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12/15/01 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERT SERVICE
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- Market is a picture of indecision with bullish and bearish tones.
- The big picture: the reason for the rally still exists, but new concerns arise with LU, CIEN and Q and wonders about a stimulus package.
- Economic news is mixed as well, but again many signs pointing to the bottom as well.
- Subscriber Questions
- Team Trades
Market bounces back up off lows Friday, but still down for the week.
The Dow posted the largest gain of the session, something a bit unusual in itself, but overall the week was down. The Nasdaq posted its first losing week in the last six, but it too managed to rally in the afternoon to close positive. Volume was weaker on the Nasdaq and NYSE, so the moves up did not have a lot of punch. Hour by hour volume on the Nasdaq lagged Thursday's selling by a wider and wider margin as the session wound down. In other words, Thursday the selling volume ramped up in the afternoon while Friday's late surge was on comparatively falling volume.
Even with Friday's positive close, the Dow and the S&P 500 still closed the week giving back all of the prior week's gains and then some. Only the Nasdaq kept a portion of those gains, somewhere in the neighborhood of 25%.
Mixed signals after a strong run off of the bottom.
Now that the indexes have made a strong run off of the September bottom they are showing their first real signs of fatigue. What are the signals the market is throwing out?
Is that pattern bullish or bearish?
The S&P, the Dow, and now the Nasdaq (in that order) have broken below the up trendlines off the low marked by the closing lows. It is true that strong uptrends cannot last indefinitely. We see that in individual stocks all of the time: they break out of a good pattern, then bounce up their short term moving averages 4, maybe 5 times and then have to correct back toward the 50 day MVA where they regroup and start the process over again. So, this move is not totally out of character for any solid move higher (or lower for that matter).
The pullbacks of the last week and one-half were somewhat orderly with no huge point losses. After such a big move up in a somewhat skewed cup pattern, these moves could be construed as forming handles for the next move higher. Handles are slight selloffs after good moves higher that get the profit takers and those that do not believe in the long term viability of a rally to sell. When the near term sellers are out, all that is left are longer term holders, and then the indexes are ready to move higher as demand outstrips supply (the holders want higher prices before they sell). This pattern is evident in some of the big names such as BRCM, QLGC, INTC, EMLX, BRCD, KLAC, etc.
These are not perfect handles, however. QLGC and BRCM show a potential double top inside the handle. The day-to-day action has been up and down, not a steady, low volume pullback. Volume has not been what you want to see on such a pullback. The downside volume ticked higher and higher while the up session volume edged lower. That is not bullish action, but it has not been out and out selling either.
With the so-so price/volume action, if the S&P and Dow do manage to rally up this week, we have to be careful of a head and shoulders pattern developing. The left shoulder and the head have formed. The neckline on the S&P undercut the other neckline (not a true pattern, but still fits) while the Dow neckline looks to be right on line. If no volume, i.e., buying conviction, comes in on any rally next week, this pattern could form and start to roll over.
Giving back the gains.
As noted, the Dow and the S&P 500 gave back all of the gains on the big rally sessions two weeks ago. The Nasdaq has held onto about 25%. One thing we noted recently was that stocks and indexes that hang onto gains and trade in a relatively narrow range are in bullish action. That the Dow and S&P immediately turned and gave up that part of the rally in a failed run at the 200 day MVA signals that buyers were not ready to outnumber the sellers, and that their enthusiasm was overrun.
Even with the broken trendlines of late and the givebacks, the percentages are inline with or even better than pullbacks on this run already. The Dow gave back 6% in late October in the largest pullback of the rally. The selling last week, intraday high to intraday low, was just 4.2%. On the Nasdaq, it suffered two setbacks, late October was 8.1% and mid-November at 5.6%. The latest pullback is 6.3%. None of these are out of hand as yet as compared to the entire run. Given that the Dow and S&P had run pretty far for two days when they hit the 200 day MVA, that is not really that bad.
Nasdaq above support, Dow above some support and S&P below support; bears higher while bulls lower (but not much); buyers tentatively stepping in on selling.
In the miscellaneous category, the Nasdaq held and closed above its 200 day MVA and the tops of its prior consolidation. If it moves up from here on strong volume, that is picture perfect. On the other hand, the Dow and S&P never made it over their 200 day MVA. The Dow sold down to the 50 day MVA on Friday, but it held there and bounced on low volume. The S&P sold below its 50 day exponential MVA Thursday and made a weak attempt to break it Friday but failed. The S&P has been the biggest drag on the leading Nasdaq; all indexes need to move up together to climb out of the hole. The Dow and Nasdaq are at points they should hold if the buyers are there; they may have to drag the S&P with them.
