Hi Bonnie
This is courtesy of Rob.
Thanks Rob, good stuff.
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12/6/00 Investment House Daily
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TONIGHT:
- Earnings warnings show it will take more than kind Fed words to right
the ship.
- A down day, but price/volume action was proper. Still looking for
another confirmation.
- Fourth quarter earnings expectations lowered across the board.
- Productivity is revised lower, but still shows impressive gains.
- Team Trades
Fed euphoria fades quickly.
Good news combined to rally stocks on Tuesday. Wednesday a double dose of
earnings warnings teamed up to push the markets right back down. It was
not a washout as volumes on the indexes and in individual stocks was
lighter on the selling. Indeed, many stocks that rose again today did so
on rising volume. That is the price/volume action we like to see. Now we
need to see the markets right themselves and move ahead on stronger volume
once again. In other words, we need a strong confirmation day to show us
that the institutions are indeed buying into this move.
What got the day off on a bad foot was last night's Apple Computer warning
about fourth quarter revenues being very light. That was not
earth-shattering as Apple had already warned sales were slow, and this was
confirmation. The markets opened softer, but then recovered and were
looking better and better. Then we heard that Salomon Smith Barney said
that INTC was going to have its worst fourth quarter in a decade. Circuit
City reiterated its outlook for weak sales, and Bank of America then
warned its earnings would not meet expectations. The Dow immediately
dropped 110 points, and the Nasdaq went down with it. The indexes sold
down sharply from there, and a weak rally attempt with a half hour to go
helped cut some of the losses, but just slightly.
Today's action shows that the market is still in troubled waters. The
market is still showing investor concerns about the economy in the coming
months. While it is good that the Fed chairman had soothing words for the
economy, today's action shows that words will not get the job done.
Greenspan liked to talk the markets down before he finally acted to raise
rates. He is now trying to talk the markets up. He knew the markets
would rally on his words and help make his job easier. Faster than he
probably thought they would, the markets resumed the selling. In a way we
can view today's market action as positive in getting the Fed to take
meaningful action as opposed to just peddling lip service. The economy
needs a rate cut to actually get money flowing back into the economy and
the markets.
Earnings expectations lowered for S&P 500 and Technology.
We have been seeing the warnings come in about every other session, and
today First Call issued its revisions on fourth quarter earnings
expectations. In early October, S&P 500 fourth quarter earnings were
expected to increase15%, and technology earnings were expected to increase
29%. As of today, those forecasts have been revised to 9.5% and 15%,
respectively. Respectable, but we have to remember that the October
numbers were lower revisions from earlier in the year as well. Earnings
are going to be lower and that means they will not support higher stock
prices unless investors become convinced that meaningful steps are being
taken to energize the economy and pump money back into technology
investment and thus increase future earnings expectations.
THE ECONOMY
Third quarter productivity revisions were released before the open, and
productivity was written down to 3.3% versus the earlier 3.8% reported.
The write-down was expected as the GDP has slowed. Notably, productivity
slowed less than the GDP, but it was still well off of the 6.1%
productivity growth of the second quarter. That is good as productivity
has helped carry this economy thus far, and it needs to keep out in front.
The downside is that companies are buying less high tech equipment due to
the economic slowdown and uncertain future prospects, and that has a
dampening effect on productivity. If we get a Fed easing coupled with tax
cut next year we should see money flow back into investment in high tech
equipment.
As productivity falls, unit labor costs rise. They were revised up to a
2.9% increase from 2.5% earlier reported. Companies are not having to
produce as many goods or services in a slower economy, so higher
productivity is not required. It is not, as some stated, that workers are
demanding more wages, but just a function of the relation between
productivity and wages in a slowing economy. In any event, labor costs
rose just 0.2% from year ago levels, meaning that even with the reduced
productivity companies are still able to keep their labor costs well under
control.
After the close tonight Hasbro (HAS) stated it would badly miss its fourth
quarter profit expectations and saying it would layoff 750 employees. Not
market shattering, but just another example of another company that is
laying off workers because of how the economy has weakened thus far and
expectations of weakness for the future.
THE MARKETS
Listening to CNBC today you would have thought Tuesday never happened.
Downright glum. Sure it was disappointing that the markets did not rally
higher for the second straight day, but it was not the end of the rope.
As usual the television anchors did not look at all of the relevant
numbers even though there were some good comments from some serious
analysts that made sense. In any event the markets sold down but they did
so on lighter volume. Yes it was above average volume, but it was
lighter. Moreover, volume with respect to the majority of individual
stocks responded in a 'proper' manner, i.e., declining stocks fell on
lower volume and rising stocks rose on higher volume. If we don't get
further rallying, that action is what we want to see in markets and
stocks. Given the massive gains on Wednesday on strong volume, we cannot
say today was a bad day for the health of the market.
