Investment House Weekend Market Summary
investmenthouse.com
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4/12/02
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TONIGHT:
- Major indexes bounce modestly while smaller issues breakout.
- Earnings have yet to light many fires.
- So-so economic data does not spur a buying surge.
- Everyone seems exasperated with the market. Good. While they worry, good plays are there.
- Subscriber Questions.
- Team Trades.
Major indexes lob one back.
It was hard to credit the bulls with a winner Friday in the ongoing bull/bear tennis match given the low volume relief bounce after Thursday’s volume selling on the NYSE. The action was more like a lob back over the net to try and buy some time to regroup. While there are some earnings success stories (e.g., MERQ in software posted good results and shot up over $7), there has been no groundswell of rising earnings taking the market. Indeed, Q1 S&P 500 profits are now expected to fall 9.7% while Q2 profits are slated for just a 2.8% rise. That is not building a lot of buying in the big names.
Not stopping the smaller issues.
The lack of earnings power among the large caps is not stifling small and medium caps. The S&P 600 broke to a new all-time high Friday with the S&P 400 (mid-caps) moving back close to an all-time high. Once again we saw many smaller cap issues breaking out and our former breakouts resuming moves and hitting targets. The NYSE A/D line once again jumped to 2:1 after Thursday’s slaughter, indicative of the resumed advance in the overall market. It has been turning in some strong advances, offsetting the declines. Indeed, the weekly A/D line fought off the large cap selling last week, flattening a bit but then resuming the climb.
THE ECONOMY
Economic data fails to wow the market.
The economic data took a breather. Overall the data has been solid to above expectations, but there are still reports that come in beneath expectations. That is normal at any time in the economy, but if a report is not sterling the comments about a double dip recession and the like emerge. When a trend changes there is still volatility. While we are hardly advocates of a strong recovery (no pent up consumer demand, housing market too strong, business side still struggling)we are not seeing a double dip recession right now.
Retail sales below expectations at +0.2%.
Expectations were for 0.4%. Take out autos and the result was +0.4%, though 0.5% was expected ex-autos. Not bad numbers at all as year over year numbers rose 3.3% compared to 3% for February. Auto sales were lower, but they were also better than expected. Most expected the growth in autos to mimic the financing late in 2001: 0%. They rose 3.6% year over year though they were well off the double digit sales in Q4. Remember, however, retail sales are measured by prices, i.e., you could sell more goods, but if prices are lower, the retail sales report is lower. Gasoline made up the increase in retail sales in March as gas prices rose. With not a lot of pricing power to raise prices, retail sales can be deceptive. Were more units sold at a lower price or were fewer units sold at the same or a higher price?
Internet sales are also on the rise. Q1 sales rose 50%, mostly due to online travel services. It was also up 8% from the record high in Q4.
PPI very tame at 1.0% on energy increases.
It was expected to rise 0.6%, but energy drove it higher. The core was up 0.1%; higher energy prices are not moving into other producer costs. As we discussed last week, even if they do, it is questionable if they could make it to the consumer. Price increases in 1984 and 1991 and 1992 never made it to the CPI. Lack of pricing power is the continued problem for manufacturers. It takes the heat off of the need to raise interest rates too quickly, but it also impacts corporate profits: higher costs that cannot be passed on hurt the bottom line.
ECRI up slightly.
This most accurate of the leading indicator indexes was up last week due to the lower jobless claims. Lower mortgage applications hurt the index. The six month index dipped slightly to 3.9% from 4%. Both still show continued economic recovery with no double dip recession.
Michigan sentiment down.
Sentiment fell to 94.4 from 95.7 prior and 96.1 expected. It is the preliminary number so it is subject to revision. Current conditions sentiment rose while future sentiment was down 2.5 points. Pollsters blame higher oil prices and continued weakness in the job market. Disappointing, but still holding well above the post 9-11 lows.
THE MARKET
The financial channels are getting worried. Thursday and Friday some of the well-known reporters talked of ‘panicked’ activity. The financials are doing horribly we hear on a daily basis. Everyone is ‘exasperated’ with the market. The put/call ratio jumped to 0.99 on the close Friday even as the indexes moved higher. That is a clear sign of pessimism.
It is very interesting that when the S&P 600 hits an all-time high, the S&P 400 is moving right back up toward a new high, and stocks we are playing are breaking out and hitting targets right and left that the market is so ‘exasperated.’ If you look at just one section of the market as displayed by the large cap indexes, the indexes that are weighted by capitalization, you could be going nuts. They keep jerking back and forth with a downward bias while the broader market is advancing. The shoe is on the opposite foot than in 1997 to 1999. Financials selling off? That is misconstruing the market. Large cap financials are having problems; regional banks and savings & loans are breaking out right and left. New issues are performing very well.
