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1/28/02 Stock Split Report Market Summary
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Stock Split Report Subscribers:

MARKET ALERT SERVICE

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SUMMARY:
- A quiet Monday follows a quiet Friday.
- Trying to change its stripes
- New home sales up but can it last?
- Global Crossing files bankruptcy. Where is the outrage?
- Subscriber Questions
- Team Trades

Indexes continue to tread water.

Friday was slow but Monday was slower, both in overall volume and index price moves. The indexes continued to trade in a tight range between support and resistance, unable to move higher, but refusing to sell off.

Volume dropped well below average on the Nasdaq for the second session, and NYSE volume also moved below average in trade today. That can be read a number of ways. The move up in the Nasdaq and Dow could be considered weak, with volume unable to push the indexes over resistance with any authority. That would imply selling to come. But the fractional move down in the S&P is not distribution nor is it churning (high volume turnover of shares when a market goes nowhere at the top of a run). It too, however, once again lacked any punch to break above resistance.

Price action is sleepy as well. The big caps on the S&P put in their third day of lateral price movement, holding above support at 1125 and the 50 day MVA on the high. A low volume move that will fail at resistance, or a lateral consolidation on low volume? The Nasdaq looks almost exactly the same as it moves laterally below its simple 50 day MVA (though it is slightly above the 200 day MVA and the exponential 50 day MVA) on lower volume. The Dow is a bit of a different cookie as it has risen the past four sessions, just now stalling at the 50 day MVA.

The bigger picture must never be forgotten. The indexes all recently made twin tops, the Dow and Nasdaq making a higher second top while the S&P tops were equal. The selling was on higher volume back down to near support where they have held and are now idling. The distribution has not been washed away by two mild accumulation sessions and lower volume consolidation, but this type of action does help. If the indexes refuse to sell off and continue to move sideways between these support and resistance levels, eventually the good economic news will provide enough upside stimulus to move the market higher.

Some big ifs there. While they have not rolled over the past four sessions, they have not bounced convincingly. There were two upside days with slightly higher volume, but those were not powerful days and none of the indexes have taken out any resistance with authority. There are also many, many individual patterns out there that have a head and shoulders look to them; it is important, however, not to jump the gun and declare a fall is coming based on those patterns. The indexes might roll over here and finish the right shoulder, or they could continue to base out laterally, working off the excesses and building buyers for the next run at resistance. In that situation, time is on their side if they do not break down. More lateral movement on low volume heals a lot of distribution; with the selling that has already been accomplished and continued improvement in economic numbers, institutions might start thinking there has been enough air taken out of prices. The longer it consolidates and heals itself, the more likely it rises.

Market not showing its immediate direction, but not showing its character has changed.

The indexes just continued more of the same today, i.e., unable to take out resistance on a weak move up toward those levels. When the indexes reversed from highs over two weeks ago and selling on stronger volume, they continued the change of character (though in more virile moves) started when the up trendlines were broken. Though they are refusing to give in at this point, their action is consistent with two failed tops and a third failure well below those prior tops. Until we see a high volume move over these levels there is not a lot to base a recovery story upon other than a move based on general economic improvement. That was what started stocks moving in the first place, but the story has changed after many have double on the move off of the September bottom. As noted before, any move on further economic improvement most likely will take time to develop, although there is a full slate of economic news this week that could push the ball forward.

THE ECONOMY

Housing sales continue their pace. As we saw with existing home sales Friday, the home market remains solid for now with new home sales up 5.7% in December, topping estimates by 24k. Yields on the long bond, and thus interest rates on mortgages, rose throughout most of December. Still, that did not stop home buying for that month as buyers continued to set themselves into new homes. One reason is that many feel rates are only going higher, so they were buying to go ahead and lock in what are still historically low rates.

Is it more than just filling out the final buyers? Are there really a lot more buyers out there this year to continue to push the housing market higher. In my area along (somewhat more rural), there are no less than three large subdivisions being bulldozed and utilities being run right now. There is obvious anticipation that the market will just continue to soar. With home sales at record levels through a recession, homebuilders are confident. Are they getting too confident, more along the lines of the massive tech spending and investment back in 1999? Homebuyers have been buying at record pace for a few years.

