Investment House Weekend Market Summary
investmenthouse.com
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2/8/02
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TONIGHT:
- Reflex bounce on lighter volume as expected.
- Big name stocks rally while recent leaders take a low volume rest.
- Getting to the real problem with Enron, Global Crossing, and other accounting issues.
- Subscriber Questions.
- Team Trades.
More selling turns into the relief bounce we were anticipating.
After an early attempt at rallying, the session had the look of more selling, rolling over after an hour and a half. The Nasdaq undercut Thursday’s low and was looking weak once more. The SOX was selling off again toward a date with 500. The S&P, however, held on right at the 1075 - 1080 level once again while the Dow held comfortably above its January low (9500). After tapping at the 1075 level three sessions in a row and holding each one, the S&P was ready for a move higher.
Even as we were watching the intraday action where the Nasdaq broke lower and the SOX rolled back over and was ready to take out Thursday’s low, we told the alert subscribers that we were not going to short the SOX as we anticipated an afternoon rally. Even though the techs had been weaker, the big cap index refused to break below recent support, and with the bigger names showing strength we held off on the SOX play. We wanted to catch the relief bounce higher even if it is just a move up to near term resistance.
Nice bounce, but is it the end of the correction or just another quick pop before more selling?
In the last hour and one-half that bounce took off. The Nasdaq rallied almost 45 points, the big caps added 15 points, and the Dow moved 145 points in that time. The Dow and the S&P had shown signs of a reflex bounce and it finally let go late Friday. Volume, however, backed off on the Nasdaq and NYSE, thus it was not a strong accumulation day.
Still, rallies do not have to start on a surge in volume. In any event, you cannot call Friday’s action a surefire turn of the recent correction into new sustained buying. Any rally attempt needs to show sustained accumulation, and that usually occurs on the fourth to seventh day after the rally attempt starts. When we see buyers jump into the market with a volume surge and one or more of the big indexes rallies 1.5% (preferably higher in this market) several sessions after a rally kicks off, that shows that big money buyers are coming into the market and that the rally stands a better chance of succeeding.
Thus far the rally attempts during this recent downturn have died off pretty fast. A quick renewal of high volume selling a day or two after the rally attempt pretty much shoots the rally down and leads to yet a lower low on the correction. That is what happened two Wednesdays ago when the indexes reversed on high volume, but could not follow through on the move.
What makes a good follow through? The big volume surge and price surge noted above, but also a good advance/decline ratio of 2:1 or better and leadership caliber stocks breaking out of good patterns and moving toward new highs. There are leaders out there in retail, restaurant, and healthcare, but a lot of the big names that bounced higher Friday have borne the brunt of the recent selling and are not in position to spring higher with any sustained move. They tend to run higher on the relief bounce momentum and then run out of steam at resistance. If there is a follow through session, the key for them is whether they hang onto their gains as they complete forming a better pattern to make a sustained move out of.
Friday’s rally led by the big names, the laggards of late.
When the indexes rally, that means the biggest cap stocks are rallying as they throw around the most weight on the averages. Friday saw those stocks back in positive territory, and that moved the indexes higher. After more than a month of selling, however, not many of them are in patterns that lead to sustained moves. The problem is that they developed overhead resistance at the recent tops on the last few rally attempts, and those levels make it harder to sustain a rally as those unhappy investors who bought at those prior tops are all too willing to sell the stock when it gets back to those levels or close to them. Unless there is some really good reason to hang onto the stock, they have a really hard time maintaining the push higher in the face of that selling.
At the same time the big names were rallying, the leaders of late in the healthcare, retail, restaurant, food and building materials took a day off, selling back on lower volume after leading higher. Indeed, many of these have been taking a week off after some good runs to rest and get ready for the next leg. When the big names rally, they tend to pull the excess cash lying around into them. Thus the other stocks take a breather while the big names rally to resistance, making some nice opportunities to enter when the pullbacks end.
One group of ‘big names’ that performed on better volume was the semiconductor sector. It was the beneficiary of some upgrades of TXN and GNSS. This is a key sector for the techs and can help lead higher in this relief rally. Still, as with many techs, many of the chip stocks are also in less than powerful patterns. Again, for a rally to have any sustaining power past all of the near term resistance ahead, there has to be something to change the view of those investors that bought at higher prices, indeed, the view of investors overall. Have not seen that yet in the sentiment indicators or in the views about the economic future.
