InvestmentHouse Weekend Update:
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- Early momentum stifled at very near resistance as techs try to lead.
- Very ho-hum session as so-so earnings and mixed economic reports fail to inspire.
- Lack of punch on an upside attempt leaves the indexes vulnerable for another decline.
- Subscriber Questions.
Market shows some life: a blip on the EKG.
The heavy selling gave way to a Thursday reversal and an upside move, at least for part of the Friday session. The tech sector had what little punch there was, and it was mainly in the large cap techs. The Nasdaq rallied to the 10 day MVA, but that is where it hit its resistance and fought the rest of the session but closed 25 points off that level. The Nasdaq 100 and the SOX led the move, but they too were both well off of their highs.
The Dow and S&P 500 made runs as well, but they had even less staying power. The Dow led the drop but the large, small and mid-caps were not far behind. The market made a move up, but it was almost like a muscle twitch on a comatose patient.
Nothing inspires the market.
Some upside earnings announcements Thursday evening, Dell’s pronouncement it would beat estimates, and GE’s inline report in the morning produced some positive futures action. Retail sales were good, but May’s revision lower took away that momentum. Then Michigan sentiment tanked. The early momentum was shot, but it did come back for one more try. It was simply not enough to rally past resistance.
There is not a lot to say about this action. There is nothing really good being said about earnings potential to the degree that would cause investors to take money out of the ‘lockbox’ and invest longer term. Some decent news moved a limited number of tech stocks higher. Some broke over resistance on some decent volume. Most did not make it. The A/D line was basically flat, up to down volume was flat. It was a session that tried to show some upside but ended up showing the same old action. The techs may give another attempt early in the week to move up with more earnings coming, but it sure does not look like a longer term move based on the Friday action.
THE ECONOMY
Retail sales, Michigan sentiment at odds.
Retail sales were up 1.1% in June, better than expected, but May was written down to -1.1%. Most were calling it a wash, but if the June sales hold up, it is better to have the gains at the end than erased. Take out autos and the gain was 0.4%, less than expected (0.5%) but better than May’s -0.4%.
The preliminary July Michigan sentiment report (all 200 surveyed) showed a sharp drop to 86.5 from 92.4. Expectations were for a modest drop to 93. Current conditions were fine at 99, but future expectations plunged to 78.5 from 87.9. Corporate fraud, stock market woes, intensified politics in D.C. played a hand in the drop.
In a perverse way, the falling sentiment is good for the market longer term as the flagging sentiment right now is based on market worries and the outcome of all of this fraud hysteria. Yes many will argue that if sentiment drops spending drops, etc., and that is bad for the economy and thus the market. The correlation, however, is just not that strong on a historical basis. In general, rising consumer sentiment leads to generally stronger spending. Remember, however, that with sentiment floundering in the seventies last year the consumer continued to buy autos, homes and just about anything else it could get its hands on. The sentiment numbers ruffled some feathers, but juxtaposed with the June sales figures, you start to see the breakdown in the correlation.
Moreover, as we saw last month, there will undoubtedly be a revision of the report. It is pretty ludicrous when you think of it. 200 everyday people, dressed they are, from all over the country are asked how good they feel about the U.S. That is the initial survey. Toward the end of the month all of the surveys make it back in (about 500), and from that economists get their panties in a wad or not. You put 500 lawyers on a survey and you are going to get 500 to 15,000 differing opinions (lawyers will ‘but if’ it to death). 500 responses representative of how we all feel about buying things now and in the future? Right.
GE and DELL trying to keep their end up.
GE met the street after about 6 affirmations in the last month. GE even said things looked good for the future. Of course, after so many promises, if GE had missed earnings a corporate officer would have had to be publicly executed given the current mania against big business right now.
Dell said it was going to beat earnings by a penny or two. That is one of the stories that had the techs trading higher last night and today. Was it an upturn in business? No. Dell just took more market share with its ‘Dude you’re starting to smell’ ad campaign. Very similar to the Cisco ‘home run’ quarter that was based on using less Kleenex and toilet paper in the home office. Did computer use rise around the world or did the demand for chips rise? No, just Dell taking yet a larger piece of the pie. In that sense, while Dell may have helped get some money moving into tech, it did not provide much of a catalyst to keep things going.
