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12/01/01 Investment House Daily
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Investment House Daily Subscribers:

MARKET ALERT SERVICE

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http://www.investmenthouse.com/alertdly.htm

SUMMARY:
- Indexes continue to hold above up trendlines in a good lateral move.
- Shake off bad news, hold steady.
- Congress ready to investigate (a.k.a., posture for votes) Enron collapse.
- Subscriber Questions

A subdued Friday is good news given the bad news.

Friday we were looking for a flat, quiet move, and that is what we got. We want the indexes to consolidation those gains in a lateral move that keeps them above the up trendlines and thus keeps everything on even keel. Friday was a continuation of the consolidation work as the indexes gather strength for when they again test resistance at the 200 day MVA and the March 2000 down trendlines.

The lateral movement on low volume is one of our favorite consolidation methods. We really like to see stocks and indexes stair step higher: sold moves higher followed by lateral to slightly downward consolidations, followed by another strong move higher. It gets stingy with its gains, i.e., there are not many investors ready to sell their shares. Thus, volume is light on any selling as the few sellers are quickly met with buyers. That keeps prices from tanking and allows the indexes and their stocks to move sideways until the final profit takers on the recent move are weeded out. Then you are left with the strong holders, and when more buyers move into the market, those strong holders are going to want more money to sell their shares. The answer? Prices move up until some of those holders are ready to sell.

Friday the indexes did just what we wanted with the Nasdaq holding almost flat on lower volume, the Dow rising a few points on higher volume, and the S&P sinking a fraction on that slightly higher volume. Again, however, NYSE volume was skewed by more feverish ENE selling, another 173 million Friday with average volume near 20 million. Take off that 150 million and volume was down about 100 million. In any event, volume was not out of whack with the overall picture the indexes are showing us: good lateral building patterns above their up trendlines and just below important resistance at the 200 day MVA and down trendlines. Everything was flat: up to down volume, the A/D line, you name it. That is a building day in this pattern.

Bad news does not torpedo the indexes.

Friday gave more reason for the indexes to sell if they had a mind to. NVLS disappointed on its conference call Thursday after the close. It was going to be an anchor on the semiconductor sector, particularly chip equipment. The semiconductors, while not strong, did not tank. Indeed, the SOX continues its ascending wedge pattern it has formed over the past month. That is a bullish, building pattern that can lead to explosive upside breakouts. If the chips continue to lead and give a strong breakout, that is very good for the market.

Besides the chip sector, bad economic news hit the street. Q3 GDP was revised down to -1.1% from -0.4% prior and the -0.8% anticipated. The headline number looked pretty grim, and initially it caused a selloff in the futures. They recovered and the indexes opened modestly lower.

Why did the futures recover? Perhaps because looking behind the number things were not that bad. The biggest factor in the downward revision was the continuing decrease in inventories. They were revised down another $10B for a total Q3 drop of $60.1B. That alone subtracted 0.75% from the GDP figure. Then there was the trade balance, revised down as well. That cut about another 0.5% from the GDP final number. On top of that, there was virtually no government spending in Q3, something that will change drastically in Q4 with all of the security measures, etc. being incorporated. Government spending is a component of GDP; it is not our favorite measure of positive GDP as history shows that government spends unwisely and inefficiently. It will, however, help raise GDP and that has a positive psychological effect on consumers. We would prefer tax cuts to let you and me figure out where to best spend the money; we may get some of that anyway with a stimulus package.

Manufacturing continues to show weakness with the Chicago PMI coming out a half hour into the session. At 41.1 (prior 46.2 and 45.5. expected) it was below 50 for the fourteenth consecutive month, with all components falling except prices paid; that is a switch from pre-September 11 reports. Production sub-index fell from over 50 to just above 40; a major drop in factory activity during November. The jobs component fell from 44 to 37.2 as workers continue to suffer as business activity falls and employees are laid off. Employment lags economic recovery, but that is little solace to those who have lost jobs. At least we can look toward a time in the not too distant future where jobs will be returning. Hard to put that in a Christmas stocking or on the hearth, however.

