12/23/00 Investment House Daily
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TONIGHT:
- Holiday rally starts off with a bang, and we don't think it is over just yet.
- This is fun, but remember we are in a bear market.
- Economy shows no surprises as softness continues.
Stocks shoot up ahead of Santa Claus.
The Nasdaq was showing signs it wanted to rally after getting blistered
the past week. The move failed Wednesday, but there were signs it was
still ready to give us a bear market bounce. Friday it was up early,
middle and late, giving us a belated holiday gift. While next week brings
us closer to earnings season and the likelihood of more earnings warnings,
stocks were showing excellent momentum after hours, and they still have
room to move up before they hit their down trendlines. At that point the
rally could very well run out of gas as the down trendlines have been very
solid resistance all the way down.
Bear market rallies can be fierce, and that is what we have to assume this
is unless we see significant changes, one being better chart patterns.
Look at the charts on the big tech stocks; they are once again showing 'V'
bottoms after Friday's move. Those are prone to failure as the sellers
who bought right before the most recent slide have not been flushed out by
the passage of time. They are ready to dump their shares when they
approach or get back to the point where they bought into the positions.
As we have seen over and over this summer and fall, rallies have
consistently failed when stocks jump back up and approach the point where
the most recent selling started.
Still a bear market.
This has the look of a classic bear market rally: furious, but on light
volume. There are still many plays to the upside in the beaten down tech
stocks, but they are merely momentum plays at this point. Don't get us
wrong, these moves are marvelous: JNPR (up 31%), NTAP (26%), SEBL (20%),
BRCD (24%). The list goes on. Despite what we have seen since September,
bear market rallies are not just 1-3 day events. They can last weeks,
even longer. It is just that this market has been brutal, and stocks have
been stomped every time they show signs of life. The market just gave us
one rally the first week in December, and it is trying to give us another
one now. This one could last longer or not.
As we said, more earnings warnings are sure to come next week, and that
could put a stop to it. We have to be ready for the end of the move as
always, looking for singles, not home runs right now. The key will be the
down trendlines that have slammed the door on each rally. Right now ADBE,
NTAP, BEAS and ITWO are a few of the stocks at or approaching their down
trendlines. If the stocks start breaking above those trendlines, we may
have a longer upside event on our hands. If we see the rallying stocks
picked off one by one as they hit their down trendlines, we have to be
ready for another turn back down. Again, keep it simple and safe.
edit: hmmm, BEAS one of the new leaders?
you read it here first, MONTHS AGO LOL
THE ECONOMY
Hey, where did all of the bad news go? Friday saw higher durable goods
sales, increased consumer expenditures, and higher personal incomes.
Durable goods sales were higher than expectations while the other two
reports met expectations. For once a report showed more life in the
economy than expected. We don't want to rain on the parade, but before we
get enthusiastic we have to look behind the numbers and one other big
indicator that was not so friendly.
Airline orders carry durable goods sales higher.
Durables goods looked pretty good for November, rising 2.3% versus
expectations of 1.5% and well above October's 6.5% drop. The largest part
of the rise, however, was again transportation, namely airplanes. That is
the most volatile element of the report, and durable goods sales rose just
0.4% when taken out. Still, the fact that one part of the economy is
still churning away is positive. Unfortunately, consumers, the largest
driving force in the economy, do not buy many airplanes.
They are literally giving merchandise away at the stores.
Speaking of consumer spending, November spending was up 0.3%, inline with
expectations, but that was below October's 0.4% increase. Given that
November is the kickoff month for holiday spending, the smaller increase
is not promising. That, however, was something we already knew given the
reports on the very lackluster holiday sales season. Indeed, we said back
in September and October to wait and do the Christmas shopping the last
few days before Christmas as stores would be begging to bring people in.
Not many agreed it would be that bad, but the numbers were pointing down,
and that is exactly what has happened. Home Depot has everything in the
store on sale. Other stores are giving stuff away to attract customers.
We are sorry this prediction was so accurate.
Consumer sentiment drops sharply.
