1/04/01 Investment House Daily
TONIGHT:
- Some rest after the big surge, but watch those volumes.
- Again, not straight up from here with earnings just around the corner.
- Money was flying out of the market before the Fed cut.
- Experts change their tune 180 degrees, but they are still on the tube
spouting forth.
- Earnings that are out are good, but warnings are still coming.
Indexes try to rally, but give in to profit taking in the afternoon.
The day was working out pretty much as we wanted with a softer open and
rally attempt after the first half hour. At that point it sold off and
could not conquer the session highs when it tried again later; that
brought in the rest of the profit takers and closed the indexes down.
Not really bad after such a huge move up, but the volumes were extremely
high. The NYSE set another volume record while the Nasdaq plunked down
2.6 billion shares. Higher volume selling is never a good sign, but much
of the higher volume selling was in those defensive sectors that have been
riding high as the bear market grew: utility, energy, healthcare, food,
beverage, smokes. Selling in technology was on lighter volume, and there
was some heavier volume buying in selective technology stocks while
telecom stocks surged on very heavy volume. Thus, it was a mixed bag as
far as volume goes, but we do note that money is rotating between sectors
versus leaving the market.
Rotation out of defensive sectors continues.
Many of the stocks that we have been following to the upside gave sell
signals today as they crashed through the 50 day moving average on high
volume. This is a follow through to the rotation out of these stocks we
noted Tuesday night. Stocks that are receiving institutional support will
jump back up off of that level or will quickly recover if they breach it.
That represents institutions stepping in to hold the stock up. If a stock
can move back over its 50 day moving average the next session, that is
okay. Indeed, stocks often turn back up after breaking such an important
level to test it as some buyers come in to try and support it. If enough
buyers are not there, it will fail and lead to further losses.
Look at the following chart of CHCS (Chico's Fashions). It broke its 50
day moving average in September and October, but was able to recover.
This was still flashing up a warning sign, but to that point institutions
continued to steop in. Then it broke that level intraday in November, but
jumped right back over it. It moved back up on much, much lower volume
than the previous moves. That showed there were not many institutions
coming in to buy the stock once again. Later in the month it broke the
level again, but it could not recover the next session. Volume started to
climb on the selling days. The next session it gapped over the 50 day,
but closed below it. It tried one more time, but then the dogs were on it
and if collapsed to the 200 day MVA. It tested below its 200 day MVA
twice before it closed below it. Then it moved up and tested the 200 day,
but it failed to take it out and collapsed further. Two tests of
important levels after they were breached, and two failed tests.
investmenthouse.com
The defensive stocks may recover when tech earnings start coming out next
week, but that is conjecture (and maybe wishful thinking) by those we see
on television who run funds that invest in these stocks. They are trying
to calm investors and keep their fund values higher. Problem is, the
volume of selling indicates that the big money is moving elsewhere for
now. It may or may not come back. Warning lights all over the place on
these stocks for now.
No big rally today, but do we sit it out?
It tried, but could not make it two sessions in a row. Huge moves
followed by some digestion of gains is acceptable as long as volumes
remain steady. As noted, that was mixed today. Still, sectors that have
been hammered continue to improve, e.g., telecoms and semiconductors.
That money that was too afraid to venture into beaten down areas is all of
the sudden pouring into them.
This is just part of what we noted last night: this won't be a smooth sail
from here. Technicians on the tube were saying that the market has to go
test the lows just hit in December and early in the week. That definitely
has been the pattern this past year, and each time the test ultimately
failed. But that was with a hawkish Fed and no change in outlook for the
economy. There is a big difference this time as the Fed has now switched
to protecting and promoting the economy versus actively trying to slow it
down. Perhaps there will be a test; the indexes are anything but clear at
this point after being roughed up so hard. When we see moves that are
bullish in plays that we want, however, we pull the trigger. It requires
us to be diligent with sell points, but if we wait and hold off on bullish
moves, we are not trusting what we are seeing and potentially let good
gains slip by. It is like always waiting for that new high-speed chip to
come out before buying that computer; the wait goes on and on as faster
and faster machines come to the market.
