1/16/01 Investment House Daily
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TONIGHT:
- A day of rest on the Nasdaq waiting on earnings.
- Dow surges, but again on lower volume.
- Earnings after hours are the story for the market.
- Economic news is still glum as inventories rise.
Today was just what was needed: take it easy into earnings and then solid
earnings.
Lot's of nervous analysts and investors leading into earnings season.
There is no doubt that the economy has been struggling and is still trying
to ride through rough waters. Yet, as we have been stating, the leading
companies in leading sectors are going to perform even now because their
businesses are leading the economy still. That is what we are seeing
after hours today.
First we take a look at the session. It was quiet on the Nasdaq with most
investors preferring to see how the leaders were going to come across the
tape after hours. Volume was lighter as it should be on some weakness,
but still a very solid A/D line on the session. Internals continue to
look very promising. We saw a lot of stocks pulling back to support
levels on lower volume, starting or continuing some consolidation after
last week's gains. That is very positive action when the internals stand
strong while stocks consolidate.
Indeed, such action is how good rallies continue onward and upward. The
timing is not just as we would want it, but it is not bad. We would have
preferred another session or two of lighter consolidation before all of
these earnings started to pour out. That would have allowed stocks to
consolidate a bit more before moving up. After hours tonight we see many
stocks racing higher on word from tech companies that earnings were better
than expectations and that the future still looks solid. Leaders keep
selling their products because they are the leaders; as William O'Neil
puts it, they are selling the red dresses and everyone wants those red
dresses. These earnings and forward statements are providing a catalyst
for the after hours trading, and this could act as the trigger for the
next leg up.
The Dow was getting all of the 'oohs' and 'aaahs' on the television, but
once again the index sported a nice price gain on lower volume. That
shows us that the buying is not strong on these stocks. They are being
purchased when the techs rest, but there are not a huge number of buyers.
We do see certain stocks moving up on good volume in the index (e.g., MCD)
and good patterns (e.g., C), but there just was not a lot of madcap buying
going on in the index even as it posted a nice price gain. That leaves us
careful of these stocks overall (with the few exceptions that look solid),
and some buying when the techs rest does not mean to us that these are
going to race forward again.
Earnings, baby.
Earnings had investors sitting and looking more than they have in the past
few sessions as volume was lower across the board. The banks showed some
steady earnings early in the session, and Southwest Airlines (LUV) also
posted another impressive year of gains (but no stock split as it remains
uncertain about the first quarter). Overall good news, but that did not
keep the nervous earnings traders in the stocks as the close approached.
This is a phenomenon we see over and over: sellers on earnings head for
the exits when it is 'show me' time. We saw it before the close in stocks
such as JNPR and AMCC. We are big believers in these companies, and that
just gave us a chance to take some good positions for some short term
trades (even longer if it pans out) on these stocks. We were even looking
for shares of stock after hours. Why? Because there is a pattern to
earnings announcements over the past two quarters: companies report
earnings that beat expectations, but they are sold off on the news. Then
about thirty minutes to an hour later we have the part of the conference
call that gives the guidance moving forward. The leaders have stated that
while they cannot control the future, they don't see any problems moving
forward as far as their bookings are looking. That propels the stocks
higher once again. That is why, as we stated in the SSR, we were looking
for positions in JNPR today. The leaders shake out the nervous ones on
the news, and then the really good news comes out later.
Several good examples were evident tonight. JNPR sold down close to 122
briefly in the half hour after earnings came out. After it started
discussing its earnings (24 cents versus 18 cents, revenues of $143
million, up a mere 550% year over year), it started to move up. Then when
guidance came out, it recovered sharply, and the last trade we saw was
over 137 after hours. AMCC dropped to 66.50 after hours on the initial
news and reports from CNBC of 'light revenues' (16 cents versus 14 cents,
revenues up 312% year over year, gross margins up to 76%), but it
recovered and the last trade we saw was over 75.75, a mere 13.9% move
after hours. Both of these stocks really started to move when the
conference call was underway and when the forward guidance came out.
INTC received a lot of attention. It slightly eclipsed reduced
expectations (38 cents versus 37 cents, flat revenues, margins at 63
cents, in-line), and after trading down to 30.38, it rallied to 32.38.
