economists were talking recession for sure, analysts were talking down earnings, and a rally inspired by GE could not hold. Fear is high and that has most negative or depressed about the market. Remember, the market starts discounting ahead of time, well before it becomes clear that the economy is going to be okay. We feel we are very close to a meaningful turn higher; it may just be days away. A good catalyst such as a positive fiscal policy package or some good news on the warfront could be it. When fear is high, we need to be ready.
VIX: 48.27; -0.77. Volatility was down on the session, but its high was 57.31, close to the 60.63 intraday reading in the 1998 bear market. The close at 48.27 tops the close back in the market (48.56). The market touched its low two sessions prior to that reading. We note that volatility was very high even the month before, hitting a 54 reading intraday before hitting that high. The rise this time has been ballistic, but Friday's high does not mean it is the bottom in and of itself. We need to see the reversal and follow through.
VXN: 77.73; -4.76. Nasdaq volatility fell on the session as well, but it too raced higher early, topping at 91.79 on the session. That is close to an all-time high (93.17 in December 2000), as this index has shot straight up over the past three weeks. Again, this could be a bottom or one very near. Fear is high enough.
Put/Call Ratio (CBOE): 1.23; -0.15. Down but still quite high as the put/call ratio logged 4 out of 5 sessions last week with a close above 1.0. These are all-time highs (at least as long as the indicator has been kept) and an unprecedented string. This indicator has certainly given us a signal that a bottom is ready to be set.
Summary: The sentiment indicators show heavy fear and anxiety in the market. They are at unprecedented levels, but investors are at unprecedented levels as well. It appears from a historical standpoint that a washout is underway, but the trouble with sentiment is that it is softer: it gives indications, not definite signals.
Nasdaq
Stats: -47.74 points (-3.2%) to close at 1423.19.
Volume: 2.588 billion shares (+24.5%). Another sharp jump in volume, but not nearly a record volume day on the Nasdaq. Indeed, it was nowhere near the 3.1 billion shares on the January 3 Fed rate cut rally or the 3.2 billion share rally on April 18. There has been selling, but it has not been runaway. Again, that is a signal that the Nasdaq is already pretty much sold out even as fear indicators spike higher. Down volume still led 2.054 billion to 508 million upside shares.
A/D and Hi/Lo: Decliners were ahead, but fell to a 2.2 to 1 lead from 3.08 to 1 Friday. Friday may have been a high day of anxiety, but the Nasdaq was not a total rout. New highs, however, did not help much with 18 (+6) versus a whopping 811 new lows (+304). New lows need to start backing off sharply.
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq has undercut the April low by almost 200 points; still a double bottom, but it is getting to a point where it needs to make its turn back up. The sentiment indicators point to a turn, and the index showed a comeback of sorts Friday from its low hit right after the open. This is a massive downtrend the past four weeks, and the index is really getting sold out. We anticipate a rally at some point next week, one that we will be ready to play, but we will have to see if there is follow through. That is a key step.
Dow/NYSE
Worst butt-kicking in a long time, but it will be back soon enough.
Stats: -140.40 (-1.7%) to close at 8235.81.
NYSE Volume: 2.317 billion shares (+15.6%). NYSE volume shot higher again, taking the second notch on the all-time list. On a weekly basis it was by far and away the worst ever at 10.53 billion shares (6.82 billion was the former high in March). It is really getting sold out on strong volume, but note that up volume was a bigger percentage of the total at 733 million to 1.542 billion to the downside.
A/D and Hi/Lo: Decliners continued to lead but slackened to 3 to 1 (4.8 to 1 Thursday). New highs rose to a whopping 23 (+1) as new lows jumped once again to 800 (+209).
The Chart: http://www.investmenthouse.com/cd/$indu.html
The Dow was 62.34 points from 8000 when GE announced its earnings report. The index roared to life and turned positive. Then it sold back and traded in a tight range for the rest of the session. Reversal? Not really. We need to see that reversal that continues to climb right up to the close, preferably closing positive. It is trying to find support at 8000, the middle of the 1998 double bottom. We anticipate a bit more selling next week in another convulsion to the downside before it makes a sharp rally.
