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us stock market, stock watch
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1/02/02 Stock Split Report Market Update
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Stock Split Report Subscribers:
SUMMARY:
- Early selling gives way to late buying as indexes hang onto support.
- Some portfolio cleaning still evident as some leading sectors sell off.
- Volume still low but climbing again.
- Economic signs still improving.
- Subscriber Questions
- Team Trades
Market seems to like the fact that 2001 is gone as buyers hold indexes at support and rally stocks late.
Futures pointed to a higher open, but we were leery. Some interesting news from Hymix Semiconductor that it was again raising DRAM prices had the semiconductors active in the bullpen. There were some downgrades (e.g., EBAY), but there were more upgrades (e.g., GSPN and AAPL). Still, a gap higher on the first trading session of the year just did not seem very convincing. Sure enough, the indexes quickly turned sharply lower. What appeared telling was a positive ISM (formerly NAPM) report that bounced the indexes higher, but then gave way to another selling wave. We were getting ready for some put action and did enter some new positions on the DJX. We were making some decent money on them when the other indexes hit and held their next levels of support. When they bounced, they pulled the Dow with them.
At that point we were waiting for this rally attempt to fail, and it looked as if it would. At the same time, however, we were monitoring several hundred stocks, and we noted a pattern developing: some key big caps were performing well on good volume along with specific small caps. Some of the leading sectors of '01, however, were selling off, e.g., retail and home builders. Not all of them, but overall they were selling. Money was still moving about even after the first of the year. Builders and retailers selling, and some of that money was heading into some big names. Some key names were not selling off as they looked ready to do.
Examining the intraday charts, it became apparent that after the brief run from 12:30 to 1:00 CT, there was going to be a bit of a pullback, but that we would then have the chance to pick up some good names at good prices for a run to the close; nothing like getting a good entry point to start a position or add to an existing position. We issued an alert to that action plan, and then when we saw the move start, we issued alerts on some of the stocks we had highlighted in the prior alert, e.g., BRCM, EMLX, IBI. Volume was great on these stocks, they were making important moves ahead of the rest of the market. They were showing something a bit unexpected today, and we wanted to take some more of their action.
Volume up but below average while some stocks lead on strong volume.
Volume overall was still low with index volume coming in below average once again. It was up, however, a modest positive for the session. Moreover, individual stocks moved well on strong volume, both large and small caps. That too was a positive. Many big caps were showing signs that they could be ready to head lower, and the solid moves higher on stronger volume helps shake off some of the lethargy they were showing year end. We really liked the bigger volume on these stocks, but overall volume remained light. Sure it rose over last week's light holiday volume, but the big indexes traded on below average volume; the holidays are over, but not everyone was ready to buy or sell stocks. All in all, we are pleased that the volume moved up and that some key names moved higher on significantly stronger, above average volume.
The Economy: again, reasons for the rally show themselves once more.
NAPM (now the ISM) surprises to the upside.
The Chicago PMI was lower than expected, but it did not pull its usual foreshadow of the national manufacturing condition. The December NAPM rose to 48.2, well above the 44.5 from November and the 45.8 expected. Most impressive, the new orders component rose to 54.9 after 48 in November and 38 in October. That puts new orders at their highest in over a year, and their second increase and a row. New orders are key: they drive the rest of the machine. If orders are up that eventually means that production has to increase, and that eventually means more jobs as well. In this case, new orders are not just up from lower levels, but they are expanding at a rate that indicates economic growth, not just trying to prevent a further decline. This was really good news so quickly after 9-11. We were seeing some expansion in new orders right before the attack, and their quick recovery speaks better of the strength of the economic move. It does not say it will be rip roaring, but it speaks better of it.
Fewer earnings warnings. One of the things that has hurt the market the past year or more is the anticipation of crappy earnings as the economy continued to slow. Now there are some better economic reports coming out and investors are building into stock prices expectations of better earnings. That is all well and good, and is the normal way recoveries occur.
One of our concerns has been how strong a recovery and how investors will treat stocks if no stimulus package is passed to help provide more of a pick me up to an economy that is suffering a severe hangover from a rapid rise and collapse in its key sector, i.e., technology. That still concerns us greatly, but we are noting that after a few days of warnings in mid-December, there have been relatively few negative pre-announcements. The past three quarters, warnings have been at unprecedented levels. The holidays may have skewed the announcements somewhat, but the usual process is much like the economic turn: you get what seems to be the worst ever in numbers just as the bottom is made. If warnings continue to run below the prior quarters, that is a very positive sign that earnings have indeed hit the bottom of the trough and are poised to improve.
