1/03/01 Investment House Daily
* * * *
TONIGHT:
- The Fed jumps in big.
- Record days on the indexes.
- Where from here?
The Fed steps in.
This morning I saw for the first time this season robins on the lawn.
That brought an image to my mind of 1991 when then President Bush's
economic secretary was discussing the economy and the recession. He said
there were robins on the economy's lawn. No one believed him at the time,
but that was in fact the case. I wondered if the robins today were
foretelling something equally promising for the market. . .
Last night we said we had fear and the Fed on our side and that we had to
be ready to take advantage of a major inflection point such as a rate cut.
We named stocks such as JNPR, AMCC, GLW and others as stocks that would
provide us stellar profits in the event of such a cut. Unknown to
investors, the Fed was really concerned by the plunging NAPM numbers and
sharp drop in home mortgage applications. Moreover, and probably more to
the point (though no one on the television mentioned it), the dollar was
starting to weaken, and as noted last night, that can snowball on itself
and spark inflation.
The Fed held a morning conference call to discuss a rate cut. It decided
to surprise the market, something Greenspan has said is good for the
markets. They did it in 1991, and they did it again today. At 12:12 CT
the Fed announced a 50 basis point cut in the Fed Funds rate and a 25
basis point cut in the Discount Rate (more a housekeeping move than
anything) citing continued high energy costs, low consumer confidence and
a litany of other economic concerns. Indeed the Fed concluded in its
release that it remained biased toward further economic slowing even after
the rate cut. The size of the cut says it all: the Fed did not like the
NAPM at all, it felt that it missed the call in December, and it had to
take serious action. At least the Fed is willing to step up and do what
is necessary even if it is a bit late. After a year and one-half of
asking why, the Fed finally stepping in on our side.
We immediately sent out a flash email to all subscribers announcing the
cut, and followed it up ten minutes later with our strategy for playing
the move the rest of the session. We hope this helped you take advantage
of the move as the index and stocks pulled back about an hour after the
announcement, giving us an entry point for the afternoon move back up.
The Fed's next step.
The markets shot higher on the news in huge volume. We will go more into
the details later, but the moves were staggering individually and in the
aggregate. There will be a lot of speculation as to what the Fed will do
next given the timing and size of the move. Some are saying that the Fed
won't do anything else for a time given the size. Don't bet on it.
First, the Fed Funds Futures contract for February shows a 100% certainty
of a 25 basis point cut on January 31, plus a 100% certainty of another 25
basis point cut at the April FOMC meeting. Hard to bet against the
market; it knew things were cooling in the economy. The collective wisdom
of investors is hard to beat.
Second, there is a lot of room between real interest rates and the
artificially high 6% (6.50% before today) Fed Funds rate. The Fed can cut
at least another 100 basis points before even seeing the faint glimmer of
the level of real rates. Indeed, the move today finally put the 2-year
and 5-year bonds in the right relationship to each other. Thus, the Fed
can act to cut rates pretty much at will without inflationary pressures.
Third, this move was a strong attempt to start to counteract that 75 basis
points of rate hikes that is still lurking around ready to hit the
economy. The economy took it hard even before those rate hikes hit. He
does not want them to take their toll also, so he is going to take them
all back by the end of the month.
Fourth, a rate cut is the beginning of the cycle. Just as it takes months
for a rate hike to hit the economy, it takes months for a rate cut to
impact spending. The market looks ahead of the actual economic results,
however, and that is why it moves up ahead of the curve. It will
ultimately have to see growth in the economy and in corporate sales, but
that falls into the second half of the equation. The Fed starts with a
rate cut and then keeps on cutting until the economy looks good. That, as
we said, can take months. So, rate cuts will continue to come, the next
being at the end of the month.
What this means.
As we have said, when the Fed steps in, the bear markets end. That is the
history of the cycle. This does not mean a rocket ship rise higher from
here out, but the trend starts to look up. There has to be performance
from here out. In other words, Congress and the Administration have to
get together and cut taxes. That is the consensus of the Fortune 500
CEO's and most economists who understand how supply and demand interact.
How the government responds will tell us how things ultimately work out.
The administration has the right idea; it needs follow through.
For the short term we look for upside. Tech stocks have been slaughtered.
The rotation we noted last night started in earnest today with healthcare,
food, beverage and utilities seeing a cash drain. Money is flowing to
beaten down stocks that can grow, the idea being that the Fed and the
government are going to set the proper environment for growth, and that
makes these stocks the place to be. Last night we said look for the
leaders who will show good earnings even during this problematic earnings
season. Those will be the stocks that lead the fastest and farthest in a
recovery. Tonight there are several of the big-name leaders in the
reports. And do not forget financial stocks as they always do well with
Fed rate cuts.
