12/21/00 Investment House Daily
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TONIGHT:
- The markets started to rally, and we expect some more tomorrow the last
day before Santa arrives.
- Timely trading thoughts.
- More warnings from stalwarts of the economy.
- As more information comes in, the economy shows more weakness.
An anemic rally attempt leaves the market still looking decent for a
final, one-day ho-ho rally.
The Nasdaq did pretty much what we wanted, testing 2285 and then starting
a solid, 135-point move up just over an hour into trading a 6% move. That
was great. Then the November FOMC meeting minutes came out where the Fed
stated it did not want to shift to a neutral bias for fear it would
further soften the markets. Whether that almost incomprehensible logic
was the cause or not, the Nasdaq then started a slow topping pattern and
then rolled over 12:45 CT when the 5 minute moving average crossed over
the 15 minute moving average. A late rally move turned the Nasdaq
positive once again at the close, but it was a bittersweet finish. The
Dow and the S&P 500 both turned in much better days, but they also sold in
the afternoon as sellers once again entered on a rally in order to dump
shares.
Still, we were able to trade some plays as we described on Wednesday night
on the big move up. Utilizing trailing stop losses, we were able to lock
in some decent gains for the session. Not home runs, but nice singles.
After the dust settled, there are still some good-looking bounce patterns
out there, i.e., doji's at the bottom of a long spate of selling, that
could give us another run up as we saw today. We note SEBL, NEWP and VRSN
all closed on tight doji's today, an indication they could spring up
tomorrow in a pre-holiday rise. Indeed, the Nasdaq itself shows us a doji
on its candlestick chart, indicating it too is ready for a rise. Nasdaq
futures are 60 points above fair value tonight.
Probably not a meteoric rise, but one, like today, can make us money as
the big movers run up. We have to keep putting in stop losses as they
move up, just as we did on the JNPR and MRCY trades we discussed last
week. That way we are better assured of locking in that gain we do have
in the event we get another one of those intraday reversals that peel off
the nice gains made intraday. We are thus looking at the same type of
plays we were looking at today: techs ready to bounce and run up, solid
sectors breaking out, and downside on those stocks that run into
resistance in their down trendlines and roll back over.
Investing in this market.
This brings us to some important points to consider in this type of market
as we head for the new year. First, as we have stated repeatedly over the
last couple of months, this market is not showing us this is a 'buy and
hold' market right now. Stocks move up and then fall back. There are
uptrends to play as we are seeing in the financials, drugs, healthcare,
food, and beverages. There are downtrends we can play in the techs when
they hit their down trendlines. None of these are going to last
long-term. So, unless you are dollar-cost averaging at this point for the
very long term, you are not thinking long term. Indeed, if you are dollar
cost averaging, you are not expecting a rise anytime soon; no short-term
gains.
What money do you use?
So, what money should you be using? Not your entire trading capital.
Times are just too uncertain to risk the whole enchilada on any particular
trade. We are using a fraction of our investment capital to make the
trades we are making. Our reason is simple: we are not able to let trades
run for days or weeks at a time due to the volatile market, so the risk is
higher. We do not want to put all of our investment capital at risk on
trades that are not going to make us rich. We will make trades that make
us 20%, 30%, and 50%, but we are not putting up all of our trading money
to do it. We try to make money all the time in the market, but the amount
we put at risk depends upon the conditions. We don't want to take
ourselves out of the game by losing all of our trading money and have to
rebuild a trading account from scratch.
Stick to sell rules.
Many people have taken it on the chin this year. We have some missed sell
orders that we had to take greater losses on than we would normally have
done; when we did not get the trade we employed the most dangerous of all
market tools: hope. Hope does not buy much, and we have paid the price on
those trades. You have to keep strict sell rules, especially in this
market. Don't hope a trade will turn around. Better to take a small loss
than see a one-day drop turn into a 7-day, 500+ point drop as we just saw
on the Nasdaq. Watch your positions and use pre-set or mental sell
points.
Trust the market signals, not your emotions.
Because this has been a tough year, does that mean we walk away from the
market? Of course not. We have to keep our skills sharp despite the
carnage. Why? Because emotion is eating at you. That is how the market
works. It sends you to incredible emotional highs, and then it just rips
it all from you. We know some of you have lost large amounts of money
this year; you are not alone. Just think, CSCO, one of the 'safest'
stocks to own, the darling of mutual funds, has lost over $500 billion in
market cap this year. Think all funds sold out of CSCO? Hardly. They
are nursing losses as well. So, you feel as if the market has walked over
you, turned around and then and gave you a couple of kicks to the stomach
as you were lying there, right? REMEMBER THIS: when you feel ready to
chuck it all and give up on the market forever, that is when things are
usually ready to turn. That is the negative sentiment that clears out the
last holders, the wannabe sellers. What YOU HAVE TO DO is keep looking at
the market. DO NOT trust your emotions. Trust the market indicators.
