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world stock market, us stock market
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9/24/01 Investment House Daily
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MARKET ALERT SERVICE
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SUMMARY:
- Broad market surges on solid volume after miserable week.
- Indexes hang onto gains though there is some effort to sell late.
- Nice turn, but need to see follow through and some other improvements.
- Leading economic indicators lower ahead of attack as oil sinks on fear of economic weakness.
- Subscriber Questions
- Team Trades
After worst week ever, indexes rally Monday.
In an obvious reaction to the heavy selling last week, the index futures were sharply higher from the open, and the indexes themselves gapped higher to start the session. There were many catalysts with European markets higher, Abby Cohen and others saying they were upping their equity allocations, and word that the President was going to freeze terrorist finances. Moreover, after such a heavy week of selling, brokerages were issuing positive covering on stocks. The combination started the buying.
Holding onto gains and decent volume.
Unlike rally attempts of late, the market held onto its early gains and even fought off a couple of selling attempts late to finish in the top of the days range. We would have liked to see the indexes close on the highs, but given that the session started in positive territory and was not a reversal, the close was positive. Remember, we were looking for a reversal day to finish on the high. The fact that the indexes were able to fight off some selling attempts late in the session shows there was sustained buying today.
Volume was very solid but not massive. In the last six sessions, in all but one volume has been higher than today's upside volume. That indicates that the selling has been stronger than today's buying. But also, we had a week of hard selling, and the fact that the indexes rebounded on still very strong volume is good and again, it shows serious buying was in the market.
Looking for more.
It was a nice turn today, but as with all turns from selling, it is not enough to take a reversal/rally session to the bank. After massive selling it was only a matter of when as far as a bounce back occurring. That is great for short term upside, but the huge question is whether this is just a nice short term rally higher or a rally with legs that will carry stocks much higher.
The key as always is sustained institutional buying, i.e., the big money in the market in an accumulation mode. After dumping stocks the prior two weeks, we need to see the institutions come in to the buy side with some staying power. That means a follow through session to today's rally occurring at some point from Thursday to next Tuesday. By follow through we mean a 1.5% (preferably 2% or more) gain on a major index, rising, above average volume, and an A/D ratio of 2 to 1 or better. That shows that institutions are back in the market and buying after any profit taking following the initial rally day. Mutual funds have to be in the accumulation game for the market to make a sustained move. The follow through session is the necessary prerequisite to any rally.
Still some problems out there.
Sentiment indicators hit reversal levels last week, indicating a rally to the upside in the making. What else could be wrong? As we noted last week, even though sentiment indicators were getting to extremes, new lows continued to spiral higher and higher. Traditionally, new lows shrink or hold steady as the market makes its final bottom. Why? It is much like the double bottom theory: the first run down clears out the easy sellers, and the second run down (the test as many call it) scares the last sellers out. The majority of stocks have already hit those lows before on the first drop, so there are not that many new lows on the selling. As we saw last week, new lows were racing ahead in the 500, 600 and even 800 range.
The sharply higher new lows do not mean any rally here will not work, but it is just out of historical norms. As the market is a reflection of investor psychology, if something such as new lows is out of whack, that could mean that the market is not quite ready to rally. However, the market, particularly at turning points, has a habit of making fools out of investors waiting for everything to line perfectly up.
In addition, we have the war hanging out there. It is still the wild card that has the potential to upset any move higher or any move lower. Today the news of freezing terrorist accounts was a positive: a smart, effective and non-violent way of helping win the war on terrorism. At some point not too far from now there is going to be news of a major attack or clash where people start dying. That can be a real negative. We have that hanging over the market as if the economic problems were not enough.
Investing at this point in time.
Where does that leave us? It leaves us patient. Remember, in spite of the talk about how you have to be in on the first move to make the majority of the gains on a reversal, if a rally is for real, we will see waves of stocks set up and break out of solid patterns. Those patterns ready to break out at this point will be followed by the next wave of stocks that will be completing their patterns over the next few weeks. As we know, stocks that set up these signature patterns and break out as the market surges higher give us the premier gains. Thus, while the market may rise 25%, these stocks can and will rise 50% and more in a real bull leg.
Thus, the key is patience and playing those stocks in the good patterns for the longer term gains. We sprinkle into the mix the trading plays to the upside and downside that we have in the reports, split plays, covered call plays, option plays, etc. As we see the stocks make their moves, we get into our favorite plays without hemming and hawing. All the while we maintain our stop rules so we don't let any one play get away from us and sour our gains. That way we get into the best stocks when they make their moves and ride them to the peaks of their runs. We also ramp up our returns on those stocks with our options and index plays. If the rally fails, we are more or less automatically moved into cash again by simple exercise of our stop rules. Our system that we use and that we teach in the seminars keeps you moving into the stocks that are going to be the big winners when they make their moves, and it gets you out of them safely and returns you to cash if the rally proves to be false. It also tells you when the move you are playing is over when the trend is violated. Keeping it simple helps you be patient and confident in decisions. That is the way to invest, and that is how we need to be right now at this critical juncture.
