1/17/01 Investment House Daily
* * * *
- Nasdaq surges on earnings, but some selling on Fed's economic outlook
and a company analyst's views on the stock market.
- Dow lags the move as expected.
- Earnings everywhere, and IBM leads the charge tonight.
- Prices still modest but showed yearly increase as a result of Fed
tampering.
- Economic numbers just weak enough to nudge Fed Funds Futures contract
back above 50% probability of a 50 basis point cut on 1-31.
- OPEC cuts production, but oil prices slide anyway. Hard to beat a weak
economy.
- Subscriber Questions
- Team Trades
A big move gives half back in the last hours.
Powerful earnings from some of the leaders such as JNPR and AMCC had every
tech stock popping today. Some called it an "Intel" rally, but do you
think the moves would have been what we saw today if Intel's numbers were
the best that were out there? No way. Intel helped by not totally
imploding. As it is, it managed to beat reduced estimates and announce a
softer first quarter. That is not what sparks upward moves.
The Nasdaq gapped open almost 100 points and surged higher. Each time it
looked as if it was going to give some back it surged up some more. But,
it started to show cracks. JNPR was up $15, but it sold back immediately
into a range it held for 5 hours before selling off at the close. Some
stocks held tough all day, and most held onto nice gains, but by the end
of lunch on the east coast, the Nasdaq was rolling back down for the day.
It held onto a 2.5% gain, and as strange as it sounds, many were
disappointed on the session.
The Dow was still lagging, and as we felt after Tuesday's move, it pulled
back today again. It did manage to turn positive when the Nasdaq was at
its highs, but when the Nasdaq started to sell, the Dow quickly slipped
back into negative territory. That action shows it was the Nasdaq leading
market direction once again, not the Dow 'dragging the Nasdaq down' as
some stated. Of course it sold on higher volume, continuing its recent
trend of backwards price/volume action.
Many scapegoats for today's up day.
Today was a strong day on the Nasdaq, but many were disappointed in the
afternoon selling. First it was OPEC and the 1.5 million barrel
production cut that was blamed. Oil priced, however, dropped over $1 on
the news. Hard to see that as the source. Second, the Fed Beige Book
report came out, and that was touted by traders as being the catalyst for
selling. The report showed what everyone expected: weakness all over the
land. That, however, was known to be the case and that keeps the Fed on
the rate cutting track, and that benefits that markets despite what we
have been hearing these past two weeks. Moreover, the Nasdaq rolled over
before that report hit the street in the afternoon.
Then Dan Niles jumped in and chided investors for taking part in a
"suckers' rally" in semiconductors, saying there was more downside ahead.
Okay, since when did Dan switch from a company analyst to a stock movement
(i.e., technical) analyst? Is he now going to unabashedly manipulate
stock prices as opposed to making 'calls' on the sector? Is this his form
of full and complete disclosure? To us Mr. Niles' statements today just
put in clear focus what we have known all along: analysts make big calls
hoping to garner a name for themselves, and if they are lucky and get it
right once, they then use that fame to impact their sectors when they want
to.
It is investors, however, who give them this power. Fund managers and
individual investors alike should ignore these statements and render them
useless. After all, Niles is not a technical analyst or a market
historian. He does not factor into the equation Fed rate cuts, investor
sentiment, history and the other factors into his equation. He is a
number cruncher who is saying that these stocks are not out of the
inventory and cyclical slowdown right now and that will cause them to
drop. In other words, the bean counter is saying they are not going to
have enough beans coming in this and next quarter to justify a move up in
the stock price. That is possible, but the market discounts well in
advance, and there are a lot of other factors to consider as we pointed
out. Sure the semiconductors may re-test their lows, but they are not
showing that right now. This 'market call' from a number cruncher is
absurd.
