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1/09/02 Investment House Daily
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Investment House Daily Subscribers:

MARKET ALERT SERVICE

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SUMMARY:
- Intraday reversal throws cold water on early surge higher.
- Individual stocks look okay
- Fed gets some blame, but comments were mostly upbeat.
- Subscriber Questions

Strong surge gives way to late selling surge.

The indexes had set themselves up for a nice surge, and they were in the process of doing just that with the S&P over the 200 day MVA, the Nasdaq moving to a post 9-11 high, and the SOX breaking out above 600. Volume was outpacing Tuesday's lighter selling volume as the indexes moved higher. That is just what we would expect and what we want. The indexes drifted sideways mid-day, made another run at a high and then drifted back down. Then the sellers hit the sell button and the indexes cascaded lower in the last hour, wiping away all of the gains and turning a very nice rally into a very ugly intraday, higher volume reversal.

Volume was strong on the early buying, and it was very strong on the late selling with 37% of the NYSE volume coming in the last 2 hours and 361 million shares in the last hour. Heavy selling pressure late. Rumor of an attack on Iraq and a very real U.S. military jet crash in Pakistan got the blame for the sudden reversal, but you cannot say that a rumor was the cause of the selling. Just as a market tends to ignore bad news when it wants to rally, it will use negative news events, even rumors, as an excuse to sell if it is ready to sell. It was not the rumor, but some big institutions ready to sell stocks at certain levels.

What were those levels? The Nasdaq hit 2100 and turned tail. The S&P 500 broke over resistance, a good sign, but then it was used as a selling point. From the volume, it is apparent that some institutions were selling into the rally, executing a preconceived plan to sell into strength if the indexes hit a certain level. The rumor and the plane crash helped turn some selling into more selling as others joined in.

Mid-day reversals always disturbing.

When watching the market for signals, one that a bull always fears is the intraday reversal. If it occurs on high volume that compounds the concern. If it comes at resistance levels, that just ratchets up the discomfort. What you have is a market that has cleared resistance, yet at that level the majority are uncomfortable in putting more money on the table; indeed, they are taking it off the table. When some big names start to take money off the table, others follow, and it starts a run for the exits. It can turn a big positive into a big negative. Is that what we saw today?

Looking at the S&P 500 and the Nasdaq, there was not a lot to be excited about at the close. Both had gapped higher, rallied free and clear of some key resistance, and were enjoying healthy buying volume across the board. In the last hour, however, they pitched all of that out the window, giving back all of the gains and turning negative on rising volume. The patterns did not collapse, but this type of action at resistance levels often signals more selling to come. The S&P had been lagging, but was working on a decent pattern. Today's action makes it look more like a double top using the early December high and the early January high of just four sessions back. The Nasdaq is in a bit better shape, but it too was turned back at its former highs after again trading above them for much of the session.

The Dow does not look too bad. Indeed, if not for the S&P and Nasdaq action, we would view today as decent action: the index broke out of its wedge pattern, pulled back on low volume to test the move, and rallied today on rising volume but sold off to close with a 'shooting star' doji right above the 200 day MVA. It had pulled back to support, attempted to rally, but just could not quite pull it off today. That action often leads to another attempt at a rally, and it usually succeeds.

The SOX showed the same picture as the Dow today: a nice move up over the 200 day MVA and a lateral, lower volume move along the December highs. Then a shooting star doji today still right above a support level. Indeed, many of the semiconductors held onto their gains today (e.g., BRCM, GNSS, KLAC, AMAT), not reversing into negative territory. Still others did manage to reverse into negative territory, and most gave up a pretty good chunk of their gain and finished with doji's themselves. These included the big daddy INTC along with MXIM and XLNX to name a few. In isolation, however, the pattern still looks good.

Individual stocks did not all reverse and plunge.