This is even in the face of a first quarter that was supposed to show a
15% drop in revenue. As many said, expectations were for something worse,
and this was 'good' news. Wow. That would seem to be the market reacting
favorably to negative news. Indeed, INTC was a catalyst for several chip
equipment stocks when it said it saw no slackening in this area of the
chip market as it was not cutting its spending in this area. Indeed, INTC
stated that it believed that the PC market would show renewed demand this
year, perhaps the second half, and that the PC would return as the
cornerstone of the desktop. Stocks such as AMAT, KLAC, KLIC, BRCM, and
PMCS were flying on the INTC, AMCC, and JNPR news. This could very well
be the catalyst for the next leg up. Indeed, we have been salivating over
BRCM on a pullback, but we did not get filled on our positions today. No
problem, we thought, as tomorrow we would get a chance. BRCM hit 115 on
the low after hours and traded up to 127 last we saw. Wow. Have to wait
for the morning euphoria to wear off first.
THE ECONOMY
Not great news today, but the markets are looking at weaker (but not
devastating) economic news as good news. Continued news of a slowing
economy means a Fed rate cut for sure on 1-31. At the same time, news
that is not devastating to the talk of a 1 to 2-quarter recovery is viewed
as positive. The market finds it easier to look over a couple of slower
quarters if it knows the Fed is in a loosening cycle.
Inventories up. The big story today was inventories were up 0.5% in
November while business sales were down 0.3%). In October, inventories
were up 0.7% while sales were down 0.5%. The last time sales fell two
month in a row was August 1998, right as the Russian crisis was unfolding.
Indeed, the inventory to sales ratio was 1.36 months, the highest since
4-99. What higher inventories mean is that it takes longer to clear them
out with any recovery so that companies can start manufacturing new items.
No point in turning on the assembly line if there is still a lot of
product sitting on the shelves. That hinders a recovery. Right now, if
things remained as they are it would take 1.36 months to deplete the
inventory. Send everyone home for a month-long vacation. Investors
viewed this as another sign the Fed would have to continue to cut rates.
NAPM revised higher. The 43.7 reading for December was revised up to
44.3. That was interesting, but did not alter the fact that this was the
steepest drop since the last recession. Nor did it change the 5-month
trend of lower NAPM numbers, demonstrating a contracting manufacturing
sector. Indeed, 180,000 jobs were cut from the manufacturing sector in
2000. FOMC member Broaddus got what he so cavalierly said he wanted back
in the summer of 2000.
Fed Fund Futures contract.
The contract for February still shows 100% for a 25 basis point cut on or
before 1-31, and a 50-50 chance for a 50 basis point cut during that time.
After today's economic numbers the futures contracts lowered the
expectations of a rate cut before 1-31 and lowered expectations of the
magnitude of the cut. The likelihood of a cut before 1-31 has dropped
below the 50% level, meaning it now has priced in a 20% chance of such a
move. As far as the magnitude of the move, a 25 basis point cut is still
fully priced in, while a 50 basis point cut on 1-31 is at a 20%
probability right now.
Money supply. The Fed added $6.745 billion to the banking system.
THE MARKETS
Overall market stats:
VIX: 28.18; +0.56. Volatility rose a bit even as the Dow and S&P 500
while the Nasdaq staged a later day recovery. It is staying near 30 even
on the move up, and we like that. We like higher anxiety in the market
even as things are performing pretty well.
Put/Call ratio: 0.56; -0.04. Dropped a bit as investors remained fairly
bullish on the upside. Indeed, there has not been any reason to short
stocks right now other than specific stocks and sectors that are
undergoing distribution. Even those are calming down.
NASDAQ: Lost ground, but on lighter volume, and it staged a
late-session run that closed it down just fractionally. This is just the
kind of lower-volume selling action we wanted to see: nothing virile,
nothing to set off a selling spree. The late-day action showed a doji
with a tail on the candlestick chart, and that is pretty bullish action.
With the leading techs vaulting after hours, it looks for now as if we
have a catalyst for a move up once again. The concern: will earnings
continue to provide a catalyst, or will they start to detract and wear
thin as in quarters past? That is the key that the market has not been
able to overcome the past three quarters.
Stats: Down 7.95 points (-0.3%) to close at 2618.55.
