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us stock market, stock watch
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3/18/02 Investment House Daily
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Investment House Daily Subscribers:
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SUMMARY:
- Indexes unable to capitalize on positive brokerage views, turning back at resistance.
- Volume tapers off on light action ahead of Tuesday FOMC meeting.
- Market breadth positive despite negative Dow and S&P close as small and mid-cap stocks continue to perform well.
- Earnings warnings running at a slower pace.
- Subscriber Questions
- Team Trades
Analyst mood turns positive.
Last week most analyst comments and reports were bearish on the economy and stocks. At most they conceded that the recovery was coming, but were cautious about its strength. Most that spoke last week were concerned about valuations.
Monday brought out some much more glowing comments. Merrill was downright positive on the economy, projecting 5% to 6% annual growth in Q1 GDP, the highest range we have heard to date. Bear Stearns said the semiconductor foundries (those that churn out the chips) they talked with sounded very bullish and BSC predicts they will exceed their Q2 estimates. The book to bill report is out Tuesday after the close, and it is anticipated to be much stronger after NVLS stated last week it would beat its earnings expectations. Smith Barney, after issuing some bearish calls the prior two weeks, joined the upside mood when one of its economists issued a call that the economic recovery was going to be front end loaded, i.e., the bigger gains in the economy would be early as opposed to steady growth or growth several months down the road. SSB accordingly raised its S&P 500 earnings estimates by $1.25 for 2002 and again for 2003. We had to look again just to make sure it was not some early April Fools joke. It may turn out to be, but the brokerages seemed serious.
Indexes cannot take advantage of the good mood.
Even with the shift in analyst sentiment today, the indexes could not break near term resistance. All three major indexes gapped higher and quickly tested their trading ranges or other resistance. The Nasdaq tried its 200 day MVA, the Dow the top of the summer 2001 trading range, and the S&P its tops in December and January. None of them could muster the buying volume to push them through.
There was little volume to back any breakout. Thus, even if they did break the resistance, we could not have put much faith in the move. Instead they sold back, moved laterally and finished slightly higher or slightly lower depending upon the index. There was no churning, distribution, accumulation, or otherwise. It looked more as if things were pausing after Friday's solid upside move, waiting to make sure the Fed does more or less what is expected. Not a great breakout, but not a reversal either. The price/volume action remains solid; as we said last week, now we have to see if the indexes can make the move now that they are back at resistance.
Breadth remains strong: indexes may not have moved, but small and mid-caps doing well.
While it is important to keep a close eye on the big three indexes and how they are performing at support and resistance and how price and volume are acting, they do not tell the whole story. The big indexes are market cap weighted; if the big stocks do not perform well, the indexes don't either.
The A/D line on both the NYSE and the Nasdaq, however, have enjoyed an almost uninterrupted climb since the second week in February. That on top of a steady climb off of the September 2001 bottom. That indicates that even on days such as Monday where the Dow and S&P closed lower, advancing issues outpaced decliners. That means the smaller and mid-cap stocks are moving up well, and did so even when the big indexes sold off in February.
That is why we have been running plays on those quite a bit over the past several months, and it is a very good sign for the overall market. The A/D line got a bad name in 1998 when the indexes were advancing steadily but the line itself was staggering lower. The big names were leading, gathering in the majority of the money. I remember making a shift almost totally to big names back in 1997 as the A/D line was showing clearly (along with other indicators such as volume) where the money was going.
True it is not necessarily a positive long-term attribute to have a narrow A/D line, but as far as a timing mechanism, it is a poor one. It helped point out the direction money was moving and where we should be looking. After that we had to look at the individual stocks to see when they were at the right buy point, etc. It also told us that the majority of stocks were going down, and that at some point the big stocks would do the same. It was years off in telling when that topple would eventually occur. Same right now: it is showing us that the smaller stocks are on the whole doing better. It does not tell us just to go out and buy as many small and mid-cap stocks as we can. We still have to look at the accumulation, the pattern, the earnings, and the sales.
