InvestmentHouse Weekend Market Summary
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9/27/02
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investmenthouse.com
TONIGHT:
- Economic woes move to the big boys and the market can�t handle it.
- GDP tacks on a fraction, Michigan sentiment shows the flipside of the Conference Board�s numbers.
- Small business forum to focus on immediate action to help business investment.
- Ten day MVA proves too much for the indexes.
- Subscriber Questions.
The underlying problem, the economy, reared its head Friday.
It is not the economic numbers so much. Indeed, the government has a pretty rosy view of the economy. Why Treasury Secretary O�Neill said just this week that the economy was doing just fine. Fiscal stimulus? Not for this juggernaut of free enterprise. Yes, the economy is in the sweet spot, poised for a recovery that we can all be happy about.
What are the signs of recovery? SBC laying off another 11,000. DAL laying off a few thousand more. GE, in just about every business you can be in, sees next year as a �more challenging business environment.� Plunging interest rates, plunging equity prices, and no business pricing power, all classic signs of the start of deflation. Add in very wide spreads on corporate bonds (a classic sign of a dying economy) and a money supply that is shrinking and you have the picture. Yeah, baby. This economy is on a roll.
Reality outweighed a slightly higher GDP uptick and the other economic reports of late that continue to suggest the economy is improving. For several months a lot was said about business owners and CEO�s being pessimistic as usual about the recovery, but now their pessimism is being borne out by the continued layoffs and reductions in earnings estimates. Sure there is overcautious reporting after the accounting scandals and that is keeping the yellow caution light on with respect to reports. But for GE to say the current quarter was okay but all of 2003 would be more challenging is pretty clear it is not a short term problem. Hell, it is already a 2-year problem, hardly short term.
That problem is what the market focused on again Friday after a couple of upbeat sessions where stocks came up for air. Grab a quick breath at resistance and then head back down to price in more crappy economic times ahead. Tanking rates, tanking stock prices, and a relative lack of concern as they fall does not bode well. During this time the government is fighting the last war still looking at corporate governance issues and somehow concluding that the economy will be saved if they lock up some CEO�s and pass a terrorism insurance bill. The problems at SBC, GE, MO, DAL, XRX, etc, etc, are not because people are scared to buy or invest because terrorists could attack again and something you built or bought might get blown up in the attack. Do you think about a terrorist attack potentially destroying a new car or home or office you are thinking about buying? If you do, will that be the primary thought driving your decision? It is preposterous to say the most important economic issue facing the nation is terrorism insurance legislation. Out of touch, out of time (Hall and Oates, 1984).
THE ECONOMY
Q2 GDP ticks up to 1.3%. So?
GDP nudged higher, but that was history. Q3 reports are so-so, and the business outlook for Q4 and 2003 is not good. Who cares about what happened from April to June? The market looks for what you are going to do for me, not what you did. Even if Q3 is up 3+% as many predict that won�t help. The market is looking way out in 2003 now and its response continues to be to dump ballast, i.e., sell stocks.
Michigan sentiment beats expectations 86.1 to 86.0.
Higher than expected but lower than August (86.2). Not a sparkling number, not a terrible number. It is good enough, but again: the consumer is not the key here. It has to continue to keep the economy afloat, but the consumer is not going to pull the U.S. out of recession. It has roared for years but it did not keep the U.S. out of recession and maintaining the current pace won�t pull the U.S. back up. Important but hardly sufficient.
The interesting thing is that Michigan sentiment shows current conditions at 95.8 and expectations at 79.9 The Conference Board�s sentiment survey last week showed currents lower than expectations (that were in the 90�s). The latter is supposedly the way you want it: looking toward the future with enthusiasm. They conflict; what are you supposed to believe? Well, just look at relatively where they are compared to history. After 9-11 they were in the mid 70�s. In past recessions they were lower than that. Relatively the consumer is very strong for now. It won�t last without some other help.
Small business forum.