The Michigan survey of consumer sentiment for December lived up to its
preliminary number, coming in at 98.4 for December, down from November's
107.6 reading. As noted last night, that is the fourth largest drop in
the seminar's history, the others coming during recessions or wartime. We
need to put the number in perspective, however. It is coming off of
all-time high readings, so while the decline was significant, the actual
number does not indicate a level where consumers are donning sackcloth and
ashes. If it continues on the downtrend that started two months ago,
however, with the rest of the weakened economy (manufacturing,
technology), there won't be a force to turn things around. We have all
heard that consumers are two-thirds of the economy, and if they go turtle
it is hard to turn things around.
Oh whence the Fed rate cut?
Thursday night we said we felt a rate cut would certainly come when the
fourth quarter GDP numbers were released. Unfortunately, in January they
won't be released until later in the month, a holdover from things
shutting down around the holidays. That is disappointing. Poring over
the reports coming out in early January, retail sales, a very good proxy
for consumer confidence, is out on January 4. In the minutes of the
November FOMC meeting Greenspan again was clear about his concern for the
consumer; if sales remain atrocious the last days up to Christmas, that
will be a potential catalyst. Not as solid as GDP, however.
THE MARKETS
Thursday hinted at it and Friday showed it: a fierce reflex rally on all
three major indexes. Lots of obstacles ahead, but we don't expect this to
be a lasting bull run. It may turn out to be one, but we cannot assume
that now. Make the most of it, but don't let it get the best of you when
it runs out.
Overall market stats:
VIX: 31.52; -2.90. Volatility fell as the market rose as it should. As
noted on Thursday, this indicator spiked over the 34 level that gave us
the brief rallies we have seen this fall.
Put/Call ratio: 0.61; -0.11. Put buyers dropped further on the continued
buying. As with the VIX, this is expected, but the ratio never spiked to
heights that lead to more substantial rallies.
NASDAQ: Thursday night we said be ready, and Friday delivered. The index
gapped higher, but stocks tested their first move about an hour into the
session giving excellent entry points for another sharp rally that has
characteristically followed the strong bouts of tech selling. There were
many plays to hit, and indeed, we hit one stock twice in one session; when
an index climbs over 7% in one session, you can get away with some wild
plays while still playing it safe.
Stats: Up 176.90 points (+7.6%) to close at 2517.02.
Volume: 2.24 billion shares (-16.5%) as the Nasdaq continues to sell on
high volume and rise on lower volume. Not the 'healthy' price/volume
action we see in bull markets. Up volume was 1.757 billion shares versus
406 million to the downside. Lots of buyers, but they still cannot
compare to the sellers when they are out in force.
A/D and Hi/Lo: Advancing issues blew away decliners, 2.05 to 1. New
highs rose to 91 (+34) while new lows fell to 340 (-352).
The Chart: investmenthouse.com
Thursday night we must have had wishful thinking, stating that 2880 was
the test. Of course we meant 2280; sorry for the lapse.
In any event, that test of 2285 was enough to turn the index higher on a
solid rally Friday. The two missing elements were stronger volume and
solid patterns in stocks that can lead the market on a long bull run,
i.e., technology stocks. We even heard one television commentator say
that the Nasdaq 'broke out' when it moved over 2500. Breakout from the
bottom perhaps, but not from any pattern. Another move to 3,000?
Possible, but there will be strong resistance at the 2750 level from past
prices and the down trendline connecting the September, November and
December highs. That is another very playable move, however, and in the
game we are in now, we are not in buy and hold but buy, get a decent move,
and get out when trouble threatens.
Dow/NYSE: Another solid point move sending the Dow over 10,600 and the 50
day moving average (10,621.39). The Dow won't give up either, but it is
rising on lower volume and it too has to face its own down trendline that
is now just below 10,750.
Stats: Up 148.27 points (+1.4%) to close at 10,635.56.
Volume: NYSE volume fell again as the index rose (1.087 billion
shares; -24.9%). Again, the wrong price/volume action, and that shows us
that for now this is a temporary thing. Up volume was 805 million shares
versus 247 million downside shares.