THE MARKET
Friday's move on stronger volume made the breakout close enough to taste, but it did not come today. Early enthusiasm was tempered with a wait and see what the Fed does attitude and a hope for a bit clearer picture on earnings. The book to bill ratio is out after Tuesday's close, and it may lend more credence to NVLS' upbeat outlook and Bear Stearns' view on chip makers. When it comes down to it, the proof is in the earnings. The indexes are trying to build for a breakout of their two-week consolidations, and the rise in the indexes is based on a belief that earnings will expand and justify current multiples and higher future multiples. Prices anticipate earnings in the future, not for tomorrow. Investors from the retail investor to the institutional investor are looking for the next signal that the earnings recovery is underway in addition to the economic recovery. One thing to note: earnings warnings are running a bit lighter. They are still coming, but they started to slack off in December. We still expect more warnings ahead, but with negative warnings down thus far and positive alerts are up, that hopeful for the bulls. If investors get the signal that earnings are improving, that will trigger a move higher; whether it is warranted in all cases is very questionable when many of the big names are not expanding their earnings and sales significantly. What we look for are those stocks in position to give us bigger moves when the overall market again gives the breakout or breakdown. Right now it is still building a positive upside pattern, but again, the proof is in the high volume breakout.
VIX: 20.75; -0.02. Matched the S&P in going nowhere though holding at that very low level that would indicate market complacency. With price and volume action still looking healthy, the VIX keeps us wary. We want to see strong moves, not uncertain steps.
VXN: 38.75; -1.51. Hitting levels that have not been hit since the index was established back in January 2001. It has been backdated using existing data, and it is now below the August 2000 low and is heading toward the 34 to 35 level that marked the bottom of the summer to fall range in 1999. Based on this indicator alone, one would conclude the Nasdaq was set for a fall. Problem with the volatility indicators, however, is that they do not always set up exact correlations with the indexes they track. Right now the index has been moving laterally and the VXN has been falling. It even fell as the Nasdaq fell early in the year. It is not showing a real correlation right now. Thus we watch the price/volume action and resistance and support closely, along with how the big names in the index are looking in their price patterns.
Put/Call Ratio (CBOE): 0.64; 0.00. Moving nowhere after hitting 0.90 last Wednesday and falling on the rally higher to the top of the trading range. Still at a level that suggests no complacency.
Nasdaq
Added a single digit gain to Friday's upside action, but it turned back at the 200 day MVA on the high. Friday's volume was up, but was still below average; today's lighter volume did not show much of anything. The Nasdaq did not garner the volume the NYSE did Friday, and its move higher is thus more problematical. This little bounce has not been much; again, it appears more ready to be led higher than making its own way up. Some big names again had very difficult times: EMLX, BRCD continued their recent fall on stronger volume. This is one of the factors you look at: how are the stocks that make up the index performing? The Nasdaq big names need help.
Stats: +8.76 (+0.5%) to close at 1877.06.
Volume: 1.547 billion (-8.8%). Volume backed off on the small price gain; not the action you like to see, but today was not a day the index was making big moves. It stalled at resistance, and the fact that volume faded as well was good. At resistance, no high volume reversal is good action. Friday's volume on the upside move was higher, but not a barnburner. There is not as much money moving into tech right now, and that is a problem for the index. It has been pulled along by the Dow and S&P, and its price/volume action has improved as well. Thus it can make a decent breakout to support the other indexes if they breakout as well. As for leadership, it is not really there. Some good earnings news may attract more dollars to the big names, and that is how it is going to breakout if it can muster the move.
Up volume: 728 million
Down volume: 748 million. Still very tight range between buy and sell volume. The market went nowhere, and the buyers and sellers were evenly matched to show it.
A/D and Hi/Lo: Advancing issues lost a bit of their lead at 1.22 to (1.25 to 1 Friday). Overall advancers continue to hold the edge, but it lacked real punch when it rallied in early March. Another sign the index is not in leadership position.
New highs: 190 (+35)
New lows: 21 (-11)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Gapped higher to 1882.73 and ran to the session high early (1893.26). There it had trouble with the 200 day MVA (1894.10 at today's close) and turned lower. On the low (1861.11) it under cut the 50 day MVA (1866.34; exponential) but held the February 13 interim top at 1859.16. It more or les did that last week during that pretty dreadful price loss; 1850 to 1859 is trying to hold as some support. A double test of that level mid-day bounced it higher in the last two hours, but it still gave back some of he afternoon gains; it was a decent bounce, but it lacked any real buying commitment. Much like the day as a whole: a decent bounce but no real buying. It is holding on for now, but it needs the Dow and S&P to rally sharply to give it more upside life over the 200 day MVA.
Dow/NYSE
The Dow poked a toe at the top of the 2001 summer trading range (10,670), but it was not ready to make the breakout move either without a bit more information on the economy and some earnings. It remained comfortably within its consolidation range, selling back modestly on lower volume. It is a good looking consolidation.
Stats: -29.48 (-0.3%) to close at 10,577.75.
NYSE Volume: 1.157 billion (-22.5%). Volume peeled way back, dropping back below average to the lowest non-holiday volume of the year. Friday's solid volume bounce had a something to do with buying and something to do with options expiration. Monday's volume had a lot to do with taking another breather before the FOMC meeting. The selling on lower volume continues the good price/volume action, showing that there is still accumulation ongoing during this lateral, 2-week move.