We have been asked by some Texas U.S. Congressmen to put together a small business forum on what small business needs now to start investing in the U.S. once again. It is tentatively planned to take place in mid-October. The idea is to come up with action ideas that need to be taken now to help small business and try to draw attention to the fact that most corporations are not GE, Enron, Global Crossing, et al, but 50 or less employees and are not publicly traded. This is a great opportunity to draw attention to the poor economic conditions those in the trenches are facing day in and day out and how some investment incentives for small business and individuals would provide great and much needed stimulus to the economy. We will update you more on the particulars as it shapes up.
THE MARKET
The door was slammed at the 10 day MVA. Heavy price selling even if volume was not high. How many times have we seen in the downtrend that selling after a relief bounce comes in quietly and then just builds and builds? The point is that in a downtrend you don�t have to see selling on higher volume each time the market sells. It is the lack of strong upside volume on the rallies that is the real flag. Lower volume can mean the selling won�t be that intense, but in a continuing trend the problem is the trend; until it is broken it takes precedence.
The fact that it was the 10 day MVA and not the 18 day MVA indicates the selling could be more severe. The Nasdaq 100 tested its 18 day MVA Thursday and Friday, but it was ahead of the rest of the indexes. Many, many stocks turned over Friday at their near term resistance just as the indexes did. When the 10 day MVA starts acting as resistance that often signals a steep and continued downtrend. The indexes are just turning down for the second time since the rally up off the July lows. You can usually look at 4 to 5 runs down the short term trends before the trend is tested. The indexes look set to break to fresh lows and toss the July bottom theory out the window.
The Dow and S&P 500 looked awful. What was a modest selling round in the first hours just slid off the table and they closed at the lows. The Nasdaq is the wildcard. It actually tried to lead the session and was positive much of the session before the late slide. It finished at the low but it is showing a pattern that suggests it could still move right back up after just a quick feint lower. Given the size of the price plunge in the other indexes, however, we are not putting too much stock in the Nasdaq pattern as it still hit the resistance and rolled over.
Sentiment Indicators
Sentiment did not show any real surge on Friday. The VIX was up but the VXN (Nasdaq 100) was down. The put/call ratio was up, but it was not screaming. Bullish advisors edged higher to 42.2 while bearish advisors moved up to 34.5; better but not nearly where they would need to be on another bottoming attempt. All in all there is no real concern about the current state of the market or everyone getting out is already out. The latter would be nice for the long term but that is a very positive read of the action.
VIX: 43.14; +3.02
VXN: 57.86; -1.23
Put/Call Ratio (CBOE): 0.88; +0.22
Nasdaq
Tried another run over the 10 day MVA after a slow start, trying to lead once again after it was absent Thursday. Looked solid but could not hold up the rest of the market. In the end it was closing at the lows, right at some potential support.
Stats: -22.45 points (-1.84%) to close at 1199.16
Volume: 1.447B (-13.16%). Volume backed off on the selling which shows there were not as many sellers in the market as buyers Thursday, but given the point losses that is hardly a comfort.
Up Volume: 466M (-44M)
Down Volume: 974M (-165M). Not as bad to the downside as it has shown on other down sessions. The pattern has been on up days the ratio was heavily upside. On down days the ratio was heavily downside.
A/D and Hi/Lo: Decliners led 2.19 to 1. About the standard on this downtrend. Note that the advancing issues on the last up session did not approach the level of the decliners on the down sessions.
Previous Session: Advancers led 1.23 to 1
New Highs: 15 (-6)
New Lows: 245 (+77). On the run up again but not bad yet.
The Chart: (Click to view the chart)
Tested over the 10 day MVA (1225.66) on the high (1235.08) but it could not find a foothold. The Nasdaq 100, the leader on the move along with the SOX, banged into the 18 day MVA and was pushed back. With the leaders testing the 18 day MVA and unable to break it, the rest of the index went lower with it. It was able to mount another run at the 18 day MVA. The fact that it failed again is indicative of a continued move lower in the downtrend. It is at some potential support at 1200 down to 1190, but no use in holding the breath to see if it holds.
S&P 500/NYSE
Nasty rollover at the 10 day MVA (850.03), selling down to the first bottom channel line in the March downtrend (now at 826). Volume was lower, but that did not prop things up.
Stats: -27.58 points (-3.23%) to close at 827.37
NYSE Volume: 1.486B (-6.91%). Lower volume but hardly a silver lining given the severe point loss.