THE ECONOMY
Inventories hit a 2-year low. Inventory glut has been one of the major problems facing the economy. With inventories built to the rafters and businesses not buying, there was no incentive to produce more goods. That means no need for as many workers to make more goods. That also means no need to invest in new capital equipment to produce more goods.
Inventories fell another 0.6% down to $288.2 billion in December after dropping a revised -1.3% in November. On top of that wholesale sales fell just 0.4%. With inventories dropping faster than sales of those inventories, that means more inventory was eaten away and the inventory to sales ratio fell to 1.29. That means it would take 1.29 months at the current rate to eat away existing inventories.
Gold hit a 2-year high Friday as well. We have had some gold play son the reports and while somewhat volatile, the trend is higher. What is causing the rise in gold prices? There is talk of producers holding back. Also, Japanese investors are buying gold as a hedge against a very shaky banking system and the government’s end to guarantees of bank deposits. If the government won’t step in as the backstop, Japanese investors, still not ready to invest in Japan, are putting their money into assets for which they do not need the government’s backing.
Congressional hearings: Addressing the symptoms and not the issues.
Congressional hearings (a.k.a., grandstanding for votes) continued last week with indignant congressmen and congresswomen blasting ENE and Arthur Andersen officials. I wondered today why every witness just did not take the Fifth so the hearings would end and then the Justice Department, SEC, etc. could investigate. Free campaigning is hard to pass up, however.
There are many areas being attacked including accounting practices where auditing and consulting go hand in hand. You can have a firm help design partnerships and ventures to take best advantage of existing laws and then have the firm audit the books. When I practiced law I had accounting firms wanting to do that for my clients. The accounting firms were just really starting to push this business then, and it did not appear correct to me and I would advise my clients against it: the purpose of audits was a clean bill of health. If the accountants set up the structure, there was a vested interest right there.
Then there are the actions of the Enron officers investing $2500 and making over $1 million on that ‘investment’ in 60 days. Even if it was perfectly legal and followed the letter of the law, it smells bad. Congress is catching the whiff of that smell and its blood is up. Of course, if the microscope was turned the other way the phrase ‘sorry, stinking mess’ one congressman used Friday to describe Enron would be equally appropriate for Congress and its members’ shenanigans.
In response to what has happened, Congress is going to try and regulate this, regulate, that, and then regulate everything else just a bit more for good measure. Then we can all pat ourselves on the back and go home and sleep easy because we have regulated our way to honesty, integrity, peace, and prosperity.
The real problem that leads to these SYMPTOMS we are seeing crop up in ENE, Andersen, Global Crossing (looks as if there was massive misinformation at a minimum there), and who knows what others is the tax system we have. 17 million pages make up the internal revenue code. Filling out a small business tax form requires dozens of hours not to mention the hours and hours of record keeping during the year. If you do not do it right? Well, the IRS can do a complete run around the Bill of Rights. It can levy property, freeze bank accounts, garnish wages and generally bankrupt you without the due process required in the Bill of Rights. These rights are basically suspended for the IRS because nothing comes between a government and its thirst for revenue.
There are loopholes in the system, but you have to be ready to pay for them. You have to hire lawyers and accountants to structure your business dealings to reduce your taxes (sound familiar?) in a ‘legal’ way. Problem is, the laws are gray, and that leads to this pushing the envelope by businesses AND the IRS. The internal revenue code is the lawyers’ and accountants’ subsidy and retirement act. With the majority of Congress populated by lawyers, do you think this is going to change?
Well, to avoid the problems the Congressional hearings are addressing right now, it has to change. There is talk of the need for ‘confidence’ in business and accounting. With the current system, business pushes the limits and so does the IRS. Lawyers spend hours and hours devising structures for clients to avoid taxes. As long as the tax code is an endless morass of special interests that fosters playing on the edges to reduce tax liability, the same problems will continue to arise. Not necessarily to the same scale, but they are out there; ENE is not the start or the end. Global Crossing apparently had some similar partnership activities ongoing that gave the illusion of hedging the company but were actually the left hand paying the right. Unless this is resolved and everything made simple, clear, and (in the parlance of the day) transparent, there will be no confidence in the conduct of business overall.
The tax code needs to be simplified in one of two ways: 1) a flat tax where everyone pays the same with certain income levels exempt, or 2) a user tax in the form of a national sales tax with exemptions for certain groups of items and income levels. If you use it, you pay for it. If the government and the Fed want to get the savings level higher, this would do it. If it cost you a 20% tax on that car you were buying, you might see that old clunker in the driveway in a new light. Either method has the benefit of being very simple, eliminating the countless lost productive hours to the economy, and each is fair to all given the exemptions at the lower end of the scale. It also gets us back to where we were when the Constitution was written.
