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us stock market, stock trading newsletter
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1/17/02 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERT SERVICE
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- The rally comes as expected, but volume lighter.
- Indexes run up to resistance.
- Earnings bouncing ball: Tuesday bad, Wednesday good, Thursday bad.
- Philly Fed positive for first time in over one year.
- Subscriber Questions
- Team Trades
Indexes bounce on cue.
After getting the torch put to them on the heels of the Intel earnings and selling below resistance, stocks were primed for a bound today on a bit better earnings outlooks Wednesday and some upgrades this morning. IBM was upgraded by Dan Niles in a move that will cost him some credibility after tonight's earnings release, SEBL was upgraded to a buy at SSB (one of our prime bounce candidates last night), and GE said it was right on the money with earnings and would deliver 17% growth in 2002.
Some pretty good economic reports did not hurt. Jobless claims slid to 384K, lower than the 438K expected and dropping the 4-week moving average to 411K. Continuing claims fell to 3.47 million claims, down from 3.51 million. These are not falling faster than a speeding bullet, but they are showing that the job market has stabilized the number of losses. You have to stop bleeding before you can get back up and walk. Crappy analogy, but you get the point.
Indexes close to resistance on light volume.
That was enough to bump the indexes higher once again. Volume was slightly lower on the move higher, however, more of what we expected. We saw three quick distribution days (selling on higher volume), the indexes breaking down below support levels, and breakout stocks reversing. We started lightening up on positions Tuesday and Wednesday, and today we took some cautious upside action with SEBL, VRTS, XLNX, stocks that look poised to bounce higher in the reflex bounce. They did just that during the regular session. All we were trying to do is capture the move up to resistance, no long term positions here in this action.
The indexes all ran up close to the support levels they just broke. As we know, broken support often becomes resistance, particularly if the move back up is on lower volume. The S&P and SOX are right at their 50 day MVA, the Dow is getting close, and the Nasdaq made a move up off of its 50 and 200 day MVA. Nice bounces, but they are already ready to test those levels. We were anticipating that they would venture over those levels intraday Friday and then start to sell down. That would give us the moves we wanted in our bounce plays and be long gone. Earnings reports tonight have tossed cold water on that prospect; XLNX is holding up, but MSFT's and IBM's after hours earnings reports are hitting stocks across the board.
Thursday's earnings followed a rally day. That must mean it is time to sell, right?
IBM beat the street but revenues were light. MSFT beat the street pro-forma by a mile and revenues were way up. Yet, IBM was uncertain about any economic recovery, and MSFT stated that Q1 revenues would be 7.3B versus expectations of 7.5B. Uh oh. Not good enough. IBM closed right at 120; it is trading at 115 after hours. MSFT closed at 70; it is below 69. The damage is widespread after hours. Gains being turned on their heads for the most part.
This down on the heels of one day's reports, up on the next, and then down on more news are further signs of the problems the market is experiencing. Choppy action where the indexes and stocks are dragged back and forth by the latest story shows a lack of direction. Combined with distributive action, it is a further sign of erosion at the current levels as investors have no anchor, but are just running back and forth. A classic sign of the bulls and bears fighting it out. If not for the higher selling volume, breach of support levels (though still above some key levels), and failing breakouts, the action would be good. That is like saying if a warthog wasn't so ugly it would be pretty.
In any event, the after hours action is looking very weak with Nasdaq futures down 25 points and falling while IBM is getting taken apart. IBM and MSFT will exert tremendous downward pressure on the Dow in the morning, not to mention the S&P. Could be the other downside shoe falling that sends the indexes on a lower test of the September bottom.
THE ECONOMY
Philly Fed positive for first time in a year. The Fed said it appeared that the manufacturing sector was recovering, and it was obviously looking at the Philly Fed January report. It came in at a stunning reading of +14.7, blowing away expectations of -2.5 and a December reading of -12.6. That was the first positive reading in over a year, and it is finally boding well for the future of the economy: one of the hardest hit areas is starting to show expansion signs. Again, you have to stop bleeding before you can recover.
Housing starts down, but the number does not tell the story. Starts were down 3.4% to 1.57M annualized units (1.610M expected), and that had investors worried. But, look at permits; they shot 3.6% higher to 1.65M units (1.56M expected). Starts in December were hurt by weather; permits were way up, indicating the starts will rally right back in if the weather gives builders the chance to build. That is very interesting action; rates have just recently dropped a bit on the Greenspan talk to the bond market. Hope you refinancers and buyers locked in as we said to do in the weekend report. Treasuries have been selling a bit ever since as economic news firms up and some are saying Greenspan did not mean to be negative. Carefully laid out strategy: get the bonds to rally to move some more refinancing and home buying closings going, but then come back and say you were not saying the economy was not going to recover to try and keep the stock market from selling off.
