InvestmentHouse Weekend Market Summary
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investmenthouse.com
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7/19/02
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TONIGHT:
- Slow motion rollover turns into a freefall.
- Despite the selling, big techs still show relative strength.
- Economic news remains upbeat, and that is good for the future.
- What will the next upside rally look like?
- Subscriber Questions.
Further selling becomes dumping late Friday.
Thursday started a slow motion rollover as we styled it, and Friday the snowball, as is usual, picked up speed. In the last hour it rolled off the edge, but it hit a ledge just below that bounced it up some. Specifically, the Dow was down over 400 points and below 8000, undercutting the September 2001 lows. Volume swelled on the NYSE and the Nasdaq during the day. It exploded in the last hour. We called some brokers to get the pulse of the retail investor; you could hear the noise even through their headsets. Yes there were several calls for redemptions. Those mutual fund folks on the television saying they were not getting redemptions were either taking a page from the ENE/WCOM/GX playbook, or they just had not checked their voicemails lately.
It was a bad day for long term upside investors, capping the worst two weeks for the Dow and S&P 500 since 1987. The A/D line was horrid (3.3 to 1 NYSE), NYSE new lows broke over 400, NYSE volume shot up to 2.6 billion shares, the Dow undercut the September 2001 lows. If not for some buy on close orders to bounce the indexes higher, it would have been a close on the low and below 8000. A lot of the late upside action was due to hedge funds covering their shorts even though it is widely believed Monday will be lower.
Techs still relatively stronger.
Note that there was no reference to the Nasdaq. Much of the action dealt with the Dow and the S&P 500 while the Nasdaq slid marginally lower but still did not undercut the recent July lows. It hit a new closing low but not intraday. That may be an illusory victory (another one of those moral victories), but many big name tech stocks held the line or rose as the rest of the market sold. BRCM, JNPR, ORCL, BRCD, EXTR, KLAC. The held up remarkably well. Does that mean much right now? Maybe not, but as discussed below, when the market gives that inevitable rally these stocks that are holding up better will be ones to make the first move.
THE ECONOMY
Government inflation stats show continued low inflation environment.
The CPI, core and overall, rose 0.1%, overall in line while the core slid in below expectations of +0.2%. While the price of houses, tuition and other basics are not factored into the CPI, the basket of indicators does remain at a historically low rate. As noted last week, even if the basket does not include some important categories, the basket has more or less remained the same over the years. Thus compared to prior periods, inflation rates are low.
Low inflation is always good, but deflation continues to be a worry. We are not making that one up as a recent poll of U.S. citizens showed that 67% felt deflation was more of a concern than inflation. It is amazing that 67% knew what deflation was in the first place. While concerns regarding the economy linger (double dips, consumer meltdown), the numbers don’t add up to that. Sentiment is down, but its correlation with actual spending is dubious. Strong sentiment does not hurt, but weak sentiment does not necessarily translate into weak consumption.
With all of the talk about the ‘reverse wealth effect,’ let’s not forget that it was last October that Greenspan stunned us all with the admission that he was not even sure there was ever a stock market wealth effect. If no upside wealth effect, would there be a downside one? Not likely. During the 1996 to 2000 period when the Fed droned about a wealth effect we reported that the only studies (other than the secret Fed studies it would not release) showed that most investors put stock gains right back into the market; they wanted to retire early. They might have slept easier at night with the market rallying higher and higher, but they were not going out and blowing it all. It was an expanding area of savings among U.S. citizens. Indeed, after the market crash and recession, consumers continued to do what consumers do: they consumed. Lucky for the Fed; the consumer it was grousing about as too aggressive has kept the FOMC’s chestnuts out of the fire thus far.
Anyway, economic activity is picking up. The commodities index is continuing higher and higher, breaking out in June over a key resistance level. The dollar is weaker, and as that makes imports more expensive, maybe domestic businesses will finally have a little wiggle room to raise some prices after years of paper thin margins. That indicates no deflation, i.e., the loss of value in hard assets. If anything it sets the stage more for some mild inflation.
THE MARKET
Lot’s of glum faces, but in the bigger picture, that is good. Massive negative sentiment ultimately swings the pendulum the other way. The indicators are all but one falling into place for some form of a bottom. The put/call ratio has spiked over 1.0 a few times; bears have eclipsed bulls; NYSE lows popped 400; NYSE volume zoomed past Nasdaq volume; the Dow and S&P 500 are finally breaking down, taking the small and mid-caps with them (the shooting of the leaders). Lots of gloom yes, but not massive. The VIX is higher but not at massively negative levels historically associated with bottoms. The VXN actually went down Friday. The planets are aligning, but they are not there.
