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3/11/02 Investment House Daily
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Investment House Daily Subscribers:
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Target hit alerts issued on DHR (+$2.65 per option) and CUB (+$5.45 per option).
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SUMMARY:
- A very quiet consolidation session, fitting for the day.
- Accounting changes abound.
- Vanguard's Jack Bogle: Stay fully invested until you are dead.
- Learn to read the market as the key to investment success.
- Team Trades
Resting with style.
The indexes have been stretched just a bit too far on this rally, and were showing signs of that late last week. The Dow and S&P started to move laterally, but the Nasdaq will still interested in playing some upside catch up as late as Friday. Today they all took a breather, closing almost flat on much lower volume.
The intraday action was constructive. The Nasdaq pulled right back down to the 200 day MVA early in the session and started to bounce back up off of that key level. The Dow and S&P also moved lower but did not hit their support before they too turned back up, following the Nasdaq's bounce. They traded sideways three hours and then started an afternoon run higher. They all ran right up to the recent resistance after the support test. They did not have enough to break through resistance today, but we did not expect them to have the ability to do that today. They pulled back, but closed in the middle of the day's trading range (the Dow held onto a bit more of its gains).
The action continues the move in the narrow trading range as volume contracts, continuing what has been healthy price/volume action during this rally. The Dow and S&P were higher, but it was not a breakout attempt from the trading range. It was more testing the boundaries, and the lower volume on such a session is good action.
More signs that the market is acting healthy: the rally up to the next resistance after the key Nasdaq support level held in the morning. At that point some short sellers closed some positions since they were not getting the move below that key level after it was broken last week. That also brought some buyers into the market that were thinking the same thing. That willingness to buy when support levels are hit is another indication that the market is acting in a much healthier manner. That is so good to see given this is the 6-month anniversary of the attacks.
Accounting actually getting to be accounting.
You wanted the numbers, you are getting the numbers. GE, CSCO, IBM, etc. are just a few of the companies that are changing their accounting methods. More and more companies are actually releasing more information about their accounting. In addition, they are going back to reporting GAAP numbers as opposed to pro forma accounting that can be pulled and stretched to fit any circumstance.
After Enron and Global Crossing, companies want to show investors that they have nothing to hide and that they are not keeping cookbooks. This is a good development for the companies and the investors. Finally investors are going to get numbers that will make it easier to compare apples to apples and figure out what is going on.
This is part of increasing the confidence of investors in the companies they invest in. It is still always critical to look at cash flow and sales. Cash flow tells the story as to whether the company can service its debts. Sales can be juggled for a quarter, but there is really nowhere to hide if sales are not there. All in all, this is a positive development for everyone.
Age old question: stay invested or time the market?
Once a week Jack Bogle, formerly of Vanguard, appears on CNBC and tells the same story: stay fully invested in the market and don't try to time things. Having invented the index fund, Bogle's mantra is understandable: keep those funds in the mutual fund so the fees can be generated. Vanguard's fees are some of the lowest in the industry, so it is very important to Vanguard that it keep all the funds it can get.
Mr. Bogle's main line: market timing is hard if not impossible to do, implying that the average person simply is incapable of learning the indicators that tell when the market is topping or bottoming. Moreover, he says that even if you get out, most do not get back in and thus miss that 'critical' turn where the market can give a 30% return as it recovers. Thus, stay invested and go to a movie.
Two points. First, the average person is not that stupid. One of the main ways to make wealth is to avoid the big blow offs that occur in the market. In February and March 2000 we wrote constantly about the distribution that was taking place, the huge percentage above the 200 day MVA for the Nasdaq, and the fact that massive volatility usually indicates a change in the trend is coming. We said it was time to take some money off the table on the techs that had enjoyed 200% runs and more from October 1999. The signals are easy to learn both at the top and at the bottom. We teach them in our seminars, and when the massive selloff came after the market reopened and sentiment indicators shot off the scale in September, we had many of our past students writing pointing out the reversal indicators as well as the subsequent follow through. They were clued in and were in there buying at the right time. Recognizing the top and taking at least some money off the table saved huge profits. Being back in at the turn in September allowed many to double their investments in just a few months.
Second, look at the numbers Mr. Bogle is saying are to the investor's advantage. If you were in a technology index fund that tracked the Nasdaq's performance, you saw the index drop 70% during the bear market. From its September low to the January high, it gained 50%. But, the 70% drop was from 5000; that comes to a 3,500 point loss. The 50% gain was from 1387; that comes to a 713 point gain. If you stayed invested during the whole meltdown and the top of the subsequent rally off the lows you were 2787 points in the red, or still down 55%. It will be a long time until the Nasdaq gets to 5000 and you 'get even.' The key is to avoid the big selloffs and then get back in when you get the follow through. You won't hit the exact top or bottom, but you will keep the sweet spot of your gains and then move back in at the right time by simply learning the big signs that show you the market is topping or bottoming. Bogle is right on one thing: you have to be a machine and exercise those rules when you see them without second guessing.