This still leaves us looking for another strong move Thursday or Friday to
give us more certain confirmation of last Friday's positive close. That
would be a start, but it does not guarantee a rip-roaring move back up by
the Nasdaq. Remember that the Dow gave us a confirmation move back in
October. That index moved up well, but did not take out any old highs
before pulling back in November to test that move up. With the patterns
we see in the Nasdaq stocks right now, i.e., trying to rally back up after
some steep post-election selling, there are not many springboards to new
highs in individual stocks. That means they will need to continue to work
on their bases, working their way back up. This is what we have seen on
many Dow stocks that are just now at a point to break to new highs (e.g.,
MMM, UTX). It does not mean we don't get a nice move up, we just have to
have realistic expectations for gains as stocks work their way through
overhead resistance. Versus the bear market selling we have had, that is
not that bad of a trade.
Overall market stats:
VIX: 27.94; +1.00. Volatility spiked back up late in the session as the
BAC news hit the wire and the real selling started. That put volatility
is back below the 30 benchmark that indicates reversals, but as we have
noted, volatility has hit reversal levels for the past month.
Put/Call ratio: 0.61; -0.06. Even with the selling, there were fewer put
buyers out there. Man their ranks fall fast when the whiff of a rally is
in the air. This is similar to bullishness readings. They are still high
(55% level) and that is a contrarian indicator for a rally. As we have
seen frequently of late, contrarian indicators have been showing reversals
and tops. That means we have uncertainty, and we have to look at the
primary indicators of price and volume.
NASDAQ: The Nasdaq opened softer as we anticipated, and then rallied.
That was anticipated as well. Then a funny thing happened on the way to
the continued rally; BAC warned, and that really surprised investors still
excited over the Fed's apparent change in heart. That sank the Dow, and
the Nasdaq had no stomach to fight it. Unfortunately, that suckered us
into some positions that we are very close to bailing on. Still, others
worked out just fine even with the late pullback. Volume was lower on the
selling, and we saw many tech stocks still moving higher today on higher
volume. That is what we want to see. We still see a rally continuing; it
is just not going to be straight up as we were used to last fall.
Stats: Down 93.30 points (3.2%) to close at 2796.50.
Volume: 2.309 billion shares (-6.6%). Strong, above average volume, but
still lower than Tuesday's rally volume. Down volume was 1.55 billion
versus 712 million upside shares.
A/D and Hi/Lo: Declining issues see-sawed back into the lead 1.55 to 1.
New highs rose to 70 (+8) versus 229 new lows (-76). The internals
improved or were not as negative on the flip side even on the selling.
The Chart: investmenthouse.com
The Nasdaq tried to move higher, and succeeded for a time early in the
day, but then gave in to the selling when the Dow really started to fold.
The index hit its low 25 minutes before the close (2781.24) and then
bounced up for the close. Notably, the index tapped its down trendline
that connects the September high and the October top on its low.
Remember, not all rallies start with a massive turn and then climb higher
immediately. Even the 1999 October low had a few staggering days before
it finally confirmed on big volume. Again, we look for confirmation
Thursday or Friday with a move of 1.5% or better on rising volume. We
also want to see the A/D line shift back to at least 2 to 1 in favor of
advancing issues on the move. That is about the only time the A/D line
means anything.
Dow/NYSE: After two strong moves the Dow was hit with the BAC warning,
and the financial stocks turned and tanked along with all of the Dow
stocks. Volume was strong but it contracted even on the bad news. The
Dow held support and does not appear to be in danger at this point.
Stats: Down 234.34 points (-2.2%) to close at 10,664.36.
Volume: NYSE volume dropped to 1.371 billion shares (-4%). Down volume
rose to 843 million versus 449 million shares to the downside. Again,
this is the correct price/volume action.
A/D and Hi/Lo: NYSE declining issues led advancing issues 1.37 to 1. New
highs fell to 166 (-11) while new lows rose to 92 (+3). As with the
Nasdaq, the internal indicators were not bad on the selling.
The Chart: investmenthouse.com
The Dow fell sharply, but it did find support at its 50 day moving average
on its low (10,620.86) and bounced up from there at the close. The bounce
off of the low indicated that support at 10,600 held though the index
closed below its 200 day moving average (10,684.57). The Dow remains in
good shape overall, and we think it will recover for a further move up.
It may take another day or so to put together a rise, but we feel it will
do that.
S&P 500: The Big caps tanked after a stellar move Tuesday. The BAC news
was a gut punch after Greenspan's olive branch offering on Tuesday. The
big caps did not respond well, but the did hold above support and volume
on the selling was lower. As with the other indexes, the S&P touched its
10 day moving average on its low (1346.15, some support) and bounced up to
close. As with the Nasdaq the S&P is still in murky water and needs a
confirmation move tomorrow or Friday.
Stats: Down 25.08 points (-1.8%) to close at 1351.46.
