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us stock market, trend trading stock
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3/13/02 Technical Traders Report
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SUMMARY:
- Retail sales, downgrades, estimate cuts, IT surveys and Greenspan all blamed for another round of consolidation.
- Nasdaq still remains the question mark as it slides yet lower on lower volume.
- Despite 'disappointing' retail sales, economic numbers still solid if a bit mixed.
- IPO's and 'excess' supply.
- Team Trades
The LU and NOK earnings comments Tuesday night piqued analyst comments about stocks this morning. A good entr e to lower estimates and downgrade. Morgan Stanley downgraded semiconductor equipment stocks, JPM cut estimates on INTC and AMD, and CSFB cut GE estimates based on Calpine cutting its 34 turbine engine order. Goldman also announced the results of its IT survey, and it was gloomy with a longer term recovery, maybe not until 2003.
Stocks seemed to shake off the analyst comments, at least until the retail sales numbers came out. They were up, but they were well below expectations. After a series of better than expected economic reports, the street was conditioned for something better. Very similar to the 'whisper' number BS that was rampant in 1999 and 2000. That made the numbers a double disappointment: did not meet expectations and did not beat expectations. We always say that investor habits never change.
The most ridiculous analysis today: Greenspan was 'not as optimistic' in his speech today. He said the same things but did not have all of the language about an ongoing recovery. Yes he said the recovery in investment might be slower, but he said that in at least the prior two speeches. It was not as warm and fuzzy, so it must mean he has gone colder on the economy. Time to sell. Reminds me of the 'body language' comment made after an analyst conference; the CFO was not as animated in the past, so there must be something up. Maybe his clam chowder did not sit well on his stomach. Maybe the analyst was just wrong in his perception. Better issue a story before the facts come out.
NYSE stocks still in consolidation as Nasdaq slides lower.
Of course none of this was really the specific reason why there was selling. The indexes made a good run. Short term profit takers were taking profits, but that is not the sole reason either. There is concern about earnings as well. There is also options expiration Friday, and there is some adjustment from that. Right now, there is a fight going on to see which way the market is going as the S&P and Dow move laterally consolidating their gains and the Nasdaq tries to hang on. It is not heavy warfare right now as volume has been declining on the move. That gives us some comfort outside of technology that stocks will win out to the upside after the good moves off the test.
As noted last night, the Nasdaq remains the big question mark as it has lagged the entire move up. It is also selling more on the way down as the other two indexes consolidate. It is simply not in as good of shape as the other indexes because its major components, those large cap technology stocks, are in weak patterns and move subject to the news of the day. When stocks are not showing patterns that indicate accumulation, they get jerked back and forth by the news each day. Now today was not a really bad day; volume was again lower and very much below average. It is just that the techs are not exhibiting the same patterns of at least some strength that the other indexes are. We discussed it tonight in the analyst meeting: if you want to go after a tech stock, it has to be a really juicy pattern and don't set the target too high.
THE ECONOMY
'Disappointing' retail sales.
Sure sales were below expectations, but they were still rising. Just like stock prices and volume, it cannot surge past expectations every month. The market did not like, however, and it helped turn the futures around in the morning. It shows how desperately important the economic recovery is viewed. Sales were +0.3% for February when +0.9% was expected. The core was up 0.2% versus +0.5% expected.
It was not all bad. Consumers are going discount still. The recession pushed them into stores such as WMT and TGT in record numbers. The housing boom had them buying Maytag and Whirlpool appliances from Best Buy, Home Depot, etc. Consumers went discount, and they kind of liked it. The home buying surge has impacted retail. Furniture sales +5.8% over February 2001; Electronics (big screens, etc.) +8.4%. The housing market has had a trickle down effect on the rest of the economy. Can it continue to help?
Weekly mortgage activity shoots lower.
Maybe not. We have been concerned that the housing boom was unsustainable and were getting word from real estate contacts that lots of houses were built months back were still empty. It varies based on the price range, but there were more houses not selling as fast as before across the board.
Higher rates are starting to bite into the market though they are still historically low. There was a surge to close and refinance at the end of 2001 and earlier this year when rates took that quick dip. Last week mortgage applications fell 24%. Refinancing applications -16%. A week does not make a trend, but that is two out of three weeks where they moved sharply lower. Choppiness is a sign of potential trend changes. If the housing market cools, that cuts into money released from refinancing as well as additional spending on getting the homestead well stocked.
ECRI looking solid.
This is similar to the LEI (leading economic indicators), but it gives a more sensitive reading. Its long range indicators that were the pits in the mid-2000 are hitting a 52-month (4 year+) high. Indeed, they are better than they were in 1991 when the economy was moving out of that recession. Now that may not be saying a lot as the 1991 recovery was one of those that took some time and was called a 'jobless' recovery. Still, it lead to the great moves in 1994, and it is showing a stronger recovery this time around. No complaints there.
IPO market and excess supply.