Volume: 2.074 billion (-17.7%) as volume fell just slightly below
average. That is what we want to see on selling. Up volume continued to
lead 1.083 billion to 936 million even on a down day.
A/D and Hi/Lo: Advancing issues still led on a down day, 1.58 to 1 (1.62
to 1 Friday). This makes for a very nice-looking A/D line on the Nasdaq.
Breadth turned around on confirmation, and it has remained solid. New
highs rose to 99 (+41) and new lows rose to 21 (+2).
The Chart: investmenthouse.com
As noted, the Nasdaq saw another doji on the candlestick chart today, and
today's doji showed a 'tail.' That means the index opened, sold down, and
then recovered to close near the open price. After some price gains we
are seeing the index pullback and digest those gains, but it is not
running into a wall of sellers yet this time around. Instead, it has
drifted back on lower volume, refusing to give back a lot of gains. That
is positive. The 'tail' shows this story: stocks sold back, but then
buyers came in and pushed them back up. Sellers did not win the day, and
those that were in the market were not there in numbers.
On the low the Nasdaq (2576.95) touched close to the 18 day moving average
at 2562.53 (on the close today, up from 2534.71 on Friday's close) and
then recovered. The index closed just under the down trendline once
again, fighting its way back toward that level at the close. Again, we
like that action as it is not bouncing the index lower after testing over
it on Friday. Again, we are looking for a break over that level held to
close on strong volume. Then it is a run over 2700 on strong volume as
well. That will start shaking off some of the lethargy the index has
experienced. It is not there yet, but it is acting as it should in
preparing for that move.
Dow/NYSE: The Dow surged up, but as noted, volume was lower even than
Friday's selling volume. That is the wrong price/volume action and means
to us the move may not have much strength as the Dow continues to struggle
in its range. Today it stalled just under its 50 day moving average. It
is hanging in there, but has not been able to breakout of the range. If
the Dow techs can take off, that could move the index back up to challenge
its range again. Could.
Stats: Up 127.28 points (+1.2%) to close at 10,652.66.
Volume: NYSE volume contracted to 1.200 billion shares (-6%). Still
above average, but lower than on the recent selling. Up volume did top
down volume 723 million to 443 million shares, and that gives a bit better
prospect for a continued attempt to move up even if the techs rally again.
A/D and Hi/Lo: NYSE advancing issues also continue their lead, boosting
it to 1.45 to 1 (1.03 to 1 on Friday). That pushes the NYSE A/D line
higher once again. As with the Nasdaq, this market is moving on the backs
of many shares. New highs rose to 172 (+74) and new lows rose to 15
(+10).
The Chart: investmenthouse.com
Once again bounced off of the 10,450 level to close higher, today stopping
right at the 50 day moving average. At this point it is at some
resistance from the MVA and some peaks in November and December. Not
enough to stop a solid move. That is in store at the 200 day moving
average (10,719.51) and then at 11,020.
S&P 500: The big caps joined in with the Dow for a gain, but it was on
lower volume and it too did not clear near-term resistance at 1335. It
still has that resistance along with the 50 day moving average (1342.35)
and down trendline now at 1340. That is some touch resistance, but the
breadth of this move is better. If the big techs join back in, the S&P
will have a good shot at moving over this resistance. We were looking for
a pullback to the 1300 level, but the index only hit 1313.65 on its low
today.
Stats: Up 8.33 points (+0.6%) to close at 1326.65.
Volume: NYSE volume was lower on the move up (1.2 billion; -6%).
The Chart: investmenthouse.com
TOMORROW
The big earnings news after hours sent tech stocks on a solid ride higher
all session long. That has a lot of momentum in the indexes with the
Nasdaq futures up 54 points (80 points above fair value) at the time of
this writing. As we know, that is subject to change, but there is a ton
of good news out there tonight that has everyone buzzing.
The downsides? Before the open we have the PPI for December, and if it is
higher than expectations (+0.2% overall; +0.2% core), that could have a
negative impact. Higher prices are signs of inflation, and as we saw with
the PPI, that has some commentators taking the position that the Fed may
not be so aggressive with rate cuts. We can never rest easy in this
market, and as the CPI is more volatile than the PPI, the possibility of a
higher number is there. Still, we have to put everything in perspective.
Even with the higher than expected, prices were down for 2000, and the Fed
has more incentive to cut than it does to raise rates.
