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us stock market, stock research
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12/29/01 Technical Traders Report
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Technical Traders Report Subscribers:
Happy Holidays!
We will issue a brief market update Monday with a full report on Wednesday.
MARKET ALERT SERVICE
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Another positive session Friday, but hardly inspiring.
- New Year is coming. Big caps under some duress as small caps look better.
- Economy keeps showing more and more signs of recovery.
- Subscriber Questions
- Team Trades
Indexes log three gains in a row on lukewarm session.
In keeping with the holiday trend, the indexes scored gains once again, but the action was slow and overall volume weak. The Dow held onto its break over its 200 day MVA, the S&P made a run at its 200 day MVA, and the Nasdaq tried a run at 2000. Overall the indexes did not really build on the recent gains, but instead tread water, biding time for the beginning of the new year when we will see institutional investors come back into the market. That will give us a much better read on the next direction the indexes will take.
Will the new year continue the rally in all stocks?
A general rule of thumb is that November to May is a good time to own stocks. As we have seen, the indexes rallied off the September bottom and have done quite well as per that general rule. That is obviously an oversimplification as most of the market's success depends upon economic conditions. The belief that the officially declared recession will end in 2002 and give way to rising profits has been the key force behind the rally.
There are other general rules as well. One is that small cap stocks tend to do better at the beginning of the year as last year's winners (those considered to no longer be 'values') are dropped in favor of smaller issues that have more room to grow. This is the 'January effect' you hear a lot about. Another general rule is that when the economy is recovering, growth stocks provide the best vehicle for returns as opposed to value stocks. Now if you can find smaller cap growth stocks, you could be in business. We have tracked many of those over the past two weeks, and we continue to add those to the ranks of the reports as they continue to look solid.
The big question is the big cap stocks. The S&P 500 has been unable to take out its 200 day MVA, lagging the Nasdaq (did so 3.5 weeks ago) and the Dow (accomplished last week). Looking at a lot of the bigger names across the board, we are seeing weakness over the past couple of weeks (as for techs, e.g., BRCM, QLGC) even with the mild rises in price last week between the holidays.
Was this light buying the so-called window dressing before the year end that will lead to more selling pressure once the new year comes, or are the stocks simply consolidating their large gains off of the September bottom before another surge, i.e., something akin to forming handles to the cups formed off of the September bottom? The pullbacks are a bit steep for what we would consider normal handles (e.g., 30% pullback for BRCM, 25% for QLGC) where a 12% pullback is about the most you want. Moreover, some of the patterns are developing somewhat of a head and shoulders look (check out PMCS, QLGC, QCOM over the last 2 to 3 months) that could spell trouble.
We will know a lot more about the big caps when the institutional players come back into the market after the first of the year. The 'in between' week gave us just what we expected given the improved outlook in the economy: a nice rise to resistance levels. Now we will see if the institutions are going to continue to buy stocks broadly, focus on particular capitalization levels, or start selling. We do not think with the economic recovery ahead that they will sell all stocks. Our worry is with the bigger caps; that is why we are focusing on the best patterns in those stocks, smaller caps in great patterns with good prospects (the internet stocks have come to life the past couple of weeks), and then some downside action on the bigger names that could complete some bearish patterns in the near future.
THE ECONOMY
One of the reasons we continue to have an overall positive outlook for the market is the continuing signs of recovery. Back in the summer we were noting these improvements. May and June were showing life, but July was not so great. Then August once again showed improving conditions before the 9-11 attack pushed the timetable back about a month. Since then, steadily improving conditions. What did we get Friday?
Housing sales still strong. New home sales were up an incredible 6.4% in November and existing home sales rose 0.6%. Strong numbers, but they do not reflect the spiking interest rates since that time.
Consumer confidence jumped to 93.7 in December from 84.9 in November (which was revised higher; confidence was up 14 points from the prior reported number). Present expectations jumped to 97 while future expectations rose to 91.5, a whopping jump form the impotent 77.3 reading in November. These are strong improvements, and the Conference Board that puts them together say they indicate that confidence has bottomed and turned the corner.
Durable good claims fell 4.8% in November, but that was better than the -5.5% expected. Moreover, take out the wildly swinging defense component, and non-defense orders actually rose 2.8%. Very good to see the private side of the equation expanding.
The Economic Cycle Research Institute also reported its highest reading in five months, a steady climb off of the lows and an indication that recovery is getting closer. This is a leading indicator, and it foretold the recession. It is good news to see it pointing toward recovery at this juncture.
These reports confirm what the bond market has been showing: rising yields are a signal that economic recovery is coming. As we have noted before, the bond market is a very reliable indicator of economic health, even more so than the stock market. Bonds have been foretelling a recovery, and the snapback in yields even after the Treasury Department announced the discontinuance of the 30 year bond is just further evidence of that recovery.
Still, it is not a lock.
Many still say that the increase in consumer confidence is all we need to allow recovery. Let's not forget, however, that the consumer was consuming at high rates even as the foundations of the economy crumbled. The consumer did not pullback until last fall when it was clear the economy was falling and pink slips were flying. The consumer could not prevent the recession despite its unprecedented consumption, the very consumption the Fed was afraid of and specifically set about to curtail.
