Investment House Weekend Summary:
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- Massive quarter ending volume unable to spark large cap move.
- Big indexes hit resistance and fall back.
- Small cap index pattern getting a bit toppy.
- Economic news shows continued slight improvement.
- Subscriber Questions.
Volume spikes as funds of all types shift their holdings.
Much was made of the quarter end shuffling and the rebalancing of the Russell 2000 that occurs once a year at the end of June. It was enough to spike volume on all of the indexes as funds dumped losers for the quarter and picked up the better performing stocks for the dog and pony show that is the quarterly statement. ‘Look at these great stocks we own that have risen 20% this quarter’ the statements will say. Then why was the fund down for the quarter is the question that is not often asked. It caused massive volume spikes in many small and mid-cap stocks Friday. What we have to filter through is whether the volume meant anything with respect to particular stocks of note. If there was accumulation in the pattern all along, it is a good indication as always.
Though there was some massive volume and a lot of action, the trend did not appear to change. The large cap indexes were up early and looking to build onto the Wednesday reversal and Thursday rally. In a now well-practiced move, they reversed from the highs, giving up the gains and sliding back to flat or worse. It was déjà vu all over again.
Near term resistance marks the spot.
The Nasdaq and S&P 500 rallied early to near term resistance. They did not immediately fall. Instead they continued to surge and pull back at the level, attempting to break on through to the other side. At lunch they made the breakthrough. After lunch they double topped. The Dow slammed into March down trendline; it did not survive the impact. All three big indexes sold off the rest of the session though a minor tweak late in the Nasdaq gave it a positive close.
It was not a massive selloff, but it was very typical: the indexes rallied up in the continuing downtrend to tap at resistance. They got there and reversed, closing near the session lows. After rallying up off another new intraday low that undercut key support, the indexes made it up to near term resistance in the downtrends and gave back the session gains showing a doji on the candlestick pattern. A doji is indicative of potential change in momentum. After the Wednesday reversal showing a doji on the Dow and S&P 500, the indexes did make the momentum change and moved back up to near term resistance. Now they are again showing a doji, now back at resistance. A doji after a move up or down indicates that momentum change. When it occurs at resistance after a move up, that is a good indication of a change in momentum, i.e., a turn back down.
The indexes did not have the only charts showing this pattern. Many of the large cap stocks were showing this action. KLAC rallied up to its 10 day MVA and May down trendline and reversed to close lower. IBM ran into its 18 day MVA, resistance in its downtrend, and rolled over with a doji. C in the financial sector did the same. The big stocks in the big indexes and key sectors are showing the same action as the indexes.
Small caps still moving well but we are watching the overall indexes.
Our small cap plays continue to perform well despite the sinking large caps and their indexes. We cannot let that lull us into any sense of complacency. In this market (or in any market for that matter), about the time you think you have it all figured out is when the market shows you how wrong you are. That is why we were watching so closely this bounce by the large caps from near the September lows. That is why we are currently watching the action on the S&P 600 and Russell 2000.
The S&P 600 is forming a potential head and shoulders pattern. The index made an interim high in January, tested the 200 day MVA in February, then rallied to a new high in April and then in May where it was unable to take out the April high. It sold back to its 200 day MVA in all of the May and June selling. It bounced to the January high near 237 and rolled back below the 200 day MVA. Friday it rallied with the market, but it could not cross its 18 day MVA on the high, the point where it ran into trouble when it tried to rally off of the 200 day MVA in mid-June. This describes a head and shoulders pattern. If it closes below 221.94 and cannot recover, it will have completed the pattern and can drop significantly more.
Other negative indicators on the small cap index. In early June the 18 day MVA crossed below the 50 day MVA. The Dow 18 day MVA crossed the Dow 50 day MVA in April; after a brief rally attempt the Dow started to sell into a steeper downtrend. Same with the Nasdaq, same with the S&P 500. A crossover to the downside often portents further selling.
How the S&P 600 responds here at the 18 day MVA (232.61), the 200 day MVA (228.38), and 221.94 will be key to the longer term success of the small cap rally. As we have noted over the past few months, historically small caps outperform large caps coming out of a recession. Problem is, the small caps can still sell down from here and continue to outperform the large cap indexes simply because the large caps have been hammered this year already. Thus we will continue to watch closely how the index performs over the next few weeks.
THE ECONOMY
Americans save more than they spend in May.
