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us stock market, stock watch
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1/13/01 Technical Traders Report
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Technical Traders Subscribers:
TONIGHT:
- The down trendline stops the advance and lots of dojis out there.
- Economic news scares some about the future of rate cuts.
- Major earnings due this week.
- Getting ready for the next move up.
- Subscriber Questions
- Team Trades
Nasdaq takes a shot at the trendline, but cannot hold the move.
At the post-session conference, all of the writers and analysts joked that we could just recycle Thursday's summary for next Tuesday. Indeed, the action went pretty much to script, and after Friday's action it appears it is set for that pullback to consolidate some of these gains.
The action: it sold a bit, rallied hard over the down trendline to 2699.87, and then pulled back. It held at the trendline for 10 minutes at 12:00 ET, even bounced up to 2666. Then it broke back below the trendline and could not muster a move back over 2650 the rest of the session. That is pretty typical action when an index is at resistance and is not quite ready to make the breakout.
On the television it was stated that 2700 was the resistance point. Indeed, that level has been called the down trendline for the Nasdaq the past few days. There is some resistance at that point, but it is not the trendline. Trendlines do not track at one level day after day; a down trendline is trending downward, and each session it drops lower. In any event, the Nasdaq did not successfully take out 2700 or the trendline, something it must do.
Signals of a change in direction everywhere.
The Nasdaq's action showed further signs of a turn down for a bit. The price action revealed a doji on the candlestick chart; after a move up or a move down, a doji can signal a reversal of that move. The tighter the doji, i.e., the closer the open and close price for the session are, the strong an indication of the change in direction.
On the Nasdaq, the doji was 13 points. That is pretty tight. There were similar patterns on many of the recently strong stocks: BRCD, JDSU, JNPR, NEWP, VRSN. Several others tapped the down trendline and retreated: CIEN, BRCM, VTSS, VRTS. The fact that the Nasdaq crossed the down trendline and then sold back to close just below it indicates a possible end to this move. As noted on Thursday, that is something we have to be ready for with our positions, but we feel we can use some weakness back to support levels in our favorite stocks as an opportunity to take new positions.
A change in direction, but not a change for the worse.
Why do we think so? The Nasdaq and its stocks have been acting better for one, rising on strong volume. They have been rising in spite of continued earnings warnings and downgrades with respect to well-know stocks. The Nasdaq gave us a confirmation of the reversal day two Wednesday's ago. And that reversal day was ushered in by a Fed rate cut. Despite all of the gloom still being served up on a daily basis, from what we are seeing thus far, things look good.
Friday's pullback was expected. It was on lower volume. Individual stock price/volume action remained as it should whether stocks moved higher or sold back some. Bad news from HWP, GTW and a SUNW downgrade did not slaughter the Nasdaq or the S& P 500. Stronger than expected economic numbers rattled, but did not sink them. So far, so good.
We always have to stay alert for signs of a reversion to the 'old ways' of the past ten months. That would be selling back on higher volume, reacting horribly to bad though expected news. There will be an opportunity to do so this week. JNPR, NVLS and AMCC report earnings Tuesday after the close. Wednesday sees IBM, AAPL, CTXS, EXTR, ITWO, and XLNX. Thursday is ALTR, MSFT, EMLX, and SUNW. Lots of possibility for disappointment, but something tells us we have heard most of the bad news thus far. We continue to expect good things from JNPR, AMCC, EMLX and SUNW. We know ITWO is going to be solid (it has said so), we know AAPL is going to miss, and we may get pleasant surprises from XLNX, EXTR and CTXS.
The market knows things were not great in the fourth quarter, and all ears will be on the conference calls to determine what guidance is. Guess what? It won't be clear; it will be much as CSCO stated it would be last Wednesday: not as clear given the economic slowdown. Some will say things will be slower, but the market is building that in already. It is looking forward because the Fed has started to ease interest rates. We have to remain alert in the event it is not ready to fly higher but needs that second rate cut beforehand. It is not looking that way, but that was the case this past summer right before that rally died.
Still, a lot has happened since then. The market was in bad shape in May, but it was in much worse shape just 8 sessions ago and ready to head much lower. The Fed rate cut changed that. And then we started to hear good things from some companies about the fourth quarter. That gave us further conviction that the leaders in the key sectors (JNPR, AMCC, GLW) would score solid earnings once again.