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THE MARKET
This is just what we were looking for: continued calm action on the Dow and S&P, and lower volume as even the Nasdaq joined in on the consolidation today. Volume pulled back sharply as the indexes continue to move in their recent ranges between near term support and near term resistance. Another day or two of this more languid activity, and it will be ready for the next leg up. The caveat: earnings warnings are coming. We already are seeing some with MCDT and EFII already; even with the economic recovery, there are going to still be a lot of companies shaking off the effects of the recession. The market is setting up for another good leg up, but earnings warnings are a reality it has to face.
VIX: 22.37; +0.76. Showed a pulse with a bump higher even as the S&P managed to turn a loss into a gain. 23.13 on the high, but still very much at the low end of the scale. Again it appears somewhat disconnected from the action in the market, and we defer to price/volume action in any event.
VXN: 42.05; +0.43. Slight rise on the fractional Nasdaq selling after falling 2.14 points on Friday's rally. At the high it hit at 43.70, still quite low.
Put/Call Ratio (CBOE): 0.55; -0.07. Continuing to fall as the market bias continues to be higher. This is the first time below 0.60 since January, but it is still above the 0.40 level that is considered a complacent reading.
Nasdaq
Held the 200 day MVA on an early test and then rallied up to test the top of the November trading range. It was not able to hold, but closed flat on much lower volume. Good action as the lower volume indicates it was not a reversal session.
Stats: -0.18 (-0.01%) to close at 1929.49.
Volume: 1.763 billion (-14%). Volume backed off, falling below average for the first time in 9 sessions. A good way to consolidate the recent gains.
Up volume: 959 million
Down volume: 788 million. Pretty much matched the session with up and down volume pulling closer.
A/D and Hi/Lo: Advancing issues continued to lead even on a slightly down session (1.14 to 1; 1.76 to 1 on Friday's rally).
New highs: 164 (+10). New highs still rising, new lows still falling on a so-so session. Good overall action.
New lows: 26 (-3)
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq tested the 200 day MVA (1904.03) on the low early in the session and held. When it held shorts covered some and buyers came in some and that rallied the index up to the next resistance level at the top of the November consolidation (1934 to 1941). On the high the index hit 1946.23, just eclipsing those tops, but it could not hold onto the gain. It fell 16 points to close in the mid-range of the day's range. We want to see it continue to test around the 200 day MVA on the low for two more sessions or so and then move higher. The Dow and S&P ahead of the Nasdaq in consolidating, and they could be ready to move prior to that time. If so, the Nasdaq may move with them, but the Nasdaq has been lagging their moves.
Dow/NYSE
The Dow once again tested the intraday high from the summer 2001 consolidation and once again was not able to hold onto the move as volume dried up. It is still in that consolidation range of the past 5 sessions. Several Dow stocks are showing the same action, another plus.
Stats: +38.75 (+0.4%) to close at 10,611.24.
NYSE Volume: 1.197 billion (-15.7%). Volume dried up on the session, and thus the Dow had no punch to move out past resistance. As with the Nasdaq, it was the first time the NYSE traded on below average volume in 9 sessions.
Up volume: 732 million
Down volume: 462 million. Up and down volume held virtually the same positions.
A/D and Hi/Lo: NYSE advancing issues led again, but it dwindled further to 1.05 to 1 (1.11 to 1 Friday). It is still trending higher, showing the broad market continues to climb.
New highs: 159 (-57)
New lows: 9 (-3).
The Chart: http://www.investmenthouse.com/cd/$indu.html
The Dow once again tested the intraday high of the summer 2001 consolidation (10,670) with a 10,647.09 intraday high. It fell back 35 points to the close, holding on to just over half of the session's gains. Volume backed off; the move did not have any conviction, but it is continuing the more or less lateral consolidation that started a week ago. It would be best to edge slightly lower than higher on these moves, shaking out the last sellers at this level. Then it is free to move higher; the edging higher keeps those in, and increases the possibility that the index may have to have a stronger down session during this consolidation that shakes them out. What we would look for is the index to maintain its recent range where it has found support at 10,400 even if we get a day where the Dow pulls back 100 points or so. We would also want to see volume stay at lower levels while that occurs. Today's action was not bad, but it was not what we really wanted; a selling session on this light volume would have set up a move higher in the next session or two. Now it may take that day of stronger selling and then have to rebound from there.