May incomes rose 0.3% while spending fell 0.1%. More income, less spending means ostensibly greater savings. The government’s method of measuring savings, however, is just money in a savings account earning 2%. That is of course growing as investors put less money into stocks each month and are not sure where to put it, but it does not tell the whole story. Not that this means a whole lot; it has never told the whole story even when the ‘savings rate’ was negative (more spending than income). Because the government does not count stock investments of any kind (along with a lot of other types of investments), the ‘savings rate’ is bogus.
The numbers do potentially show that consumers are spending less. The differences are so slight, however, they are well within statistical margins of error. As with so many of these government reports, even if they are accurate (i.e., not intentionally deceptive as many are advocating right now), at best they show very general trends. A 0.1% drop? Taken over the vastness of the U.S. consumer, that fraction fades into oblivion.
Chicago PMI: better than recent expectations, worse than Thursday night’s expectations.
As further evidence of the ongoing shell game with economic reports, late Thursday expectations were that the Chicago PMI would come in at 58.5; lower than April at 60.8. Well, by Friday morning, ‘expectations’ had fallen to 58.0. Guess what? The PMI came in at 58.2. Great news! It beat expectations. Yes, it was lower, but by golly it beat expectations. Hip, hip, hooray. These ‘adjustments’ are continuous. They are so fluid, however, that they end up making the actual number mean very little, again assuming that the actual number is accurate.
Statistics are funny things: supposedly hard numbers can be distorted in many ways. We always attempt to dig to the bottom to see what all of this means as far as the economy and the market. What does this number mean? In the Chicago region activity expanded at a slower rate in May. What did it mean to the market? Not a whole lot Friday.
Michigan Sentiment greater than previously reported.
Well, the last of the 500 ballots from ordinary citizens made it back to the University of Michigan. The first 200 ballots earlier this month said sentiment had fallen to 90.8 from 96.9. Panic, fear, anxiety. The consumer has gone into hibernation. Have mercy on our souls. The last 300 finally made it in, and this whopping survey of sentiment across the vast U.S. showed a drop to just 92.4. Beat expectations again. We were free to rally once more by the grace of the 500. Sound a little cynical? Can’t help it. The size of the statistical sample, the way it is dramatically released in ‘phases’ each month, and the wide ranging variances from early in the month to later in the month makes this ‘indicator’ pretty much a joke in our book. Its nice to have a report that is not necessarily government-generated, but it is more of a commercial for the Michigan economics department than a report. In any event, those 500 citizens are less upbeat but still feeling pretty good.
THE MARKET
All of the volume Friday did not change the overall action as the indexes found the near term resistance and sold down to the session lows. The downtrend looks ready to continue, but we are going to keep an eye on those September lows on the Nasdaq and S&P 500. The NYSE has shown that volume surge the entire month of June with NYSE volume close to matching Nasdaq volume. As previously discussed, this is an indication of a bottoming process. Along with the put/call ratio this is important.
On the other hand, volatility, bulls versus bears, and new lows have not hit levels that would indicate a bottom being set. Pieces of the puzzle are coming together, but others are not (sentiment, the Dow and its relatively minor correction compared to the Nasdaq and S&P 500) and some new problems could be developing (the small cap bearish action). For now the current trends remain in place but we have to stay alert.
Sentiment Indicators
VIX: 29.13; -0.89. Back below 30 as anxiety peaked intraday at 36 last week and has fallen ever since. It was not what was need to characteristically show a solid and important bottom.
VXN: 57.95; -5.18. Nasdaq 100 volatility held up on Thursday’s solid move higher. It tumbled Friday on the relatively weak action, showing up a day late. It spiked to 66.14 on its recent high, decent but not high enough.
Put/Call Ratio (CBOE): 0.66; -0.10. Not a lot of anxiety in the market Friday even as it rolled over from near term resistance. We were buying some puts in the afternoon as we saw the action reverse at those levels and turn lower.
Nasdaq
Actually cleared the 10 day MVA on the high and then gave the gains back. A late bounce moved the index to the positive side. An up day on massive volume, but it was not an accumulation session. The doji on the candlestick pattern shows the churning as millions of shares traded hands as the index slid back from resistance.
Stats: +4.01 points (+0.27%) to close at 1463.21
Volume: 2.762B (+42.34%). A massive volume surge on quarter end shuffling after the worst performance in Nasdaq history. You think institutions were trying to make their portfolios look better on their statements? Sure they were.
Up Volume: 1.497B (+33M). Up volume managed to top down volume, but on a shuffling day such as Friday it did not mean a whole lot.