Up volume: 612 million (down just under 400 million).
Down volume: 530 million (up about 120 million).
A/D and Hi/Lo: NYSE advancers still led on a down session, but fell to 1.26 to 1 from 1.46 to 1 Friday. Still good to see the continued uptrend in the line even on a day the Dow and S&P 500 were down.
New highs: 203 (+8)
New lows: 30 (+6)
The Chart: http://www.investmenthouse.com/cd/$indu.html
Friday's action tried to follow through with a test of the top of the trading range (10,670; high 10,661.06), but it was not ready to move out of the 2-week lateral consolidation that follows the breakout of the 8-week cup with handle that pushed the index over the January high at 10,300. The price/volume action has been very good, and that indicates that no one is dumping shares during this lateral move. That is an indication that it has plenty of support to break it out higher over the top of the summer 2001 trading range. Again, until we see the breakout, it is all just a pretty picture. It has to make the move on strong volume or it will most likely fail. A failed move carries it down to 10,300 first. For now we like what we see in the pattern and we do anticipate the breakout. How long it can carry the index is another question entirely. For now if it does make the breakout working on some resistance at 10,800 and then at 11,000 will be a major task.
S&P 500:
The S&P action mirrored the other indexes, but as its increase Friday was the largest, its loss Monday was the smallest (-0.1%). It too tested resistance on the high (1172.73, December and January tops at 1173 and 1176, respectively), but then pulled back on lower NYSE volume, holding well above support at 1150. It continues its 10-week cup with handle with good price/volume action as volume rises on up sessions and falls back on down sessions. A breakout will start it on the next leg of its quest off of the September bottom, but as with many computer games, the next level does not get any easier. It has some minor resistance at 1183, and then some real issues with 1240 and 1260 to 1270. One step at a time; recovery from a real tail kicking takes a lot of work. You have to sit down and rest after making a good move. So far it is managing to make the incremental moves higher, but it has to make this breakout over this resistance pretty soon as the lateral move is getting fairly elongated.
Stats: -0.61 (-0.1%) to close at 1165.55.
Volume: NYSE volume dropped 22.5% to 1.157 billion shares as the S&P held steady; no churning, no dumping of shares.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Two big pieces of information come out tomorrow: the FOMC decision on interest rates and the book to bill numbers after the close. The first gives some certainty as to where the keeper of the punchbowl stands; the second gives a clearer picture of where the earnings recovery stands for an important part of the economy, i.e., the semiconductors.
There is the usual speculation about what the Fed will do. The only things people can agree on is that it won't raise rates and it won't lower rates. Thus, the game is between the lines. Greenspan has said the economy is recovering. The Fed will have to acknowledge that. Greenspan has said the recovery most likely will not be as robust as previous recession recoveries because the consumer was so strong; no pent up demand to be unleashed. The Fed will in some way have to acknowledge that. The Fed has also said not to take too much stock in its bias moves anymore; it is no longer trying to send a signal with those but just to let everyone know where it stands right then and there based on the economic data it has before it. That means if the economy slows down over the next month, what they say at this meeting does not mean a whole lot. Ultimately the Fed has to take the foot off of the gas. A Fed Funds rate of 1.75% is still stoking the economy. At the earliest that will be done in June, but probably not until the second half of the year. The Fed can raise rates and still have no fear of inflation at this point simply because the Fed Funds rate is so low. Just because it may raise rates does not mean it is breaking out in hives over inflation fears.
So, we anticipate the Fed to say the economy is improving and that it needs to stay vigilant to both signs of backsliding while being careful not to overstimulate the economy. We don't think that means a change to neutral bias and really cannot see a tightening bias. That would really shake up the market and the Fed cannot afford to do that. It has stepped on the gas hard, and it is going to say that is working and it needs to be ready to lighten up on the throttle. That certainty instead of all the speculation will help investors get off the fence that they were sitting on today.
If the Fed is received positively, we expect investors to anticipate more good news on the book to bill, and that will help push the indexes toward the breakout points. We feel the breakout will occur this week unless some really bad news rocks the market. Remember, the Dow and S&P are set up well; the Nasdaq is struggling and its biggest names are still subject to the most recent news story. When you have shareholders that are ready to jump out when bad news hits, it is hard to make sustained advances. The lack of accumulative patterns on the Nasdaq remains its biggest problem as there is not a lot of faith that the big tech names will make their earnings.
End Part 1 of 2
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