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world stock market, us stock market
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10/23/01 Stock Split Report
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SUMMARY:
- The 50 day MVA and more anthrax stop the markets again.
- Another distribution day at a key resistance level.
- Earnings topping reduced expectations.
- Subscriber Questions
Indexes try the 50 day MVA once again and fail. Strike two.
Last Wednesday the indexes made a run at the next very significant resistance levels. They were making great progress, and then stories of new anthrax strains, assassination, Taliban threats, etc. reversed them on heavy volume. A test of the prior consolidation tops, and then another move up with many stocks in good looking patterns.
Today the indexes were again trading over the 50 day MVA's most of the morning. Indeed, the Nasdaq broke over that level, tested it, and moved higher. Then confirmation that two deaths were anthrax-induced and news of another two cases of inhalation infection were being treated in hospitals. As with last Wednesday, this news reversed market direction. Shortly after the confirmation came, the indexes stopped their morning rise, failed on an attempt to break over that morning high, and then sold lower. A brief attempt at recovery in the last hour (the Nasdaq turned positive again, where it spent most of the session) was squashed in the last ten minutes when a White House press conference revealed that a remote White House mail sorting site had tested positive for traces of anthrax. After fighting off more anthrax news Monday, Tuesday's news was too much; the Nasdaq turned negative and joined the other indexes that were already down for the session.
That is the second try in five sessions, and the second failure as well. While the indexes could always turn significantly lower, many times they will take a third shot at a resistance level. If they do not make the break on that one, they tend to head down to regroup.
Second distribution day in five sessions.
Today's selling was on higher volume on both the Nasdaq and the NYSE. After last Wednesday's hard selling, the indexes managed to hold above the prior consolidation and move right back up to again test the 50 day MVA. The volume on the move back up, however, was on steadily lower volume. We stated Monday night that the indexes needed upside volume to break over this key resistance level. It looked as if it had it early, but the reversal turned that upside volume more negative.
Indeed, the price/volume action has not been what we would want since last Wednesday. The indexes have once again demonstrated intraday bullish activity, i.e., starting slow and finishing strong, but we had been noting the missing ingredient on the climb back up: volume. Volume is the key.
Last Wednesday sellers were in control because the indexes sold lower. We knew that more sellers entered the market when the indexes tested the 50 day MVA because volume climbed sharply on the selling. After that session, the rises higher were on lower volume. Yes there were more buyers in the market on the days it moved higher, but overall buyers were not outnumbering sellers because that high volume distribution day hanging out there. When the indexes made their second try at the 50 day MVA resistance, sellers came back into the market as the indexes sold off on higher volume.
Distribution means institutions are net sellers of stocks as opposed to buyers as we had seen up until last Wednesday. Since then, buyers have not reasserted themselves, and when the resistance was met again today, sellers came into the market again. We were looking for buyers to come into the picture given some patterns we see in the semiconductor sector, but even though the techs led the session, they could not break that ice and make it stick. Thus, we have two distribution days in five sessions. In other words, the sellers are gaining strength at the 50 day MVA. Another one this week would not be a good sign for this part of the rally going much further. Indeed, with today's action the indexes have a higher probability of returning down to the bottom of the trading range to try and regroup once again for another attack on the 50 day MVA. Whether they go lower than that depends on how strong the selling is on the way down to the recent support levels just tested.
Price/volume action has deteriorated, and sentiment indicators have suddenly fallen.
Anxiety keeps a rally going. Everyone is guessing about what may happen. Do I need to get in on this move before it gets away? Is this just a head fake before another plunge lower? Should I be defensive or aggressive? Should I just give up? All of the uncertainty tends to keep enough doubters to keep the market from flaming out too fast. Those bears turn into bulls eventually, giving additional drive to a rally. You want to see them dragged in kicking and screaming.
Monday the CBOE put/call ratio plunged to 0.50 after weeks of 0.70 and higher; 0.40 indicates some complacency in the market. The VIX, a measure of volatility on the S&P 100, dropped hard Monday, its largest daily drop since early September. Today the VXN dropped over 3 points. Still in the higher end of the range, but dropping.
