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us stock market, stock watch
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9/26/01 Investment House Daily
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SUMMARY:
- Frustrating day, but in the big picture it was good. Patience.
- AMD, MU, INTC, and IBM have bad news or analyst comments, but the market does not tank.
- Comparisons with past events helps us see the big picture.
- Team Trades
If you are ready to rally, today was frustrating, but it was not all that bad.
Today the market started out with a bit of a flourish, but that is often trouble. Indeed, that is what we were looking for last night, to be followed by selling. That is what happened. The market was not going to rally after Monday and Tuesday regardless of what anyone may have wanted. There was not a lot of selling: volume slipped lower on all major indexes. There may have been more sellers today, but there were not more sellers than buyers earlier in the week.
We have seen light volume selling turn into heavier volume selling over the past 18 months. That could happen again this time as well. However, we had some bad news from AMD and MU with very poor earnings reports and INTC had its outlook slashed by analysts, but the index did not spiral down. Indeed, volume fell quite a bit on the Nasdaq, and the NYSE volume still remained at a high percentage of Nasdaq volume. It could always fly out of control to the downside, but it did not give that indication today.
Looking at past events.
The war.
As we have discussed before, despite the comments to the contrary, we see a lot of similarities between this war and the Gulf War. That war was one that a major magazine declared on the cover we could not win. A million fighting men, well-armed armies, oil, lots of tanks, the desert. Using technology that most of us did not know existed, our forces cut off, scared, and ran roughshod over Iraqi troops. By the time the ground war started, it was a rout.
We are taking similar actions now. We have set up a coalition of support, we are cutting them off from supplies (money, and soon oil), and you can bet we have some other methods of attack, direct or indirect, that most do not realize exist. We are not saying it will be a rout as in Iraq, but it will not be a U.S.S.R. experience or another Viet Nam. The Soviets were not fighting to win, but to insure instability while we supplied the other side with massive amounts of arms. There will be no one supplying the Taliban and we have weapons that you cannot escape by running into a cave. We learned our lessons and we are going in to win, not appease or contain.
Consumers, stimulus, and the markets.
Investor's Business Daily pointed out something today that makes a lot of sense as well. Back in 1990 when all of the above was just getting underway, consumer confidence tanked on fears of the Iraq war and how we might be getting in over our heads or into a quagmire. It tanked after the stock indexes sold off, and in fact, it did so two weeks after the market hit its low. That was three months before the ground war when the outcome was far, far from set. Moreover, the economy was still five months away from ending its three quarter recession. Yet, the stock market looked beyond that to the future and had found its footing and was starting to rise.
Tuesday we received word that consumer confidence had tanked once again, and there are daily stories about how the airlines are going down, along with other industries in a domino effect. Very negative news. Yet, BBBY reports sterling earnings and a beautiful balance sheet. Then financials and insurers start looking better. Those are stocks that lead economic recoveries. We have had false starts earlier this year, but a lot has transpired since then.
First, the sentiment indicators have spiked to highs not seen at least since the 1998 bear market. The put/call ratio has hit highs not seen during since the records have been kept. Bears finally outnumber bulls for the first time since 1998. Second, NYSE volume is at historic highs versus Nasdaq volume, and indeed, has eclipsed Nasdaq volume in some recent sessions. That means most of the speculation is gone from the market. With at least 7 Nasdaq 100 stocks trading at less than $1, it is pretty clear that speculation is not in the Nasdaq right now. The indicators of investor fear have been satisfied.
Then there is the stimulus in the market already and the stimulus to come. The Fed has jumped up money supply to very impressive levels. There has been no period in history that the U.S. economy has had such an infusion of money and not had a corresponding economic boom. The question is when. Well, there has already been some fiscal stimulus in the form of the tax cut, but we are about to see a whole lot more.
In addition to the airlines and New York rebuild, the talk by Greenspan is that $100 billion more is needed. What is on the list? It depends upon who you are talking to. Some want to give more of the rebate type money that, as we have seen, has had really little impact. Others want to give longer lasting, economic-boom generating relief such as capital gains cuts, corporate tax reductions, investment credits. What to expect: a bit of each. The minimum wage will most likely be increased in a deal for corporate tax cuts, capital gains cuts, and hopefully (and this is key), investment credits. Investment credits are the turbo booster for investment. Companies that did not have the incentive to buy new computer systems, telephone systems, manufacturing equipment, etc. because business is not that good all of the sudden do have that incentive when they can get a tax credit. If they do it, they get a tax credit, and that increases the bottom line. If they don't, they get no relief. It is an easy choice. Computers, telephone systems, manufacturing equipment, etc. will FLY off the shelf with tax credits enacted, and that is how the manufacturing sector pulls us out of the recession. This is so important, yet so misunderstood. The big, big, big buying power, much like institutional money in the stock market, comes from the businesses.