Caution is the rule, but when we see the financial services stocks break
downtrends on huge volume, telecoms breaking downtrends on huge volume,
and key stocks making solid, high volume moves, we get in. We also
continue to average into positions on great stocks we know will be back
(e.g., SUNW, CSCO, GLW, etc.) with stock positions and option positions.
The reason: technology does well after the Fed eases rates. According to
Prudential, the first month is the best, and the first three months are
better than the next three months. Indeed, the last three Fed rate
cutting cycles saw tech stocks rise 65% in the following year. That is
why we continue to average into great stocks and make plays on those
stocks that are showing heavy buying interest. We will have down days
when bad earnings come out, but the landscape changes when the Fed starts
easing. What was a series of deep canyons we had to climb down and out of
all of the sudden has a suspension ladder spanning it; rickety and
sometimes scary, but it gets the job done for those who venture across it.
More information on why the Fed acted so fast.
The NAPM was a big factor, but another report circulating the brokerage
houses showed that $13 billion flowed out of the market on Tuesday. That
is a ton of money. The Fed saw these figures, and the word is that it
feared a complete meltdown of the market. Things were not looking too
good for them Tuesday and Wednesday as the Nasdaq had hit a new 52-week
(and more) low each day. Moreover, we understand that big institutions
were directly communicating to the Fed that there was no liquidity in the
market to sell many issues. This was similar to the credit crunch in 1998
when spreads were so wide no one would trade.
Fed cuts discount rate another 25 basis points.
After the close today the Fed cut the discount rate another 25 basis
points at the request of the 12 Federal Reserve Banks. The Fed said
Wednesday it would do so if requested, and it was. This is the rate
charged to commercial banks when they need to borrow money from the Fed,
but it is rarely used as banks lend each other money. Stocks jumped on
the news as some investors were confused about what was being done, but
they then settled right back down.
Are you sick and tired of these guys or what?
Today Stephen Roach, economist from Morgan Stanley, was back on the tube
delivering his expert opinion on what the Fed did and what was going to
happen. He is a former Fed member back in the glorious early and mid
1970's. He stated that 'when the dust settled' we would be in a
recession. He stated that the Fed would cut another 100 basis points "at
a minimum" this year. Just three and four months ago Mr. Roach was saying
the Fed had to RAISE interest rates another 100 basis points to quell the
runaway economy. Indeed one of the statements came after the Fed left
rates alone and Roach was grousing about that. He was complaining about
how the Fed got in trouble back in the seventies when energy prices were
rising. The Fed screwed things up then and they may have done so again
even as he urged them on. Yet, today he was pontificating in his usual
superior tone as if he had predicted this. And of course, no one on the
tube was putting him to the task, asking him about how wrong he had been
before and what the heck made him think he was right now. Gee, wish he
was an opposing expert on the witness stand in one of my trials; that kind
of cross examination is dreamed of.
And then there are the Wall Street Journal columnists on CNBC where the
anchors treat them as if they were economists and knew all the answers.
Tonight one was stirring the pot about valuations on tech stocks saying
that with Wednesday's rally they were once again overvalued. By their
standard, tech stocks would have to go nowhere for five years and grow
earnings 40% per year in order to be 'properly' valued. Yes there are
stocks that have no earnings now, have had no earnings in the past, and
are not going to have earnings in the future. These are stocks to avoid.
We don't mess with them. But these reporters act as if ALL tech stocks
are ridiculously priced and investors are just going to get slaughtered if
they buy tech stocks. Only at the end of the interview when Ron Insana
questions whether all tech stocks are overvalued is it mumbled that of
course certain stocks do have earnings that are great and still surging
ahead.
The point: these guys are looking for news, and what gets an investor's
attention most? Some contrarian story that says 'this time it is
different' with respect to whatever happened that day. Today it was the
Fed rate cut and how tech stocks and markets do better when rate cut
cycles start. This is just like the 'analysts' who make controversial
calls to get a name for themselves. These tend to come when things are
less than stable, and thus they tend to be self-fulfilling prophecies.