As we said, not straight up from here. Indeed, after such a huge run we
expect some profit taking at some point in the morning. Preferably at the
open as we love softer opens that then surge, but we may see a rise before
a pullback to terra firma and another start up from there. How long will
this move last? Hard to say right now. There was tremendous buying
today. There was positive and negative earnings news after the close.
Earnings will drag on stocks, but again, we have to focus on those stocks
that are going to continue to post strong earnings and the best moves,
those stocks who will announce good news (stock splits), those with good
patterns, and those with other reasons to give us good momentum moves
(pre-split plays). When the bias switches, we have to move with it.
Don't get us wrong. By saying that the trend is up, we do not mean that
technically stocks and indexes are suddenly showing uptrends. They are
still in downtrends and those points will still act as resistance points.
With this kind of shift in mood, however, those points will at some point
be broken, thus allowing for much better gains.
THE ECONOMY
Auto sales were down again, and for the second month Chrysler announced it
was closing plants next week and the week after in a rotating fashion
across the country. GM admitted sales were weaker, and Ford said it was
really hurt by car sales. Nothing new, nothing unexpected. The
big-ticket items are the first to go.
Retail sales rose 2.7%, below pre-holiday expectations of a 4% gain, but
the end number was better than some had expected, buoyed by a last-minute
rush for bargains. More will be out tomorrow, but Telecheck's preliminary
results are usually pretty dead on. AEOS, specialty apparel retailer,
bucked the trend with an 11.8% increase in same store sales. Tomorrow we
will hear from Wal-Mart, Sears and other majors, but don't expect a
miracle.
Construction spending was the big surprise, falling by 0.6% versus an
expected 0.2% rise. It was the first decline since July's 0.7% drop.
Previous months were also revised downward. This shows us nothing new;
the economy is slow and it needs to be picked up.
THE MARKETS
Last night in this section we talked of rotation. That really showed
itself today with defensive sectors getting lit up by the move into
beleaguered sectors that have the greatest growth potential. Now that the
Fed has started the rate cut cycle, we have to shift our focus as well.
We don't have to sell immediately, but we were unloading some of those
stocks that had given us good gains over the past couple of months and put
that money to work in technology. Indeed, we bought first and sold second
as all stocks were rising at first and we wanted to get into positions to
catch the rise and then sell the others as they peaked. Worked out pretty
well; we didn't catch all of them at the high, but we were pleased with
the positions we took. As we said last night, this is a major inflection
point and we needed to get positioned.
Indeed, we were putting a lot of that cash that had built up with stop
losses being triggered and covered calls sales on long term holds to work
on those stocks we love: EXTR, EMLX, GLW, SUNW, JNPR, BEAS, AMCC. There
are times to put money to work for the coming rallies, and this was a day
to start putting it back in.
Will this run last? That remains to be seen, but there is a chance that
stocks will sprint in the short term and then go back to test levels it
just visited. After such a bashing in this bear market, there has to be
healing, and that often involves testing lows. Perhaps this week's move
was the test already of the lows hit two weeks ago. We continue to watch
price and volume and keep strict sell limits even with this change in the
environment. Markets rise when the Fed cuts rate, but it is not on a
straight line. It needs to be sure of its footing, and that means some up
and down. Still, we cannot ignore days such as today, and we need to put
some money to work when these inflection points start. Then we look for
the next chance to move into individual stocks as the opportunities are
presented.
Overall market stats:
VIX: 28.67; -5.53. The VIX spiked higher on Tuesday, but it was not
doing much for a rally today before the Fed announcement. There was a lot
of fear, and this was helping the market toward a reversal. It played
well with the rate cut as a lot of anxiety was released.
Put/Call ratio: 0.48; -0.31. No need for puts today after 1:00 ET, and
after rising in the morning, the put buyers hit the doors. Indeed, many
short positions were closed out today, but many of the big players had
already exited short positions according to our brokers.
NASDAQ: Highest point gain, percentage gain and volume day on the index.
Huge day for an index that had been taken to the cleaners. Again, it is
not all up, up and away, but the landscape changes when the Fed steps in.
New life gets breathed into stocks, particularly the leaders that will
still log good earnings this quarter.
Stats: Up 324.83 points (+14.2%) to close at 2616.69. A record day.
Volume: 3.094 billion shares (+61.3%), an all-time high. 2.8 billion
shares to the upside versus 219 million downside shares. Staggering
buying from institutions.
A/D and Hi/Lo: Advancing issues swallowed decliners 3063 to 986, 3.1 to
1. New highs rose to 60 (+8) while new lows rose to 151 (+20).
The Chart: investmenthouse.com
The Nasdaq opened at a new low and moved lower (2251.71). It was looking
as if 2200 was going to be blown and perhaps a test of 2000 to some extent
as we were looking for. Reversal and powerful move up on powerful volume.
