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11/20/01 Stock Split Report
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Stock Split Report Subscribers:

MARKET ALERT SERVICE

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SUMMARY:
- Chips leading again, this time down.
- Mild distribution on the Nasdaq while the Dow and S&P sink on slightly lower volume.
- Watching for support at up trendlines and 50 day MVA's, but each pullback inspires debate and conjures visions of deeper selling.
- Some covered calls along with new puts and some "add-to's" on this pullback.
- Dow at 4,000 or 35,000?
- Some reckoning today on reports of a weak stimulus package.
- Subscriber Questions

A more substantial pullback that does not lead to late buying.

A long rally, significant resistance, and weakening sentiment indicators combined to send the markets lower, the first real selling session in a couple of weeks. After bumping up against 2 to 3 layers of resistance (upper channels, previous price tops and bottoms, 200 day MVA) and trying to crack through, the buyers ran out of gas. Unlike prior sessions, buyers did not come back in on the weakness to rescue the day. Instead the indexes made a good run of it after lunch, but then peaked and rolled over after fighting with the morning highs.

The late slide was just as aggressive to the downside as the late rallies have been to the upside. The leader on the way down? The leader on the way up: semiconductors and technology. The chips had been selling grudgingly for a few sessions, they too rallying late to close well off of their lows. Kind of a portent for the rest of the techs and as it turned out, the rest of the market as well. Today the damn broke and the chips crashed down to our target level of support on our put play that we initiated over a week ago, slightly undercutting it on the low. It is still above the 50 day MVA and the up trendline, so we will keep an eye on that for support. The last thing we want to do at this point is lose a decent gain after riding the bounce higher in anticipation of another fall. Patience and confidence in the resistance the index was showing have turned a nice gain, and we will be patient now as well and let it show us just how far it is going down.

How far a pullback?

That is the big question after today, and it is the debate that appears on the financial stations each time there is a pullback in a rally or a rally in an overall downtrend. Those that think this rally is a fluke anyway say this is the start of the next test. It sure looks like a test, but of what? We are looking for the up trendlines off of the September bottom to hold; indeed, it is important that they hold on a closing basis to keep the uptrend in place. The type of movement the past two months has been perfect: up sharply, some lateral to slightly downward consolidation, and then another rally higher, all within the trendlines and upper channel. That will once again be tested.

The Dow and S&P have their up trendlines just about coincident with their 50 day MVA and price support; that is some pretty solid support, just as solid as the upside resistance just tested. That makes it look good to hold the selling in check, particularly with the good economic signs and good war news. The Nasdaq's up trendline is coincident with the 18 day MVA, and just above some price support. Pretty solid support as well.

Some distribution in technology raises a flag, particularly in the chips.

Still, the SOX, one of the leaders, undercut its near term support today though it is still above its 50 day MVA and its up trendline (which are roughly coincident). So, it is still in good shape from that standpoint. Looking at some of the chip leaders, however, there was some aggressive selling today. BRCM, AMCC, PMCS, NVLS, etc. sold on stronger, above average volume. Several undercut the 50 day MVA (e.g., SMTC, MSCC) on strong volume. That is not just 'profit taking' as the selling today was called. It was distribution of those shares as there were many more sellers today than in the past few sessions.

Indeed, the Nasdaq showed slight distribution today with a small gain in volume on the selling. That means that the big buyers were selling more stocks relative to Monday's up session. Unlike what we heard on the tube, the higher volume does not mean money is coming into the market; higher volume on a down session is not money coming into the market but instead going out of the market. The point that was attempted, however, is that overall money has been flowing into the market, i.e., accumulation as we have been monitoring with the price/volume action. Today might have been distributive, but note that Monday's volume was much lower than prior sessions, and today's volume increase was not huge. It did not surpass last week's volume. It was mild distribution, but it was distribution and a warning flag for us along with the poor sentiment indicators. We are certainly going to see a test of the up trendlines.

The SOX was showing weakness in the 3 prior sessions, giving clues that the immediate resistance was going to hold. That index tends to lead at least the Nasdaq, and today they fell in line. It also continued its fall, increasing the intensity as it did. Leading the others down further? Probably, but as we noted last night, it tends to race up and down at a sharper pace than the overall market. There are quick put possibilities here again on many of the leaders that are falling fast; get it, grab the gain, move on, and then look for the upside again.

What strategies at this point?

The pullback was inevitable, just a matter of timing given the good feelings about the war and the economy. We have had some great runs in stocks we picked up such as BRCM and SMTC, as well as breakouts such as KKD, EPIQ, etc. that are or could pullback in this selling. We still like the stocks overall as we have no indication of a major re-test right now, so we are looking at selling some at or slightly in the money calls on these positions, letting them fall to support, and then buying them back, netting the gain as cash in our accounts. That way we keep our stock for the next rally, and we have more cash to buy stock with or buy holiday gifts and otherwise stimulate the economy as best we can.

