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3/20/02 Stock Split Report Market Summary
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SUMMARY:
- No news is treated as good news today.
- INTC estimate cut sends unstable techs lower on slightly rising volume.
- Techs win tug of war today as Dow and S&P could not capitalize on their patterns.
- Many sectors still look fine.
- Housing starts and permits soar.
- Subscriber Questions

Everything viewed negatively today.

No amount of good economic, earnings, or other positive news today could turn back the selling. Housing starts at record pace and in some cases at levels not seen in over twenty years. Oil inventories lower and crude prices were higher, but energy stocks were sold. Several companies, including GS, BSC, FDX (Federal Express), and GIS (General Mills), reported better than expected earnings, but they too could not benefit. Other than the housing sector, these stocks did not tank, but their good news was not well received.

Analyst view of INTC sets negative tone.

It was the negative story of the day that had the most dramatic impact. Jonathon Joseph of SSB issued a comment where he cut Intel's Q2 estimates citing seasonal factors. Q2 is usually a softer quarter after consumers buy computers in Q4 and then look for 'deals' in Q1 as PC sellers try to clear off the excess inventory. Sounds plausible, but why didn't Joseph already have this factored into his estimates? I mean, if it is a seasonal thing, even the government makes adjustments for that in its reports. SSB surely is at least as savvy as the government in putting together its projections. Either SSB was sloppy in its preparations (should you be using them in that case?) or Joseph, whom we had not heard from since Q3 when he upped INTC's estimates based on, you guessed it, seasonal factors, was looking for some headlines to remind everyone that he was still there. Is it really necessary to adjust estimates based on seasonal changes? Surely estimates would already include seasonality; they would only need adjusting if something unforeseen developed. Seasons vary in intensity, but they always come and go. Looks like Joseph felt it was time to grab some headlines again.

In any event, the market, after it was already nervous over the Fed's bias change, took to the INTC news much like Chicken Little, and sold from the opening. Again, good news was not what investors wanted to hear. Fed goes to neutral = rising interest rates = slowing economy = slow stock market. That was the simple (not 'fuzzy') math used. Wrong, but it was simple.

As we discussed Tuesday, the Fed has a lot of room to raise rates and still stimulate the economy. It is like having the pedal to the floor and going 100 mph and then backing off a bit on the gas so you are only going 90 mph. And the Fed did not raise rates at all; it just said that based on the data available as of 2:15 p.m. ET Tuesday it felt that the risks of economic backsliding versus inflation were balanced. No rate hike, and indeed the frantic 11 rate cuts show that Greenspan has no intention to screw up again as he did in 1999 and 2000. He won't want rate hikes until he sees employees going back to work in droves.

Now the Fed's switch to neutral bias does not reflect the real world, but we have to remember that the Fed does not live in the real world. It warned of non-existent inflation for over a year and then started fighting the elusive enemy (hard to fight what is not there) in 1999 with rate hikes that crushed the stock market first (foreshadowing) and then flattened the economy. 'Soft landing' is what the Fed ring-kissers called it. Right. It is normal to land a jet full of passengers halfway to your destination, sit around for a year until the passengers and the airlines go just about bankrupt, and then rev up the engines and finish the flight. Soft landing? What was the point in trying for a soft landing when no landing was needed? Might as well have crashed and burned; many people did just that anyway. Revisionist history books will say Greenspan's last great effort was to stave off a recession by making aggressive rate cuts, etc. As we once said, that is like starting a fire, letting it burn for awhile, and then putting it out to get the hero's treatment. What a waste. Two years of pain that wiped away 10 years of hard work and gains. Did we forget to say 'thank you' to the Fed for rescuing us from recession?

Nasdaq's poor patterns win the day.

Okay, so a little satirical bitterness comes to the surface every once in awhile. Levity sometimes helps relieve the pain. It does not, however, erase what the techs did today nor what they have been doing. We have been talking about how the Nasdaq was susceptible to the poor patterns of the big cap names that dominate the index' moves. When the stocks that control an index' fate are in poor patterns, the index has a tough time making important headway. When stocks are in poor patterns, they are susceptible to news, good and bad.