Down Volume: 1.214B (+778M)
A/D and Hi/Lo: Advancers led 1.49 to 1. Advancing issues maintained a lead Friday, indicating that the overall Nasdaq moved fairly well. It did as we saw many of our smaller plays perform very well.
Previous Session: Advancers led 1.67 to 1
New Highs: 179 (+83)
New Lows: 167 (+12). New lows made it over 300 one session last week on the selling. Really not high enough or long enough to indicate a real sellout. You can see very high new lows without any climactic action. We could see new lows spike on further selling and find a bottom without a massive selloff.
The Chart: (Click to view the chart)
Lots of churning as portfolios were retrenched for the quarterly mutual fund and hedge fund statements going out in July. The Nasdaq ran past its 10 day MVA (1470.36) on the high (1486.25) but then fell back for a slight gain. Heavy volume and an intraday reversal or very little headway is a sign of distribution. That is what we saw Friday. Combined with the doji pattern indicating a reversal and the fact that it could not hold above the 10 day MVA on the close indicate the index is ready to turn back down.
There is some support at the interim low after the September bottom (1418). After that there is the March down trendline at 1410, teaming up with the long term up trendline from 1991 at 1400. That is the near term support that could give a bounce. We continue to watch that long term up trendline to see if it is going to have any ability to hold the index on the trend or if it has to further correct below the October 1998 bear market lows that started the most recent and violent upside spike. In any event, that gives us plenty of room to make another batch of downside plays.
Dow/NYSE
Hit the March down trendline on the high and rolled over on some massive volume. Churning action as well.
Stats: -26.66 points (-0.29%) to close at 9243.26
Volume: 2.068B (+10.79%). A similar volume surge on the NYSE but not nearly the volume of the Nasdaq. Nonetheless it continued its June volume surge as more and more NYSE stocks turned over. High volume churn after a long round of selling can indicate that an index is getting sold out. Problem is the Dow continues to sell down for now as it has a lot of ground to make up.
Up Volume: 1.3B (+100M)
Down Volume: 822M (+214M)
A/D and Hi/Lo: Advancers led 1.97 to 1. Very broad advance Friday as money left a lot of large caps and swelled the volume of small caps giving many of the smaller issues gains. Thus the strong A/D line.
Previous Session: Advancers led 1.74 to 1
New Highs: 166 (+67)
New Lows: 69 (-75)
The Chart: (Click to view the chart)
Hit the March down trendline on the high (9362.82) and rolled over, crossing back below the 10 day MVA as well (9331.76). Does not look as if the Dow is going to attempt the 18 day MVA (9458.77) as it did on the recent bounce. It has some near term support at 9100, then the bottom channel of the downtrend at 9025.
S&P 500:
Cleared the 10 day MVA (997.24) and the September 2000/May 2001 down trendline (997) on the high then reversed as well on the rising NYSE volume. That marks the near term resistance and the doji and higher volume churn at resistance indicates a move lower. The bottom of the March downtrend channel is at 974. After that it heads back below the September 2001 lows.
Stats: -0.82 points (-0.08%) to close at 989.82
NYSE Volume: 2.068B (+10.79%)
The Chart: (Click to view the chart)
THIS WEEK
A shortened week with the market closing at 1:00ET Wednesday and closed on Independence Day. That will keep somewhat of a lid on trading activity as not all institutions will be in the action after shuffling the portfolios on Friday. Monday will be somewhat interesting again, however, as stocks that were sold are repurchased and stocks that were bought are sold right back. The first part of the week could thus be active. After Tuesday morning, however, it will most likely calm down considerably as most money managers will head out for the longer weekend.
On top of that there is more economic data coming. The most important is the national manufacturing report (ISM) on Monday. Factory orders are out Wednesday. Friday is the employment report for June. That keeps things interesting as well, but as we have seen of late, economic news has not kept the market from continuing its trend. It can help a move already in progress along, but the news has not reversed any trends.
At this point we all know what that trend is. After hitting near term resistance on the bounce up after undercutting the 2002 lows, the indexes started to roll down once again. Friday we started to catch some of that move on the reversal, taking some put positions as the turn came. We have more of those lined out for this week ahead as the downtrend resumes.
Friday was a good day for smaller cap stocks as there was a lot of ongoing shuffling. We will see how they respond this week when the portfolio shuffling reverses itself a bit. As noted earlier, however, we are sticking with stocks in the best upside patterns that show accumulation even before all of this late quarter shuffling. The ongoing accumulation throughout the base/pattern is a major key as to how well they will continue to perform and how well they will fare on the breakout moves. While we stick with the best upside accumulative patterns we will also keep an eye on the small cap index and how it shapes up this week. That potential head and shoulders pattern keeps us on alert.