Want proof of the absurdity? Remember back last March, April and May were
touting tech stocks of all types based on their last earnings and
projected earnings for the next quarter? 'Strong buy' was the phrase of
the day. Yet, these stocks were tanking into the bear market as the stock
market started to forecast the economic slowdown (already happening by our
numbers) to come. So, go ahead and buy CMGI , CMRC, etc. even if they
were tanking; the analysts had counted the beans and concluded 'strong
buy.' Now after being slaughtered more than 50%, the Nasdaq and techs are
starting to discount better times in the future due to Fed rate cuts, a
possible tax cut and other positives. Yet, the analysts did not start
lowering expectations until the market was crushed, and they are still
doing it right now as stocks start to make moves up based on expectations
6, 12, and 18 months in advance just the way it always does. Once again
the analysts are behind the curve; you cannot listen to these people at
all if you want to be ahead of the crowd. You watch the stock patterns
and look at how volume is working. Are institutions moving in or out? Is
price/volume action positive? Is a good pattern developing? The answers
to those questions right now is 'yes.' We saw that two weeks ago and were
buying the big names we wanted to own more of. That tells you that big
money is starting to accumulate these stocks and that is what is needed.
It may not end the bear market, but the necessary steps are progressing.
If things stay on track, the analysts will, as always, be behind the
curve.
Just not enough rest?
The above factors could have contributed to the weakness in the afternoon
that was so distressing to many (which is good in the big picture), but it
sure looked to us as like late-day selling ahead of more earnings and
perhaps just not enough rest after a big move up.
The pattern for the day was typical of an earnings season: strong moves on
the news of solid earnings, but then as the next round of stocks were
lining up for earnings after the close, investors decided to not risk it
and pulled money off the table. As reported last night, we saw that
Tuesday as well ahead of the AMCC and JNPR earnings.
Another factor that could be the case is that the Nasdaq might not had
enough rest after pulling back just 22 points Friday and Tuesday. At its
high today it was up 21% from the low this year with just that slight bit
of rest to consolidate gains. After hours tonight we saw great earnings
from IBM that set that stock on fire, but stocks overall were just not
holding onto the impressive after hours gains. Perhaps the Nasdaq is
still a bit ahead of itself after just 21 points of pullback. You cannot
argue, however, with the volume on today's move; buyers were out in force
still. The picture is not clear given the selling in the second half of
the day, but overall the picture is still a positive one.
Earnings.
IBM really surprised to the upside, showing it is truly versatile: it can
surprise higher as well as lower with equal dexterity. The numbers were
impressive, and that had stocks such as SUNW up after hours as well. The
moves held for the most part, but there was some fading unlike Tuesday
night's session where stocks surged until they closed the doors.
AAPL was okay, EXTR met estimates, SANM beat estimates, XLNX missed by a
penny. These stocks were down and up a bit off the lows, but nothing
spectacular. ITWO reported good numbers but investors did not like
everything in the conference call and sold it off late in the after hours
session. CTXS and KLAC said the right things on the guidance, and their
stocks moved right back up with CTXS recapturing its highs of the day.
In sum, we saw good earnings for the most part and some disappointments.
The power after hours tonight, however, was not really there. It was not
gone, just notched lower than Tuesday.
THE ECONOMY
CPI lighter than expected. A 0.2% gain overall met expectations, but the
core came in at 0.1% versus 0.2% expected. Good to see it in line and
better as that continues to give the Fed unquestionable room to maneuver
with further rate cuts. Year over year the CPI rose 3.4%, the highest in
three years. That had some saying once again 'thank heavens the Fed was
raising rates or it would have been a disaster.' No, the disaster
occurred, and that is that the Fed choked off supply early on with its
rate hikes and tanking the market while demand continued to rise until
September 2000. That allowed demand to overtake supply and caused
whatever imbalance there is (or was) between supply and demand (now that
demand has tanked as well that is most likely a moot point; hopefully).
Is it coincidence that the first sign of a rising CPI was in March 2000,
almost one year after the Fed starting raising interest rates? There was
no inflation before that. What we see now is a by-product of the Fed rate
hikes that killed supply long before demand peaked.
Industrial capacity and utilization was a low 79.1% for December, well,
well below the bottleneck levels. There is no shortage of plant space for
expansion when it comes. Industrial output was also weaker than expected
at -0.6%. It was up for the year over 1999 (5.7% versus 4.3%), but the
last part of 2000 showed a dramatic drop.