As we have seen with all markets, nothing can keep running hard forever. As we discussed this weekend, housing runs in waves; it does not keep building at record levels year after year. Look at the baby boomers. When that massive group started buying houses, you could not find starter homes. When they moved on in their lives and started having families and making more money, they moved on to the next level of housing, leaving starter homes with no market. Their prices plunged while mid-level home prices soared. Ten to fifteen years ago baby boomers started moving on to their big, high-end homes. Middle level home prices fell as the boomers dumped them and went upscale. The high end and low end of the market were all that was moving. It was not until the past 4 years that mid-range homes started to come into their own again as those that bought starter homes 10 or so years ago bought more house during the economic boom.

Thus the entire market was doing well. Once the majority of homeowners gets its new home or refinances the existing home, will there be another in the wings to push the next buying boom? Not yet according to current demographics. Moreover, those just upgrading to the next level of homes are not going to be in the market right away. The pace cannot keep up, and we cannot continue to put our eggs in the home and consumer basket as we have all through this recession.

Another chip bottom declared.

But that is okay. Why? Because TXN tonight declared that Q3 2001 was the bottom of the chip cycle. That makes a bottom in Q2, Q3, and Q4 2001, and at least one bottom coming sometime in 2002 as well.

Yes you have to take it all with a grain of salt right now. It is very good to hear another major chip player say it has hit bottom; it is more than just an isolated event when so many start seeing their business trough. At this point, however, it is not generating a lot of excitement. Why not? Because the outlook has not been one that shows a strong rebound. TXN said it was going to break even in Q1 versus expectations of a 6 cent loss, and that was a surprise. Overall, the pace of the advance is just not causing many to stand up and take notice. Again we have to look at the home market as a preview of the future: if all of the demand is satisfied there won't be much of a pop higher if any at all in this important sector of the economy. That general idea is reflected in the corporate guidance (historically conservative, but still important): yes we hit bottom, but just how much upside will there be?

More bankruptcies as Global Crossing goes under: where are the investigations?

Today Global Crossing joined the lengthening list of major companies filing for bankruptcy protection. It holds the most laid fiber cable in the industry, so its demise was significant. Yet, there were no fingers pointing, no vows to investigate every stone to get to the bottom of the bankruptcy. Why? Because Global Crossing's bankruptcy won't make political hay. It was part of the massive tech boom fueled in no small part by the Fed's pumping the money supply to incredible levels in 1998 and 1999, encouraging massive investment based on massive demand, and then pulling the rug out from under it when it literally drained all excess funds from the economy. Global crossing bought and laid all that cable to meet the demand, and then the demand evaporated. Another big names goes under, but there won't be any congressional investigations, no indignant speeches and posturing. After all, it was just another one-time leading technology company that went under in the wake of massively imprudent or purposefully orchestrated monetary policy that none of our leaders understands or wants to attempt to understand. There is no easy target to level fraud allegations at, at least not one they want to take on, i.e., the Federal Reserve.

THE MARKET

Still trying to hold on between support and resistance, again on low volume. Each day helps, but it has not changed its attitude enough. We would look for a big upside day on strong volume this week. Today obviously was not that.

One indication the market is really undecided is the continued number of trades that we have in both directions. Once again today saw upside action on all of the reports from the likes of RYL, STU, LLL, RNBO, IXX, and then downside action as well from JPM (turns out it possibly was part of some of those ENE of balance sheet partnerships).

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: 21.77; -0.16. Volatility held more or less steady on the session, matching the action on the index. Again, this is at the July 2001 lows, indicating a very complacent market. That makes it hard for any rally to sustain itself.

VXN: 42.96; -2.71. Volatility on the Nasdaq has really tanked. It closed below the July 2001 closing low and just missed the July 2001 intraday low. The Nasdaq did not do a thing today toward the upside, but volatility continues to fall. This is not a good sign; any move higher will need a lot of volume to support it.

Put/Call Ratio (CBOE): 0.69; +0.07. The ratio is back up near the 0.70 level it has been at much of the time since the September low. More people taking puts on the belief the market will fall. This shows more pessimism, but it is not enough to overcome what we are seeing in the indexes right now.

Nasdaq

A slight rise on very low volume, showing another doji under the simple 50 day MVA. As with the rest of the indexes, it is holding on for now, but that is about all.

Stats: +6.21 points (+0.3%) to close at 1943.91.
Volume: 1.482 billion (-10%). Volume backed off for the second day to come in below average. Not good on an up day, but this was more of a continued consolidation. In that view, the action was just fine.