THE ECONOMY
Leading economic indicators down ahead of the attacks.
The LEI was expected to fall 0.1%, but it dropped 0.3% in August from a 0.3% increase in July. That was the first fall in 5 months as the leading indicators were projecting a turn in the economy. In August, however, the only indicator that was positive was the money supply as the Fed had continued its freer money policy. Two indicators were flat, leaving the remaining seven negative for the month. The recovery hit a plateau in August even before the attacks. Still, in the consumers surveyed in the report, while 47% stated they thought the attack would trigger a recession, 90% of those surveyed still said they would not change their spending habits.
Just plain nonsense coming from Washington at times.
Tonight Treasury Secretary Paul O'Neill left us and others scratching our heads. He stated that it would take 7 to 10 days to determine how much fiscal stimulus the U.S. economy will need. That is surely NOT what the market wanted to hear; it knows fiscal stimulus is needed and it knows it is needed NOW. The statement is ridiculous: what is Mr. O'Neill looking at to tell him just what will be needed? Is there some new economic fiscal stimulus needed measure that has been created? Is he simply echoing what Greenspan said (most likely given the 7 day figure when Greenspan said on Thursday to wait 10 days)? In any event, the statement on its face is strange and won't help.
As noted, the market knows it is needed and expects it. Moreover, it expects something to already be in the works along the lines of tax credits, capital gains cuts, and accelerated depreciation. Waiting 10 days to determine if it is 'necessary' puts us just that much further behind the eight ball and leads to more likelihood the right steps will not be taken. That has been the problem all along in the attempted recovery: no one willing to do what the market has shown us is necessary. History in the 1960's and early 1980's shows us that capital gains cuts and investment credits key an explosion in economic growth and thus tax revenues. Why we do not grab hold of that and run with it now that everyone is on board to do so is mind boggling. We are ready to blow the recovery again when we have the golden opportunity to set the stage for twenty more years of solid, inflation free growth.
Oil prices hit the skids on fear of an economic recession.
Oil prices skidded to a 22-month low at $22.01/bbl today, down 15% on the day alone. The conventional wisdom was that oil prices would spike after the attack as reprisals against the perpetrators would cause disruptions in supply as Arab states quarreled about helping the U.S. or not. Thus far there has been broad support from all countries on the war against terrorism, and the fear of a supply disruption has abated. Indeed, OPEC has indicated it wanted to maintain supply.
The major reason for the fall? Weaker world economies being priced into each barrel. We stated a year ago that OPEC did not want oil prices too high because it would impact what we were already seeing as a weak U.S. economy back then. OPEC learned that lesson back in the late seventies and early eighties: slow economies in the west killed OPEC profits. Well, the Fed's tinkering and the higher prices did their part to tank western economies, and now we are seeing oil prices starting to roll over and tank so to speak. OPEC may now want to keep the price stable, but it cannot do it if western economies are using far less oil. Everyone got what they did not want as a result of the foolish tinkering with the markets.
THE MARKET
Over the weekend we said we thought we were perhaps just days away from a meaningful bottom, and today came somewhat as a surprise as we were wanting a bit more selling and an intraday reversal. Still, the market never goes exactly to plan, and today's lasting, broad rally on solid volume was very good. Still, keep those emotions in check and wait for that follow through. If we don't get strong volume moves higher, near term resistance could send them back down. We need to keep light on our toes, take positions on solid patterns that breakout, and also keep in mind the resistance that we note.
VIX: 41.33; -6.94 points. Volatility shot lower today on the massive rally in the S&P 100. That is to be expected after the spike to 57.31 on Friday. As noted then, this sentiment indicator has hit extremes.
VXN: 69.41; -8.32. Tanking lower after the spike to 91.79 Friday. It too has hit its extremes, and now we need to see how the market itself, the final voice, speaks.
Put/Call Ratio (CBOE): 0.55; -0.68. Not a day for puts as the market was in rally mode.
Nasdaq
Stats: +76.21 points (+5.4%) to close at 1499.40.
Volume: 2.054 billion shares (-20.5%). Volume was above average, but well off the pace from last week. It is hard to compare the buying versus selling action, but we must look at that. The selling was higher on most of the sessions last week than today's action. Now the market was in hopefully a cathartic selloff, and we would expect strong volume. Moreover, today's volume was not weak. Still, we have to be patient and look for that strong volume follow through late this week or early next week. Up volume led 1.763 billion to 279 million to the downside.
