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1/23/02 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:
- A relief bounce on some better earnings news and upgrades
- Looking for a short bounce higher unless some really good news hits.
- Budget sniping.
- Team Trades
Indexes finally bounce from some support.
After two weeks of more or less solid selling, the indexes made a stand today as some decent news helped push stocks higher. The semiconductor book to bill ratio rose to 0.78 in December from 0.73 in November, a 7% rise. In addition, JPM upgraded the chip equipment sector after its slaughter post-INTC earnings. In a market still driven by news stories, after sustained selling or some sustained buying, the right news story can open or close the wallet. We were expecting an attempt at a move higher before further downside. We opened some downside positions after the early move higher failed, but then the market staged a stronger bounce after the early move failed. That is okay, because if things continue as they have been showing, the bounce higher will run out of steam and we will get some more good downside entry points in the near future.
Also we note that the Nasdaq made a strong break lower on Tuesday. Many times after sustained selling, a solid break below support can trigger an immediate bounce back up toward the level just breached. Buyers come in looking for values and there is a bounce. Unless there are a lot of buyers coming in, however, bounces back up to test that former support usually fail, particularly if there has been distribution. As noted last night, 4 of the prior nine sessions on the Nasdaq were distribution sessions where institutions had been unloading tech stocks.
Volume was higher on both the Dow and Nasdaq. After distributing again Tuesday, the Nasdaq recovered on slightly higher volume. That is a positive, but when we compare the volume to volume over the past month or so, it was puny. In short, there was no surge in buying activity that showed the majority of investors viewed the news great enough to shift into serious buy mode. Unless something shifts that view, there will be trouble at resistance.
How far a bounce?
This market is still news driven. Today there was some great volume in what we were referring in the alerts to as the usual suspects, e.g., EMLX, BRCD, BRCM, QLGC, KLAC. Moves in these stocks would indicate some serious buying taking place today. After hours, however, it was more of the news-driven action. KLAC at first wowed investors with earnings, and then dropped $5 from the after hours high, moving down lower than the closing price (lowered future guidance). QLGC had a great day, and then was just taken apart after hours, dropping $3 from its closing price. BRCM was looking good after earnings, but someone coughed at the wrong time when a question was asked and it turned and dropped over $3 from the close. In short, it was hard for the big names, the leaders in the regular session, to hold on after hours.
This could very well mean that Wednesday's reflex bounce is shortened even more than originally anticipated. News pushed it back up, it could take it back down. Still, it most likely will attempt to rally back up to the support recently broken. On the Nasdaq that would be the 200 day MVA and the top of the November consolidation roughly at 1934 (another 15 points or so). The S&P 500, the 50 day MVA at 1137.88 or even 1150. The Dow has a bit of room up to the 50 day MVA (9879.80). Any one of these levels could be overrun a bit on the upside before turning lower, or the indexes could take the turn lower before ever tapping them.
What could drive the indexes to higher levels, either on a test or even a reversal? Big news. There is the potential for that tomorrow at 10:00ET when Greenspan addresses the Senate Budget Committee. This is his second talk in about two weeks, and while his them will be the same, there is no doubt he will clarify his statements from two Fridays ago. Over the weekend there were stories coming from high Fed sources that Greenspan's speech had been misconstrued regarding the economy's future. There is no doubt that Greenspan was talking to the bond market, trying to jaw long term rates lower and that had an impact on bonds and stocks. The bond impact was short lived; hope those wanting to do so locked in their rates last week. Anyway, it is anticipated that Greenspan will be a bit more emphatic on the chances of recovery or at least less obtuse.
Can we expect a lot from him? If he comes out and is perceived as strongly stating the economy is on the road to recovery that could shoot the market higher, but it would also tank the bond market further. That is not what Greenspan wants to do. He will thus be coy as usual. He may throw one more bone toward recovery, but he cannot afford to get everyone too fired up. Thus, there may be some disappointment tomorrow after the weekend 'leaks' about how Greenspan was not so downbeat on the recovery prospects. Instead of turning the market higher, it may be disappointed and slump back down. That is fine; the sooner it gets the correction over the better in our view.
