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us stock market, trend trading stock
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2/19/02 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERT SERVICE
Targets hit on OEX puts taken last week, EXTR puts taken last week, and IBM puts taken as well.
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- Techs lead heavy selling toward 50% retracement.
- WMT meets earnings but says economy has not turned.
- Buffet sells Citigroup as financials refuse to acknowledge any recovery.
- Housing starts and permits defy the recession.
- Market view very negative right now, and that is good. Just not good enough yet.
- Subscriber Questions
- Team Trades
Nasdaq flirts with 50% retracement as it bleeds another 3%.
Investors came back form the holiday weekend ready to continue the selling trend that reemerged Thursday after the major indexes tested upside resistance and failed to break it. The Nasdaq led on the move off the September bottom, and now it is leading on the way back down, overtaking the S&P as the leader on the fall. The techs broke decisively through some support at 1772 on an increase in volume, putting an official end to the rally attempt that started two Fridays ago (if there was any question it was over before today).
Not only was the point loss ugly, the rest of the numbers were ugly as well. The volume increase signaled even more distribution where big shareholders such as insurance companies and mutual funds sold lots of shares. Overall they are in the dumping mode right now. The A/D line backed that up with a pathetic 2.5 to 1 decliner edge. The result was the lowest close since the January peak and a flirtation with a 50% retracement at 1743. That retracement looks easily in the bag, and we must remember that is a rule of thumb; just because one index hits it the selling is over. The Nasdaq could very well continue to fall with the other indexes following it. With the distribution, it is definitely showing no indication it wants to turn things over right now.
The Dow and NYSE fared better, but not much. Both down over 1.5% and the NYSE A/D line put decliners ahead 2 to 1. The only silver linings: they did not plow through support to new post-January lows and they did not distribute. You have to look for positives even in the cloud of negativity so you can keep perspective. The Nasdaq could pitch much lower as fears over a weak economic recovery do not support current prices and earnings increases while the Dow and S&P find support at higher levels and start to recover. That remains to be seen, but again, you have to keep the big picture in mind.
Some of the catalysts.
Accounting issues were out there again, dogging IBM and PNC that again wrote down its numbers on a bookkeeping error. Then Circuit City (CC) was questioned on the costs of its remodeling costs, and that put the hickey on the electronics sector. Once the bug bites, it takes a while for it to let go. It is much like the upside momentum of the tech rally in 1999 only now it is to the downside. We have been riding some of that momentum and will look to do the same here for a quick gain.
WMT reported earnings in line with expectations, just as it had said it would do. That was one reason there was no surge higher (no surprise), but WMT also came out and said that the size of its tickets (i.e., each sale) was not increasing. WMT says when ticket size increases that is a better sign of economic recovery. That led WMT to state that it did not see the economy turning as yet. Thus another reason not to accumulate stocks as the primary reason for doing so (an improving economy leading to improving earnings) is not there as far as the largest retailer is concerned.
Buffet selling Citigroup. Over the weekend we put some financial plays on the reports as puts as they were showing some technical breakdowns. Today it was revealed the Warren Buffet was selling shares of C, one of the mainstays in the banking sector and a put play on the Technical Traders Report. After showing some recovery signs in January, the financial stocks have once again failed and are rolling over. Financial stocks are considered harbingers of better economic times to come as they benefit from greater loan numbers and the benefits of improved economics in general. Investors buy them earlier in the cycle to take advantage of the rising economic tide. The turn in the sector indicates the market is not yet ready to buy into them on an economic recovery scenario.
THE ECONOMY
Housing starts and permits shoot higher. The housing market continues to thumb its nose at the idea the economy is not going to recover. January housing starts showed their strongest jump in two years with a 6.3% rise to 1.678M annualized units, much better than the 1.595M expected and December's 1.579M (revised higher). On top of that, there is no lack of plans for the future as permits jumped 3.1% to 1.706M annualized versus 1.6M expected. That is on top of an 11% rise over the last 6 months.
