1/10/01 Investment House Daily
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TONIGHT:
- A solid confirmation on the Nasdaq despite earnings warnings and
downgrades.
- This is Wednesday, so must be a new story on the financial stations.
- More upside earnings 'warnings.'
- Tomorrow: YHOO warns for first quarter, MOT meets expectations; we
expect the market to shrug them off.
Another test lower and then a strong Nasdaq rally and confirmation.
Last night it looked as if the Nasdaq was tiring even as it gave us a
muted confirmation day. We thought we would get a test lower and either
stay down, or, if there was any mustard in this move, it would try another
rally. It did the latter, and we were able to use the early touchdown to
support levels to take some nice positions on some key stocks in good
patterns. On top of that, the index gave us a strong confirmation move
with above average volume, a 3.4% advance, and an A/D line better than 2
to 1. As frustrating as Tuesday was, today was the opposite as we had
strong moves and decent entry points. Nice change of pace.
Problems to overcome early.
The day was not without its negative overtones. Before the open a new
networking analyst at CIBC World Markets wasted no time trying to show he
was his own man, follows a different drummer, was a maverick . . . in
other words, the stock market's new millennium equivalent of the 1990's
investigative reporter. He downgraded CSCO, RBAK and JNPR saying that
business was going to slow in the future. That is the MO: pick a favorite
sector with the strongest stocks and earnings and say it is going to slow
down. That had stocks down in the pre-market and the futures heading
lower. That opened the Nasdaq down 50 points and sent stocks to test some
support levels. What did it do? It shrugged it off and used the selling
as an opportunity to pick up stocks once again. A very positive sign.
Even more positive was when CSCO CEO Chambers said forecasting was 'more
challenging' and the stock sold off heavily. That took the market with
it, but it again fought the sellers and stair-stepped its way up until the
last hour when it took off. Even with CSCO's drag the techs scored big.
Same old story depending on what day it is.
Even while this was going on, we kept hearing the same mantra of late on
the television. The Nasdaq was up 50 points (a 100-point reversal), yet
Bob Pisani already had his story line he generated before the open, and
damn it, he was not going to leave script. He was still stating that
'investors' were concerned about the economy and were not going to put
money into the market until the second quarter when the economy actually
started to improve. He was literally shaking his head about the 'tech
selling' as they raged upward on the screen behind him. Even later in the
session he put up charts showing the "financial selloff" since the Fed
rate cut last Wednesday.
Very curious. Of course, you all know that the 'financial selloff' was in
fact the formation of handles on cup with handle and double bottom
patterns. LEH: spent the last 5 sessions forming its handle on its cup
pattern. JPM and MER spent the five previous sessions forming the handles
on their double bottom patterns. Then today, as we were expecting in the
reports, the stocks exploded higher on stronger volume. They have not
broke out yet, but they are moving that way and made for great entry
points today.
It was not until after hours did the story change when Bob stated it was a
'good day' on the averages, techs included. Another reporter stated that
today investors were no longer worried about the weakening economy but
were focusing on the Fed rate cut as a sign of things to come. Wow.
Magic transformation, huh? Of course not. Fed cuts, despite the 'this
time it is different' theme we hear each time some new event pertaining to
the markets occurs, signal the end of a bear market. It might take two
cuts to reverse the trend, but in all cases but one that has happened.
That one case was in 1990. That was a tough time and the market was
finally scratching its way higher when Iraq invaded Kuwait. That put the
blight on the move up.
The point: don't get swatted back and forth like a tennis ball by the day
to day observations on the tube. On a down day the guest analysts are
those prognosticating further selling. On up days the guests are those
advocating the bottom is here. The key: look at history, look at the
price and volume action, look at key stocks. Those tell you 98% of the
story. Seeing the patterns shaping up in the financial sector is further
evidence of good moves to come. They still have to make the breakouts and
move higher, but they are setting up just as they should be doing.
Upside earnings 'warnings' becoming common.
The focus is still on the negative earnings warnings and concerns about
this quarter. Good. Keep that anxiety up. The market seems to be
finding its footing even as some heavy hitters are fretting on the
television on a daily basis. They are still fretting even in light of
more and more upside earnings forecasts by analysts and the companies
themselves. AMCC was touted today as going to beat its estimates. MVSN
raised its own earnings estimates. RATL (Rational Software) beat the
street and was up $3-$4 after hours (10%).