S&P 500: The big caps were getting the hammer as well when it tapped down below 960 to a session low of 944.75. It is still holding above the 960 level on the close (the higher of the two 1998 double bottom lows) and the 925 level that was the low in the 1998 double bottom pattern. It rallied off the low on massive volume, but we saw that on Wednesday. Again we are looking for another intraday reversal that rallies to the close on high volume. Two intraday reversal attempts in three high volume sessions; it is trying to put together a sustained rally, and we think we will see it this week.
Stats: -18.74 points (-1.9%) to close at 965.80.
Volume: NYSE exploded to its second highest ever (after Monday) at 2.317 billion shares (+15.6%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
There is still a lot of unknown out there as this is being written. No major news on the war, but it appears that the terror was planned to be more widespread with the discovery of crop dusting materials in the possession of one arrested Algerian who wanted to take jet flying lessons. This is the guy who said he only needed to learn to fly horizontally, not land. Apparently a mass poisoning of the U.S. population was or is one of the plans. To us it seems pretty apparent that Iraq's hand is all over this as well. The U.S. and free-world lockdown continues, and once that is secure, once every potential problem on the homefront is taken care of, then we will see a campaign that few imagine. We hear a lot about how this is going to be such a difficult task, etc. We have no doubt it will be tough, there will be sacrifice, and we will most regrettably lose some of our brave defenders. As with Iraq, however, our military can do the seemingly impossible. No one thought an army could cross the vast Iraq desert at all, much more in just a few days. Done. Once again many are saying we face an impossible task. Mark it down as done.
With that said, we think we could see another upset next week that results in either a reversal that day or shortly thereafter. With the closes Friday, we are not too excited about a follow up rally on Monday, but we cannot rule it out given the rallies off the low. Again, we would prefer to see any reversal rally to the close and finish positive. That is one of the strongest signs, but it is not a lock; we would still have to see the follow through 4 to 7 days later. That would not stop us from playing some index plays or stocks that can really ramble for short term moves, but to commit more money to the market, we need to see that rally, follow through, and the good patterns breaking out.
We believe we are close to that. Maybe it turns out to be nothing more than a good playable rally. In any event, we anticipate a move up next week, and we will be watching for it once again with intraday alerts to subscribers. What we are watching for is another touch down near the lows in the 1998 bear market and for those to hold. Then a big rally. We will be ready with plays off of those lows on the indexes, and we will be ready to catch those stocks in good patterns ready to breakout of their patterns. Downside plays are still in the gameplan, but the have to be 'right'; that is, they have to be coming off a down trendline or breaking support. The indexes and many stocks have been selling hard, and we would want to see a weak bounce before we enter new positions on those.
Support and Resistance
Nasdaq: Closed at 1423.19.
Resistance: 1619 and 1638 are the prior lows that have been undercut and are the nearest potential resistance.
Support: The lows of the 1998 bear market, 1419 closing and 1357 intraday.
S&P 500: Closed at 965.80.
Resistance: 1045. Then 1075 to 1081.
Support: 1000 blew out, but 960 held on the close (one of the lows in the 1998 double bottom). The other low in that patter is 925.
Dow: Closed at 8235.81.
Resistance: 8500 is potential resistance. Then 9106 and 9500.
Support: 8100 held at the close after being breached early in the session. 8100 (former price tops) look like the best next support. 8000 is next (the middle of the 1998 double bottom) and then 7500 (the lows of the 1998 double bottom).
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
9-24-01
Leading Economic Indicators, August (10:00): -0.1% expected and 0.3% prior.
9-25-01
Consumer confidence, September (10:00): 109.0 expected and 114.3 prior.
Existing home sales, August (10:00): 5.20M expected and 5.17M prior.
9-27-01
Initial jobless claims (8:30): 410,000 expected and 387,000 prior.
Durable good orders, August (8:30): -0.4% expected and -0.7% prior.
New home sales, August (10:00): 922,000 expected versus 950,000 prior.
9-28-01
GDP final, Q2 (8:30): 0.1% expected and 0.2% prior.
GDP Chain deflator, Q2 (8:30): 2.2% expected and 2.2% prior.
Michigan sentiment (revised), September (9:45): 79.0 expected and 83.6 prior.
Chicago PMI, September (10:00): 42.3% expected versus 43.5% prior.
End Part 1 of 2
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