Congress to investigate Enron debacle.

Thursday and Friday members of Congress were taking turns grabbing a microphone or issuing a press release about how terrible the situation at Enron was and how shocked they were that this could happen. Congressional investigation was promised.

Oh boy. Seems every time something happens that could impact a few votes Congress wants to open hearings and launch an investigation. They are expensive, rarely get to the bottom of anything, and even if they do, not a whole lot comes of it because no consensus is met. Example: IRS abuse was the subject of Congressional hearings. Reforms were adopted, but from what we have heard, it has not changed much. It just gives Congress the ability to brag about the decisive action it took when the issue was presented. Talk to most anyone in Congress about IRS problems and they will launch into a self lauding discourse about how Congress answered the cry of constituents and reined the agency in.

One has to wonder why Congress feels the need to get involved. Supposedly it wants to figure out how to help the workers and to determine what impact it has the oil and gas market. Laudable, but is this the best way? After all, there is the SEC to examine any securities violations, and the Energy Department to assess the impact on the energy market and report the findings to Congress and the President. If necessary, there is the Justice Department to back up those two agencies with any necessary legal action.

Why ENE when there are much bigger issues to investigate?

Why is Congress so adamant about this event? Yes it impacts thousands of U.S. workers and potentially the energy market (Not likely, however, as most of those dealing with ENE realized something was amiss and scaled back their relationships with the company. No disruption of the market has been seen as measured by the true market barometer, i.e., prices). But why is Congress so adamant about this event when there is a much more insidious event that impacted every U.S. citizen and company, young and old, as well as the entire world? What are we talking about? The dear Fed and its unwarranted rate hikes that were to forestall inflation that certainly had to be around the corner.

Yes, the Fed forestalled inflation by sending the equities markets into the longest bear since 1974 and crashing the economy into recession (hey, it's official after last week!). Hundreds of thousands, indeed millions of U.S. workers were thrown out of jobs as companies had to downsize to cut costs to prevent massive plunges into the red. The numbers are staggering. In October there were 1816 layoffs that involved 50 or more employees. That is another 212,000 workers hitting the streets. The number has continued to increase; in September there were 1316 such layoffs. There are now over 3 million continuing unemployment claims, and that is an understated number because after two months some drop off the roll even though they are still unemployed. Companies that were spawned in the technology boom close their doors and let their people go. Same thing with your 'run of the mill' production factories. 40% of the October layoffs were in manufacturing. 50% of all workers laid off were factory workers. Sure there would have been an inevitable shakeout; there always is in each technology boom. But, the Fed accelerated and exacerbated that shakeout when it misread the economy and overreacted to something that was not there. Or it simply was acting upon the orders of its owners who do not reside here in the U.S.

There are two levels of inquiry right there: the impact of all of those job losses and crashed businesses and how to avoid it in the future as well as the Fed's structure and controls on it. Yet when Greenspan comes before Congress, he is met with shockingly little resistance. Any Congressman who attempts to confront him is met with almost visible disdain from the Chairman, and if that does not back the congressman off, an offer to meet in private is made under the guise of the need to save time. Hey, he should be working for us; who cares if it takes a few days, lets get it out in the open.

No, the real tragedy of the last two years is not Enron, but the economic background that was purposefully wrought during that time period that made the Enron collapse and other business and employee disasters easier. Without the economic crash and the resulting death spiral of energy prices, many businesses and thus workers would still be just fine instead of fighting for survival and hoping the Fed can do something and that Congress will act with a little grace and dignity and get a real stimulus packaged passed that benefits all U.S. citizens and gets jobs back.

THE MARKET

Good building action Friday as the indexes build toward another attempt at taking out the important 200 day MVA's and/or their March 2000 down trendlines. It was just what we were looking for, and another couple of sessions of similar action would be very constructive. Continued patience is required, but we are getting a bit excited by what we see building.