As noted, many of the semiconductor stocks held onto to nice gains even if they did give back a big chunk of the gains they were building for us after our early session buys. Several other stocks from the reports, particularly some of the smaller issues, held onto much of their gains (e.g., PRGS, PRSF, BELM, BNE, DSTM, SYMC) as they moved ahead on strong volume. The market is made up of stocks, and we saw many still performing well. We also know, however, that 3 out of 4 stocks ultimately follow the market, and if it today's action does turn out to be the start of some deeper correction, many of these moves won't continue. Again, if we get a 20% move on a stock we will most likely take some gain off the table just to be prudent.

When looking at individual stocks for cues on what is going on in the broader market, one to consider is NVDA. It is a stock that has led the market in 2000 and 2001 when most tech stocks were in the dumpster. Since the September bottom it has recovered and broken out over its previous highs and mounted a solid run from there. It has now bounced 4 times up its 18 day MVA, and it is starting to get some choppy action. Immediately after a strong move in early January on above average volume, it reversed the next session on even higher volume. Since then it has struggled right at the 18 day MVA. Stocks typically breakout over resistance, and then bound up their 18 day MVA 4 or so times before the need to consolidate again, usually with a test of the 50 day MVA. This choppy action after four such bounces off the 18 day MVA indicates that the stock could be ready to pullback and consolidate here. As a leader before and after September 11, perhaps NVDA's apparent need to rest is a signal that the market itself needs to rest.

Maybe. The Nasdaq has spent the last month already consolidating its gains off of the September 11 bottom. It is in a good place and ready to rally if today's reversal does not take it lower. That sounds somewhat circular, but as we noted last night, the Nasdaq was showing very good price/volume action and had consolidated its gains for a month. It was prepared to make a more definitive move. An intraday reversal on volume always raises warning flags, but the Nasdaq is still in good position to rally if today was just indeed some profit taking using a rumor as a catalyst. There can always be single sessions of distribution in a rally; that does not mean the rally is over. Indeed, the price/volume action has been very good of late. It may take a few more sessions to regroup, but the Nasdaq is certainly in position to do just that and then rally.

Fed gets the blame as well, but curbing the market is not the Fed's game right now.

After four Fed presidents came out Tuesday and stated that economic signals turned from bad to mixed, Dallas Fed president McTeer said the same and moreover stated that the manufacturing sector was no longer shrinking. Some said that was more negative news and that the Fed was trying to start to talk about the possibility of raising rates in the future. Well, the last thing the Fed wants any glimmer, conversation, or otherwise about right now is rate hikes. That would be kryptonite to the market and the consumer, with a resulting economic collapse.

What is the Fed doing? It is focusing directly on the bond market. Long term rates have not fallen, indicating the bond market is factoring in increasing inflation and a pretty strong economic recovery. Not a boom maybe, but a strong recovery. The Fed really needs those long term rates to fall to give maximum impact to the recovery, and Greenspan has ordered 'the twelve' out into the hinterlands to try and talk down the likelihood of inflation and a huge economic boom. That is the purpose; the Fed is not trying to get us used to the idea rates will be raised as some are suggesting. Indeed, taken on its face, the language indicates that they are not eager to raise rates at the first sign of economic improvement. Thus, if the market took this as a negative, it was a misread that will become more obvious when Greenspan speaks on Thursday and Friday. Interesting isn't it? Greenspan sends the minions out early in the week to start the story, and then he comes out later in the week to (hopefully) speak what the Fed intends.

THE MARKET

A very disappointing turn of events today after what looked very positive last night. It was not, however, a total failure. We were getting the big move we wanted and then some funds had a prearranged sell program at certain levels. When those were triggered, the shorts started the rumor mill going to see if they could bait a few more into selling. It worked and the snowball was rolling faster and faster and getting bigger and bigger in the last hour. The Dow and the SOX are still decent technically, but the SOX and Nasdaq are brothers, and the Nasdaq does not look as good as it did Tuesday. Still, one day of selling does not mean a trend is over; the indexes have suffered pretty much one distribution day per week this rally, and leading stocks are still holding onto their gains. Still, an intraday reversal does require our attention.

