12/4/00 Investment House Daily
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TONIGHT:
- More after hours downside earnings guidance cannot dampen response to
Florida court ruling.
- Defensive sectors rise again as some techs sell and some techs gain.
Not much leadership.
- Economic news is still to the downside.
- Team Trades
Don't like what is happening? Wait 30 minutes.
The defensive stocks were in the limelight today, but the techs were not
sold hard. It was an up and down session for the techs again while the
defensive stocks rose all day. After the close, XLNX guided fourth
quarter earning estimates lower, and COMS stated its fourth quarter loss
would be about 10 cents greater than previously expected. That had the
usual dampening effect on after hours trading with respect to tech stocks.
Just 20 minutes later, however, the court in the Florida election contest
lawsuit ruled in favor of Bush on all counts. That sent stocks back up to
their closing prices and beyond, indeed to highs beyond the session highs.
As of the close of trading those gains were not only maintained but were
extended. Nasdaq futures were slightly down and then jumped up by about
90 points. They are holding as well. What looked like a real down
opening for the morning now looks like a higher open. It may not last the
session, but this may be the start of a post-election rally.
Why do we say that? The circle is drawing tighter for closure of the
election. The momentum appears to be growing for that closure after
today's rulings. A technology sector that has suffered a second bear
market on top of the existing bear since the election is ready for a rally
that lasts more than one and one-half sessions. The pieces appear to be
falling into place for that rally before harsh reality sets back in about
earnings and the economy and the rally stalls once again. Until then,
however, we can pocket some nice upside gains, but we have to watch those
resistance levels that have turned tech stocks back regularly. These
include the 200 day moving average, the 50 day moving average, or a down
trendline. We may see stocks start breaking these resistance levels on a
strong rally, but we need to see those moves hold until we are believers.
Still, we will look to play a strong move if we get the chance. A strong
gap higher can be hard to play as stocks race out of the box. Then we
have the problem as to whether the rally will hold. We like the picture
developing, however. We will watch for the gap higher and then the
pullback on the initial profit taking. If the market starts back up at
that point, we will be ready to take some positions to play that move. On
breakouts, we will treat them as usual, purchasing on the breakout. Even
with the two earnings warnings tonight, the techs are trying to start a
rally. Approach with caution, but we plan to approach.
Leading with defense?
You have heard the advice that the best defense is a strong offense? Does
not seem to apply to the stock market, however. But it still makes sense
when trying to figure out where the market is going. What we mean is that
defensive stocks, a.k.a. cyclicals, do not provide sustained leadership.
They are a defensive play; investors go to them when scared. By
definition they will not maintain leadership. We are already seeing
cracks when brokerages are downgrading stocks such as Walgreen's (WAG) on
valuation calls. They have already run up high and hard. As money cycles
into them, it cycles right back out, and it does not take long to do that.
In the past, whenever investors have moved into cyclicals, the move did
not last. This time things are a bit different in that we have a
weakening economy and weakening tech earnings. That gives less incentive
to run right back to tech stocks once they get roughed up a bit and
defensive stocks get a bit pricey (after all, how much can the stock of a
company selling sugar water be worth?). Still, stocks will rally even in
bear markets. We have not seen a rally from the techs in a long time.
The election noose is tightening and the Fed will at least change its
bias. The techs are ready to do some moving.
What does this mean? It means that with the defensive stocks in the lead
we should not look for long, strong moves. This one will be longer than
other moves (it already has been) because of the economic fears. But
those who feel everything is fine in the markets because the Dow is
looking okay are wrong. The Dow cannot lead the stock market by itself
because it does not represent where the heart of the U.S. economy is for
the future. It is not a growth index. We will continue to see choppy
trading from all indexes until we get the economic issues worked out. The
Dow will hold up well we think (barring major problems), but it won't lead
the market to new highs. The problem for the Nasdaq is that with the Dow
holding up just fine there is no real fear. Heck, we even heard one FOMC
member last week say just because the Nasdaq was down did not mean the
markets were in trouble; look at the Dow he said. That kind of talk
chills our insides as it either shows a fundamental misunderstanding of
where the future of the U.S. economy is and how critical techs are to the
economy, or it is just more callous, arrogant Fed rhetoric to keep the
markets gasping for air. Either way the markets lose. More important, the
economy loses long-term as the investment our technology sector needs to
keep its advantage over the world is just not there with a tanking market
and credit crunch. The foolish Fed worries about nonexistent inflation,
and feels it is worth risking our economic future fighting that paper
dragon.
