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12/08/01 Stock Split Report
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Stock Split Report Subscribers:

MARKET ALERT SERVICE

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SUMMARY:
- Employment numbers give a reason to take some profits after a strong week.
- Lower volume selling as most stocks test their recent moves in orderly fashion.
- Fed is ready to do its part again, but is Congress going to do its job?
- Subscriber Questions
- Team Trades

Some profit taking on the employment news.

Friday all major indexes sold back after the momentum slowed on Thursday. It was what we expected after we got the move that we were watching build and then explode Tuesday and Wednesday. A solid week with very strong buy volume. The Nasdaq closed up 4.7%, the Dow up 2% and the S&P added 1.6%. The SOX blew it out with a 10% move. This was the third leg in the rally off of the September bottom, and we are looking for more.

The selling was starting to show itself Thursday, and Friday's employment report gave some more momentum to the selling as it provided an excuse to take some profits. Though the employment numbers are a lagging indicator, it was taken as bad news. The futures were about flat line but then dipped negative on the news and the markets started lower and never recovered. It was not a bad session, however.

Lower volume selling is a good cap for the week.

Sure we would love to see the market continue to rally on through the weekend, but Tuesday and Wednesday were big moves. A little rest and profit taking before the weekend was pretty much what we expected as discussed Thursday. There were more than a few things we liked. The selling was on much lighter volume even with the 'bad' employment news that was the excuse to sell a bit more. On top of that, the indexes did not tank. They were selling pretty hard, but they never lost grip, and were able to bounce back up in the last hour after holding above some psychological and technical levels. That was good action given that we had to have some selling.

More to come this week?

Everything that put the market on this path is still in place (well almost; stimulus is becoming even more questionable), and after this pullback we anticipate more upside coming. This could give us another shot at those stocks that enjoyed great gains and are now giving some back on lower volume. It has thus far been a very orderly pullback with lower volume and very few stocks tanking; most are holding onto their gains. That is the beauty of the market; there is no 'one' time to get in. There are multiple opportunities in a bull run.

Trillions of dollars were sitting on the sidelines during the continued downtrend. Trillions were lost, but money was still being made by all of those workers out there. It just was not going into the market. Now it is being put to work. This week another $6.7 billion hit mutual fund money market accounts, the 'on deck circle' for entry into the stock market. That is on the heels of $16.7B the prior week and $21.5B the week before that.

On top of that, good news from the companies themselves is appearing. CSCO, ORCL, INTC, ALTR, SUNW, PIR and others either upped their earnings estimates or said business was starting to turn. That definitely helped the big names and most other stocks. Several months back we discussed how this would be the case: economic numbers would start to improve, but the economists would dismiss them because they were now (finally) in the recession mode after being gung ho up until November 2000 when things came crashing down. The signs of weakening were there before, but they were in the 'go-go' mode, and the slowing reports were 'aberrations.' They dismissed the improving numbers because it did not fit their model of recession. Now the companies are coming in droves with better news and all of the sudden the economic news does not look so bad to the economists though most are still married to their new 'recession mode' of thinking as we discussed Thursday night.

There is money coming into the market, but not all at once. There are still a lot of nervous would be investors out there. Who can blame them? Most get their market 'insight' from the commentators on the financial stations, and they are mixed in opinion at best with a definite lean toward the negative 'it cannot last' side. Economists remain negative in the face of improving economic numbers and in the face of history (we will discuss that with the employment numbers). Analysts, despite the words of the companies themselves that things are getting better and even upping their own estimates, are ragging on the companies, saying this quarter is a blip or that they will simply not make their increased expectations. Reality check. Companies can get sued if the inflate expectations and then fail to deliver. They learned even more over the past 2 years with the downturn and Regulation FD. They are not going to go out on a limb if they cannot deliver.

Not all roses.

In any event, the negative reporting is good reporting. We like to keep a healthy fear out there as it continues to fuel the market higher. All of the ammunition is not being used up at once in a great big buying frenzy. The market is rallying, taking its time consolidating those gains and building a good base before it rallies again. Despite what we hear each day, these consolidations allow the market to keep from getting ahead of itself.

Still, the Dow and the S&P were unable to clear their 200 day MVA in last week's rally. Stopped dead in their tracks at that point. Once again, however, they have sold back a couple of sessions on lower volume and are being squeezed between solid near term support and that overhead resistance. With the big volume accumulation last week, after a few days of consolidation under this level, we look for another run and breakout over it.