A/D and Hi/Lo: Advancers finally took the lead at 2.45 to 1. Not bad. We need to see that as a minimum on the follow through session. New highs rose to 39 (+21) as new lows fell to 184 (-627). That is getting back in the right direction. After this rally ends and we get the next inevitable pullback, we want to see new lows hold flat.
The Chart: http://www.investmenthouse.com/cd/$compq.html
The techs rallied right back up to 1500, but could not close over that potential resistance level. It was a solid session, but we note that it and the SOX closed below at least two highs on the session. It was strong, but it struggled a bit at the end. That is some indication that this rally, while it will probably move a bit higher, will face some serious selling pressure after a one, one and one-half, or two more sessions.
Dow/NYSE
If you get your butt kicked, the best thing to do is get right back up.
Stats: +368.05 points (+4.5%) to close at 8603.36.
NYSE Volume: 1.711 billion shares (-26%). Volume remained above average and solid, but it was well off last week's levels. Not necessarily a bad thing as pointed out with respect to Nasdaq volume above. 1.465 billion upside shares to 268 million to the downside.
A/D and Hi/Lo: Advancers jumped ahead to 2.99 to 1. Again, this is what we want to see on the follow through. New highs fell to 20 (-3) as new lows fell to 140 (-660). The new lows must drop to 50 or less and hold at that level on the next test.
The Chart: http://www.investmenthouse.com/cd/$indu.html
A reach down Friday and a bit of a rally followed through today. The Dow is still way, way down after its freefall the past two weeks. It started the bounce that we were looking for and the Dow index options got a good jump early today. We will now look for that follow through later this week as we mind our shorter term positions.
S&P 500: The big cap action mirrored that of the Dow: a reach down Friday, a rally of sorts, and then a further move higher today on solid but lower NYSE volume. On the high today (1008.44) it hit the down trendline that was formed with the September, November and December tops. It must clear that trendline and continue to work toward 1050. There it may find some resistance and pullback a bit before trying to move further.
Stats: +37.65 points (+3.9%) to close at 1003.45.
Volume: NYSE volume was still above average, but lower at 1.711 billion shares (-26%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Again there is still a lot of unknown. Today did not answer any questions longer term; we got an oversold bounce, though it was a good one. We still have to watch for that follow through later in the week or early next week.
Shorter term we anticipate this rally to last through tomorrow and all or part of Wednesday. This would allow the indexes to rally up to the prior lows in March and April that were broken in the recent selling. That is a logical point of resistance and rest before the market can move higher. That is also a logical point to mind our shorter term index option plays and indeed most of our short term option plays.
Today was a good start, and we are going to continue to take positions on the breakout stocks and other rally stocks that can give us a good move over the next two sessions. We want to be careful on these, however, as we don't want to get in on the tail end of this, hopefully, initial rally in the return of a stronger bull run. If it is not, however, we do not want to be taking upside positions on the tail end of an oversold bounce. The trend is still down; we do not want to buck the trend with unwarranted chances at this point. If we were in an uptrend, we could withstand a pullback after a rally and ride it on up. The trend can backstop you if your timing is a bit off; if you are against the trend, it can hurt. So, don't stretch short term bounce plays at this point.
Support and Resistance
Nasdaq: Closed at 1499.40.
Resistance: 1500 is some 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 1003.45.
Resistance: 1045. Then 1075 to 1081.
Support: 960 held on the close Friday (one of the lows in the 1998 double bottom). The other low in that patter is 925.
Dow: Closed at 8603.86.
Resistance: 8500 did not stop the Dow. Then 9106 and 9500.
Support: 8100 held last week. 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): -0.3% actual versus -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.
SUBSCRIBER QUESTIONS
Q: I live in Toronto. Most Sundays, I pick up an Investor's Business Daily at a variety store in a small neighborhood shopping area. IBD is often sold out, as the paper does not offer subscriptions to Canadians. At 8:30 this morning, the store was sold out of the Herald Tribune, and the London papers. They had some New York Times left, and an absolute ton of IBD. What is this world coming to?
A: Actually, you just described one of the indicators of sentiment that is needed for the market to turn: so many investors get to the point where they want nothing to do with the stock market. They thought they could make a ton of money at it, they got in at the top, it sold down, and they got out disgusted and vowing not to return. That is what happens when you do not understand why the market and stocks move the way they do. The lack of understanding makes it look tremendously difficult or rigged. Again, they leave with an oath not to return. When this happens in large numbers, the sellers are getting cleared out. When the financial newspapers are not shunned, that is a good sign sentiment is reaching that negative level. Keep those observations coming. A lot of success in the stock market is just paying attention to trends and looking at them in light of how they reflect upon sentiment. It is not hard to make money in the market, you just have to think a bit differently.
End Part 1 of 2
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world stock market
us stock market
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