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us stock market, stock prices
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1/19/02 Investment House Daily
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MARKET ALERT SERVICE
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SUMMARY:
- Two competing themes in the market, one result.
- Distribution, breakouts failing, bulls falling but not enough: bias still downside.
- Inevitable plunge to the lows?
- Market: closed below consolidation ranges; volume lower, but pre-holiday Friday.
- Subscriber Questions
- Team Trades
Good earnings now and stronger economic numbers versus possible weaker recovery.
Two sides are slugging it out. Q4 earnings are not only matching reduced expectations, but beating them. They are coupled with economic numbers that continue to improve. Friday saw those economic numbers improve again with January Michigan consumer sentiment readings jumping to 94.2 from 88.8 in December, the highest reading since one year ago. Future expectations are the key; consumers think things will be better a few months down the road. Those numbers were on top of decent December retail sales, lower inventories, lower jobless claims, increasing building permits and a vastly improved, positive Philly Fed reading. Those numbers look as if recovery is coming.
On the other side of the ledger is the belief that improvement might be there, but it is not going to justify the prices that stocks have build back in since the September bottom. Quarter 4 results may have been better than expected, but that was not enough. They are now pointing to Q1, saying that is where the real nut is, and saying that companies are not providing any positive direction. Case in point: Dell upped its Q4 expectations Friday, but it did not give any Q1 guidance; a brief pop higher was sold into.
Moreover, there is no stimulus package, and there is real concern about how strong any recovery will be. The economic numbers are improving, but they only show improvement, not how strong a recovery will be. With the consumer having been strong all through the recession and the housing market never really giving in (thanks to low interest rates and related refinancing), there won't be that surge in demand as pent up buying desire is unleashed. That is the usual scenario in a recession: consumers slow down, lower some debt, and then when things get better they buy, buy, buy. As buying never really slowed, this effect will be lower. That is why the stimulus package was so important to a strong recovery: business had not spent, and if it could be stimulated to do so by tax incentives, that would open the coffers that have been shut tight for over a year. THAT would help with a 'V' shaped recovery, but it does not appear that economic need will overtake political desire.
The victor? Thus far those concerns about the lack of a strong recovery, at least one strong enough to justify current stock prices, are overwhelming the market. Company comments about Q1 have not been strong enough, and thus stocks are making a U-turn as money is taken off the table until there is a change in view about the future.
Market bias still negative as Nasdaq sports its worst week since September.
The market tried to rally twice last week from its oversold condition, but both times it was dragged back down by the news of the day. It is no longer in a head down rally mode, but is being pulled up and down, back and forth but the current news. All the while, the bias continues down as the bad news, or at least the weight it is being given, is greater than the good news.
The indexes have taken out important support points and are hanging by a thread to other levels. Stocks have been selling on higher volume, indicating that institutions are lightening up on positions. When the big money sells, that is not good for the market; if institutions are unloading stock, that pressures the market. This is distribution, the opposite of accumulation. After a strong run, many institutions are finding reason to take money off the table and wait for another round of buying at some other time in the future.
Take upside money off the table when the gain is there.
Breakouts are also failing at a more rapid rate. We see good, solid breakouts over resistance on high volume. Stocks run 15%, 20% or so, and then reverse on high volume. This is always a sign the market is struggling. We still see stocks making impressive breakouts and impressive moves afterwards, and we can definitely make money on those. What we do, however, is take that profit off the table as soon as the upside target is hit.
What happens in a choppy market on breakouts is that stocks breaking to new highs or making solid runs often become the targets of sellers fearing valuations have risen too high. After a 2 to 3 day move the sellers come in. Again, the best method is to buy in on the break, and when the stock hits the target, start taking money off the table. If it keeps running, we get extra gain; if it starts to fall, we close the rest of the position out immediately. We will gladly, happily take that nice gain and then get out, keeping the powder dry for the next play.
Downside action still there.
