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11/24/01 Stock Split Report
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SUMMARY:
- A Thanksgiving rally a day late.
- Holiday sales off and running, driven by discounts.
- German factory orders log biggest drop in 15 years as U.S. gets ready to declare the recession official on Monday.
- Good war news but no great war news this weekend.
- Indexes want to try resistance again, but are they ready?
- Subscriber Questions
- Team Trades

Friday gives a late Thanksgiving rally. Is it a turkey?

Friday the market gave in and provided a holiday rally. Traditionally the day before Thanksgiving up through the new year is a rally time for stocks. That is how it has played out on average over the past 30 or so years. On average. As we all know, 2000 was not average and 2001 has been anything but average. A year ago at this time we quoted the old Chinese curse, 'may you live in interesting times,' wondering aloud if the curse was on. Things have gotten a mite interesting indeed.

Still, we are excited about the future. Not in an 'interesting' way, but a true excitement about what the future has to offer. Time and time again the U.S. has risen to the challenge and responded with greatness. We are doing it right now in every aspect and facet of our lives whether it is ensuring we will be safe in the skies and on the highways to being closer to each other even if we have never met to simply going about our business as usual.

There are those that look at the technology and internet slide over the past two years and see only darkness ahead. But that belies history. In every great new revolution in technology there is a shakeout followed by massive expansion as the remaining companies are the strong ones that then develop that technology to its logical ends. In the auto revolution there were dozens of automobile manufacturers. Then there was a shakeout and companies such as GM were left to enjoy massive growth and gains as automobile sales and ownership grew to reach its full potential. There are also those that look at the September 11 attack and the ongoing fight against terrorism and only see darkness. They don't get it. Tragedy has given birth to prosperity time and time again as we respond to correct what was wrong and set the proper course for the future. Good is not going to fall to evil; the U.S. is not going to fail. The dollar has been rising sharply again and is still the leading world currency for a reason: the U.S. is going to continue to lead in economic prosperity, technology, and freedom. It is pretty clear to us.

Is it rally time for the holidays? There is money in them there markets.

As noted, in normal times the market tends to trend higher toward the new year. Of course, September and October are also considered the two worst months for the market. September lived up to its billing, but October was a great month. The market didn't even have to bottom in October (usually the best month for market bottoms) as it did so in September. Now the market has two months of rallying under its belt; this is not a new rally at all. Does it have more in it through the end of the year?

The indexes are bumping up against some pretty substantial resistance that they must clear in order to continue the rally on into the new year. Still, money continues to move into the market. Not a massive flood, but a continued stream being pulled in off of the sidelines. Another few billion came in last week, and that money is being put to work. The fuel is there for a continued move, but there will be hiccups along the way. As discussed in the 'Market' section below, the move toward near term resistance after no real rest or consolidation is the first obstacle to such a rally which is really nothing more than a continuation of the current rally.

Holiday sales off to a good start.

Stores and malls were crowded Friday all across the nation. We noted many sales and discounts already on in an attempt to get the shoppers to go ahead and open their wallets and purses. We also noted that some sale prices were lower this year than they were the same time last year. In addition we noted many 12 month and 18 month interest free financing sales. Retailers are not wasting time on last minute shoppers to lure sales.

The discounting in prices is leading several analysts to say that sales will disappoint regardless of the number of shoppers out there. Their hope is to do volume business just as supermarkets with razor thin margins on a daily basis. Again as with the 0% auto financing, however, the analysts are missing the real story: buyers are out and willing to buy. They are not stupid, however, as they are playing the stores for bigger mark downs. If they get them, they will buy. While that may mean smaller profits on each sale, it also means that inventory is being sold. Inventory being sold means more good will have to be produced to replace them. Maybe not in holiday numbers, but still there will need to be goods on the shelves.