On top of the Dell and GE reports, DCLK, JNPR and some other techs reported better than expected pro forma results. The problem with these is the same: what do they really mean? Are they an accurate representation of what is occurring? Still a lot of questions out there. What you have to do is look at the bigger picture: slowly yet steadily improving economy that will eventually lead to a turn higher in profits. We may not know what the profits are, but in a general sense they will be higher. As the market is telling us, that is not much to hang your investments on right now.
THE MARKET
Slow like molasses, the market traded in a tight range between support and resistance on the Nasdaq, the leader for the session. That leaves it with a chance to make another run at resistance early this week. Indeed, the Dow and S&P500 selling intensity backed off while they held above the Thursday low. They are still down at the bottom of the channel or trough on this selling round and still are primed for a bounce up to test near term resistance.
They are also still vulnerable to further downside despite the failure to rally to test the near term support (for example, the Dow closed 325 points off of its 10 day MVA and is below the bottom channel line of the March downtrend). We have discussed the rollover plunge that would send investors climbing for the exits and that spikes the negative sentiment. That usually happens when the market has already sold and looks as if it can go no lower on this leg. To hit extremes, that is what it has to do, i.e., defy expectations about what is too much or what is extreme. We talked with even more brokers with ‘get me the _ _ _ _ out of here!’ orders from clients, but the stampede is not on in significant numbers.
The market is definitely not at reversal levels for a long term bottom, and it can either sell very sharply from here for about 1000 to 1500 points on the Dow and another 100 to 150 points on the S&P 500 and scare everyone out, or it will do what it has been doing to get there: sell down several hundred points (Dow) and then rally up to resistance, and then sell down a few hundred points again, all the while ratcheting up fear and negative sentiment and grinding out the last holdouts as it works lower.
Sentiment Indicators
The week saw the VIX clear 40 on the high and the VXN crack over 70 intraday. That is getting to the 50+ and 80+ levels needed. Bulls shrank below 40% and bears rose to 36.7%, the closest since the market lows in September 2001. Closer to the necessary crossover where bulls exceed bears (that is the minimum rating). The put/call ratio, however, showed very restrained action even as the VIX rallied and bulls and bears converged. The put/call ratio has already put in several closes over 1.0 that indicate a turn, but the other indicators were sorely lagging. What is needed on a plunge and continued spike in volatility is also a coincident spike again in the put/call ratio.
VIX: 38.33; -0.31. 40.82 on the high, just below the 41.64 hit intraday Thursday.
VXN: 66; -2.99. With the tech sector having some life, volatility faded after hitting 68.66 on the high.
Put/Call Ratio (CBOE): 0.64; -0.25. Even as the Dow sagged over 100 points and the indexes shrank from resistance, put buyers did not jump into the action. Another indication that the indexes are going to attempt a bounce up here before they fade much deeper.
Nasdaq
Led the market higher if you want to call it that with the semiconductors and large cap techs exhibiting the most strength. They managed to close weakly higher while the Nasdaq gave back 25 points from the high at the 10 day MVA. Still in the game to the upside, but not much strength.
Stats: -0.93 points (-0.07%) to close at 1373.5. Gave back 25 points from the session high.
Volume: 2.009B (-11.96%). Still some strong volume though lighter as some of the big names moved up over near term resistance on strong volume.
Up Volume: 851M (-704M)
Down Volume: 1.023B (+316M). Narrowed up on the session.
A/D and Hi/Lo: Decliners led 1.14 to 1. It was no strong climb, but it was also no strong sell off.
