world stock market, us stock market

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11/19/01 Stock Split Report
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Stock Split Report Subscribers:

THE STOCK SPLITS REPORT HAS gone through many improvements over the past year. The major changes include the introduction of the "Best Plays" section, the change in the format of individual plays for easier reading, adding our projected stops and targets on each play, and the introduction of Bonus Plays. Now, in response to member requests for an even more user-friendly and streamlined report, we have introduced the "Watchlist" for those stocks that have momentarily fallen out of a pattern, or need to pull back after a move, or have shown little change over a period of time. In the Watchlist we provide a brief description of the action and our expectations but when the stock starts to show us something, we will bring it to your attention with a full write-up. The response to the new format this week has been very positive, and we are excited about keeping you up to date on a large number of plays, but making it easier for you by keeping the focus on those that are ready to make moves.

IN ADDITION to the Watchlist, by popular demand we have added a new section of "MARKET FAVORITES," which are widely-traded stocks that are looking strong once more and are popular with our subscribers. Enjoy!

SUMMARY:
- Indexes pull back on light volume, refusing to give up much ground for now.
- Momentum is still to the upside in the absence of bad news
- Everyone is a bull all of the sudden.
- With the recent conversion of many bears, a pullback is more likely.
- Subscriber Questions
- Team Trades

Indexes again tap resistance but refuse to give up much ground.

In a repeat of the prior week, the indexes rallied hard early in the week and then spent the last three sessions consolidating some of those gains. Again they were testing resistance levels, unable to break over them, but not selling off either. This has been more the typical, bullish movement: rally up to resistance levels, consolidate laterally to slightly downward, then rally up again.

The same action also continues, more or less, intraday: the indexes sell down on the news de jour, but buyers come back in and push the indexes higher to close. This does not happen every session, but there has not been a session on the Nasdaq since October 29 where the index was not able to rally off of its low. The market is being stingy with its gains, refusing to give them back as buyers keep looking for opportunities to enter stocks. As long as buyers continue to come back into the market at each sign of opportunity, the future continues to look solid for the market.

Momentum and resilience to the upside.

As an example, look at the SOX, the semiconductor index. It has performed the best of any index since the September low, rising 54% as of Friday's close. On more than one occasion is has appeared primed for a more aggressive pullback, most notably 8 sessions ago, but it only tapped down intraday to the 18 day MVA before snapping back in a 31 point move intraday. It again rallied to resistance and after showing a topping sign Wednesday, started to pullback. The pullback, however, has been very mild given the extraordinary run-up. Indeed, it looks as if this pullback, barring any outside news surprises, looks to be mild as well, with perhaps another intraday test to the 18 day MVA (right at 500, our target on this pullback on the puts we initiated). Sure it pulls back, but a healthy market pulls back regularly. As long as volumes are under control and it does not crash support, it is to be expected and it is needed. Gives more chances to get in on a move.

Another example: Friday's event at the Atlanta airport. A forgetful football fan forgot his camera; running late, he decided to take the quick route back to the gate. The airport was shut down on the search for him and the market sold down on the news - - in this climate it is still very susceptible to news stories - - but then it rallied right back up to close just slightly lower for the session. Moreover, there was no heavy volume on the fear selling, no institutions dumping shares. Again, buyers used the opening to pick up shares.

Upside momentum leads to a bull population explosion.

Last week we reported about the weekend financial shows and their legions of bears that were disavowing ownership of stocks. It was not a mild 'we think it is best not to be in stocks right now,' but a rabid 'I HATE the stock market right now' theme. This week the same crews were back at it, and the result was a 180 degree swing. One of the most egregious offenders last week now says there have been 'stealth' bull markets in many sectors all along, insinuating that he had recognized all along you should be buying in those stocks. Sure did not get that impression last weekend, but that is one reason television analysts are trouble: they want to get the name out and remembered, and as we have seen many times in journalism, the accuracy of the story is often not as important as the fervor with which it is reported.

This week they were gushing over the market. Why the change? The economy was better than expected, we were winning the war, oil prices were lower, confidence was back, and the ever popular 'there is more good news to come.' Now we do not disagree with any of the above, but the timing. Back in August the economy was showing the early signs of recovery, the signs that the careful observer picks up before it slaps you right in the face. Even the 9-11 attack did not stop the improvement, just pushed it back a couple of weeks. Moreover, when it was not popular, we were saying that we felt the war would not be as long and impossible as many were saying, and that would help support a nice rally in the market. Again, a look at some history indicated this was the most likely scenario. Moreover, we discussed how bull rallies have a habit of being born out of tragic times. Along with the massive sentiment indications the week the market reopened, these factors pointed to a rise in stocks, and that is why we have been buyers.