One thing that may help out some over the rest of the week. After the close First Call announced that positive earnings pre-announcements were up 53% over the same period in 2001 while negative pre-announcements were down 3%. Now that is not all unexpected, more of a confirmation of what we all knew was going on. Putting it into hard numbers, however, may help investors again focus on why the rally is occurring and make today's reversal a one-day event.

Another interesting fact today. MER announced 9,000 job cuts. MER has timed the market bottoms perfectly in 1984, 1987 and 1998. That should be a pretty good shot in the arm for those that look out to the future.

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: 23.25; +0.85. Mild gain on the reversal bringing it up over the summertime range but still very low. This id continuing to give many doubters fuel for their fires, and with the higher volume selling today, it definitely has our attention. Remember, as long as price/volume action is good we do not let this indicator direct our investing. It gives us warning to keep alert, just what we are doing with today's action.

VXN: 48.35; +0.94. Up as well on the selling, still holding above the summer 2001 consolidation level (47.50) and well above the June low at 43.96. Still not at an extreme either way.

Put/Call Ratio (CBOE): 0.78; +0.14. Put action jumped up immediately on the first hint of selling in the afternoon. Again, to see the index jump up as the market turned lower is a positive contrary signal, and shows the market is still on edge. That is good, but we have to have that price/volume action get back on track as it has been.

Bulls versus Bears: Bulls advisers are getting too rampant. They rose to 52.6% this week versus 49% last week. Bears are down to 22.7% from 27.5% a week ago. This is something to keep an eye on as well as rallies tend to run into trouble at 60% bulls level.

Nasdaq

It was ready to move higher, but when it hit 2100, a few sell programs kicked in, and those were joined by more and more investors as the rumors flew. Still in decent shape, but we absolutely hate those intraday reversals on higher volume.

Stats: -10.85 points (-0.5%) to close at 2044.89.
Volume: 2.318 billion shares (+24%). It was going to be a very good upside day on rising volume, but then it turned into a high volume reversal session. The first really serious distribution session (big owners dumping shares) in a few weeks. The index has recovered from these sporadic days throughout the rally, but the timing and point of the initiation of the action is troubling.

Up volume: 998 million
Down volume: 1.296 billion

A/D and Hi/Lo: Advancers were ahead 2 to 1 at one point, but decliners took over at the end at 1.15 to 1. Not bad when you look at it, but they had to overcome a big deficit.

New highs: 159 (+26)
New lows: 12 (-5)

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

Looked ready to rumble, and rallied to 2098.88 on a second rally today before reversing at that point. It did not immediately tank, instead drifting lower. With just over an hour left, however, that mild selling from a few institutions turned into massive selling as the rumor of an Iraq attack gave the trigger to join in the fray. The index closed back below the December closing high (2054.27). On the low (2034.09), it again managed to hold above the 10 day MVA (2018.70) intraday and the 18 day MVA (1998.86; joining some support at 2000), but if there is more selling, the 10 day MVA most likely will not hold. Indeed, if this is a real reversal, there won't be much to stop the selling until the 200 day and 50 day MVA at 1929.60 and 1930.16, respectively.

It is a real reversal? As noted above, the Nasdaq has seen several distribution days on the rally up. The key is whether they continue. Reversals are our least favorite actions: things look very good and then are slammed. Thus we need to watch closely tomorrow to see where the Nasdaq makes a stand. It really needs to hold above that 2000 level to have a chance at turning back to that post 9-11 high soon. Tomorrow we look for the downside momentum to continue early, and we will see if it can catch and rally off 2000. It needs to rally and not just sit there. That opens the door to further downside toward the 200 day MVA. Today's action looks to delay that move back to a post 9-11 high for a time, but we still have the same positive elements in place that brought us here.

Dow/NYSE

Was on the way to breaking over the January highs, but then turned with the rest of the market, selling back on stronger, above average volume. Not good action at all, but it held above the 200 day MVA, and if it were in a vacuum, the pattern would look rather bullish. The Nasdaq and S&P, however, have a lot to say about what it is going to do.