Up Volume: 195M (-949M)
Down Volume: 1.301B (+830M). This was more typical of the action the past few weeks: when it sells, it is all sellers; when it rallies, it is all buyers.
A/D and Hi/Lo: Decliners led 2.47 to 1. NYSE A/D line not any better than Nasdaq, but it is has enjoyed great breadth on up sessions as well.
Previous Session: Advancers led 2.86 to 1
New Highs: 61 (-3)
New Lows: 131 (+75)
The Chart: (Click to view the chart)
Started off mild enough, even looked as if it would be a brief pullback before a try at the 18 day MVA. Managed a brief move back up to the open, looked decent, and then fell off the table and sold with increasing fervor the rest of the session. The news about earnings was just too bad for the large caps with GE and MO on the hit list. It closed right at the first lower channel line in the March downtrend (826). The recent low is 817.38 (four sessions back). They could hold, but with Friday�s selling the would have to prove it. Looks like a pretty severe return to the downtrend.
Dow:
Stats: -295.67 points (-3.7%) to close at 7701.45
Volume: 1.486B (-6.91%)
300 points in two up days and then take an eraser in one day. The worst performer with a crushing 3.7% decline. GE and MO were major blows as it seeks another low that is just 18 points away (closing) and 169 points intraday (7532.66). It can do that in a morning�s work. The Dow is not the place to find any leadership right now, at least upside leadership. It has broken below the bottom channel line in the March downtrend channel. The last time that happened was in early July when the ugly selling started.
The Chart: (Click to view the chart)
THIS WEEK
Friday was not rally a surprise from the aspect that the market sold, it was the severity as well as the light volume. There were simply no buyers willing to commit so the sellers had sway. No real fear indicated in the sentiment readings even as the indexes hit close to the recent lows. No run away downside volume even as some big names announced �no go� on earnings. The market could almost surprise us with this somewhat strange array of indications, checking up near the prior lows and rallying. Moreover, NYSE volume continues to either hold pace or actually outstrip Nasdaq volume. As we have indicated on several occasions the past two months, that is one sign that the speculation is being wrung out of the market: when the old, stodgy index is traded with equal or more enthusiasm than the more speculative index most of the speculators are gone. Ultimately that clears the decks for a move higher. Problem is, it is not a timing mechanism.
Even with the somewhat jumbled sentiment and volume currents, it is unmistakable that the downtrends have resumed for now at the 10 day MVA, an indication that the downtrend could be intense heading into early October. Many stocks tested resistance and rolled over; we were taking downside positions in the afternoon and we anticipate more coming this week.
The news will be big. Income, spending, Chicago PMI Monday, then auto sales, Chicago PMI, ISM, factory orders, and the monthly employment report are the big reports for the week. On top of that there will be continued warnings. Negative warnings are way up, most likely due to companies being overly cautious. Any question about earnings and it is better to warn and understate in this environment lest the SEC spotlight shine in your direction.
Either the news is so good it turns the market up from the lows or it fails to impress in light of the continued earnings warnings and fear of earnings warnings. Again, with the market in a renewed downtrend when the rally failed at the 10 day MVA, we are not betting on any turn higher at the recent lows that are indeed quite recent. Only the S&P 500 of the big three has not already hit a new closing low for the year. The odds of it being the lone wolf holdout that makes a stand and turns the market seems remote given the action at the 10 day MVA.
On the bright side there are some sectors with stocks that made great moves even as the market started to collapse back lower Friday. TTWO shot higher again, STE is finally looking as if it will make and hold a breakout. The point is one we made earlier in the week: not all stocks are collapsing in the selling as they did in July when the leaders broke down hard. That might change if the selling gets intense, but for now they are making a stand and that is something that can indicate the market is not going to sell down.
Support and Resistance
Nasdaq: Closed at 1199.16
- Resistance: The August down trendline at 1218. The 10 day MVA (1225.66). 1230 and 1250 are price resistance points. The 18 day MVA (1248.42). 1270 is still more price resistance from the September lows. The March/May downtrend line at 1292 along with price resistance at 1300. 1316, an early August interim high. The 50 day MVA (1309.93). The late July high (1354.48) and 1357.09, the October 1998 bear market low. There is another downtrend line from the March and May highs at 1372. 1418, the interim test after the September low. That is followed by price resistance at 1500.
