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us stock market, understanding the stock market
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12/18/01 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:
- Solid housing market helps market keep some upside momentum.
- Volume increases slightly on Tuesday's gains.
- Good earnings in retail, but after hours Alcoa warns and MU loses more than expected.
- Stimulus package a terminal victim of politics as the true face of Congress again emerges.
- Subscriber Questions
- Team Trades
Housing starts and permits rise again.
November starts were expected to fall slightly, but instead they continued their climb, rising 8.2%, the fastest rate of growth since July. Indeed, if it keeps up this rate of climb it is heading for is best year since 1986. It was not all single family dwellings (versus apartments), but it was a solid continuation in the trend higher. Permits rose as well, up 5.3%, also better than expected and the best growth since August, right before the September attack. Another interesting feature shown in the report: the percentage of disposable income used to service debt was 13.8%, the smallest percentage since Q4 of 1999. That means more money to spend on other things. That is why the 30 year was eliminated: lower rates and unlock a lot of equity and monthly cash to be used in other areas of the economy.
Market responds with a continued upside move to resistance levels.
Bolstered by the good economic news, the markets were able to keep the upside action going. It was not straight up, as usual. Gapped higher, broke some resistance, and then sold back down. Mounted an afternoon rally to retake resistance more or less, though the Dow closed below the 10,000 level and the S&P never did take out 1050.
Volume was a tad better, moving to average on the Nasdaq and above average on the NYSE. Still lower than last week's selling volume, but as noted last night, the week before and after Christmas is usually lighter, options expiration or not. There were some more good breakouts, e.g., CREE, FILE, IPIC, SEBL, NTAP, but a lot of the action was sluggish. The SOX was up on the session, but many semiconductors were down on the day. And they will be down more tomorrow most likely as MU reported more crappy earnings (losses actually) after the close. Better than last quarter's losses, but still crappy.
The Nasdaq crossed over 2000 and held, but the S&P never did give 1150 a real test. The Dow moved over 10,000, but gave it up in the last few minutes. The SOX tried resistance at 575 early, but never challenged it later in the session and tanked 5 points in the last 10 minutes of trade ahead of MU's numbers. I just was not a powerful session, but it was about what we expected.
Can the rally continue with after hours earnings woes?
Now the question will be if the can rally further beyond resistance. The leader has been the Nasdaq, and it will be the key on any further move. It will have its hands full. MU reported those bad earnings; one positive: DRAM prices spiked sharply right at the end of the quarter. MU is not taking the overly positive position on that, however, as it has seen that before. The chip sector was already dragging at the Nasdaq. It will pull at it more tomorrow.
There won't be much help from the Dow or the S&P as Alcoa (AA), the first blue chip to announce, earned just 10 cents exclusive of charges. It will be a major drag on the Dow. Motorola lowered its expectations by a ton for Q1, but said it was still committed to its earnings for the year. Sounds more like it has not simply given up hope just yet.
Momentum abhors hard, negative news. The moves were not powerful today, and the indexes will be challenged from the open tomorrow. Softer opens can lead to rallies in more times. We will see if the bullish buyers come back in after some selling in the morning.
THE ECONOMY
We covered the stats above and tomorrow the big news is the Leading Indicators. They project economic activity 6 months into the future and have been positive for four months prior to September 11 and are supposed to be positive once again (they were in October, right after the attack).
The stimulus package is about at a point where it could not stimulate a teenager at a wet t-shirt contest. It is the victim of political objectives that have nothing to do with the country's well being over the next year or more, but the political careers of several Congressmen. While there may be deep beliefs on both sides as to what is and is not proper, the language we are hearing at the press briefings is filled with political bias, backstabbing, and party maneuvering. Looks like Congress has finally returned to its normal ways.
Unfortunately, this gridlock is not what economy or the market needs. There are important parts to this bill, including some accelerated depreciation. That would really help the high tech arena by allowing the purchase of their products and writing off that expense faster. That sells products that would not otherwise be sold and helps reduce inventories and gets workers back to working. If that does not come to pass, the high tech doldrums will continue a bit longer. There are other parts of the bill that are good as well.
