Here's a good read :
Bonds rally and stocks suffer the consequences
Dear Jeff: I was away from my PC when suddenly I heard all of my
Q-charts alerts on bond yields start to trigger. There was
apparently a very sudden drop. I haven't been watching bond
yields for very long, but I've taken quite an interest in what
you have taught me about money rotating from stocks to bonds and
vice versa. What's up with the sudden drop?
Treasury bonds surged this afternoon after strong demand for the
10-year auction of $11 billion and its yield ($TNX.X) was gobbled
up by the market as if it were gold. At 01:30 PM EST, all heck
broke lose in the bond market as the YIELD for the 10-year YIELD
plunged from 5.159% to 5.11% in the matter of 15-minutes (bond
yields fall as prices are bid higher). The demand this bond
found today was the highest level of demand found in the past
eight years with the bid-to-cover ratio (a measure of demand)
surging at 2.85 versus an average of 2.23. In essence, there
were a lot of market participants on the wrong side of the bond
market and when that realization became known, the bond market
surged and YIELDS dropped. The YIELD on the 10-year finished to
close at 5.054% and represents a very significant move by the
market toward a lower risk investment vehicle.
That action its success then had other Treasury bonds finding
buyers and stocks were left out in the cold as cash moved away
from stocks and toward bonds at a frenzied pace. Almost like
domino theory would have it, where dominos are lined up on end
and then tipped over, traders jumped on the 30-year Treasury.
The YIELD on the 30-year ($TYX.X) plummeted from a YIELD of 5.59%
to a session closing YIELD of 5.517%. With such demand for
today's 10-year bond auction, many participants felt that the
upcoming 30-year auction would have the same type of sponsorship.
That said, many traders unloaded their stocks to raise cash to
buy bonds and stocks began to weaken.
Then in another round of "domino theory," the Federal Reserves
Beige Book report was released. For those that aren't aware, The
Beige Book contains information collected in the prior period (in
today's case, prior to July 30th) by the Federal Reserve Bank of
San Francisco. Topics discussed in the report were consumer
spending that generally remained weak in June and July, although
the report did show some areas of scattered pickup in sales
around the country. Services, which include demand for business
services like advertising, computing, temporary employment
agencies all found stagnant or declining demand for their
services. One bright spot in this section of the report came
from the Dallas, TX market and legal firms in that area. Dallas
lawyers noted a pickup in demand due to energy market
developments and increased bankruptcy filings. "Every cloud has
a silver lining" doesn't it?
But wait... it got worse. Manufacturing, Real Estate and
Construction, Banking and Finance all experienced stagnant to
continued slowing demand. You get the picture, there wasn't a
lot of positives in the report and that 5% Treasury bond YIELD
all of a sudden looked very attractive from the perspective of
potential risk/reward.
The Beige Book report and information provided in it wasn't that
much of a surprise today and I'm not thinking for a moment that
it was the driving factor for today's stock declines. It sure
helped fuel the decline, but it wasn't the ultimate cause. What
set things off was the Treasury auction and I truly feel it was
the sharply lower YIELD and the markets perception of what that
sharp decline in YIELD was saying that had traders flushing some
stocks and running to bonds. We've talked before in great detail
about how the market differentiates and perceives risk/reward
between stocks and Treasury bonds. Treasuries are backed by the
full faith and credit of the U.S. Government, stocks are backed
by a piece of paper called a stock certificate usually with a par
value of $0.01. The "reward" for the Treasury bond is the stated
interest payment, while the potential reward for a stock is
unlimited.
One subscriber sent me an interesting e-mail. He wrote, "I was
away from my PC when suddenly I heard all of my Q-charts alerts
on bond yields start to trigger. There was apparently a very
sudden drop. I haven't been watching bond yields for very long,
but I've taken quite an interest in what you have taught me about
money rotating from stocks to bonds and vice versa. What's up
with the sudden drop?
This subscriber was alert to the potential move coming in stocks.
I'm not sure if he acted on his alertness, but at least he knew
something was about to happen. You can tell from his e-mail that
he got more than one alert from the bond market as he most likely
had alerts set on the 5-year ($FVX.X), 10-year ($TNX.X) and 30-
year ($TYX.X). This morning in the 09:00 EST I felt it was
important to point out the 30-year YIELD alert at 5.581%. That
YIELD alert was triggered at 1:42 EST and the S&P 500 ($SPX.X)
was trading 1,200. By session's end, the SPX had lost 1.4% of
its value to close at 1,183.
