Don, personally I think you could be 100% right. The volume on Friday shows that there are interested buyers. I'm a bit down on a lot of AMAT I am holding but a rally will come after the final selling. We may not have to test the Sept lows.
Thank you for your answer and all your hard work. Interesting info here from Investment House here:
Weekend Market Summary
investmenthouse.com
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6/14/02
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TONIGHT:
- The elements were falling into place, but the market again rallied back.
- Comeback once again lets off steam and gives the market a reprieve.
- Economic numbers good, but sentiment helps trigger further selling.
- Indexes test lower again, making another lower low and then rebounding.
Friday looked as if it could start the final selloff, but it never hit panic levels.
That factors were piled up against the market: yet another reversal off an attempted rally on Thursday, a bombing at the U.S. consulate in Pakistan, a warning from the wireless sector, downgrades, tech warnings. In other words, the familiar litany of woes that stalk the market and have kept a lid on the rally attempts. Then the Michigan sentiment survey hit just after the open and really sent things reeling on the belief it was confirmation of the weaker retail sales and raised again the specter of the double dip recession.
Friday was piling on more than usual, and it looked as if the indexes could start a definitive sell off that would finally cascade lower and drive fear high enough to set the second bottom of the double bottom/test off of the September 2001 lows. A nice tanking Friday and a solid shelling Monday would really shake things up. Selling was intense, but it was not panicky. The VIX and VXN moved immediately higher early (36 and 57 on the highs); good for the start of a selling climax.
The daily comeback lets the market off the hook.
Then the market did what it has done for the past couple of weeks: it found support at the next lowest level and rallied back. Now while this was once again some short covering off of the support and some end of week position squaring by the hedge funds it was surprising that the indexes closed near their session highs given the bombing of a U.S. interest overseas. Seems not too many were concerned about holding some positions or not being short over the weekend.
So once again the pressure that was building for a strong downside sell off was released. The relief valve in the form of a relief/short covering bounce off of some minor support dissipated a good start. Still we note that once again lower lows were made (the Nasdaq 100 undercut the September 2001 lows) and again more of our downside plays hit their targets. One commentator noted that if you were short the market you had 'your head handed to you.' Well, that is the usual micro analysis you see on the television. Unquestionably the trend is down, and each day several of our put positions hit their targets as they bounce up and down but trend lower and lower. As of Friday the market was not in a position to mount a reversal, but more of the same grind lower with short covering each time a support level is hit.
THE ECONOMY
Michigan sentiment jolts investors, but the bigger picture is still getting better.
Michigan sentiment survey falls to 90.8 from 96.9.
Flagging sentiment jolted the market after the early bad news already started the selling. Expectations were for 96.6, a small drop, not the worst showing in the report since December 2001. The six month outlook plunged and caused the drop, and investors decided to send the market down with it. After the weaker than expected May retail sales numbers, investors saw declining sentiment as just confirmation that the economy was slowing. That is just more than a bit off the mark.
Sentiment is important because it does gauge the general feelings of the average shopper out there. Historically, however, sentiment is just not a very accurate gauge of how the consumer will perform. Many good economists have gone back and matched up the data, and it just does not give the kind of forecasting as to consumer spending that it is credited with. Add to that the fact that this was the preliminary statement and that the survey group consists of a whopping 200 people, one should not put too much into the report. Sure the market gyrated over it as we thought it would in the Thursday report, but the number did not take anything away from the economic recovery in the longer term.
What statistics back this up? Well besides the historical data, June sales (2 weeks into the month now) are very strong. We discussed this late last week when the May retail sales numbers were released; consumers are waiting for sales and they are getting more of them in June. Plus they are buying clothes, electronics and the like just as the weekly reports have been showing.
Industrial production tells the more important story.
All along it has been clear that the consumer was doing what the consumer should, i.e., consume. The consumer was one reason the Fed was so worried about inflation (we were going to spending our way into inflation, oh my!) and one of the purported reasons for rate hikes. The consumer still purchased throughout the recession much to Greenspan's befuddlement; consumers consume and they did so until jobs started to go away. They still kept the plastic dusted off however even in the recession. The consumer did not lead us into recession and the consumer is not going to pull us out: it is the business side that has been dormant, and it continues to show signs of improvement.
While consumer sentiment was lighter the business sector continued its improvement with another increase in industrial production (+0.2%) its fifth consecutive gain. It was the lowest increase in 2002, but the expansion in this key area continued. Autos and utilities dragged it down even as high tech and semiconductor production rose (1.2% and 2.3%, respectively). It may not be a surge, but it is steady growth, and coupled with very thin inventories, good news for the future.