On top of that we have been reading headlines. Today there were several that were talking somewhat confidently of a rising bull market. "Bulls begin to gather" one headline stated, citing the market's ability to overcome bad news. Many more are saying things are going well for the market, etc.
The drop in anxiety as measured by the volatility and put/call ratio combined with the financial headlines indicates there is something of a change going on. Not a massive change, but the market and the world did not fall off of a cliff after September 11. Now that the indexes are back at pre-September 11 prices, anxiety has backed off a bit.
These are secondary indicators, and we do not read them as leading indicators and make decisions off of them. But, the major indicator, price/volume action is crumbling over the past week, and it is coinciding with the drops in the secondary indicators. On top of that, the markets are running into resistance and unable to break through as it appeared they would. The indicators are lining up for something of a downward move. From a positive day Monday to Tuesday's session that just could not get the volume we said it had to have to break and hold over resistance, the market is suddenly missing steps.
Earnings continue to slide in ahead of reduced expectations while the semiconductor book to bill climbs a hair.
In a game of decent expectations management, corporate earnings are for the most part consistently coming in ahead of expectations. That does not hurt at all, but when you consider how far the bar was lowered in the aftermath of September 11, beating the street is not the trick. The outlook is the key as it has been for the past several quarters. The final analysis: corporations seem to have little more to add to what they said last quarter: things seem to be looking better here in the U.S. (which is very good news given that the world takes its lead from the U.S.), things overseas still slow, overall business still slow, Amazon.com's CEO once again saying Amazon will be profitable. You get the picture.
Does it really matter what they say? Well, the comments range from still just horrid business conditions to a bit better. Historically, however, markets tend to rally long before corporations on the whole start to see things getting better. Thus, as long as they don't just say they are going to close up business, investors are not too worried.
As for specific sectors, the semiconductor book to bill ratio actually rose from August to September to 0.65 from 0.63. That means for every $65 in orders for chips, $100 in chips were sent. As a frame of reference, back in the economic expansion, the ratio was easily in excess of 1.00. Orders were down 11%, but shipments were down 13%, so the book to bill rose to that 0.65 level. So, even though the ratio rose, both components of that ratio were down. In other words, the ratio was better, but the sector is still down in the red.
THE MARKET
A disappointing day in our book: a second test of resistance failed, and it once again failed on stronger volume. GE does not look healthy here and we saw many, many stocks hit resistance on the high and then turn lower on rising volume. Many doji's mixed in with that group, and a doji on high volume after a run higher can signal selling to come. Looked as if it was building strength Monday and making a good move today only to be repelled.
Does it mean a collapse? No, nothing nearly that dire. What it could mean is another run down to the bottom of this trading range for the Nasdaq, and perhaps even further for the S&P 500. Overall the market is holding up remarkably well. Today's downside action, just like last Wednesday's action, was driven by anthrax. It is not ready to crater, but it appears it is ready to head down again to test the recent lows, maybe lower.
What do we do? Well, we still have some upside plays that are holding up just fine, and we are happy with those. We took some upside options today, and we are not too thrilled about the developments later in the session. But, we have bought some time on most of those, and we are not going to panic out of them right away. One thing we have seen the past few weeks, the overall trend has been up, and a little patience paid off. The distribution makes us more concerned, but a run down to support over a couple of sessions followed by a strong move higher has made us good money on some of our trades.
VIX: 33.19; +0.08. A slight rise today on the reversal in the S&P. Still above the 30 level which is considered the high end of the range. Not a collapse, but it is whittling away.
VXN: 63.73; -3.63. Monday was not a big drop on the move higher. Today the Nasdaq is up 30 points and then sells into negative territory. Volatility falls 5.4%. That is not what it should do. Getting lower than we would want.
Put/Call Ratio (CBOE): 0.58; +0.08. A slight increase on the selling, but still lower than it has been for a few weeks. What will be key: how much does it jump when the market sells down tomorrow. We want to see puts jump right back up on any selling to show that there are still many ready to short the market and bet on it falling.