THE MARKET
After tapping at support for three sessions, the Dow and S&P rallied. The Nasdaq decided it was time to do the same as well. All posted solid gains, but on lower volume. It can be the start of a rally, but that has yet to be seen. There has not been anything to change investor moods yet, sentiment indicators are still very low, and the majority of stocks that everyone likes to follow are not in great patterns right now. They can bounce as we saw on Friday, but that does not mean the move will last.
Money is not a real problem. The Fed is still keeping a lot of money in the system. Moreover, in January $20.3B flowed into stock funds. That was on the heels of a similar rise in December. It is not all being put to work just yet; indeed from the distribution seen in January and early February, institutions are taking money off the table. There is definitely money there to start and engage a rally, but there has yet to be a trigger. Maybe this oversold bounce will turn into more of a rally with a solid follow through next week. With the weak sentiment indicators and weak patterns in many of the big names, we have nothing to indicate that the current trend is shifting.
VIX: 25.47; -2.21. Volatility on the S&P 100 fell right back down on the rallying, close to summertime 2001 doldrum levels. Volatility spiked toward 30 in the recent selling; with the huge spike in September that kicked off the rally, perhaps a spike to that level will be sufficient to continue the move. As noted Thursday, however, the index really needs to bounce above 30 to give a better signal.
VXN: 49.28; -1.83. Ran right back down as fast as it ran up Thursday. Volatility runs up on selling and down on buying. It is not showing any sustained level of fear that usually marks a turn is near.
Put/Call Ratio (CBOE): 0.73; -0.12. Down 0.26 in two sessions as this indicator of market extreme never gave another reading on the close of 1.0 or better after that initial 1.05 close. It spent a lot of time in the upper nineties, thus indicating option players betting on a fall, but put buyers did not continue to outpace call buyers, a true sign of excessive fear.
Nasdaq
As usual, the techs scored the biggest percentage gain, just as they usually do on the downside as well. The SOX led all of the big indexes with a 3% gain. After 330 points of selling, it was time for the techs to attempt another rally. Volume was lower and below average, an inauspicious start to any rally attempt, but again, a 46% test of the rally off of the September bottom is a good place to start one. What you start you have to follow through with, however.
Stats: +36.77 points (+2.1%) to close at 1818.88.
Volume: 1.794 billion shares (-10%). Volume fell below average on the first gain in 6 sessions. A continuation of the rather poor price/volume action that has showed significant distribution the past month. A lower volume rally session that is the start of a potential new rally can still be the initial turning point.
Up volume: 1.347 billion
Down volume: 424 million.
A/D and Hi/Lo: Advancing issues reversed the tide, advancing to 1.95 to 1 (decliners led 1.53 to 1 Thursday). Impressive reversal.
New highs: 68 (+14)
New lows: 56 (-34)
The Chart: (Click to view the chart)
Not the picture of health even with Friday’s impressive turn from the lows and rally to the close. Since topping out at 2098 and change in January, the index has retraced 46% of the 712 points it gained off of the September bottom. That could be enough; the reflex bounce Friday was a potential start. Everything looked solid but the volume, and of course, many of the biggest cap stocks on the index are in fairly weak patterns following the steep decline over the past 5 weeks. There is a lot of resistance after such a steep decline (it took three months to build to that high point and just over a month to take half of it back). The short term downtrend from the January high and the long-term March 2000 down trendline have more or less merged at 1875. That point also marks the bottom of the November consolidation range. Thus, 1875 represents some very solid resistance, and that is backed up by the 50 day MVA (1915.65) and the 200 day MVA at the top of the November trading range (1934 to 1941). The down trendline is a key point to beat, though the entire November consolidation range from 1875 to 1941 provides tough resistance due to the amount of time spent in that range. There will need to be solid buying volume to clear it. We anticipate this run to make it up to the down trendlines/1875 range before it runs into much trouble.
Dow/NYSE
The Dow was trying to hold above 9500, and it did so for now with a nice Friday rally. It has some immediate resistance ahead from the January down trendline, but it appears to have the momentum to clear it. The big test comes a bit higher up. The Dow is showing more life and resilience than the Nasdaq, but it still needs a high volume follow through starting sometime Wednesday.
Stats: +118.80 (+1.2%) to close at 9744.24.