THE ECONOMY
What about those economic numbers that had so many talking on the television about the decreased odds of a Fed rate cut and the threat of inflation?
Retail sales came in with a 0.1% overall gain versus a last minute downward revision to -0.5%. That had some crowing that there was no retail implosion in December and that the Fed would find it harder to cut further or at least as much as originally thought. As always, let's put the numbers into perspective.
Sales rose 0.1% when last year they were up 7%. So, they held at last year's level. No growth, but no collapse. Still, they were expected to rise 4% before the rest of the folks out there started to see the slowdown we were talking about back in August. Then there is the previous two months of sales numbers. They were revised downward to -0.5%. Then we have to consider that with December's numbers, retail sales have shown growth (or contraction) levels over each of the last three months not seen since the 1990-1991 recession.
Without autos, sales were flat. Autos were interesting. Less units were sold overall, but high-end vehicles (with their greater profit margins) were the ones that were moving. This gave them better sales numbers than they would have and probably will have if things don't change. This past week was the Houston Boat Show. Reports from dealers indicate sales were down 30% from last year with high-end units being the best sellers. The lower to mid-range boats, the bread and butter boats, were not moving. Fewer units sold. This indicates that the majority of consumers when it comes to big ticket items are holding off from purchases. Confidence has indeed been shaken.
PPI climbs above expectations.
The overall PPI was flat, coming in below expectations of a 0.1% rise. The core, however, rose 0.3% versus an expected 0.1% rise. That had everyone buzzing about what the Fed would do next and comments such as "the Fed will have to think twice before cutting again" were not uncommon. To us, nothing has changed that much. At most it means that the Fed most likely won't move before the second day of its January meeting (1-31), and perhaps 25 basis points versus 50. Perhaps.
Even with December's higher than expected core rate, core producer prices were up just 1.2% in 2000 versus a 1.9% gain in 1999. Nothing is running out of control on that front. Even if you want to view this as inflation, the worst thing the Fed could do is let the economy continue to slow. Why do prices rise? Because demand outstrips supply. Given the continued slowing economy, December's numbers are no doubt simply a blip higher as demand has continued to slow. Still, it is the demand that finally caught up with supply that causes prices to rise. And why did demand catch supply? Because the Fed choked off supply by increasing the cost of borrowing and tanking the stock market; there was no investment capital left to fund supply expansion. Consumer confidence, however, continued to climb. As we said back in the spring and summer, consumer confidence does not start to fall until the whiff of potential job losses is in the air. It started to peak in late fall when initial jobless claims climbed solidly over 300,000 per week. Before it did, demand had started to outstrip supply. Ironically, the Fed's own actions taken to reduce the 'pressures' it saw in the economy caused those very pressures to arise. They are not horrid, but if the Fed keeps tight money, liquidity problems will prevent us from ramping up supply high enough to produce us out of this mess. It is a vicious cycle: increased money costs continue to hold the supply side of the equation down.
Oil prices come back into the picture.
OPEC is now going to cut production again (indeed it has already been doing that), and that also has a negative impact. Not on inflation as is the knee-jerk reaction, but on the economy as it will further sag under that weight. Higher energy costs are the same as a tax; it costs more to produce goods. With consumers not buying as much, that will slow things even further. Greenspan indicated in October he was worried about higher energy costs impacting consumer expenditures. Confidence was much higher at that time. He knows once again rising oil prices will add just another weight on the economy as it attempts to find bottom. More incentive to cut rates.
Fed Fund Futures contract.
After today's economic numbers the futures contracts lowered the expectations of a rate cut before 1-31 and lowered expectations of the magnitude of the cut. The likelihood of a cut before 1-31 has dropped below the 50% level, meaning it now has priced in a 20% chance of such a move. As far as the magnitude of the move, a 25 basis point cut is still fully priced in, while a 50 basis point cut on 1-31 is at a 20% probability right now.
A 'humorous' note. The IMF, a strong proponent of higher U.S. interest rates even before the Fed started to raise rates back in 1999 noted Friday that the slowdown in the U.S. would hamper Asia's recovery, but concluded it would not derail it. At least it is being consistent in its position; we have been very concerned that Japan's unwillingness to let go of failed policies of massive government intervention into business and too tight money would scuttle even its extremely weak attempt at recovery (that appears to be failing). The IMF also said the U.S. growth was a "normalization" of growth. It did say the rapid rate of deceleration was a surprise. Only idiots were surprised.
