Investment House Weekend Market Summary
investmenthouse.com
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3/22/02
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TONIGHT:
- Thursday’s reversal finds no follow through as market caps a consolidation week.
- Consolidation week pure and simple.
- Leading stocks still in very solid patterns.
- ECRI finished economic news on a strong note.
- Team Trades.
Friday fails to capitalize.
Thursday’s intraday reversal left a fresh look to the market for Friday. Friday could not deliver, however, as the indexes spent almost the entire session underwater, failing in a mid-day attempt to once again rally into the afternoon. The action tagged the Dow with its first down week since February 8.
The action was sluggish all session. Even with the indexes moving into positive territory mid-day volume was light and trading sluggish. There was no upside inspiration. At the same time, there was no real drive to send the indexes lower. All three held at support and closed above some important near term levels. It was a downright boring session.
Just more consolidation.
Boredom can ultimately be quite nice in the stock market, however. There is an old adage that you never want to short a dull market. What is a dull market? Relatively narrow intraday ranges, an overall trading range the index just cannot seem to breakout of, low volume, and just a lack of excitement because not many stocks (at least not name brand stocks) are making strong gains. That sounds an awful lot like the market we have experienced the past two weeks.
This ‘killing time’ action tends to get investors frustrated and impatient. Stocks look oh so close to moving up out of the range and then, poof, slide right back down on lazy volume. The inability to hold onto the gains in the up and down action inside the range gets investors thinking that there is just no way the market is going to sustain a move higher. After all, each recent attempt has failed. The impatience finally prevents the investor from looking at the bigger picture. The resulting tunnel vision convinces the investor the market is going nowhere, at least not up, and that he or she had better take profits or prevent any losses from getting any bigger. They sell out of their long positions and wait, or they sell out of their longs and go short.
Problem is, nothing is really wrong with the market action at the time. Sure it has been in a trading range and cannot hang onto the gains as it just always runs out of gas as it tries to make that breakout move. But just as the buyers are not pushing it out of the range, there are even less sellers to drag it down and force a collapse. The price/volume action has been as it should: up on rising days, down on selling days, with very few exceptions. That means the majority of investors are buying more stocks than they are selling. Who are they buying them from? Those losing patience and not seeing the big picture. Once the majority of those eager sellers have sold the investors left in the market are pretty much those that have been slowly accumulating stocks during the prior run and during this consolidation. When the sellers are gone those left want to own stocks. That greater demand eventually leads to a breakout.
Good news cannot break it to the upside, bad news cannot break it down.
Another angle to look at is how news is treated. In a weak market, news tends to jerk stocks up and down as it hits the market. Poorer price patterns show less conviction by investors toward a stock, and thus these stocks tend to run up on good news just to flame out or get jerked back down on the next negative story. When the market shows accumulative behavior such as the god price/volume action it has shown over the past three-plus weeks, however, it tends to not lurch back and forth on each news story. It simply continues to go about its business as most investors ignore the daily noise of analyst commentary about particular stocks.
Last week there was a lot of news either way. Economic news continued to show more improvement in the economy, though some reports were a bit less than expected. Nonetheless, they showed growth as opposed to backsliding declines. AMAT issued a release that it saw semiconductor equipment sales improving and gave good estimates on the continued expansion. More and more earnings were coming in better with retailers such as PEP and WTSLA beating expectations, and WMT once again saying its sales were going to beat estimates. PG said it was going to handily beat estimates. Warnings are way down from just last quarter. Still, this news was unable to move the market very much; the market just was not ready to make the breakout.
As for negative news, there was plenty as well. Analysts went from a positive spin to downgrading about every sector and cutting estimates on many more. INTC was hit with an estimate cut based on seasonal demand. Pimco accused GE of relying too much on short term debt and did not like the disclosures it was making; it announced it had sold $1 billion of GE debt because of that. The FOMC’s decision was put in a negative light as many investors have become Pavlovian in their responses to Fed actions: cut=good; increase=bad. As we explained last week, that is not the case at all, but that was the way some were styling it. An HWP internal memo from the services unit was released that stated Q2 sales and profit were well below plan partly as a result of the CPQ proxy fight.
