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us stock market, top stock pick
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1/10/02 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERT SERVICE
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http://www.investmenthouse.com/alertdly.htm
SUMMARY:
- Good recovery session after Wednesday's distribution day.
- Market overcomes rumor de jour.
- Jobless claims down, December retail sales better than expected.
- Subscriber Questions
- Team Trades
Not much happened today and that is just fine.
After Wednesday's higher volume distribution session, the indexes settled down and traded almost flat today on lighter volume. The trading ranges were quite tight as they bounced up and down all session, digesting Wednesday's events. In our view, the fact that not a lot happened and the indexes returned to their stingy ways was a very good sign. No action was good, healing action today.
There were reasons to show strain other than Wednesday's selling. Right off the bat Salomon Smith Barney comes out with a statement that it was 'underweighting U.S. stocks'. I don't know about any of you, but I have brokerage and retirement accounts with SSB. This morning I felt like replacing the middle 's' with an 'o'. The big brokerages beg for your money and recommend all of these different investment vehicles and specific equities. Then their hotshot analysts come out and make these calls the day after your broker told you to by a handful of stocks. Heck, I remember back in 2000 one subscriber just had his SSB broker recommend various chip stocks to him and the next session Jonathon Joseph comes out and downgrades the whole sector. The broker had no idea it was coming. I have not checked into the legal ramifications of this, but it seems to me to be a major conflict of interest when their brokers put people into investments and then their stable of analysts make macro and micro calls that go against their broker recommendations without disclosing same to the broker and without disclosing it to the client ahead of the release. Seems there should be some duty to disclose there if not a fiduciary duty. If I still practiced law I would be interested in the law on the subject and the class action prospects.
More rumors.
When there is a dearth of action or driving impetus in the market, the rumor mill cranks up as the short sellers try to drive the market back down and the long players try to prop things up. For the third straight quarter the IBM rumor started circulating. The rumor has been the same: IBM is going to warn. Well, the last two quarters not only did IBM not warn, but it beat estimates and revised expectations for the following quarter higher. That was during the teeth of the slowdown. We noted in the summer and time and again thereafter that the economic indicators were turning around. They continue to improve. Will IBM warn? We doubt it.
The rumor was working, however, pushing the Dow lower with IBM. Even though it is a rumor, note that the stock did not recover much. It did make it almost back to the 200 day MVA, a level we were looking to hold, but volume was very high. It has been a leader in this market, and we note that it played with the 18 day MVA back in late November. It does not appear to be too extended since the breakout right now.
The CSCO rumor came along later in the session, that being the opposite, i.e., CSCO would beat its estimates. That helped the market recover, but it did not carry the day as the Nasdaq drifted back and forth after the news.
Again, rumors are a symptom of moves, not the cause of moves. Again we note that the indexes held in fairly tight ranges and closed near the flat line despite the intraday drift up and down.
THE ECONOMY
Jobless claims fall more than expected. Jobless claims dropped to 395K, down 56K from the prior week when 420K new claims were expected. The 4-week average fell to 410,500 while continuing claims fell to 3.53 million from 3.70 million. As we have stated before, the jobless claims numbers have reacted as they have in the past: lagging the first signs of economic recovery and not really getting better until the economy is on its way.
Retail sales for December were not blockbuster overall, but they were better than expected. A survey of 84 retailers revealed a 2.3% increase in the December same store sales. If a company did well, its stocks did well; if not, it did not. The bigger picture: retailers had a better December than expected.
Fed merry go round continues. Philly Fed president Santomero had some sane words today, noting that the Fed still had room to cut and saying that the recent jobs numbers should not be viewed as an endorsement that the economy is on the rebound. More of the same talk that has been directed at the bond market in trying to get those longer term rates lower.
The bigger picture: the economy is on the mend, but there is a real issue about how well it will mend. The unfortunate developments in the Enron situation are overshadowing the need for the stimulus package.
Enron again.
