12/27/00 Investment House Daily
TONIGHT:
- This is just the kind of rally that is needed: nothing flashy, just
solid building on surprisingly solid volume.
- Solid moves across the board, tech to food.
- Leading economic indicators sag, but don't forecast a recession.
- More job cuts: Union Pacific trims 2,000 workers
Just what the market needed.
Today there was no huge rally on any of the three indexes, but it was an
important day in several respects. First, it was a day that could have
gone either way, but it held on and actually rallied in the closing
minutes as the last urge to sell was overrun. No huge rally that leads to
an immediate selloff the next session, just a nice, quiet, steady move.
String together this kind of session 4 of 6 trading days and you go a long
way to repairing damage.
Second, a nice, steady gain without a huge rally allows stocks to build
their bases in an orderly manner. When the Nasdaq shoots up 150 points
and then sells off 100 points, stock patterns look like a set of jagged
teeth. There is no pattern to build on and we never get rid of the
overhead supply. A nice, steady rally that builds on each day, rising and
pulling back but always trending up is how bases are completed. Look at
the charts on semiconductor stocks such as AMCC, KLAC, ALTR, etc. They
have all sold down in more or less nice sloping patterns. The interest in
semiconductors waned over the past few months and now we are seeing the
stocks start to perk up. Indeed, AMCC has been trying to move up for two
weeks, and today broke above its down trendline in a solid move. If we
get a steady, orderly rally we could see these stocks run up to complete
the right sides of their bases. That is exactly what the market needs:
some solid patterns to develop in leaders (yes, semiconductors can lead
the market again, especially the likes of AMCC, PMCS, VTSS and BRCM that
are in specialized niches) that presage solid breakouts. That takes some
time, but a rally over the two to three weeks would put many of these
stocks in positions to then form their handles, i.e., a week or two of
light volume selling or profit taking that shakes out the last of the weak
holders before the stocks make the really strong breakout move. That
might be too much to ask for now with fourth quarter earnings still to
come, but we are going to have a rate cut from the Fed and the serious
investors will be looking ahead, not back. We need to be ready for that;
moreover, in the interim we can make good money as the stocks complete
their bases.
Third, today's action was on surprisingly solid volume in this shortened
week sandwiched between Christmas and New Years. Nasdaq volume moved up
28.7% to 2.004 billion shares, right at average. NYSE volume, while below
average, rose 32% to 1.063 billion shares. Indeed, today's move on the
Nasdaq represents confirmation of last Thursday's reversal rally: a 1.8%
price gain on rising, average volume. We would prefer to have had higher
volume, but given the fact that this is a holiday weekend, the volume was
not bad at all. In 1999, confirmation came and then stocks blasted out of
solid bases on the way to that historic run. This year, stocks still need
to complete their bases, and there needs to be some recovery to do that.
In a year that saw the worst losses ever on the Nasdaq and the deepest
bear market in such a short time, it is fitting that the repair work
require a confirmed rally before it can really start to move higher.
Some are saying this is just a trading rally preceding further selling.
We know that bear market rallies can last for weeks or a month or more.
All we can do is watch leading stocks and price and volume action. We see
some good bases, we some bases trying to form, and we see many stocks with
a lot of work still ahead. The lack of quality bases lends weight to the
idea that this is nothing more than a trading rally. But, it looks to be
a trading rally with some legs on it as it anticipates a rate cut and
better times ahead for stocks that were once under attack by the Federal
Reserve and high taxes on the U.S. citizens, a very bad combination for
sustained growth. When things look really bad, rallies start. We think
that is what we have here.
THE ECONOMY
The leading economic indicators came in as expected, showing a 0.2%
decline. That projects the state of the economy six months out.
October's number was revised down to a 0.3% drop versus a previously
recorded 0.2% decline. This shows further weakness which is not good, but
the LEI is just down 0.4% from the same time last year. Again, that is
not forecasting a recession at this point, just a slower economy. That is
welcome, but there are still a lot of variables out there that could send
this economy down harder and faster. No reason to hold off on rate cuts.
No reason indeed when you have yet another major corporation announcing
layoffs today. After the close Union Pacific said it would cut 2,000
employees and take some charges. We have had Ford, IP, GM, Georgia
Pacific, Union Pacific and many others announcing major layoffs. On top
of that we have the continuing problems in the technology sector with
23,000 jobs lost in the last three months in internet businesses alone.
The Fed wanted higher unemployment? It's got it. It wanted lower
consumption and confidence. Its got it.
THE MARKETS
The market did just what we wanted it to do today: a nice, steady rally
that hung on. We were holding our breath for a while, but the rally on
the close was a real relief to see. It looks to us that in the midst of
despair about earnings, the economy and the Fed the market has started to
rally. Once again, not all of the indicators were firing, so who knows
how far it will carry us. Still, we viewed today as one of the most
positive in a long time.
Listening to the tube, however, they were talking about what was, not what
is coming. They were talking with Wall Street Journal reporters about how
bad the year in the Nasdaq was and how the internet was killed. It was a
pretty gloomy lineup. But that is okay. The fact that they are dwelling
on the negative and turn their collective noses up at a 45 point gain on
the Nasdaq that showed excellent volume and follow through for the earlier
rally attempts is good as well. The fact that they cannot be pleased by a
mere 1.8% move shows that the common wisdom on the street is that things
are still much too bad. They should be looking forward, but are mired in
their misery. That is the way it usually works. Those that are always
late to the party dwell on the past while the real investors, those who
make good money, are looking at what the market is showing and seeing the
changes taking place. May be nothing more than a bear rally, but it is
something to be focused on, not the past.
