|
|
stock watch, stock trading investing
* * * *
2/28/02 Stock Split Report
* * *
Stock Split Report Subscribers:
MARKET ALERT SERVICE
BRCM target hit alert issued on the put (+$4.05 per option). EMLX target hit alert issued on the put (+$5.20 per option).
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- Big economic news cannot stir the market.
- Nasdaq sells on rising volume again as Dow and S&P hold the line on lower volume.
- Why no major rally on such good economic news? Market knows something we don't?
- Subscriber Questions
- Team Trades
More of the same as strong economic news cannot sustain the market.
A big upward revision in Q4 GDP and a surge to expansion in the Chicago manufacturing index set the stage for a market advance. GDP was credited at +1.4%, sharply higher than the 0.2% gain previously reported and well in front of +0.9% expectations. That was the fastest GDP growth in a year. Chicago manufacturing leaped to 53.1 in February, blowing past January's 45.1 reading and the 47.0 reading anticipated. New orders vaulted to 59.9 from 48, the highest level since August 2000.
Those were strong numbers. The indexes answered, rallying in the morning to near term resistance once again. The news, however, was not enough to push the indexes past that resistance. Once again they turned lower, the Dow erasing its triple digit gain. The Nasdaq and S&P, mired all day, closed at the session lows. It was not the kind of move you would expect given such positive news that the economic rebound is on the way.
Techs continue to distribute.
Despite the good economic news on the heels of Greenspan talking up semiconductors and other technology Wednesday, the Nasdaq was lower again on rising volume. That is the second straight distribution session since the index tried another rally attempt a week ago. Distribution on the heels of a light volume rally is a portent of more downside. It indicates that the big money players are getting rid of tech shares in mass quantities. In other words, they are divesting tech, not investing in it. When the big money dumps, stocks fall. The Nasdaq is falling and it cannot get up.
Dow and S&P throw second straight doji as they try to build handle consolidations.
Yes the Dow and S&P once again gave up their gains on the session, closing at the lows. That is not bullish intraday action. On the other hand, they did not give up much ground and volume shrank on the selling after there was a bit of churning Wednesday. Churning is high turnover where the indexes move very little while volume increases. It shows that buyers and sellers are fairly evenly matched, but at the top of a run it is an indication that shares are being dumped.
Both the Dow and S&P are in decent patterns, the Dow the better of the two. It is in an 8-week cup that is attempted right now to form a handle below resistance at 10,250 and above support at the 200 day MVA (10,036.26). It is moving laterally between these two levels, and today volume started to back off. That is a good sign; you like to see a tighter trading range and lower volume as a stock or index consolidates right below a pre-correction high. Kind of the quiet before the storm. It is an accumulation pattern.
The S&P is trying to do the same thing, though it is less defined. It is trying to form a double bottom off of 1075, and has rallied back up to the middle of the pattern where it too is attempting the same type of handle the Dow is forming. It is bounded by resistance at 1125 on the high side and 1100 on the low. There is hope for the big caps, but it has a lot to prove still.
Divergent indexes is a problem.
It is hard, however, coming out of a bear market to have the major indexes at odds. On the way off of the September bottom, the Nasdaq was leading while the Dow and S&P where the reluctant followers. Eventually the Nasdaq ran its course. It was not until the Nasdaq had rolled over that the Dow started to assert itself.
Much of this had to do with the perception of the economic recovery. It went from optimistic to less than thrilling when the stimulus package was killed. That meant no capital investment surge to help technology companies. From there investors turned to cyclical stocks as a defensive move and also one that could take advantage of an economic recovery even if it was going to be a weak one.
The Nasdaq heading south is a drag on the other indexes. The Dow has MSFT, INTC, IBM, and HWP that can pull it lower. If the Nasdaq totally breaks down, it will no doubt have a negative impact on the other indexes. Thus even though the Dow and S&P patterns are not bad, the Nasdaq's continued plunge lower is not going to help them.
THE ECONOMY
We discussed the solid economic reports above. The question is: why cannot the market rally and hold its gains on such news?
Markets represent the collective thought of all investors from around the world. All information is synthesized over that pool. Markets accordingly tend to be good predictors of the future. The sharp drop in March 2000 was an early reaction to the coming economic slowdown. The tech rally off of the September low was in anticipation of a recovering economy and that increase in stimulus. Take away the stimulus, and the tech recovery is not such a good deal. Hence the selling in techs as they are re-priced for a very slow tech recovery. Again, why cannot stocks rally when the economic numbers are turning higher?
Again it comes back to relative levels. In June and August 2001 we saw signs of a turn back up. September 11 pushed that back a couple of months, but the signs of recovery resumed and have continued to grow in number. The concern we have voiced after the stimulus package was killed was the quality of the recovery. A patient with chronic heart disease can recover from a cold but still be in bad shape because the chronic heart disease is still there. That is kind of what is going on with the economy.