National Association of Homebuilders reports its lowest level of activity
since 1997. Further weakness speaks for itself: fewer homes built means
fewer washers, refrigerators, drapes, flooring, tables, chairs, beds, etc.
manufactured and sold. Lets not kid ourselves: low mortgage rates (in
defiance of the Fed rate hikes, as strong a sign as you can get of a
slowdown in progress) kept home sales going, and that kept a big part of
GDP going. As that slips, GDP slips.
OPEC cuts production 1.5 million barrels per day. Oil prices did not
care, and they fell over $1 on the announcement. What does this mean? It
means that, as we said all along, when the biggest economy in the world,
the one supporting the world for ten years, slows down, even artificial
price controls don't work well. If you are not using all of the oil that
there is out there, you cannot jack the price up. OPEC struggled for
years with the rest of the world in recession and had to cut production to
try and prop up prices. That worked, but not because there was all of the
sudden a dramatic shortage of oil. It was political maneuvering as we
said at the time, and after everyone kicked dirt on each other's shoes,
prices have settled back down. Enough so OPEC has to cut production again
to try and prop up prices. Prediction: it is not going to work because
the U.S. is not manufacturing squat right now.
Fed Funds Futures: Today's economic news solidified the futures
contracts' position on future rate cuts. The 25 basis points on 1-31
remains 100%. A 50 basis point cut moved back over the 50% probability
level, and once that happens and holds, the contract is very accurate in
predicting what the Fed will do.
THE MARKETS
Overall market stats:
VIX: 28.51; +0.33. Volatility was up fractionally again on the Dow's
selling, closing well off of its low at 26.93 when the Nasdaq was raging
at its high. The disparate market is keeping it at the higher end of the
neutral range (over 30 is considered high volatility).
Put/Call ratio: 0.49; -0.07. Fewer put buyers as the Nasdaq roared
ahead. Not showing us anything right now, but we do note once again that
the ratio never made it over 1.0 on the close, a move that usually
indicates a reversal.
Futures: Nasdaq +13.50 (+13.38 over fair value). S&P +2.20 (+4.98 over
fair value).
NASDAQ: As expected, the Nasdaq exploded on the JNPR and AMCC earnings
news, gapping 92 points to the upside and racing up to 2756.63 on the
high. The move was on high volume across the board, but the index could
not keep the momentum all session long. After hours response to earnings
was positive if lukewarm by Tuesday's comparison.
Stats: Up 64.23 points (+2.5%) to close at 2682.78.
Volume: 2.820 billion shares (+36.4%). A huge surge that pushed volume
well above average. Up volume was 1.996 billion shares (Tuesday total
volume was 2.068 billion); down volume was 770 million. Very powerful
volume.
A/D and Hi/Lo: Advancing issues continued to lead 1.48 to 1 (1.58 to 1 on
Tuesday), but not the same power we saw on Tuesday's down day. New highs
rose to 127 (+28) while new lows fell to 18 (-3).
The Chart: investmenthouse.com
The Nasdaq was definitely ready to move up Tuesday, anticipating the
earnings and running up off of its session low and showing us the doji at
the close. Today the index gapped higher and ran right up to its 50 day
moving average (2773.25; high 2756.63). There it hit resistance and it
spent the rest of the session selling back.
The Nasdaq is now in interesting territory. Unlike CNBC's Tom Costello
says, the down trendline was broken today on the initial surge. It is not
at 2700, and has not been at 2700 for six sessions. It is now at 2580 to
2590. It has been broken on high volume, and that is a major
accomplishment, something it has not been able to do since it started in
September. Breaches of trendlines, if they occur on high volume and if
they can be held, are major events. They show us a 'character' change. We
have been seeing the move brewing, it just had to happen and it has to
hold.
There is resistance still at the 50 day moving average and its conjunction
with the 2710 to 2750 level. that turned the index back today, and the
key test now is for the index to hold onto its gains again as it takes on
this resistance. There is a lot of talk about technical resistance at
2700 and the trendline, and that has many confused. The Nasdaq made a
great move today, an important move. It has to hold onto it, however,
even as it looks as if it might suffer from some possible weakness as
earnings continue to flow in the week. Again, the index is not out of the
woods, but from what we are seeing thus far, earnings are mostly pleasing
investors as they had built in some really horrid expectations. We think
the index has made very positive moves that have some strength behind
them, and that this is just another proving ground that will win out.