Downside action will also likely remain very viable. The indexes have been distributing and taking out support levels and threatening the next level. We see many, many stocks announcing earnings and then gapping down. The status of the recovery was still a green light three to four weeks ago, and continued improvement looked as if it was in the cards. Still there was the lack of a stimulus package out there, and when companies did not come out and say Q1 was going to be good, that came back to haunt stocks. That was what reversed the sentiment; it changed the landscape of the recovery, and now investors are taking money off the table as the strength of a recovery is in question.
As for that downside action, we note there has already been over a week of selling. Things are getting oversold. Just as we do not want to chase stocks that have run too far after breaking resistance or making a recovery move, we don't want to chase stocks that have broken down and fallen hard and far. For downside action we are looking at stocks that are continuing their downtrends and have come up to test the down trendline; there are still those out there despite the selling. There are also downside plays that have just started to break down, that have just started to crack even with all of the prior selling.
Market collapse coming?
There are many who believe there is a market collapse coming and many that believe a V-shaped recovery is coming. Then there are those in between who don't see a collapse but see a sustained struggle as the effects of the stock market and economic surge and reversals are worked off. Upside moderates see a recovery, but nothing spectacular.
We always receive a ton of mail on the downside collapse scenario (similar to Japan) either from those promoting it or those scared by it. What you need to focus on is what it would take to cause a collapse. That would be no prospects of a recovery, just continued cycles of no business investment, no consumer spending, deflation, the dollar losing its strength; in short, no economic recovery and then dollars being exchanged for other currencies where the prospects looked better. As long as the dollar remains strong based on better U.S. prospects vis a vis the world, that is a good sign.
What are the problems cited? The economic and stock market bubble and subsequent collapse; comparisons to Japan abound. High consumer debt loads. Weak recovery prospects.
It is true that after improving, commodities are showing some weakness as of the end of last week, setting up somewhat of a head and shoulders top on renewed fears about the economic future. Further, as noted, there has not been any real falloff in consumer demand while debt has climbed; no surge in consumer demand to try to keep the economic recovery moving forward. Even if consumers wanted to spend, they may not make the debt/equity ratios necessary to make further major expenditures. The dollar index is bucking at the December high, but it is looking decent. We have already commented about the problems that too much government spending brings in trying to recovery from a recession following a stock market and investment meltdown. Right now there really is not stimulus other than spending on the war and rebuilding efforts. The near term stimulus from the 2001 tax cut has already hit the economy. Right now there is nothing more to drive it or at least accelerate it.
Those are some pretty compelling reasons to be gloomy. To accept them, however, you have to believe the economy is as bad as it was or is setting up as bad as it was in the depression. Let's face it, that is pretty much what the worst case scenario adds up to. The next is a 1970's era stagflation environment where there was no economic growth and the misery index. A prolonged war against inflation can be compared to a Viet Nam, no end in sight campaign. Of the two, the second appears the most probable given those two choices.
Is that the case? I don't think so. Economic indicators may not show us how strong a recovery will be, but they are indicating recovery at this point. There has been a large liquidity run up on the Fed's rate cuts, there are tax cuts in place, those are typical underpinnings of every recovery. Economic numbers have been steadily improving; The weekly ECRI leading indicators, a very current, very reliable set of indicators, has shown six weeks of improvement, indicating a turn to the upside is coming. It can be mucked up by the wrong actions, e.g., rescinding tax cuts in the belief that surpluses are good for the economy, raising interest rates again; in other words, reversing the actions taken that historically led to economic recovery.
Thus the real question is how strong the recovery will be both in strength and timing. That does not sound like the bottom is going to fall out. It does not portend new lows in the market. If the economy is going to recovery, rapidly like the hare or slow and steady like the tortoise, the market should not hit new lows that were hit on the fear that the economy was heading down the chute.