Volume: NYSE volume was strong, but lower on the selling (1.371 billion
shares).
The Chart: investmenthouse.com
TOMORROW
Today was a tough day to trade. We were suckered in on the early move
back up after about 15 to 20 minutes of trading. Instead of waiting it
out to see what the direction for the day really was, we got overly
enthused and jumped the gun. We paid the price for that eagerness and now
are looking for a confirmation to help us out. We have not changed our
view of the market at this point as we feel we are still going to get more
of a rally on into the new year. What we want to see is another day where
the institutions step in and start buying heavily. That will signal that
Tuesday was no fluke, especially after the pullback we saw today. We need
to be cautious as so many rally attempts have failed, but we finally have
some different circumstances, i.e., a friendlier Fed and an almost
complete election.
We are still having earnings warnings, but the market is good at figuring
out the score. Just because Greenspan said that the Fed was concerned
about the potential for downside risk as opposed to inflationary risk,
that does not mean that companies that have been experiencing weaker
demand will all of the sudden have a surge in sales and revenues. The key
is the expectation for future earnings increases. Looser money and the
potential for a tax cut is what will spur those expectations, and that
will spur investment to pour back into the leading stocks. We are getting
close to allaying the major fears of investors. There are problems ahead
as we have pointed out: less than great patterns for leading stocks, and
it will take a few weeks for them to finish basing out; bullishness is
very high (but, there is a lot of money on the sidelines that has been
building up for months that can carry the market a long way); and we will
continue to have earnings warnings and analyst 'calls.' Those are tough
for a shaky market. That is why it is important to get the election over
and get the Fed to give us a strong move. That combination of events will
get investors thinking about a positive future and not an uncertain mess
where the only thing clear is that things could get a lot worse.
What we are going to be watching for the rest of this week is a turn back
up on stronger volume. We see a lot of doji's on individual charts, and
that can mean the stocks will sell down some more before they turn back
up. If that happens we watch for stocks to turn and start back up on
stronger volume. That means waiting patiently until we see the move back
up occurring on what will be stronger volume for the day. That means we
may be taking positions late in the session when we see the volume looking
strong and the moves accelerating to the upside as we saw on Tuesday.
After that we can start setting buy stops on the stocks we want at points
where they break resistance. That way we don't have to watch the screen
for too long each day as this up and down (mostly down) action has tried
to make us do. We love using buy stops and then trailing stop losses,
riding positions for weeks or more as opposed to a day or two. We are
getting close, and now we are watching for a strong confirmation move to
signal more buying opportunities to the upside.
Support and Resistance Levels
Nasdaq:
Resistance: 3100 to 3200. After that, 3525 to 3535.
Support: On the 10 day moving average and a down trendline now, but 2600
looks like support if things start to sell. Below that is 2500, then 2000
to 2200.
S&P 500:
Resistance: 1390 at a down trendline. Then 1410. After that, 1435 to
1460 (maybe we will get there).
Support: 1335 to 1300. 1270 to 1280 is the next level.
Dow:
Resistance: 10,900 to 11,000. Then 11,100 to 11,200. Then 11,300 to
11,400. Lot's of overhead, but the index is looking good.
Support: 10,600 (the 50 day moving average held today on the low at 2781.
Below that is 10,000.
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.
Investment House subscribers are offered a special from eSignal for those
interested in a realtime service. Contact:
Genevieve Tsamoudakis
Account Executive
Data Broadcasting Corporation
800-322-1617
gtsam@dbc.com
Office hours 6:30-3:30 PST
www.esignal.com
TEAM TRADES
SEBL: One of our favorite stocks and in the software sector (wish we had
jumped onto MAPS from the TTR), SEBL opened fractionally lower, sold down
to 87.50 and then started back up. We were looking for a softer open and
then a move back up, and we were eager to get in on solid stocks that can
really move. The stock opened at 90.12 and sold down from there. When it
started to bounce back up, we were looking for it to take out the morning
high as our buy point. Accordingly, we entered a buy stop just over that
level at 90.38, one-eighth over the high for the morning.
The stock continued its move back up, and at about 8:40 CT the stock moved
to 90.38 and the fill was made with a bunch of other orders at that price.
SEBL continued on a strong move up, rising to 94.50 in the next 10
minutes. Now just sit back and watch the gains. Twenty minutes later
SEBL was at 87.50, just above its low for the morning. It bounced again
and ran back up to 94.62. We thought about moving a stop loss up to 93 or
so, but decided against it. Of course, the BAC news came out and SEBL
sold with the other stocks, hitting 86.50 on its low in the last hour. It
made a solid bounce in the last half hour and closed near 90. Basically
flat on the day. Could have been worse; we got lucky. SEBL is strong, so
we anticipate further gains in another rally. Still, we need to keep our
stop rules for new buys, setting this one at 84. |