THE MARKETS
Overall market stats:
VIX: 27.62; -1.07. Volatility dropped again, a surprise all of the markets were down and gyrated up and down most of the session. The VIX tanked 1.70 points in the last hour; again, strange action.
Put/Call ratio: 0.60; +0.12. Rising on selling as expected. We anticipate it will rise more early next week as the indexes pull back a bit.
Sentiment: Thursday we talked of how sentiment indicators were showing mixed results. One of the sources we mentioned Thursday was IBD. Friday IBD touched on sentiment as well, noting as we have in the past that fear on some standard measures have not peaked most likely because the Dow and S&P 500 never experienced the level of selling the Nasdaq experienced; yet, other sentiment measures showed high bearishness. That is what we found with our polling of brokers. People are still very skeptical about what is going on. Television pundits are very skeptical. Good.
NASDAQ: Sold back on lower volume after briefly breaking free of the down trendline. The action of the index and its key stocks indicates more of a pullback as stocks start reporting earnings, but there are some heavy hitters right off the bat Tuesday after the close. If AMCC and JNPR can knock the ball far and give solid guidance, that could set the stage for another leg up.
Stats: Down 14.07 points (-0.5%) to close at 2626.50.
Volume: 2.520 billion shares (-11.2%). Above average, but lower on the selling. 1.325 billion versus 1.123 billion to the downside. Pretty much tells the story of the day: a transition from strong buying to some milder profit taking.
A/D and Hi/Lo: Advancing issues continued to lead, but the ratio tightened to 1.62 to 1 (2.38 to 1 (Thursday). This is the third week in a row the A/D line has trended higher, and on Wednesday and Thursday the A/D ratio was better than 2 to 1 which is what we look for in a confirmation of a reversal. New highs fell to 58 (-9) and new lows continued to fall to 19 (-16).
The Chart: http://www.investmenthouse.com/cd/$ndx.html
As noted the Nasdaq showed us a doji just below the down trendline. On the daily chart it broke over that level, tried to hold there, failed, and could not break back over it the rest of the session. We are looking for some selling early next week. The 18 day moving average is at 2534.71 looks as if it is a point that could hold (about a 4% drop).
Dow/NYSE: The Dow continues to struggle as tech stocks continue to show gathering strength. The index has now fallen back into the 10,300 to 10,600 range. Volume was lower and it is trying to hang on. Note that the Dow is now 10.4% off of its January 2000 high, and that puts it back in correction territory.
Stats: Down 84.17 points (-0.8%) to close at 10,525.38.
Volume: NYSE volume fell on the selling to 1.262 billion shares (-10.5%). Down volume led up volume 625 million to 604 million shares. At least the volume was lower on this selling.
A/D and Hi/Lo: NYSE Advancing issues still lead, but barely at 1.03 to 1. Nonetheless, the A/D line continued its 4-week uptrend. New highs fell to 108 (-70) while new lows fell to 5 (-12).
The Chart: http://www.investmenthouse.com/cd/$dja.html
As noted, it is back in the 10,300 to 10,600 range, tapping 10,468 on its low the second time in a week. It may see some new life if the techs pull back a bit early this week, but it looks as if it wants to test the 10,300 level once again.
S&P 500: The big caps once again tapped resistance at 1333.20 and retreated to the 18 day moving average on the close. It never tested its down trendline on this move (1340 to 1345). That is very interesting point as it indicates that the largest stocks were not the biggest movers. 1300 looks like a good first target for this pullback.
Stats: Down 8.31 points (-0.6%) to close at 1318.55.
Volume: NYSE volume pulled back on the selling as the S&P continues to demonstrate good price/volume action (1.262 billion shares, -10.5%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
While we like what we saw this past week and feel the market is in the process of turning the corner we have to recognize this is a critical period. Sure the Fed just cut rates and we have had some good price and volume action. We now have the test of the down trendline on the Nasdaq and earnings that we know are going to be weaker. Some will be weaker than expected, but others will be stronger than expected. The key will be how investors react to the future guidance. Will they look beyond the lowered forecasts and instead rely on the fact that the Fed is in a rate-cutting mode, that the new administration is going to be business friendly, that history is on their side?