Keep watching for a reversal followed by a higher-volume gain of 1.5% or
better 4-10 days later. Watch for strong stocks to start breaking out of
sound patterns, something we are still a few weeks away from right now.
When that happens, you will most likely say 'yeah, right,' and turn away;
at least that is what your emotions will tell you to do. That, however,
is the precise time you should shun emotion and trust what the market is
showing.
Help is on the way.
We know there is going to be a Fed rate cut sometime in January. The Fed
Funds Futures contract now as a 44% to 50% probability priced in that
there will be a rate cut BEFORE the January 30 FOMC meeting. Very
reliable; very accurate. A rate cut officially kicks off stock market
recoveries as the market looks ahead, and rate cuts mean more money and
investment in the economy, and that means growing earnings. The pundits
estimate a 25% to 50% rise in the Nasdaq in 2001. With aggressive rate
cuts (75 to 100 basis points in the first half), that is not out of the
realm of reasonable reality. 25% is not bad. 50% is great. Who will be
in to capture the lion's share of that move? Those who keep in tune with
the market and are watching the signals. When the market says 'go,' you
go and ask questions later. If you hesitate, ponder, procrastinate,
instead of 25%, you may get 10%.
Keep your focus.
We have said it before. Michael Jordan took a year off and then came back
to basketball for the playoffs. He was not Michael Jordan; the timing was
not there. It is a tired clich , but it is true. You have to run the
drills just as if you were playing so when the time comes, you can turn up
the tap on the number of dollars you are investing because the risk is
diminished when the market starts to rally for those who are watching and
ready to take action. Those singles we are hitting now to help build up
some cash and keep the money flow coming into the household will start
turning into doubles, triples and home runs as the market takes off on the
next bull leg. We will be looking at the best of the best that will
return much more than 25% to 50% when they start moving. You have to be r
eady and know when to act. Keep sharp because the move up is not too far
away. When the Fed gets the first quarter GDP numbers, we anticipate that
will be the trigger for the rate cut.
THE ECONOMY
Warnings again. LU completed the grand slam today, making it 4 quarters
of warnings in a row. Someone once told me LU was going to run CSCO out
of business. Talk is cheap; so is Lucent's stock. Georgia Pacific warned
of slowing earnings, but it rose on the news of layoffs and restructuring.
IP did the same earlier in the year, but then it just warned yesterday
again. It is hard to overcome a bad economy. The big one: after hours,
Ford warned of a fourth quarter miss (10 cents off) and a 17% production
cut in the first quarter. When the economy goes, the big ticket items are
the first to go with it.
GDP actually revised lower. We did not think it possible, but the final
GDP revision came in at 2.2%, down from the 2.4% revision of the 2.8%
number first reported way back in October. Seems that September strength
that McTeer was telling us to count on turned into a September swoon. We
have a very bad feeling that we are in negative GDP growth right now, well
ahead of schedule. Maybe the holiday sales will push us to flat for the
quarter, but flat or negative, things are not pleasant. It is really sad
to see these dire predictions we made months ago come true, but we have to
live with them. Again, help is on the way from the Fed, though we are
perplexed that the Fed was not as aggressive in preventing a downturn as
it was in pursuing inflation that never really showed its face. Maybe not
perplexed, more like saddened.
Jobless claims jumped to 254,000, topping expectations of 250,000. That
pushed the four week average to a level not seen since 1988. Seems the
Fed got its wish for Christmas, i.e., fewer people with jobs. This is a
leading indicator as opposed to the unemployment number that gets all the
headlines. It is similar to a boat captain looking in the boat's wake for
an approaching reef. Utter foolishness.
Tomorrow is the Michigan sentiment indicator. Closely watched by all
including the Fed. The preliminary number showed the fourth largest drop
in the history of the survey. Two of the larger drops were during a
recession, and the other was when Iraq invaded Kuwait. Let the good times
roll.
THE MARKETS
Tried to rally and almost made it. Volume was high, surprisingly so.
There is a lot of money out there ready to be put to work. The time is
coming. In the interim, we think we get a Santa Claus rally tomorrow.
One day, but better than no day.
Overall market stats:
VIX: 34.42; -1.28. 37.50 on its high. The VIX is showing us it is time
for a short term rally. Be ready tomorrow.
Put/Call ratio: 0.72; -0.08. Any rally, and the put buyers subside.
That is to be expected, however, and the ratio has climbed back to the
high-side of its range of the past two months. Nervousness, but not
enough. We may have an interim rally tomorrow that may last to next week,
but we feel there is another plunge coming that could drop the Nasdaq to
the teens and thus spike fear to all-time highs. Hate it, but almost have
to have it at this point.