THE ECONOMY
The economy continues to slow. New home sales fell 2.6% to 928,000 units,
slightly higher than expected. Hey, great; it did not slow as much as
thought. The leading economic indicators (LEI) fell 0.2%, about what
expected. This report shows the economic future six months out. It has
been trending lower. More news this week including the employment numbers
on Friday that everyone will look at because the Fed does (or claims to).
The rest of the news is not good.
Consumer spending seems to be well off pace this season. The
post-Thanksgiving weekend has been described as weak. Now Telecheck
reports that the pace of spending after that weekend has slowed even more.
Maybe consumers are just returning to their old habits of buying right
before the event. Even if they do, massive discounting will cut profits
for retailers. This news came out after the close today; retailers had a
good day. Things appear to be at loggerheads here; eventually something
will give, and we think it may be retail stock prices.
For those still claiming the economy is just fine (including some
democratic Congressmen today), consider that the last two rate hikes may
just now be starting to impact the economy (early, but let's give them the
benefit of the doubt). The brunt will be felt the next 6 months. Also,
oil prices take 8 months to a year to impact the economy. We are seeing
indicators at levels not seen since the last recession and we still have
more slowing to come from those rate hikes and energy price increases.
These folks can play ostrich if they want, but once again we are not
getting any leadership from anyone on any side as to the economy. As a
result the markets are still in flux about what the future holds. Do we
have someone coming to office that is going to help the markets and the
economy? Who knows? None are talking. Indeed, what we have heard
dismays us. Markets go up, markets go down. There will be no recession.
Soft landing assured. Wow, what sage words of leadership. Does not give
us much hope unless we can get the election squared away so the Fed can
act.
THE MARKETS
Overall market stats:
VIX: 30.31; -1.28. Again the VIX falls as the Dow and S&P 500 climb. It
remains at high levels, but this has not led to a reversal on all indexes
or a sustained rally on any index.
Put/Call ratio: 0.68; +0.07. Holding about flat even as the Dow rallied.
Still no reversal levels hit to date.
NASDAQ: Early rally attempt sold off quickly, but an afternoon rally
followed the U.S. Supreme Court ruling. The techs turned positive again,
but still cold not hold on, selling back to negative in the last hour.
Volume was light on the selling. Again, we are looking for a move up
tomorrow.
Stats: Down 29.54 points (-1.1%) to close at 2615.75.
Volume: 1.861 billion shares (-16.2%). Down volume was well out in
front, 1.134 billion to 675 million shares.
A/D and Hi/Lo: Decliners retook the lead 1.76 to 1. New highs held
steady at 42 while new lows climbed to 379 (+115).
The Nasdaq resumed its interim downtrend from the election, testing the
down trendline on its high today (2671.18). But for the positive response
to the Florida court ruling it looked as if the Nasdaq was rolling back
over. The key to the future will be whether the Nasdaq can finally break
out of this election downtrend and mount some type of a rally. With the
remaining issues about the economy and tech earnings it most likely won't
lead to an end of the bear market, but it can be a very tradable move if
it does break the downtrend on higher volume.
Dow/NYSE: The Dow put on a show as several defensive issues did well on
the U.S. Supreme Court ruling and others just did well on their own. It
should get more help tomorrow as MSFT $3.50 after the Florida circuit
court's ruling; it held onto those gains. Volume was lower on the move
today, something that has plagued the Dow. It has been unable to break
out of its trading range as it cannot put together the right price/volume
action. We will see if that can change if it moves up over resistance
tomorrow on strong volume.
Stats: Up 187.41 points (+1.8%) to close at 10,560.95.
Volume: NYSE volume was again lower on a move up, this time dropping back
to average at 1.098 billion shares. 634 million votes to the upside
versus 419 million to the downside. The right breakdown, but we need to
see higher volume overall.