We are seeing the same thing in the auto industry: massive sales of new units is requiring production to increase. What many are missing is that there are a number of programs that are expiring in the spring. While there has already been some rollouts from those programs, there will still be many consumers looking for new vehicles in February and March. That will help drive units as well despite those saying that sales in October were at the cost of the future. There is a basic economics/sales lesson: sales now versus sales later is a good thing.

Indeed, even with the talk of discounting hurting profits, we are hearing from Best Buy and other discounters that they were selling a lot of merchandise. They were not expected to sell a ton, but they are moving it out the doors fast. When you look at the charts of BBY, BBBY, WTSLA, WMT, HD, LOW and others, you see stocks that are either on the verge of breaking out of some good patterns or already moving into new high territory. Despite many analysts saying don't expect much, the market is anticipating sales will be solid.

The rest of the world awaits the U.S. recovery.

German factory orders tumbled to 15 year lows it was reported Friday. We said it two years ago: as the U.S goes, the world goes. The U.S. has been in a recession for close to a year (judged by the decline in GDP), and on Monday the National Bureau of Economic Research is expected to make the official call. Of course, as we also have noted, by the time the call is made, the economy is usually on the road to recovery. This time it appears to be no different. Even with the September 11 tragedy pushing things back, the recovery is not dead but growing momentum.

Japan is trying to help the world by taking more action to get its economy moving. It is buying securities from other countries, namely the U.S., to keep the yen weak. That is an attempt to encourage exports by making Japanese goods cheaper. That also helps the U.S. dollar.

The bond market is also signaling recovery. After a massive rally on the 30 year note elimination, it has tanked massively. When the bond market fades in the face of such a move, it is most often an expectation of future economic strength.

THE MARKET

A nice rally Friday, and though volume was of course lower given the short session, it lagged behind Wednesday's hourly volume count. Still there were some great breakouts on strong volume, and many stocks continued very nice consolidations.

The indexes moved up Friday, ready once again to test the solid resistance levels immediately overhead. The three majors had two pullback sessions before Friday's move higher. After a full week of rallying before that, it is hard to say they got enough rest to take on this resistance level. This is strong resistance, and while the holidays are a season of good cheer, it will take a lot of it to get them over this level for good.

The SOX, however, has had enough of a pullback to try to seriously tackle its resistance starting at 535. This index sold back for five sessions before it started to rally off of the 50 day MVA on Wednesday. The past two sessions it tested lower, but buyers came in to drive it higher each session. It still has serious resistance ahead of it as do the other indexes, but as noted before, the SOX tends to move ahead of the other indexes. If it can break through, the others may follow, but they big three may need to move laterally a day or two while the SOX makes its way back up to try the break. If it fails, all of them will most likely have to fall a bit and then regroup for another try. Many are calling for the indexes to stall here for a bigger fall. Maybe, but they are not showing that yet.

There was not real great war news late in the week to provide a big boost for the market, but there was good news: Taliban were surrendering a the war moves wind down. Maybe no big boost to the market, but it is good news nonetheless. What will other news be? Monday has given way to Tuesday as the downgrade day; we saw it last Tuesday, and we will likely see more of it as the market remains 'overbought' in many of their estimations. Even with the downgrades, however, we are also seeing some signs the other way. For instance, Goldman Sachs reallocated assets from underweight to overweight in securities in the overall market. We have seen mutual funds accumulating shares all along, sometimes more aggressively than other times of late, and the brokerages are also starting to look to accumulate stocks for clients.

VIX: 24.78; -0.54. Volatility dropped again Friday, something to be expected on a session that pretty much rallied from bell to bell. It has been steadily slipping, particularly over the past two weeks. It is in the middle of the 'normal' 20 to 30 range, but well off of the range it was holding for much of September and October. 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: 50.81; -1.87. Same story on the Nasdaq 100 volatility measure. The index did not sell back much at all the prior two sessions, and volatility did not race higher when it did. It is still above its summertime doldrums level, so it is still not necessarily at a level indicating a selloff is at hand. It is worth noting, however, that the volatility continues to tumble as the index again approaches resistance. That can indicate the move will need something extra to break those resistance levels. 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): 0.61; -0.16. Put activity fell Friday, but on a half day session with a rally underway, we did not expect much else. It is still in a decent range after moving up to 0.77 on last week's selling.