Bulls spell trouble?

Now that the market has put together a strong rally (e.g., the SOX up 54%), there are a lot of gung ho views. There is nothing worse than a reformed anything, and reformed bears can be confusing to investors if not downright dangerous. Last week hated stocks, this week love them. Moreover, when they finally convert, there is a good chance it is a bit late, at least for the current move.

How so? Well, we have been watching the sentiment indicators deteriorate as the indexes moved higher. They are not at their summertime lows, but they have hit levels that have sparked prior selling events; not major selloffs, but the selling bouts that we have seen. Judging from the sentiment indicators, many investors are getting the feeling that it is safe to buy or worse, they are feeling as if they are missing the rally. This is something we have not seen thus far in the rally as most investors have been too scared to get back in, something not uncommon after severe selling and major uncertainty. But as we noted at the time, that is when rallies are born. Now that it has taken off, the perception of missing out among the majority of investors is just about the time a market is at a top, interim or otherwise.

Moreover, there are still as many breakouts failing as succeeding. TARO, RMCI, JEC, FLIR, TJX are just a few that jumped up recently only to fall back down hard. At the same time, KKD, GTK, EPIQ, LOW, DAP, NVDA, BRCM and others are maintaining their moves, refusing to give up their breakouts. That is a good sign as we can recall a few months back when almost every breakout was trashed. But, it also shows that the market is not ready to reward even the strongest stocks. Indeed, when stocks breakout and hit new highs, they are being subjected to 'valuation' downgrades on the moves, and the market is still jumpy enough to sell them off. Good stocks tend to recover in a good market, but lingering nervousness is still plaguing breakouts, and that is a sign the market is still not in full fledged rally mode.

Further, markets tend to get ahead of themselves both to the upside and the downside. This has been a very orderly climb, but the past week or two have been driven on good war news, some improving economic numbers, and positive words from companies. The bond market soared on the news of the elimination of the 30 year note, and then it corrected just as hard this week. As we teach in the seminars, strong upside moves that swing too far ahead often lead to stronger than normal moves below the mean. The bond market swung up sharply, has corrected sharply, and now will most likely find equilibrium with some improving bond prices. Same with the market: up well, and needs to pullback; its move, however, has not been as sharp as the bond market, so the pullback has not been as sharp yet.

Add it all up, and there is more of a chance of a pullback now than a week ago. Better than expected economic and war news has fed the rally of late. That has led to this conversion of more bears to bulls after the indexes have made an impressive, mostly uncorrected run to this point. There is quite a bit of resistance immediately overhead as well, and that can contribute to a turn down as well. Once everyone feels it is time to get in or that they are missing out, that is a signal of a near term top, but the timing does not always immediately follow.

As we have noted, the market resilience is strong, and the primary indicators of price and volume are behaving as they should: up on market gains, down on pullbacks. Indeed, this current pullback looks very orderly and controlled. With the upside momentum, this current lateral move may not give way to a stronger drop at this time. It may take another moderate pullback, another attempt over the thicker ice, and then further selling. For now it is not showing more than a 'normal' pullback.

THE MARKET

We have covered most of this already: still bumping against some pretty strong near term support with the SOX pulling back a bit ahead of the pack. Still no sharp selling at all. Very orderly on proper price/volume action with buyers coming in to pick up shares when they see selling. Indeed, over the past week, all of the major indexes had their 18 day MVA cross the 50 day MVA, a bullish indicator. Then take a look at QLGC; its 18 day MVA has crossed its 200 day MVA and the 50 day MVA is not far away. BRCM is on the verge of an 18 day MVA/200 day MVA crossover. Again these are bullish indications, but they are not moves to time buys; a crossover can occur and then a test usually occurs before the move continues.

VIX: 27.17; -0.61. Continues to drop, falling below the 30 level that is considered high in everyday trading. As noted, still above summertime levels, but dropping off steadily, a sign more confidence in slipping into the market. In the inverse world of contrary indicators, increased confidence is not necessarily good for the market. For perspective as to where it is now, volatility ranged from 20 to 22 during the summer (very low, very complacent), and then spiked over 55 when the market re-opened after September 11. Since then it has ranged from 28.19 to 38.

