|
|
us stock market, top stock pick
* * * *
3/06/02 Technical Traders Report
* * *
Technical Traders Report Subscribers:
MARKET ALERT SERVICE
Target hit alert issued on SLGN (+$6.25; +22.5%).
Subscribers to the current reports can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Rally refuses to stall as Nasdaq makes it four in a row.
- Volume lighter across the board as rally loses a bit of strength.
- Issues regarding valuation showing up again with downgrades and grousing.
- Factory orders post solid rise as Fed somewhat sanguine on economic recovery.
- Subscriber Questions
Nasdaq overcomes adversity, rallies again.
The last time the Nasdaq rallied four consecutive days was in November, four months back. Four days, 162 points, 9.4% gain. The Nasdaq does everything a bit grander, up and down. When you consider the hurdles it had today, the ability to finish higher when it looked as if it wanted to sit down was pretty impressive. Last night MCDT in the storage sector reported it would miss earnings big time, and it took BRCD, QLGC, EMLX, NTAP and others down with it today. JPM cut EMC's estimates, DCLK and AMZN were downgraded, and GM was reported to have excess capacity.
Once again the Nasdaq overcame some bad news to rally. When investors make up their minds to rally, current reality does not mean a whole lot. Investors are buying based on the current and future economic recovery and what that will do to earnings. They are looking down the road 6 to 9 months at growing earnings. Thus, despite very recent CEO remarks that there was no planned increase in buying or investment as far as they could reasonably see into the future and the recent statements from GLW, ORCL and MCDT that they will not make their earnings, investors are buying. Eventually those earnings will have to improve, and thus far investors are willing to overlook misses from laggards such as GTW and MCDT.
Will that sentiment remain when more warnings come? As with everything in life, timing is key. Earnings season is just far enough away to preclude any real worries about what disappointments are ahead. If the techs continue to rally into earnings season we could very well see them top out for more of a correction right beforehand if warnings continue to come and as investors get cold feet about what is coming.
Remember, even though companies such as GLW today said that Q4 looked to be the bottom, many still carry high P/E ratios that will need to see a big jump in earnings to support the stock prices. Like it or not, we are still in a very value conscious market, particularly when it comes to the techs that have been ransacked and whose earnings and revenues are not growing in many cases. As we discuss in the online seminars, while market leaders that are growing their earnings, sales, and revenues by at least 20% a quarter, year over year can sport higher P/E ratios, those without the growth or potential for such growth have a very good chance of eventually being sold off.
Rally good but not strong.
It was nice to see a continued rally, but volume backed off on the session. There was not really enough rest to give the market a good point to continue the run with real strength. It had rallied on strong volume on the breakouts and follow through, but today volume backed off again leaving the rally without a lot of punch. Still, if you are going to have lower volume after a strong move higher, might as well be on a rally. After all, volume cannot run higher every day, but when rises occur on lower and lower volume, that means there are not enough buyers to keep pushing the indexes up. There are more buyers than sellers because prices rose (demand was still there), but the lower volume shows that the overall number of buyers is declining in the rally.
We all know that low volume gains eventually will lead to price losses as no new buyers are attracted to stocks as the prices move higher and higher. You literally run out of buyers at those prices. That is why low volume pullbacks are so important: the market needs to consolidate gains every once in awhile so prices can come back, buyers can get interested again in stocks that are better 'values' again, and another wave of buying pushes the market higher. That is what happens in a 'healthy' market.
After volume starts to tail off on a move higher, the key is whether the sellers ramp up and volume rises on selling. If that happens what you are seeing is dumping of shares to get out of the stock at those prices and not just profit taking. Dumping means institutions are selling and are not looking to add positions at lower prices. Usually when an institution is accumulating positions for the longer run it will hold most of its position on the pullbacks and then add positions at the 18 day MVA, 50 day MVA or other key support. Thus far the price/volume action on this rally has been solid. Today's action gives the hint of some weakening in the move up ahead of an inevitable pullback, and that makes us watch individual and overall price action closely tomorrow. It was not a 'get out now' signal by any stretch though we would have preferred seeing a couple of days of mild selling on lower volume before further rallying.
Grousing about valuations.