Bears moved higher last week while bulls moved lower. More pessimism and less optimism is good for upside rallies, but the moves were not huge, especially when compared to where they have moved from. There are still far, far more bulls right now than there were just a month and one-half ago; the bears are vocal, but they are not in the majority.
Buyers are still stepping in on the selling. They did so Wednesday and Thursday even as many were saying the rally was over. That is bullish action. They did not step in on Tuesday or Thursday, however, as the indexes stepped lower on higher volume.
The big picture.
Why did the market start to rally in the first place? There were all of the signs we noted last week and when they were occurring (e.g., sentiment and volume indications), but the big reason any market rises is that earnings are expected to rise. Stock prices follow earnings. Earnings rise when the economy continues to rise or when a recession gives way to an economic upturn. Stocks handicap that upturn ahead of time. That is why stocks have been rising: investors on the whole believe that economic recovery is coming, and they are buying to avoid the Christmas rush.
The bond market is also pricing in an economic recovery judging from the rise in long term yields. The bond market is accurate, usually more so, than any other handicapping market as to economic activity. The move higher is premised on an economic recovery occurring in 2002. Recent economic data both before and now even after 9-11 are showing that is a real possibility (more below).
There has not been a lot of change in the reason for the rise off of the September bottom. That is, other than the nice moves in the indexes, individual stocks, and some recent news from a few companies anticipating lower earnings this quarter and then flat or down earnings in 2002. MRK, BMY, CIEN, LU, and Q hit the market last week with such news. That gave those building in expectations of an early 2002 recovery pause and aided the selling. That is contrary to what BRCM, BRCD, AMAT, AMD, ALTR, ORCL, NTAP CSCO and many others have stated, but then again, there are always sectors and companies within sectors that do not share in the growth. LU, CIEN and Q are in a sector that is still suffering from overcapacity. MRK has drug pipeline problems. Some say the same for BMY. That is an easy explanation of their problems, but it did not erase the uneasy feeling the announcements engendered in the market as easily measured by last week's up and down action.
Other factors weighing on the move: the market had built in a pretty good expectation of an economic stimulus package before the end of the year. We have heard from friends in D.C. that the sides are closer than they say in public, but no deal materialized Friday or Saturday. Originally we felt the November 30 deadline was impossible, and now the pre-Christmas wish is fading. No stimulus package for use at Christmas is a drag on the market.
Still, to us the economic signals still telegraph recovery, and thus the market should continue to read the same into them. If so, the market will continue to price in economic recovery. This setback over the past week as noted above was not a huge price correction relative to earlier corrections on the move up, but it did change the character of the move. Despite what we believe about the future, we always take our cue from the market itself. It is showing some equivocation, some tentativeness after the rally. Longer term we feel the bottom is set. Shorter term we may get a few more downgrades this week based on valuation and future expectations that will pressure the market. The key again is whether the leading Nasdaq can hold on above the 200 day MVA.
THE ECONOMY
What about those economic numbers? Friday gave us another dose, some good some not so good, but overall they imply a recovering economy.
The Consumer Price Index, the measure of prices at the consumer level, was flat for November, but taking out the decline in energy prices, prices grew 0.4%, the most in over 8 years. That is the hint of inflation in a pretty weak economy, especially for one technically one now officially in recession. What do we mean? Energy is down, but housing, medical costs, cars, smokes, and college tuition was up. Any turn up in the economy will put more demand on energy, and thus more increases in prices. That report may put the lid on further Fed rate cuts.
Industrial production was not full of economic cheer either at -0.3%, better than the -0.7% expected and October's -0.9%, but it made 13 out of 14 months of falling output and an 18-year low. Industrial capacity (the amount of production capacity in use) hit 74.7%, the lowest since 1982.
What the heck is good about these numbers? Business inventories fell 1.4% in October due to a 2.7% jump in sales. This pushed the inventory to sales ratio down to 1.39 from 1.45. This is a measure of how many months it takes to sell what is currently in the store at the current sales pace. This was a big drop, and at this point it is at a level that sets the stage for the end of the manufacturing recession.
THE MARKET
Another late rally helped turned the tide, but it did not turn the indexes up for the week. Downgrades of VTSS, PMCS, and AMCC (after the CIEN and LU warnings) did not tank the market. That is the resilience it has shown even as it starts to question its own move.
VIX: 25.97; -0.73. The CBOE and others report volatility hit 34.09 on its high, but the best we see is in the neighborhood of 27.85. In any event, it moved up on the selling, but then moved lower and fell off in the last part of the session as the indexes rallied. It is hanging in this 25 to 26 range. Not in the low twenties that would show out and out complacency, but not showing much fear or anxiety either.