The end result: while the market was influenced up and down by the news of the day (particularly the big names techs in less than great patterns), neither the good news nor the bad news sent it reeling out of the range. They tried to breakout, but failed. They tried to break down, but buyers rallied them back above support. Price/volume action was slightly weaker on Wednesday, but it returned right back to a strength position Thursday, barely missing a beat. While the Nasdaq and its big name techs still remain a problem for the overall market, they did provide leadership Thursday when the market needed it most on the heels of some distribution Wednesday. There is definitely resilience in this trading range.
Leading stocks just take a pause.
A final angle from last week. While some leading groups ran into trouble last week, e.g., the home builders on fears of higher interest rates and Canadian lumber tariffs, most of the leaders used last week as a consolidation period of their own. They consolidated some of their own gains, pulling back on lighter volume toward support. They were just taking it easy while the rest of the market tried to figure out what it wanted to do.
There is also some rotation ongoing. Homebuilders as noted are showing the strain of a long move higher for a long period of time and now faced with changing conditions such as higher rates on top of a market that has been growing well above the curve. They broke below their 50 day MVA last week, and while blowout numbers by KBH buoyed them Friday, many rose on lighter volume and could not reclaim the 50 day MVA. Restaurants are experiencing some of the same problems. DRI reported good earnings and a split, but we have been playing it as a put because it had broken below its 50 day MVA. Friday it gapped higher on the earnings and the split news, but then folded back below the 50 day MVA again on extremely high volume. The inability to continue the rally on good news is a sign that the stock is in trouble.
When one sector starts to fall but the others continue to move forward and the overall market holds up, that is known as rotation. Rotation can be good and bad. In the bear market fund managers still reeling from the selling chased one sector after another. The rotation was vicious because it occurred so rapidly. In a healthy market the rotation occurs, but it is a slower process. Financials are looking as if they are going to be a beneficiary of some rotation out of homebuilders.
THE ECONOMY
Many viewed last week’s economic reports as disappointing to a degree as the Leading Economic Indicators and Philly Fed did not show better improvement. Nothing ever shows continual, uninterrupted improvement; all markets, even the healthiest, move at varying paces. Thus, numbers that still show improvement on the heels of reports that showed explosive improvement are not really disappointments but are more like normal rest stops.
ECRI weekly reading surges again.
While the LEI were flat for February, the more sensitive ECRI reading was again surging last week, rising to 122.3 from 121.8 the prior week. Lower jobless claims and improving stock and bond prices led the improvement. Once again the most impressive move was in the six-month growth rate that jumped from 2.8% to 3.8%, a 6-week high. This continued improvement in the longer range numbers indicates that there is less likelihood of that ‘double dip’ recession we have talked about before.
United Airlines recalling workers.
UAL is recalling 1,300 employees, and is looking to hire another 900 workers for the summer flight schedule. While it is a drop in the bucket compared to the 20,000 laid off after 9-11, the return has to start somewhere, and it at least appears as if the decline is reversing.
When the company way is not the best way: AOL drops requirement.
From the serious to the seriously ridiculous, Time Warner dropped a requirement that its units use AOL e-mail exclusively. Seems employees were having trouble using it as it frequently crashed, dropped lines, prevented sending large attachments, and labeled emails with large mailing lists as spam and blocked them. In short, the company’s own product is not really good for conducting business or serious e-mail use. If there was ever a wakeup call.
THE MARKET
A week of very light, below average volume where the indexes almost slipped out of the consolidation, but then rallied back on stronger volume, continuing the positive price/volume action that shows continued accumulation. Friday was a disappointment or frustrating to many because it could not follow through on Thursday’s reversal on higher volume. It held support on lower volume selling once again. Given the circumstances, that was a continued positive.
VIX: 19.62; -0.36. In another indication that the VIX is not acting as a good contrary indicator at this point in time, the index fell on a day when the S&P sold off as well.