The chip downgrades were a classic example. The call was for a slowdown,
and while some did slow down, it was blown way out of proportion.
Earnings better than expected in brokerages.
LEH and MWD topped earnings estimates in a weak stock market. That was a
surprise, and it helped the smaller brokers more than the big boys today.
Rate cuts should only help these stocks. SMTC also said it would meet
fourth quarter expectations. Others are coming in as well, but the news
is all focused on the warnings. That is the sentiment, and to us, that is
still good. We don't need too much bullishness. We want to keep that
wall of worry so the markets can climb higher and higher.
THE ECONOMY
Retail sales were up just 0.1% to 0.5% for the holiday season. Wal-Mart
barely managed a gain. There were gains in specialty stores such as TLB,
RSH, AEOS, and TOY, but it was obviously not across the board. This was
expected, and if the Fed had not already moved, this would be another
catalyst to cut.
Jobless claims just shot off the map, rising 16,000 to 375,000, the
highest level in 2.5 years (back in 1998 when things were rocky). Claims
were expected to come in at 350,000. The four-week average jumped to
352,250 from 347,000 (revised) the previous week. Remember last week when
the claims dropped more than expected? We said it was smoke and mirrors
because the states turned in estimates; true to form, the actual numbers
were much higher. This was a big jump and another reason to cut.
December job cuts tripled to 133,713. This is the fourth time in the
history of the report that it has surpassed 100,000.
Good new: factory orders were up 1.7% versus expectations of a 1% rise.
Still, it does not offset October's 4% drop.
Summary: Things are not good. Moreover, rate cuts will take a long time
to actually put money back into the economy. It is not overnight. This
is one reason why we need to push all of our congressmen to vote for
meaningful tax cuts as the second part of a needed economic plan. It is
not just for economic recovery from the current slowdown, but it is needed
to put money back into investment in technology to patch up that sector so
we can further our lead in that arena for the future. We won't be the
leading consumer nation in 10-15 years. Consumers will be from Asia and
South America. We need our technological lead to maintain our economic
status and standard of living; that will be our commodity to sell to all
of those consumers. Paying down the debt does not put cash into the
economy; it is an illusory benefit couched in terms of lower interest
rates. History shows that lower taxes lead to lower interest rates, not
lower debt levels. The tax increases are sapping the economy of needed
money to advance our technological edge, our one great resource that has
come out of the last twenty years of expansion. We need to put a full
court press on our elected officials for the full tax cut, not just a
token cut to appease the masses.
THE MARKETS
The Fed changed the landscape, but as we know, we still have to watch and
see how things shape up before jumping headlong into the market. There
are still earnings reports to come which will be a drag on some stocks,
but the leaders will show good earnings again. That will help. We will
look for a high volume confirmation and lots of buying starting Monday.
That is no guarantee, but it has been a historical requirement of a strong
move up. Still, we are averaging into positions on the leaders and we are
playing solid-looking stocks. That way we can take advantage of quick
moves up and get great prices on stocks we have wanted to add to or build
new positions in.
Overall market stats:
VIX: 29.96; +1.29. Below the 30 level, but still showing some healthy
skepticism after a massive 5-point drop on Wednesday's rally. We want to
keep that wall of worry going.
Put/Call ratio: 0.55; +0.07. Rising slightly, but it never made that
closing high of 1.0 or better. It may have been heading that way on
Tuesday and Wednesday before the Fed stepped in as the markets looked
ready to test 2000 this week.
NASDAQ: Sold down on high volume, but most of the stocks we looked at did
not sell on higher volume. We saw telecoms and other techs moving up on
higher volume. Overall volume was lower as well. That is fine for now,
but we want to see things move up.
Stats: Down 49.86 points (-1.9%) to close at 2566.83.
Volume: 2.615 billion shares (-15.5%). Lighter, but still strong, above
average volume. 1.152 billion shares to the upside versus 1.425 billion
to the downside.
