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us stock market, trend trading stock
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2/16/02 Technical Traders Report
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Technical Traders Report Subscribers:
Monday is Presidents' Day. See you again on Tuesday!
MARKET ALERT SERVICE
BRCM put target hit (+$1.60 on options). EMLX put target hit (+$4 on options).
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Indexes continue trending lower after testing resistance Thursday.
- New accounting worries hit the market as IBM and NVDA targeted.
- Slew of so-so economic reports provides no punch for the market.
- Sentiment indicators showing bullish and bearish extremes.
- Subscriber Questions
The roll down from resistance continues.
Thursday the indexes reached up toward resistance intraday and then turned back. Friday they continued the move down, the Dow and S&P on rising NYSE volume, the Nasdaq on slightly contracting volume. It was not a crushing rout, but more of a continuation of the action that has plagued any upside attempts since the rally off of the September bottom topped out in January. That action has been a down trend preceded by mild distribution, and periodic low-volume rallies that are stifled at resistance with more mild distribution.
We definitely expected more volume Friday than we got, especially as Friday was options expiration. NYSE volume increased to slightly above average, and as the Dow and S&P both logged losses of 1% or better. After showing promise in the price/volume action as the Dow tried to rally toward the January high, institutional selling has come into the picture. Nasdaq volume backed off from Thursday's pace; technically that kept the techs from distribution, but volume was ahead of Thursday's pace all session until the last two hours when trading dried up. Most likely the lowered volume was due to the long weekend. It was on pace for a distribution day, but it appears that the holiday put a bit of a question mark as to that. Not much of a question mark, however.
New accounting worries take out some big names on the Dow and Nasdaq.
IBM was on the hotplate Friday as it was accused of failing to disclose a $300 million optical unit sale to JDSU as a method of cost cutting. The hint of accounting issues triggered a run for the exits as investors decided to sell first and ask questions later. The stock was hammered $5 and accounted for 35 points of the Dow loss alone.
NVDA, the best performer on the S&P 500 in 2001, blew out earnings again on Thursday night, but also disclosed it was under an SEC probe regarding its bookkeeping. After breaking its uptrend in January and flirting with its 50 day MVA all the prior week, NVDA broke sharply lower on massive volume. Again, investors were quick to lock in gains rather than take a chance of getting 'Tycoed'.
Accounting concerns are another reason for selling as we see the indexes continue to trend lower on a test of the move off of the September bottom. We note, however, that selling volume has not shot off of the scale in wholesale distribution. Thus, while the indexes are definitely in a downtrend from the January top, they are not in a free fall. They are all still above 50% retracement levels, and the Dow and S&P each moved over their January down trendlines on this last rally attempt. It is not a free fall.
THE ECONOMY
A load of economic data hit the street Friday. Overall it was viewed as less than positive, but there were some silver linings there if you wanted to sift through the numbers. Of course we did just that.
Michigan sentiment drops in February. A 2.1 point drop to 90.9 from January's 93.0 was what caught investor attention. While current expectations were solid at 97.2, future expectations plunged to just over 86 after coming in at 91.3 in January. This was the first decline in 5 months, i.e., since the 9-11 attack. Recent polls have indicated that 70% of the U.S. wants a stimulus package passed. They are still very much feeling the pinch of the recession and the plunge from 6%+ growth rates and want something done about it. Congress prefers to play a zero sum game at this point, however, each side wanting an all or nothing proposition and more than ready to play the blame game if they do not get anything done.
Surpluses are not the end we should be seeking.
There is some strange views that are separating the sides right now. Basically, it is the idea that surpluses lead to economic growth and safety in the social security system. That has the cart totally backwards. Surpluses are the excess revenue thrown off by a strong economy. Surpluses are like money in a 0% bank account, i.e., they just sit there, not growing. Some night say that is good because the money is always there. That is the argument that surpluses are needed to protect the social security trust fund. Problem is, it is not really the same as money just sitting in an account. There are more beneficiaries taking more out of social security than is being put in during times of economic downturn. If there is no economic growth to generate additional revenues to keep building up the trust fund, it gets chewed up faster and faster. That money 'invested' in the future is really just sitting there. It needs to be truly invested back into the economy to create economic activity. With economic activity tax revenues rise and the trust fund is replenished.
In reality, surpluses ultimately are a drain on the economy because they represent excess taxation; they represent money that should be invested in the U.S. economy that creates more jobs and thus more of a tax base to feed Washington. Indeed, those that want a balanced budget (and all things equal, a balanced budget is desired) apparently don't want one; they want surpluses to spend. If the budget is truly balanced tax receipts would equal spending. Surpluses would be returned to the people that paid them so they could invest further in the economy and thus keep the economy thriving. Those that do not believe that should remember that studies show that 80% of the stock market gains during the bull run were reinvested in the market. The same holds true for taxes returned through tax cuts: they are invested in the economy because in a thriving economy with lower tax rates, that is where the best return will be. It is not hoarded and left idle; that is an unnatural state for capital, yet that is the position propounded by those fighting stimulus.
