InvestmentHouse Weekend Update:
investmenthouse.com
- Volatile Friday holds onto gains.
- Why you focus on price/volume action and the charts versus �pet� indicators.
- Market acting as a healthy market should.
- Holiday week in a healthy, uptrending market can produce further gains.
- Subscriber questions.
Up and down session, but in the end the market holds onto its gains.
The market again displayed some positive characteristics even after two big up sessions where you would expect a bit of softness. The futures were down significantly with the Nasdaq, of course, ready to take the biggest hit. It was down the most on the open, but the market then reversed and fought back to turn positive. It was not until some position squaring late in the session that the indexes then dipped back into negative territory as many people after a good rally wanted to finish the week square (we contemplated this but for reasons discussed below decided to hold for now). Even with that the Nasdaq managed to finish with a very slight gain and the losses on the Dow and SP500 were modest.
After the nice breakout the action was solid. It was more or less a standoff between buyers and sellers, but it was clear that the buyers were in control as the market recovered from the gap open lower, moved up in the early afternoon on a surge in volume, and the late selling was on lighter volume profit taking. Moreover, the indexes held onto their gains; no immediate urge to dump stocks. Being stingy with gains is what you want to see.
Keep focused on the basic market drivers not the esoteric, right sometimes, wrong sometimes indicators.
These past two weeks were a good study in what we teach in the seminars: focus on what really moves the markets, not the noise that you hear every day. Before Wednesday the mood was pessimistic with several analysts saying the market was breaking down. Others were saying the Dow and S&P 500 had formed a head and shoulders pattern that would lead to a breakdown before the indexes could test the November or August highs. Then Maria B on CNBC was out early last week talking about Trim Tabs (one of her favorite �sources� it seems) turning �bearish on the market� given the new supply of stock from secondary offerings. Then as the market raced higher Wednesday, Trim Tabs went back to neutral. Amazing. Friday after the close there was the usual talk of �too fast, too far� that crops up after each rally. They said the same in late October after that rally up when the market was moving laterally and consolidating that move.
What they seem to be doing is using their �gut� feelings along with a few indicators here and there that give anecdotal but not clear evidence of what is going on. Whether conscious of it or not, they are letting emotions and secondary indicators dictate their market calls. In the seminars we say you have to be a machine; you have to fight those emotions that are always sneaking in. In one subscriber question a few months back it was asked how we could hang on in a play and reap the big gains when the volatility was bouncing the plays around. It is because we try our best to let the stock�s technical action (the trend, the price/volume action, support, resistance) tell us when to take action. It is not easy; some days and nights we have to sit down and just let things calm down so we can view things as dispassionately as possible in order to give as close to an unvarnished market read as possible.
How do you do it? You go to the nuts and bolts, e.g., price/volume action, accumulation, support, resistance, trendlines. Those show you what the collective of investors are doing. They show you if there are overall buyers or sellers in the market, whether a consolidation is a good thing or is wearing thin. The two weeks preceding the Wednesday and Thursday moves were quite negative with predictions that the market was rolling over as mentioned above. While the action was not great, our read of the nuts and bolts was that the market was not breaking down. It was struggling at resistance, but the sellers were not able to make anything of it. While the action was somewhat nerve wracking given the market history of the past 30 months, that action kept us looking for that further move up and we were taking positions in anticipation of that move.
Indeed the predilection of basing your views on the preceding action is a common affliction. During the last part of the bull market it was very difficult to think the market would not continue to rise even as the economic indicators started to soften. Indeed even the weakening data was viewed as not a bad thing as opposed to a warning that the Fed rate cuts were starting to eat away the root of the stock market climb, i.e., the 20 year economic expansion. Some bears were five years early calling for the plunge while the staunchest bulls would not believe that things could and were coming to an end. After the tide shifted the majority finally swung negative. Now everything is viewed with a negative eye because the emotions resulting from getting burned in the bear market influence the current and future views of the market. In short, they simply did not believe what the market was showing as it moved off the bottom, and because of that a lot of investors did not enjoy the rally by being ready for the move and watching other investors rush in and bid their current positions higher and higher up to and over target levels.