Stocks like PeopleSoft (NASDAQ:PSFT) (in today's Net Bulls
section titled "StockSoft") suffered more than a 1.4% loss from
its 1:45 EST trading level of $41. The stock fell to a session
low of $38 and finished trading at $39.51.
Shares of PeopleSoft (NASDAQ:PSFT) outperformed the market to the
downside today, but bulls in this stock may have just experienced
the first bit of pain that could come from a broader market
decline. Tomorrow, I'd ideally like to see the stock rally to
the $41 level as a good entry point. this would help reduce risk
for a bearish trader. The S&P 500 Index (SPX.X) should have some
good resistance starting to build at the 1,200 level and that
should keep things in check for PeopleSoft. Traders looking to
play the stock at the open, should the market be looking weak,
can still play the stock short, but I'd only initiate 1/2
position short in the stock. I've slapped a retracement bracket
on the stock from the recent low to recent high. For this trade
to really get going in the bears favor, I feel the stock needs to
close below the $38.25 level. This would be wonderful
correlation not only with retracement, but also the 200-day MA,
which is currently at $38.23 (see black box in lower left hand
corner of chart). The reason I'd only be looking to short 1/2
position at current levels of $39.51, is that the stock could
conceivably rally to downward trend near $41-$43. If you
normally only like to short $5,000 worth of stock, then only
short $2,500 at current levels. If the stock falls to $34 or
$30, then you've got a piece of the action. Should the stock
rally against you from a short at $39.50 to resistance, you will
not be panicked and be able to better assess MARKET action
against stock action. Then if PSFT were to consolidate near
resistance, and begin showing weakness once again, the trader who
has properly managed his trading activity can round up to full
position short at the higher price (at the higher price, there is
more potential reward and less risk to your stop). I feel this
stock has at least the $34.31 level in it based on the
technicals. If I'm wrong I'm gone at $45.25. Hey! That rhymes.
Tomorrow could be wild. Today's bond market activity caught a
lot of traders off-guard and tomorrow morning I want to be
watching bond YIELD very closely to see if there is any type of
follow through. If not, then I want to be very careful with any
shorting of stocks. I'm looking at tonight's bullish percent
readings. The most volatile of the bullish percent indicators
comes from the NASDAQ-100 bullish % ($BPNDX). Tuesday nights
reading was 49%. Without looking, what do you think today's
action had on this indicator? Answer: No effect. The reading
remains at 49% and there was no net loss of stocks showing a buy
signal on their chart.
To comprehend this, go to www.stockcharts.com and pull up a
point/figure chart of eBay (NASDAQ:EBAY). That stock actually
gave a point/figure buy signal today at $66. This was the short-
term traders goal from bullish support at $60 (see 08/03 09:00
EST Update). The stock traded $66.10 today and then we got the
bond market action and The Beige Book report. The stock finished
at $62.20.
Watch Microsoft (NASDAQ:MSFT) too. The stock just continues to
trade above bullish support. This stock fell just 2% today. The
bar chart looks terrible, but for some reason the stock hasn't
broken $64. As long as this stock stays above $64, I would be
cautious on going overboard with shorting. The best shorts
remain those that offer the best risk/reward. If a stock has 20%
downside to support and only risking 5% to stopping point just
above resistance, then those are the stock I feel are best served
as short candidates. Conversely, stocks that are trading near
support that only have 5% risk downside and 30% upside and have
been finding sponsorship in the past week can turn into big
trouble if your short and the MARKET turns against you.
Don't be surprised if stocks find buyers at some point tomorrow.
A key level I'd be watching as it relates to the S&P 500 ($SPX.X)
is the 1,176 level. Look at this morning's 09:00 update and
learn to correlate the bond YIELD chart with that of the SPX.
Right now it is a game of progression. I'd argue that the recent
range for the SPX has been approximately 1,176 to 1,228.
================
Market Sentiment
================
The Old One-Two Punch
Cisco delivered a left hook to market's chin right at the opening
bell. The market was a little dazed and confused, but managed to
stay on its feet. Stocks even managed to fight back, and deliver
a few bullish blows themselves. But then they looked down for a
second, and the Fed landed a haymaker that knocked stocks to the
canvas.