A/D and Hi/Lo: Advancing issues still topped decliners 1.22 to 1 (3.1 to
1 Wednesday). New highs rose to 92 (+32) while new lows fell to 47
(-104). We like the fact that advancers maintained their lead and the
fact that new highs continued to rise and new lows continued to fall on a
down day in the market.
The Chart: investmenthouse.com
Holding above the down trendline it just broke, holding above its 10 day
moving average. The candlestick chart shows a loose doji, and that can
signal a change of direction; with the huge gain on Wednesday, however, it
is difficult to read a loose doji as some profit taking is expected. For
now we have a strong move off of an intraday 52-week low, and we are
waiting to see if it can move up to challenge the down trendline at 2745.
Dow/NYSE: The Dow fell to some profit taking today as well, but the
volume was another record, topping 2 billion shares. That is not good
news, but again, much of the selling was rotation out of defensive sectors
on high volume while other stocks sold on lower volume or rose on higher
volume. Money appears to be shifting to different sectors, not leaving
the market.
Stats: Down 33.34 points (-0.3%) to close at 10,912.41.
Volume: NYSE volume hit yet another record at 2.110 billion shares
(+12.1%). Up volume was 990 million versus 1.089 billion to the downside.
A/D and Hi/Lo: NYSE advancers continued to lead by a reduced margin (1.17
to 1; Wednesday was 2.94 to 1). New highs fell but were solid at 272
(-45) while new lows fell to 7 (-24).
The Chart: investmenthouse.com
The Dow tapped 11,028 on its high, a level that represents resistance for
the index and one that it tapped at on Wednesday. It did manage to close
at 10,912.41, a level that acted as resistance in September, October and
December. That is pretty good support.
S&P 500: The 500 big caps ran up to the 50 day moving average on its high
(1350.24) and turned back. It was able to land at 1333, right at a
possible support level in the 1335 range. The index really needs to break
the down trendline at 1350 to make a serious run at further gains.
Stats: Down 14.22 points (-1.1%) to close at 1333.34.
Volume: NYSE volume set another record at 2.110 billion shares (+12.1%).
The Chart: investmenthouse.com
FRIDAY
The big pre-market news will be the employment report. Unemployment is
expected to tick up to 4.1%, etc. We will all know an hour before the
market what it is and what the bond traders and pre-market traders make of
it. Barring any nasty surprises we cannot think that the report will be a
real negative impact on the day's trading: the economy is slowing, the Fed
got what it wanted last summer. This is a lagging indicator anyway; we
already know what has happened. The concern is what the future holds.
The future. Despite the negative comments on the television from the
experts, we think history will repeat itself. It has done so every time
the Fed steps in. The 'this time it is different' line we are hearing out
there doesn't phase us. Names change, sectors change, but the facts are
the same: economy great, stocks performing superbly, Fed raises rates to
chase inflation, stocks tank, economy tanks, Fed cuts rates, stocks start
to recover, economy starts to recover. As we have said over and over, it
won't be all roses because the economy is still slowing; one rate cut does
not magically create money in the economy. It makes it easier to get, but
companies don't just run to the teller and start withdrawing large
amounts. They have to size up when the upturn could start, how they
should plan for that, then actually take action. That takes time. There
are market setbacks such as low earnings ahead of that.
We don't know if the Fed acted fast enough to prevent recession, indeed,
we won't know until much later. What we do know is that the Fed is acting
aggressively to reverse what is currently going on in the only way it can.
The federal government needs, with our help, to keep focused on what is
important: the economy and what makes it work. Paying the debt down does
not make the economy work better. A strong economy makes the economy work
better, and the fastest, surest way to get that happening is to let
citizens and corporations keep more of the money they make so they can
produce and consume. The Fed can lower interest rates if needed; we don't
need a lower debt level to do that. Let's not lose sight of the ball:
Congress wants a surplus so it can spend it on pork. History shows that
the government is inherently and pathetically inept at efficiently
allocating resources. Might as well take the money and burn it. |
