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us stock market, understanding the stock market
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1/15/02 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERT SERVICE
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertdly.htm
SUMMARY:
- Early news on decent retail sales and Treasury Secretary's upbeat comments about the economy cannot hold the market higher.
- Lackluster session gives way to widespread selling after hours on Intel news.
- Dow and S&P were trying to turn at the 50 day MVA on higher volume, but INTC will most likely squelch that move.
- Subscriber Questions
Economic news gives early rally.
December retail sales fell just 0.1% both core and ex-autos (auto sales remained solid), easily topping the expected -1.2% decline that factored in a major auto slowdown. Instead buyers remained strong into autos, and that is congruent with the boat show indicator reported over the weekend: consumers still ready to buy given the right deal.
In addition, Treasury Secretary O'Neill was on national television in the last hour of trade mapping out the path of the economic recovery: from slow to mixed with some positives to positive on balance. He was pretty confident the turn had been made.
The indexes stutter stepped, but then caught stride and rallied well for the first hour and one-half, climbing back over key moving averages. Then they got nervous feet ahead of earnings, sold to negative, rallying late to close on the plus side. Then O'Neill talked, and there was a nice recovery as buyers came in ahead of key earnings announcements. NYSE volume was up on the session, a good sign as the Dow and S&P 500 bounced up over the 50 day MVA and closed positive.
Earnings start and INTC disappoints with lower capital spending plans.
INTC and EBAY both easily drove past Q4 expectations, but investors were not impressed. EBAY even guided higher for the current quarter, but that did not help that stock. A big drag on the entire tech sector: INTC reduced its planned capital spending from $7B in 2001 to $5.5B in 2002. It said it would have had $6.5B in such spending this year, but it had converted to 300mm wafers. That hurt stocks such as AMAT, KLAC, and NVLS after hours as investors see less demand for their chip making equipment.
The selling was not limited to semiconductors, however, as MSFT and several other tech stocks sold back in the last session. We do note that the smaller stocks in software and internet were holding their own after hours; that is a good sign, but we also have to realize that smaller issues just do not get the action after hours that the big names do, and thus they action may not reflect what will happen the next session. After hours Nasdaq futures were down 24.50 points, indicating that there will be some more selling Wednesday. The smaller caps still look good; we will just have to see if they continue to buck the trend.
What INTC is doing is being conservative about Q1 just as it was conservative about Q3 and Q4, guiding expectations very well in an analyst market that was very willing to overshoot to the downside. It has mastered the necessary art of keeping expectations low and then beating them comfortably but not so far as to upset analysts. After 60 straight quarters of profitability, that is necessary, and that is what INTC was doing in the conference call today.
What happens tomorrow? As noted the futures were way down after hours, but a lot will also depend upon how the analysts treat the news. It is hard to fight with INTC's numbers and expectations or EBAY's numbers and expectations, but the semiconductor equipment makers will get downgraded on the news, and that could cause a cascade effect. If INTC is not going to spend more on chip development, what does that also mean for PC's; that will be the question that will drag them lower, even if it is not the correct conclusion. REMEMBER: at times of big news the market tends to overshoot whichever way the news is pointing. Problem is here, the market was already weakening ahead of the numbers, but not enough to be considered sold out and thus prevent much more downside.
THE MARKET
Danced up and down ahead of the first major earnings announcements, but the buyers came in late on some slightly higher NYSE volume. Not bad action as the buyers were ready to move in. Now it looks as if the tech side of the market, at least the large caps, are going to take a hit. That is not the move we were looking for. We are certainly going to continue looking at small and medium cap stocks, a view that continues to be a good one given the treatment of the INTC and EBAY news.
At the same time we saw the big name retailer WMT make a high volume move up off of the 50 day MVA, an important move from an important stock. Some other retailers are doing the same (e.g., KSS). NVDA, a leader even in the bear market, made a sharp bounce off of its 50 day MVA on strong volume as two big name analysts stepped in and said it was a buyer here. That is textbook institutional support at an important level. We also see insurance continuing to improve, and gold stocks (yes gold), continue to move higher.