The Fed's haymaker was the latest edition of its beige book,
which is a survey of economic conditions that the Fed uses for
setting interest rates. The gist of the book is that this
economic downturn is going to make the great depression look like
a picnic. Okay, it wasn't nearly that bad, but when investors
are as nervous as a long-tailed cat in a room full of rocking
chairs, it doesn't take much to start a selling spree. The Fed
basically said that manufacturing continues to weaken, that
weakness is starting to spill over into other sectors, and retail
sales are sluggish. For the full story go to
federalreserve.gov
If retail sales were in fact sluggish, we should find out
tomorrow when July retail sales are released. Should the numbers
confirm that consumer spending is waning, retail stocks, and the
rest of the market, could be in for a rough day. Retailers
weren't the worst sector today, but the Retail Index did lose
2.5% in the last two hours of trading.
What was the worst sector of the day was oil service, followed
closely by software, networking, and semiconductors. Internet
and biotechnology was also bruised and battered, and the only
sector left standing at the end of the day was gold and silver.
So is the market down for the count? It might need a standing
eight count, but there are a lot of rounds to go. The question
is whether the market has the chin of Rocky Balboa or Trevor
Berbick. After suffering a second round knockout at the hands of
Mike Tyson, Trevor Berbick was asked by a report what he thought
of the fight. His response was, "I like eggs." Hopefully the
market can take a punch better than that.
*************************Sector Watch****************************
Weekly Daily Overbought Support Resistance
Trend Trend Oversold
DJIA Bearish Bearish Neutral 10,200 10,600
NASD Bearish Bearish Neutral 1,940 2,125
S&P 500 Bearish Neutral Neutral 1,170 1,240
Rus 2000 Neutral Neutral Neutral 465 495
The daily trend of DJIA and NASD have been changed to bearish
after dropping below their 25-day moving averages, and breaking
their up trends. Overbought/Oversold status is neutral, but
rapidly approaching oversold.
Weekly Daily Overbought Support Resistance
Trend Trend Oversold
Semis Neutral Neutral Neutral 535 660
Biotech Bearish Bearish Oversold 490 550
Internet Bearish Neutral Overbought 140 170
Networking Bearish Neutral Neutral 300 365
Software Bearish Bearish Oversold 180 200
Banking Bullish Neutral Overbought 640 675
Retail Bullish Neutral Neutral 875 920
Drugs Neutral Neutral Neutral 380 410
Keep and eye on software and biotechnology tomorrow. Both
sectors are sitting right at support. Semiconductors broke
through their support level today. Internet and networking
continue to trade sideways, thus their neutral trend ranking.
Percent Change
Last Last Last Rel Strength Point and
5 Days 10 Days 30 Days vs S&P 500 Figure Signal
DJIA (0.6%) 2.1% (0.4%) Neutral Buy
NASD 0.0% 3.5% (1.1%) Neutral Sell
S&P 500 (0.6%) 2.8% (1.2%) N/A Sell
Rus 2000 (0.9%) 1.3% (0.8%) Neutral Sell
Semis 1.5% 12.1% 2.1% Positive Buy
Biotech (3.0%) 3.6% (11.6%) Neutral Sell
Internet 4.1% (1.1%) (16.2%) Negative Sell
Networking 2.0% 8.8% 0.3% Neutral Buy
Software (1.0%) 4.8% (11.0%) Neutral Sell
Banking 1.0% 4.1% 2.8% Positive Buy
Retail (1.0%) 2.6% 3.8% Neutral Sell
Drugs (1.2%) 3.3% (0.5%) Neutral Buy
*****************************************************************
=========================
Play-of-the-Day (Bearish)
=========================
PeopleSoft, Inc. - PSFT Close:$39.51 Change:-2.77 Stop:$45.50
Comments When Originally Selected On August 7th:
Company Description:
PeopleSoft is the third largest developers of enterprise resource
planning (ERP) software after SAP and Oracle. ERP software helps
clients manage human resources, financial, manufacturing,
purchasing, sales and inventory planning. The Pleasanton,
California-based company's vertical applications target the health
care, financial services, public-sector, and communications
industries. PeopleSoft generates 65-percent of sales from related
software maintenance, training, and consulting services.
After six consecutive years of doubled sales, the company saw
demand for its flagship ERP products diminish due to increased
competition and a saturated market; it slipped into the red in 1999
for the first time in the decade. In response, the company
launched an aggressive array of new products and services,
particularly in the customer relationship management (CRM)
industry. The company is counting on its Internet-based PeopleSoft
8 CRM offering to make further inroads into competitor Siebel
Systems' dominant market share.
Fundamentals:
Analysts forecast the company will earn 60-cents on sales of $2.1
billion in the current fiscal year and 83-cents on $2.4 billion in
2002. Last year, the company earned 31-cents on sales of $1.74
billion. This gives the company a 2001 earnings growth rate of 93-
percent (industry average is 3.9-percent), a current P/E of 136 and
a forward 2001 one of 71 (industry average is 43) and a PEG of 2.86
(industry average is 2.18). For the fourth quarter, the company has
said it was comfortable with analysts' current estimates of 19
cents per share.