Inventories lower but still very, very high.
The theory of inventories: if you reduce inventories to low enough levels, factories have to crank back up in order to keep up with current demand and hopefully increasing future demand. As we discussed last night, even Greenspan is worried that consumer demand has to back off after remaining strong throughout the recession. Debt levels can only go so high no matter how cheap money is. Thus future demand has to back off as there was no cessation of demand that builds and is finally released in a consumer frenzy.
Second, and very importantly, is the relative level of inventories. Again, Greenspan and others talk of the reduction in inventories over the past two years. Cisco has talked about how it has reduced its massive inventory through write downs and fire sales. It sounds great. Problem is, there was that huge surge in production in 1999 as demand shot off the map and GDP with it, fueled with the cheap money from the overblown Russian meltdown of 1998 and then the Y2K 'problem.' The Fed helped mash down on the accelerator during that time with very easy money. Factories were built to handle the demand, inventories were building even with just in time inventory models being adopted. Then Greenspan and company realized they had overshot the mark. The Fed always intended to call in the money at some point, but it had overestimated the potential drags on the economy. It had blown past them and was racing ahead.
When the plug was pulled and the money supply dried up like an Arizona arroyo in August, business activity ground to a halt and demand for business products plunged. Inventories leaped to huge levels because the demand was suddenly taken away.
After two years of whittling, total business inventories are now right back at 1999 levels pre-boom. That means inventories are at levels that can easily meet 'normal' demand. Problem is, demand is not normal for business products. It is at about, oh, zero.
CEO's not ready to buy.
International Paper's CEO today was candid about what he was seeing for the future. He was one CEO that saw the problems in the economy back in late 1999 and early 2000, so his insight has a bit of weight to it. He does not see the turn in business. He believes that corporate CEO's are NOT going to ramp up production in this climate, not until they see real demand increases. They don't need to; inventories are still easily capable of meeting existing slow demand. He is candid and says that without the ramp up in production any recovery will be slow. Just what the markets are pricing in.
EDS' CEO had similar comments. He indicated he knows of no other CEO that anticipates spending more on capital items this year than last year. He plainly said that until there is spending on capital goods there won't be any new jobs created.
It makes sense. If current inventories and production rates are at pre-boom levels and demand is still somewhat slack, even inventory reduction won't cause a surge in production activity. If there is no need for ramping up production, there is no need for new systems to assist in production (i.e., expenditures for capital goods). In short, there is nothing here right now that breaks the doldrums cycle the economy is in. Slow, plodding growth is the best case scenario.
Some caveats. CEO's are usually pessimistic about recoveries; goes with the territory. There is also something of a vested interest there; if you think you can complain enough and can get a tax credit for buying new systems, why not give it a shot? Moreover, many economists are seeing possible 4% growth in Q1 2002, blowing away estimates of a 2.5% to 3% increase for the entire year (Greenspan's estimate). Until there is capital investment, however, we don't see growth nearly as strong as those projecting big jumps in Q1.
Still, the problems are real, and it is a simple economic equation. Inventories are adequate; thus, no need to ramp production; thus no need to hire more employees or invest in new manufacturing or other capital equipment; thus inventories of capital goods remain stagnant and now major production occurs. Incentives for businesses across the land to buy capital goods would help break the cycle. Give someone the incentive to buy new computer, manufacturing, or other systems and you create demand above normal levels. That requires more products to be manufactured and that requires more workers coming back to jobs.
That is not happening, and that is why the market is backing out price gains on the Nasdaq and turning instead to cyclical stocks that provide some safety, that are easy to understand, and do a bit better in a weakly improving economy. Cyclicals do not lead well or for long, however, and hopes of a market recovery pinned on them are false hopes. The market cannot make real headway without growth stocks. Growth stocks usually are the place to be in a recovering economy. With the unique history of this boom and bust, however, there is not massive demand to require ramped up productive capacity. Thus the market suffers for now.
THE MARKET
Nasdaq distributing and heading lower while the Dow and S&P try to fight it off and consolidate for a break over resistance. The recovering economy will help support them, but will the premise of a lukewarm move break them out over resistance? A very strong ISM may do the trick, but there is a lot of baggage to clear up regarding what is going on with the recovery.
VIX: 23.13; +0.04. Going nowhere and not indicating fear or anxiety.
VXN: 45.19; +0.43. Minor, minor rise given the resumption of the downtrend on higher volume. Has a long way to go.
Put/Call Ratio (CBOE): 0.83; +0.04. Hovering at the 0.80 level. High end of the range, but not contributing to any upward push.
Nasdaq
Continued its roll down after a brief wave at 1775 resistance today. Volume climbed even higher for the second straight session as once again the sellers muster more volume on the downside than the buyers could on the upside. Not a healthy index.
Stats: -20.39; -1.2% to close at 1731.49.