THE MARKET
It looked as if selling was going to be the rule today, a depressing start to the new year. Some big names, however, along with word that semiconductor prices were rising and improved manufacturing orders, combined to bring buyers back to the market in the afternoon. It was not a total endorsement to the rally as volumes were still low, but a good recovery in the afternoon typifies more bullish sentiment. Still, the Dow and the Nasdaq are just below some key levels, and the test is still ahead though today was promising.
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: 23.92; +0.70. A modest rise on the session as the big names swung lower and then recovered to close positive. Still at those low levels of the summer (low at 20.26), so there is not a lot of upside argument from this secondary indicator at this point.
VXN: 48.08; +0.79. A modest rise as well in Nasdaq 100 volatility, but nothing to get excited about. Again it remains just above the July 2001 consolidation level (47.50) and above the closing low in June (43.96). Indications of complacency that can be a bearish bias to the market, but we note that sentiment has been flagging for over a month at this point. It is giving us that 'take a look at me' indication, and we are. It has us on alert to watch to see if there is any higher volume dumping of shares starting when all fo the investors get back to the market this or next week.
Put/Call Ratio (CBOE): 0.81; +0.08. Contrary to the contrary volatility indicators, the put/call ratio continues to spike higher whenever there is the hint of selling in the air. Monday it was back up to 0.73; today as the indexes sold lower and then the Nasdaq and S&P bounced off support and rallied, the ratio climbed even higher. A positive session in the end that sported a higher put/call ratio based on earlier selling. That continues to show that option players are nervous as a group, and that traditionally has been good for the market. It shows there are still bears out there that are not putting their money into the upside but are jumping on each downside opportunity. When they finally give up, their money will go to the upside, and that gives more upside impetus.
Nasdaq
Tested the highs of the previous consolidation today, and then ran 43 points to close positive but right under the gap up point at 1980. A good recovery on slightly higher volume as some of the big names performed pretty darn well.
Stats: +28.85 points (+1.5%) to close at 1979.25.
Volume: 1.512 billion shares (+6.9%). The fifth session of rising volume, but it was still below average volume, so we cannot say yes, this was a good day.
Up volume: 1.062 billion
Down volume: 427 million. Nice turn in up volume after the early selling.
A/D and Hi/Lo: Advancers stretched the lead to 1.17 to 1 (1.04 to 1 Monday). Not stellar by any stretch for an up session
New highs: 90 (-59). Big drop on the up session after rising Monday on a down session.
New lows: 13 (-5)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Tapped at support (1934 to 1941) on the low (1936.56) as we anticipated, and then rallied over 40 points to the close. In the end it stopped just below the early December gap up point at 1980 (close at 1979.25). This is a harder read. Overall the index did well, testing support and rallying late; those are bullish attributes. On the other hand, it is still below 1980 and did not make a solid volume move higher. It is right in the middle of its range for December with volume not tipping its hand at this point. We saw some big names move up on strong volume, but they were definitely the minority. Some chip stocks were feeling better due to the second straight month of higher DRAM prices, but they were not running away on high volume. The continues to hold above its 200 day MVA (1926.46); not all it needs is strong upside volume to back up the moves today.
Dow/NYSE
Broke below support early, but then turned and rallied to once again bump up against the 200 day MVA. Volume was much better, but still below average. An important date with the 200 day coming up.
Stats: +51.90 points (+0.5%) to close at 10,073.40.
NYSE Volume: 1.180 billion shares (+17.3%). Much improved, though still below the 1.29 billion average level. Improvement, but needs more buying volume to clear the 200 day.
Up volume: 599 million
Down volume: 562 million
A/D and Hi/Lo: Advancers continued to lead, but at 1.07 to 1, it was not impressive (1.03 to 1 Monday).
New highs: 67 (-67).
New lows: 16 (+0)
The Chart: http://www.investmenthouse.com/cd/$indu.html
Looked as if it was ready to proceed lower, hitting 9935.70 on the low (support roughly at 9992), but rebounding 138 points to close positive. As noted, the move left the index just below the 200 day MVA (10,090.08), a key level it has been trading on either side of for the past week. Monday it looked as if it wanted to give back some gains with a pretty dramatic reversal at the December highs. Volume was not very heavy, however. Today it rallies back from an intraday low on pretty solid volume, trying to make yet another higher low. It has tested the 9990 level and below; will more volume now come in on the upside. Today's surge on higher volume was a good start. It makes us watch our few DJX puts taken this morning with more care; if it closes back over that 200 day MVA on strong volume, we will have to take a loss on that position.
S&P 500: The big caps moved down to test support as well (1136.23 on the low), holding above the 50 day MVA (1133.47) on that low and then rallying 18 points to the close. That pushed the index over 1150 on the close, but still well below the 200 day MVA (1166.72) that will remain the key level to beat. The action today had us looking at some OEX puts for the completion of that head and shoulders pattern, but the index never hit the buy point that would have given the green light (below the 50 day MVA). That is why we pick these buy points; the index has to show us it is breaking down. The improved volume on the reversal off of the 50 day MVA is always a good sign for upside action, but we are not forgetting the head and shoulders pattern as the index still has not resolved that move either way. Big caps can struggle at this time of the year, but many times it is simply a relative struggle, i.e., they do okay, it is just that small and mid-caps do better.