As we have been saying, the leaders are going to show good earnings. ARBA
is out tomorrow, and it has already told us its earnings would beat the
street and show the first B2B profit. AMCC beat the street in the third
quarter, and it will do so again. JNPR, yes. BRCD, yes. CSCO, yes.
SEBL, yes. EMC, yes. The list goes on. They have been beaten up because
they were leaders. Leaders because of their prowess in their sectors and
how that shows up in earnings. That is why we follow them, average into
long-term positions when the opportunity presents itself, and play them on
their short term moves as well.
THE ECONOMY
Recession in California? Morgan Stanley stated the U.S. was heading into
recession in the first and second quarter, but that there would be
impressive growth in the third and fourth quarters that will more than
offset that negative GDP growth. Today the talk was that California may
already be in a recession. Heck, we feel the whole U.S. may have already
had negative GDP growth in the fourth quarter. It will be close. The
point is the same: if the Fed continues to cut rates, the market will look
ahead to better earnings. The economy will have to start performing, and
the retroactive tax cut will insure that and put the economy back on the
fast track we need heading into these last critical 10 years of baby
boomer consumption. If it does, the market will continue to discount that
economic prosperity ahead of the actual economic good times.
PG&E suspends dividend. Reeling under the poorly conceived attempt at
energy deregulation in California, PG&E announced this afternoon that it
will suspend its dividend. It stated it could not borrow money. Another
sign of potential trouble for the credit markets if these big utilities
start to fold. This could slip out of hand pretty fast and really shake
the U.S. markets. In a perverse way, that is good for the market overall
as it keeps the Fed focused on the need for further rate cuts, but the
lack of an energy policy in this country has led us to this situation of
playing with fire.
THE MARKETS
The Nasdaq rallied from a weak open. It then shook off the negative news
on CSCO. Even CSCO rallied on the close. The action in the techs and
financials also helped the Dow turn positive in the last hour, and the S&P
500 tracked the Nasdaq higher as well. All moved higher on stronger,
above average volume. The indexes are nowhere near out of the woods, but
there is life stirring in many previously 'dead' sectors, and the
financials are acting as they should when the Fed starts cutting rates.
Overall market stats:
VIX: 30.15; -0.64. Volatility remained above 30 even on a strong move up
in the Nasdaq and S&P 500, and a late rally in the Dow. We like that
continued anxiety.
Put/Call ratio: 0.57; -0.22. The 0.89 figure we had last night was, as
we thought, off. It was 0.79; still not bad, but not 1.0. In any event,
today's rally chased out the put buyers for now.
NASDAQ: The big stocks tested some support and then jumped up as
investors used that as another entry point. CSCO threw cold water on the
party, but it again recovered on strong volume. Solid action. Look for a
bit of weakness after such a strong move two consecutive days (three if
you count Monday's reversal). No reason to panic. It may last the day or
it may try to forge higher. It has run 224.53 points from the Monday low
(2299.65, a 9.76% move), and that could require some profit digestion.
Stats: Up 82.88 points (+3.4%) to close at 2524.18.
Volume: 2.474 billion shares (+25.5%), well above average. Up volume
trounced down volume 1.839 billion to 584 million shares. Again, the
proper price/volume action on market gains.
A/D and Hi/Lo: Advancing issues surged to 2559 to 1255 (2.03 to 1). When
looking at confirmation days we want to see the A/D line at 2 to 1 or
better. This is about the only time the A/D line means anything in the
markets. New highs rose to 65 (+4) while new lows fell to 61 (-19).
The Chart: investmenthouse.com
Not a lot to say about the daily chart at this point as the Nasdaq is
still trying to come off of a 52-week low and there is not much pattern
there. It did make a higher low, however, and that is bullish. At this
level that is little comfort. What the Nasdaq must do is take out the
down trendline at 2650 to 2700 that has turned back all moves since
September. Intraday the index fought off early selling and closed at its
high. That is strong action.
Dow/NYSE: The Dow finally caught on in the last hour and managed a higher
close on rising, above average volume. The move cracked back over 10,600
as it continues to wend its way through its trading range from 10,300 to
11,020. Techs and Financials pulled the index up at the end of the
session to positive territory. Indeed, that is the problem the Dow faces:
techs do well, old economy stocks get sluggish. Seen it before.
Stats: Up 31.72 points (+0.3%) to close at 10,604.27.
Volume: NYSE volume inched higher again, coming in at 1.288 billion
shares (+4.8%). Up volume doubled down volume 817 million to 440 million
shares.