Up volume: 822 million
Down volume: 642 million

A/D and Hi/Lo: Advancers took the lead back at 1.05 to 1 (decliners led 1.14 to 1 Friday). No real action at all.

New highs: 119 (+27)
New lows: 34 (+2)

The Chart: http://www.investmenthouse.com/cd/$compq.html

The techs cleared the 50 and 200 day MVA once again (1940.77 and 1937.65, respectively), making a late rally to do so. On the low the Nasdaq again tested the 1930 level (1925.43 low) and then reversed to close higher. This is some opposite action from what we have seen the prior two sessions where the techs closed off of their highs, and a welcome relief to upside action. Still, it does not change the status of the index; it helps heal the distribution a bit, but there has been no big move upside on volume. There has been no big downside move either, however. After the correction, we would look for a strong upside move of 1.5% or better on strong volume to view that there is more upside ahead. That would show a change in character to the upside. It is trying to set up to do that, at least from the standpoint it is not selling off on higher volume. Still, the pattern looks very toppy; it would be very easy to sell lower from here.

Dow/NYSE

The Dow moved higher again, right up to the 50 day MVA where it stopped. Volume has backed off on the past two sessions as it approached the 50 day. Not a strong move, and the prefect setup for more selling.

Stats: +25.67 points (+0.3%) to close at 9865.75.
NYSE Volume: 1.167 billion (-13%). Below average volume for the first time in over a week as the Dow ran out of steam at the 50 day MVA. Falling volume on the test of a resistance level is not good.

Up volume: 582 million
Down volume: 583 million. Dead heat.

A/D and Hi/Lo: Advancing issues again held on to a narrow lead at 1.13 to 1 (1.07 to 1 Friday).

New highs: 130 (+13)
New lows: 26 (+2)

The Chart: http://www.investmenthouse.com/cd/$indu.html

Again, a run at the 50 day MVA (9874.72) did not succeed, but it came close. The index closed in the upper portion of its range, driven by cyclicals. It is not, however, getting any punch to push it higher. Much as with the Nasdaq, it is awaiting a big upside day to follow through on last Wednesday and Thursday's turn higher on stronger volume. At the same time the index has moved up off of support at 9690 right up to resistance at the 50 day MVA on decreasing volume as it approached that resistance. After an interim top in December was followed by a second top early this month, a failure here or at 10,000 would set up a head and shoulder. Volume lighter on the move higher, the A/D line poor; it is not a great move back up.

S&P 500: Almost the same pattern as the Nasdaq, moving laterally the past three sessions, tapping at support on the low (1125) and resistance on the high (50 day MVA, 1137.31; intraday highs 1140). After the selloff the prior two weeks, the reversal on higher volume and the lateral movement on lower volume is not bad action at all. It is healing the distribution while it holds between support and resistance on low volume. While the overall picture has not changed from downside bias (it too has had a double top), it shows some sustaining power right here. Interesting possibilities, but it has to reverse the action with a big upside day.

Stats: -0.22 points to close at 1133.06.
Volume: NYSE volume fell to below average for the first time in over a week (1.167 billion ; -13%).

The Chart: http://www.investmenthouse.com/cd/$spx.html

TOMORROW

The FOMC starts its 2-day meeting tomorrow. Then consumer confidence comes out at 10:00ET. There is a lack of enthusiasm early in the week with all of the economic reports coming out later. Investors anticipate the Fed to hold pat, and if it does, they might take that as a sign of confidence in the economy. Even though it is expected, it may help the market.

The market did not show its hand today as to what its next move will be. It has not changed its tune, but the tempo has changed a bit as it tries to work sideways and get the distribution out of its system. The next high volume move will tell a lot of the tale. We are still trading positions both ways, i.e., taking upside and downside positions, based on good plays hitting our targets, taking less profit while we wait for the market to either continue its downtrend or try to start another rally. Again we look for a move up on one of the three indexes of 1.5% or better on strong, above average volume. If that occurs, the character will have defied the odds and changed back to upside; we will have to close out our index puts.

For now the action lacks punch and has not shaken off the distribution of the prior weeks. We continue to keep profit targets pulled in more, trying to capture the strong moves and taking money off the table before it runs out of momentum and tries to turn over. We always let the market direct our actions. It has been negative, and while it is trying to change its stripes a bit now, it has not done so. Futures are up a bit on the TXN news, but it is very modest, and tomorrow will bring an entirely new session.

End Part 1 of 2

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