InvestmentHouse Weekend Market Summary
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9/20/02
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investmenthouse.com
TONIGHT:
- Modest bounce accompanied by high volatility and high volume.
- Profit warnings and layoffs. And the mainstream economists thought that was behind us.
- It will be a dicey week but we expect upside at first before more September selling resumes.
Lots of volatility and volume in a tight range.
Equity, index and futures contracts all expired Friday, and the position squaring and rolling over led to high volume and up and down action. Most of the action was above the flat line, however, and the last hour shuffling pushed the Dow and S&P to their highs. That put the S&P 500 right below resistance at 850 to 855, and that was as far as it could go. The last 15 minutes backed them off of a very solid relief session. That was just as well as it gives them some room to start a move up early this week as a relief bounce from the week of selling begins.
Volume was at the highest level in two months, moving above average for the first time in as many months. There is definitely an uptick in trade the past three sessions as more and more money managers get back into the game. In June and July that led to the July meltdown. Most of the recent action has been bearish with higher volume on selling, an indication that more players means lower prices as the indexes come back to test the July lows. Nonetheless, this is not the volume seen in June and July when 2+ billion share days were more common than not. We can see some strong short covering rallies in the midst of that selling as the indexes bounce to test the downtrending resistance points. Indeed we believe there is a short one ready to start here to bounce up a bit before the selling starts anew. Another bounce up to the short term moving averages would be perfect. It would take the indexes up well into next week, and then the selling could resume and take the indexes to test the July lows in early October. Of course, there are obstacles along the way.
THE ECONOMY
What obstacles? There are some insidious undercurrents.
Layoffs and warnings continue to accelerate.
Alcatel announced thousands of layoffs Friday. Ciena is going to lay off 17% of its workforce. Layoff announcements are on the rise once again the past month as business is not picking up. Repeat, it is not picking up. Proof? EDS� warning. MWD�s warning. JPM�s earnings. There is simply no business investment and thus no incentive to go and buy new capital equipment. Let�s face it; most businesses put in new systems in the late 1990�s to handle the then current explosion in consumer and business demand. While consumer spending has remained solid, it has not increased to outstrip that recently installed capacity. On top of that, there is no business spending, so there is plenty of capacity to handle anything thrown at it. Thus with declining revenues continuing (all those warnings mean just that), companies are not going to spend scarce resources on upgrading to the latest and greatest technology. It has not happened and it won�t happen at these levels unless the machine breaks and cannot be fixed. That does not happen too often, and we are not advocating smashing all of the machines at work as a way to stimulate investment. It is just the hard fact of this very weak economy.
The U.S. is not alone.
What happens if you hold a treasury note auction and no one comes? Ask Japan. Friday it held a 10 year treasury auction and it had to cancel it because there was no interest. What a vote of confidence: no thanks we won�t buy a 10 year note from you because you may not be around in 10 years. Who the hell is saying that Japan is recovering? Japan has a high savings rate, but no investment in Japan. That just goes to show you the illusion of how important savings are. What a country needs is investment in the country, e.g., investment in new businesses, existing businesses, new private projects, etc. Savings are supposedly used for loans. But remember our recent discussion of the current loan market. That puts a big question mark on the importance of savings. Yet, savings is something our leaders want from us. They say they learned from Japan, but one wonders what? How to follow the path of economic implosion and long term economic suffering?
In short, as long as there is no investment in the U.S., there is little hope that the economy will enjoy meaningful, sustained growth. There is talk of 3+% GDP growth in the third quarter. That is numbers smoke and mirrors as we have discussed: one sector of the economy (housing), the beginning of another inventory overhang as demand falls again, and rising exports due to a weak U.S. dollar will give the boost in GDP, but those are nothing to strut and pop off about. Those are quirks of how the number is calculated, and the one real growth area (housing) is getting very long in the tooth. It cannot be relied on. Unfortunately, however, it is being relied on as the White House staff today confirmed that the president was not going to push for investment incentives because his advisors think they can carry the November elections just focusing on the war effort and not dealing with the serious economic issues at hand. Gee, that is the tried and true recipe for a one-term president. Reminds you of the old anti-smoking commercials: like father, like son. Think about it.