We are also looking at a few new puts and adding too some put positions that we already have. The same stocks that are set up for covered call sales are also put candidates, getting in, riding them down to support (up trendline in most cases), and then selling to bank the profit. The same as with the indexes, though the SOX has already been selling ahead of the market and it is extended to the downside, at least for us.

This is just part of being a versatile investor, able to take advantage of what the market throws at you to maximize the return. Take what the market is giving. That is our goal that we pound again and again on the online seminars: make your money work hard for you. Get the return up as much as you can so you can get to the ultimate goal: doing what you want when you want. Thus, take advantage of the inevitable downturns in an uptrend just as we were taking advantage of the inevitable tests of resistance in the long downtrend.

The market tanks versus the market flies.

A 'bull/bear' debate on CNBC tonight caught our attention. David Tice, the bear, Harry Dent, the bull. Tice thinks the Dow goes to 4,000. Dent says it could go to 35,000 by 2008. This caught our attention, other than the numbers, because Dent's theory is population driven, something we touched on last week when discussing Japan's economy and how it ran out of consumers in the 1990's due to a gap in its population left after WWII. Where the U.S. had a baby boom, Japan did not because of all of the young men and boys lost in the war.

An interesting point: Mr. Tice focuses on more recent developments such as consumer debt, the decline in corporate earnings, the coming collapse of many of the IPO's of the late 1990's, and what he calls an overpriced market. Mr. Dent focuses on the macro picture of the entire history of the U.S. markets and economy as well as the history of markets and economies in Japan, Europe, China, etc. The entire histories.

The Dent theory basically swallows the Tice theory to a certain extent. In other words, the Tice theory is a subset of the Dent theory: today's actions find ready comparisons in Dent's demographics model, and the massive bear market is still within the long term trend demographics of the U.S. dating back to before the turn of the century in 1900. The market is at the bottom of the channel, having fallen from the top of the channel hit in early 2000.

If Mr. Dent's theory holds water, we should see an economic and market upturn. We are thus far. For Mr. Tice's theory to work, historic trends would have to change. You know we closely follow history simply because it repeats again and again. Moreover, Mr. Tice was a bear years before the March 2000 top because things just could not keep going; they did. Then the top finally came, and his fund is up 9% this year. To put that in perspective, we have subscribers with returns of 50% and better this year, and many with 50% and better on their entire portfolios in the past month.

These theories are interesting, and it is important to look at the big picture instead of the microscope of where the market is going in the next week, month, six months. Long time subscribers know that we do believe there is about 8 years or so of a good market to make your money before the baby boomers retire and start to shift their investments and stop consuming so much.

THE ECONOMY

More signs of economic improvement ahead: leading economic indicators rose 0.3% versus expectations of holding steady. Most of that was driven by the rise in the stock market.

Treasury Secretary O'Neill also indicated that a workable stimulus package could come together early next week, with Monday and Tuesday being key to the process. O'Neill was lampooning bison subsidies, pumpkin grower subsidies, etc. parts of the package as pure pork, so reading between the lines there is still a lot of work to do. Next week? We will have to see it to believe it, but we do know that many of our subscribers are contacting their senators and reps.

What we saw today was some selling on the news that the stimulus package is not going to be much stimulus as far as businesses are concerned with a one-year, 20% depreciation advance. As we stated two weeks ago, there would be some reckoning on the stimulus when it became apparent that the stimulus would be a Japan-like spending package as opposed to what historically has worked for stimulus that results in longer term, low inflation growth. That is part of the stronger selling we were seeing today when the market rolled over later in the session when the word came out. We would rather see business side stimulus, but if that does not happen, how about lowering marginal tax rates for everyone, lowering the employment tax? Those are better than the subsidies that dominate the current bill and only work to prop up inefficient markets and provide incentive not to work. Regardless of your stand on the stimulus, make your position known to your elected leaders. That is how the process works, i.e., input from a concerned, interested populace.

THE MARKET

A pullback started today with some distribution on the Nasdaq (mild) and some good price action on the Dow and S&P. We are now looking at the up trendlines as support for a turn back up; the one concern is the vigor of the Nasdaq selling on a week that is historically lower volume. As we said before, not many managers left early this week.

VIX: 26.13; +0.49. A gain, but not much of one as the market sold off. Volatility is still much lower than it has been on this entire move higher, and that is just another monkey on the back of the move higher that is now rotating lower. We want to see a pretty sharp rise on the selling, getting back well over 30 by the time the S&P hits its up trendline. 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 before this recent dip lower.

VXN: 51.41; +0.58. Nasdaq volatility also made a marginal gain on the selling, not commensurate with the 4.2% tanking in the Nasdaq 100. This indicator tends to hold the line for a day or two, however, before it really tanks one way or the other. 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 from 55 to 60 before the Nasdaq's dive.

Put/Call Ratio (CBOE): 0.60; +0.07. Inching higher on the selling, but not spiking. This is the lingering bullishness that has, despite many commentators, taken over the market. We like to see it move away from 0.40, and want to see it spike up to 0.80 again on the selling to the up trendline.

Nasdaq

Finally ran out of gas at the multiple resistance ice, falling on higher, slightly above average volume. This market sure keeps you on the edge of your seat, doing nothing completely by the book. As we said before, perfection rarely happens in the real world.