VIX: 26.14; -0.12. Volatility faded a hair as the S&P held steady on the session. The measure is still in the mid-range between 20 and 30, the 'normal' range. Lower than it has been off the bottom in September, but holding up relatively well, particularly when compared to the complacent summer months. 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: 48.45; -0.46. Nasdaq volatility faded a hair as well as the techs held basically flat on lower volume. It was a slow session, but not bad for a building session. About what you would expect. 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 after that 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): 0.63 points (-0.15). Put activity dropped Friday even as the indexes opened lower and never made much of a move toward the upside. It was a quiet day overall on most market indicators. Still well above the 0.40 level that can signal complacency.

Nasdaq

After Thursday's bounce up off the up trendline the techs had the opportunity to rest above that support and below resistance at the 200 day MVA, and they took advantage of it. Even with the NVLS news, the index continued the building pattern toward that attempted breakout to come.

Stats: -2.68 points (-0.1%) to close at 1930.58.
Volume: 1.832 billion shares (-6%). Volume shrank back below average on the sideways session. That is exactly what you want to see when an index is working sideways and building a potential breakout pattern.
Down volume: 879 million
Up volume: 839 million
Very close and very much typical of the action on the session.

A/D and Hi/Lo: Declining issues flip-flopped back into the lead at 1.06 to 1 (advancers led 1.62 to 1 Thursday). Not a strong down session.

New highs: 84 (+7). Actually rose on a down session.
New lows: 44 (-1). Just what we like to see on a down of flat session. That is good action for a 'down' day.

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

Continued its wedge pattern, showing a doji on lower, below average volume. That is precisely the kind of action we were looking for to let the pattern build more. Patience is the key as the index builds pressure from below in the form of the up trendline (now at 1900) as it tries to mount enough strength to clear resistance at 1941 and the 200 day MVA (1954.70). The pattern is forming up well. The big question will be whether the institutions keep on buying. The economy is still having its struggles, and the rally is based on a recovering economy. That makes the stimulus package all the more important as it will keep expectations for recovery strong.

Dow/NYSE

Continued its slight bounce up, but the day was not one for a breakout, just keeping the pattern going. That is what it did with a slight gain on slightly higher volume.

Stats: +22.14 (+0.2%) to close at 9851.56.
NYSE Volume: 1.45 billion shares (+7%). Continued above average volume, rising on the session, but as noted above, take away 150 million shares above average for ENE, and you have 1.3 billion, down from Thursday's action.
Down volume: 720 million shares.
Up volume: 608 million shares.
Evenly matched up and down volume indicative of the session.

A/D and Hi/Lo: Decliners were back in the lead at by 28 issues (1.01 to 1). Advancers were well ahead Thursday at 1.71 to 1. Dead heat.

New highs: 82 (+25)
New lows: 33 (-5)
Good hi/lo action on a basically flat session.

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

Not an impressive day by any stretch, closing well off of the intraday high (9891.58) after bouncing up off the up trendline (now at 9750) Thursday. Still a very tight range on the session as the index tried to follow the leading tech sector in building more of a base to break higher over resistance at 9992 and then the 200 day MVA at 10,157.41. It has a lot of resistance and will need the help of stocks such as IBM that are forming good patterns in the index.

S&P 500: The big caps pattern more mirrored the Nasdaq than the Dow Friday, closing on a doji just a fraction lower. The volume was higher, and while normally not a good sign, the ENE.com blowup is still impacting NYSE trading volume. Back it out and you have a lower volume session as the index traded flat. No churn in that instance, i.e., there are not a lot of sellers dumping shares requiring a lot of buyers to step in to hold the line. It is more of a consolidation pattern as the index holds above its up trendline (now at 1132; right with its 18 day MVA at 1131.91) while the March 2000 down trendline (now at 1155) and the 200 day MVA (1178.96) compress down from the top. It is not the good wedge pattern of the Nasdaq and the SOX, but it keeps the index in its trading range from 1122 to 1150 (plus or minus).