As for the downside, there has been a lot of selling to this point. Tomorrow will send many stocks lower tomorrow on that first reaction downward. We have had some very nice downside action all along, and trying to catch the knee jerk reaction move will be harder as stocks gap down. We prefer to let the smoke settle, let stocks set up for the next downside move, and get in at the right point. Chasing that bus is hard to do; gaps to the downside are like that. Best to let the dust settle, let the stocks set up, and then be ready at the bus stop with the correct change when the plays make their move. Also, techs are just part of the market. As noted, there are several stocks still in the upside position.
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: 24.42; -0.64. Sold back on the modest advance, indicating there is still a lot of complacency out in the market. Not much has changed.
VXN: 48.02; -1.49. Rose just marginally when the index turned negative, and then fell as the techs rallied late. Still holding just above last summer's low levels when the index struggled, indicating some continued complacency.
Put/Call Ratio (CBOE): 0.77; -0.11. Fell on the gains, but still showing high levels. This indicates that there are still bears out there that somewhat offsets the low volatility.
Nasdaq
Scratched out a 0.5% gain, but volume was lighter ahead of the INTC numbers. We bet volume will not be lighter tomorrow and we have to see how close the index comes to trading down to its 50 and 200 day MVA. The Dow and S&P are threatening their 50 day MVA once again, already down ahead of the Nasdaq.
Stats: 10.17 points (+0.5%) to close at 2000.91.
Volume: 1.675 billion shares (-6.7%). Volume did not support the move higher. We were looking for buyers to come in to support any upside gain, with earnings providing a catalyst. They will be a catalyst, but it looks more toward the downside.
Up volume: 843 million
Down volume: 812 million.
A/D and Hi/Lo: Advancers took back a narrow lead at 1.04 to 1. Nowhere near the power of decliners on Monday (2 to 1).
New highs: 83 (-13)
New lows: 24 (-2)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Ran back up to 2000 after testing the March 2000 down trendline again on the low (1977.28). It made no real decisive move today as volume was lower on the climb; nice to finish higher, but a weak move. Now it has to face the INTC news, and the index, already under pressure, will test lower tomorrow. It has the 50 day MVA (1942.63) and the 200 day MVA (1932.03) as the next levels of support. Those key indexes coincide with the tops of the November consolidation that run from 1934 to 1941. That will be the key, key test for the Nasdaq that has up to this week demonstrated solid price/volume action on the rally. That is breaking down and combined with the poor volatility numbers and the lukewarm reaction to earnings, the outlook for a deeper test before any new rally attempt is much higher. Remember: the Nasdaq is a market cap weighted index meaning the bigger names control its moves. Thus the smaller caps that we are looking at can and will go about their business less affected by the bigger names. This is the time of year for the smaller stocks, and they will have their chance to assert themselves further.
Dow/NYSE
The Dow undercut the 50 day MVA further as anticipated and then rallied on higher volume, closing above that level. Still, it closed well off of its session high, and INTC is on the Dow.
Stats: +32.73 points (+0.3%) to close at 9924.15.
NYSE Volume: 1.370 billion shares (+7%). A nice, above average volume gain on the Dow, showing that buyers had indeed stepped back in with more fervor than sellers. That was today; we have to see how INTC treats the index tomorrow.
Up volume: 737 million
Down volume: 639 million. By no means a runaway to the upside.
A/D and Hi/Lo: Advancers took the lead 1.47 to 1 (decliners led 1.52 to 1 Monday).