Business inventories at record lows while sales are up.
Inventories fell 0.2% making it 15 straight months of declining inventories. The $1.11B drop was the lowest annualized level in since October 1999. Moreover, the 6.1% drop year over year is a 10 year low. At the same time sales rose 1.8%, the first real positive gain since February 2001. That puts the inventory to sales ratio at 1.35 months (how long it takes to drain current inventories), an all-time low.
What this means: companies are not increasing production to match the draw down in inventories, i.e., just to match sales. They are willing to let inventories slide for now, just meeting the current production demands. This could lead to quite a big rebound in production activity if the strong early June sales continue into the summer and businesses demand continues to improve; businesses will have to increase production. Good old supply and demand takes over and starts a real rebound.
CFO's looking at rising Q3 profits. The winds of corporate leadership sentiment are finally starting to change from dour to not so bad. Expectations are for a profits rise of 14.4% in Q3 says the Duke University quarterly survey. Only 20% of the CFO's think capital spending will return to more normal levels, however, and most plan to keep cutting inventories. That jibes with the conclusions drawn from the Business inventories reports. Employment is expected to remain flat for Q3 which is a bit different from a prior survey last month that indicated employers expected to raise employment in Q3. One last positive: CFO's expect U.S GPD to grow at 2.9% over the next year versus 2.3% in the prior survey. There are finally some admissions that things are getting better in addition to the economic reports showing things are still improving.
Summary: The weaker retail sales and lower than expected consumer sentiment that fanned the initial fears last week over a double dip recession are simply overreaction. Indeed, these were really just the excuses to sell in a market that was ready to sell anyway. The economy is coming around; businesses are starting to spend. Businesses are going to have to spend more if consumption continues into the summer as it appears it will. While that may not rescue technology stocks anytime soon, the cycle that starts driving earnings higher has started. Another key element: commodities held steady Friday, barely blipping on the market worries over confidence and the like. Commodities are very economically sensitive. Their reaction to the news tells a lot about the importance of Friday's sentiment report. As we have said before, however, at what level do stocks become a value? Not yet as the market continues to sell with an average S&P 500 P/E of 42.
THE MARKET
Friday action is familiar. Many this is familiar action. Another sell off to near term support and a rebound on strong volume. While it can make you think that one of these is going to have to stick for a rally, the lows keep getting lower each time. Moreover, you might think the market is just getting too oversold and needs to bounce in relief. Problem is, it does that every other session with these rallies; just when it looks as if things are climbing toward the boiling point the kettle is taken off the fire and the fear subsides.
That is not to say that progress is not being made. The Nasdaq 100 (the 100 largest cap Nasdaq stocks) undercut its September low, the first of the majors to do that. At 1445, the Nasdaq was still 58 points shy, the S&P 500 35 points shy. As we noted Thursday, they are far enough; they have done a sufficient test. The problem is the Dow that has a long, long way to go. Its low at 9260 put it 1200 points off of its September low. That is still a hefty drop.
How far is far enough? Okay then, does the Dow have to fall that far? No. In the 1973 to 1974 bear market the Dow fully tested its low over a 3-month period, but the S&P 500 tested 'just' 80% of the move off the low over the same period. You can have one index fully test and the other hold above, lagging behind and then starting to rally on up when the others have done the dirty work. The Dow could be doing that now.
The last episode where the stock market did not respond to Fed rate cuts (though the Fed did not help itself by raising rates prematurely) in this manner was in the early 1930's. The Dow was in a big head and shoulders pattern from 1929 to 1930 much the same as the S&P 500 and Nasdaq today. It completed the pattern and crashed lower in a continued downtrend for another year and a half before it bottomed. It fell 77% from its initial rally off the bottom, and that was the end of the test.
Where does it stand today? How does that compare to today? The S&P and Nasdaq are in big bearish patterns similar to the Dow in the early depression. P/E ratios are at historically high rates even though the market has sold off. Investors are just not willing to pay a lot for future earnings right now. The economy is expanding, but investors have not decided if it is fast enough to warrant current stock prices. Certainly the fear indicators are not at historic levels that have led to the final bottom. It is very likely that both the S&P 500 and the Nasdaq will undercut the September lows as the Dow tests the September low more in the 60% to 80% range (it has only done 54% as of Friday's low; 80% puts it at 8585, roughly 700 points lower than Friday's low). If some vigorous selling was maintained over a 3 or 4 session period, everything would line up: percentage sell off, sentiment indicators, etc. It is not doing that, however, taking a stair step approach that is still giving some hope that this is the bottom. It could be, but we don't believe everything has lined up yet for a final bottom.