They can get there. The action Friday, particularly in the last hour, had the ‘juice’. People were scared. The indexes started to fall off of a cliff. We may see, we hope we see, a 600 point drop Monday on the Dow; kind of a son of Black Monday that would put the Dow down to the 1998 bear market lows. It would need to spike the VIX up to 55 or better, preferably better. Talking with several hedge fund managers Friday, they had closed out their shorts as we had been doing a lot of, even though they felt there was another major drop coming this week. The point: they think another hard selling session will convert to a rally.
We agree that another serious round of selling will spark a rally. Whether it is an interim rally or a longer term bottom depends upon how intense the selling becomes. It is not there yet. Even if it is, we won’t know until we see a follow through a week or so later with massively positive A/D readings, huge upside volume, stocks breaking out. Indeed, with the current stock patterns the early action, at least on a percentage gain basis, will be led by a specific group of stocks that are the ‘go to’ stocks when investors sense a rally. They may not be the ‘stay with for the long term’ stocks, but they will get things rolling.
As of the close Friday the argument for a bottom is not in place. Some say ‘buy now because stocks are cheap.’ Problem is, we don’t know how much cheaper they are going to get before there is a bottom. It is the old story we heard all the way down from the peak: gee, JDSU was at $140 and now it is at $70; it must be cheap now. Then it was cheap at 35, at 17.50, at 8.75, at 4.47 . . . you see the point. We have made some great downside money on this fall. When it turns there will be some immediate great upside action as well. We can buy that, and then look for a real follow through for longer term positions if it comes to be. If not, we jump back on the downside bandwagon when the rally fails.
Sentiment Indicators
Lots to like from this area Friday, but also the same shortcomings. $11 billion in outflows from stock mutual funds. Business Week puts the ‘Angry Bear Market’ on the cover, roaring bear graphic included. Bears eclipsed bulls last week. The put/call ratio was back over 1.0 on the close. There is more discussed below. Volatility, however, was not where it needed to be for a major bottom.
VIX: 43.45; +3.50. 43.79 on the high, moving closer to where it needs to be. A major sell off Monday could spike it to 55 or so (it has made 12 point intraday spikes in the past), but that would be the threshold. We would like a reading of 60. Not all bottoms have shown VIX over 60, but we have waited this long, so why not look for it?
VXN: 61.17; -2.44. High was 66.81, but the Nasdaq’s relative calm versus the other indexes bled fear off of this indicator. 75 might do it, but we would like to see it over 80.
Put/Call Ratio (CBOE): 1.14; +0.21. After failing to budge higher during the recent selling, the options players broke through today and started buying puts again. This is another indication that some form of bottom is setting in. All option markets combined showed a 1.0 reading, i.e., equal amounts of puts and calls. It was higher all session but then tailed off late.
Nasdaq
Stats: -37.80 points (-2.79%) to close at 1319.15.
Volume: 2.404B (+30.77%). Rising, strong volume on the selling, indicating share dumping.
Up Volume: 319M (+43M)
Down Volume: 1.505B (-43M). Lop-sided as expected on such a day.
A/D and Hi/Lo: Decliners led 2.6 to 1. Bad, but not nearly as bad as the NYSE. This is the second consecutive 2:1 decline. That is a positive.
Previous Session: Decliners led 2.29 to 1.
New Highs: 8 (-6). Wow.
New Lows: 260 (+111). Not there; want to see 400+ as on the NYSE.
The Chart: (Click to view the chart)
The Nasdaq is now back down to the July lows (hit a closing low Friday) after a trip to the 18 day MVA failed. It has officially made a lower low, and that looks just like a continuation of the downtrend. It has not yet undercut its July lows (1315.30) on the close, and we note that it did close right on top of the March down trendline. Maybe that is a moot point; the downtrend certainly has not ended even if the Nasdaq is showing some signs of life (imagine that statement looking at the downtrend!). Again some big name techs did not sell as the market. Some were up, some were down, but they were not being slaughtered. That does not make a rally, however. The Nasdaq is in the downtrend, and if there is selling Monday, it will undercut the lows. The key will be what it does then as discussed below.
Dow/NYSE
Got all of the attention Friday and perhaps rightly so. A 4.6% loss is a headliner.
Stats: -390.23 points (-4.64%) to close at 8019.26
Volume: 2.64B (+53.09%). Volume was huge, far outpacing even the highest session after the market reopened in September 2001. Some of it was due to the S&P 500 rebalancing that occurred Friday. Nonetheless, it is very significant when NYSE volume outpaces Nasdaq volume (by 300 million Friday). The Nasdaq is the speculative market. The NYSE is the stodgy, blueblood market. Typically, therefore, Nasdaq volume outpaces NYSE volume. When the speculative index is out-traded by the stodgier index, the speculation is pretty much out of the market. What is happening is the sellers have turned from the volatile, speculative issues (technology, biotech, etc.) to the indexes that held up. The air is being taken out them in a hurry.