NYSE Volume: 1.383 billion (-4.8%). Still above average but declining on the first gain in 6 sessions. The index suffered distribution throughout January, and it has yet to show positive price/volume action (higher on up sessions, lower on down sessions) that would indicate that stocks overall are being accumulated once again.
Up volume: 1.037 billion
Down volume: 320 million. As indicated on Thursday when up volume took back the lead, buyers were in the majority Friday. Unfortunately they were not out in greater numbers than the previous sellers.
A/D and Hi/Lo: NYSE advancing issues turned the tied, coming in at 1.99 to 1 (decliners led 1.2 to 1 Thursday). It was an impressive A/D showing, one that we would look for on a follow through session.
New highs: 80 (+2)
New lows: 56 (-18)
The Chart: (Click to view the chart)
The Dow may look better than the Nasdaq overall, but it is still in the process of forming a base. It is still trending down since January, but unlike the Nasdaq, it is moving more laterally, testing support at 9500 and not yet giving it up. Another plus is that it did not undercut the January low (9529.46) on this last pullback. Now it has a quick test on the upside at the down trendline at 9800. It looks as if the Dow is going to take that down trend out as it heads toward the simple 50 day MVA at 9913.86 that stopped the Dow on its last two recent rally attempts. If volume does not increase significantly (above average, accelerating on the gains) as it rallies, it will then most likely run out of steam at the simple 50 day MVA or right in that range. Again, we are playing this move higher, and we will watch what the market is telling us about the strength of the move as to how long we maintain the upside positions.
S&P 500: As noted on Thursday, the S&P and Dow show similar patterns: a deep intraday test of support two Wednesdays ago and then pulling back after a brief rise to test that level once again. It was refusing to give up support at 1078 to 1080, and was able to mount a rally after holding that level again Friday on the low (1079.91). It too has some immediate resistance at the recent January down trendline and also the September 2000 down trendline right at 1110. The S&P has cleared the September 2000 down trendline before and we believe it will do the say now. There is more resistance at the 50 day MVA (1126.07) and price consolidations at 1125. It needs buying volume to give any break of these levels significance longer term. Big caps are still struggling but are going to rally over the next few sessions. What volume comes in will determine whether this is just a relief bounce or the end of a 42% retracement of the gains off of the September bottom.
Stats: +16.05 (+1.5%) to close at 1096.22.
Volume: NYSE volume slipped lower on the gain (1.383 billion; -4.8%).
The Chart: (Click to view the chart)
THIS WEEK
A slow economic week for Monday and Tuesday, but then it picks up the last three days with the retail sales Wednesday and Michigan sentiment statement again and the PPI on Friday. Dell will come out with earnings as well. The first of the week will be rather quiet other than analyst comments on Monday; most likely those will be positive in most cases, but the new way to make a name is to raise accounting issues. On top of all of that, President Bush said this weekend that stimulus was not dead because it was needed and the U.S. public wanted it. Tell that to the Senate.
The market will more or less have the ability to move on its own then through the end of session Tuesday. That may just keep this rally alive until that time. That is why we have set our upside targets on the upside plays started Friday at the resistance levels ahead; we will need to see something more, i.e., impressive upside volume, to keep us in those plays longer.
The market is still in a downtrend from the January high, and we treat is as such with our plays. We have been playing the trend, but also playing upside when the relief rallies come. At the same time there have been leadership groups as we detailed in the summary that have been taking a rest the past few days; they are getting set up for their next moves.
Thus Monday we anticipate a continuation of the move that started Friday. We have conservative upside targets on existing and new upside plays as we are still in a market that will reward you for 15% to 30% upside, but then will take it away just as quickly. Until we see a change in character, we are keeping our trades even in dollar amounts, cutting losses when the stock drops 7% or below other support, taking profits when the stock gives us that 15% to 30% upside.
Support and Resistance
Nasdaq: Closed at 1818.88.
- Resistance: The short term January down trendline and the March 2000 down trendline have merged with the bottom of the November consolidation at 1875. That is significant resistance, and it runs up to 1900. The 50 day MVA follows at 1915.65 followed by the 200 day MVA at 1935.08. The 1934 to 1941 range represents the top of the November consolidation. After that we look at the simple 50 day MVA (1956.74) that stopped the index in late December.
- Support: Turned at 1772 on Friday’s low, right below some support at 1775. The November gap up point is 1745. 1743 would be a 50% retracement. Support at that level looks to be anywhere from 1700 to 1750.
S&P 500: Closed at 1096.22.