What does all this mean? The bond market is showing recovery, and the economic numbers are bottoming or have bottomed. The real issue is how strong a recovery when it occurs in the spring? Consumer spending has remained strong. We see the housing market strong. There is not going to be that big stomp on the gas pedal that we usually get when a recession occurs and then recovery comes around and demand is unleashed. As someone put it today, the economic engine may start, but there won't be much gas in the tank. With the consumer demand remaining relatively strong throughout the past 10 years, the gas has to come from capital investment. Congress, however, just cannot grasp that concept, most likely because it is a common sense business issue.
THE MARKET
As noted, all indexes moved up, but on slightly lower volume and all but the Nasdaq are just below key moving averages. Tomorrow's action is surely opening to the downside and will test lower. Will a reversal come intraday and rescues things?
Lets take a look at the SOX. It often is a precursor to broader moves. It topped out at its December highs early this month and reversed lower. It sold off on the same economic and now earnings news as the Nasdaq. Volume has been distributive just as on the Nasdaq three out of six sessions. It broke below its 50 day MVA, then rallied back up to that level on today's move. Where to from here? In December it did the same thing, selling down from the high over a 2-week period and cracking below its 50 day MVA. It recovered, walked sideways, and then blasted off. It has now come back down and is trying to duplicate the move.
Since then the character has changed a bit more with the negative distribution action. Earnings are not shouting out recovery as firms are still hesitant about committing to future earnings. Fear of a less enthusiastic recovery. It has still made a higher low for now; if it holds that would be very good as the index would be forming a bullish ascending triangle pattern. The change of character is the big difference. There is a lot more water under the bridge right now; the rumor of better earnings ahead has become the harsh reality of further questions about the future and the lack of any real help coming. Without something to re-inject confidence about a great future, it is hard to buck the change in character.
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: 23.74; -1.52. Tanked right back down on the rally session. It did not shoot higher on the selling, but as soon as buying started, it lost twice as much as on the down session. Definite complacency.
VXN: 46.97; -2.46. Smaller point gain than prior day's selling, yet the VXN loses much more ground on the up session than it added on the down session. As with the VIX, this shows there is complacency out there.
Put/Call Ratio (CBOE): 0.79; -0.12. Dropped on the rallying, but still remaining well into the high end of the range. As noted last night, the 0.91 reading would most likely trigger a bounce as it has done this entire rally. It did, but there were no legs. Looks as if there will be the chance to try and close over 1.0 tomorrow if the futures are any indication.
Nasdaq
Bounced up off of the 50 and 200 day MVA as expected. Volume was lower, but close to Wednesday's action. After hours the futures are getting hammered, however, on the latest earnings stories. Looks like back down tomorrow.
Stats: +41.83 (+2.1%) to close at 1985.82.
Volume: 1.892 billion shares (-0.2%). Just slightly lower, almost a draw on the session. Thus the lighter volume is not such a negative today. Tomorrow is options expiration, and that might provide some fireworks volume wise.
Up volume: 1.352 billion
Down volume: 514 million
A/D and Hi/Lo: Advancers were ahead 1.53 to 1 (decliners led 2.02 to 1). The rally was not as broad as the selling.
New highs: 81 (+9)
New lows: 29 (-5)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Bounced up off of the 50 day MVA (1944.39) with a gap higher. Closed at the high, passing the December gap up point at 1980. Not bad. It looked as if it was going to make a run at the 2000 level and the 18 day MVA (1996.44), but the MSFT and IBM action are causing major tech headaches. Now we will see if that 50 day MVA is going to hold and whether the 200 day MVA (1932.55) just below it will hold as well. The bounce on fairly strong volume was good, but it was not that powerful upside volume we said was needed. Now we will see how powerful the downside volume is when it shows itself again tomorrow.
Dow/NYSE
A nice recovery bounce, but volume fell on the bounce as the Dow heads back up toward the 50 day MVA. The lower volume indicates the move will run out of steam.
Stats: +137.77 points (+1.4%) to close at 9850.04.
NYSE Volume: 1.358 billion shares (-8%). Volume is not rising on the move back up, keeping the poor price/volume action in place. In other words, there were not as many stock buyers on today's upside action as there were stock sellers on the downside action of late.
Up volume: 798 million
Down volume: 560 million
A/D and Hi/Lo: Advancers came back at 1.67 to 1 (decliners led 1.77 to 1 Wednesday).
New highs: 77 (-16)
New lows: 32 (-10)
The Chart: http://www.investmenthouse.com/cd/$indu.html
In a nutshell: a nice bounce, but on weaker volume. Still below the 50 day MVA (9897.84). We were anticipating a move over that level at least on an intraday basis on this rally from Wednesday's selling, but it looks as if IBM and MSFT are going to harpoon the index on the open. The next real level of support is 9500.
S&P 500: The big caps gapped higher and continued to run, closing at the high. That just happened to be right at the 50 day MVA (1139.51) where it tried to hold and bounce earlier in the week but failed. It looks as if it will again test some critical support at 1125.