The Fed's ramp up of the money supply and the fiscal stimulus to come will be an unprecedented stimulus package for the economy. Outside some cataclysmic event, it guarantees good economic times. The stock market will start rising ahead of that. How soon? When it becomes clear that the economic stimulus will be passed. When will that happen? Well, Congress adjourns this session this year on October 30. That is a gnat's rear end away when you think about it. Any stimulus initiative has to pass both houses of Congress, be reconciled, then sent to the President for signing. The Congress can act fast, but there will be behind closed doors yelling and hollering to get a compromise, and that will push it to the wire. The market will keep track of the progress, and we suspect it will start pricing in the action before it actually becomes law.
THE MARKET
As noted, today was frustrating, and it could lead to further and stronger selling, but we are not ready to let today's selling tell us that is the case. Sentiment indicators spiked, stimulus is to come, the parallels to previous events are very close. The selling was on lighter volume, and the action after hours in the futures is more downside tomorrow. That is expected, but we are expecting to see the recent bottom more or less hold. We may even see the Monday gap higher hold on a closing (not intraday) basis. That is what we really want to see.
We may not get a stirring rally off of the recent low or the gap up point, but for now we want it to hold. The market is still in a downtrend; we cannot ignore that, but there is a divergence of what is happening: reversal-level sentiment and sold out conditions versus a continuing downtrend and fears about the economic future.
What we have to see is either the breakdown once again on high volume (we were glad to see the positive gains not washed away by rising volume) or the follow through session where the buyers come back in and really rally the indexes on strong volume and solid internals (A/D line). Indeed, today was what we would consider a perfect setup for such an event with Thursday being the first session we would look for a follow through. Again, we anticipate some downward pressure on the open, and then we will look to see whether the old lows hold and the market reverses or if it just continues down on higher volume. We are holding off on further index plays until we see that move; the competing indicators need to be reconciled.
VIX: 39.15; +0.28. No real movement even intraday. Investors showed their hand last week. Now we are waiting on the market to confirm Monday's move.
VXN: 65.94; -1.63. Down on a selling day, but again, it showed its hand last week as it spiked higher.
Put/Call Ratio (CBOE): 0.82; +0.31. Puts jumped back up on the first hint of selling, a good sign that there is still a lot of anxiety out there after last week's unprecedented string of closes above 1.0.
Nasdaq
Took the brunt of the selling point-wise, but volume was declining. It held at the gap up point from Monday, but we think that will fall intraday tomorrow while we look for it to hold on the close.
Stats: -37.60 points (-2.5%) to close at 1464.04.
Volume: 1.775 billion shares (-18.6%). Volume was still above average, but barely as it falls off rapidly. That is very positive; there were less sellers in the market today than buyers earlier in the week. We knew selling was coming, and this was what we wanted if we had to have it. 1.472 billion downside versus 269 million upside shares.
A/D and Hi/Lo: Declining issues took the lead again at 1.6 to 1. No rout today. New highs fell to 25 (-4) as new lows rose to 271 (+83). New lows have not yet stopped rising, but note that they are rising before the index hits a new low. That is good; the index can rise and then test again without more new lows.
The Chart: http://www.investmenthouse.com/cd/$compq.html
A brief rally attempt failed as we expected it to, and the Nasdaq tested the gap up point (1459.47) on the low (1458.34). The close did not take it far from that point. We are looking for the 1423 level to 1413 to hold. We may be disappointed as support levels are iffy at this point. Tomorrow marks the first session we can look for a confirmation of Monday's rally. We may get a test and rebound or another down session. We want to see continued low volume on another selling session, but a sharp jump in volume on a reversal of intraday lows.
Dow/NYSE
Stats: -92.58 points (-1.1%) to close at 8567.39.
NYSE Volume: 1.533 billion shares (-6.1%). Volume continued to fall, hitting its lowest level in nine sessions. As with the Nasdaq, we liked the lower volume on the selling. Still, it was relatively not as light as the Nasdaq on a historical comparison. The NYSE is still selling off harder in historical terms. Down volume led again at 989 million to 533 million upside shares.
A/D and Hi/Lo: Declining issues led, but not by much at 1.1 to 1. Not bad and much lower than any recent sessions. New highs held steady at 23 (+0) as new lows rose to 202 (+54). Still rising new lows; we need to get out of that.