Stats: +6.59 points (+0.6%) to close at 1154.67.
Volume: NYSE volume was up nicely though still a bit below average at 1.180 billion shares (+17.3%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Construction spending is out along with jobless claims tomorrow, but the 'big' report is Friday with the unemployment report. While that is totally lagging, it is also one that the Fed supposedly watches. Well, that is what the Fed said when it was looking for excuses to raise rates; we are not so sure it is really looking at it as an important indicator of recovery (the Fed knows it lags), but it can use the report as a reason to cut if it is still inclined to do so. After tanking the economy and the market the Fed has cut rates sharply to try and mitigate its handiwork. We hate to say it has 'done its job,' because it was a job that should not have required doing. Again, the analogy we used one time was that of a firefighter setting fires just so he could put them out. We will put it this way: the Fed has done about all it can do at this point from its side of the equation, and now there needs to be some more fiscal stimulus from the government. That is all but dead, and that is one of the big remaining drags on the market.
The Friday employment report and the shorter week have some saying that volume will continue to be light. The rise in NYSE trading volume today encouraged us that may not be the case; the Dow and the S&P need to make a rather quick and definitive move over the 200 day MVA on stronger volume given the right impetus, i.e., continued improving economic news. If the good news is there but the indexes cannot make that move, that indicates that there are those other forces at work, e.g., concern over the strength of any recovery without further stimulus to give the business side of the economy CPR. Stocks have made a good move on the expectations of an improving economy; now some investors are looking around and asking 'now what?' The stimulus package was the 'what,' and without it the question goes unanswered until we start hearing from companies. That is enough uncertainty right now to keep the indexes from moving; again we need to see that above average volume break over the 200 day MVA on the Dow and S&P 500.
In the meantime we are still looking at three primary areas for our investments regardless of whether they are stock split plays, plain old breakouts, or plain old breakdowns. First is the small and mid-cap arena for upside potential as they have been doing well and should continue to do so. Second are select big names that are simply outdoing the rest (some market favorites and some great split candidates on that list). Third, there still are several big cap names and even the indexes that are still in rather bearish patterns; it has been tough to move against the upward bias of this market in some instances, very easy in others as we have seen. As long as the patterns keep setting up, we will keep looking to the downside when buy points are triggered; after all, if more and more set up those patterns and start breaking down, is that not a sign for most of the market? Keeping an eye on the entire picture is the key as always.
Tomorrow will most likely see the Dow test the 200 day MVA and the Nasdaq 1980. The S&P has a bit of traveling to do to get to the 200 day MVA, but it could do it as well. this is where the next big battle will be fought and the volume will tell the story.
Support and Resistance
Nasdaq: Closed at 1979.25.
Resistance: 1980 (the gap up point). The next level is more a psychological one at 2000, but the December high at 2010.91 is after that.
Support: 1934 to 1941 (tops of prior consolidation; held today). The 200 day MVA (1926.46). After that the 50 day MVA is at 1904.01.
S&P 500: Closed at 1154.67.
Resistance: The 200 day MVA at 1166.72. Then the December high at 1173.62.
Support: 1150 is a level of some support, but it has been broke back and forth so many times of late it has tire prints on it. The 50 day MVA (1133.47) held today and looks somewhat worthy. It is backed up by price consolidations at 1125. After that, 1100 is next (top of the October consolidation range).
Dow: Closed at 10,073.40.
Resistance: Still the 200 day MVA at 10,090.08. The December high is next at 10,169.44. The up trendline is at 10,340.
Support: 9992 did not hold today. It held basically at no support today (9935). Below that is the 50 day MVA (9836.52). After that, 9500.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
1-2-02
NAPM Index, December (10:00): 48.2 actual versus 45.8 expected and 44.5 prior.
1-3-02
Initial Claims; December (8:30):
Auto Sales, December (8:30): 6.1M versus 6.3M prior.
Truck Sales, December (8:30): 7.8M versus 8.2M prior.
Construction Spending; December (10:00): -0.1% versus 1.9% prior.
1-4-02
Nonfarm Payrolls; December (8:30): -175K versus -331K prior.
Unemployment Rate; December (8:30): 5.8% versus 5.7% prior.
Hourly Earnings; December (8:30): 0.3% versus 0.3% prior.
Average Workweek; December (8:30): 34.1 versus 34.1 prior.
NAPM Services; December (10:00): 50.3 versus 51.3 prior.
End Part 1 of 2
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