THE ECONOMY
Sniping regarding the budget is already up front, and we are getting a lot of information. Screaming about deficits and surpluses is what you hear. I don't want government spending to go beyond the common defense and infrastructure and helping those that simply cannot provide for themselves. More than that, and we have the government controlling too much of our lives. That means we need lower budgets and staying within them.
Problem is, many calling for balanced budgets today (and if you ask any Congressmen, he or she will say that overall a balanced budget is what is needed) want to have every imaginable spending program funded by our tax dollars and administered by the central government. Hardly anyone is saying let's reduce the overall budget to cover the basics and let American ingenuity and drive do the rest as it did for 150 years before the central government exploded in its growth and size. Congress today thinks a balanced budget is spending on whatever programs it sees fit and then generating the revenues to pay for them whether that requires increasing income taxes, licenses, social security taxes, payroll taxes, etc. There is no real debate about whether certain programs can be afforded or are even necessary, just what can we do to generate enough revenue to pay for everyone's pet project. The process is backwards right now.
The government should not run surpluses long term; it should not run deficits long term. It should take in enough revenue to pay for necessary services and then give the surplus back to the economy. History shows that when the government runs surpluses long term, the economy turns and falls into recession. Surpluses are a result of good economic times. Good economic times generate more revenues without raising taxes. That revenue, however, needs to be put back into the economy to so it can continue to grow. If not, the economy starts to nose lower. We saw it again repeated in the 1990's. Surpluses, rising tax rates, rising interest rates, and an arrogance that we could control the economy at will led to the usual result: a recession.
Right now we have had the largest terrorist attack ever on U.S. soil. We have had to immediately ramp up defense, security, rebuild. We are at war with those that killed thousands of our fellow citizens and want to kill thousands more. Indeed, they want to take down the U.S. We are also in a recession of our own doing, and we have to get U.S. citizens back to work, back to contributing to the world's greatest economy.
What we need to do is get the economy going, because as sure as the sun comes up, a thriving economy will generate the revenue needed to take care of these problems. Do you raise taxes to generate revenue? If you have a booming economy and raise taxes, you will increase revenues. But in doing so, you start choking off the economy and revenues eventually fall. We just did that. If you raise taxes in a recession, you ensure the life of that recession will be extended because there will be less money to invest in an economy that no one wants to invest in anyway. A double chokehold. What you do is eliminate unnecessary programs that were put in place during the good times when our leaders had a blank check. What you do is get people investing in the country. Give them incentives to do so. The tried and true method is to give them their money back and let them spend it and invest it in the U.S. It is so simple but so twisted by the time our leaders get through with it.
So when we hear the wrangling about deficits and surpluses, tell your congressmen that it is okay to run a deficit for now (indeed the OMB says even with deficit spending over two years there will still be a surplus three years out and beyond) in order to provide for the common defense and get the economy going. Once that is done, then cut out the unnecessary spending and don't raise our taxes back up. It is like breaking down brick wall after brick wall when talking to these folks, but we need to keep working on them.
THE MARKET
A nice bounce off of support levels on rising volume. It was not blowout volume, so we don't think a lot has changed overall based on today's action. We certainly do not think today's action washed away the four quick distribution sessions we just had. Still, the indexes will try to move back up to test near term resistance before turning back down. We need to keep our eyes on the market indicators and remain patient. Let the plays set up, and don't panic out of positions on a normal bounce higher. If the character changes, we will need to change. Thus far it does not look as if that is ready to occur without some significant outside force. The market has turned down for a correction, and it has showed all indications that is what it wants to do.
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: 23.66; -1.44. Volatility barely budged higher on the selling, and then as soon as the buying started volatility tanked lower. Combined with the recent distribution, the low volatility is a continued chain on the attempted moves higher.