You heard it today. After three or four up sessions the inevitable arguing over valuation arises. After being burned by stocks with no earnings, analysts are quick to downgrade stocks on valuation bases. BBBY was a victim of its own success Monday when it was downgraded, and today DCLK received the same treatment from Morgan Stanley. Bob Pisani was reporting rumblings re valuation during the session.
It seems ridiculous after three days of rallying that stocks that were attractive to buyers on Friday are not overvalued. Heck, you could never have a sustained rally if that was the case. Rally three days then take them back down even lower before they would be attractive to value players once more.
What are the value mongers saying here? Simply that earnings and future earnings do not support the P/E ratios after a rally in the stock. Now in BBBY's case it was not just a short rally; BBBY has been outperforming for months on end. As noted above, leaders with real sales, earnings, and revenue growth usually sport higher P/E ratios than the market average even before they take off on their impressive runs. The better fundamentals historically support higher valuations regardless of what strictly value investors say. Maybe BBBY is overvalued; it has risen from $10 to $35 over the past four years (2 splits along the way), but it still has very solid fundamentals.
Stocks such as DCLK are not in that league. They have been plagued by massive P/E ratios with very low or no earnings, sales or revenue growth. While history tells us to more or less ignore somewhat higher P/E ratios on stocks with great fundamentals, without those fundamentals, a stock with a high P/E ratio is just waiting to get taken out at some point when the smoke clears.
Thus, the talk about valuation has some merit and it lacks some merit. In every bull run there are stocks of leadership caliber that have the numbers and the patterns to lead the market higher. Their P/E ratios are not much of a worry as long as they are not astronomical. If they are showing the right patterns and price and volume action, we are not very concerned about the P/E. For the other stocks that don't cut the mustard fundamentally, they are a risk when they run up and their P/E's balloon.
THE ECONOMY
Factory orders up.
More good news as factory orders rose 1.6% in February versus the 1.2% gain expected. Ex transportation they rose 1.2%. Take out defense and the gain was 1.7% (defense spending was down for the month). The majority of the gains were in transportation goods, computers, and electronics.
Inventories were reported down again, dropping 0.6%. A continued take down of inventories is credited with the stronger ISM numbers. Again, however, inventories are just now getting back to 'normal', pre-boom levels. That supports normal activity, but not a revved up recovery as some are anticipating. It keeps current employees in their jobs, and that is great. It does not necessarily mean many more will be higher, however.
Beige book upbeat.
The Fed reported increased economic activity in 9 of the 12 Fed districts. Employment remained 'slack' in all districts. It was more of what Greenspan said in the past few weeks: cautious optimism about a recovery, albeit less the robust. It was not a ringing endorsement, but it was better than the 'bad to mixed' reports of two and three months back.
The market seemed to digest it fairly well; there were no surprises, no taking back of the idea that the recovery was ongoing. What would be comical if not so sad were the several reports of how the Fed 'did its job well' as it was able to keep consumer demand up during the recession (and regardless of what Treasury Secretary O'Neill says, it was and is a recession). How soon they forget: the Fed was targeting the 'runaway' consumer in its war on the economy and prosperity in 1999 and 2000. When it realized it had as usual slammed the brakes too hard, it cut rates 11 times in an all out blitz to get the consumer back into the stores. Eleven times. Unprecedented and almost frantic in its actions.
Once again our leaders focus all of their attention on relatively small economic events such as ENE (it went under and there was nary a ripple in the energy market) and the few billions involved there instead of the trillions and trillions of dollars that were lost by U.S. citizens as a result of the Fed's actions that were misguided at best and intentional at worst. No hearings, no stimulus, and no sympathy. Why? Better to attack private actions than government actions. Otherwise the masses might wake up and realize that their money means little to Washington other than job security and a federal pension. Revenue shortfalls? Just get rid of the tax cuts or even raise taxes. You have to pay for those Enron hearings somehow. Now that is really helping out the citizens who already saw their futures blip away in a few short months as a result of foolish government policies that sent a healthy economy into the toilet. We need to wake up and demand that the government do what is needed to restore that wealth that was taken.