The housing market continues to be the stalwart of the economy with consumer purchases not far behind. As with any strong number there are two sides to the story. The bulls say this is simply further proof along with the other improving economic numbers that the economy is on track to recovery in the second half of 2002 if not in Q2. There can be no doubt that a strong housing market helps keep the economy going. Housing starts and increasing permits mean that more materials to build the houses will be purchased. Then when the homes are sold they have to be furnished with washers, dryers, refrigerators, furniture, etc. That has ripple effects all through the economy, and that will help keep things going economically.
The bears note that the housing market has been uncharacteristically strong during the recession. That makes it an unusual recession, and when there is recovery, it cannot be led by a strong surge in housing as there is no pent up demand that is unleashed in a buying frenzy. That will be a governor on any recovery. Further the bears argue that there may be a housing bubble forming as housing sales increase even as a recession continues. There has been no spike in housing starts that compares to the early 1980's and then the early 1990's, so that is not really the case at this point. Another driving factor could be the belief that interest rates are going higher and the desire to buy now; that is the old surge before the darkness theory. Possible, but we note that housing has been on a rise over the past two years regardless of whether the rates were higher or lower.
In sum, housing continues to help hold the economy up. Without it, the economy would be mired in recession. At the same time, the very thing that keeps the economy out of deep recession will limit the vigor of the upside recovery, at least the intensity at the early stages. That is what continues to act as a drag on the stock market as it works to price in the strength of the recovery.
THE MARKET
A sharp decline on the Nasdaq sent it below near support as the Dow and S&P managed to hold above their recent lows. The selling continues to center around the overall idea that the economic recovery is not going to support valuations that get too far too fast. When many of the old names are still seeing revenues contract, the early optimism regarding the economic recovery remains in check.
Today you could feel the negative sentiment on the market. The financial station commentators had that whipped dog sound in their voices and the guests were all discussing the negative mood. The most frequent comment was 'when will the accounting issues end?' with the response being no one was quite sure. Decliners shot ahead of advancing issues emphasizing the overall selling.
As we said over the weekend, what we are seeing right now is really not abnormal after the first rally attempt off of a significant bottoming event back in September when the sentiment indicators shot higher and volume surged in a flushing of the system. At this point, none of the indexes have tested back 50% of the move off of the September bottom despite all of the selling and rising gloom on the financial stations. Thus we like to see the gloomy talk already starting to work its way in. It is not nearly strong enough to signal an end to the test; usually that occurs when investors again conclude that the market is only going to head lower and decide to get out and avoid further losses. That can happen anytime from a 50% retracement or lower. The idea is to get that shakeout again to clear the way for a move higher. It is heading that way, but it is not there yet.
VIX: 26.37; +2.28. Big surge in volatility as the S&P tests support again. A good start. The last rally attempt came off of a spike to 30, but as we saw it had no legs. It usually takes a spike well above 30 to turn things.
VXN: 47.23; +2.24. A decent raise on top of Friday's 2.77 gain. Volatility is still just at the top of the summer 2001 low range, so there is still a lot of work to do from this measure of investor fear: the more volatile the premium in options, the more uncertainty in the market. At extremes that uncertainty is a positive for the market.
Put/Call Ratio (CBOE): 0.84; -0.31. After closing at 1.15 Friday, its second close over 1.0 (the other one January 30 at 1.05), put activity dropped off on the sharp Nasdaq selling today. That was a disappointment and indicates that some of Friday's action was indeed related to option expiration. Still, put activity remained high.
Nasdaq
After rolling back over at 1875 the Nasdaq broke some support at 1772 today on higher volume. It is now seeking a full 50% retracement and more.
Stats: -54.59 points (-3%) to close at 1750.61.
Volume: 1.749 billion (+8%). Volume jumped higher again to its highest level in 6 sessions, but was still below average. Thus, there was distribution, but it was not extreme. Nonetheless, there was share selling ongoing again, not share accumulation.
Up volume: 161 million
Down volume: 1.575 billion. Down volume continued to trounce up volume by almost 10 to 1.
A/D and Hi/Lo: Decliners really widened the lead to 2.38 to 1. This is what you would look for on upside follow throughs. Kind of a downside follow through.