Nasdaq
Jumped over the 50 day MVA with ease and was on its way, but then it was anthraxed. A late move back into positive territory got the same treatment with the White House press conference with 15 minutes left in the session. Looks lower in the interim, but it is still the strongest of the big three. Indeed, the Nasdaq 100 finished positive on the session.
Stats: -3.64 points (-0.2%) to close at 1704.44.
Volume: 1.839 billion shares (+20%). The second above average volume day of selling in 5 sessions, volume that rose above the prior session. That indicates institutions selling shares. Up volume managed to lead 951 million to 860 million, but that shows the reversal type of day it was. Another higher volume selling session will speak for itself.
A/D and Hi/Lo: Decliners took the lead at 1.14 to 1 (advancers led 1.4 to 1 Monday). New highs fell to 44 (-9) as new lows rose to 55 (+8).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq tried the 50 day MVA once again (1715.46), hitting 1739.47 on the high. It was looking strong, but then turned and sold. It bounced twice at the 50 day MVA, but could not hold the line. The high last Wednesday was 1754.01. The high today was unable to eclipse that level before turning lower on higher volume. That is a weak double top where the index was unable to climb to the prior high before selling off on stronger volume. That raises the likelihood of further downside action. The question is whether it holds at 1630 again, or if the selling continues to climb in volume and push it lower for a further test of the low.
The Nasdaq remains the strongest of all three major indexes. The move higher has been strong and the index is holding onto its gains rather tenaciously, something you like to see. It appears it is about to be tested: will the recent sellers be able to overcome the buyers off of the September lows? We do not think they will. Everything is in place for a new bull market, but with the fear levels slackening it may take another wakeup call to shake things up again for the next move higher.
Dow/NYSE
Waived at the 50 day MVA and then reversed and closed negative on stronger, above average volume.
Stats: -36.95 points (-0.4%) to close at 9340.08.
NYSE Volume: 1.296 billion shares (+16%). More selling on rising, above average volume. Second distribution day in five sessions as on the Nasdaq. Down volume led 715 million to 585 million shares.
A/D and Hi/Lo: Decliners led 1.04 to 1 (advancers led 1.45 to 1 Monday). Dead heat, but showing the swing in momentum occurring. New highs fell to 45 (-7) as new lows fell to 58 (-1).
The Chart: http://www.investmenthouse.com/cd/$indu.html
The Dow never made the 50 day MVA, hitting 9439.21 on the high and then turning lower on rising volume. The candlestick pattern: a doji under support, and that is a sign of selling to come, particularly when it just tested resistance, fell on high volume, recovered on low volume, and then misfired at resistance again on higher volume. So what is the downside? This market has been very resilient whether it be news stories or higher volume selling. Too much selling can sink it, but thus far we have not seen a ton of sellers. They are there and outnumber the buyers for now, but will they the next time the indexes tap support? The Dow looks as if it is heading for a test of 9000 as a critical level. If it holds there and can rebound on strong volume, it most likely will not re-test the September lows.
S&P 500: The big caps tapped the 50 day MVA (1099.85) on the high (1098.99), looking good. Then the news came out, the market broke its morning uptrend, and the selling was on. It held at 1081 on the low, above prior support, but selling on higher volume. The big caps had no trouble testing 1050 last time it sold back, and we doubt it will have a lot of trouble this time as well. It has tested the 50 day MVA unsuccessfully once again and sold on higher volume once again. Again, the move was looking good, but the news overwhelmed it. As it was news driven, we expect to see it attempt a hold at 1050. That is our focal point for the move lower.
Stats: -5.12 points (-0.5%) to close at 1084.78.
Volume: NYSE volume jumped to 1.296 billion shares (+16%). We were concerned about volume last night, and today continued the poorer price/volume action started last Wednesday.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
There are two competing forces here. Overall there has been accumulation since the September low. The market continues to try to rise, all things being equal. On a 'no news' day, the market was rising. It has been repelled twice at resistance on the same day that more anthrax news hit. Is it the anthrax news or is there something else at work?