It is coming down to a battle over a small portion of the bill (medical insurance for laid off employees) that reflects different philosophies: should government be in charge of taking care of everyone or should government set up the framework to allow people the opportunity to make the decisions about their lives. Most Congressmen have had people whispering in their ears that stimulus is not really needed now, so they are not willing to give in on this issue. If it does not pass, any further recession can be blamed on the current administration. If it does not pass, the republicans can blame the democrats for stonewalling stimulus if the economy fails again. Great political fodder, but it does nothing for you or me.
Sure the bond market is showing a recovery coming. But the bond market has also been expecting a stimulus package; when reports the past week were coming out that the stimulus package was in trouble, the bond market rallied some. Not a lot, but it started to stem the losses. Don't think the bond market is not trying to tell us something. We could have an improving economy, but then fail to do what started us on the road back, i.e., rate cuts, promises of stimulus, etc. If those do not come to pass, the markets will take some back.
The galling part of all of this is that we are having all of this teeth gnashing over something that was made worse than it had to be. We know the story: rate hikes to slow down a very healthy, no inflation economy. Purposeful, deliberate actions using 'new' measures of inflation instead of the old measures to con everyone into thinking it was necessary to stomp on the economy. Basically the Fed looked at anything that was a sign of prosperity and said if that kept up, the economy would overheat. If it showed strong economic growth, it was a new inflation measure.
Low weekly jobless claims equaled a 'tight' labor market. Higher wages were deemed inflationary even though history says inflation is more money chasing fewer goods. There was no shortage of goods as supply was in high gear and capacity utilization was still below 'bottleneck' levels. CEO after CEO said their companies had no pricing power at all. Does that sound inflationary? People had jobs in record numbers, had record discretionary income, and prices were not rising anywhere near historic levels that were considered inflationary. It sounds more like the prosperity every politician promises but cannot deliver. When we sit back and reflect on what was and what is now, we just have to shake our heads and try not to get sick at the thought of millions of households with their retirements flushed away, college accounts imploded, prosperous businesses folded. Why did this happen? Not because of inflation.
With all of the investigation about Enron and the horror for its employees, magnify that across the entire nation. Where is the advocate for those families? They suffer while the 'experts' said nothing about the Fed's actions and now while Congress bickers over whether a small part of an insurance policy (the stimulus package, that is) uses government to pay for health care or puts money into the pockets of the individual so the individual can decide what is best. In a free enterprise society, my belief is that the latter is preferable: let the individual decide what is best without requiring more government. In any event, it is a small part of the package, and our Congressmen are fools if they think everything will be roses next year without it.
THE MARKET
The rally continued, but the indexes are still at an important resistance point. News is not good tonight, and that will put a lid on action early. Today we saw the indexes start higher, test the move higher, move up, and ultimately form a double bottom that broke out late in the session. We were on top of this all day with the alerts and let everyone know when the breakout occurred. We entered some nice positions on the moves.
VIX: 24.16; -1.27. Quiet pre-holiday action has volatility lower, particularly when you can gap higher and hold onto the move for the session. Volatility cracked below 25; still above the 20 to 22 level that signals complacency, but this is not good territory long term. Prior to the holidays, we won't complain.
VXN: 49.05; -2.02. Nasdaq volatility continues to plummet after bumping up to almost 54 last week, a level that has led to some minor rallies, just as the one we are seeing now. It still is signaling that the index has some room to move up as these rallies have found resistance when the VXN hits 47.
Put/Call Ratio (CBOE): 0.62; 0.00. Held steady on the session. Given the gains, that is not bad action at all. We like it when the ratio holds higher as the market rallies. The indication of pessimism means that there are still investors that have yet to enter the rally, and that represents future fuel for the rally.
Nasdaq
Broke over the 2000 level early, sold below it, and then made a later breakout. Volume rallied a bit, a good sign. Sluggish day, however, and MU's announcement will cool things at least for the morning.