It jumped the recent top with no trouble and is now eyeing the down
trendline at 2750 as the next big hurdle.
Dow/NYSE: The Dow was languishing lower as well, but exploded on the news
with the new JPM leading the way. Record volume and a move that almost
broke resistance at 11,000. A good, solid start.
Stats: Up 299.60 points (+2.8%) to close at 10,945.75.
Volume: NYSE volume hit record levels at 1.872 billion shares (+65.8%).
1.324 billion to the upside, 527 million to the downside.
A/D and Hi/Lo: NYSE advancers led 2296 to 780 (2.94 to 1). New highs
jumped to 337 (+152) and new lows rose to 31(+3).
The Chart: investmenthouse.com
The Dow tapped 11,019.05 on its high, a level that turned it back in
November on five occasions. It did clear 10,900, another level of pretty
potent resistance. Sometimes you cannot clear all levels at one time. A
break over 11,020 on strong volume will be huge, and will let the Dow
focus on 11,400, the last stop before it tackles the old high at 11,750.28
visited last January.
S&P 500: The 500 big caps put on a show of their own, rising 5% on
tremendous volume. This was the second largest point gain in index
history. The move put it just below its 50 day moving average (1352.81)
and its down trendline connecting the September, November, and December
highs. This is the next critical test for the index, and it resides at
1356 to 1360, a potent level of resistance. This is one of those down
trendlines we talked about needing to be broken for more gains. It may
pullback a bit and then make another run at it.
Stats: Up 64.29 points (+5.0%) to close at 1347.56.
Volume: NYSE volume was a record at 1.872 billion shares (+65.8%).
The Chart: investmenthouse.com
THE REST OF THE WEEK
Nasdaq futures are about 20 points below fair value at this writing, but
as we saw last night, much can change between tonight and the morning.
Actually, a softer open suits us just fine. We started dropping money
into stocks that we have been eyeing for a turn, and we would like to put
some more money to work at a bit lower price that immediately precedes a
strong move up. That is how we really like to average into positions:
pullbacks after moves up when we have a market we feel is going to rally
for us.
We plan on taking advantage of this change in market sentiment, but as of
now we do not know what the longevity of the move will be. Each move up
to this point, even confirmed rallies, have failed, but they also were
testing the waters that were still in doubt about when the Fed would act.
Now the Fed has moved and is showing the investor that it is its friend
(still would not want to go have a beer with them, however).
Many are saying that we are going to have earnings disappointments ahead,
and that today's move will just fizzle out as the others have. That
totally discounts the power of the change in the future this forecasts
versus earnings that are history, that are the result of what was a
tightening policy, not a loosening policy. As we saw after the close, we
are going to get surprises to the upside as well from surprising corners,
e.g., BMCS' after-hours upside earnings 'warning.' We also had MCLD state
it will beat estimates. And AEOS said same store sales showed a very
solid rise. Yes there will be a host of earnings that do not make the
grade, but as we said above, look for those stocks that are leaders and
will not disappoint us: JNPR, GLW, AMCC, SEBL, BRCD, SUNW, CSCO, PMCS,
CIEN and others. These stocks have continued to show, even through the
bear market, that they are earnings and revenue leaders, and they will
continue to do so moving forward. Again, it will not be a bump-free ride,
but we keep our eye on the ball, keep our loss cut parameters, and follow
the leaders and those stocks with good news associated with them.
Support and Resistance Levels
Nasdaq:
Resistance: Broke over 2600. The big point ahead is the down trendline
at 2750.
Support: 2200 down to 2000.
S&P 500:
Resistance: Jumped right past 1335. Now it has to clear the down
trendline and previous resistance at 1355 to 1360.
Support: 1335 is some support. 1270 is possible support. 1254.07 is the
2000 low.
Dow:
Resistance: Beat 10,900, and now needs to beat 11,020. After that,
11,400.
Support: 10,600, then 10,300. After that, 10,000.
Weekly Economic Calendar (All times Eastern). The figures are the
consensus expectations, not ours.
1-2-00
NAPM index for December (10:00): 47.1% versus 47.7% prior.
1-3-00
Chicago PMI for December (10:00): 43.5% versus 41.7% prior.
1-4-00
Initial jobless claims (8:30): 350,000 versus 333,000 prior.
Factory orders for November (10:00): 1.0% versus -3.3% prior.
1-5-00
Non-farm payrolls for December (8:30): 133,000 versus 99,000 prior.
Hourly earnings for December (8:30): 0.3% versus 0.4% prior.
Unemployment rate for December (8:30): 4.1% versus 4.0% prior.
Average workweek for December (8:30): 34.3 versus 34.3 prior.
New home sales for November (10:00): 925,000 versus 928,000 prior. |