Stimulus would help. The House thinks they have a bill that will pass with such bipartisan support in the House that the Senate will have to pick it up. It includes that important 36 month depreciation provision that will make it worthwhile for businesses to invest in capital new equipment. The House thinks it will get to the President. Hope springs eternal not only on Wall Street but in some parts of Washington as well.
THE MARKET
Another rally, but it was on lighter volume and pushed the indexes right to the next resistance levels. It attempted to take another day of rest, but that changed early for the Dow and later for the Nasdaq. The lighter volume and resistance levels indicate that the rally may continue to have some trouble here. It needs a couple of days rest.
VIX: 22.03; +0.22 Still at the bottom of the 'normal' range. Again, about all this is showing right now is that options are relatively cheap.
VXN: 42.73; +0.45. Inched higher on an up session. The volatility indexes are somewhat disconnected from the market activity right now, holding steady as the market rallies.
Put/Call Ratio (CBOE): 0.65; -0.06. Falling on another rally, but still in the higher end of the range and well above the 0.4 level that is considered complacent.
Nasdaq
Started slow but reversed and rallied up to close near resistance at the 200 day MVA. Volume was lower, so we can expect some tougher sledding as it tries the 200 day MVA.
Stats: +24.11 (+1.3%) to close at 1890.40.
Volume: 1.909 billion (-7.8%). Volume backed off for the second session of gains. It will need stronger volume to clear key resistance at the 200 day MVA.
Up volume: 1.310 billion
Down volume: 546 million. Up and down volume held roughly the same.
A/D and Hi/Lo: Advancing issues improved their lead to 1.78 to 1 (1.12 to 1 Tuesday and 1.84 to 1 on Monday's follow through). Much better action, but still not blowout as we have seen on the NYSE.
New highs: 143 (-9)
New lows: 31 (0).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq rallied again toward the simple 50 day MVA (1897.81) and 200 day MVA (1907.55). Unlike Tuesday, the index held its gains moving into the close. Those two levels are the key resistance it faces ahead, and we want to see volume pick up on the move through. That assumes it is going to do that; the momentum is solid and the index has delivered follow through. Still, it could use a couple of sessions of rest before making the attempt. It has rallied 4 straight sessions, after all. It looked as if it was going to give a pullback session earlier as it traded down to 1841 on the low before rebounding. We anticipate it will have trouble at the 200 day MVA. We will watch the volume closely.
Dow/NYSE
The Dow took a day off and then ran higher, almost recapturing Tuesday's losses. Had trouble once again at 10,600 on a slight drop in volume.
Stats: +140.88 (+1.4%) to close at 10,574.29.
NYSE Volume: 1.516 billion (-2.9%). Slightly lower volume on Wednesday's session. Not bad volume, but we would have preferred to see it rise.
Up volume: 1.243 billion
Down volume: 290 million.
A/D and Hi/Lo: NYSE advancing issues shot up again to 2.65 to 1 (1.02 to 1 Tuesday and 2.4 to 1 Monday). A strong session again showing that the advance was broad.
New highs: 247 (+17)
New lows: 15 (-4)
The Chart: http://www.investmenthouse.com/cd/$indu.html
Jumped up off of the 10,400 level (looks like decent support) and headed back to try 10,600 once again. That represents roughly the top of the summer 2001 trading range and has held the index back the past three sessions. Today it hit a high of 10,601.51 and then gave up 25 points in the last half hour. Volume was lower, but not bad at all. We were looking for a bit more consolidation near 10,400, but the Dow would not wait. The advance was broad again, but the key remains ahead: it has to break 10, 600 (10,670 intraday high) on strong volume.
S&P 500:
Monday and Tuesday the big caps stalled out at the 200 day MVA (1151.43) but held close on lower volume. Today they did not test further back but instead rallied to the 200 day and that level did not pose much of a problem though volume was a bit lower. Again, not bad NYSE volume, but a bit lower. The move was solid and the next resistance is the twin tops from December and January (1170 to 1176). It has been a strong move with little rest. The twin tops are going to slow it down a bit.
Stats: +16.63 (+1.5%) to close at 1162.77.
Volume: NYSE volume was again lower, but slightly at 1.516 billion (-2.9%). Still well above average for the third session in a row in a broad rally.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Initial claims and productivity are out before the open. We don't anticipate them to have too big of an impact. That will be reserved more for Friday's employment numbers that are out that morning.