Stats: +17.31 points (+0.9%) to close at 2004.76.
Volume: 1.850 billion shares (+0.6%). Not a big jump in volume and still lower than the prior week's selling volume. Holiday volume already.
Up volume: 1.197 billion.
Down volume: 631 million.
A/D and Hi/Lo: Advancers held the lead at 1.33 to 1 (1.30 to 1 Monday). Again, no real power on the session.
New highs: 124 (+19)
New lows: 46 (+5)
The Chart: http://www.investmenthouse.com/cd/$compq.html
A gap higher that ran through 2000, tested it, looked as if it would hold, but then fell to 1989.81 on the low. It failed at 2000, retested 1990, and then rallied to the close. Double bottom intraday. The index managed to break and hold above 2000, a level that is now important. It still has the December high ahead of it (2065.69), but that is about all. More important is the downside that could be tested tomorrow: 2000 (the up trendline is there now), then the gap point at 1980. The SOX was lagging today, and with MU, it will pressure the Nasdaq tomorrow early.
Dow/NYSE
The Dow rallied as well, rising again to test 10,000 on above average volume. Not bad at all, but AA will hurt it tomorrow early.
Stats: +106.42 points (+1.1%) to close at 9998.39.
NYSE Volume: 1.332 billion shares (+4.9%). Good to see volume crack back over average on some buying. Still below last week's selling volume, but a nice rise on a pre-holiday weekend is good action.
Up volume: 830 million
Down volume: 482 million. Held steady from Monday.
A/D and Hi/Lo: Advancers climbed to 1.71 to 1 (1.31 to 1 Monday). Not bad action.
New highs: 118 (+21)
New lows: 54 (-3)
The Chart: http://www.investmenthouse.com/cd/$indu.html
Another rallying session after testing the 50 day MVA Friday. Picked up some momentum today on the move with rising, above average volume. Cleared some resistance at 9992, taking aim on the up trendline and the 200 day MVA (10,111.19; trendline at 10,100). Lots of resistance at that point, including the December high at 10,169.44. That gives the index another 100+ points to rally before some volatility may set in for Thursday's action. Looks as if it might make that level after all but for the problems with AA. That will drag the index early.
S&P 500: The big caps brought up the rear, but still managed a solid gain on that rising, above average volume. It did not even test the resistance at 1150 and the down trendline just below that level (1148). We like the higher volume on today's move, but again we have to be careful of any rollover at the 1160 range if volume should fail on any move higher tomorrow. A head and shoulders pattern is still a very real possibility here as the big caps have not been very strong of late. With AA, MU, and MOT, it may have problems in the morning before it tries to catch its feet.
Stats: +8.56 points (+0.8%) to close at 1142.92.
Volume: NYSE volume rallied on the move, moving up to 1.332 billion shares (+4.9%). Good to see volume rising on a move up.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
After hours news will most likely dominate the pre-market and early trading with MU, AA, and MOT being the catalysts. Unfortunately for the rally, they will be downside catalysts. This market has continually overcome bad news on this rally, and it will have the opportunity to do that again tomorrow. We will watch for what levels hold early; if it is a good support level, that will invite a few positions. Not a boatload of positions, but just building a position on good stocks that are making good moves.
If support levels do not hold, we will hold off and let buyers decide if they are going to come back into the picture. Overall, the bias is still to the upside in the absence of an upset to the system. What would that be? Others piling on with bad earnings or outlooks, proclaiming the stimulus package dead, a series of downgrades. Of those, the second is most likely (our sources in D.C. are amazed at the holdup), then the first. Either of those will hurt the session for the day. Still, at this point we are not ready to step back in and short until we see a bearish pattern develop such as a head and shoulders on the S&P for example. The market has been resilient each time it looks ready to sell down. There are some ripe downside plays for a quick hit tomorrow if the gap down is not too big (e.g., QLGC to 45), and the DJX could also form a head and shoulders pattern from here. Those will present the best downside opportunities, but we have to be patient and let them develop.