Previous Session: Decliners led 1.37 to 1
New Highs: 25 (+10)
New Lows: 134 (-132)
The Chart: (Click to view the chart)
The Nasdaq was acting decently early on. It gapped higher and then fell to test support, but then rallied right back up in a strong 30 point move to the 10 day MVA. Backed off, made a higher low and rallied again. Then it ran out of gas, never hitting the 10 day MVA again on the session. It showed early attributes of positive upside action, and then reverted to the old more bearish ways, being unable to crack resistance and closing closer to the session lows than the highs. The positive: it did not and close at session lows. Still, it showed a loose doji on the candlestick chart that tapped the 10 day MVA on the high (1402.45) and rolled over. In this downtrend that has been the kiss of death for each move higher. After 5 rotations down the down trendline since mid-May it is primed to move higher up toward 1500, but it has yet to show half the strength necessary to do that.
Dow/NYSE
Barely cleared Thursday’s intraday high before reversing and just undercutting Thursday’s intraday low on the low. After a week of serious selling it sold some more without an attempt at rallying. The bounce we anticipated barely registered on the most sensitive seismographs in the nation.
Stats: -117 points (-1.33%) to close at 8684.53. Led the indexes to the downside, taking over from the S&P 500 for the session.
Volume: 1.579B (-24.99%). It was not very strong selling as volume dried up.
Up Volume: 690M (-443M)
Down Volume: 897M (-64M)
A/D and Hi/Lo: Decliners led 1.48 to 1. The selling was stronger Friday than Thursday but the A/D line improved. It was not heavy selling.
Previous Session: Decliners led 1.52 to 1
New Highs: 24 (-15)
New Lows: 125 (-201). Down 117 points but new lows fell 200. Again, the selling was not intense.
The Chart: (Click to view the chart)
Barely traded outside of Thursday’s range on both the high and the low. It did not even get close to the warm-ups at 9000 and the 10 day MVA after showing that big doji Thursday. A very weak attempt at moving higher, but the low volume and easing A/D line indicate weak selling as well. That does not mean it won’t sell down further (it has started other rounds of selling on lighter volume), but after an 800 point drop the trend has been to bounce back up and test resistance. We thus still expect it to rally up to at least test those near term resistance levels at 9000 that has been the pattern in the downtrend.
S&P 500:
Gapped higher to test the lower bottom channel line of the March downtrend (929, now at 926) and then fell. It held well above the Thursday low intraday, and managed to close well off the low. As with the Nasdaq, a loose doji on the candlestick pattern that could indicate a turn back down. It could be ready to break the downtrend pattern and tank from here, establishing a new downtrend. It will have to prove it, but if it does we will not fight it.
Stats: -5.98 points (-0.65%) to close at 921.39
NYSE Volume: 1.579B (-24.99%)
The Chart: (Click to view the chart)
THIS WEEK
The big issue is whether the market continues its trend along the current down trendline and thus rallies back up to test near term resistance, or breaks down from here and establishes a lower downtrend or just spirals off into the depths and jacks fear up to critical levels. It has a propensity of avoiding the big selloff and until it changes its stripes we anticipate it will hold the current trend. Ironic, huh? All the possibilities still keep the indexes in a downtrend.
CPI is out Friday, but before that Greenspan speaks Tuesday and Wednesday in his annual, son of Humphrey-Hawkins speech to Congress. Will he inspire the market? No. If eleven rate cuts and countless stumping opportunities cannot do it, another Q & A before Congress won’t do it. No, the market will have to finish the unwinding of the boom and work through the scandals and new regulation mania on its own. It is getting there, but as we have tracked for the past several weeks during the latest selling, it is not there.
As strong as the selling was leading up to the Thursday reversal, it still does not look as if the market is ready to tank sharply lower in a cathartic freefall. More of the bump up then grind lower. We anticipate another try to move higher to test near resistance after so much selling. That will score us some gains on our upside plays from Friday and set up some more of the bigger trend to the downside. With the doji on the Nasdaq at the 10 day MVA, however, we have to be ready for the indexes to turn lower from here and establish that lower downtrend. In that case we will not hesitate to close those positions out and move into the downside positions that are once again ready to fall.