A/D and Hi/Lo: NYSE declining issues edged advancers by 19 shares (1421
to 1440). New highs rose to 119 (+18) versus 123 new lows (+30).
The Dow tapped resistance on its high today (10,604.46) and pulled back
from there to close. Again the index is having trouble breaking out of
its trading range between 10,300 and 10,600, and the volume is not giving
it any support. We want to see indexes move higher on rising volume and
pullback on lower volume. The Dow is showing the opposite right now. It
could still break resistance tomorrow if we get a good rally going in the
tech sector, but that means the defensive issues will have some weakness.
S&P 500: The 500 big caps mirrored the Dow today, rising all session and
selling off slightly at the close. On its high it too tapped at
resistance (1330.96 session high; 1335 resistance) and pulled back
slightly. Like the Nasdaq, it too is brushing its interim down trendline
that started at the election. It is fighting for its life right now to
start a rally just below the October lows. It could do it with a tech
surge, and it needs to get off of this 1300 level soon or risk falling to
1270 or lower.
Stats: Up 9.74 points (+0.7%) to close at 1324.97.
Volume: NYSE volume was again lower on the move up, still giving us the
wrong price/volume action.
TOMORROW
Earlier we said we were looking for a rally. We are sticking with that
position; nothing like consistency. We do have the third quarter
productivity number out in the morning, and it is anticipated to come in a
bit lower reflecting the decline in the GDP that war revised earlier.
Productivity was the lifeblood of the economy according to Greenspan, but
he and his gang have successfully dried up investment dollars and
productivity may come in lower than the 3.4%. Indeed, remember that high
tech spending in this last GDP revision was way down from the second
quarter. That will only worsen productivity numbers. The lower number
will not be good for the markets, but it may be absorbed in the good
feelings about the Florida court ruling.
We are going to play it as described earlier: watch the gap higher if we
get one and then try to pick up positions as the stocks start to rebound.
We will not take full positions on that move, but we will be looking at
getting in. On specific plays we are going to watch where the stocks turn
back; if they turn back at resistance points and sell down sharply from
there, we will have to be very careful if we elect to take a position on
that stock. If a stock breaks resistance on the move and comes back to
test it and bounces off, that is a good sign for an entry position. We
will also be looking at breakouts of patterns as we always do, taking
positions on those moves. If they gap above the breakout we will look for
a test of the breakout and pick them off as they start back up. We are
planning for a rally tomorrow and that is what we are looking to play, but
we have to be cognizant of resistance levels on each of our plays so we
don't get immediately turned around if there is not enough power to break
and hold above resistance.
Support and Resistance Levels
Nasdaq:
Resistance: 3100 to 3200. After that, 3525 to 3535.
Support: 2600 held again today on the close. Below that is 2500, then
2000 to 2200.
S&P 500:
Resistance: 1360 to 1365. Then 1400 to 1410. After that, 1435 to 1460
(if we are lucky enough to get there).
Support: 1300 is still trying to hold. 1270 to 1280 is the next level.
Dow:
Resistance: 10,600 to 10,900. Then 11,100 to 11,200. Then 11,300 to
11,400.
Support: 10,300 held once again. Below 10,300 is 10,000, but that is not
the bottom if selling gets intense.
Weekly Economic Calendar (All times Eastern). The figures are the
consensus expectations, not ours.
12-4-00
New home sales for October (10:00): 915,000 versus 946,000 prior.
Leading economic indicators for October (10:00): -0.1% versus 0.0% prior.
12-5-00
NAPM services for November (10:00): 57% versus 58% prior.
Factory orders for October (10:00): -2.5% versus 1.6% prior.
12-6-00
Productivity third quarter, revised (8:30): 3.4% versus 3.8% prior.
12-7-00
Initial jobless claims for prior week (8:30): 346,000 versus 358,000
prior.
Consumer credit for October (2:00): $7.6 billion versus $6.5 billion
prior.
12-8-00
Nonfarm payrolls for November (8:30): 150,000 versus 137,000 prior.
Unemployment rate for November (8:30): 4.0% versus 3.9% prior.
Hourly earnings for November (8:30): 0.3% versus 0.4% prior.
Average workweek for November (8:30): 34.3 versus 34.3 prior. |