Up Volume: 454M (+115M)
Down Volume: -2.146K (-1.376B). Massive downside dumping. All Dow stocks closed lower.
A/D and Hi/Lo: Decliners led 3.32 to 1. This is strong. 4:1 Monday would be better.
Previous Session: Decliners led 2.12 to 1
New Highs: 28 (-1)
New Lows: 423 (+221). This got to where we would like to see the Nasdaq, but the Nasdaq is trying to toe the line.
The Chart: (Click to view the chart)
Closed below the September 2001 low (8062.34), clawing back above 8000 it undercut in the last hour. A 2600 point round trip. The late bounce staved off a total rout, but it closed near the session low and there is tremendous downside momentum as the Dow is sells off to catch up with the Nasdaq and S&P 500. The plunge has been dramatic since May at 10,300. This is the hard plunge we have discussed the past month, the Dow finally sliding off the edge and selling very hard. We are looking for a real plunge on Monday. 7400 is the intraday low from the 1998 bear market. That is the point bandied about on the financial stations. That would be a good starting point for a rally whether the VIX gets ‘right’ or not. At this point we don’t guess what is the bottom. If we see a turn after such selling and the upside stocks we are looking at still look good, we will play the upside. Later we will look for signs of strong follow through to determine what we buy into in the future.
S&P 500:
The S&P 500 is already well below the October 1998 lows and is on the way to the 1997 levels. The next is 817, the Q1 1997 highs. After that, 750 to 760 with an intraday touch to 730. The S&P is in freefall right now, and we look at these levels as potential intraday turning points. If you want to talk about wiping away the entire gain when the really big run started on the S&P, that takes it down to 450 to 500 back in 1994. One step at a time. The large caps are in full retreat and fear is rising. We anticipate more downside Monday and will watch to see where it attempts to hold.
Stats: -33.8 points (-3.83%) to close at 847.76
NYSE Volume: 2.64B (+53.09%)
The Chart: (Click to view the chart)
THIS WEEK
Well, things are finally getting a bit interesting in the market. The downtrend is becoming a very massive selloff. Contrary indicators are starting to hit extreme levels. Not all of them are there yet, and those that have could get even more extreme. However, this past week added some more holdouts with the bears eclipsing bulls in the investment advisor category and NYSE volume eclipsing Nasdaq trade. Sentiment measures are mushy, and they are not something you necessarily time major buys on. They show the conditions are ripe for a turn; when that turn comes is the key. Get ready when you see them. Maybe Monday we will see what is needed to send them all to the extreme category with the VIX blasting toward 60, the VXN over 80, the put/call ratio closing well above 1.0. That would put us on alert. Then, if we see some of the upside stocks that are holding up relative to the market start to move, we can move in to play an upside reversal that could be fairly furious whether it is an interim bottom or the ‘real’ bottom.
What will a rally look like after this selling?
Stocks are mainly in the trash can as far as patterns after all of this selling. One of the keynotes of final selling binges in a downtrend is when the leaders are plowed under as well. That pretty much puts all stocks in the ‘damaged goods’ category. Thus, when the market bottoms after massive selling, there are not a lot of good patterns ready to breakout to jump into. The leaders that were just dragged down have the earnings and sales, but they need to rebuild; they just sold off hard and all of that overhead has to be weeded out.
What happened after the market bottomed in September 2001? Who were the leaders off the bottom? Stocks with ‘go to’ names for investors, stocks that have the potential to run up hard when a rally starts. In September these were tech stocks that led up off the low. They were the names investors looked to. After they rallied up the peak in January, then the small and mid-caps took over and started their climb as the large cap indexes started to falter. They had rebuilt their bases and were ready to take the lead. They did until just two months back when all of this current selling started.
This time around the small and mid-caps are still the best bets longer term, but their patterns have been predominantly shattered (not all, however; there are still several holding up quite well on the reports). They will not be ready for long term buys at a turn; they may provide short term rallies, but as in September, they may not lead or provide the best returns. They will rebuild and after the first rally, they will either take up the torch again as the first wave fades, or the whole thing melts back down.
As for the lead off the bottom, a lot of the go to stocks are still some of the techs. Why? They are holding up better than the other stocks currently in freefall. We have talked for over a week about the Nasdaq’s relative strength. Stocks such as JNPR, BRCM, ORCL, EMC and EXTR are holding up very well. They are not necessarily the old first line techs (MSFT, DELL, INTC, GLW, SUNW); those are not showing the same strength. As we have said before, not all of the old leaders will return to lead. Some won’t even return much on any big rally. These stocks that have been holding up, however, are already showing life the past two weeks, and they can provide some explosive upside moves during the initial rally while the other stocks we want to hold longer term set up for a breakout. Again, we could buy these other stocks, but on the move up off the bottom we want the stocks that can run the fastest for us. Then when they run out of gas we look for the leaders in sales and earnings that have formed good patterns and are ready to take the baton. If they breakout on strong volume we pass the torch to them for longer term.