Another reality: our government sucks up revenue like a giant vacuum; surpluses are doomed to be spent no matter what rhetoric we hear about cushions for the future. Even if not spent, they are doomed because they are the lifeblood of the economy and siphon off investment dollars above and beyond the 50% tax rate most Americans pay (with income taxes, FICA, and national excise taxes, it is 50%). When the total tax burden begins to exceed 50%, that is when decisions not to invest in the U.S. are made, and that is one of the reasons we have been seeing the continued lethargy in business investing.
Industrial production shows some life. Production was down 0.1%, better than the expected 0.2% drop. More importantly, it was the smallest decline since July 2001. Production was still falling, but it was not falling as fast. Kind of a lesser of evils scenario. Still, it was the fist month in the last six that factory output did not drop. Moreover, output held its ground even though aggregate hours worked declined a big 0.9%. Less hours worked but output was steady; that means productivity was sharply up and that supposedly helps keep inflation away. Another KEY aspect to the report: business equipment output (manufacturing of business equipment) was up 0.4%, the first rise since August 2000 (1.5 years). Computer and semiconductor output were up 1.1% and 1.5% respectively. This was the first signal in a long time that there may be a bottom forming on production. Perhaps the inventory draw down is finally having an impact.
Housing market weakens on rising mortgage rates and weekly ECRI falls again.
The housing market index fell to 58 in February versus 60 in January. That still indicates a strong level, but housing data have started to back off despite builder optimism and economist hopes that it will continue to help carry the economy. It cannot do so forever as we have noted before unless there is real economic activity to back it up. That is vital because expectations of better economic times have been driving the housing market. As we saw with Michigan sentiment, future expectations are falling, and with them we will see the housing market fall.
The weekly ECRI report (a higher octane version of the Leading Economic Indicators) dropped for the second straight week. The reason for the drop were fewer mortgage applications and falling stock prices. The report had been showing economic recovery, and it still does. The weakening reports, however, continue to indicate that the recovery won't be robust.
THE MARKET
The indexes resumed their downward trek Friday. Well, not a total resumption as the Dow and S&P are still above their January down trendlines and the S&P is still above its September 2000 downtrend. The failure at important resistance and the fall on higher NYSE volume, however, was not a good way to end the week, and there was no follow through on the rally attempt that started the previous Friday. A follow through can still take place Monday and fall in the 4 to 7 day window following the start of a rally that indicates a possible stronger rally. The lack of a bevy of strong leaders ready to head to new highs makes the success of a rally more difficult.
VIX: 24.08; +1.20. Nice gain on the S&P selling. Still, volatility remains at the low end of the range. The last modest rally was sparked by a reading of near 30.
VXN: 44.99; +2.77. Still scraping along near the bottom of the range of the past 8 months. It mounted the last small rally attempt after hitting near 51. It is not there yet, and even that level most likely would not show enough anxiety to jumpstart a big move.
Put/Call Ratio (CBOE): 1.15; +0.24. The second close above 1.0 in the past three weeks (the last was a 1.05 close on January 30). Closes over 1.0 are indications that investors are getting overly bearish either scared the market is going to go only lower or the majority are boldly betting the market is heading lower. Either way it is starting to show extremes, and extremes are signals of market changes. Friday's option expiration had something to do with it, but past expiration sessions did not have the high put action seen on Friday. It is still at odds with volatility, but it is a signal to watch for that follow through session.
Nasdaq
Rolled over at 1875 Thursday and kept on going Friday. Volume was outpacing Thursday's volume hour by hour, but then backed off in the last two hours. It was not a rout, but it resumed the downtrend, falling below its January and March 2000 down trendlines once again.
Stats: -38.17 (-2.1%) to close at 1805.20.
Volume: 1.618 billion (-3.5%). Again below average volume on a session. Avoided the second day of slight distribution, but that had more to do with the long weekend than lack of sellers. Another rally attempt has been met with distribution, but the rally has not undercut the low at the start of the rally and there is still time for follow through.
Up volume: 269 million
Down volume: 1.336 billion. Volume may have been down on the session, but down volume gained over 200 million shares and up volume lost 300 million. The sellers were definitely out for the session.
A/D and Hi/Lo: Decliners led once again at 1.44 to 1 (1.56 to 1 Thursday).
