Comments from the Investment House.com newsletter...
I really like this newsletter, whoever writes it is very perceptive, they cut right through the Wallstreet BS and lemming trader moves and tell it like it is.
Though the thread might be interested in today's comments.
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7/05/00 Investment House Daily
Investors let the analysts call the shots as leading sectors get clobbered.
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TONIGHT:
- We hate days controlled by analysts.
- Doomsayers are out in packs.
- Overall, price/volume action was as it should be, but watch those leaders, chips, and software stocks.
- Tomorrow may be weak with the jobs report on Friday, but we are going to watch for the leaders again.
These are the days we absolutely hate.
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Don't you hate it when the officials in a sporting event call cheap fouls/penalties where the game ultimately becomes one that is decided based on what calls the officials do or don't make? The players don't
control the action, but someone who is supposed to have an ancillary role at best. Well, today was just that kind of day, and unfortunately, investors were all too ready to play that game.
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This morning Jonathon Joseph (415-951-1887) and Clark Westmont (don't know his number) of Salomon Smith Barney issued one of the most gutless types of reports you can. It was one of those 'we don't have anything specific,
but are just looking at some numbers that could be read at least ten different ways, and because we want to make a name for ourselves we are going to issue a controversial report' report; a report designed to be high profile and contrarian to insure lots of coverage, but one that was
so loose and esoteric that if they are wrong they can come back and say the figures were off, etc.
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It had its impact. It started the markets down as investors questioned whether one of the most profitable sectors in the economy could keep its growth going. The irony is, the report said the slowdown was 6-9 months out. But, as is usual, investors overreacted and sold everything off that
had to with chips. Sure there will be a slowdown some day as capacity grows to meet supply, but companies are still announcing PLANS to build new facilities; it takes a couple of years for these plants to start adding to the chip supply. Are these very profitable companies, managed
by men and women who make tremendous amounts of money based on how much money the company makes, that stupid? Are these two gurus of silicon in California smarter? Or is there some other motive at work here? Think about it, and you will most likely concur with the latter (short squeeze?).
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This is not SSB's first trip into this type of 'analysis.' Last week it was Compaq (CPQ) SSB singled out as having potential problems because of low inventory lines. Well, Compaq was quick to point out (that day in fact) that low inventory lines were a GOOD thing as the company was
selling the heck out of computers. Same story: SSB interpreted the numbers in the worst possible light instead of looking at chip sales (which are, by the way, still growing) and computer sales at computer stores (Best Buy sells more computers than televisions) to conclude that
perhaps, just perhaps Compaq was selling lots of computers.
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We have several accounts with SSB. We are thinking of pulling all of them after today's 'report.' This call hurt our accounts; accounts of long-standing customers. Worse, it was very short on research and analytical prowess, and it unnecessarily hurt the sector and investors.
Investors need to treat this type of reporting for what it is worth: nothing. The best revenge would be to look at the report, note its porosity, and ignore it. So much for the fame and notoriety the authors seek.
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We sold off the chips, now lets sell off the other profitable sector: software.
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Primed by the SSB downgrade/short play, investors again panicked at the earnings warnings of two market laggards, Computer Associates (CA) and BMC Software (BMCS). CA announced Monday at midnight (did they think it would
go unnoticed?) and BMCS today that earnings were going to be bad, really bad. They blamed it on poor mainframe sales for which the bulk of their software is written. This from CA just a month after a bullish analyst meeting. Well, investors decided to toss out everything to do with
software as the selling spree expanded beyond chips. Some great names that have nothing to do with mainframes were sold today. SEBL gave a great buying opportunity early on, off $6 from Monday's close before rallying to finish flat. In that respect, at least some sanity existed out there.
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But not much. Oracle (ORCL) announced on Monday that its president and COO was resigning. No reasons were given, but Mr. Lane is going to remain on the board of directors, indicating that his departure is not final.
For that reason, investors sold the stock off. Then today, with the other software stocks selling as well, ORCL suffered another harsh round of selling. J.P. Morgan jumped on the bandwagon today (ahead of the crowd as
usual, right?) and downgraded the stock because of the resignation, valuation, and a belief that investors will now move back into Microsoft.
'Valuation' calls are always ludicrous in our opinion a stock's value is what buyers and sellers are willing to pay. We don't need someone who is not in the game trying to tell us what we should pay for a stock.