That may seem oversimplified to many, but usually the straight forward, simple solutions are the correct ones. Look at the economic collapse: everyone said the Fed rates would not hurt the economy because it was just too strong. Well, not everyone; we were saying it was trouble because it is ALWAYS trouble when the Fed hikes rates. Sure enough, the historically based, simple analysis was correct: the Fed raised rates until it snapped the economy's back. The stock market saw it coming and dove first. Now the market is recovering. It is having some problems right now on some hesitation about the economic future, and it looks as if it will further test the prior lows. We do not think it will test all the way back down, and we do not think it will undercut those lows unless the economic numbers tank, thus eliminating the belief in economic recovery. That won't happen unless we take our eye off the ball once again.
THE MARKET
Worst tech week since September, with the major indexes hanging on near support levels by a thread after a week of distribution. There has already been a lot of downside action and the indexes are getting oversold. Two attempts at bounces last week failed on disappointing earnings news. Thus far there is nothing to change the direction and support the indexes here at this support.
But then again. In typical earnings seasons, stocks tend to rise in the first week of earnings when they are decent and then roll over after the initial thrill is gone. This time they have sold off ahead of time and are selling on some decent earnings news. Perhaps there will be a recovery at these support levels if this week's earnings come in strong and there is some hint of even better results in Q1. That could be the juice to stop the slide. Could be, but it would take some pretty good earnings and guidance to overcome the current bias that the economic recovery is going to be weaker. We thus continue to look at downside action along with solid upside plays that can give us nice upside gains to our targets.
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: 24.34; +0.60. Volatility rose again on selling, but it was not much of a gain given the strength of the selling last week. That is very disconcerting; the worst selling since September, and yet volatility is in the summer doldrums.
VXN: 48.89; +1.92. Up, but not as much as Thursday's tanking. Strong selling is not inducing a rise in anxiety as measured by volatility. Again, this is not the best indication that the indexes are ready to move up, especially given the distribution we saw last week. Complacency as measured by the volatility accompanying intensified selling are not good.
Put/Call Ratio (CBOE): 0.85; +0.06. Slight rise on Friday's selling. Staying in the upper end of the range, so that is one positive. Still, with the poor price/volume action, it needs to spike up to the 1.0 level to really give a signal of upside action. Last week it hit 0.88 and above on two occasions. Both times the market attempted to rally the next day and did. The moves were thwarted by bad news after hours on each occasion. The rally tried to start but it did not take. Bigger news pushed it back.
Nasdaq
Gapped down, tried to recover, but then sold down to close just below the 200 day MVA. That is not bullish action. Over a week of selling, 170 points lower and at the 200 day MVA, you would think it was ready to bounce. It tried twice last week and was tossed lower. To recover it has to have better news about the future to recapture a positive view of the immediate future. That would mean earnings, good guidance, and a lot of it.
Stats: -55.48 points (-2.8%) to close at 1930.34.
Volume: 1.690 billion shares (-10.5%). Back below average on the selling, but don't take too much heart in that. Lower volume on a Friday before a long weekend is nothing new though it was a surprise on an options expiration. The week showed distribution.
Up volume: 244 million
Down volume: 1.396 billion
A/D and Hi/Lo: Decliners again jumped way out in front at 1.9 to 1. They far outpaced the advancers three times last week, over 2 to 1 twice. The selling remained strong.
New highs: 86 (+5)
New lows: 30 (+1)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Closed just below the 200 day MVA (1933.10) but still right at the top of the November consolidation range. This is a level where the index puts up or shuts up. A solid break below this level is a signal of further selling; the 200 day MVA is such a portent. The Nasdaq has led the entire move higher. The Dow and S&P have already broken below the 200 day MVA; if the Nasdaq cannot recover, there is more selling ahead. 1875 is the bottom of the November consolidation range. The index could fall to there easily if not good earnings news is to come this week.
Dow/NYSE
Held above the low since breaking below the 50 day MVA and right at some support. Somewhat similar to the Nasdaq in that respect, but also similar in that it too has suffered some quick distribution, and that usually means further selling ahead without some change in the view of the future.