THE MARKET
High volume but a narrow range Friday as equity, futures, and options positions were juggled at expiration to get ready for the next expiration period. There was a late burst of upside action on the Dow and S&P 500, but when the S&P hit resistance with 15 minutes left, it turned back and sold lower. It is very hard to take anything away from an expiration session. You could say oh boy, a gain on rising volume means there was accumulation. You could, but you would be wrong or at least guessing. On expiration stocks are bought and sold to roll in, roll out, and roll over equity, futures and options positions. That generates volume that is not related to long term accumulation.
Given that, we are still looking for a relief bounce early this week after over a week of selling since the last bounce. Volume has jumped the past three sessions, but it does not look like the kind of volume that preceded the big July sell off. Even then the fall was punctuated by sharp upside moves. After getting hammered lower for more than a week, many stocks and the S&P 500 and Dow are at the bottoms of their March downtrend channels. If they are not going into meltdown mode as the did in July, that should provide a bounce point.
If it does that is great timing as noted before. If the indexes bounce in relief for three sessions or so, the could then sell off and reach the July lows in early October. Markets like to bottom in October, but as always, there has to be a reason to bottom. Some economic carrot thrown to businesses, some positive geopolitical development would help, but as of Friday it seems that the carrots are rotten and the odds of a negative geopolitical development seem more likely. Still, out of the worst gloom bottoms are hit. Hey, have to have a positive mental outlook to be successful even in trying times, right?
Sentiment Indicators
On the negative side but fading with Friday�s abatement of the selling. Just as long as they spring to life on the next downside we will be more satisfied.
VIX: 44.55; -1.61
VXN: 59.08; -3.68
Put/Call Ratio (CBOE): 1.16; -0.07. Fifth session over 1.0 on the close. Lots of speculation but also lots of positions squaring ongoing this week ahead of expiration, and that had something to do with the higher action. We will see where it goes in the next round of selling.
Nasdaq
Held above the Thursday low and below the Thursday high on rising volume. An inside day that is not that strong of an upside indication despite the higher volume gain.
Stats: +4.64 points (+0.38%) to close at 1221.09
Volume: 1.798B (+18.1%). First above average volume session since July. Too bad it was on an expiration Friday when you cannot put much into it.
Up Volume: 1.001B (+899M)
Down Volume: 779M (-635M)
A/D and Hi/Lo: Advancers led 1.07 to 1. It was a standoff.
Previous Session: Decliners led 2.41 to 1
New Highs: 18 (-1)
New Lows: 222 (-65). Good to see new lows fall when the index went practically nowhere.
The Chart: (Click to view the chart)
The pattern shows what is called an inside day, i.e., a day where the high and low traded inside the prior session trading range. That is not a real strong upside signal on its face, but there is something different. After over a week of selling the index held its ground on rising volume. While a lot of that was attributable to option expiration, not all expirations produce these volume spikes. When you see a stock or index hold its ground in a narrow trading range on high volume, that indicates that there were buyers stepping in to support shares. It is one of those momentum things: after the sellers were easily winning, the buyers stepped in and fought them off for the first time in a while. That can be a precursor to a move up. After a week of selling the timing is certainly right.
S&P 500/NYSE
A nice doji on the first bottom channel after an 8-day resumption of the downtrend off of the August high. This time we anticipate a move up in relief after the selling. Not the bottom, just a relief move up to test the resistance before the next selling round.
Stats: +2.07 points (+0.25%) to close at 845.39
NYSE Volume: 1.787B (+21.18%). Sharply higher, above average volume for the first time since July. Certainly the triple witch had something to do with it, but again, not all options expirations of late have had high volume.
Up Volume: 958M (+770M)
Down Volume: 771M (-535M)
A/D and Hi/Lo: Advancers led 1.09 to 1. Evenly matched as the ending price on the index showed.
Previous Session: Decliners led 3.36 to 1
New Highs: 41 (-11)
New Lows: 171 (-45)
The Chart: (Click to view the chart)
For the second session the S&P 500 held on the first of the two bottom channel lines of the March downtrend. It is not the primary channel line as it was breached in April and May and formed a new channel line that the index played off of after that time, but it is asserting itself at this point. The higher volume doji after the selling is similar to the Nasdaq: at a top it would be considered churning, i.e., where sellers were selling as fast as buyers were buying; once the buying stops the index falls. After a sell off, this action shows buyers buying as fast as sellers are selling; the buyers are now asserting themselves. From this there can be a bounce, and that is what we are looking for up toward the 10 day MVA and March down trendline. That would tap resistance and set up another roll down to test the lows at 775. Again, this would be perfect timing for a bottom in October. Whether the horses drink when they get to the water is another question.