THE ECONOMY

The Fed is set to act again on Tuesday with a 25 basis point cut. That was a 100% lock on the fed funds futures contract today with even an 18% probability for another 25 basis points the same session. That second is a real stretch, but it just goes to show you how important this is. The Fed is going to cut because it needs to keep confidence on the mend after 9-11, and cutting is one way to do it while Congress plays kids' games. Basically, Congress is forcing its hand. Also, the Fed, once it starts on a path of tightening or cutting, does not stop until it starts seeing results. Hence the Fed did not cut rates until GDP went from 6% to almost 0%. Now that it is so focused on confidence and given the 9-11 attack, it won't stop cutting just yet.

Unemployment rate rises to 5.7% from 5.4%, the highest level in 6 years. Non-farm payrolls were down 331,000, much sharper than the 201,000 expected. That was the biggest drop since 1974. That had practically everyone abuzz all day, and was a major reason the FFF jumped up. You have to look at what the numbers really mean in terms of the economy. In 1974 when the numbers were in the same league, the economy was already on the road to recovery, indeed it was three months along that path. Jobs are the last to come back because companies have to sell goods to rehire. We believe that the economy is already turning the corner despite the continued barrage of economists that say it is different this time. Note that most said it was different this time back in early 2000.

Michigan sentiment for December was higher than expected at 85.8 versus 84.5 expectations and 83.9 prior. That gave the market a momentary pop, but it did not last. Sentiment is continuing to improve in the wake of the attack and better economic reports and an improving stock market that is forecasting that recovery.

Congress cannot act for the good of the country.

Even though jobs are a lagging indicator, they make good political fodder, and that was being trotted out today by the Republicans in an attempt to get past the impasse with respect to the dead in the water stimulus package. There has not been any real effort to get off center. They did not make the November deadline the President wanted, and they are not going to make it by Christmas.

Indeed, there are political shenanigans ongoing that are downright embarrassing. First we had to help out the bison ranchers and pumpkin growers, those pillars of the American economy. Then there were the tax cuts for corporations that were not really going to help a lot of the smaller corporations that make up the majority of U.S. businesses (the alternative minimum tax carry forwards). The most recent is the invocation of a maneuver where any proposal would not even go to the floor unless 72% agreed to it. Heck, to get a constitutional amendment to the floor it only takes 66%. And now some are simply packing up their toys and going home because they are not getting their way.

It is insane, petty, and an insult to all of us that are waiting for a stimulus package. The market is waiting as well. We have been saying that the stimulus package was a potential problem for the market. It is expecting one as a given, but that expectation could be dealt a sharp blow. It would be another Christmas miracle if we got one by Christmas; even by New Years is a dream.

THE MARKET

The market sold back but on lighter volume. It did not get out of hand though we would have liked to see less of a loss on the Nasdaq. We like those selloffs that don't give up a lot of points and occur on lower volume. Held at the proper points on the lows and started bouncing back a bit. Pretty decent action.

VIX: 24.89; -0.21. In an unusual day, volatility fell when the S&P fell. The relationship is usually inverse. It continues in the middle of the normal range of 20 to 30, but fading. It is secondary, however, and the price/volume action is very good right now. 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 dip lower.

VXN: 50.18; +1.79. Hit 51.14 on the high as volatility is so-so; not at the summer time range but not high. Good to see it move up sharply on the selling session. 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): 0.73; -0.07. Put activity fell on the session, but after the big jump Thursday on mild selling, we are not too concerned. It remains in a higher overall level, jumping up each time selling starts. That is indicative of the continued apprehension about the rally. Climbing that wall of worry.

Nasdaq

It tried to get a bit ugly, but it was able to hold above 2000 and then recovered to put a comfortable margin between itself and that level. Practically all of the big names sold back on lighter volume.

Stats: -33.01 points (-1.6%) to close at 2021.26.
Volume: 1.920 billion shares (-13%). Slightly above average, but still much lower on the selling. The Nasdaq has been exhibiting very solid accumulation the past week after showing slightly positive accumulation during the wedge consolidation. This is the action we want from the primary indicator.
Up volume: 561 million
Down volume: 1.309 billion.

A/D and Hi/Lo: Decliners took over Friday by a hair at 1.07 to 1 (Advancing issues led 1.32 to 1 Thursday).