VXN: 48.15; -2.22. As with the VIX, volatility did not shoot higher on some pretty aggressive selling, but once a rally poked its head up, the volatility beat a retreat double time. It is too low given the price/volume action, and it is not showing upside life that would indicate there is some spark in a rally attempt.
Put/Call Ratio (CBOE): 0.50; -0.15. The put/call ratio has not been at this level in a long time. Even on Tuesday's selling, puts were not in demand (0.65 reading). This indicator is joining the volatility indicators and showing a lack of anxiety in the market. That is unhealthy for an attempted move higher, or at least one that has any legs.
Nasdaq
A bounce up from the 1875 level, the bottom of the November consolidation. Logical place for it to bounce, and it did it on slightly higher, above average volume. That is a good sign, but it was not a powerful move. After hours treatment of earnings was not stellar. KLAC was racing higher on its earnings, but then it warned of a lower Q1. Off $5 from its after hours high to close under the regular session closing price. We still think the index could make a run back up to the 200 day MVA or a bit higher, but nothing has washed away the 4 quick distribution sessions.
Stats: +39.85 points (+2.1%) to close at 1922.38.
Volume: 1.869 billion shares (+3%). Rising volume on an up session, a rarity over the past two weeks. On the heels of Tuesday's distribution session helps, but it was not a surge of buying interest. That may come, but we have to see it.
Up volume: 1.342 billion
Down volume: 510 million
A/D and Hi/Lo: Advancers pulled back into the lead at 1.55 to 1 (about 3:2). Nowhere near the 1.7 to 1 on up to 2 to 1 and better trouncing the decliners gave advancers during the selling. We will see if that can improve, but this shows today's action was not as broad as the selling.
New highs: 82 (-2)
New lows: 38 (-7). New highs did not budge higher on the rally, not a good signal.
The Chart: http://www.investmenthouse.com/cd/$compq.html
After breaking down hard Tuesday, the techs made a reflexive bounce up off of near support at 1875, the bottom of the November consolidation range. It is now running up to test the top end of that range (1934 to 1941) as well as the 200 day MVA (1934.01). The 50 day MVA backs that up at 1940.69. Quite a bit of resistance; definitely enough to stop a bounce higher if it is just a relief bounce and does not have the institutions behind it. It may break above that level intraday, but unless something changes and the institutions jump on board big time, we see it running out of gas for that further test lower down near the 1800 to 1750 level to complete the test and then move higher. Unless the economic indicators turn and tank, the market is poised to follow them out of the recession (actually lead them as they have done already) once this consolidation of the move off the bottom is completed.
Dow/NYSE
The Dow did not make a big move today, instead closing almost flat on a jump in NYSE volume. It held at support; it appears to be ready to bounce higher from this level. Still, it has formidable resistance, and while it will most probably bounce, we expect it to run out of gas and then turn lower to complete the test of the low.
Stats: +17.16 points (+0.2%) to close at 9730.96.
NYSE Volume: 1.444 billion shares (+9%). Rising, above average volume on the slight move higher. Could call it churning, but it looks more like a preparation for a near term move higher.
Up volume: 999 million
Down volume: 423 million
A/D and Hi/Lo: Advancing issues led 1.7 to 1, not a bad day at all (decliners led 1.28 to 1 Tuesday). A broader move than we have seen of late.
New highs: 97 (+7)
New lows: 36 (-23). Swapped out with Tuesday.
The Chart: http://www.investmenthouse.com/cd/$indu.html
The Dow held again above the November low (9691.39) on the close as the candlestick pattern tightened into a loose doji. The Dow has roughly held at the 9700 level the past five sessions, a point where it found bottom in November and December. Today it showed a spike in NYSE volume; it could be called churning, i.e., the index going nowhere as volume runs higher, but it was more like getting ready for a spring higher than a fall lower. We anticipate that it will move higher from here to at least test the 50 day MVA (9897.90). We still feel it will have a hard time moving higher with any sustained momentum without a change in the future views. IBM is in real trouble; GE is not looking solid at all. If the Dow does make it beyond the 50 day MVA, we expect it will run out of steam for further short positions for the test lower.