Another major flaw in the 'consumer will save us' camp is the fact that consumers never really shut down consumption. The 'worst Christmas in 10 years' was not that bad after all we are finding out after the fact. Usually what happens in recessions is that consumers shut down completely; then when they are ready to buy, there is a lot of pent up demand and that unleashes torrents of buying. Without the consumer shutting down, there is not a lot of pent up demand that really spurs the economy on.
That sets up a potential problem. We may get a recovery, but it could be anemic if it has to be consumer led as many in the Fed and Congress are banking on. The consumer could not prevent the recession despite his buying lust, and now those same folks that wanted to stop the consumer are praying he will deliver them.
It points back to the same problem, i.e., the need for a complete recovery. The business side as evidenced by manufacturing has been in a recession for well over a year, and the Chicago PMI on Friday shows it is not improving much if at all. The missing link in the economy has been the business side, yet nothing is being done to spur investment in the industrial side of the U.S. The Congress is looking at quick fix spending on the consumer and federal side, but that alone has not worked in the past and does not address the complete picture.
Let's face if, if record consumption could not prevent the recession, it is not alone going to pull us out of recession, especially as it never really tanked. We have to have incentives for the entire economy, and that means getting a stimulus package passed that assists all sides. The one proposed is not perfect, but it is an insurance policy that helps make the recovery better than the lukewarm one we are looking at. I sure wish both sides would get on board and take action to help all of those out of work that they pay lip service to but then find an excuse not to assist. This is the ugliest side of our system.
THE MARKET
The last day of the year could be a bumpier ride with portfolio shuffling and positioning for the new year, but with many fund managers out until after the first, the real action and solid indications of direction will start Wednesday and beyond.
Secondary indicators: Volatility and the put/call ratio are sentiment indicators. They are thus contrary indicators (typically moving inversely with the market) and are most useful at extreme levels. They take a back seat to price and volume, but they can give us a heads up or a caution flag so to speak ahead of time. That is why we keep an eye on them.
VIX: 22.33; +0.05. Falling close to the lows of the summer (20.26), volatility is getting to the complacent side. The overriding factor is price/volume action, and that will tell us the story after the first of the year, but volatility indicates complacency setting in, a heads up along with the weaker big cap patterns we are seeing. It does not mean a downturn is coming; it does, however, keep us cautious and patient to let the market show us where it is going.
VXN: 45.94; -1.52. Dropping below the July 2001 consolidation level (47.50) but above the closing low in June (43.96). As with the VIX, it is a heads up that there is some complacency in the market. Last week's action is harder to read simply because the action overall was very light in the market. That skews all results, volatility included. We are taking this as a heads up on the big Nasdaq 100 stocks, but the price/volume action next week will tell the tale.
Put/Call Ratio (CBOE): 0.70; +0.02. A very light options day, but the ration did climb back into a 'comfort' level if you are long on the market. This indicator has consistently indicated continued anxiety in the market or disbelief that the rally can hold. That is bullish as this is a contrary indicator. Also note that the NYSE short interest is rising again, another indication that there are still plenty of non-believers. That is good because it is also a contrary indicator, and if the rally does continue, those folks will eventually have to cover, and that is more fuel for the rally.
Nasdaq
Ran up to 2000 on the high Friday, making the 200 day MVA to 2000 run during the holiday week. This week we will get a better idea as to what the institutions' new year resolutions will be.
Stats: +10.84 points (+0.5%) to close at 1987.26.
Volume: 1.328 billion shares (+7.3%). Up again on the move higher, but still way off average (1.9 billion). That should change this week.
Up volume: 835 million
Down volume: 267 million.
A/D and Hi/Lo: Advancers maintained lead, but it fell to 1.32 to 1 (1.41 to 1 Thursday). The A/D line continues to trend higher as small stocks continue to rise.
New highs: 120 (+8)
New lows: 25 (+0)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Was up over 1% on the high (2002.72), and that was the point we were looking for the index to hit by the year end. It made it and then pulled back to show a 'tombstone' doji on the close. These candlestick patterns indicate a potential top after a move higher. With volume so low it is hard to gauge the authenticity of the move, but low volume assents are not our favorites regardless of the situation.
Overall the index remains a positive bias, but it has that broken up trendline it fell below 6 sessions back and has not made much of an effort to recover. Its action mirrors some of the large Nasdaq stocks (BRCM, QLGC, CSCO): pulling back over the past 2 to 3 weeks with a slight rally last week on low volume. Since that break below the trendline it has not shown strong accumulation at all; granted 4 of those sessions were light holiday action.
Still, as the economic numbers showed Friday, the reasons for the rally are still there; the issue is how strong a recovery and are stocks too pricey at this point. The market has continued to defy those guessing that the rally must come to an end because stock prices are now supposedly too rich. After the low volume rise, we expect the Nasdaq to test the 200 day MVA (1926.50) this week. It is essential that the 200 day or the 1934 level hold for the market to continue is upside action over the near term.