Support and Resistance
Nasdaq: Closed at 1373.50
- Resistance: The May down trendline is still right there at 1373, followed by the September 2001 low at 1387. The 10 day MVA (1395.34) held the index back on the Friday high. Then 1418, the interim test after the September low, and the 18 day MVA (1426.12). 1500 and the May low (1560.29). The second March down trendline is at 1521. The 50 day MVA (1531.45).
- Support: The March down trendline (1358). The July intraday lows may have some stability (1336) for a bounce back up in the downtrend. Then the March down trendline bottom channel line at 1308. 1357.09 is the October 1998 bear market low just for reference. After that is roughly 1250.
S&P 500: Closed at 921.39
- Resistance: The lowest bottom channel line of the March downtrend (926) stopped the index dead Friday. Then the predominant bottom channel line at 952 and the 10 day MVA (951.50). The May down trendline (972) and the 18 day MVA (970.11). After that 984 is the March down trendline. The 50 day MVA at 1018.55 and the second March down trendline (1025). Then the May low at 1048.96. 1060 offers minor resistance from previous prices. Then the February lows at 1074.
- Support: The October 1998 bear market low at 923.32. 900 is after that. Then 855 the October 1997 low and 817 the February 1997 high.
Dow: Closed at 8684.53
- Resistance: The bottom of the channel of the March downtrend at 8845. Then 9000 and the 10 day MVA at 9009.55. The 18 day MVA (9157.77) and the March down trendline at 9235. Then price resistance at 9250. Then 9500 and the 50 day MVA (9527.31).
- Support: There is a rest stop at 8500. The September closing low is 8235.81 and the intraday low is 8062.
Economic Calendar
7-15-02
- Business inventories, May (8:30): 0.0% expected, -0.2% prior.
7-16-02
- Greenspan speaks to Senate
- Industrial production, June (9:15): 0.4% expected, 0.2% prior.
- Capacity utilization, June (9:15): 75.8% expected, 75.5% prior.
7-17-02
- Greenspan speaks to House
- Building permits, June (8:30): 1.660M expected, 1.676M prior.
- Housing starts, June (8:30): 1.680M, expected, 1.733M prior.
7-18-02
- Initial claims (8:30): 395K expected, 403K prior.
- Leading economic indicators, June (10:00): 0.0% expected, 0.4% prior.
- Philadelphia Fed, July (12:00): 18.0 expected, 22.2 prior.
7-19-02
- Trade balance, May (8:30): -$35.3B expected, -$35.9B prior.
- CPI, June (8:30): 0.1% expected, 0.0% prior.
- Core CPI: 0.2% expected, 0.2% prior.
- Treasury budget, June (2:00): $25.0B expected, $31.9B prior.
SUBSCRIBER QUESTIONS
Q: I am still confused over the strategy involved in recommending puts or calls with low or no open interest when you have repeatedly stated that you prefer options with 100 OI or better yourself. Are we to ignore your advice? Do you yourself buy options when there is no OI? Also it would be reassuring to hear from you that when you are recommending these low or no OI options that you are not selling the relevant puts and calls yourself. If these questions have occurred to me I am sure they have occurred to others as well and it would be reassuring to me if not to the readership in general if you would outline and clarify your position for me on these points.
A: It is our general rule of thumb to buy options with 100 or more open interests primarily because that allows us to better use stop losses and shave the spread. In order for a stop on an option to work it has to be triggered by a sale at that level. If there are not many ongoing trades in the option (the problem with low OI) then you cannot utilize stops effectively. We are driven by the technical pattern of the play and, if using options, the ability of that option to make us an acceptable level of profit on the play. If the right combination of pattern and option to make our money exists (we have to bypass some good patterns because the option deltas and prices just won’t cut it) but there is low OI, we will still make the play knowing, however, we will have to monitor the trade without a stop. No big deal really; I did that all the time when I was working another job. There were sometimes I could not make plays because I knew I would be too busy, but I worked around it. There have been many times the play was so good but there were no OI; I was the only OI in those options and still made great profits. I just had to be ready to sell and willing to take what the market maker was willing to pay. On no positions we discuss in the report are we taking opposite positions to those discussed or taking positions before the plays are discussed unless it has alrady been on the report and has hit a buy point.
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