We like the worry the television stations are portraying. We like the high put/call ratio. There are significant sectors of the market performing well and those are the ones we have been focusing on. The anxiety keeps money rotating from the other sectors to the winning sectors. It keeps plenty of fuel dry for continued moves higher. There is talk that leading sectors are getting too extended; hence some valuation downgrades. In this market that is always going to happen, but we don’t think money will suddenly turn and flow to technology or other large caps en masse. This could very well be a secular return to small and mid-cap stocks.
Put/Call Ratio (CBOE): 0.99; +0.08. Second consecutive close above 0.90 and third in two weeks. Close to that 1.0 close we were looking for. Again, we note that the ratio spiked on a session where the major indexes actually rallied. There is a lot of speculation that the market will stall and fall. That very well could happen; some were no doubt loading up on puts as the day was an up session in anticipation of a down session on Monday. That was the pattern last week, and maybe it will continue. What we take from this is the growing belief that the market will fall by option speculators.
Nasdaq
Friday the Nasdaq moved over its short-term downtrend that started in March. The gain was on tepid, below average volume, however. Given that Wednesday’s volume on the gain was the strongest in over a month, there is some positives here. Not many, however, as the stocks that make up the majority of the index’ weight are still in less than desirable upside patterns. The focus for upside remains on the smaller issues such as smaller techs, regional banks, savings and loans, restaurants, retailers, health services, lodging, etc. Thus, while we might not see the index make gains, many stocks within the index are and will make impressive moves.
Stats: +30.95 points (+1.8%) to close at 1756.19.
Volume: 1.530 billion (-10.1%). No power on the move volume-wise, so we cannot give much credence to the move over the short term down trendline. Over the past two weeks it is almost a dead heat between declining sessions on rising volume and rising sessions on higher volume. Overall, however, the Nasdaq slid lower.
Up volume: 1.168 billion (+913 million)
Down volume: 341 million (-992 million). Trading places. Volume was as strong to the upside as it was to the downside Thursday. It was, however, lower overall.
A/D and Hi/Lo: Advancers jumped to . . . 1.93 to 1, turning the tables once again after decliners led 1.93 to 1 Thursday. Good to see advancing issues finally take off with some authority instead of lagging decliners. Not a trend, but much better.
New highs: 244 (+19)
New lows: 48 (-42)
The Chart: (Click to view the chart)
Moved slightly over the March down trendline on Friday’s close, but it is still close enough to reach out and touch that level back at 1742. In other words, it has not broke free from that level and the lower volume move Friday was not the volume that makes for lasting trendline breaks. We are not putting a lot into the move; it has been trading blows on a daily basis, and there is no change yet in the downtrend. Price/volume action may be at a standoff, but in this market where the big name techs are considered overvalued, a standoff equals falling index prices. If strong earnings and outlooks become the norm this week (along the lines of MERQ), perhaps we see a rally. There is not much that we have seen, however, that would lead us to believe that there will be an earnings led surge in the big techs this quarter.
The index has come back down almost to its February low at 1696.55 when it retraced roughly 50% of the move up off of the September bottom. This double test of that level has a look of an attempted double bottom. This pattern is not developed yet, however, and we won’t know if it has been successful until it clears 1950. Many large techs are showing a test of the February or even the September lows already (e.g., QCOM, EMC, SUNW. If earnings were to rise, these stocks could make good moves. Many techs, however, are still well above those levels after the rally off the bottom, and without rising earnings to support them the stocks are at risk; the rose in anticipation of rising earnings. If the IT spending recovery does not pick up pace the stocks are at risk.
Do we risk playing a bounce higher? You can get a day or two of good moves and then get slammed on a disappointment or the latest story about delayed or pushed out IT spending. There are some that look interesting, e.g., ADBE, QCOM, KLAC, and we may try some quick upside hitters on those. If we do, we have to know what we are getting into and set our expectations accordingly.
Dow/NYSE
Slight gain on lower volume. An indecisive session, but not a bad one. The index held over 10,100, the bottom of the trading range, and it showed another low at that level. It is moving roughly laterally along 10,100. It could try to build for another move higher, but the price/volume action needs to improve.
Stats: +14.74 (+0.1%) to close at 10,190.82.
NYSE Volume: 1.282 billion (-15.4%). Volume backed off after Thursday’s tough distribution session. It still has 4 fairly rapid distribution sessions to deal with, and that is not a good sign. A breakdown below 10,100 on once gain rising volume would be a problem given the distribution. Best case scenario is a massive rally on huge volume. Okay, okay. Most likely best case: some more lateral movement on light volume and then a move up on strong volume.
Up volume: 808 million (+604 million)
Down volume: 452 (-843 million). Improvement, but no massive upside action.
A/D and Hi/Lo: Advancers turned the tables again at 2.01 to 1 after decliners led 1.96 to 1. That makes two broad advanced in three sessions. The big index may not be moving, but the a lot of stocks are.