Why? Because there are a lot of owners that bought at higher prices. They are not happy. They would like to get even, but there comes a point where the next bad news story is enough and they just say 'sell the damn thing.' That overhead supply is triggered on a bad news story, and the big stocks are sold down again. They have to get to a point where everyone just says 'so who gives a _ _ _ _?' when the bad news comes out (look at GLW, CIEN, and other fiber companies; they don't sell much anymore on bad news because everyone expects bad news). Then they can work along quietly, rebuilding while flying below everyone's radar. Maybe they recover, maybe not. The point: investors sell them and then forget about them. That is how the market works sectors through recoveries.

INTC was hammered on the news, and MSFT, BRCM, EMC and a host of other big tech names went down with it. The Dow was hurt by INTC, MSFT, IBM, HWP, i.e., its tech components. In short, the Nasdaq won the day because the techs in their crappy patterns sold more than the cyclicals, retailers, financials, and other stocks in good patterns could rise. The S&P and Dow had a chance to breakout Tuesday, but failed. When that happened, the negative tech news was able to trigger a pretty broad selloff: the NYSE A/D line was 2 to 1 in favor of decliners. That has not happened in a long time. Failure at resistance is tough to handle. The sellers punished the other indexes as well for that failure.

Some mild distribution.

The Nasdaq and the NYSE both saw volume rise. As the indexes were down and closed at their session lows, there is little doubt that the sellers were in firm control. The slightly rising volume indicates investors as a whole as compared to the past few sessions were getting rid of stocks; not profit taking that weeds out the easy sellers, but some that were holding stocks for longer term were lightening positions.

It was not heavy distribution, just some increased selling. Still, that is the first real distribution we have seen in this consolidation. One day of higher volume selling does not doom a rally. Most rallies have a day or two of distribution; somewhat normal. After a failure at resistance once again on Tuesday, however, it does get our attention. It is something to be wary of, particularly as the Nasdaq undercut near term support at 1850. The Dow is still in its range and the S&P hung onto 1150 support, but the Nasdaq at best was going to get dragged up by the other two indexes. At its worst it could drag them lower; the Dow and S&P did not take the lead, so they followed the Nasdaq lower. They are still in good shape, but they have to acquire some buyers soon or the consolidation is in trouble.

Several sectors still solid.

Techs, drugs, the SOX and coal had a tough day (not really coal; just needed the rhyme). Retailers, financials, and even some semiconductors in good patterns held up well. Good patterns, i.e., those signature patterns we look at in the seminars that show accumulation held up. RKY, ATK, SBUX, HRLY, ROH, MAT, NATI, SLVN, TUES, FCX, MUR, ADSK, KRB, ACS, CUB and other plays from the reports that are in good patterns and showing accumulation held steady today or even made good gains. Not all can hold up to selling, but just because INTC has its estimates cut, that does not mean that chemical stocks, breweries, aerospace and other stocks are going to sell off. Heck, when INTC sells off who is surprised to see Coors go up?

Most realize tech is going to have a hard time. And it is not all tech names that are going to hurt. SMTC, SY, SYMC, LRCX, CYMI for example all did well or held their ground today. Thus, while the mood was gloomy on the financial stations after the triple crown loss today, many of our stocks performed well. We did trigger quite a few stop alerts, but many of those were trailing stops that we had moved up and either locked in a bit of a gain or sold out flat or with a very minimal loss.

The point: the economic picture has not changed between 2:15 p.m. ET Tuesday and today when INTC's estimates were cut. Indeed, housing starts were huge (think the Fed was passing that around the table during Tuesday's meeting? That is a sure bet.), just another in a string of impressive economic data. Stocks in good patterns have been under accumulation, and there was nothing in the Fed's decision or in the news today to change the reason why they are being bought. They have happier investors looking toward the future; happy investors are not quick to sell their good stocks when a stock that already has sagging earnings, sales and revenues has its estimates cut.

THE ECONOMY

Housing starts shoot higher.
February saw starts rise 2.8%, well above expectations. January's numbers were revised higher as well by 43k units. That is the highest since late 1998. Single family dwellings shot up 7.3%, the biggest since the late 1970's. Permits jumped 1.8% as well, and the highest in a year. Very good numbers, but for the third week mortgage and refinancing applications were down. The housing starts numbers look backwards a bit, the applications and permits look forward a bit.