Stats: -53.91 points (-2.8%) to close at 1880.51. Up moves are hard work, selling comes fast.
Volume: 1.988 billion shares (+3.8%). Higher and slightly above average volume, indicating slight distribution on the session. Down volume jumped into the lead at 1.527 billion to 359 million upside shares. The sellers were ahead today and there were more than Monday's buyers. Still, volume was lower than last week's sessions, an indication of the holiday week most likely.
A/D and Hi/Lo: Decliners took the lead at 1.67 to 1 (advancers led 1.56 to 1 Monday), a strong showing for the first transition to selling. Does not alter the recent trend of improving advancing issues. New highs fell to 66 (-7) as new lows rose to 34 (+7).

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

After closing right at resistance at 1934 Monday, the Nasdaq turned down fast, again doing so before hitting the upper channel at 2000. It closed above the 10 day MVA (1869.86), but with the rising volume we do not expect this to hold. We are looking at the 18 day MVA (1829.31) that is coincident with the up trendline from the September bottom. That is where we would want it to hold on this bout. After that there is 1800 and the 50 day MVA at 1776.08.

Dow/NYSE

After bumping right up to resistance at 9992 and the upper channel (10,050 today), the Dow also started to pullback. That is a lot of resistance after a solid run up from 9500. Volume, however, edged back ever so slightly on the move, showing a more orderly pullback than on the Nasdaq thus far.

Stats: -75.08 points (-0.8%) to close at 9901.38.
NYSE Volume: 1.310 billion shares (-1.3%). Pulling back slightly on the selling is what we want to see. 836 million downside shares versus 469 million to the upside.
A/D and Hi/Lo: Decliners took over at 1.15 to 1 (advancers led 1.68 to 1 Monday). As with the Nasdaq, this does not change the uptrend in the ratio. New highs fell to 92 (-6) as new lows rose to 35 (+11).

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

Unable to crack resistance at 9992 and the upper channel at 10,050 at today's close. The quick consolidation and jump higher on Monday simply did not have the background to hold up. The selling was not intense, but the index did sell off late in the session after rallying back to a session high before lunch. May not get any more upward movement for Thanksgiving, but as noted, the selling was not severe. There is slight support at 9750, but the 50 day MVA is at 9546.87 and the up trendline is at prior support at 9500. That is three layers of serious support.

S&P 500: 1150 reached out a hand today and pulled the index back down. The big caps never reached the upper channel now at 1170 nor the resistance at the 200 day MVA (1186.03) and the middle hump of the March and April double bottom at 1182.17. The up trendline is roughly coincident with the 50 day MVA at 1108.65. It may find support above that level at the 18 day MVA (1119.44), but it is time for a pullback to the trendline.

Stats: -8.40 points (-0.7%) to close at 1142.66.
Volume: NYSE volume fell again today, something good as it indicates there was no share dumping. 1.310 billion shares (-1.3%).

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

TOMORROW

The day before Thanksgiving, traditionally a light volume day. Light volume days can lead to wide swings, however. We were rising into the holiday, but the Nasdaq, the leading index of the September low, turned lower on rising volume, led by the semiconductors. They all tested resistance, tried to break it, but then failed. After a long run maybe this time they will give a proper pullback to support so they can take on the resistance again. The holiday is the wild card with a half day session on Friday. The market is still in a positive mode overall, but with today's action it appears the needed test will show up.

We will get a chance to see how resilient the market is. Futures are down and the market finished on its lows, so we are looking at a lower open. Will buyers come back in right now? We will be hesitant to jump in on an early rally off of any selling at the open without a test of the trendlines first. Otherwise we set ourselves up for action such as what we saw today. We would rather see selling down to support that is sharp and then a rebound (if we have one tomorrow). Preferable: just a controlled selloff toward support all session on lower volume and maybe more of the same Friday. That sets things up better for next week with maybe some good news about Bin Laden (there is a three-day deadline set for surrender of the last Taliban stronghold).

We don't want to be totally out of the market this weekend, but we don't want to be all short either. As we noted last night, there are indications Bin Laden is about to be apprehended one way or another. Now we know that there are more marines on aircraft carriers ready to assist ground operations. The firepower is there to go into the caves once intelligence and special ops find him. If he is caught this weekend the market shoots higher next week. It will come back, but how much? That is why we would love to see a steady, controlled pullback to support levels this week, preparing for good news. That would also take some of the heat off of the valuation downgrade action we saw appear today, one day after we expected it.

So, we are looking for covered calls on our positions we want to hold, buying them back at support. We are also going to look at closing out our puts if we get another good down session tomorrow, perhaps waiting until Friday. Then we will be ready for what comes next week with some profit in the bank and some good stocks to let rally again if there is good news. Tough with a wildcard out there like the war, but at least it is going well, and we still believe the market wants to rise more than it wants to sell overall. We just have to watch those support levels closely given the weakening sentiment indicators and the slight distribution on the Nasdaq today.

End Part 1 of 4

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