Stats: -78.19 (-0.8%) to close at 9771.85. It escaped the heavy selling Friday on the back of MMM. The big damage was done by IBM and MSFT.
NYSE Volume: 1.339 billion shares (-3.8%). Volume was lighter, but still above average; as with the Nasdaq, we cannot take much comfort from the lighter selling volume.
Up volume: 475 million
Down volume: 829 million
A/D and Hi/Lo: Decliners led 1.53 to 1. Not as strong as the prior selling (1.77 to 1 Wednesday), but not weak.
New highs: 83 (+6)
New lows: 36 (+4)
The Chart: http://www.investmenthouse.com/cd/$indu.html
The Dow broke below the 50 day MVA Wednesday, tested it on lower volume Thursday, and fell again Friday. That is typical action of a weak index or stock that breaks the 50 day MVA; it rallies back and tries to break back above, but it cannot do so. Now it is holding right at some potential support near 10,750. It has held last week three times above 9711, and there was a bottom at 9691 in November and 9736 in December. Those are previous interim bottoms that can provide support. They were also, however, above the 50 day MVA at that time. If they do not hold, the index will move to 9500, a point of pretty solid support. That is where we have been banking it would hold on any test. Below that is 9125 to 9000.
S&P 500: Again very similar to the Dow. It broke below the 50 day MVA (1139.05) Wednesday, rallied back to that level Thursday on lighter volume, then plowed back down Friday. It has held 1125 on the low the last three sessions. 1125 is a good support level. It has held before and the March 2000 down trendline is right there as well. This will be a fight here. The distribution is not positive for it to hold, and the economic bias is not favorable for now. If it cannot hold here, there are two October tops at 1100.
Stats: -11.30 (-1.0%) to close at 1127.58. Gave back what it gained Thursday.
Volume: NYSE volume backed off again, but we don't take much from that as it was a pre-holiday session (1.339 billion shares; -3.8%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
The market was jerked around by earnings last week, and there is another heavy week of earnings ahead. Will the earnings be good enough to turn things around is the question bulls are asking. Tuesday EMLX and AMCC are highlights. Also announcing are LU, MRK and NVLS. LU and MRK have charts mired in the mud; that is an indication that not much is expected. NVLS was hammered last week as it was a chip equipment manufacturer; we doubt that even a rosy outlook from NVLS would generate much excitement given INTC's cut in cap ex spending (TSM said it was doing the same Friday, by the way). Wednesday there is BRCM, KLAC, QLGC and SEBL. Heavier hitters.
We would be surprised if earnings on Tuesday, even if much better than expected and forecasts are even better, would get things going. If it continues Wednesday, perhaps that would help turn the tide. Companies are being cautious, however, so it will definitely be a surprise if they do give upside guidance above expectations.
There fore we are looking for more downside Monday. The market is getting to an oversold point, but it is also getting to a point where it can really break down. Things never go down in a straight line, and even downtrends see stocks bounce up for a few sessions and then roll back over. The indexes may undercut the support levels and then try to rally back for a few sessions. The fact that the Dow and S&P have already undercut the 50 day MVA and gave it a kiss Thursday before turning back down Friday (the kiss good bye), however, makes it look as if another full session or two of selling is ahead.
As we have seen, however, the indexes are news driven. The bias is down but still without a clear breakdown. Thus they are subject to still being yanked around by news until that happens. We are playing the trend down as we opened some downside index positions Friday (along with our continued stock puts we have been running), and we will look to continue doing that as long as the price/volume action remains negative. At the same time, however, we have some good upside action that can deliver us excellent returns. We just have to have our targets in mind and be ready to pull the trigger when they hit them or have sell orders preset.
As to whether the indexes hold here or not, we suggest they will not. The distribution and failed breakouts are symptoms that the big investors are no longer as confident that the economic recovery will support the rise in stock prices to this point. Until we see something to change that bias and the institutions respond with some big upside volume we expect the next support levels to be tested.
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us stock market
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