A/D and Hi/Lo: NYSE Advancing issues stretched their lead to 1.76 to 1
today. New highs rose to 169 (+4) and new lows rose to 20 (+6).
The Chart: investmenthouse.com
The Dow tapped lower again today (10,472.51) before it caught its wind and
started higher. It continues to struggle in its trading range (10,300 to
11,020) as it tracks above and below its 200 day moving average (at
10,725.25). With the financials looking solid the Dow looks better for a
run back up.
S&P 500: The 500 big caps tracked the Nasdaq today, dropping in the
middle of the day and then racing higher in the last hour. As with the
Nasdaq it made a higher low this time around, one of the first times it
has done that in a long time. It still must crack the down trendline now
at 1345. That 1335 to 1360 range is critical resistance for the big caps.
The index has to break over that level in order to attempt any real gains.
Stats: Up 12.47% (+1%) to close at 1313.27.
Volume: NYSE volume inched higher, remaining above average. (1.288
billion, +4.8%). This is the right kind of price action.
The Chart: investmenthouse.com
TOMORROW
YHOO and MOT came out with earnings after the close. YHOO pretty much hit
numbers (a bit light on revenue), but said revenues in the first quarter
would fall to $220 to $240 million, down from expectations of $300
million. The stock has been taken apart after hours, down over $5 from
the close at 30.50. MOT met expectations and rose almost $2 on the high,
but it sold back later in the after hours session. Other stocks in the
tech sector and internet were down after hours, but not getting
slaughtered. Indeed, ARBA was racing higher on the word that it was going
to report a profit.
As noted in the summary, the Nasdaq has logged a 9.7% move the past three
sessions and the after hours action and the earnings reports may give some
the incentive to take some profits in the morning once again. The Nasdaq
futures are down 23 points (about 19 points below fair value) tonight. We
like softer opens if we can get a turn back up. The market surprised us
with its strength today after the CSCO selloff, and the price/volume
action was solid as was the A/D line. That is something we don't like to
bet against. Thus, some selling tomorrow on lighter volume will not shake
us out of upside positions; indeed, we will probably use that to take some
more positions on stocks testing support. We may not get the rebound back
up that day, but if the selling is on lighter volume, one should follow
shortly.
The market is building back up after the profit-taking following the rate
cut, and there are many holes to fill on the way up. But, the indexes
sold off on lighter volume after the rate cut, and that set up some great
looking patterns in the financial sector, one sector that has been leading
in this market. That is just what was needed; so, as some were lamenting
the short-term selling after the rate cut, we were using it as a buying
opportunity. The Nasdaq still must break the down trendline at 2650 to
2700 on strong volume before we can really breath the first sigh of
relief, but for now it is looking good.
In morning weakness we will start looking around for stocks to take some
more positions on for long term positions and shorter term option plays.
Then we have to watch any rise to see if it holds. This could be one of
those days that struggles after a solid move or it could just power on up.
Nothing has come that easy with this market, however, so the former seems
more plausible. In any event, caution is the word still. If the futures
reverse and the market starts the day higher, be very careful and watch
for a pullback. That would be a continuation of this almost 10% move, and
that would start to wear very thin without some rest time.
Support and Resistance Levels
Nasdaq:
Resistance: Some at 2600. The big point ahead is the down trendline at
2650 to 2700.
Support: 2200 down to 2000.
S&P 500:
Resistance: The down trendline at 1345 and previous resistance at 1360.
Support: 1270 is possible support. 1254.07 is the 2000 low.
Dow:
Resistance: 11,020. After that, 11,400.
Support: 10,600 and then 10,300. After that, 10,000.
Weekly Economic Calendar (All times Eastern). The figures are the
consensus expectations, not ours.
1-8-01
Consumer Credit for November (3:00): $8.0B versus $16.7 B prior.
1-10-01
Wholesale Inventories for November for 1/6/01 (10:00): 0.3% versus 0.3%
prior.
1-11-01
Initial jobless claims for December (8:30): 370,000 versus 375,000 prior.
Export Prices (ex. Ag.) for December(8:30): -0.1% versus -0.1% prior.
Import Prices (ex. Oil) for December (8:30): -0.1% versus -0.1% prior.
1-12-01
PPI for December (8:30): 0.1% versus 0.1% prior.
Core PPI for December (8:30): 0.1% versus 0.0% prior.
Retail Sales for December (8:30): -0.2% versus -0.4% prior.
Retail Sales (ex. Auto) for December (8:30): 0.2% versus 0.2% prior. |