Nasdaq

Two days of rest and rallying higher Friday. It still has major resistance immediately ahead and no real rest before tackling it again. If the SOX leads it could make the move, but it may need a couple more days of lateral movement below that resistance.

Stats: +28.15 (+1.5%) to close at 1903.20.
Volume: 569 million shares (-63.9%). The half day leaves little to discuss on an overall volume basis. We do note that volume hour by hour was lower than on Wednesday. Up volume was way ahead of down volume at 433 million to 62 million downside shares.
A/D and Hi/Lo: Advancers moved back into the lead at 2.12 to 1 (decliners led 1.03 to 1 Wednesday). Looks as if the shortened session skewed this number as well. New highs rose to 56 (+14) as new lows fell to 11 (-11).

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

The Nasdaq showed a doji Wednesday after failing at resistance on Tuesday and giving a sharp move down Tuesday. From that doji at the 10 day MVA (1875) and above the up trendline now at 1855, the Nasdaq jumped higher Friday. It is moving once again toward resistance at 1935 (former price tops and bottoms) and the 200 day MVA at 1971.30. Meanwhile the upper channel is at 2030 now; no real resistance from that level in the near future. With just two days of rest it could find the sledding tough here. It must clear this level, and some lateral movement would be best for the index as that gives it time to consolidate a bit more, brings the 200 day MVA closer, and lets the buying demand build up for a burst over resistance. This is the most critical 75 to 100 points the index has had on this move. If we get some selling down to the 18 day MVA and up trendline early in the week, we will most likely close out our remaining QQQ puts if the index continues to hang on there.

Dow/NYSE

Surged back up Friday after testing the 10 day MVA on Wednesday's low. It is battling at resistance, but such a quick move up after topping out at resistance on Monday may not have the endurance to break resistance.

Stats: +125.03 points (+1.3%) to close at 9959.71.
NYSE Volume: 414 million shares (-60.1%). As with the Nasdaq, hourly volume was lower than Wednesday's trade. Up volume led 335 million to 76 million downside shares.
A/D and Hi/Lo: Advancing issues were way out in front 2.9 to 1 (decliners led 1.44 to 1 Wednesday), but on a short day the numbers were skewed. We would love to see this action to the upside early this week! New highs rose to 66 (+11) as new lows tanked to 12 (-22).

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

Ran into resistance at 9992 and the upper channel on Monday and spent Tuesday and Wednesday pulling back. We would have loved to see a further fall to the 18 day MVA (9688.29) or even the 50 day MVA (9573.90) that is even with the up trendline from the September bottom. It may still come this week as Friday's move was more of good cheer than substance. It may be nothing more than an intraday test as noted in Wednesday's report. After the gain Friday, a lateral move on low volume for a couple of sessions would be great. Then it could challenge 9992 and the upper channel at 10,075 with a better chance. The 200 day MVA is still lurking above all of this drama, at 10,183.83, just below further resistance at 10,200.

S&P 500: Action very similar to the Nasdaq and the Dow, selling back Tuesday and Wednesday before rallying intraday Wednesday and continuing up Friday. Volume has not been strong Wednesday's intraday reversal and Friday's gain, but it was a holiday session. The index is now sitting at resistance at 1150, a serious resistance level but just a warm-up for the down trendline formed by the September 2000 top and the May 2001 top (1165). Then that is followed by the 200 day MVA at 1183.86. Serious resistance and a check of support at the 18 day MVA (1124; also represents former resistance) would be good. The 50 day MVA (1111.35) and up trendline at 1113 are a bit lower than we would like to see after Friday's move.

Stats: Stats: +13.31 points (+1.2%) to close at 1150.34.
Volume: NYSE volume was predictably low at 414 million shares (-60.1%).

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

End Part 1 of 4

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