VIX: 29.93; +1.20. Hit an intraday high at 36.01, its highest reading early November 2001. It is making needed progress, but when overlain with an S&P 500 or OEX (S&P 100) chart you can see that the magnitude of the fall in the S&P is greater than the rise in the VIX. Going by historic levels it would appear that the S&P has further to fall.
VXN: 55.67; +1.37. 57.58 on the intraday high. This is approaching levels the VXN traded at in the summer of 2001 as the Nasdaq trended lower as it is doing now and BEFORE it started the bigger sell off in late July when the VXN started its rapid climb right ahead of September 11. Indeed, the day before the attacks the index peaked at 66.06 and closed at 63.84. We felt that the market was close to bottoming as we said in those reports that night. It really should be in the seventies to eighties for a good, solid indication.
Put/Call Ratio (CBOE): 1.15; +0.33. This is the fourth read over 1.0 on the CBOE in the past 5 weeks. Moreover, the put/call ratio on all option exchanges closed at 1.05 (that takes the entire put activity in the market), the first time it has done so since February. These are strong indications of downside speculation getting extreme: option players are on the whole speculators, and they are betting on further declines. If the fear level in the rest of the market can rise to match this speculation (i.e., VIX, VXN, bulls vs. bears), you have a good signal to get ready for the turn off what will most likely be the final bottom in this bear market. It is not there yet.
Nasdaq
Stats: +7.88 points (+0.53%) to close at 1504.74
Volume: 1.826B (+16.32%). Yet another volume surge on a reversal after a test of interim lows. Each such test has triggered higher volume as shorts cover. This also had the aspect of end of week shuffling. At some point it will stick, but we feel it will come after a more extreme spike in the sentiment indicators.
Up Volume: 921M (+391M)
Down Volume: 879M (-77M). A come from behind win for up volume.
A/D and Hi/Lo: Advancers led 1 to 1 (a 5-stock margin)
Previous Session: Decliners led 1.68 to 1
New Highs: 25 (-17)
New Lows: 242 (+75). New lows rose on a session the index gained ground. A sign of underlying weakness on the move that belies the volume and the positive finish.
The Chart: (Click to view the chart)
The Nasdaq 100 undercut its September 2001 low and the Nasdaq was just a couple of sessions away on the Friday low. It once again found support at a marginal support level (the bottom channel of the May downtrend) as short term shorts covered at that level. The shorts are playing a game of selling into the rallies and then covering when the indexes undercut the prior lows and tap possible support levels, not wanting to be caught in a whipsaw. The Nasdaq, however, has been making steadily lower lows, riding down the bottom channel of the May down trendline. Now at roughly 1420 the bottom channel line in the May down trendline will intersect the bottom channel of the March down trendline. That may produce some more support. Of course, that is also the intraday low tested on 9-27 just after the Nasdaq bottomed on the selling after the market reopened.
The Nasdaq 100 has usually led the way for the Nasdaq in the downtrend. That it made a lower low that undercut the September low indicates to us that the overall Nasdaq will do the same after it tries to mount a further move up toward the 10 day MVA (1539.86) if it is not stopped here at the May down trendline right at the Friday close.
Dow/NYSE
Kept things in round numbers, falling close to 9250 on the low and then rebounding to close just shy of 9500. Big volume reversal again just as we saw on June 4 and June 7, though this one was more impressive as it came back from a further deficit. Important that it could not muster a positive close.
Stats: -28.59 points (-0.3%) to close at 9474.21
Volume: 1.537B (+8.76%). Above average NYSE volume on the reversal, but it was much lighter volume than the two prior reversals the past week.
Up Volume: 577M (+113M). Up volume fell well off the pace even with the reversal. Another signal it was not a really strong move.
Down Volume: 950M (+13M)
A/D and Hi/Lo: Decliners led 1.2 to 1
Previous Session: Decliners led 1.59 to 1
New Highs: 39 (-24)
New Lows: 177 (+76)
The Chart: (Click to view the chart)
It was dancing on the cliff and fell off Friday. It caught a springboard at 9260, however, and fought all the way back to close just below 9500. On the low it came close to the bottom of the March downtrend channel (9200). On the high it closed just below the March down trendline (9525), and the 10 day MVA (9634.71) lurks right above it. The fact that it closed negative and below 9500 Friday with lower reversal volume than it has been showing indicates it was not a strong bounce.