The breakout does not mean it will be all clear sailing from here or even that the bear market is over. You have to take the action on its face. Now that the market is behaving more as it did before the great rush higher in 1999 (i.e., more normal), we can expect these rallies followed by some consolidation that will try your nerves once again, taking a bit longer than you want and selling back a bit more than you want. That worry and concern is, after all, what keeps the market moving up as money is committed only reluctantly, being dragged in by the market�s penchant to move higher just when most think it will move lower as it did last week. Understanding why the market moves is the key to having the confidence to step in when it says to step in and thus be in position for the big moves that we saw late last week. That is why we spend so much time looking at the technical indicators to determine if there is money moving into the market and into specific stocks. A company can have the best fundamentals in the world, but if the market is not buying it, it won�t go anywhere. Maybe it will someday, but when it does, it will start showing telltale signs and we can move in as opposed to sitting in it for two years before it gains a few percentage points.
THE MARKET
Seven straight up weeks on the Dow. The headlines will be screaming it over the weekend. That may perk up some more interest in the action though there are still many disbelievers as of Friday evening. That is fine. As we noted the past two weeks you have to have a healthy side dish or two of pure skepticism to help keep a rally fueled. The thing is, even 7 up weeks won�t get a lot of people back into the market. It never, never does after a serious bear.
I think it is called a bear market for a reason not many talk of: it sends the average investor into a hibernation from investing that is so deep that they do not awake and come out to partake in the run until summer is almost turning into autumn. In other words, the average investor gets burned, swears off investing, and refuses to even consider going into the market again even as it scores impressive gains after the selling abates. It is that emotion telling them �look what happened last time; it will only happen again.� Sad thing is, eventually the moves are so good and so sustained that they figure it is �safe� again. That �safe� time is usually the climax run and they get in at inflated prices just as the big money that started the move is selling and heading for the exits. Fast forward, repeat the story all over. It happens every time.
So, you can be very proud of yourself. You enjoyed a great drive down in the summer and into October. Then you were able to enjoy some great moves up. Thursday we walked away with a lot of gain, and we are looking for the light holiday volume to drift the indexes even higher toward resistance for even more upside this week.
Good action hallmarks the move up.
The leading Nasdaq broke out over key resistance last week after a rather lengthy consolidation that still saw the market trend higher and higher during that time. This stair step action is very healthy with price/volume remaining solid (volume up on up price days, down on down price days) as the market surges, consolidates the move, and then surges again. These footprints of institutional action help us determine where the market is heading, and as long as they continue to �act right,� we can continue with our positions and course of action.
One sign of this is the action of the leaders. The early leaders ran up ahead of the market (TSCO, UNTD, IMN, etc.) and are holding their gains as they consolidate and get ready for the next breakout. At the same time they consolidate other stocks are breaking out. At the same time others are breaking out, even more stocks are working on finishing their bases. That is how a healthy market acts: money stays in the market and is joined by new money, rotating or expanding out into new sectors with each iteration. As long as the leaders keep holding up and building on their moves and are being joined by new breakouts, the market will sustain the move.
It will get choppy at times and stocks that were leading will fall back to their 50 day MVA. If it occurs after 4 to 5 jumps off the short term moving averages and the stocks hold at the 50 day or the up trendline, they will usually start the move right back up making that 50 day MVA test a very good entry point. Knowing why a stock is moving down to the 50 day MVA in that instance keeps you from panicking out of a real winner in a longer bull run (of course with option plays you know to be on guard after the fourth bounce up because you don�t want to ride it down; but then you understand that and are ready). Again, knowing why stocks move the way they do is key to having the confidence to make good decisions. That is what we try to incorporate into the reports and what we teach in the seminars. Right now the leaders and the next crop are doing very well given the market breakout last week.
Sentiment Indicators
While sentiment indicators are showing more and more upbeat opinion after the big breakout, there are still some interesting signals of that lingering pessimism. For one, the put/call ratio remains at what is considered the high end of the scale even as the market shoots higher in a big breakout. Then there is the NYSE short interest that, while off of that big high in September, is creeping back up and is above January levels and equal to summertime levels. Rising short interest is a sign of pessimism and is very interesting given the market action. There was some heavy betting that the rally would fail. Finally, while bullish advisors were rising, they plateaued and dipped a bit last week. They will no doubt rise this week after the big rally, but at 49% and change they are still below the 55% level that has indicated an overbought position in the past.