Dow/NYSE: The Dow tapped its 200 day moving average on its high
(10705.93), but when the Nasdaq rolled over for the session it simply did
not have the strength to hold the move. As we suspected, the Dow was
unable to breakout of this range as the techs were set for and did put on
a buying show.
Stats: Down 68.32 points (-0.6%) to close at 10,584.34.
Volume: NYSE volume switched on the Dow, rising to 1.330 billion shares
(+10.3%), above average and again the opposite price/volume action we want
to see. Up volume still led down volume 684 million to 607 million even
on the selling.
A/D and Hi/Lo: NYSE advancing issues continued their lead as well, but
falling at 1.19 to 1 (1.45 to 1 on Tuesday). New highs climbed to 188
(+16) and new lows fell to 14 (-1).
The Chart: investmenthouse.com
The Dow is firmly entrenched in its range that runs roughly from 10,400 to
11,020. It simply does not have the power at this point to break out, but
it is forming a narrower and narrower flat base. If the overall market
continues to improve in anticipation of further Fed rate cuts, this is a
good sign for an ultimate breakout of the range. For now it is
demonstrating the wrong price/volume action and that does not predict a
breakout soon.
S&P 500: The big caps surged as well, rising to 1346.92 on its high,
crossing its down trendline that started in September (now at 1335) and
its 50 day moving average (1341.85). It could not hold those moves,
giving back 17 points from the high. It also showed a loose 'tombstone'
doji on the day, and the combination with the failure to break its down
trendline does not look promising. The move was on higher volume, and it
was an up day. Those are positives. Until it can break and hold over
that down trendline and the additional resistance at that level, the S&P
500 is not going anywhere. It has been making a series of higher lows
this month; it is building for a move or a failure. It might take a bit
of a breather right now which is okay, but it has to make the move sooner
than later.
Stats: Up 2.82 points (+0.2%) to close at 1329.47.
Volume: NYSE volume was higher on the move up (1.33 billion shares,
+10.3%). The correct price/volume action once again.
The Chart: investmenthouse.com
TOMORROW
More economic news (jobless claims, housing starts, building permits), but
don't expect anything that will show the economy is flying forward. We
need to see housing starts holding up; as noted above, they have been
(thanks to falling interest rates even as the Fed hikes rates) a big roll
in keeping the economy from really tanking hard.
Everything plays a role right now in the big picture, but the primary
focus is on earnings. IBM was good, and tomorrow we see SUNW, MSFT, CHKP,
CAT, UTX and other big names. Again investors will hang on the most
recent reports. They tend to live on a 'what have you done for me today'
basis at this time of the year when the economy is not powering ahead.
The bar has been lowered, but the economy has not revved up. In two to
three quarters the bar will have been set so low this time around that
they will be crushing estimates. That is not the case now, but as we are
seeing, leaders are still leading with earnings and huge revenue growth.
Tomorrow is giving mixed signals. The move today was on powerful volume
and we saw that in individual stocks as well. Big chunks of the moves
were given back, however, and that weaker finish is worrisome. We think
most of it was based on investors taking gains on big moves ahead of more
earnings announcements that are still uncertain. We are going to be ready
for either a positive open that bleeds back or a flat to down open that
tests some support and moves up. The latter is our favorite move as that
allows us to better gauge what is going on in the session.
The question is where will it pull back to if it does? If it opens and
runs higher right out, we need to see if it can take out 2710; it may try
the 50 day moving average, but that is one strong move up (2773.25). On
the downside, we have to deal with the gap higher, and that always makes
finding a turning point more interesting. If looking for a pretty solid
point, the Tuesday close at 2618 is not bad as it closed there (2616) on
the big rally the day the Fed initially cut rates. The Nasdaq has been
making higher lows as has the S&P, it broke its down trendline on strong
volume, and leading stocks are announcing good earnings. It may be
somewhat tired short term, but so far the underpinnings of this move are
solid. We will be using weakness to enter positions on stocks we have a
lot of confidence in (e.g., EMLX, BRCM, CIEN), and we will continue to
play the breakouts, solid pre-announcements, and pre-splits. |