While we keep an eye out on the small cap pattern and how the large cap indexes once again handle the test of the September lows where they cold bounce with all of that NYSE volume in June, we will still continue to play the trends in place. Those are the most forgiving; you don’t have to be right on the money to still make good money as the trend works in your favor.
Support and Resistance
Nasdaq: Closed at 1462.21
- Resistance: The 10 day MVA (1470.36). After that 1500 and the 18 day MVA (1500.52) team up for resistance. Then the May low (1560.29) and the second March down trendline at 1555.
- Support: There is some support at the interim low after the September bottom (1418). After that there is the March down trendline at 1410, teaming up with the long term up trendline from 1991 at 1400. The March downtrend bottom channel line at 1355. The September low at 1387.06. 1357.09 is the October 1998 bear market low.
S&P 500: Closed at 989.82
- Resistance: The September 2000/May 2001 down trendline and 10 day MVA are also coincident at 997. The 10 day MVA (997.24). Then the March down trendline is at 1003, backed up immediately by the 18 day MVA at 1011.01. The second March down trendline at 1036. The May low at 1048.96. 1060 offers minor resistance from previous prices. Then the February lows at 1074.
- Support: The bottom channel of the March down trendline (974). The September closing low is 965.80 and the intraday low is 944.75. 923.32 is the October 1998 bear market low.
Dow: Closed at 9243.26
- Resistance: 9250 represents some resistance from some intraday and closing prices. The 10 day MVA (9331.76) and the March down trendline at 9335. After that is the 18 day MVA at 9458.77, followed by price resistance at 9500. Then 9750 and the April and May lows at 9800 to 9811. The 50 day MVA (9751.31) is at price point resistance at 9750. Then the 200 day MVA (9816.01). The September 2000/February 2001 down trendline is at roughly 9900. Then 10,100, followed by 10,250 to 10,300.
- Support: 9100 from the October 2001 consolidation after the move off of the September low. 9000 is the November low off of the first rally from the September low. The bottom channel of the March downtrend at 9020. There is a rest stop at 8500. The September closing low is 8235.81 and the intraday low is 8062.
Economic Calendar
7-01-02
- Auto sales, June: 6.1M expected, 5.7M prior.
- Truck sales, June: 7.2M expected, 6.8M prior.
- ISM, June (10:00): 55.5 expected, 55.7 prior.
- Construction spending, May (10:00): 0.3% expected, 0.2% prior.
7-03-02
- Initial jobless claims (8:30): 385K expected, 388K prior.
- ISM services, June (10:00): 58.2 expected, 60.1 prior.
- Factory orders, May (10:00): 0.6% expected, 0.4% prior.
7-05-02
- Non-farm payrolls, June (8:30): 60K exected, 41K prior.
- Unemployment, June (8:30): 5.9% expected, 5.8% prior.
- Average workweek, June, (8:30): 34.3 expected, 34.2 prior.
- Hourly earnings, June (8:30): 0.3% expected, 0.2% prior.
SUBSCRIBER QUESTIONS
Q: I have limited online access during exchange hours (I work!). I am considering using stock contingency orders for options. What is your opinion of this? Love the Daily.
A: Stock contingency orders with respect ot options means that you place an order to sell your options when the underlying stock hits a certain price. This is opposed to setting s top on the option itself. There are advantages. First, in thinly traded options (less than 100 open interests is our usualy cutoff point, but very liquid options have over a thousand open interests) stop losses do not work as well. You have the problem of market maker manipulation as well as not having the order triggered until there is a trade at your stop price. If the option is not liquid, i.e., there are not a lot of trades in the option, your stop could be passed over. If it is a stop loss, the next lower trade would trigger the stop; with a stop limit, it would not be triggered until there is a trade at your price. Second, you don’t have to chance an incorrect stop point based on the delta. While you can be pretty accurate in calculating an option’s price based on the delta when the stock hits a certain price point, you might be a bit off. If you do not allow for this and move your stop order inside where you think the price should be when the stock makes the targeted move, you could be close but not get the execution. The stock could rebound on you and you miss your sell point. Given that sometimes a stock itself turns a bit ahead of where it was anticipated to fall, you can see how you could miss out on an execution at times.
In summary, using contingency orders based on the stock price for options has advantages. You have to have a broker that allows you to do this, however. More do it now so that is not as much of a problem.
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