- Support: Price support from 1190 to 1200 (the July intraday low is 1192.42). 1177ish is some support. There is price support from 1080 to 1100. Then there is a big shelf of support at 1050 down to 1000.
S&P 500: Closed at 827.37
- Resistance: 850 to 855 (the October 1997 and Q2 1998 lows) stopped things Friday. The 10 day MVA (850.03). The 18 day MVA (864.73). The March downtrend line at 867. 875 is price resistance of some significance. The 50 day MVA (897.97). July and August interim highs at 911.64. The September 2000/May 2001 downtrend line at 923. The downtrend lines from the March and April highs (933). Price resistance at 950. 965, the September 2001 closing low.
- Support: The first bottom channel line in the March downtrend (826). Some price support at 800. The lowest channel line in the March downtrend channel (790). Then the July low at 775.68 and marks the culmination of the short head and shoulders pattern. 750 to 760 with an intraday touch to 730.
Dow: Closed at 7701.45
- Resistance: The lowest bottom channel line of the March downtrend (7840). The 10 day MVA (7972.04). The August lows (8043) and the September 2001 intraday low (8062). The 18 day MVA (8130.21). The September closing low at 8235.81. 8250 acted as resistance before after acting as support. The March down trendline at 8270. The 50 day MVA (8474.05). Some price resistance at 8500. The late July interim high at 8762.14 (8745 closing). A range of resistance from 9000 on up to 9050. Then 9250 and then 9500.
- Support: The July low (7532.66). The October 1998 lows are at 7400 and 7467. After that is 7000, some 1997 lows and highs.
Economic Calendar
9-30-02
- Personal income, August (8:30): 0.5% expected, 0.0% prior.
- Personal spending, August (8:30): 0.5% expected, 1.0% prior.
- Chicago PMI, September (10:00): 53.0 expected, 54.9 prior.
10-01-02
- Auto sales, September: 6.1M expected, 6.6M pior.
- Truck sales, September: 7.8M exepcted, 8.8M prior.
- ISM index, September (10:00): 51.0 expected, 50.5 prior.
- Construction spending, August (10:00): -0.1% expected, 0.0% prior.
10-03-02
- Initial claims (8:30): 406K prior.
- ISM Services, September (10:00): 51.4 expected, 50.9 prior.
- Factory orders, August (10:00): -1.5% expected, 4.4% prior.
10-04-02
- Nonfarm payrolls, September (8:30): 15K expected, 39K prior.
- Unemployment Rate, September (8:30): 5.9% expected, 5.7% prior.
- Average workweek, September (8:30): 34.1 expected, 34.1 prior.
- Hourly earnings, September (8:30): 0.3% expected, o.3% prior.
SUBSCRIBER QUESTIONS
Q: I bought 100 September 35 C puts at $1.25 back when C hit $36.01. Even though you indicated a put buy on C around $30, I sold my position at $2.15. Do you know these options actually hit a high of $11.00 at one point after that! I would like to know from an obvious expert, you, how do you hold onto the bloody end? I took a $10,000 profit but missed another $90,000! Am I a chicken, normal or just too emotional to play this game? Do you ever "get nervous" and sell out too soon? You held your C position I see, but what happened to me?
A: Everyone, regardless of who they are and years of experience, gets some nerves every once in awhile on a play. The key is sticking with the trend in place or the move you are investing in and looking at the signals from the market as it moves up and down and the stock as it does the same to see if the trend is changing. If you have confidence in your understanding of the market by reading the signposts then you have confidence to stay in the play and reap the big profits. It takes discipline, becoming that machine to act when it is necessary to act but not to have �happy feet� and jump out of positions too fast. It is definitely a learned trait; you have to force yourself to stick by your plan as long as an honest evaluation of the conditions tells you the trend is still in place. Try this: ask yourself �are all the attributes I looked for when I entered this play still in place?� If so, there is no real reason to get out. With options you have the time consideration as well; as long as your time on your options is still good you can stick with the play. |