S&P 500: The big caps held for the second session at 1117 on the low and then turned back up and topped 1125 on stronger NYSE volume. It also is due for this relief bounce higher, but whether it occurred was iffy. It looks as if it will give the 50 day MVA (1137.88) a run, and even 1150. We do not think it will get beyond that to once again test the 200 day MVA (1166.33) on this move. We think it will then move down to test the 1100 level at least.
Stats: +8.87 points (+0.8%) to close at 1128.18.
Volume: NYSE volume was above average on the move, the first rising volume up session in two weeks. Volume rose 9% to 1.444 billion shares.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Still a news driven market, and after hours things were looking pretty good until KLAC warned on Q1 and other big Nasdaq names reported earnings that received lukewarm response. That had futures down, but not tanking. We will see how they play in the morning with analysts. Also before the open are weekly jobless claims; again they are expected to rise, but they have not done so of late. At this point, however, unless there is a massive surprise, we don't see the jobless numbers running the market dramatically higher on their own.
From the futures we may see a slightly softer open before the bounce rally resumes. Just as we don't think improved jobless claims would add a lot of fuel to the upside fire, we don't think tonight's earnings numbers will necessarily stop the bounce started today. Certain sectors may be pressured, e.g., storage where QLGC disappointed after EMLX lit things up last night. Again, we are just being patient, waiting for our openings on both the upside and the downside when they present themselves as they have been doing.
Again, we anticipate a softer open could turn to a continued move higher to test near term resistance levels before they eventually turn lower to further test the September bottom. Despite the short term bounce higher, we are continuing to look at the bigger picture and making our trades accordingly. We are still keeping tighter upside targets right now, preferring to take the profit as it is presented and move on before a nice move runs out of steam in this more downside biased market right now.
Support and Resistance
Nasdaq: Closed at 1922.38.
Resistance: The 200 and 50 day MVA (1943.01 and 1940.69, respectively) are directly ahead, and roughly coincide with the tops of the November consolidation (1934 to 1941). The March 2000 down trendline at 1942. Then 2000. After that, the December intraday high at 2065.69, followed by the January intraday high at 2098.88.
Support: The bottom of the November consolidation (1875) held. After that point, 1800 at best. As noted 1750 would be a 50% retracement. Support at that level looks to be anywhere from 1700 to 1750.
S&P 500: Closed at 1128.18.
Resistance: Trying to clear the March 2000 down trendline (1122) and the 1125 consolidation range; has not broken away yet. The 50 day MVA (1137.88) to 1150 are more formidable. After that the 200 day MVA looms at 1166.33. The December high (1173.62) and January high (1176.55) all line up as strong resistance.
Support: 1125 more or less held; the index has not really decided if it is going to break away just yet. After that is 1100, the tops of the November consolidation range. That is followed by a range of support from 1075 to 1050, the 1050 level holding twice in October. That is right at the 50% retracement.
Dow: Closed at 9730.96.
Resistance: Still the 50 day MVA (9879.80) has checked upward movement thus far. Then 9992 to 10,000. After that the 200 day MVA (10,103.87).
Support: 9750 to 9690 has held firm thus far. From here it gets dicey all the way down to 9500, a level of good support. After 9500 there is a very congested trading range from 9125 to 9500. A 50% retracement is 9181.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
1-22-02
Leading Indicators, December (10:00): +1.2% actual versus 0.7% expected and +0.8% prior (revsed from 0.5%).
Treasury Budget, December (14:00): $26.6B actual versus $24.0B expected and $32.7B prior.
1-24-02
Initial Claims, 1/19 (8:30): 400K versus 384K prior.
1-25-02
Existing Home Sales, December (10:00): 5.16M versus 5.21M prior.
End Part 1 of 2
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