New highs: 86 (-4)
New lows: 39 (-3)
The Chart: http://www.investmenthouse.com/cd/$indu.html
As expected the index fell below the 50 day MVA (9907.45) on the low (9865.61) before the afternoon rally pushed the index positive. It gave back over 100 points top to bottom, however, (high at 9986.21) and closed well off of that high. That is not necessarily a bad pattern: a selloff down to support and a shooting star doji is not bad. We would prefer to see the wick or tale touching lower and then snapping back up to close above the support level. The fly in the ointment is INTC and MSFT in the Dow. It is fighting to stay above the 50 day MVA, today rising on above average volume. If it cannot hold, 9750 is next, then 9500 (has been solid support).
S&P 500: Very similar to the Dow the S&P tapped slightly lower on the low (1136.88; below the 50 day MVA at 1140.03) and then mounted a very nice comeback on rising, above average volume. Unlike the Dow, the S&P closed just 2 points off of its session high (1148.81). It was a much stronger day on the S&P than the other two indexes not only in the sense it had the stronger percentage gain, but it had more bullish action. Unfortunately, techs still make up roughly 20% of the index, and selling in the big techs tomorrow could push it back below the 50 day MVA. There is very good support at 1125 from former price consolidations and the March 2000 down trendline is tapping around that level as well. That is quite a fall, but if investors decide it is time to dump their big tech names, that 20% of the S&P could push it down to that level. It looked very good today, but that was before INTC disappointed. INTC's report may hurt others more than itself (e.g., AMAT, KLAC), but those are big cap names as well.
Stats: +7.78 points (+0.7%) to close at 1146.19.
Volume: NYSE volume moved back above average on the buying (1.370 billion shares; +7%), just what we wanted on the buying. Now we see if it can hold up during the turbulence tomorrow.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
The CPI (consumer price index) and business inventories are out before the open, and they may help convince investors that inflation remains non-existent and the economy is getting better and will get better if inventories are still getting sliced and diced. Later in the session the Fed Beige Book is released describing the economic landscape. That too can help. One thing that Secretary O'Neill said today was that Wall Street misread what Greenspan said. O'Neill stated Greenspan's speech was really much more upbeat: things are better and improving, but we have to do what is right and necessary. Thus O'Neill also stated that a stimulus package was not dead. Not sure what he knows, but we have not heard of its imminent resurrection.
The pre-market numbers may help, but most of the action will be Intel-driven. One thing we will alert to before the open is the analyst reaction to the INTC earnings report. Again, INTC may not be the stock hit. Look more to the chip equipment manufacturers getting downgrades. They were setting up well for a move higher, but they could fall right out of those handles.
Tomorrow is hard to gauge because you cannot tell how hard the market is ready to take stocks down. They have been weakening: price/volume action was turning south and the indexes were unable to hold their recent post 9-11 highs. Fears of a failed economic recovery were already weighing on the market, and the INTC news does not assuage that fear. Thus we are pretty sure we will see more gains backed out of the market. The big question is how far does it go? The Nasdaq has been the strongest of all. It has yet to break its 50 and 200 day MVA. Do we wait? Much depends upon the stocks we are in. Taking some profits or cutting losses is never a bad plan when the indexes change their character. Waiting to the 50 day or 200 day MVA breach can cost you money. We were closing some positions today, and will take more off the table if our sell points are hit or if some good movers start to pull back.
Support and Resistance
Nasdaq: Closed at 2000.91.
Resistance: The December intraday high remains unconquered (2065.69), and it now also has the January intraday high at 2098.88. The up trendline is at 2150. Then 2250 to 2300.
Support: The March 2000 down trendline held again on the low (now right at 1970, more or less). Then there is the 50 day MVA (1942.63) and the 200 day MVA (1932.03). This coincides with the tops of the November consolidation at 1934 and 1941.
S&P 500: Closed at 1146.19.
Resistance: 1150 is some resistance in conjunction with the 18 day MVA (1150.70). Above that is the 200 day MVA at 1167.07. Then the December high at 1173.62 followed by the hump in the March double bottom at 1183.35.
Support: The 50 day MVA is roughly holding right now (1140.30). Below that is 1125, good support, and the March 2000 down trendline is 1125.
Dow: Closed at 9924.15.