Stats: +11.31 points (+1.0%) to close at 1138.88.
Volume: NYSE volume backed off on the rally, indicating weaker buyers at this point (1.358 billion shares; -8%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Michigan sentiment is out a half hour into the trading action; maybe it can turn the tide in what is sure to be a gap down just as today was a gap higher. Not sure sentiment will be able to turn the tide. What it might provide is a relief bounce from selling and allow us to get out of some positions and enter some downside positions on the indexes. It is option and LEAP expiration, so volume could run higher even on a Friday.
Over Tuesday and Wednesday we were lightening up on positions as stocks were pulling back and breakouts were turning around. There has been a lot of selling already, and we would have kept more positions but for the distribution action we have seen. The bounce was a relief bounce, and it looks as if there will be more downside action. This would have come we believe even without the IBM and MSFT earnings. It has definitely put the accelerator on it.
On any downside positions on stocks or the indexes, we will start taking positions carefully, waiting for the bounce higher to enter some positions. One thing to remember: the market action is choppy and the distribution indicates it wants to sell down further, but stocks have already fallen a long way. We want to see the S&P and the Nasdaq break those last support levels before we get really aggressive. Indeed, the best move is to do what we are doing right here: let it break support and test it before entering as we described last night. This break for the S&P and Nasdaq is the first stage. They still have another level to break, test, and then fall from. That is where we would then take even more downside positions. That way we also don't get in the trap of jumping in whole hog too soon just to see the market rebound on us. The latter is unlikely given all of the indicators the market is showing us, but the market always tosses you curves just when you think you have it licked.
Support and Resistance
Nasdaq: Closed at 1985.82.
Resistance: 2000 and the 18 day MVA (1996.44). After that, the December intraday high at 2065.69 and the January intraday high at 2098.88.
Support: The 50 day MVA (1994.39) backed up by the 200 day MVA (1932.55). This coincides with the tops of the November consolidation at 1934 and 1941.
S&P 500: Closed at 1138.88.
Resistance: Right at the 50 day MVA (1139.51). After that is 1150, and the 18 day MVA is right below that at 1147.28. Then the 200 day MVA (1166.72).
Dow: Closed at 9850.04.
Resistance: The 50 day MVA (9897.84). 10,000 (18 day MVA at 9981.80). After that the 200 day MVA stands in the way (10,105.06).
Support: Some support near the 10,750 level (November and December bottoms). After that there is not much to stop it from 9600 to 9500. 9500 has been good support prior in the 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): -0.2% actual versus +0.1% expected.
Core CPI, December (8:30): +0.1% actual versus 0.2% expected and 0.4% prior.
Business Inventories, November (8:30): -1.0% actual versus -0.5% expected and-1.6% prior.
Industrial Production, December (9:15): -0.1% actual versus 0.0% expected and -0.4% prior (revised from -0.3%).
Capacity Utilization, December (9:15): 74.4% actual versus 74.6% expected and 74.7% prior
Fed's Beige Book (2:00): Better, but still dicey.
1-17-02
Initial Claims, (8:30): 384K versus 430K expected (they raised it during the week) and 395K prior.
Housing Starts, December (8:30): -3.4% (1.570M) versus 1.610M expected and 1.645M prior.
Building Permits, December (8:30): +3.6% (1.650M) versus 1.570M expected and 1.595M prior.
Philadelphia Fed, January (12:00): +14.7 actual versus 0.0 expected and -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 and TRADES
Q/Comment: Hi Jon, I just wanted to pass on a great play I just closed out today. It was the Feb.55p on TYC that you had recommended in the Daily a couple of days ago. I know in yesterday's newsletter you didn't get into the play because it had gapped down, but I, the amateur, set my e-mail alert for the 50 enter price and the volume. When I got the alert, I checked the stock and it had indeed gapped down to $48 and change. I thought, well, maybe this is the kiss of death now beginning as you had described in the Daily, and I placed an order for the Feb55p at a limit of $6.80. To make a long story short, I just sold those today for $9.90 since the stock tanked again today in the afternoon after more rumors surfaced about the company (gotta love them rumors)! So I just want to say thank you and even though I shouldn't have jumped in when it gapped down (or sold today with further downside possible), this story has a happy ending. Keep up the great plays. P.S. I in the last week, I have profited on PVSW (stock play) and SATH (stock play). Keep 'em coming.
A/Comment: Well, that does not sound too bad really. Sure the stock gapped down, but the important thing is, the stock hit the buy point and did not rally back up over the entry point. The technical breakdown was already in place: massive crash through 50 day then 200 day, test of the 200 day (that old kiss), and then the next tanking. It did gap and fall, but it rallied back up to 49.51 before turning lower and really tanking. All I could say about it is that you may have wanted to let it complete the move up and then turn back down. As noted, however, the technical breakdown was well in place already, and it was just ready for more downside. Nice trade.
End Part 1 of 3
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