VXN: 55.04; -2.41. On a day marked by the Nasdaq mostly being below water the entire session, the index hit 58.50 on the high early in the session, but as the selling trailed off and ultimately turned to buying late in the session, volatility faded quickly. Indeed, even as the Nasdaq sold down in late and early afternoon, the volatility index fell. Not the action of complacent investing. For perspective, in the summer it ranged from 43 to 47 on the lows. After the re-open it was up to 93 intraday, and has since ranged from 55 to 70. Another thing to consider; volatility levels back in January through March 2000 traded in a range form 55 to 60 before the Nasdaq's dive.

Put/Call Ratio (CBOE): 0.50; -0.21. Precipitous drop on options expiration Friday as not many were buying puts or closing them out - - those betting on a market fall and playing short term options were losing money. This indicator is dropping sharply, though still above the 0.40 level that can indicate complacency. Something to keep a close eye on as an early indication of trouble.

Summary: More bulls, fewer bears, less puts, less fear. That is what we were seeing last week, and the sentiment indicators are even closer to complacent levels now. These do not direct our actions, but they give us a good heads up on what may be coming. If we see price/volume action start to break down, e.g., more volume on any selling, we could get a deeper test.

Nasdaq

After flirting with 1930 for two sessions, the Nasdaq did not try to reach that level Friday. It sold back to Thursday's low, but went no further, rallying back up to close right at 1900. Again it maintains a narrow, tight trading range on low volume after a good run, a very good sign.

Stats: -1.99 points (-0.1%) to close at 1898.58.
Volume: 1.173 billion shares (-15.3%). Volume again pulled back on selling, falling below average. This is exactly the price/volume action you want to see on a consolidation. Volume was fairly evenly matched at 892 million upside and 793 million downside. Up volume beating down volume on a losing session. Indicates the lack of sellers on the selling.
A/D and Hi/Lo: Advancing issues beat decliners on a down day, 1.19 to 1 (decliners led 1.11 to 1 Thursday). New highs fell to 60 (-16) as new lows also fell to 32 (-13). A good sign that new lows fell on a down day.

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

Holding in a tight range from 1875 to 1922 during the past three sessions, with a nearly flat closing price. Another good lateral consolidation on lower volume as buyers continue to come in each time the index sells down. Still, it has overhead resistance at 1830, but the upper channel has moved ahead as the index has pulled laterally. That channel line is now at 1985, right at the 200 day MVA at 1988.60, about 90 points from Friday's close. The tight, flat consolidation is another good sign as this rally again consolidates its gains in an orderly manner. Last consolidation it tested the 18 day MVA on the low before bouncing higher (now at 1810.21).

Dow/NYSE

The Dow finally turned a bit lower, showing a doji on lower, below average volume as it nudges against the upper channel. Unlike the Nasdaq, Friday was the first session of lateral movement; it could show us some more downward action first.

Stats: -5.41 points (-0.1%) to close at 9866.99.
NYSE Volume: 1.367 billion shares (-6.8%). Back below average and doing what you want it to do on selling, i.e., falling. Up volume led down volume on a down session, 726 million to 595 million shares.
A/D and Hi/Lo: As with the Nasdaq, NYSE advancing issues led decliners on a down session, 1.18 to 1 (decliners led 1.1 to 1 Thursday). New highs fell to 71 (-41) as new lows also fell to 24 (-16). As with the Nasdaq, good to see new lows fall on a down session.

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

Stepped sideways Friday on low volume, rallying off the low (9792.47) to close slightly lower. The candlestick pattern is a doji, and that can indicate some selling in the picture after three up solid up sessions. It has been the pattern for the indexes, to step up for 3 to 4 sessions, move laterally and slightly lower, and then rally up again. The upper channel continues to act as resistance (now at 9992), and it is coincident with resistance at 9992. We anticipate further consolidation action, but there is not a lot of near term support. 9720 to 9750 is possible, but not much is there. 9500 is more likely as it acted as resistance on the way up and the 50 day MVA is there as well (9514.27).

S&P 500: More akin to the Nasdaq's action with a fairly tight lateral consolidation after a decent run. The intraday range the past three sessions (doji's) has been roughly 15 points with the closing prices being very tight. This is the exact pattern it showed us last week as well. The index is bumping against resistance at 1150 and the upper channel is now at 1170. Looking at the patterns the past three sessions, momentum has gone from slightly positive to slightly negative. It could turn back a bit more here with first support at 1125 where the 10 day MVA is. Below that is solid support at 1104 (prior resistance and the 50 day MVA is at 1105.47). We anticipate at least an intraday test lower toward 1125 and even 1105.

Stats: -3.59 points (-0.3%) to close at 1138.65.
Volume: NYSE volume eased back to 1.367 million shares (-6.8%). This is just the kind of action a healthy market shows.

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

End Part 1 of 4

world stock market
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