Stats: -56.46 (-0.6%) to close at 10,094.09.
NYSE Volume: 1.458 billion shares (+14.8%). Volume jumped back above average on the selling, indicating there was some institutional selling occurring. As with the Nasdaq, the NYSE has not suffered many distribution days of late and has shaken off those that have occurred.

Up volume: 596 million
Down volume: 844 million.

A/D and Hi/Lo: Decliners took over at 1.05 to 1 (advancers led 1.07 to 1 Tuesday).

New highs: 133 (+35)
New lows: 19 (+1)

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

Opened flat and ran to 10,270.88 on the high, still below the January intraday high at 10,300 that has held it back this month. It then reversed and sold all the way down to the 18 day MVA (10,070.19) on the low. From there it managed a late rebound to close right at the 200 day MVA (10,096.90). It was a reversal session off of the attempt at the January highs, but the pattern is still very much intact: it is holding right at support after a rather mild selloff, tried to make a rally today on some stronger volume that failed, and closed with a shooting star doji. That can signal a turn back up; again, the Nasdaq and the S&P are not as positive (and we are not saying the Dow's action is just what we would want in any event) and will greatly influence the blue chip action. This is a great time for the improved pattern of the Dow to step up and lead. We will watch closely tomorrow to see if it can do that.

S&P 500: The big caps jumped over the 200 day MVA (1166.79) with vigor, but the story was the same: after hitting close to the January closing high intraday (1172.51) the index drifted sideways and slightly down before collapsing in the last hour. A reversal off of resistance on higher volume and another failed break of the 200 day MVA is not the action you want. It did manage to hold at some support at 1150 and the 18 day MVA (1153.23) on the low and the pattern is still intact, but the higher volume reversal makes it look more like a double top below resistance that has stymied the index even as the other two major indexes have handled the 200 day MVA. If it cannot hold the 50 day MVA (1138.91) and 1125 (a solid level of support) are below.

Stats: -5.57 points (-0.5%) to close at 1155.14.
Volume: NYSE volume did not fall back on the selling, but surged back above average to 1.458 billion shares (+14.8%). That is not the volume action we want to see.

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

TOMORROW

Initial jobless claims are out before the bell and then wholesale inventories a half hour into the session. They may help to mitigate some of the downside impetus tomorrow at the open as the indexes try to find a point they can hold and turn back up. As of the end of the session today the market is pretty much where it has been all the way up: surges higher, pullbacks, some distribution, more accumulation. Today added a reversal off of the high after crossing a resistance level and then selling on higher volume. That occurred in late November and the indexes pulled back the next session just to rally and then stage the big break higher in early December. Similar action again. We do not want to blow today's intraday reversal out of proportion. It was frustrating because of the nice early move over resistance that was subsequently tossed away. It could lead to more selling, or the market could contain itself as it has done on the past, and then resume the work higher. The latter is what we were talking about earlier when we stated it might take a bit longer to rally higher after today's action.

Today we took many positions. When the smoke cleared we were still up on many of the smaller issues on the reports that enjoyed nice gains, we were even on many of the big names we stepped in on when they cleared the pivot, and we were underwater in some such as the SOX. While we will watch closely where the indexes settle tomorrow and on what volume, we still like the overall position of the market even with today's action. Why? Because today's action was nothing the index has not seen on this rally higher, and nothing with respect to the earnings landscape or the recovery landscape changed today. Indeed, as noted above, earnings continue to improve (due to those low comps) and upside pre-announcements continue to roll in.

Thus we expect to see some weakness at the open. We may see the market close lower again tomorrow without much of any rally attempt as investors digest the reversal. Unless volume ramps up again on more selling, we expect the indexes to settle near the near term support levels (2000 on Nasdaq; 1150 or 1135 on the S&P; and 10,070 on the Dow on an intraday basis).

End Part 1 of 2

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