Volume: 1.935 billion (+6.1%). Rising above average volume for the second session of selling. Distribution back to back, meaning tech shares are being dumped. This is a predecessor to further downward action.
Up volume: 560 million
Down volume: 1.360 billion. Up volume fell further while down volume rose. Sellers clearly in control.
A/D and Hi/Lo: Decliners moved into the lead, though rather meekly, at 1.16 to 1 (advancers led 1.05 to 1 Wednesday). It was not a rout for the entire index.
New highs: 101 (-16)
New lows: 75 (+22).
The Chart: http://www.investmenthouse.com/cd/$compq.html
Wednesday the Nasdaq tested higher support near 1800, and today it tested the next lower level at 1775 on the high (1773.20) and then it rolled over for the second straight session on rising, above average volume. The Nasdaq is still firmly in the downtrend, heading back down toward the lower channel that is now near 1640. It has some potential support at the recent low near 1700, but that is about it. The distribution signals that tech stocks are heading lower as institutions are lightening up on them. Over two months ago we said the lack of a stimulus package that would allow for capital investment credits and accelerated depreciation would come home to roost on the tech stocks, and it is just pulverizing them with a 10% loss in the month of February alone. There is nothing apparent right now to break the cycle of too much inventory and too little demand.
Dow/NYSE
For the second session tested resistance only to close on the lows. Still, it is holding a tight closing range and volume backed down on the action as it tries to consolidate in its cup pattern.
Stats: -21.45 (-0.2%) to close at 10,106.13.
NYSE Volume: 1.348 billion (-4.26%). Still above average volume, but backing down on the selling session. That is better action for a handle consolidation and unlike the Nasdaq, there was no distribution after Wednesday's churning.
Up volume: 619 million
Down volume: 729 million. Down volume pulled into the lead, but the action was still fairly evenly matched.
A/D and Hi/Lo: NYSE advancers still led the session at 1.14 to 1 (1.58 to 1 Wednesday). This indicates that the action overall was still pretty healthy despite the decline and is what you like to see in a consolidation.
New highs: 174 (-7)
New lows: 37 (+16)
The Chart: http://www.investmenthouse.com/cd/$indu.html
Continuing in its 8-week cup pattern, again testing resistance at 10,250 on the high (10,238.70), still below the pre-correction high at 10,300. After testing resistance it plowed lower once again to close near the low (10,104.88). That puts it still comfortably above the 200 day MVA (10,036.26) as it works on shaking out any remaining sellers. It does appear to be attempting to form a handle to that cup before making a run at 10,300. There is a large amount of overhead resistance from 10,300 to 10,500 from the summer 2001 trading range. The further removed it becomes, the less resistance there is. Has enough water passed beneath the bride and is there enough of an economic recovery coming to push it through? What we do now is watch the volume as it makes its consolidation and then tries to break through. That will tell just how many are buying into the recovery move. So far it has been holding up well.
S&P 500:
The big caps sold down a bit further, but not much. NYSE volume backed off slightly on the selling, indicating no dumping of the big cap names. No buying, but no dumping either. The index continues a somewhat tortured attempt to form up a double bottom with handle that bottomed at support at 1075. It is moving laterally above support at 1100 and below resistance at the 50 day MVA (1116.83) and then 1125 (the high today was 1121.57). It remains above its January 2002 (1080) and its September 2000 down trendline (1095) as it works on the handle. Breakout is over 1125 on very strong volume.
Stats: -3.16 (-0.3%) to close at 1106.73.
Volume: NYSE volume backed off to 1.348 billion (-4.26%), avoiding distribution on the session following Wednesday's churn. Better action for the consolidation in the handle.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Another major day of economic reports from autos, to Michigan sentiment, to construction, to the ISM (national manufacturing index). The ISM released a half hour into the session will be the key. If the national number is the blowout that Chicago was, there might be a more lasting impact on the indexes than today's report-inspired rally and fade.
The improving economic picture is benefiting non-tech stocks the most, so if there is a blowout on the reports tomorrow we anticipate it benefiting the Dow, the S&P somewhat, and smaller and mid-cap non-techs. The key will be if the Dow can slice through its January high on higher volume and hold its gains.
As for the Nasdaq, good numbers may push it higher as well but we would be surprised if it was able to surge and hold over its downtrend given the recent distribution. We look for a test of 1700 at a minimum (31 points away) though it may try to make that push higher first.
Thus for tomorrow we do not see much change from today. Several of our put plays are well on their way and we don't want to chase them at this stage. At the same time we see some new stocks breaking down below support for new put plays. There are also the many smaller NYSE and Nasdaq stocks that are still performing well. Remember, the NYSE A/D line was still positive today, indicating that the non-large caps were still having decent sessions. After all, the economy is improving even if it is not improving enough for tech stocks to be considered values.
End Part 1 of 2
|
stock watch
stock trading investing
|