New highs: 57 (-7)
New lows: 113 (+52)
The Chart: http://www.investmenthouse.com/cd/$compq.html
The selling started early and continued throughout the session as the Nasdaq closed right off of its low (1745.05). 1743 is a full 50% retracement from the January high of 2098. Right now it does not appear that the tied is being checked right now as the index undercut its prior 2002 low at 1772. The Nasdaq is in full selling mode right now as it is right above the first November gap up point at 1745. It does not look as if it will hold at that point with the increased selling today, so we focus on 1700 where the index found a bit of resistance back in October as it moved off of the September low.
Dow/NYSE
Blue chips sold again as well, but they started higher in the range and today's selling still keeps it comfortably above the year lows near 9500. No heavy selling and IBM again made up a lot of the downside on its own.
Stats: -157.90 (-1.6%) to close at 9745.14.
NYSE Volume: 1.180 billion (-13.7%). Volume remained below average as it declined on the selling. There was not wholesale dumping today.
Up volume: 199 million
Down volume: 980 million. Selling volume rose 100 million as sellers were still in the far majority.
A/D and Hi/Lo: NYSE decliners jumped into the lead at 2.09 to 1. This indicates that the selling was wider spread today after advancers managed a gain on Friday's distribution session.
New highs: 74 122 (-46)
New lows: 50 (+9)
The Chart: http://www.investmenthouse.com/cd/$indu.html
Even as the Nasdaq crashed to new lows for the year the Dow remained within its recent range on today's selling session. Volume was lower and the index held above some support at 9730 (early January low). It also remains above the January 2002 down trendline now near 9690. Still it showed some distribution Friday, and distribution is hard on attempted rallies. Indeed, the Dow is still in the rally that started two Fridays back as it has not undercut that low (9580). The Nasdaq, however, is acting as a drag on it as we feared it would. The lower volume today was better news and gives it more chance of holding at the recent lows above support at 9500. Even if the Nasdaq sells lower, the Dow and S&P can hold the line.
S&P 500:
The big caps sported the second worst loss of the big three indexes, breaking below the January 2002 and September 2000 down trendlines (at 1101 and 1095 respectively). It is now again approaching the 1078 to 1080 level that held as support earlier in February. It is going to give us that test again, hitting 1082.24 on Tuesday's low. 1060 is the 50% retracement level, and there is some support at 1050 below that. After 1050, there is not much heading into the September low. The S&P failed to make a higher high in the last rally attempt. It will be sorely tested at 1075. The lack of distribution today was better and it gives some chance for the 1075 level to hold. Still, it is right behind the Nasdaq in reaching a new 2002 low if it cannot.
Stats: -20.84 (-1.9%) to close at 1083.34.
Volume: NYSE volume continued below average as it fell further to 1.180 billion (-13.7%). It finally avoided distribution after two straight distribution sessions.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
CPI comes out before the open, but at this point it cannot really help the market. If it shows tame prices, that is expected and will have little impact. If it shows increased prices it just adds fuel to the downside fire: higher prices raise the specter of inflation and that gets people talking about rate hikes. Right now we do not have to worry about rate hikes. The economy is still so fragile and the market still so shaky, the Fed will not entertain rate hikes for many, many meetings. Like it or not, the economy and the market are wound together and the Fed has to look at all of them when determining a course of action.
Many stocks were making substantive moves lower today on strong volume as we were anticipating. The breakdown of the financials is troublesome from an upside perspective, but it plays into the downtrend we have been taking advantage of as well. The key will be how the S&P handles 1075 and how the Dow handles 9500. That is still 245 points away, so it is very possible that the Nasdaq and the S&P break down further and get sold out as the Dow touches down at 9500. That would be a perfect point to state the next up leg and that appears to be unfolding. Until then we will take advantage of what the market is giving, as always.
Support and Resistance
Nasdaq: Closed at 1750.61.
Resistance: 1772 might provide some resistance on a move back up. The January 2002 and the March 2000 down trendlines are roughly at 1825. The bottom of November consolidation at 1875. The 50 day MVA follows at 1901.41, a long haul from Friday's close.
Support: The November gap up point is 1745. 1743 would be a 50% retracement. Support at that level looks to be anywhere from 1700 to 1750.