NASDAQ: Down, a rally, then selling into the rally. Another day on the
Nasdaq. Tomorrow we see another good point gain even if just intraday.
Keep the stops in and hit some singles.
Stats: Up 7.34 points (+0.3%) to close at 2340.12, breaking the 7-day
losing streak.
Volume: 2.694 billion shares (-5.2%). Rising on lower volume, but this
is huge volume nonetheless. Down volume came in at 1.485 billion shares,
and up volume shot up to 1.128 billion shares. Much better, but not
great.
A/D and Hi/Lo: Declining issues still leading, but down to 1.25 to 1
versus the 3.98 to 1 ratio on Wednesday. New highs rose to 57 (+4) while
new lows fell (get this, fell) to 692 (-234). The new lows are
interesting. They show another sign that a crescendo is building (is that redundant?).
2888.16 was the lose that was tested. We were looking for a test of the
2880 to 2890 level, and that is what we got. That sent the index up 135
points to its high (2423.71) before the sellers came in. On the close it
held above the 2300 level again, and with the doji on the candlestick
chart today, it looks to us as if we get a continuation move tomorrow.
Dow/NYSE: After Wednesday's carnage, the Dow snapped back nicely above
10,400 on just slightly lower volume. Not bad at all as 10,300 held
nicely this time around.
Stats: Up 168.36 points ((+1.6%) to close at 10,487.29.
Volume: NYSE volume fell slightly to 1.419 billion shares (-1.3%). Up
volume was 760 million versus 608 million to the downside.
A/D and Hi/Lo: NYSE advancing issues overtook decliners once again in
their seesaw battle, 1.37 to 1. New highs rose to 208 (+16) while new
lows fell to 196 (-13).
As noted, 10,300 held, and the Dow, after starting lower on the session,
turned stronger and posted a nice gain. A very solid turn off of support,
and we expect the Dow to rise again tomorrow. Still, this may be
short-lived, and we feel that we will get another test of 10,300, more
likely 10,000 before it is done. That is good in the big picture. If the
Fed is coming with rate cuts, a selloff that spikes fear higher sets the
table for a better move up.
S&P 500: Wednesday the S&P 500 gave us its worst performance in over a
year. Today it jumped right back into the game, tapping 1254.07 on its
low and then moving up 20 points to close back over 1270. 1270 is
considered support, and a one-day violation of support can be forgiven.
For now that is okay as we anticipate another rise tomorrow in
anticipation of Santa Clause. After that, we will just have to see how
low the S&P will go on the next, and hopefully last, test of the lows
before the Fed acts.
Stats: Up 10.12 points (+0.8%) to close at 1274.86.
Volume: NYSE volume fell ever so slightly on the rise to 1.419 billion
shares (-1.3%).
TOMORROW
Today tested the waters, and we feel tomorrow will move ahead for a nice
pre-holiday rally. The VIX spiked, the Nasdaq closed on a doji, Nasdaq
futures are up 58 points, and we see several stocks once again showing us
that doji at the end of a long string of selloff days. We have to treat
this like a bear market rally, exactly what it would be, and that means we
are going to get some gains and move on. A few thousand extra bucks
before Christmas would help keep the Grinch at bay a bit more.
We think we will see an up open tomorrow, not like the picture-perfect
lower open and test of 2885 before moving up to the high on the session.
That means we are going to let the market open, wait for the pullback, and
then when we see the move start back up, we will start with positions on
those tech stocks we want to play to the upside for a quick gain. If the
first pullback takes the index below its open price, the safer play is to
let it and the stocks break back over their open price as that can act as
resistance. If it just tests the open price, but does not breach it, the
play is to enter when the bounce up of the open occurs.
For other plays, we do as always: let them breakout over resistance and
out of their patterns and take positions. On some tech plays, we are
watching for them to break over their down trendlines to enter; that is a
bullish sign for the day.
Keep it simple, keep it safe. Follow gains with trailing stop losses;
don't let gains get away from you. Bank some money for the holidays. If
the rally continues next week, we will do it again. Don't try to hit home
runs. Swing to make contact, and the home runs will be coming sooner than
we think.
Support and Resistance Levels
Nasdaq:
Resistance: 2750 represents some resistance. The down trendline is
around 28500 at this point.
Support: 2288 was the low today. After that 2200 down to 2000.
S&P 500:
Resistance: 1335 is acting as some resistance. 1370 is the down
trendline.
Support: Jumped right back over 1270 after testing 1250 on the low.
Dow:
Resistance: 10,800 to 10,900.
Support: 10,300 held again. After that, 10,000. |