Dow:
Stats: +43.63 points (+0.55%) to close at 7986.02
Volume: 1.787B (+21.18%)
The Dow is sitting on the bottom channel line of the March downtrend. It even started to rise off of that level and was at a session high before the last 15 minutes were hit with one last wave of selling. Many of its components have been hit hard, and many were up Friday on rising volume. Most are still in distribution patterns but are ready to bounce. We look for a move up toward 8250 where there is price resistance and the 10 day MVA.
The Chart: (Click to view the chart)
THIS WEEK
Barring any outside influence (may be asking a lot in these �interesting times�) we anticipate a relief bounce early this week up toward the short term moving averages. That could be asking a lot given that it is earnings warning season and we have already seen some beauties (JPM, EDS, MWD). There will be more to come. Volume has increased the last three sessions, but outside of Friday�s triple witch it has not shown the intensity it did in June and July. That could change, but given the relative light selling volume we anticipate the pattern in the trend to continue at this point as opposed to a meltdown. Man was the gloom ever high on the market wrap up shows this week. That in itself is good for a short term bounce up to the trendlines.
With that in mind what we are looking for are some continued upside plays and trades as well as some puts that have and are setting up for the next move down. We have noticed many solid stocks that have not sold off in the recent selling. COH, HSIC, EDMC, CCCG, etc. are still forming very nice patterns. When the July selling was underway everything was tanking. There are still quite a few stocks that are holding up. That could change but they are still holding up and showing good accumulation, and that is another indication the selling in not reaching the intensity of July and that there could be a relief bounce this week.
Keep focused.
Two and one-half years of a bear market has ground up a lot of people. We have been part of history, seeing one of the greatest runs and greatest falls in the market. Little consolation. What killed most investors was not knowing how and why the market moves, and very importantly, how to take advantage of downtrends just as they took advantage of uptrends. You are still here even though the market keeps selling, even though the powers that be do not seem all that concerned about helping those who lost so much recapture some of those losses while they are still around to enjoy it.
You have the drive it takes. Keep focused on your goals and be meticulous in taking what the market is giving. It is not always giving bountiful upside plays. We can always find some upside action we can make 10% to 15% (more with options) on in quick moves even in a down market, but buying and holding is still very difficult because the market is still under distribution. You have to be willing to still take a small consistent gain and cut losses without letting them do much damage.
Equally important is the ability to take advantage of the downside when that is what the market is giving. That is the other side of investing that financial planners and most brokers don�t tell you about because they don�t know it themselves. But as you have seen over the past 2.5 years, it is necessary. It is not enough to just sit out the market; 2.5 years is a long time to earn 1.5% on your money.
Our type of investing is not the find one stock you fall in love with and stay with it forever. That has killed investors in this market. A hot stock can give it all back. Remember NVDA? In 2001 it made us a ton of money as we saw it under accumulation and start its move up. It had its day, however, and the bear market shredded it. What we do is constantly scour the market for upside and downside plays that are under accumulation (upside) or distribution (downside). We look at a lot of stocks and plays; we are not egomaniacs and know that even the best looking play will not work out. If it hits our buy point and satisfies the parameters, we enter the play. If it does not work we don�t wait around; we move on.
We want to hold onto upside plays for weeks, months, even years and we will if the market lets us, i.e., if the action remains solid in the stock. If not we protect what we have; this market will punish you if you don�t. If it recovers and gives another entry point we will not hesitate to get back in. One of the common aspects we have found in all successful investors we have met and interviewed is the ability to admit you were wrong and get out fast and move on. That has been even more critical in this market that shreds stocks. The ability to say a play is not working and move on without regret and keep on investing according to plan is the key to success that we have seen over and over in successful investors. You are still in the market, still making it work. You have lasted this long. You obviously have the drive.
With that said, sit down and evaluate where you are and where you want to be. Do a personal inventory and figure out what kind of plays you do well with. Try to duplicate that action. At that same time, take stock of what you still need to learn. Maybe it is playing the downside, maybe it is learning about options, maybe it is learning more about the market and why it moves as it does. One thing is certain: when you understand the how and why with respect to anything, your confidence improves and you become better at it.