It is talked of often and tonight CNBC had a special report on the revival of the IPO market as several companies have recently hit the market and more on the way. The argument is that this is an extra supply of stock and it competes with existing issues for a limited pool of funds. That is supposed to hurt either the current stocks or the IPO's.
Does it hold water? On the face of the argument it looks plausible. Heck, as a lawyer I could pretty much design an argument for any need given a set of facts and law. Historically, it doesn't really work.
What sectors of the market really grow? I mean really grow, doubling, tripling, etc. It is the new technologies, new industries, new ideas that are brought to the market in the form of new companies. When do these ideas tend to hit? When the economy is doing well enough to provide money for these startups. Because these companies are cutting edge, leading the way with new technology, they tend to see their sales and earnings jump. They lead the market in price gains as well. IPO's typically lead in bull markets because they are growing sales and earnings at rapid rates and their stock prices climb to keep ahead of that pace. CSCO, DELL, MSFT, AAPL, INTC are all names that were IPO's in new technologies that led the technology boom.
History shows these companies are leaders in new bull markets. Thus it is not really a bad thing that they are coming to the market at all. History says that when the economy is good enough and the market stable enough to see the IPO market heat up, that is a good sign for the future. Yes some stocks will languish as money moves to the new issues; that is the way all markets work: those areas that are growing attract the money. That does not mean the market collapses because IPO's are actually on the upswing. History indicates the opposite.
THE MARKET
This is coming up to the real test for the market: is it ready to move higher with some improved corporate earnings and the prospects of more in Q2 to Q4, or is it going to fold up shop and go home? Today it was still undecided but nervous, sliding lower again with the Nasdaq sporting the largest loss as usual though it did move lower on once again subdued volume. The Dow and S&P are still in their consolidations and holding above support though they sold on volume equal to Tuesday's below average volume. That volume was skewed, however, as LU traded 223 million shares; its average volume is 21 million. Without the massive turnover attributable to LU, NYSE volume dropped a significant 200 million shares. The Nasdaq and the SOX are the continued problem. They are underperforming again even if not in out and out distribution. They are the drag on the other indexes as they try to form good consolidations and hang onto support. If the S&P fails to hold onto this support it could wind up at 1125 again, a very damaging move to the recovery attempt. From here the S&P looks somewhat bullish and we do not expect it to fall; expectations, as we have seen, can be your enemy.
VIX: 21.97; +0.66. Slight rise on the selling, but not much of a move. It continues to hug the flat line in the low end of the 'normal' range whether the S&P 100 rises or falls. That is the disconnect we have been talking about.
VXN: 43.26; +0.25. Another small gain on the selling, but it too is going nowhere fast. Some are saying this is a sign the rally has to fail, but the rally started with the same low volatility as well. It did not give us much encouragement that the move has legs, but the price/volume action is not showing distribution, i.e., institutions dumping their shares.
Put/Call Ratio (CBOE): 0.90; +0.25. Big jump in put activity, really building on Tuesday's increase in that selling. Even if volatility is flat, the put/call ratio is responding to buying and selling action on the indexes. In the past three months, readings of 0.88 or higher have been able to spark rallies. Two closes over 1.0 in late January and February helped spark the rally up off of the test. We like what we see here.
Nasdaq
More downgrades and estimate cuts had their impact on the techs that are already subject to the news of the day. It has given back 100 points from the intraday high just three sessions ago. Volume has been lower, and new lows are mild. It has been like a slow bleed. It is now at a level where it holds or folds. So far it has held together internally. If it breaks below 1850 and holds below it, we will most likely see volume jump up.
Stats: -35.09 (-1.8%) to close at 1862.03.
Volume: 1.664 billion (-4.8%). Volume again tapered on the downside action. That continues to show that shares are not being dumped, but a break below 1850 could prompt some stronger selling.
Up volume: 329 million
Down volume: 1.317 billion. Sellers still in charge of the day.
A/D and Hi/Lo: Decliners continued to lead but at a lower 1.34 to 1 ratio (1.38 to 1 Tuesday).
New highs: 96 (-18). New highs finally slowed down, but it has been a long time.
New lows: 31 (+8). New lows finally grew on the selling, but not by much. Even this round of selling is not bringing out a lot of dumping.
The Chart: http://www.investmenthouse.com/cd/$compq.html
More negative news helped tack on another 1.8% loss. The volume is light, but the stocks that make up the index don't have the great patterns to withstand bad news; bad patterns = overhead resistance = disgruntled shareholders. After a rally that did not quite reach the previous highs when the shares were bought, bad news and some selling pressure often makes them throw in the towel. The question is, how many are willing to hold or fold? Thus far the volume has been light, meaning that even though more are selling than buying on the day, overall most are not dumping their tech shares just yet. That holds out the kernel of positive light for the index. 1850 has held as resistance and as support in the past. The Nasdaq cannot afford to close below it by much; if it does, it will most likely bring out some of those sellers. This is the earnings season worries coming to bear. If there is no belief the stocks will make the numbers, the index is going to go down to 1775 or lower. It has not thrown in the towel yet and many are negative on it. Could be a head fake, but we are not going to be jumping all over tech right now.