VIX: 26.73; -0.64
VXN: 46.49; +1.79
Put/Call Ratio (CBOE): 0.7; -0.05
Nasdaq
Sold the hardest early of all the indexes but then made the best recovery to hold slightly positive at the close. Very solid action following a big move the prior two sessions.
Stats: +1.19 points (+0.08%) to close at 1468.74
Volume: 1.964B (-18.78%). Volume fell but was still strong for a Friday. Note that a lot of the volume came in the early afternoon when Nasdaq surged to a new high session high and then dropped off as it sold back late.
Up Volume: 986M (-1.16B)
Down Volume: 936M (+683M)
A/D and Hi/Lo: Advancers led 1.19 to 1. Very evenly matched, following the basically flat close.
Previous Session: Advancers led 2.17 to 1
New Highs: 68 (-23)
New Lows: 23 (-12)
The Chart: (Click to view the chart)
The Nasdaq made an impressive recovery, turning the bigger loss of the session into the only gain. As indicated, that is solid action, holding onto gains when it looked as if the news of a lower chip equipment book to bill ratio and Brocade�s earnings report would turn the sell light on with regard to techs. It is approaching the next resistance near 1500, and that will most likely cause some lateral consolidation. We do expect the index to drift higher this week in the lighter holiday action to tap at that resistance. That will build us some more gain in our index options as well as other option and stock plays that we will be happy to bank for that holiday shopping season.
S&P 500/NYSE
A fractional loss on the session as volume backed off. Held onto the gains as did the Nasdaq.
Stats: -3.21 points (-0.34%) to close at 930.55
NYSE Volume: 1.608B (-20.49%). Volume backed off but was still strong for a Friday.
Up Volume: 799M (-849M)
Down Volume: 812M (+429M). Very equally matched action.
A/D and Hi/Lo: Advancers led 1.12 to 1. Narrow breadth on an evenly matched session.
Previous Session: Advancers led 2.21 to 1
New Highs: 30 (-18)
New Lows: 25 (+1)
The Chart: (Click to view the chart)
Showed a doji on the session. After a big gain a doji can indicate that there is some selling coming. As with the Nasdaq, the fact that it did not sell off given the early negative sentiment was good. We would like to see it continue to move higher this coming week ahead of the holiday toward the next resistance at 965, the August high. That gives it plenty of room to drift though it may try to test the breakout point at the November high (925) before it starts that move. We will use that to take some gain on the index and other option plays.
Dow:
Very similar to the SP500, holding the breakout and giving up a fraction loss on much lower volume.
Stats: -40.31 points (-0.46%) to close at 8804.84
Volume: 1.608B (-20.49%)
The Dow managed to hold, just barely, over the breakout over the November high at 8800. Some late selling stripped about 75 points off the index, pushing it down to its session low on the close. As with the other indexes, most of that selling was on lighter volume as the market moved toward the close, an indication that the action was more profit taking and positions squaring after the good rally and before a weekend. That is the indication we received from several floor traders; it was not heavy volume selling, just lingering caution with the �event risk� relating to Iraq.
The Chart: (Click to view the chart)
THIS WEEK
That event risk was somewhat mitigated moving toward the close. We had been looking at taking some more gain but decided that after the positive comments from the head UN weapons inspector late in the session that we would let the historical odds work for us. Those indicate that in the last 15 or so years, 80% of the Thanksgiving holiday weeks have been up weeks. On top of that, the indexes did not run up again Friday, and they still have some good upside room to move up to resistance in a continued overall positive market mood and deliver us some more gain on our positions. The fact that it is a holiday week also lessens the chance of negative calls or downgrades that could stall out the upside move.
The week will not be without news as the economic calendar remains full. Existing home sales (the largest part of the home market) is Monday. Q3 GDP is Tuesday along with consumer confidence. Wednesday is packed with personal income and spending, jobless claims, Michigan sentiment, durable goods orders, and Chicago PMI. What a load of data for a �quiet� week. We expect GDP to come in higher than the 3.2% expected, and the Chicago PMI will be close to cracking back over 50, also better than expected.