We are still concerned about the housing market, and that is being reflected in the prices for its stocks. Even with the strong numbers they sold off on higher volume today; that is not the type of action that indicates everything is fine: remember how the economic numbers were just moving up and up in early 2000, but the Nasdaq started to distribute on high volume and with high volatility? It then sold off even as the numbers were still strong. We said the numbers were starting to get choppy, a sign of a trend change coming, but economists persisted in saying each weaker report was an 'aberration' and 'did not break the trend.' No, it did not break the trend, but it sure got us looking closely when the trend had been no weakness for months and months and the stock market was starting to lurch and stagger.

ECRI numbers still strong on the short and long end.
This is a form of the Leading Economic Indicators, but it has been refined to give what many consider faster and more accurate signals of what lies ahead for the economy down the road. It was way out in front at calling the slowdown. A week ago its long lead indicators were the highest in 52 months. They continue to show strength, and the people who compile this report say that it is NOT showing a double dip recession; indicators continue to run strong. Sounds promising, but again, today was not the day to be talking nonsense about economic recovery and such.

Share buybacks down.
Remember each day after the SEC allowed companies to buyback stock with less restrictions? Seems there was a new buyback announced every hour as companies took advantages of the low stock prices and loose rules to buy stock. Michael Dell made a personal fortune buying Dell stock right when the market reopened. Well, since the first of the year buybacks are down 30% year over year. Good sign or bad sign? With the economy recovering, fewer buybacks potentially mean that companies are putting their money to work on revenue producing projects as opposed to buying stock. It could also mean that companies are stockpiling cash for bad times ahead. It could be a bit of both. If there is money to be made, companies will try to make it. At the same time they will also protect themselves from the possibility of a further downturn.

THE MARKET

The Nasdaq gave up near term support on slightly rising volume while the Dow and S&P hung on. They too suffered some mild distribution as the Nasdaq weighed them down. A warning flag and we now watch to see how the S&P deals with 1150. If it falls through on rising volume, the character of the market is changing a bit.

VIX: 20.73; +0.38. Slight rise on the selling. Very slight. These contrary indicators are not showing much of a correlation with the index action. With the mild distribution today, we are watching this closely to see if it starts to move more.

VXN: 38.16; -0.83. The Nasdaq takes a licking and the VXN continues to fall. This is contrary action to what you would anticipate from a contrary indicator. It is showing very little correlation to the action on the Nasdaq.

Put/Call Ratio (CBOE): 0.93; +0.28. Ah, the one constant in this market: when the selling starts, the put buyers jump into action. While the volatility indicators may not be showing much in the way of forecasting, the put/call ratio has remained high, and each time there is selling it jumps back up. Readings of 0.88 and higher have set off rallies to the upside. This would be the point to do it as the S&P is sitting on support.

Nasdaq

Was rattled early and never recovered. A couple of bounce attempts at 1850 failed and it was down from there on slightly rising volume. Not a good day in tech land, but it has been the laggard.

Stats: -48.00 (-2.6%) to close at 1832.87.
Volume: 1.550 billion (+2%). Still very light, below average volume, but the Nasdaq did sell on stronger volume for the first time in over two weeks. We note that the selling volume was well below the strong volume on the early March run, indicating that the selling today was light relative to the earlier accumulation. Still, the point losses are pushing it back down to those levels, erasing the gains.

Up volume: 239 million. Amazingly low.
Down volume: 1.249 billion. Blowout downside action.

A/D and Hi/Lo: Declining issues swarmed all over advancers at 1.57 to 1 (better than 3:2). Advancing issues could not top that level early this week or late last week.

New highs: 128 (-40)
New lows: 29 (+2). Not spiraling out of control yet.

The Chart: http://www.investmenthouse.com/cd/$compq.html

The Dow and the S&P could not make a move to drag the techs higher, and being in a somewhat precarious pattern already, the bad news helped drive the Nasdaq through near term support at 1850. That level was trying to hold the index over the last week, but after two tests today it gave way. The November gap up point is at 1840, and it is possible there could be some support there if today was just a one-day reaction to negative news on a big name in a sector that has to do well for the techs to recover. After that it is pretty slim down to 1800 and then 1780. The failure to hold at 1875 near the February interim high is not good obviously, and it opens the door to more downside as investors shy away from technology ahead of Q1 earnings. It remains a drag on the other indexes; if they are going higher, they will have to overcome their tech components and the pressure the Nasdaq puts on the market overall.

End Part 1 of 2

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