Overall market stats:
VIX: 32.31; -0.23. Volatility held steady even in today's rise. Not a
lot of believers out there still. That is a good sign for a continued
move up as the market usually rallies while the majority are still
wondering what is going on.
Put/Call ratio: 0.72; -0.23. Put buyers fell off again on today's rally.
This indicator has yet to give us a close over 1.0, a pretty reliable
signal that fear has reached a reversal level. Still, other bear/bull
indicators are showing bears in the majority, so we have to recognize
there is a lot of despair and take advantage of moves the market is
telegraphing.
NASDAQ: Not a huge day point-wise, but an important day of building on
solid volume. Leaders were moving up sharply (e.g., JNPR, AMCC) even on
an 'average' day. A 1.8% gain on stronger, average volume four days into
a rally is considered a confirmation day, a requirement for any solid bull
leg. It does not guarantee a bull run, however, and we have seen recent
confirmations fall by the wayside. The market needs a solid, steady rally
to get bases formed, and then it needs a catalyst to break it out. A 2-3
week rally spurred by a Fed rate cut in early January would help complete
bases, then some profit taking to form the handles, then a breakout on
another Fed rate cut at the January 30 FOMC meeting. That is a best-case
scenario. Plausible, but we just have to see what the market gives us.
For now we see a continued move up through the New Year.
Stats: Up 45.84 points (+1.8%) to close at 2539.35.
Volume: 2.005 billion shares (+28.7%) 1.56 billion shares (-30.4%). This
is average volume, not bad at all for a shortened holiday week. Up volume
came in at 1.059 billion shares while down volume fell to 781 million
shares.
A/D and Hi/Lo: Advancing issues took back over, but not by much, 1.21 to
1. That is not the 2 to 1 or 3 to 1 ratio we like to see on the start of
a new advance. New highs continued to climb to 129 (+28), and new lows
actually rose to 384 (+10).
The Nasdaq was able to close back above the point where it gapped sharply
lower last Wednesday, and it did so on decent volume. Nothing like the
volume on that day (2.3 billion shares), but very respectable given the
holiday week. The Nasdaq has a lot of obstacles ahead of it, but it looks
to be ready to move up for now.
Dow/NYSE: Another 100+ point day on the Dow as it moved up to close just
over 10,800 and is apparently readying itself for another test of 10,900,
the level that has stopped the index for over the past month.
Stats: Up 110,72 points (+1.0%) to close at 10,803.16.
Volume: NYSE volume rose to 1.063 billion shares (+32%). Strong, but a
bit below average. Up volume was solid at 753 million shares versus 267
million to the downside.
A/D and Hi/Lo: NYSE advancing issues moved well out in front, 2.48 to 1.
Very solid advance across the board. New highs continued to climb up to
318 (+31) while new lows fell to 86 (-19).
The Dow jumped over the down trendline connecting the September and
November highs (throwing out the quick rise in December that immediately
failed) and its 200 day moving average as well. The break over the down
trendline was good, but we would have liked to have seen at least average
volume as we saw on the Nasdaq. It has a solid test at 10,900 to 11,000.
If it turns back there, we will have to watch volume carefully; selling on
higher volume is a very bad sign for a continued rally attempt.
S&P 500: The 500 big caps continued to move up off of the year low last
Thursday. Volume was higher, yet below average, so the move has some
questions behind it, though we have to consider the holiday weekend. The
index touched 1332.03 on its high; 1335 has acted as some support and
resistance in the past, and the index needs to clear this point and take
out 1360 after that. Lots of work, but we think it will at least
challenge these levels in the next few weeks. After that we have to watch
the price versus the volume.
TOMORROW
The rally continued today and we think it will continue to build. We like
the slow, steady pace. We have to admit that we felt kind of funny
talking about low-volume pullbacks last night, but that is exactly what it
appeared that the market was showing us, and it turned out to be the case.
The market swings from the very bearish downtrends to these sudden shifts
in character to a more bullish posture. The key, however, is that each
one of these attempts has yet to take hold and overcome the severe
downtrends that currently grip the indexes. Two to three weeks of
rallying to complete bases coupled with the right news from the Fed and
leading companies could do the trick. Yes, we are expecting some pleasant
'surprises' from the usual leaders this earnings season, e.g., AMCC, JNPR.
This will show that even with the economic slowdown the leading stocks are
performing well, and with the Fed easing, the prospects for the future
will be even better.
What we continue to look for is the market moving up in a more or less
bullish fashion. That means rising on stronger volume, pulling back on
lower volume much as the drug stocks, healthcare stocks and other
defensive sectors that have enjoyed bullish moves have. Not every day
will be an up day. That is the tricky part as we have seen most rallies
start to turn back on low volume and then the volume kicks in as the
selling intensifies. Keep an eye on the resistance points; if selling
starts at those levels and cannot turn back up and take them out, that may
signal the end of the rally, and in this climate, we prefer safety to
sticking the neck out.
The nice thing about today was that the moves were made across the board.
That helps quite a bit as we can continue to play the defensive sectors as
they line up and break out and play the techs to the upside as well. You
can make money both ways, but the upside gets everyone excited.
Support and Resistance Levels
Nasdaq:
Resistance: 2600 represents some resistance from the late November and
early December lows. Then there is 2750. The down trendline is
approaching 2750.
Support: 2500 for now. If 2500 does not hold, 2200 down to 2000.
S&P 500:
Resistance: Right at resistance at 1335. Then 1350 to 1360. The down
trendline is now at 1360.
Support: 1270 is possible support. 1254.07 is the year low hit last
Thursday.
Dow:
Resistance: 10,900 to 11,000.
Support: 10,600, then 10,300. After that, 10,000. |