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How long will this last? Maybe until Friday's employment numbers, maybe not that long. The day after a holiday is susceptible to this kind of nonsense. Investors are caught by surprise, especially in this case where we had a decent rally on Monday on the half day of trading. It is a rude
and unexpected awakening to be hit with the SSB non-report; it makes some not so surprising profit warnings appear worse than they are. This appears to have the same effect of 'valuation' downgrades: they put a temporary damper on a stock, but if it is a leader, it will overcome the analysts and make its own wake. We will see how this one pans out. If the market is still ready to move up, it will.
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Doomsayers abound today.
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Every day the market sells back the television stations trot out their resident doomsayers to tell us how we are all going down in a ball of flames. 'There is no escape; make your peace now' is the common theme. Today we were showed a chart of the Nasdaq in a 'possible' head and
shoulders pattern. We were also told that the 'NYSE bullish percent' indicator and its Nasdaq equivalent were 'hanging on by a thread.' We were told if the Nasdaq closed below 3500, things could be bad. Well, we
would not like to see the Nasdaq down at 3500 either as that would mean this consolidation failed. We still had a hard time finding that head and shoulders pattern; we looked at a daily, weekly, monthly, 3-day, 4-day,
7-day chart. We didn't see it. We thought we saw something close to one, but that turned out to be some dirt on the glasses. As for the 'bullish percent indicator,' that one is secondary at best. To us, we prefer to
see lower bullishness as that indicates we still have room to move higher; if things are too bullish, where is the fresh surge of money going to come from?
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The problem with head and shoulders patterns and other similar patterns?
You never, never know until it is way too late. Bullish percent indicators? They are secondary indicators at best. If you hang your hat on this one, you are going to be disappointed. It is much better to look at your daily and weekly price/volume action to determine what the market
is doing now. That tells you more about what is going to happen than reading an ambiguous pattern that has formed over the past 9 months or trying to divine investor moves based on how many say they are bullish versus bearish. If a stock starts selling on higher volume over a few
days, that is a clear sign institutions, those that support a stock's price, are getting out of town. Best to do the same.
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Anyway, on a day such as today, the worriers are trotted out, and they can add to the overall anxiety. But let's face it, the market has been climbing a wall of worry, or at least the leaders have been while the market hangs on and tries to find footing to make another run at a
breakout. What we need to see is a modicum more of confidence in the market to get a bit more money working. Institutions are still somewhat mixed in their participation, and a bit more confidence might get some to
put that pile of cash to work. In the interim, however, we still see good volumes in the market despite the gloom today.
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THE MARKETS
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Let's get to the markets. There was a lot of talk about the 'technical takedown,' a 'devastating earnings warning,' or whatever today, but those were just names. We all know how the news boys and girls love to package and label everything in neat little bundles. Let's tear them open and see what really happened.
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A lot of teeth gnashing over a low volume down day.
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Yes there were many stocks taken down in some pretty hefty point moves. And yes, there were many chip stocks and some leaders that were hit on higher volume; we feel those were related to the overreaction to the SSB report and the CA and BMCS warnings. We will know more about that by the
weekend.
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Overall, however, stocks pulled back on lighter volume, and that action matched the overall volume on the Nasdaq and the NYSE. Have you noticed the pattern? It seems that even the more patient, sage prognosticators are not trusting their own indicators and philosophies. We have seen some individuals who seemed to know what was going on or would at least stick to their guns become invertebrates, calling for a rally when the market moves up one day, and then a crash when it sells down one day even as their 'pet' indicators indicate the same thing. Is their patience being
tested? Sure it is. We are all watching the Nasdaq move sideways, waiting for it to break out, but we cannot let the wait alone sway us. Our focus should be what the market is telling us as we fight the our emotions that swing with each up and down day.
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What are the markets saying?
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Overall, the Nasdaq continues to move up predominantly on higher volume, and sell back on lower volume. The leading stocks have been doing likewise. Today we saw higher volume selling in the chip stocks, some broadband stocks (JDSU, GLW), and software stocks, and that concerns us.
These areas have been market leaders. While we believe that the selling was most likely related to the downgrades, we will have to see if they can right themselves quickly. If they don't, one of the components of this move we have been seeing will have weakened. That would be a sign that
the chance of an upward breakout is waning.
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On the positive, side, the biotechs shot up today across the board, a sign that investors are not totally divorcing themselves from more speculative issues. Again, the action over Thursday and Friday will tell us much. If investors (especially institutions) realize they overreacted with respect to the chips and software, things could look pretty solid pretty fast.