Arthur Andersen told the Justice Department today that documents relating to its client Enron had been purged. The headlines, however, changed that to "Arthur Andersen Admits Enron Documents Destroyed." News flash: as most of you know that it is SOP after a job is done to purge the files of unnecessary documents that were produced in the course of preparing the returns or whatever was being done. That is routine in legal offices and most other offices. The way the media styled it, however, was for maximum headline impact. It is all in how the issue is framed; routine document purging is given nefarious connotations based on how the headline is written.
THE MARKET
The market did not answer all the questions today, but it did show some resilience in holding in a steady range on low volume. In fact, it was again stingy with its gains once again, refusing to tank. That gave the indexes some more time to lick the wounds from Wednesday's distribution day and continue the lateral, slightly downward consolidation. The distribution day raised questions about whether the S&P and Nasdaq have double topped at resistance, but the indexes are not giving up easily and many stocks are also refusing to give in.
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: 23.13; -0.22. Volatility dropped in the tight trading range today. 24.42 on the high, a nice pop that gave way to the later move to a flat finish. Price/volume action improved today, a good signal, but we are still on alert after Wednesday.
VXN: 48.66; +0.31. A slight rise on a flat finish as with the S&P VIX indicator. 50.17 on the high, a good signal that there was some nervousness returning to the market in the early selling.
Put/Call Ratio (CBOE): 0.58; -0.20. While volatility may have risen on the early selling, put activity dropped off as the indexes traded flat. This is in reverse of what we have seen vis a vis the volatility indicators. Still the ratio is well ahead of complacency levels, and it has shown the propensity (e.g., Wednesday) to jump right back up on any selling. That is a key sign of continued nervousness.
Nasdaq
Tapped lower intraday but held up well on the close, trading in a narrow range on low volume. Big names held up well and we saw more smaller issues breakout. It may be running into some problems, but today it resumed its consolidation action after a false start breakout attempt Wednesday.
Stats: +2.35 points (+0.1%) to close at 2047.24.
Volume: 1.761 billion shares (-24%). Volume was up 24% Wednesday and down 24% today as the index held steady. Better action on a tight trading range. More like consolidation after a hiccup on an aborted breakout attempt.
Up volume: 875 million
Down volume: 859 million. Neck and neck, and it reflects the back and forth action and the flat close.
A/D and Hi/Lo: Advancers edged decliners by 12 issues, 1834 to 1822. Again, neck and neck after decliners took over 1.15 to 1 Wednesday.
New highs: 106 (-52)
New lows: 16 (+4)
The Chart: http://www.investmenthouse.com/cd/$compq.html
After Wednesday's aborted breakout attempt, today was a relief of sorts. The reversal could have led (and still could) to more vigorous selling, but today the techs returned to more consolidation action after what appears to be a premature attempt to run higher. The candlestick chart revealed a doji while holding within the trading range established the past five sessions (2025 to 2080). On the low it tapped the 10 day MVA (2026.05; 2023.89 10 day) and rallied 20 points to the close. Not bad action all things considered. We would love to see the index continue to consolidate holding above the 18 day MVA (2003.95) as it does so. Similar action in November resulted finally in the breakout: two attempted breakouts reversed, then a tap down to the 18 day MVA, and then a breakout to the upside.
Dow/NYSE
The Dow continued its decent consolidation, though it gave up the 200 day MVA in the process. Again, however, the breach was on lower volume while the move over the MVA earlier in the month was on very strong volume.
Stats: -26.23 points (-0.3%) to close at 10,67.86.
NYSE Volume: 1.276 billion shares (-13%). Volume pared back to average on today's selling after Wednesday's distribution session. That is what we want to see; some consolation.
Up volume: 567 million
Down volume: 716 million.
A/D and Hi/Lo: Tight, tight as was the Nasdaq. Decliners led again, but slipped to 1.02 to 1 (just 32 ahead of advancers).