We think it is the anthrax and a big move off the lows losing steam at key resistance. The 50 day MVA is big, especially after a long downtrend. In our mind the indexes have hit bottom and the market has made a reversal. The basis: sentiment indicators spiking higher, some off the scale; reversal; follow through; good patterns breaking out; more good patterns forming; overall solid price/volume action; rising when there is no news.
As we have said all along, good action does not prevent upset from war activities. The key will be whether the indexes do what they did last week: have volume contract on further selling and then hold at the near term lows. What is the market telling us without the overlay of news? It has shown two distribution days in close proximity as the indexes tried to break resistance, the second attempt not able to match the high on the lat try. That is showing a change in character from the previous three weeks. It indicates more selling pressure. Again we feel the market has made its low; the increased selling pressure indicates it wants to sell for now.
So, we have a pure market reading that is showing us increasing selling, but not 3 or 4 days of distribution that can mean further, harsher downside. The big test will be at the recent support levels; that will tell most of the story. For now the move higher remains intact; if the market breaks near term support on higher volume, a further test is on. At this juncture it cannot be much clearer than that: another failed move at resistance, higher volume selling, and the key is whether near term support holds once again.
Support and Resistance
Nasdaq: Closed at 1704.44.
Resistance: 1700 still has gravitational hold on the index. The 50 day MVA is still there at 1715.46. Then 1750.
Support: 1700 would be nice, but hardly real support. 1650 is much better and has held on the close. 1626 is the point where the index gapped higher and where it held last time. 1605 is next.
S&P 500: Closed at 1084.78.
Resistance: The former closing low at 1103.25. The 50 day MVA at 1099.85. 1124 (prior consolidation level) and 1150 (also price consolidations).
Support: 1070 (Monday's intraday low). After that is 1050, a level it tested intraday Friday.
Dow: Closed at 9340.08.
Resistance: The April closing low at 9389 still looms, and then 9500 where the index was stymied last week. The 50 day MVA is right there at 9484.75.
Support: 9000 looks like the best level at this point though 9115 to 9100 may try to hold in another test.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
10-22-01
Leading Indicators, September (10:00): -0.5% actual versus -0.5 expected and -0.1% prior (revised from -0.3%).
10-24-01
Fed Beige Book (14:00)
10-25-01
Initial Claims, 10/20 (8:30): 490K versus 490K prior.
Employment Cost Index, Q3 (8:30): 0.9% versus 0.9% prior.
Durable Orders, September (8:30): -1.0% versus -0.3% prior.
Existing Home Sales, September (8:30): 5.2M versus 5.5M prior.
Help-Wanted Index, September (10:00): 53 versus 53 prior.
10-26-01
Mich Sentiment-Rev., October (9:45): 83.0 versus 83.4 prior.
New Home Sales, September (10:00): 852K versus 898K prior.
Treasury Budget, September (2:00): $29.0B versus $65.7B prior.
SUBSCRIBER QUESTIONS
Q: When a stock breaks out on huge volume for a couple of days and only moves the price a little, what does that mean?
A: Assuming the stock broke out of a sound pattern on heavy volume, the key is whether it holds at the pivot point or not. Usually a heavy volume breakout will propel a stock higher within a few sessions, often on the day of the breakout. The pivot point is the point of resistance that once broken, should hold as support even if the stock does not immediately race higher. If volume was good, we want to see it hold at that point and then start to move higher. If it does not, a few things can happen. One, it can start another base right on top of the one it just broke out of. That is often a flat base; once it is completed the stock often heads to much higher gains. We want to see that base on good price/volume action. If it churns on high volume, i.e., going nowhere on high volume after a move up, that means there are a a lot of sellers at that point; the increased buying cannot overcome the selling. That usually means further selling is coming. Again, however, the key is whether the stock holds above the pivot point after a strong volume breakout.
End Part 1 of 4
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