Resistance: 10,000 could act as some psychological resistance, but the 200 day MVA is still the level to cross (10,105.91). Then the early January highs at 10,300 are tough. 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.
Support: The 50 day MVA at 9907.45 is trying to hold on. Below that 9,750 is some support. 9500 has proved solid on this entire rally.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
1-15-02
Retail Sales, December (8:30): -0.1% actual versus -1.1% expected and -3.7% prior.
Retail Sales ex-auto, December (8:30): -0.1% actual versus 0.0% expected and -0.5% prior.
1-16-02
CPI, December (8:30): 0.1% versus 0.0% prior.
Core CPI, December (8:30): 0.2% versus 0.4% prior.
Business Inventories, November (8:30): -0.5% versus -1.6% prior.
Industrial Production, December (9:15): 0.0% versus -0.3% prior.
Capacity Utilization, December (9:15): 74.6% versus 74.7% prior
Fed's Beige Book (2:00)
1-17-02
Initial Claims, (8:30): 395K versus 395K prior.
Housing Starts, December (8:30): 1.610M versus 1.645M prior.
Building Permits, December (8:30): 1.570M versus 1.595M prior.
Philadelphia Fed, January (12:00): 0.0 versus -12.6 prior.
1-18-02
Trade Balance, November (8:30): -$28.5B versus -$29.4B prior.
Michigan Sentiment-Preliminary, January (9:45): 89.6 versus 88.8 prior.
SUBSCRIBER QUESTSIONS
Q: I've heard mention of "Bellwether" stocks. How do you tell which stock is the bellwether for it's Sector/Industry? Are there technical criteria (like the highest average volume) or is it more of the ones that get the most press? Another publication just referred to AMAT as the Semiconductor Bellwether, but I hardly ever hear of it. Or, is there just a generally accepted list of Bellwethers for each sector/industry that more experienced traders know about?
A: There are key sectors in the economy. Within each such sector there are leaders in market share and innovation. When these companies experience increases or decreases in business, that can be read as having an impact on the sector and the greater economy as well. That would move those stocks as well as related stocks. Thus there are certain stocks that analysts and traders watch to glean information as to how the overall sector or market will perform. AMAT is a bellwether in the chip equipment manufacturing sector because it is the biggest in an important group. INTC is the bellwether in the chip sector. GE is a bellwether for the general economy. MSFT is one for software. There is no list of bellwethers that I know of (at least not an 'official' list; personal lists abound). Usually you look at the companies with the biggest market share and strength in an important economic sector.
Don't get too carried away with this. There are bellwethers after this bear market that are not leading the market. Indeed many of the bellwether stocks remain well off of their highs while a new group of stocks (e.g., NVDA, though not so new to us anymore) has led the market and is still charging ahead. Don't let an understanding of bellwethers make you abandon true leaders in good patterns. That is where you make the tremendous runs.
TEAM TRADES
Today there was a lot of wild action, but early on we were looking at how certain stocks such as WMT and NVDA would handle their 50 day MVA. When we heard that NVDA had received two touts from established analysts after falling to its 50 day MVA Monday, we were ready to get in on the first dip, and we sent an alert regarding same. After about 10 minutes of trading it had dipped lower, tested the gap up point, and was starting to bounce. We fired off the alert saying we were covering (i.e., buying back) our covered calls sold and, sticking to our plan laid out in the earlier alert, picking up some shares. The stock was recovering, at 62.80. We put in a limit order at the ask, but we were missed at that point. However, the trades were bouncing back and forth, and we were partially filled in the next 5 minutes. After that we modified the order and picked up the remaining shares at 63.25. The stock was off and running. It rang to 64.75, but dipped back to 63.50 on the afternoon selling. Volume was super, however, and it held well. In the last hour it rallied $1.50 to close at 65.50. It sold off about $1 on the INTC news, but this stock had institutional buying today, classic support at the 50 day MVA as noted in the alerts.
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us stock market
understanding the stock market
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