New highs: 90 (-43)
New lows: 19 (+0)
The Chart: http://www.investmenthouse.com/cd/$indu.html
Well, the Dow is at a crossroads itself. It sold back below the 200 day MVA (10,099.81), but it did so on lower volume and held above the 18 day MVA (10,069.95). On the low it tapped 10,032.23 and bounced 35 points to the close. In doing so it held over the November highs, a good sign. Now it needs to make a higher low, holding here at the 18 day MVA or lower at the 50 day MVA (9904.12). Obviously this level is preferable, but the point is that unless the volume ramps up on more selling, if the Dow turns at either of those levels it will have made a higher low and be in good position to rally on the next buying spree.
S&P 500: Not bad action from the big caps as well. It was indeed overall a session where there was an attempt at healing. NYSE volume peeled back and the index once again tapped at 1150 on the low (1150.85) and rallied back up (it tapped 1151.89 on the low Wednesday). The action kept it above the 18 day MVA (1153.58) on the close. 1150 has been a soft level of support: it holds okay in lighter action but can fold if things heat up. As with the Dow, if it holds here or at the 50 day MVA (1139.60) it would make a higher low and continue the consolidation it has been working on for the past month. The pattern could be a double top; thus we want that price/volume action to get back to acceptable patterns as it did today.
Stats: +1.41 points (+0.1%) to close at 1156.55.
Volume: NYSE volume fell back sharply on the action, a good resumption of the consolidation. 1.276 billion shares (-13%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Friday is here, and it may be one of those sessions similar to today where it will be good just to finish the week out with further lateral consolidation on low volume. PPI (Producer Price Index) is the big news out, but Greenspan speaks Friday as well. Greenspan's speech will be the focus; investors want to hear that the economy is on the mend. What they will hear is what his Fed presidents have been saying: economic numbers are improving from crappy levels, but there is a long way to go. Greenspan is in favor of stimulus; he has said so. Unfortunately, the Enron situation is going to take our focus off the ball, i.e., getting the economy back up to speed. If we do that, we avoid Enron problems. Enron was apparently playing fast and loose; the economic downturn caught it and it took down some good people with it. What we need to do is focus on how we can prevent this from growing by an unnecessarily prolonged recession. Not going to happen from the looks of it.
Tomorrow we may see more indecision before the weekend with investors wanting to get out of town with another quiet session. The fact that there has been no big gain this week makes Friday look a bit better from a selling standpoint. Frankly another quiet, low volume day would be very good for the indexes; more lateral, low volume consolidation after Wednesday's failed breakout attempt is good. Most times when a move fails, it heads the other way fast. If the indexes continue to hold steady on low volume, continuing the consolidation and shaking off Wednesday's reversal, that is a signal of continued upside potential.
Support and Resistance
Nasdaq: Closed at 2047.24.
Resistance: The December intraday high remains unconquered (2065.69). The up trendline is at 2125. Then 2250 to 2300. Again, there is not a lot of specific resistance.
Support: 2040 is still holding up on the close. The 18 day MVA is at 2003.95, and the down trendline is right at 2000. After that 1934 to 1941 (tops of prior consolidation) have been the best support since the early December gap higher.
S&P 500: Closed at 1156.55.
Resistance: The 200 day MVA at 1166.97. The December high at 1173.62. Then the hump in the March double bottom at 1183.35.
Support: The 18 day MVA (1153.58) and 1150 are trying to hold, but 1150 is soft support. Then the 50 day MVA is at 1139.60, and is bolstered by some strong support at 1125.
Dow: Closed at 10,067.86.
Resistance: The 200 day MVA is overhead at 10,099.81, but it was broke on high volume and the index drifted back below it on low volume. As noted with the S&P before, an index can play with an important MVA for time before it moves away for good. The action in breaking the level was better than this slip back below it. Now we also look at the early December highs at 10,300. Again, 10,280 to 10,300 has acted as the tops recently for the index. The entire 10,200 to 10,500 is the trading range from June to August 2001 and represents resistance. The down trendline from January 2000, the all-time high, is moving right at 10,500. The up trendline is at 10,505.