New highs: 102 (-23)
New lows: 30 (-3)

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

Hung in there in the early going, but it was a day for selling. The index sold off all afternoon down to 2002.34. It tapped down at that level for just a few seconds and then rallied 20 points to the close. Like that it tested the intraday high down trendline on the low (also a psychological level) and recovered. Low volume on the selling and the ability to bounce off of potential support is another sign of the resilience. The 10 day MVA is at 1972.28, just below the gap up point at 1980, a potential level of support. We want to see 2000 hold again on some early selling Monday and then have it rally from there.

Dow/NYSE

Good action. Below average volume on the NYSE during the selling, and a tap of support on the low and a rebound toward the close. It still has to tackle the 200 day MVA, but it is looking better at the odds of breaking it.

Stats: -33.01 points (-1.6%) to close at 10,049.46.
NYSE Volume: 1.228 billion shares (-18%). Nice below average volume on the pullback. That is what orderly pullbacks without distribution are made of.
Up volume: 495 million shares
Down volume: 736 million shares
Downside action was predominant, but it was nowhere near a rout.

A/D and Hi/Lo: Decliners pulled into the lead, not unexpected, at 1.20 to 1 (advancers led 1.02 to 1 Thursday).

New highs: 94 (-46)
New lows: 30 (-2). Great to see new lows still falling on a down session. That indicates the NYSE remains sold out.

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

Still trading below the 200 day MVA (10,135.34), tapping near support at 9992 on the session low (10,002.41) and then rebounding to recover half of the session losses. The 10 day MVA (9944.89) is backing that level up. The up trendline is riding up right with the 18 day MVA at 9859.48. We would expect 9992 to hold, but if not, the up trendline has been doing a great job. The 200 day MVA is the objective to beat right now, and when it does it still has a lot of congestion from 10,200 to 10,300. We may see some more softness Monday to test the support again before it can start making a move on the 200 day.

S&P 500: The big caps also labored below the 200 day MVA (1174.84), never making an attempt at testing the level. It did test support at 1150 and managed to bounce to close just above the March 2000 down trendline it broke on Tuesday. There is a bit of a squeeze play going on here as with the Dow. The 200 day MVA is pushing down on the top as support at 1150 (it held on Friday's low of 1152.66) and the up trendline at 1148 (just above the 18 day MVA at 1142.08). The price/volume action is good again. After breaking the long March 2000 down trendline, we anticipate it to take another day to rest and then take another shot at the 200 day MVA. With the strong volume it ahs a good shot at clearing it this time around. It needs to in order to provide support to the market leading Nasdaq.

Stats: -8.79 points (-0.8%) to close at 1158.31.
Volume: NYSE volume fell to below average on the selling (1.228 billion shares; -18%). Very good price/volume action as it shows that even though the sellers were ahead Friday, they were fewer in number than the buyers.

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

Summary: A solid week for the market with some gratuitous selling the last session after such a large run. The volume action was just as we want it as we did not get any high volume reversal immediately on the heels of the buying; that was a recurring plague during the downtrend. The action remains good and we look for this selling to work its way out early next week for the next round of upside buying.

THIS WEEK

Still no slouch for economic reports, the primary being Tuesday's FOMC meeting (results at 2:15 ET), followed by the Producer's Price Index (PPI) and retail sales (a biggie) on Thursday and the Consumer Price Index (CPI) on Friday. As noted, the market has priced in 25 basis points and we are confident the Fed is going to meet that expectation. It simply cannot afford to give the impression, no matter how small, that it is not standing behind the recovery effort. It will take some pretty salty economic reports to get the Fed to stop, though it is very close to finishing. Also, it must play cover for a Congress that cannot get its act together and work together. I have seen 2 and 3 year olds in a room with only one toy get along better.

Our outlook for the market this week is pretty simple. There is a goal the Dow and S&P 500 have to meet, and that is breaking over the 200 day MVA with some authority, i.e., expanding, above average volume on the move. They have to clear their resistance to give a hand to the market leading Nasdaq. If they move more or less in tandem, the rally is all the more sustainable.

Early in the week we anticipate the indexes to test the support levels they tested today, possibly lower to the next close support. We expect that support to hold and then the indexes to make another move higher to take out the next resistance on the Dow and S&P 500. That will give us the chance to take some more positions coming off the support levels on stocks that have broken resistance and are currently testing that breakout right now. We are looking at picking up these stocks as they start back up off of support. The market is such we feel more confident in jumping on these stocks at this point.

End Part 1 of 4

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