New highs: 64 (-29)
New lows: 61 (+16)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Friday's continuation of Thursday's reversal off of 1875 pushed the Nasdaq below the January 2001 and the March 2000 down trendlines once again. Though volume was not higher Friday, it appears the index has another prearranged meeting near the 1775 level, a point of an interim top in October and where it held before this last rally attempt in February. That is the last real level it can hold before a full 50% retest down to 1743. That is just below the point where the index gapped higher in November (1745.73). For now the index is showing us it is heading lower and we will have to see where it grabs support for another rally attempt.
Dow/NYSE
The Dow tapped resistance as well Thursday and continued selling back Friday, slicing through the simple 50 day MVA on higher volume. It too looks as if it is going to test lower once again.
Stats: -98.95 (-1.0%) to close at 9903.04.
NYSE Volume: 1.368 billion (+7.5%). Volume rose above average Friday, indicating that Thursday's churning (running in place as sellers matched buyers) was signaling the end of this leg of the move. With no follow through session, the distribution is not good for a further move up on this leg.
Up volume: 465 million
Down volume: 887 million.
A/D and Hi/Lo: NYSE advancing issues fought back for a small lead of 9 (1546 to 1537). Not bad breadth for a distribution session. Smaller stocks held up better.
New highs: 122 (-15)
New lows: 50 (0)
The Chart: http://www.investmenthouse.com/cd/$indu.html
The Dow is still above potential support at the exponential 50 day MVA (9849.09) and then 9730. It is not stout support. If the Dow is going to hold and make a move on this leg, however, it needs to do it there. It remains in much better shape than the Nasdaq (already trending back down), but it has already undercut the early February top at 9943.94 again on higher volume. Again, it needs to hold at 9730; if not it will test 9500 again.
S&P 500:
The big cap index was looking a little better than the Nasdaq, a bit worse than the Dow. They all, however, behaved the same way at the end of the week, tapping resistance (1125 on the S&P) and rolling down from there Friday. The S&P sold on slightly higher NYSE volume, and that gives this downside move a bit more potency as once again distribution rears its head. The usually portends deeper selling, but the S&P is still above support at 1100 that is bolstered by the September 2000 down trendline at 1101 and the January down trendline at 1098. If it can hold above the September 2000 down trendline, it has a much better chance of stemming the tide; the distribution makes a test of 1075 again more likely.
Stats: -12.30 (-1.1%) to close at 1104.18.
Volume: NYSE volume moved above average on the selling to 1.368 billion (+7.5%), giving the second straight distribution session.
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
Despite the Dow and S&P finishing the week higher, they failed at key resistance and started back down on stronger volume. The Nasdaq started the week in the worst shape, and it finished negative for the week, resuming its downtrend. All in all it is a less than cheery sight for the bulls near term.
As always we have to look at the big picture as well as the near term view. After the market reopened in September, sentiment indicators shot of the scale as volume soared, washing out the last sellers. That allowed the market to start a rally higher. Many proclaimed that the September low was the bottom. We believe it was, not because of any gut feeling, simply because we compared it to other bottoms throughout history.
Now after a strong move up, the indexes are now testing that move. As the test lingers on, many are starting to doubt, wondering how deep a test will go and whether September was really the bottom. From a historical perspective, what we have seen thus far is nothing new. In fact none of the indexes have even tested back 50%, the 'rule of thumb' test after a move off of an important low.
We still feel the market is in for more of a test; it is certainly indicating that it is trying to do that right now. In the bigger picture, however, that is not abnormal. In 1974, the Dow tested all the way back to its low while the S&P retraced 80% of its move before turning and rallying for good off of the low. Thus in the bigger picture the current action of the indexes is not out of the norm nor is it alarming. What we have to do, what we have been doing, is recognize what is going on, seeing each trend change, and then tailoring our investments and trades accordingly. We have been doing that with index options, put options on the downtrending stocks, and investing in those stocks and sectors that are still giving upside. It takes awhile to build something out of the rubble of a crash from very lofty heights. We will continue to see rally attempts start and fail, but ultimately we will see the second bottom put in and the long climb out start.
Until then we continue to take what the market gives us just as we did Friday with the downside action (and upside action) that brought us some nice returns when our targets were hit. We still see the indexes continuing their interim downtrends at this point, but we have to watch the Dow and the S&P at their trendlines as they could find support there; they have not fully resumed their downtrends as the Nasdaq did.
The key continues to be finding those stocks in sectors that are rising for upside stock plays and then capitalizing on those stocks breaking key support or continuing their downtrends. Of late we have been able to capitalize on the upside and the downside in the same sessions, simply using define entry and exit points. The alert service has been providing good entry and exit points, and by keeping to the targets and keeping trades of even dollar amounts in this market, we have enjoyed nice gains.
End Part 1 of 3
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