S&P 500:
The large caps tanked with the rest of the market, bottoming at no real support level at 981.63. It reversed 25 points off of that low and rallied to close just negative. The close put it right on the September 2000/May 2001 down trendline and also at the May closing price down trendline. Volume was strong, but as noted with the Dow, weaker than the prior reversal sessions. Resistance ahead include the 10 day MVA (1027.74) and the March 2001 down trendline at 1025. An impressive point reversal, but as with the other indexes, the real fear was not there for setting the bottom.
Stats: -2.29 points (-0.23%) to close at 1007.28
NYSE Volume: 1.537B (+8.76%)
The Chart: (Click to view the chart)
THIS WEEK
Another week stacked with economic data (CPI, housing starts, trade balance, leading indicators) that, with the current mood, have to be very impressive to convince investors the economy is not heading down the toilet. It is not as the very data some were saying last week showed slowing actually show gains as we pointed out.
Basically the market is where it was the previous Friday, just lower. The prior Friday there was a reversal off of some ugly selling on Thursday that appeared it could lead to a fast and significant slide lower. This past week the same action: selling on Thursday after an attempted bounce Wednesday, and then a big sell off Friday that reversed off the next potential support level. Sentiment indicators rose but did not hit critical levels. Again, same story, just a bit lower.
Monday we anticipate a bit more follow through on the reversal as we have seen in the past bounces off support. Without sentiment hitting the highs that historically indicate a reversal of substance, any bounce will struggle at resistance levels and then most likely continue the trend of making lower lows until something major causes sentiment indicators to rise significantly or just he continued selling gives the same result.
This week we anticipate a bit higher bounce than the recent previous attempts. The losses on the S&P 500 and Nasdaq have been smaller and smaller, the Nasdaq almost making a higher close on Thursday. We are watching for the 10 day MVA to hold or the immediate down trendlines. If the indexes behave as before, they will close off the highs on the session they run out of steam. We will use that move to take some more downside positions and see if the sentiment indicators can run up on the next test lower.
Support and Resistance
Nasdaq: Closed at 1504.74
Resistance: May down trendline at 1502. The 10 day MVA at 1539.86. Then 1550 that held as resistance in recent sessions. The 18 day MVA (1573.91) and 1600. The second March down trendline at 1605. Then the following March to April trendline now at 1641 and the February low at 1700.
Support: 1500 is still fighting to hold. 1460 is some support. 1425 to 1430 is the bottom channel of the May down trendline. Then there is the bottom channel of the May downtrend at 1420. After that is the September low at 1387.06.
S&P 500: Closed at 1007.27
Resistance: Closed at the September 2000/May 2001 down trendline. Then the first March down trendline at 1025 and the 10 day MVA at 1027.74. The 18 day MVA at 1042.06 and 1050 are next followed by 1060 that offers minor resistance from previous prices. The second March/April down trendline at 1055. Then the February lows at 1074.
Support: 1008 is the September 2000/May 2001 down trendline. Below that is the bottom of the March downtrend channel at 1000 to 999. The September low is 944.75.
Dow: Closed at 9474.21
Resistance: 9500 and the March down trendline at 9525. The January and February lows at 9620, followed by the 10 day MVA (9634.71). Then 9750 and the 18 day MVA (9748.61). The April and May lows at 9800 to 9811. The 200 day MVA (9853.04). The September 2000/February 2001 down trendline is at roughly 9940. Then 10,100, followed by 10,250 to 10,300.
Support: Still on the bottom of the shelf of support from 9500 to 10,100. 9250 rose up from nowhere to turn the Dow Friday; possible support there. Then 9000 to 9100. There is a rest stop at 8500. The September low is 8062.
Economic Calendar
6-18-02
- CPI, May (8:30): +0.1% expected versus 0.5% prior.
- CPI, core (8:30): +0.2% expected versus 0.3% prior.
- Housing starts, May (8:30): 1.600M expected versus 1.555M prior.
- Building permits, May (8:30): 1.620M expected versus 1.634 prior.
6-20-02
- Current account, Q1 (8:30): $-107.5B expected versus -$98.8B prior.
- Trade balance, April (8:30): -$32.1B expected versus -$31.6B prior.
- Intial jobless claims (8:30): 38kK expected versus 390K prior.
- Leading Economic Indicators, May (10:00): 0.2% expected versus -0.4% prior.
- Philadelphia Fed, June (12:00): 10.6 expected versus 9.1 prior.
- Treasury Budget, May (2:00): -$60,0B expected versus -$27.9B prior.
RtS |