VXN: 37.56; +0.58. Volatility rose a hair on the selling. It too is not providing a reliable contrary indicator at this time.
Put/Call Ratio (CBOE): 0.66; -0.04. After jumping to 0.93 on Wednesday’s selling, put activity ahs backed off Thursday and Friday. It is still at the high end of the range, well above a complacent 0.4 reading. Each time the ratio has topped 0.88 during this year the indexes have rallied. Perhaps we will see that rally come about this week.
Nasdaq
Slid lower on lighter volume once again. The pattern is hardly one that instills inspiration of an imminent upside breakout as the tech big names still struggle. As noted, it did lead the recovery Thursday after Wednesday’s distribution session. Not the one we are counting on, however, to lead things higher.
Stats: -17.44 (-0.9%) to close at 1851.39.
Volume: 1.504 billion (-6.2%). Volume continued to languish at below average levels, but the price/volume action remains good. Lazy, below average volume on a pullback is not a bad thing. Large, jerky up and down volume swings would be cause for concern.
Up volume: 633 million.
Down volume: 711 million
A/D and Hi/Lo: Decliners returned to the lead at 1.33 to 1 (advancers led 1.60 to 1 Thursday). Still trading punches as the index tries to figure out if it wants to rally or tank.
New highs: 152 (+3)
New lows: 24 (-1)
The Chart: (Click to view the chart)
Fell back below the exponential 50 day MVA (1865.14) Friday, though it never did break back over the simple 50 day MVA (1868.77) all week. It is still in the downtrend that started after it peaked out in January off of the run from the September bottom, and it has now formed a steeper downtrend from the March high. As noted above, it is not an inspiring sight as it tries to hang on while working below the 50 day and 200 day MVA (1888.16). It has flashes of leadership as it led the move on Thursday, but it also has a lot of stocks in shaky patterns that are susceptible to news as we noted before. It has to take back the 200 day MVA and break the down trendline that started at the beginning of the year, now just over 1900.
Dow/NYSE
A nice recovery Thursday, but it could not continue the move Friday. About all it did was hold above 10,400 on lighter selling volume. All things considered, not that bad.
Stats: -52.17 (-0.3%) to close at 10,427.67.
NYSE Volume: 1.251 billion (-6.6%). Sliding back once again on selling action and still holding well below average for the entire week. Lower volume on selling is better if there has to be selling.
Up volume: 507 million
Down volume: 711 million
A/D and Hi/Lo: NYSE decliners moved back in the lead at 1.36 to 1 after jumping to a 2.11 to 1 lead in Wednesday’s selling. This is the first 2 out of 3 declining issue days in a long time. It indicates (along with the price pattern late in the week) that the overall market weakened a bit late in the week.
New highs: 163 (-20)
New lows: 44 (-19)
The Chart: (Click to view the chart)
Okay. Ten sessions trading between 10,650 and 10,500 with an overall trading range down to about 10,400. The past two sessions the index undercut 10,400 on the low, moving back up to keep that bottom overall trading range in tact. After trading above 10,500 for 10 straight sessions, this action could be viewed as a weakening of the range leading to a possible breakdown. That could very well be the case what with the intraday trading range becoming more volatile and the A/D line swinging in favor of decliners the last 2 of 3 sessions. On the other hand, price/volume action remains solid. What we may be seeing here is a shakeout of final sellers before a real run at the top of the range. Given the negative news on INTC and GE late in the week, the selling down was understandable. The ability to recover and hold the range after bad news was a positive indication of the action being a shakeout. It now has to make its way back to 10,670 and breakout on a strong volume surge. It can cover upside ground in a hurry as we saw earlier in the year.
S&P 500:
The pattern in the S&P 500 is very similar to the Dow’s, basically a cup with handle with the breakout at 1175 and the handle holding above the 200 day MVA (1144.18) on the low. The big caps undercut the 200 day MVA Thursday, but used it as its low on Friday (1144.60). Overall, the pattern of the big caps is probably the best looking of the three big indexes as volume continues to track below average on the slightly dipping lows. The one session of above average volume came two Fridays back on option expiration when the index logged its second largest gain of the consolidation. Again, stories such as GE and INTC hurt the big cap stocks late in the week, but the index was able to recover and hold key support. It looks as if it is poising for a move higher.