The Chart: http://www.investmenthouse.com/cd/$indu.html
The Dow hit close to Tuesday's intraday high on the high today (8718.16) just as expected, and then it rolled over. The selling was not vicious as the volume and internals indicate, but we have to be wary of it ramping up as it has in such instances in the past when a rally topped out. Again, we feel things are a bit different this time, but we are still deep in a downtrend. Today was the best we could have expected (or just about) for a selling session that was pretty inevitable. We expect some more selling early on tomorrow before the market tries to hold and make a stand at 8500.
S&P 500: The S&P also tested Tuesday's intraday high on the session high (1020.19) and rolled over as well. On the low, it tested 1000 as it did on Tuesday (1002.62 today; 998.33 Tuesday), a level that really wants to hold as support, but will have a hard time. What we want to see is selling tomorrow at the open that rallies for a strong close well over 1000. We may get another day of selling, however, before it is ready to make a strong upside move. We do note that it rallied on the close to close just above the down trendline connecting the September, November, and December 2000 tops. Again, it is trying to hold the line here on lighter selling volume.
Stats: -5.23 points (-0.5%) to close at 1007.04.
Volume: NYSE volume fell on the selling, coming in at 1.533 billion shares (-6.1%), just above average.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
After a one-day hiatus, we get some economic news Thursday. Jobless claims, new home sales, durable goods orders. You can bet the home sales will be the focus after existing homes earlier in the week, but again, it is for August, before the attack. Good news for the economy: oil prices continue to plunge, and we know that lower prices mean more money in consumers pockets ($13 billion per 10 cent drop in gas prices) and cheaper costs for manufacturers (and thus more profit margin). Oil companies had it good last year with record profits, and this downturn can be expected; it is a boom and bust cycle in the business.
As noted above, we are anticipating further downward momentum on the open. What we want to see is a hold and then buyers stepping in again. It may not happen tomorrow; in that event, we want an even slower selling session with lower point losses and lower volume. That will be a very good sign the spring is coiling for a bounce back up of some force. We will see. The last thing we want is a higher volume selling session; that has been the death of each rally attempt, and it will signal more downside. That means turning to downside plays once again.
While we do not anticipate taking out these lows on this round of selling, we have to let the market speak. Sentiment indicators alert us to possible turns, but we have to see the market follow through on it. Until it does and we see good stocks breaking out more and more, we have to remain cautious about putting a lot of money in the market.
Support and Resistance
Nasdaq: Closed at 1464.04.
Resistance: 1500 is some resistance. 1619 and 1638 are the prior lows that have been undercut and are the nearest potential resistance.
Support: We want to see 1459 hold on a closing basis. The lows of the 1998 bear market, 1419 closing and 1357 intraday.
S&P 500: Closed at 1007.04.
Resistance: 1020 is forming up some resistance. Then 1045, followed by 1075 to 1081.
Support: We want to see possible support at 1000 hold on the close. After that, 960 (one of the lows in the 1998 double bottom). The other low in that pattern is 925.
Dow: Closed at 8567.39
Resistance: 8700 is forming some rough resistance. Then the prior low at 9106, followed by 9500.
Support: 8500 will try and hold, but it failed on the way down last time. After that, 8100 looks pretty good. 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): 97.6 actual versus 109.0 expected and 114 prior (revised from 114.3).
Existing home sales, August (10:00): +5.8% (5.5M) actual versus 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.
TEAM TRADES
AJG: A big breakout move today on massive volume, just what we were looking for out of the handle of its nine month cup with handle pattern. We were checking over potential plays early, and noted that AJG was rising, most likely on the heels of some good earnings news from some other major financial brokers. It ran right up to the breakout point early, stalled, then blew past it during lunch. Volume was strong, so we issued an alert and watched the stock race up to 34 over the next thirty minutes as we tried to find a position. We issue alerts before we act on the stock; our goal is to get it to you first so you can evaluate the play at the earliest possible moment. As noted in the past, when we have a breakout, we usually try to catch it right away, but if we miss it, it usually tests the breakout again. After missing the break, we waited. It came back to 33 and moved laterally testing 33 and 33.20 over about 40 minutes. Once that was established, we went ahead and put an order in to buy when it broke over 33.25; we saw the intraday trading range establish itself after the breakout, the volume was good, so when it moved higher from that range we were going to pick up the shares automatically. Well, the stock did not hit 33.25 the rest of the session, but closed right near the breakout point on some great volume. We still want it on this move. So, we are going to watch tomorrow to catch it after maybe some weakness early when it moves back over the breakout point.
End Part 1 of 2
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