VXN: 52.79; +0.64. 53.72 on the high. No big spike, but moving up toward the high end of the range for the past four weeks. That has set off small rallies in the past. It shows some skittishness, but no real fear in the Nasdaq.
Put/Call Ratio (CBOE): 0.72; -0.07. Put activity fell, but it still remained in the higher end of the range even as the market recovered late in the session and rallied positive. Option players as a whole are still betting on a fall, and that is good for the market overall.
Nasdaq
Held once again above the 200 day MVA after testing it, but stopped shy of moving back above the up trendline. A decent, if a bit volatile, pullback. Needs to hold here.
Stats: +6.66 points (+0.3%) to close at 1953.17.
Volume: 1.899 billion shares (-9.1%). Volume was lighter all session than Thursday's selling. It was a nice recovery, but there was no real buying power. No distribution, but no accumulation.
Up volume: 833 million
Down volume: 1.021 billion. Much more evenly matched than Thursday's beating.
A/D and Hi/Lo: Advancers did take back over, but just barely at 1.03 to 1 (decliners led 1.78 to 1 Thursday).
New highs: 78 (-7)
New lows: 38 (+2). New lows advanced on an up session, but as the fell on Thursday's selling, not bad action at all.
The Chart: http://www.investmenthouse.com/cd/$compq.html
Things were not looking so hot for the Nasdaq recovering the up trendline Friday, and it sold early before a late rally pushed it close to that mark. Indeed, in the last hour it tapped right at that point on its high (1965.74) and then retreated to the close. It was not a bad day, however, even if it made a weak, relatively low volume attempt to cross that level. The index held the 200 day MVA (1935.22) on the low and then rebounded from that. That range is also in the closing high range of the late November consolidation. The Nasdaq is in a good place to hold for a rally. It has been the strongest of the big three, and this pullback, while not picture perfect, is less than the 8.1% pullback in late October. We may see more downside Monday on some more downgrades, but unless there is bad news, we anticipate it will hold the 200 day MVA on a closing basis.
Dow/NYSE
Much as with the Nasdaq, it was heading lower on Friday, unable to retake the up trendline, but managing to hang onto the 50 day MVA and rebound. The best gainer of the session, not its normal distinction. It is a potentially dangerous pattern, but no lower low yet.
Stats: +44.70 (+0.5%) to close at 9811.15.
NYSE Volume: 1.362 billion shares (-10.6%). The index tested the 50 day MVA and made a stand, reversing to close positive. Volume did not match the move: you want to see more volume on a reversal off of support.
Up volume: 725 million
Down volume: 570 million
A/D and Hi/Lo: Advancers moved back in front 1.31 to 1 (decliners led 1.93 to 1 Thursday). Not bad, but way off Thursday's selling.
New highs: 52 (+10)
New lows: 56 (+16). New highs rose on the up day; not too powerful a session.
The Chart: http://www.investmenthouse.com/cd/$indu.html
Held the 50 day MVA (9719.65) on the low (9736.42), the point you would want it to hold. Volume did not race higher on the test of the 50 day, but it did hold that level. For a Friday, that may not be bad. Despite the 4.2% selloff on this pullback, it is still less than the 6% selling in late October, and it has not made a lower low on this pullback, not bad for having broken its up trendline. That is the good news and it looks as if it is going to make another run. If it cannot clear 10,000 on any bounce up from the 50 day MVA and do it on good volume, it could sell back and form a head and shoulders pattern leading to further selling. Again, we think it would take some bad news to send it lower.
S&P 500: Thursday it sold below the 50 day MVA (1125.13), and Friday the big caps made a run to 1128.28 on the high, but as soon as it crossed the 50 day, it sold back in the last hour: it made a run off of the October highs at 1100 (the low was 1114.53) and cleared the 50 day MVA, but could not hold the move. Lower volume did not help. The S&P has been struggling the most of the major indexes, and it has made a lower low on this pullback when it was unable to hold 1125 and the 50 day MVA. That is something the other indexes have not done, and is a real sign of a change in character. Still, as compared to the other pullbacks on this rally, it is 5%, still less than the 5.1% drop in late October. That sounds good, but the pattern is not so good. We took some puts on the OEX Friday because the inability to hold the 50 day MVA was key to us.
Stats: +3.69 points (+0.3%) to close at 1123.07.
Volume: NYSE volume edged lower on the attempt to clear the 50 day MVA (1.362 billion shares; -10.6%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
Summary: The Nasdaq and the Dow are in position to rally after the pullback. The S&P is the question mark as it sits below the 50 day MVA. It has been the drag on the market, and foretold the recent weakness of the other two. The Nasdaq will have to reassert itself for the market to rally.
End Part 1 of 4
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