We will know when we see how individual stocks are treated and how the indexes do volume-wise. There is no grace period. AMCC and JNPR announce after the close on Tuesday, two that we anticipate will score good earnings. If they stumble it could be a rough week. If they do well it could set the proper tone and put the other earnings into perspective.
Monday we expect the weakness we saw Friday to continue early on. Hope tends to spring eternal and we may see an attempted rally on Tuesday morning. Without some motivation, we doubt such a move will last the day, especially as the day winds down for some big earnings announcements after the close. Best case scenario would be continued selling down to support levels followed by solid earnings that propel the indexes back up. Might take more than just one day of rest before they are ready to move up, however, even with solid earnings from AMCC and JNPR.
We are just going to watch and wait for the stocks to show us when they are finished pulling back. Not all were in pullback mode (CIEN, BRCM, EXTR, SCMR were all up on stronger volume) Friday, and if these stocks do pullback in some market selling, they look as prime candidates to lead back up. We note that pre-split plays have been super momentum plays in this market of late (e.g., TALX), and we see more and more stocks building bullish patterns in financial and retail sectors, two traditional leaders when the Fed starts to cut rates and a recovery in the economy is anticipated. This is what was happening (with other sectors) back in July when the summer rally started to fold. That keeps us on edge, but we also know that things have changed a lot since that time.
Support and Resistance Levels
Nasdaq:
Resistance: The down trendline at 2655 to 2660.
Support: 2535 is the 18 day moving average, and that is our target on a pullback on profit-taking. 2200 down to 2000.
S&P 500:
Resistance: The down trendline at 1345 and previous resistance at 1360.
Support: Our target is 1300 on profit taking. If things get really ugly, 1270 is possible support. 1254.07 is the 2000 low.
Dow:
Resistance: 11,020. After that, 11,400.
Support: 10,600 failed, and now we are looking at 10,300. After that, 10,000.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
1-16-01
Business inventories for November (8:30): 0.4% versus 0.6% prior.
1-17-01
Consumer Price Index for December (8:30): 0.2% versus 0.2% prior.
Core CPI (8:30): 0.2% versus 0.3% prior.
Industrial Production for December (9:15): -0.5% versus -0.2% prior.
Capacity Utilization for December (9:15): 80.9% versus 81.6% prior.
1-18-01
Initial jobless claims (8:30): 345,000 prior.
Housing starts for December (8:30): 1.5 million versus 1.562 million prior.
Building permits for December (8:30): 1.586 million prior.
Philadelphia Fed report for January (10:00): -7.1% versus -4.2% prior.
1-19-01
Trade balance for November (8:30): -$33 billion versus -33.2 billion prior.
Preliminary Michigan sentiment for January (10:00): 99.0 versus 98.4.
SUBSCRIBER QUESTIONS
Q: We often receive questions about determining how well a stock is doing volume-wise during a session. This is really important if you are looking at breakouts where we like to see volume surge well above average, but we always like to see stocks moving higher on stronger volume when we are entering positions. We talked about the Investor's Business Daily site last week, and we did some more testing with it this week. It is not bad.
When you get a quote from the site, it gives you the current volume (not realtime, and it can lag by 15-20 minutes we have found), the average daily volume. The best part, however, is that it tells you how that day's volume stacks up to the previous day's volume at that time. In other words, you see the average volume, the volume thus far that session, and whether that volume is ahead of where it was at that time the previous session. Very useful because it gives you a more accurate picture of where volume is going that day. For example, if volume the previous day was average but the volume this session is well ahead of the previous day at the same time of day, you are likely heading to a big volume day. It simplifies determining where volume is going. A very nice feature.
TEAM TRADES
TALX: A pre-split that has give us a previous great play was looking a bit tired Wednesday as it showed us a doji on very low volume after a pretty decent $5 move (on a $35 stock, that is just under 15%). Thursday it surprised us with a $1.88 move higher off of that doji on sharply higher volume. That tuned our radar back onto this stock for Friday. There are no options on it, and with pre-splits we sometimes like to play stock anyway as the spreads are tighter as we don't have to make up time value or volatility on options. This is important in that if we are looking for a $3-$4 move, we get more bang from stock from the perspective of a narrower spread. Now the option can give us a greater percentage move based on our outlay of capital, and that is why we like them. If a stock does not have options, however, it does not have them.
End Part 1 of 2
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