This is typical action off of severe lows. The name stocks that still have a following are snapped up and lead higher. Eventually their overhead supply catches up with them and they start to struggle as some old holders sell them to recoup some losses. At that point money swings to those stocks with the leading earnings and sales, the specifics of which we teach in our seminars. Those are the stocks with the goods people want; mutual funds will want to hold them for the longer term. They have more staying power at that point if the move is for real.
Monday expectations.
Monday looks to head lower, and we want it to. It has moved past the slippery slope and into the vertical plunge. Though the market is way oversold we are still eyeing some downside plays. We never turn our head at day trips, and a big move down on the Dow and S&P is hard to pass up. We have to be ready to get in and then get out. Gaps lower are always a problem. A huge gap down does not give a lot of time to react; that is why a lot of funds closed their short positions today even though the selling continued. That is what we saw in the last 15 minutes that moved the market higher: shorts covering.
If the market starts to sell out of the gates a lot depends on where it opens as to what we are willing to do. A 100-point gap is not that bad if it is going down 500 points that session. If we see that, we will venture into some downside index plays and other weak stocks if the sentiment is still gloomy. Judging from the headlines Friday on the financial stations, it should be. We are then ready to close them out if the indexes hit potential support levels and start to bounce. At the same time we look at the stocks that have held up well during the selling as well as the indexes themselves for upside action. The SOX comes to mind.
Above all, we have to remember we are in a downtrend still, though that downtrend is getting very oversold. At some point there will be a strong rebound. Another plunge lower Monday and we could be at that point. Until the market proves or shows otherwise, however, a bounce is just a bounce in this current massive bear market and downtrend.
Support and Resistance
Nasdaq: Closed at 1319.15
- Resistance: The May down trendline (1330). 1357.09 is the October 1998 bear market low. The 10 day MVA (1372.97) and the 18 day MVA (1399.15). Then 1418, the interim test after the September low. After that is 1500 and the second March down trendline at 1495. That is followed by the 50 day MVA (1501.29).
- Support: The March down trendline (1317). The July intraday lows may have some stability (1315) for a bounce back up in the downtrend. Then the March down trendline bottom channel line at 1292. After that is roughly 1250.
S&P 500: Closed at 847.75
- Resistance: It has fallen so far there is not much above it. The 855 and 850 from the October 1997 low and Q2 1997. Some resistance at 900. The 10 day MVA (908.93). The lowest bottom channel line of the March downtrend (912). The 18 day MVA (934.75). The predominant bottom channel line from the March downtrend at 940. The May down trendline (951). After that 972 is the March down trendline. The 50 day MVA at 995.16.
- Support: 817, the Q1 1997 highs. After that, 750 to 760 with an intraday touch to 730.
Dow: Closed at 8019.26
- Resistance: The September closing low is 8235.81 and the intraday low is 8062. 8400 to 8500 is some resistance. The 10 day MVA at 8599.79. The bottom of the channel of the March downtrend at 8750. The 18 day MVA at 8829.00 followed by 9000. The March down trendline at 9165. Then price resistance at 9250. Then the 50 day MVA (9324.06) and 9500.
- Support: The October 1998 lows are at 7400 and 7467. After that is 7000, some 1997 lows and highs.
Economic Calendar
7-25-02
- Initial jobless claims (8:30).
- Durable goods orders, June (8:30): 0.5% expected, 0.9% prior.
- Employment cost index, Q2 (8:30): 09.% expected, 0.8% prior.
- New home sales, June (10:00): 960k expected, 1.028M prior.
- Existing home sales, June (10:00): 5.73M expected, 5.75M prior.
7-26-02
- Michigan sentiment, revised, July (9:45): 86.5 expected, 86.5 pior.
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SUBSCRIBER QUESTIONS
Q: Can you please explain the term "secular" bear market used in last night's Daily. Thanks.
A: Ah, secular bear markets, secular bull markets. The idea is that these are long term cycles in one direction of the other. Bear, long term downtrend. Bull, long term up trend. The bull market that ended in March 2000 was a secular bull market that covered two decades. Some say shorter as it was broken up by 1987, 1994, 1998, but secular trends can have countercyclical moves within them. Thus those short bear markets did not change the long term uptrend of the secular bull market.
With this bear market there are some saying that it could last for years and years. After such an excess to the upside that is not idle talk. There can be bull markets even in a longer term bear market just as there were those shorter bear markets in the longer term bull market.
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