Support and Resistance
Nasdaq: Closed at 2004.76.
Resistance: Moved over that 2000 level, but has not broken free. The December high is at 2065.69.
Support: 2000 would be great as the up trendline is right there as well tomorrow. Below that is the 200 day MVA 1933.39; that is right at support at 1934 to 1941.
S&P 500: Closed at 1142.92.
Resistance: 1150 (former price consolidations) and the down trendline at 1148. Then the December high at 1173.62, the 200 day MVA is at 1170.52, and the up trendline is at 1171. After that there is the middle of the March and April double bottom at 1183.85.
Support: 1125, former price consolidations, and the 50 day MVA (1126.17). After that, 1100 is next (top of the October consolidation range).
Dow: Closed at 9998.39.
Resistance: 9992 was taken out today. Up trendline at 10,070. The 200 day MVA is still there at 10,111.19. The December high is at 10,169.44.
Support: The 50 day MVA is at 9737.07. After that, 9500.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
12-18-01
Housing Starts, November (8:30): +8.2%. 1.645M actual versus 1.525M expected and 1.521M prior (revised from 1.552M).
Building Permits, November (8:30): +5.3%. 1.564M actual versus 1.470M expected and 1.485M prior (revised from 1.473M).
12-19-01
Trade Balance, October (8:30): -$27.5B versus -$18.7B prior.
Leading Indicators, November (10:00): 0.2% versus 0.3% prior.
12-20-01
Initial Claims, 12/15/01 (8:30): 394K versus 394K prior.
Philadelphia Fed, December (12.00): -17.5 versus -20.2 prior.
Treasury Budget, November (2:00): -$47.5B versus -$23.7B prior.
12-21-01
Personal Spending, November (8:29): -0.5% versus 2.9% prior.
Personal Income, November (8:30): 0.0% versus 0.0% prior.
GDP - Final, Q3 (8:30): -1.1% versus -1.1% prior.
Chain Deflator - Final (8:30): 2.1% versus 2.1% prior.
Mich Sentiment - Rev., December (9:45): 85.7 versus 85.8 prior.
SUBSCRIBER QUESTIONS
Q: Can you please explain what takes place in the last 45 minutes that unleashes all the buying activity so often?
A: Most of the action takes place in the first and last hours. Why? Usually the early hour is dominated by retail investors that put in orders the night before, and to a much greater extent institutions with buy orders that are either buying equities or selling them based on fair value in the futures. The last hour is often called the 'smart money hour.' The reason is that many are more interested to see how a stock has performed all session (pattern and volume) so that there is a better understanding of what a 'fair' price is for the stock and what the stock may do the next session. When they buy in big quantities on the NYSE, they often use buy on close orders, buying the stock at whatever the price is at the close. If they like what they see during the day, they submit these orders 20 minutes before the close and make the buy then. Your broker can scan those for you. I have often said I want to know where a stock is closing more than where it is opening. There is history there for the session, and it helps to make educated entry points. That is why when we see an early breakout sure we will take some positions, but we will also look later in the session to see how the volume is fairing and how the price action has held up. As an investor, it is good to know what the institutions are doing, and it is easier to see that on an intraday bases in the last hour.
TEAM TRADES
PSFT was moving in a double bottom with handle. The first hour saw it take off, moving on very strong volume but stalling at its handle high of 42. It looked good as it pulled back and traded through the middle of the day on very low volume, trying 42 again on a bit higher volume at 11:30 CT and then making a higher low on another low-volume dip. When the Nasdaq started up from its lows at 1:45 CT, I watched as it tried 42 again. This time it snuck through, and volume spiked up. Watching the market carefully as it tried 2000, and it broke 2000 just as PSFT hit the buy point of 42.12. Volume spiked up to breakout levels, the heaviest since the morning hours, and I put in the order at the ask of 42.15. It moved up momentarily but came back and took me out.
End Part 1 of 3
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us stock market
understanding the stock market
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