Economic news continues to improve as does some of the word from companies. Last week HPQ talked of �stabilization� and TSM, the world�s largest chip foundry, raised its Q4, said it saw increased demand for PC�s and personal communications devices, and was increasing its production capacity. Companies are historically negative in recoveries. They see recovery as being back at levels prior to the slowdown (much as some market analysts see a market recovery as taking out the previous highs). Thus when they start talking about stabilization, improvement in Europe, the bottom of the cycle, etc., that is a pretty good sign that there actually is improvement. Improvement means increasing earnings ahead. On top of that, after all of the slashing of payrolls, streamlining processes and elimination of fat, when the cycle does make its turn those profits will be even better than expected as a result.
Now many stocks have made good runs and Friday�s little pullback did not put many of them in better buying positions. As we discussed Thursday, that means we are not going to chase a lot of them but instead let them work higher for us for some more holiday gain. That does not mean all stocks are extended. As discussed above, some of the early leaders in the rally have been working through their consolidations and may use some good economic news to make the new break. There are also a lot of smaller stocks that are coming to life in their own bases. For one, we are seeing a lot of smaller business services stocks pick up in nice patterns. If the market is a good handicapper as it historically has been, it is hard to accept the proposition that there is no improvement in the business climate. In any event, after a big move that scored us a chunk of nice change last week we should not expect a repeat of the action this week. More of a drift up to resistance to give us further gains with a few solid breakouts scattered here and there, most likely from some of those smaller stocks in great patterns that we are seeing. Then there will have to be some consolidation to set up the next move.
That is what we anticipate based on the action thus far and the market history, but as always we will let the market show us the way, relying on its cues to drive our decisions.
Support and Resistance
Nasdaq: Closed at 1468.74
- Resistance: Price resistance at 1500 and the 200 day MVA (1502). 1574, the May low, is next.
- Support: The August high at 1427. 1418, the interim test after the September 2001. The 10 day MVA (1412) is possible support. The 18 day MVA at 1385. 1357.09, the October 1998 bear market low. July, August, and September interim highs at 1345. The 50 day MVA (1334).
S&P 500: Closed at 930.55
- Resistance: Price resistance at 950. 965, the September 2001 closing low along with the August 2002 high. Then price resistance at 990.
- Support: The November high at 925.66. 921 is some price support. July, August and September interim highs at 909 to 911. The 10 day MVA is right there at 911 as well. The top of the late October consolidation range at 899 and the 18 day MVA (903). The 50 day MVA (890). The September 2000/May 2001 downtrend line at 877. The March down trendline at 866. 850 to 855 (the October 1997 and Q2 1998 lows).
Dow: Closed at 8804.84
- Resistance: A range of resistance from 9000 on up to 9050. The 200 day MVA (9205). 9500 from June and July lows.
- Support: The November high at 8800 and then the late July and early September interim high at 8726 to 8762.14 (8745 closing). The 10 day MVA (8617). The 18 day MVA (8539) and then the October high at 8500. The exponential 50 day MVA (8410) and then 8250.
Economic Calendar
11-25-02
- Existing home sales, October (10:00): 5.35M expected, 5.40M prior.
11-26-02
- Q3 GDP, preliminary (8:30): 3.2% exepcted, 3.1% actual.
- Consumer confidence, November (10:00): 83.0 expected, 79.4 prior.
- New home sales, October (10:00): 980K expected, 1.021M prior.
11-27-02
- Initial jobless claims (8:30): 376k prior.
- Personal income, October (8:30): 0.0% expected, 0.4% prior.
- Personal spending, October (8:30): 0.2% expected, -0.4% prior.
- Michigan sentiment, final, November (9:45): 85.0 expected, 85.0 prior.
- Durable goods orders, October (10:00): 3.0% expected, -4.9% prior.
- Chicago PMI, November (10:00): 47.5 expected, 45.9 prior.
- Fed Beige Book (12:00)
SUBSCRIBERS QUESTIONS
Q: What is the likely future direction of a stock that has risen for several consecutive days (7), but with declining volume each day?
A: Some stocks can run on low volume. They defy the normal logic of needing more buyers to push it higher, but if there are no sellers they can do it as they fly under the radar screen of short sellers. WTW is famous for that and it has some good runs. But it also gets whacked down, and that is the usual result of a low volume ascent. The longer it moves up on low volume, the more likely it will fail, but volume can always kick in. In short, a stock can climb on low volume but the moves tend to be abrupt when a change comes. |