Until we get that breakout from the Nasdaq, however, down days where we see some higher volume in leaders keeps you on edge.
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NASDAQ: The Nasdaq took the brunt of the retreat, falling 128.83 points (3.2%) to close at 3863.10, just four points off of its low for the session. After a brief attempt at a rally in the first half hour, the action was pretty much to the downside. The leading economic indicators report seemed to shoot a hole in the market, but that report was not the cause of any widespread selling.
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Volume was up over Monday's session, but in the context of the past week, the action was on significantly lighter volume. Today's trade was 1.34 billion shares, well off last Wednesday's 1.66 billion share up day, Thursday's 1.55 billion down day, and Friday's 2.06 billion share up day.
Even Monday's action would have given today's trade a run for its money. So, from an overall volume perspective, today's action was acceptable, though down volume did overwhelm up volume 928 million to 329 million shares. With the overreaction we saw, that is understandable to a certain extent.
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While we did not like the selling, the Nasdaq did not violate any part of its consolidation pattern. It sold down below the 10 and 18 day moving averages, but on its low (3859.20) it held well above its 50 day moving
average (3839.08) that has held as solid support on this lateral move. It has not always held above it intraday, but it has held on the close. That is a point that we will be watching closely as Thursday's trading progresses. A close below that level on higher volume is not a good sign,
and we would use that to most likely exit positions. We don't want to sound pessimistic, however. There is enough of that out there to keep a rally going; as weird as it sounds, that gives us hope.
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Dow/NYSE: The Dow tried to make a game of it, but it was not able to overcome the drag of the technology stocks. It ended down 75.84 points (0.7%) on the session, closing at 10,483.60, 20 points off of its low. That 20-point move came toward the end of the session, so there was some hope.
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NYSE volume was lower as well compared to the moves last week, so as with the Nasdaq, there was no real distribution. Further, down volume was just 532 million shares versus 449 to the upside; much more palatable.
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Even with better volume, however, the Dow is still in a downtrend, continuing to hold below its 50 day moving average at 10,594.33. The descending triangle is narrowing, and the Dow should make a move soon. We
just don't think it will be to the upside.
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S&P 500: The big caps split the difference, dropping 23.09 points (1.6%) to close at 1446.23. The move was on lower NYSE volume, so that was okay, but the selling took the index once again below the 50 day moving average
(1448.07). Now the 50 day moving average has not been the bottom of this trading range (that is at 1434.63, intraday; 1441.48 close), but we would prefer to see that level hold; strong stocks and indexes usually hold at the 50 day moving average. Again, the selling was not on higher volume,
and we will take that as a positive for now.
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THE ECONOMY
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About the only game in town today was the leading economic indicators for May. They came in at 0.1% when they were expected to fall 0.2%. Good and bad. Good that the economy is not showing as much slowing as was expected, but bad in that it was higher from the Fed's perspective. The
Fed, however, does not take a lot of stock in the LEI's.
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Thursday we have initial jobless claims for last week and factory orders. Don't expect much market moving news from those given Friday is the
unemployment report.
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TOMORROW
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We never really had the chance to implement what we were looking at after Monday's trading as the market showed it was weaker, and then the nascent rally died before it got started. We spent most of the day watching for
things to improve, but it was apparent in the first hour that such optimism was wasted. JNPR showed promise, but it too fell within the first hour.
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While today was disappointing (would not it be nice to string together two or three days of gains in one week?), it definitely had the feel of a Monday: bad news hitting the markets (negative analyst reports are always
out at the start of the week for maximum impact), more across the board selling. It may take the markets a day or two to shake it. It may take a good jobs number to get things moving. If the jobs number comes in stronger than expected, that may be the rally killer. With many
heretofore good patterns struggling after today, more bad news could put them back a week or two if the patterns can hold at all in the face of more selling.
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And that is where we are going to be focused. Are the leading stocks falling out of their patterns on stronger volume, or are they moving up. Today has either given us a great buying opportunity or has set up our sell orders for us if stocks break support. As overall volume remains
upbeat and as the biotechs soared, we still like the prospects; we are sticking with the overall numbers. If the chips and software stocks as well as the leading stocks do not recover or at least slow down the selling (lighter volume), we have to be ready to close things up on the
bullish side. We hate to be downers, but as long as we are in this consolidation range and play with a downside breakout, we have to be on the alert just as much as when we are catching a stock breaking out to the upside.
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