New highs: 241 (-24)
New lows: 34 (-28)
The Chart: (Click to view the chart)
The index is now trading at the bottom of the range at 10,100. This is roughly at the January high, but the poor price/volume action leading up to this point is a red flag. As noted above, the best thing that can happen is the index holds at this point, moves laterally to regroup, and then moves higher. Kind of forming a cup on top of the January and February cup. It has to hold against the distribution in the early stages of forming this second potential cup. If it cannot, 10,000 is the next support level, but if the selling resumes, 9500 is more likely. If the Nasdaq does make a double bottom, the Dow will hold up as its tech components will not only abate the selling pressure but will help a rally higher. Without them the Dow can rally on its own, but to make real progress it needs MSFT and INTC moving higher and IBM at least not selling down further.
S&P 500:
Held at 1100, hitting 1102.74 on the low. This is the next support level after a pretty good one at 1125 gave way on Thursday. The S&P suffers from the same distribution as the Dow, making upside moves to recapture 1125 and beyond very difficult. It does not have the same status as the Dow as it is not sitting on top of the recent base. Thursday it looked to have started a new leg down to the next support level at 1075 where it formed its brief double bottom.
Stats: +7.34 (+0.7%) to close at 111.01.
Volume: NYSE volume fell on the gain to 1.282 billion (-15.4%).
The Chart: (Click to view the chart)
THIS WEEK
More economic news with business inventories, CPI, housing starts, permits, LEI, Philly Fed. Each week brings the next litmus test for the economy. This week is a bit different. There will be a lot more earnings coming. This week will tell us a lot more about what to expect from the indexes. They have sold off ahead of the earnings based on warnings and growing concern that technology earnings won’t be up to snuff. If they surprise us all they could spark a nice bounce higher to test recent support levels broken or higher up in the trading range in the case of the Dow.
In any event we continue to see the strongest moves in the S&P 600 and S&P 400 stocks. As noted, the small cap index (600) hit a new high Friday with the mid caps (400) not far behind. Those have proved to be the safest and most lucrative. They hold up better in the selling and then breakout and rally when the selling is over. We continue to focus on those as they continued to breakout Friday. There were many breakouts Wednesday, a lull Thursday, and then they were at it again Friday, breaking out and hitting targets as well.
Again, we can get a nice bounce from the downtrodden if earnings come in with surprises, e.g., MERQ. If we get a move from these stocks do we make a play for them, trying to catch the momentum? We see some we do find interesting as we discussed in the Nasdaq section. We will look at them, but also the smaller tech stocks that have been showing very good relative strength in the declining Nasdaq. Holding up well in the selling, these could be the best bets in technology to take advantage of any earnings bounce if the earnings warrant an overall market rise. The indexes are certainly set up for such a move.
Support and Resistance
Nasdaq: Closed at 1756.19
- Resistance: 1770 to 1775 is the next higher level. After that is 1800 that stopped the prior bounce attempt. That level is followed by a jumble of trouble at 1850 with the simple 50 day MVA (1823.55) in front of that. Then 1875, the bottom of the November consolidation and the 200 day MVA (1864.73). 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. These are nice levels, but they are a long way off.
- Support: 1700 is next (February low at 1696.55). Then 1613 to 1626.
S&P 500: Closed at 1111.01
- Resistance: 1125. The 200 day MVA (1135.95). There is some resistance at 1150 as well; any bounce on low volume might find that level trouble. After that the December high (1173.62) and the January high (1176.97) are the real key. Those points also mark 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: 1100. Then 1075, the February low. After that 1050. The S&P moves in 25 point increments.
Dow: Closed at 10,190.82
- Resistance: 10,265, the up trendline from the September bottom. Then 10,400, the barrier to the upper half of the March trading range. The top of the June, July, and August 2001 trading range at 10,600 (10,679 intraday high) marks the top half of the March trading range. 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: 10,100 has been holding on the intraday lows. After that 10,000 represents some support. That is backed up by the 200 day MVA (9953.90). From 9500 to roughly 10,000 - 10,200 is recent support off of the September bottom that for now is holding up.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
4-15-02
- Business Inventories, February (8:30): 0.0% versus 0.2% prior.
4-16-02
- CPI, March (8:30): 0.4% versus 0.2% prior.
- Core CPI, March (8:30): 0.2% versus 0.3% prior.
- Housing Starts, March (8:30): 1.7M versus 1.769M prior.
- Building Permits, March (8:30): 1.685M versus 1.774M prior.
- Industrial Production, March (9:15): 0.4% versus 0.4% prior.
- Capacity Utilization, March (9:15): 75% versus 74.8% prior.
4-17-02
- Trade Balance, February (8:30): -$29.0B versus -$28.5B prior.
4-18-02
- Initial Claims, 4/13 (8:30): NA versus NA.
- Leading indicators, March (10:00): 0.4% versus 0.0% prior.
- Philadelphia Fed, April (12:00): 13.4 versus 11.4 prior.
- Treasury Budget, March (14:00): NA versus -$50.7B prior. |