Why We Like It:
PeopleSoft's emphasis on web-based applications have scored big
with customers and enabled it to rebound after a tough 1999.
However, the shares are richly valued making them vulnerable to
dips during market pullbacks. Although the company is predicting a
solid year with license-revenue growth "slightly ahead" of the top
of the 30-percent to 35-percent annual growth the company had
projected, and that full year EPS would be at the "high end" of the
company's 55 to 60-cent range, investors are still concerned. They
question whether the firm can maintain this robust growth when even
the company admits the selling environment has become more
difficult.
After bouncing off a session low of $29.80 on July 20th , the
shares put together an impressive run to a session high of $44.78
on August 1st. Unfortunately for longs, this high represented the
second failed attempt to top $45 this month. Since then, the
shares have been noticeably weaker and seem poised to test lower
levels. On Tuesday, after opening at $42.41, longs managed to
drive the shares in the morning hours to a session high of $44.26
before a strong wave of selling pushed the shares lower for the
remainder of the trading day. This selling was on a spike in
volume from Monday's 4.5 million shares traded to 6.8 million on
Tuesday, suggesting the bears have momentum. This makes likely a
test the next level of downside support at the 200-day moving
average of $38.41, and possibly support offered at $35 and the July
$29.80 low. We will start this Bearish play with a stop at $45.50,
which is just above the thus far unreachable $45 resistance level.
Updated Comments:
Our outlook hasn't changed much. Our first day for this Bearish
selection gave us a $2.77 gain and we believe there is more
downside weakness than upside risk. A point and figure analysis
will not generate a buy signal until the shares reach $45. The
downside shows good potential of a move to $34 and a not
unreasonable shot at $30. A big inflection point will be reached
when the shares approach the $34 level. We will tighten our stops
to protect profits when we get closer.
Picked on August 7th at $42.38
Gain since picked: -2.77
Earnings Date N/A (Not Confirmed)
==========
Watch List
==========
COMMENTARY:
Worried that the market is headed for an extended downturn?
Check out these stocks on the watch list. Ask any truly
experienced trader and they'll tell you that to succeed you
need to be able to play the downside of the market too.
We're not making any predictions about market direction here
but if certain indices breakthrough key support levels then
these stocks (and a lot more) should be making large moves
to the downside. Will you be ready to capitalize on them?
==================================================================
BEA Systems - BEAS - close: 19.79 change: -2.76
WHAT TO WATCH: If the software index is going to continue its
recent fall then BEAS could easily be setting new lows soon.
The GSO.X is perched just above support at 180. A fall below
this level would be bad news for software stocks. The previous
low back in April was south of 155. In contrast, the April low
for BEAS was 20.18, a low already surpassed. More recently back
in July, BEAS traded as low as 19.01. Today was a pretty big
move for the stock and there could be a bounce but if the new
trend is down then BEAS is looking pretty weak already.
---
Siebel Systems - SEBL - close: 30.69 change: -3.78
WHAT TO WATCH: Another software casualty, shares of SEBL have
been hammered today gapping down to fall almost 11%. The stock
is sitting precariously above support at $30. Shares have not
been under the $30 mark since late April and the yearly low
is $22.95 on April 3rd. A potential trigger to watch is the
stock under $30. From there, sellers are likely to take it
down to support at $25.
---
Brocade Communications - BRCD - close: 33.70 change: -4.24
WHAT TO WATCH: Bring a towel, the bears are probably drooling
over this one. BRCD has been fighting to breakout above
resistance at $39/$40 for days. Today's punishing 11% drop
plops the stock back under the top of its descending channel.
If the new trend is down, bears could be eyeing the bottom
of this channel near $25. If things really turn sour, the
April low for BRCD was $16.75.
---
Amgen, Inc. - AMGN - close: 60.89 change: -1.76
WHAT TO WATCH: Keep your eye on the Biotechs. Always subject to
volatility, the biotechs could really be hurt if investors loose
hope in another market downturn. At 497, the Amex Biotech Index
(BTK) is flirting with support at 490. If the group drops below
this level, AMGN is likely to feel the pain. Currently, AMGN
shares are trading above support of $60. If the stock breaks
down, we're likely to see the selling take it down to $56 or $54
which are July support levels. In contrast, the April low for
AMGN was $50.31. |