Dow/NYSE
Held above the 200 day MVA, and made a new closing high since the September bottom. An important move, but remember, the break over the 200 day was on light volume. The true test is to come this week.
Stats: +5.68 points (+0.1%) to close at 10,136.99.
NYSE Volume: 906 million shares (+2.6%). Moving higher again on the gain, but it was not much of a gain. Still well below average (1.29 billion).
Up volume: 625 million
Down volume: 267 million
A/D and Hi/Lo: Advancers lost some luster but were still very good at 1.75 to 1 (1.97 to 1 Thursday). The NYSE A/D line remains stellar.
New highs: 119 (-5)
New lows: 14 (-10)
The Chart: http://www.investmenthouse.com/cd/$indu.html
The Dow maintained its position above the 200 day MVA (10,092.10) on the close, but the index gave back most of its gain on the session (high 10,184.45). It still sits at a high since the September low (closing high; intraday it hit 10,099 early in the month and 10,184 on the high Friday). It is bumping close to its up trendline, now at 10,300, but that still gives it room to run. The candlestick pattern, however, is a doji after a move higher; as with the Nasdaq, that can indicate that the index is going to test back toward support this week when the fund managers get back to work. The cross over the 200 day MVA was an important move, but it has not broken free of that level and volume was low. It is at serious resistance at 10,200 (prior price consolidations), and for this move to hold, that low volume rise will have to turn into stronger volume this week. We think the upside move will be tested early in the week down to the 10,000 level.
S&P 500: Tried to make the 200 day MVA Friday on its high (1164.64; 200 at 1167.46). Again, that was the expected rise for the holiday week. It was unable and indeed did not even try to break that level. If it turns back here is could complete that head and shoulders pattern, but we note the 'head' is not all that high, and these patterns typically fall as far as the head is high. It is trying to mimic the Dow's wedge higher, but it is not pretty and has the 200 day MVA to deal with. It looks as if there will be some downside pressure; we want 1150 to hold.
Stats: +3.89 points (+0.3%) to close at 1161.02.
Volume: NYSE volume was up again (906 million shares; +2.6%), but still well below average.
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
Monday is the last session of the year and a full session. Big caps might get a last push with some last minute window dressing, but even with the full session and some potentially high volume on the window dressing, it won't give us the full picture as most money managers won't be back until Wednesday. At that point we see the real action for the first time in a while; what are the institutions thinking at this point?
There has been no change in the economic picture, but we have to see what the new year brings in the money managers' eyes. They control most of the money, and if they are buying, we buy as well. If they are selling, we don't go long on the stocks they are selling (most likely the larger names is our best reasoning for now). What we are going to continue to focus on are the smaller issues that have been outperforming over the past few weeks and those larger issues that are in good patterns and continue to show good accumulation. We have good smaller issues on the reports once more, and we won't hesitate to enter those positions when we see them hit our buy points.
We will all hear a lot of 2002 prognostications over the next few days. While you listen to them (if you do), remember that nothing has really changed at this point with the changing of the year. We may see some hiccups this week, and we will be watching to see if there are real signs in the action. Still, the economy remains on the recovery track, and that is what ultimately drives stock prices. Thus two and three weeks more of market action will set up the board for the next big trends. For now even with the up trendlines broken over the past few weeks, the pieces are still in place for the upside.
We are going to closely monitor many of the big names with those weaker patterns. If they start to break down we will run some put plays on them; heck, even the SOX is potentially showing a head and shoulders pattern. The big names can fall and the small caps still remain in good shape as we saw last year. Moreover, many sectors will buck any selling over the near term. Opportunities to the upside and downside are always welcome in our book as long as the overall trend is discernable. There are many solid plays out there that can put some great money into our pockets while the big names figure out which way they are heading. Again, we think they will come under some pressure after Monday, and the indexes will test the resistance they recently broke over (the S&P still has not done so). From there we will have a better idea where these big names are heading; let the market show you the way.
Support and Resistance
Nasdaq: Closed at 1987.26.
Resistance: Held over 1980 (the gap up point). The next level is more a psychological one at 2000, but the December high at 2010.91 is the point to beat for now. After that the down trendline is at 2055, in conjunction with the up trendline for now.
Support: 1980 gap up point would be great if the techs could hold there and build higher; big if. On any test, we really look for the 1934 to 1941 level to hold, backed up by the 200 day MVA (1926.50). After that the 50 day MVA is at 1898.92.
S&P 500: Closed at 1161.02.
Resistance: The 200 day MVA at 1167.10 still looms as the key resistance to beat. Then the December high at 1173.62.
Support: 1150 is where we want it to hold, but the break over that level was not strong last week. After that the 50 day MVA is at 1131.98 and former price consolidations at 1125. After that, 1100 is next (top of the October consolidation range).
Dow: Closed at 10,136.99.
Resistance: Still holding above the 200 day MVA (10,092.10), but has not pulled away from it definitively. The December high is next at 10,169.44. The up trendline is at 10,300
Support: The 200 day MVA is what we want to hold (10,092.10). 9992 is next, but it has not held with much consistency. The 50 day MVA is at 9818.91. After that, 9500.
End Part 1 of 2
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