Dow/NYSE
That gradual edging higher was setting it up for a bigger blowoff as we suggested, and today it did just that. Volume was higher, but with LU accounting for an extra 200 million NYSE shares, we don't look at this as a distribution session.
Stats: -130.50 (-1.2%) to close at 10,501.85.
NYSE Volume: 1.339 billion (+0.00%). Volume was flat according to tonight's NYSE report. Factoring out 200 million from LU indicates there was lighter selling volume.
Up volume: 408 million
Down volume: 939 million. Volume was equal to Tuesday, but sellers gained strength.
A/D and Hi/Lo: NYSE decliners increased their lead to 1.27 to 1 (1.03 to 1 Tuesday). No big gain but starting to show the overall market is weakening a bit.
New highs: 108 (-19)
New lows: 19 (+5)
The Chart: http://www.investmenthouse.com/cd/$indu.html
Those slight gains where the Dow edged higher instead of slightly lower were leading up to a bigger blow off, and that is what we saw today. It is still 100 points ahead of 10,400 that marks the bottom of this range. The LU trade skewed the volume numbers but there was a reason for the LU trade: earnings are going to be worse. Earnings drive the market and the market was responding to some negative earnings news. Thus we have to put some suspicion on the Dow as well here. Maybe some good economic numbers Thursday or Friday will turn things back (more better than expected) to the upside. The index has certainly performed better than the others, but it is has not made the breakout and its consolidation was not picture perfect as it was originally looking. It is flashing a caution sign and its technology components could start to be a drag once again with more analyst downgrades and earnings warnings in technology stocks. It has to hold the line from 10,400 on lighter volume from our perspective.
S&P 500:
The big caps held onto support at 1150 today, but tested it two times before holding the line. They still closed near the session low (1151.01). That keeps it right above the 200 day MVA (1148.34) and 1150 that is a rough support and resistance level from past tops and bottoms. This is about as far as we want to see the index pull back on this handle or consolidation of the move out of the double bottom pattern from January and February. The picture of the pattern looks really nice, and the price/volume action has been very good. Today the LU trade suggested there was some dumping ongoing in NYSE stocks, but looking at most stocks, they generally pulled back on lighter volume. It seemed LU specific to a certain extent, though all techs suffer when a big name comes out and warns even if it is an expected warning from a stock that has warned every quarter for two years now. Again we need the S&P to hold at 1150 or above the 200 day MVA on a closing basis and then the rally to start. It still looks good, but anticipating earnings warnings and actual tech earnings that are most likely going to disappoint in several cases, there could be trouble.
Stats: -11.49 (-1.0%) to close at 1154.09.
Volume: NYSE volume held flat at 1.339 billion shares.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Business inventories may be the most significant economic report tomorrow along with the weekly jobless claims. Even though they have been trending lower, a higher than expected number could upset the apple cart again.
Right now it is time to see if the indexes hold here. If they don't and volume comes in we will look at some puts on the Nasdaq for a quick ride lower. There are still strong stocks out there that are still performing well. The market is at a crossroads now and it will show us by the weekend more direction. Options expire Friday, and that will help clear some of the deck as well.
Everyone was bummed after the close; another down session, retail sales lower, me oh my. Futures were down as well. We are not going to freak out if the indexes (Nasdaq and S&P in particular) undercut the support levels we want to hold. We will watch and see if they recover near the close. Thus far the indexes have rallied off the bottom, corrected back to test that move, and have rallied up to resistance levels with confirmed follow throughs. They have yet to distribute since doing that. Indeed they have pulled back on lower volume after strong runs up to that resistance. That is still very solid action. The horizon is darkened by earnings worries and whether technology will be up to speed. It won't be in Q1. The market looks beyond its now, however, in pricing stocks. There are the tax cuts, monetary stimulus on a grand scale, solid economic numbers (some better than in past recessions, others not), and more stimulus to come with some business investment (not much, but some). Those are positives that cannot be overlooked in the big picture.
Support and Resistance
Nasdaq: Closed at 1862.03
Resistance: 1875 is the bottom of the November consolidation. The 200 day MVA (1900.30). 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: 1850 can act as some support (February interim top at 1859). After that, hello 1800 to 1775.
S&P 500: Closed at 1154.09.
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 (1148.34). After that, 1125 is the hump in the double bottom, and the simple 50 day MVA (1128.19) and exponential 50 day MVA (1128.90) are converging. 1100 has acted as support as well.
Dow: Closed at 10,501.85
Resistance: The top of the June, July, and August 2001 trading range at 10,600 (10,679 intraday high), is still holding. 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 (10,013.03) and 10,000.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
3-13-02
Retail Sales, February (8:30): +0.3% actual versus +0.9% expected and -0.2% prior.
Retail Sales, ex-auto, February (8:30): +0.2% actual versus 0.5% expected and 1.2% prior.
3-14-02
Business Inventories, January (8:30): -0.4% versus -0.4% prior.
Initial Claims, 3/9 (8:30): 375K 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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