S&P 500: Closed at 1083.34.
Resistance: 1100 from former prices and the September 2000 down trendline. The January down trendline at 1096. The 50 day MVA (1121.88) and price consolidations at 1125 stopped the index cold Thursday. Then 1150 and the 200 day MVA at 1159.08.
Support: 1078 to 1080 continues to hold; it has been growing as a support level with each successful test. There is a jumble of prices in a range from 1075 to 1050, perhaps the reason this 1080 level has held well for now. 1050 was tested twice in October, holding both times. That is right at the 50% retracement (1060).
Dow: Closed at 9745.14.
Resistance: The simple 50 day MVA (9918.33) may try to hold it back again on the next rally try. Then price consolidations at 9992 to 10,000. The 200 day MVA (10,065.45) turned the index back on the last test. The January high at 10,300 level is last, but the resistance starts at 10,200 (June, July and August 2001 trading range).
Support: 9730 is the first January low and might provide some support. The January 2002 down trendline is at 9690, right at some support at the 9691 level, the bottom of the November, December and January range. 9500 was tested on the January intraday low, and it seems the level is continuing to act as 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.
2-19-02
Housing Starts, January (8:30): +6.3%. 1.678M actual versus 1.595M expected and 1.579M prior.
Building Permits, January (8:30): +3.1%. 1.706M actual versus 1.6M expected and 1.654M prior.
2-20-02
CPI, January (8:30): 0.2% versus -0.2% prior.
Core CPI, January (8:30): 0.2% versus 0.1% prior.
2-21-02
Initial Claims, 2/16 (8:30): No information.
Trade Balance, December (8:30): -28.5B versus -27.9B prior.
Leading Indicators, January (10:00): 0.6% versus 1.2% prior.
Philadelphia Fed, February (12:00): 10.0 verus 14.7 prior.
Treasury Budget, January (2:00): $52.0B versus $76.4B prior.
SUBSCRIBER QUESTIONS
Q: The VIX seams to be caught in a range between 22 and 30. Could you discuss the implications of it breaking this range either way? To the upside (i.e. above 30), do you anticipate that to be linked to a "major" sell-off, maybe lower than the September bottom? To the downside (i.e. below 22), would you see an important rally accompanying the break and where would you see the VIX heading for next "support"?
A: The VIX is a sentiment indicator, and as such, it gives the best readings at extremes. We refer to the 'normal' range from 20 to 30, very much what the VIX has been tracking in of late. At the low end it shows complacency, i.e., little volatility in option prices and that indicates little fear that tends to drive the market. At the upper end it shows more anxiety that can fuel the market when new money comes in. In this normal range you can see readings near 30 trigger minor rallies as we saw two Friday's ago when the VIX spiked to 30 intraday before that move.
After strong selling, it usually takes more than a reading of 30 to make the turn. That would accompany stronger selling that typically drives the VIX higher. To break over 30, it would not need a selloff to the September bottom. The question is whether it needs to get much over 30. The VIX shot up to 57.31 during the week the market reopened, the highest reading since 1998. Other sentiment indicators spiked to highs as well. That was enough to turn the market from its continuing downtrend. I doubt whether the VIX would have to spike that high to turn this test back up from this current downtrend, but it certainly would take a reading well over 30. That can be accomplished without a major breakout to the downside. The volatility indexes are starting to move up sharply this downturn as the Nasdaq hit a new 2002 low and the S&P is heading down to test its low.
As for the downside breakdown of the VIX, it would not take a major upside move to lower volatility below the 2001 range. Indeed, at this low level, there would be little impetus for the market to drive higher outside some major unforeseen news. It is hugging that range most of the time now, somewhat disconnected from the action in the indexes. From this level, it is more likely that it rallies higher on further selling before the next major move higher. At that point we will see volatility head lower as the rally gains steam. Volatility gives signals at the extremes. The low volatility we have seen acts as molasses on any rally. Once it gives a sharp spike higher and the markets start to move, we don't get too worked up about it until it settles back down to extreme low levels as we have had.
End Part 1 of 2
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