Support: 9992 has acted before as support, but it is weaker. The 50 day MVA is next at 9904.12.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
1-8-02
Factory Orders, November (10:00): -3.3% actual versus -2.6% expected and 7.0% prior (revised from 7.1%).
Consumer Credit, November (3:00): $19.9B actual versus $4.7B expected and $11.2B prior (revised from $7.0B).
1-10-02
Export Prices ex-ag.; December (8:30): -0.4% actual and expected.
Import Prices ex-oil; December (8:30): -0.3% actual versus -0.6% expected and -0.2% prior (revised from -0.6%).
Initial Claims; 1-5-02 (8:30): 395K actual versus 420K expected and 447K prior.
Wholesale Inventories; November (10:00): -1.1% actual versus -0.3% expected and -1.2% prior (revised from -1.0%).
1-11-02
PPI; December (8:30): -0.2% versus -0.6% prior.
Core PPI; December (8:30): 0.1% versus 0.2% prior.
SUBSCRIBER QUESTIONS
Q: If I enter a position at the proper buy point, how much consideration should be given to an upcoming earnings announcement? Should I get out before the announcement--"buy on rumor/sell on news?" Or, if the stock is doing well, it shouldn't pull back below any stop loss level? Thank you for your input.
A: Overall, stock patterns tend to reflect good or bad news in a stock. The market is very efficient in sniffing out what is going on. There are always surprises, but when a stock has formed a good pattern and is approaching a new high, surprises are pretty rare. Conversely, when bad news is anticipated, stocks start to weaken and give up good patterns or sell from their highs ahead of the news actually hitting. The classic example is Boston Chicken that was a headline stock. About the time everyone was talking about it the stock started to slip. It slid lower and lower, throwing off volume spikes on breaks below key levels. Still it was the darling. Then, after about 50% of the value had been eaten away, the bad news hit and the stock just imploded. The stock was forecasting the bad news that was to come. The same action was in the market during the selloff in 2000 long before the earnings actually started showing up poorly.
Now in a weakening market you will see stocks treading at the top of their ranges and then start to sell on the earnings release. That was happening in 2000 after stocks started to slide and were extended in fourth or fifth stage bases. They were extended and starting to fall, and the earnings reports that came in weaker (not bad), started serious price erosion with stocks selling on the news.
Now we have an improving market with earnings expectations rising and comps pretty easy to beat after stocks tanked in the recession and expectations were slashed. Notice how stocks are rising on when companies say things are not so bad or when the earnings come out? Different market based on an improving, not declining economy.
If you have hit your target, you still may want to take some money off of the table. Maybe some expectations were already built in, maybe it will rally more. We like to take some money off the table if we have our targets hit.
TEAM TRADES
EGOV is a Technical Trader stock that was in a cup with handle, ready to break out after a good move Wednesday when it closed at 3.78, up in the handle on good volume. Wednesday it hit our buy point, and today we were looking at some more positions if it continued the breakout. The stock was up right off to 4.06 on volume of 90,700 (average is 93,000), so it was looking huge early as we figured it would. Hit a high at 4.06 and paused, but was holding fast. It then started to move higher with the spread at 4.00 by 4.10. With the huge volume we put in an order at 4.05, shaving it right down the middle and waited to get a fill. Volume was up to 98,400 and the fill came almost immediately; sometimes when there is a lot of activity on these early on, you can get a better fill taking advantage of the price shuffle. Not necessary as the 5 cents was not that big a deal (though with a $4 stock it makes more of a difference). The Nasdaq was down almost 9 points which wasn't great, but that didn't stop EGOV, a smaller issue that was primed to move. The price rocked up and down a bit, again, that early shuffling to pick a firm price to move on. It got back to 4.05 and then blasted off, racing up to 4.18 on volume of 161,000. Nice breakout. Slid in a stop loss at 3.75. By 10:30 the stock was at 4.40 on volume of 404,000, off a high of 4.61, but by the end of the day looked super at 4.50 on volume of 882,000, outstanding.
End part 1 of 2
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