S&P 500:
Again very similar action to the Dow as the S&P ran up to test those two highs from December and January (1170 and 1176.55), hitting 1173.03 on the session high. It continues to range from 1150 (the 200 day MVA at 1149.76) to those two peaks as it has moved more or less laterally the last three sessions. NYSE volume was below average on the session, continuing its fall over the past week. It is attempting to form a handle to the cup that the index scratched out over the past two months after making a double bottom at 1075 and jumping up on very solid volume this month. The lower volume, more or less lateral move after that run is necessary to build strength for another move higher. As with the Dow we would like to see it back off a bit on the lower volume, shaking out those last sellers that stand in the way of another move higher as it approaches that resistance again. As long as it can trade above 1050 on this consolidation with volume remaining low on the selling sessions, that is a good indication the consolidation is still taking place and the move up is building momentum.
Stats: +3.95 (+0.3%) to close at 1168.26.
Volume: NYSE volume eased off to 1.197 billion (-15.7%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
A quiet session which is what we wanted, though we would have preferred to see the Dow and the S&P close flat to slightly lower. Still the action continues to be healthy. Seems everyone is looking forward to the economic juicing Q1 earnings with the talk of a greater than expected GDP. There will be some easier comparisons no doubt, but the market could be setting itself up for some disappointment in technology stocks. They have been noticeably lagging the Dow, S&P, and the NYSE in general, so the potential for some downside disappointment is there. For now the market is acting as a healthy market should act with a broad range of stocks moving higher and past breakout points even as it moves laterally.
Tomorrow is quiet from an economic standpoint with no scheduled reports. It is a good day for the market to consolidate again, but it has been drifting higher on days where there is no news. That is certainly more bullish than the past two years where it would drift lower when there was no news and then really tank when the bad news hit.
Again we feel the Dow and the S&P need another day or two of consolidation to really set up the move higher, but the market does not necessarily do what we think is best for it. Good price/volume action, very solid A/D line over the past two months, and holding well over near term support indicate the market is doing fine for now. We continue to see stocks with good patterns and underlying numbers moving higher on strong volume. The bias is still definitely up after the good rally and during this consolidation. There will be sectors that get hit with earnings warnings over the next two weeks, and we anticipate many of those will be in technology as that sector has not seen the pickup in business many investors are hoping for. The Nasdaq is acting better, but we will have to see if it is strong enough to overcome some sector disappointments.
Support and Resistance
Nasdaq: Closed at 1929.49
Resistance: The top of the November consolidation at 1934 to 1941. After that is 1980 (the December gap up point) and some minor resistance at 2000. Then the January top at 2098.88.
Support: The 200 day MVA just broken Friday (1904.03). 1875 has acted as support in the past and represents the bottom of the November consolidation range. After that, not a lot of room before 1800.
S&P 500: Closed at 1168.26
Resistance: The December high (1173.62) and the January high (1176.97). That point also marks roughly the lows of summer 2001 consolidation that runs up to 1240.
Support: 1150 and the 200 day MVA (1149.76). After that, 1125 is the hump in the double bottom, and the simple 50 day MVA (1128.16) and exponential 50 day MVA (1126.34) are converging. 1100 has acted as support as well.
Dow: Closed at 10,611.24
Resistance: The top of the June, July, and August 2001 trading range at 10,600 (10,679 intraday high), is still holding tough for now. 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 (10,020.55) and 10,000. The 50 day MVA (10,048.29) is joining up at that level.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
3-11-02
Wholesale Inventories, January (10:00): -0.2% actual versus -0.5% expected and -0.5 prior (revised from -0.6%).
3-13-02
Retail Sales, February (8:30): 0.3% versus -0.2% prior.
Retail Sales, ex-auto, February (8:30): 0.4% versus 1.2% prior.
3-14-02
Business Inventories, January (8:30): -0.4% versus -0.4% prior.
Initial Claims, 3/9 (8:30): 376K versus 376K prior.
Export Prices ex-ag., February (8:30): 0.1% versus 0.1% prior.
Import Prices, ex-oil, February (8:30): 0.1% versus 0.1% prior.
Current Account, Q4 (8:30): -$101.5B versus -$95.0B prior.
3-15-02
PPI, February (8:30): 0.1% versus 0.1% prior.
Core PPI, February (8:30): 0.1% versus -0.1% prior.
Industrial Production, February (9:15): 0.2% versus -0.1% prior.
Capacity Utilization, February (9:15): 74.3% versus 74.2% prior.
Mich. Sentiment-Prel., March (9:45): 93.0 versus 90.7 prior.
End Part 1 of 2
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