Today the indexes rallied well, and once again they find themselves right at resistance levels. Seems each resistance level is a big one. Thus far the indexes have been shooting them down, aided by some solid price/volume action. Volume is still good but it has backed off two up sessions on the Nasdaq and today on the NYSE. The indexes have come a long way in a short time and are facing tough levels with little rest. We won't turn away from good breakouts that present themselves, but we anticipate some consolidation at these next resistance levels. At this point the action has been very solid, so we anticipate the consolidation to remain orderly, i.e., on low volume, holding at or above support levels that were recently resistance.
The momentum is still upside, and we anticipate more upside action tomorrow to test the next resistance. Without volume we expect the indexes to peak out on this move and have to consolidate a bit. That is what we are expecting based on the rise thus far, the action near this resistance, and the volume. That does not mean we give up on the move; it has been solid to now. We just look at the strong breakouts for new positions and also think about some covered calls on existing positions.
Support and Resistance
Nasdaq: Closed at 1890.40.
Resistance: Not totally free of the bottom of the November consolidation range at 1875, but a good start today. The 200 day and simple 50 day MVA are next (1907.55 and 1897.81, respectively). That is just under the top of the November consolidation at 1934 to 1941.
Support: 1875 may act as support, but the break over it is new and it has not put a lot of distance from there. 1800 could provide some support. After that 1775 is some support as well, followed by the November gap up point at 1745. 1700 has held loosely. After that, there is not much until 1626, the early October gap up point and the April 2000 intraday low at 1619.58.
S&P 500: Closed at 1162.77.
Resistance: Cleared 1150 and the 200 day MVA (1151.43). The next level is 1175 marking the December and January tops. That point also marks roughly the lows of summer consolidation that runs up to 1240.
Support: 1150 and the 200 day MVA (1151.43). After that, 1125 is the hump in the double bottom, and the simple 50 day MVA is also there at 1121.59. 1100 has acted as support as recently as two weeks ago. Then 1075 to 1080 continues to hold tough, right at the March 2001 intraday low. There is a jumble of prices in a range from 1075 to 1050. 1050 was tested twice in October, holding both times.
Dow: Closed at 10,574.29.
Resistance: The top of the June, July, and August 2001 trading range at 10,600 (10,679 intraday high). 10,800 represents some resistance. That is followed by resistance at 11,000 on its way to the May 2001 high at 11,345.72.
Support: 10,400 has been providing support, followed by the January high at 10,300. Then the 200 day MVA (10,028.70) and 10,000. After that is 9730, the first January low and has provided some support. There is some support at 9691, the bottom of the November, December and January range.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
3-5-02
ISM Services, February (10:00): 58.7 actual versus 51.0 expected and 49.6 prior.
3-6-02
Factory Orders, January (10:00): 1.6% actual versus 1.4% expected and 1.2% prior.
Fed Beige Book (2:00): Up in 9 of 12 districts.
3-7-02
Initial Claims, 3/2 (8:30): 380K versus 378K prior.
Productivity-Rev., Q4 (8:30): 380K versus 378K prior.
Consumer Credit, January (3:00): $3.2B versus -$5.1B prior.
3-8-02
Nonfarm Payrolls, February (8:30): Unch. versus -89K prior.
Unemployment Rate, February (8:30): 5.8% versus 5.6% prior.
Average Workweek, February (8:30): 34.1 versus 34.0 prior.
Hourly Earnings, February (8:30): 0.3% versus 0.0% prior.
SUBSCRIBER QUESTIONS
Q: Could you not by puts or go short for NVLS if you don't already have a position? Thank you for a reply.
A: Last night we were looking at NVLS as a covered call candidate on the Daily as a stock we had previously taken positions on and was ripe for a pullback. We know that stocks will inevitably pullback no matter how strong they are, and if we are going to hold onto the stock during the pullback, we can sell some calls on it, let it fall, and then buy them back when it hits support and starts to rebound.
That is the same theory of puts or going short: the stock is going to fall. That can be played with puts or short selling as well. The usual precautions apply: is there enough room on the fall down to support to cover the spread and give us a safe enough return?
End Part 1 of 2
|
us stock market
top stock pick
|