- Resistance: 1100 could try to stop it on the way back up. Then there is the recent down trendline and the September 2000 down trendline merging right at 1110. Above that is the 50 day MVA (1126.07) and that combines with price consolidations at 1125.
- Support: 1078 to 1080 continues to hold; it has been growing as a support level with each successful test. There is a jumble of prices in a range from 1075 to 1050, perhaps the reason this 1080 level has held well for now. 1050 was tested twice in October, holding both times. That is right at the 50% retracement (1060).
Dow: Closed at 9744.24.
- Resistance: Clearing the range from 9691 to 9750, the bottom of the November, December and January range. The quick test is the January down trendline at 9800. That is followed by the simple 50 day MVA (9913.86) and price consolidations at 9992 to 10,000. Then the 200 day MVA (10,086.98). The January high at 10,300 level is last.
- Support: 9500 was tested on the January intraday low, and it seems the level is continuing to act as good support. After 9500 there is a very congested trading range from 9125 to 9500. A 50% retracement is 9181.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
2-13-02
- Retail Sales, January (8:30): -0.2% versus -0.1% prior.
- Retail Sales ex. Auto (8:30): 0.2% versus -0.1% prior.
2-14-02
- Business Inventories, December (8:30): -0.5 versus -1.0% prior.
- Initial Claims, 2/9 (8:30): 376K versus 376K prior.
- Export Prices ex-ag., January (8:30): -0.4% versus -0.4% prior.
- Import Prics, ex oil, January (8:30): -0.3% versus -0.3% prior.
2-15-02
- PPI, January (8:30): 0.2% versus -0.7% prior.
- Core PPI, January (8:30): 0.1% versus -0.1% prior.
- Industrial Production, January (9:15): 0.0 versus -0.1% prior.
- Capacity Utilization, January (9:15): 74.3% versus 74.4% prior.
- Mich Sentiment-Prel., February (9:45): 94.3 versus 93.0 prior.
SUBSCRIBER QUESTIONS
Q: Everyone I know keeps saying that we will not go down to the September lows again (or lower). Why not? Seems almost a sure thing since no one believes it .........the perfect trap!!!
A: That is usually the case isn't it? It is often the case that when everyone decides something has to be, it never comes about. Now I can give you some reasons why I do not think it will head back down to the lows (at least not all of the indexes), but as investors, all we can really do is listen to what the market is telling us. The economy keeps improving, but as I have been saying, the quality of the recovery is in question, and as long as that is up in the air the indexes could just continue to slide on back to that level. Or, one or two of the major indexes could fully test the lows while the other holds up above that level.
The reason I don't think all of the indexes will fall all the way to the lows is that the economy is improving now while back in September it was still trying to bottom. Then the attack came and torpedoed what was looking to be the bottom; the day before the attack we wrote that we were looking for the market to start a rebound. The fact that the market was trying to turn at that point on some signs of improving economics is one reason I think the indexes could head toward the pre 9-11 lows (on the Nasdaq that was right at 1670 to 1700) and then rally from there. Before that is the 50% retracement at 1743; as we have said before, that is a rule of thumb and not a hard and fast level.
Again, however, despite all of the theory, we just have to look at what the market is showing; right now that is a downtrend from the January high after some pretty serious distribution. Until it changes its character with a follow through to a rally attempt and some leading stocks shooting higher, the bias is downside.
TEAM TRADES
DJX: We were looking for the Dow to rally in Thursday night’s report and set up an aggressive upside play on the DJX. It did not take the index long to hit our buy point (96.50) after opening, falling back on the first test of the morning and then rallying higher. When it hit the buy point the March options were asking 5.60 with a 40 cent spread. We knew we had little chance of splitting the spread with the index moving, and as this was an aggressive play anyway we went ahead and entered a limit order at the ask. All went well and the index continued its rally up to the 97 level. It then proceeded to sell off, down to 95.80 over the next 3.5 hours where it found support above 95 once again. Now here is where we could have helped ourselves more. We were looking at the SOX hard, trying to decide if we wanted to short it. We decided it was not worth the risk to chase it down after it had already fallen 12 points from the session high and was only flirting with falling further. We believed an afternoon rally was coming and did not want to short at the wrong time. That was fine; we were right. But we did not then go back in and take more DJX positions as it and the S&P were holding above support once again and starting to rally. We are still in a decent position and the options closed at 6.20 by 6.60, but we could have improved our position by using simple support and the fact that the market was starting the bounce we were looking for. |