The market is getting to an inflection point with a test of the July lows coming. It is either going to make a meaningful bottom there similar to the 1974 �quiet bottom� or it is going to keep falling and really set some lows not seen in decades, i.e., S&P 500 at 500, Dow at 5000 to 6000, Nasdaq at 1000 to 800. So much depends upon the economic realities because stock values are ultimately a function of economic activity. Regardless of which way the market goes, the market is still the greatest and last open access, pure form of free enterprise where the average person can take finite resources and turn them into a constant flow of cash and a comfortable retirement. All we have to do is recognize the trends as they occur and be ready to generally invest with the trends whether they are up or down. You have to be able to go whichever way the market goes to be able to put it to your use. You have to be able to turn market trends to your advantage and avoid the trap that so many are in where they curse the bear market and the predominantly one-sided action and simply give up on opportunity. A trite but true saying: it is better to light one candle than to curse the darkness. Learning to be a complete investor who can play all sides of the action and thus put the market direction to work for you is like owning a whole bag of candles to light when it gets dark.
Support and Resistance
Nasdaq: Closed at 1221.09
- Resistance: 1230 and 1250 are price resistance points. 1270 is more price resistance from the September lows. The August down trendline at 1255. The 10 day MVA (1262.43). The 18 day MVA (1281.89) and price resistance at 1300 are also in play. 1316, an early August interim high. The March/May downtrend line at 1315. The 50 day MVA (1333.71). The late July high (1354.48) and 1357.09, the October 1998 bear market low. There is another downtrend line from the March and May highs at 1390. 1418, the interim test after the September low. That is followed by price resistance at 1500.
- Support: Price support from 1190 to 1200 (the July intraday low is 1192.42). After that it gets really fuzzy. You have prices at 1080 to 1100. That takes you back to 1996 levels.
S&P 500: Closed at 845.39
- Resistance: 850 to 855 (the October 1997 and Q2 1998 lows). 875 is price resistance of some significance. The March downtrend line at 876. The 10 day MVA (874.68). The 18 day MVA (886.51). July and August interim highs at 911.64. The 50 day MVA (911.88). The September 2000/May 2001 downtrend line at 926. The downtrend lines from the March and April highs (939) along with price resistance at 950. 965, the September 2001 closing low. Then 1000 is psychological resistance.
- Support: The first bottom channel line in the March downtrend (839). The lowest channel line in the March downtrend channel (800) along with price support at that level. Then the July low at 775.68 and marks the culmination of the short head and shoulders pattern. 750 to 760 with an intraday touch to 730.
Dow: Closed at 7986.02
- Resistance: The August lows (8043) and the September 2001 intraday low (8062). The September closing low at 8235.81. 8250 acted as resistance and sent the Dow lower in the last hour. The 10 day MVA (8239.95). The 18 day MVA (8362.30). The March down trendline at 8365. Some price resistance at 8500. The 50 day MVA (8619.13). The late July interim high at 8762.14 (8745 closing). A range of resistance from 9000 on up to 9050. Then 9250 and then 9500.
- Support: The lowest bottom channel line of the March downtrend (7935). Then the July low (7532.66). The October 1998 lows are at 7400 and 7467. After that is 7000, some 1997 lows and highs.
Economic Calendar
9-23-02
- Leading Economic Indicators, August (10:00): -0.1% expected, -0.4% prior.
9-24-02
- Consumer Confidence, September (10:00): 95.0 expected, 93.5 prior.
- FOMC meeting results, 2:15
9-25-02
- Existing home sales, August (10:00): 5.35M expected, 5.33M prior.
9-26-02
- Durable goods orders, August (8:30): -1.8% expected, 9.2% prior.
- Initial jobless claims (8:30): 420K expected, 424K prior.
- New home sales (10:00), August: 990K expected, 1.017M prior.
- FOMC minutes, 8-13 meeting (2:00)
9-27-02
- GDP Q2 final (8:30): 1.2% expected, 1.1% prior.
- Michigan Sentiment revised (9:45): 86.2 expected, 86.2 prior.
Don thank you. Now we will have some information to compare to for the SOX in the future.
Thanks, RtS |