A/D and Hi/Lo: NYSE advancing issues widened their lead over decliners
2.28 to 1. New highs rose to 211 (+3), while new lows fell to 91 (-105).
The Chart: investmenthouse.com
The Dow did in fact rise again as we thought, but the poor price/volume
action does not give us a lot of hope that the move will continued.
Nonetheless, these are very tradable rallies as we are seeing. The down
trendline as noted is at 10,750 right now, and 10,800 has acted as some
resistance in the past. If it can clear that, the real test is at 10,900.
S&P 500: After the worst loss in over a year, the S&P 500 is trying to
move up, but it has just a little less damage to it than the Nasdaq. It
does have a lot of room to run to its down trendline at 1365, but there
are serious hurdles before that 1325 to 1335, and then at 1350 to 1360.
As with the Nasdaq and Dow, however, we cannot be looking at this move as
the move that will right all wrongs. It is playable, and we take it for
what it is until it shows us otherwise. Right now it is showing a strong
point move to the upside on declining, below average NYSE volume. As we
have seen all year, these low-volume rallies run into trouble sooner than
later.
The Chart: investmenthouse.com
THIS WEEK
For economic news, this week does not pack a lot of wallop. The big news
is consumer confidence due out on Tuesday. It is expected to be lower for
the third month in a row, a safe bet seeing the Michigan survey that came
out on Friday. Jobless claims are out on Thursday, but other than
consumer confidence and jobless claims, there is not much Fed-moving news
on the economic front. That is, other than more earnings warnings by
companies coming clean before the fourth quarter earnings season starts
the second week of January. That week also gives us the December retail
sales numbers, and as noted above, that could provoke the Fed to take
action.
Right now we have to avoid looking ahead to a Fed rate cut and focus on
our plays at hand in this market that gives us light-volume rallies that
tend to fail rather abruptly. That could always change, and we always
keep our eyes open for that occasion. There just are not enough good
patterns in leading-caliber stocks that are ready to complete their
formation. With the recent round of damage, a few more weeks are needed
if no serious shocks come again. No guarantees there, but a few extra
weeks would allow the patterns to form up and give the Fed a chance to cut
rates; that would be a fortuitous confluence of events.
We expect the rally to carry through Tuesday (market closed Monday), but
we also know that some companies wait until the first of the week to drop
bad news. If that happens the rally could be abruptly ended, but we have
to deal with what we have. We are going to avoid new positions on
rallying tech stocks that are near their down trendlines; that is a recipe
for disaster if the recent past holds form. There are several with plenty
of room to run still, and some that showed us doji's on Friday as other
stocks rallied. That is the way it works: one wave takes off then the
next. These are pure momentum plays at this point as most shot up on
lower volume in a reflex move (JNPR and CIEN are notable exceptions).
While the techs rally, other stocks in the defensive sectors that have
done so well (tobacco, food, drink, healthcare, utilities) pull back. With
light volume on the tech rally, the pullbacks in these stocks will not be
on heavy volume either. We expect the pullbacks to be to support at
breakout points or at the 10 or 18 day moving averages (these act as
typical support levels when uptrending stocks pullback). That works out
just right because when the techs run into resistance these stocks will
have pulled back to logical buy points. That is the rotation that has
marked this market for the past several months. It behooves us to be
ready for the changeover when it starts. That has usually been when the
techs hit their down trendlines. We are continuing to monitor those
defensive sector plays that have been on the reports, and when the tech
move starts to fade or they hit good buy points, we will put them back on.
Support and Resistance Levels
Nasdaq:
Resistance: 2750 represents some resistance. The down trendline is just
above at 2800 at this point.
Support: 2288 held last week, but if selling starts we are not confident
of that level holding. After that 2200 down to 2000.
S&P 500:
Resistance: 1325 to 1335, then 1350 to 1360. The down trendline is at
1370.
Support: 1270 is possible support. 1254.07 is the year low hit last
Thursday.
Dow:
Resistance: 10,800 to 10,900.
Support: 10,300. After that, 10,000. |