Stats: -4.89 (-0.4%) to close at 1148.70.
Volume: NYSE volume pulled back on the session’s loss, easing back to 1.251 billion shares (-6.6%). This is the action we like to see in a handle and shakeout.
The Chart: (Click to view the chart)
THIS WEEK
A pretty big week of economic reports once again. After the ‘disappointments’ of the Philly Fed and the LEI, new and existing home sales, durable goods orders, consumer confidence (Conference Board and Michigan), final GDP, Chicago PMI, and personal spending will get a close eye. Investors will want to see the reports give some upside surprises once again.
The S&P and Dow are set up to make a move higher after the late-week test of the bottom of their trading ranges. Yes things got a bit hairier at the end of last week, but again, the price/volume action has remained solid as the two indexes test lower in the handles of their cup with handle patterns. That is more like classic shakeout action than a breakdown.
Of course, we were looking for a breakout last week but it was thwarted with the GE and INTC comments that helped some of the selling Wednesday and Thursday. The fact that it was shaken by that news showed it was not ready to make the move. It was able to recover, getting rid of some more investors that were ready to sell and keeping the pattern as well. It is set up, but as we said two weeks back, until the breakout occurs, it is nothing more than another pretty picture (or in this case, chart).
Support and Resistance
Nasdaq: Closed at 1851.39.
- Resistance: 1875, the bottom of the November consolidation, stopped the move higher Thursday and the intraday high Friday. The simple 50 day MVA (1868.77) and then the 200 day MVA (1888.16) is next and what stopped the recent rally attempt. The top of the November consolidation at 1934 to 1941. After that is 1980 (the December gap up point) and some minor resistance at 2000. Then the January top at 2098.88.
- Support: 1850 was broken Wednesday, but the index jumped right back over it and it held again Friday. 1840, the early November gap up point, has provided little help. After that, it is pretty sparse down to 1800 to 1775.
S&P 500: Closed at 1148.70.
- Resistance: The December high (1173.62) and the January high (1176.97). That point also marks roughly the lows of summer 2001 consolidation that runs up to 1240. Before that point there is some resistance at 1183 from March 2000.
- Support: 1150 down to the 200 day MVA (1144.18). After that, 1125 is the hump in the double bottom, and the simple 50 day MVA (1127.95) and exponential 50 day MVA (1136.04) are converging. 1100 has acted as support as well.
Dow: Closed at 10,427.67
- Resistance: The top of the June, July, and August 2001 trading range at 10,600 (10,679 intraday high), is still holding it back. 10,800 represents some resistance. That is followed by resistance at 11,000 on its way to the May 2001 high at 11,345.72.
- Support: 10,400 held on the close once again, though it was again violated intraday. That is followed by the January high at 10,300. Then the 200 day MVA (9995.19) and 10,000 teaming up together.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
3-25-02
- Existing Home Sales, February (10:00): 5.50M versus 6.04M prior.
3-26-02
- Durable Orders, February (8:30): 1.0% versus 2.6% prior.
- Consumer Confidence, March (10:00): 98.0 versus 94.1 prior.
3-27-02
- New Home Sales, February (10:00): 880K versus 823K prior.
3-28-02
- Initial Claims, 3/23 (8:30): 375K versus 371K prior.
- GDP-Final, Q4 (8:30): 1.4% versus 1.4% prior.
- Chain Deflator-Final, Q4 (8:30): -0.2% versus -0.2% prior.
- Mich Sentiment-Rev., March (9:45): 95.0 versus 95.0 prior.
- Chicago PMI, March (10:00): 54.0 versus 53.1 prior.
- Help-Wanted Index, February (10:00): 47 versus 47 prior.
- Personal Income, February (8:30): 0.2% versus 0.4% prior.
- Personal Spending, February (8:30): 0.4% versus 0.4% prior. |