There is also the continued earnings parade. It got off to a bang with
JNPR, AMCC, NVLS and others. As we have seen the past two quarters,
however, the good news hits and everyone is all cheers. Then the novelty
wears off and we are back into selling on the news again. Last time BRCD
broke the cycle and got things going again. Moreover, we have the Fed on
a rate cutting cycle, and while we hate to beat the horse, it is this very
type of change in character that looks as if it sets this action apart.
Still, this is something we have to be aware of moving forward and not get
too wild chasing extended stocks. Better to buy after a pullback to test
support as we have been seeing.
That brings us to tomorrow which looks to be a rip-roaring open based on
how earnings were received, the after-hours momentum, and the futures. If
the CPI is in line, we anticipate a gap higher in the morning on many of
the 'name-brand' leaders: JNPR, AMCC, BRCM, PMCS, CIEN, GLW. Several of
these we have been looking at as solid even as the Nasdaq pulled back. As
we said, we don't want to catch stocks too extended, so we will be
watching where they touch back after the first surge and start to take
positions at that point; not full positions, just partial until we can get
a better pulse on where the action is going. If things continue as we see
after hours today, we believe that will be continued moves up after
testing the higher open. We feel fairly confident of this move, so we
will take positions on other weakness as well when it appears the move
back up has started. Again, we think this is very likely another leg for
the Nasdaq, though we wanted to see more consolidating. We won't ignore
the moves, however.
Key to us tomorrow will be whether the Nasdaq can hold over the down
trendline when it breaks it. It will no doubt break that level as it
closed right beneath it today. We want to see increasing volume on the
move, and a break and hold over last Friday's high at 2700 would be great.
We will see what we get tomorrow, but we will be ready to start taking new
positions again on solid moves either after pullbacks on the initial surge
or on breakouts from the patterns we are looking at.
Support and Resistance Levels
Nasdaq:
Resistance: The down trendline at 2620.
Support: Tapped close to the 18 day moving average on the low as we
thought it might (2562.53). After that, 2200 down to 2000.
S&P 500:
Resistance: The down trendline at 1340. 50 day moving average at
1342.45. Previous resistance at 1360.
Support: Turned back up at 1313.65. If things get really ugly, 1270 is
possible support. 1254.07 is the 2000 low.
Dow:
Resistance: 10,900. Then 11,020. After that, 11,400.
Support: 10,300 to 10,400. After that, 10,000.
Weekly Economic Calendar (All times Eastern). The figures are the
consensus expectations, not ours.
1-16-01
Business inventories for November (8:30): 0.4% versus 0.6% prior.
1-17-01
Consumer Price Index for December (8:30): 0.2% versus 0.2% prior.
Core CPI (8:30): 0.2% versus 0.3% prior.
Industrial Production for December (9:15): -0.5% versus -0.2% prior.
Capacity Utilization for December (9:15): 80.9% versus 81.6% prior.
1-18-01
Initial jobless claims (8:30): 345,000 prior.
Housing starts for December (8:30): 1.5 million versus 1.562 million
prior.
Building permits for December (8:30): 1.586 million prior.
Philadelphia Fed report for January (10:00): -7.1% versus -4.2% prior.
1-19-01
Trade balance for November (8:30): -$33 billion versus -33.2 billion
prior.
Preliminary Michigan sentiment for January (10:00): 99.0 versus 98.4.
SUBSCRIBER QUESTIONS
Q: Are the indexes going to fall because options expire once again later
this week?
A: Friday marks the end of the January option period. That historically
generates more volatility. December's expiration came at a very volatile
time for the market anyway as it had just tapped the down trendline and
was already coming back down. That added to the downward momentum the
extra volume generated. This time around the Nasdaq is once again at the
down trendline, and that raises the possibility of a fall down once again.
This time, however, there is more positive action in stocks and the
indexes, and we have a Fed rate cut that has propped things up somewhat
despite what some on the television are saying. This time around we think
the momentum will be more to the upside than downside with the positive
action we see. Bad news could upset the apple cart, but we don't think it
will be devastating as it was last time.
Again, for short-term option plays, remember that after expiration,
shorter term options will start losing some value, all things remaining
equal. If there is selling ahead, it will be difficult for them to regain
upside momentum in a short time period. |