Stats: -0.75 points (-0.1%) to close at 1139.45.
Volume: NYSE volume was up to 1.45 billion shares (+7%), but take out ENE and you get about 1.3 billion, less than Thursday's session.

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

Summary: The Nasdaq led the way with a 1.4% gain on the week with the Dow losing 1.1% and the S&P dropping 0.9%. That has been the way the market has performed since the September bottom: Nasdaq leading, others following. They need a bit of strength to help out, but the Nasdaq is once again taking the lead by forming up well for a breakout along with the semiconductor sector that is doing the same thing. Again, we hate to sound like a broken record, but patience is the key, waiting for that breakout to give us the clear buy signal for more upside money into the market.

THIS WEEK

Another week, another load of economic data: auto sales, NAPM, construction spending, productivity, factory orders, and the unemployment numbers. All heavy hitters and some are more important to the vision of economic recovery than others (e.g., the employment index is widely followed, but it is more of a pain index and history lesson when looking for signs of economic recovery).

With the pattern in the Nasdaq and the SOX, we would like to see a day or two more of lateral motion and then a powerful move up out of the patterns. It may not wait if there is a very positive NAPM number Monday, or it may be a delayed reaction. For now the market is showing us building action, not declining action. There are always those predicting a correction or test is necessary, and indeed there usually is a test in of the low when you look back at history. The indexes will either make a strong breakout over resistance and not look back, or they will weakly make the move (or fail at the threshold) and then fall back for a test. Again, right now we see building action when looking at the nuts and bolts of the market, i.e., price patterns and action versus volume.

That keeps us ready for that breakout, but patiently waiting. We continue to take positions when they present themselves before the indexes breakout, but that is just part of our philosophy: see the proper move and then act. We don't like guessing or speculating. I have had many personal friends who know better after learning proper investment techniques from our analysts and me come up and ask if Enron is a good buy right now. They are speculating, thinking they will get a bounce from the 30 cent price up to $3 or so and 'make a killing.' When I ask what they would do if ENE files for bankruptcy, cannot put together a plan, and then is sold off piecemeal, the response is 'it is worth the small amount of money you put into it.' Perhaps. I have invested in bankrupt companies before, but there was reason to do so: a plan was coming, and when the plan or contract is announced, you get a spike in price and can take shares bought at pennies and sell them for 10 times as much. The majority of the time, however, I prefer to catch companies going the other way: companies that are leading, not gasping for air, praying for a takeover. Leave the speculation to the speculators. Invest, don't speculate.

That is a long way around to say we are waiting to see the moves, and are waiting for that breakout by the Nasdaq and the SOX to lead the way higher.

Support and Resistance

Nasdaq: Closed at 1930.58.
Resistance: 1930 to 1940. 1940 is the breakout of the ascending wedge, but it needs to clear the 200 day MVA at 1954.70 as well. The March 2000 down trendline is right at 2105.
Support: The up trendline is 1900. 1875 is still the bottom of the recent trading range. The 18 day MVA is right there at 1877.23. Below that is 1800 and the 50 day MVA at 1810.32.

S&P 500: Closed at 1139.45.
Resistance: 1150. The March 2000 down trendline is at 1155. The 200 day MVA is at 1178.96.
Support: The up trendline is at 1132. The 18 day MVA is right there at 1131.92. Then there is 1125, a level of prior consolidations. The 50 day MVA is next at 1117.03. Then 1103, the old closing low in the double bottom from March and April.

Dow: Closed at 9851.56.
Resistance: 9992 (former top and bottom). The 200 day MVA is at 10,157.41. The upper channel rides just over the 200 day MVA at 10,185. Other resistance at 10,200.
Support: The up trendline is at 9750. The 50 day MVA is 9623.46. 9500 also acts as support independently.

End Part 1 of 2

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