InvestmentHouse Weekend Market Summary
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10/4/02
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investmenthouse.com
TONIGHT:
- Investors see through employment numbers as early rally fails.
- Employment numbers seem better, but not much substance.
- S&P 500 holds its low, teetering on a breakdown and not getting any help.
- Subscriber questions.
Early rally gives way to same result.
Futures were up on the employment report and its lower unemployment rate, and the market made good on that early. A brief pullback and subsequent rally had the look of something better, but not. The selling started and a late rally attempt was easily tossed back as it simply had no believers.
As has been the case for months and particularly of late, the economy is not supporting prices. There was no good news out of the CEO conference, at least news that would support a gain in prices. The unemployment numbers were mostly headline and were enough to take the Fed out of the picture for now and keep the administration on its �stay the course� and ignore (for the most part) the economy mindset. The Labor Secretary�s attempt to paint a rosier picture this morning on CNBC rang hollow, and when she snapped back after being pressed on how the numbers were really rather poor, it was easy to see that the administration is worried about the economy but at this point before the election is afraid of making any serious moves lest it appear indecisive, wishy-washy, incompetent. The price we all pay for politics as usual is enormous. The market saw it for what it was and sold off again.
THE ECONOMY
Unemployment supposedly drops.
Okay, so what about that economy. Unemployment dropped to 5.6% from 5.7% in August. Non-farm payrolls fell 43K versus the 6K gain expected. Manufacturing fell 35K (-24K expected), transportation dropped 32K, and retail shed 16K (during the back to school season). Services gained 28K and government gained 4K. Manufacturing remains, as some of the CEO�s at the West Virginia conference so correctly noted, in a depression, not a recession.
Now August non-farm payrolls were revised to +107K from +39K, hourly wages rose 0.3%, and the average workweek rose to 34.3 from 34.1. All of these were better signals. What is the real theme here? It is hard to trust the numbers the government is putting out, though the underlying theme is continued lethargy. The unemployment rate is from a survey of households and includes questions about working around the house without pay. Believe it or not, the government considers that working. So much for putting much faith in the unemployment number. The non-farm payroll number comes from businesses themselves. It is considered more accurate, but it is seasonally adjusted by the number crunchers; that accounts for the huge swing in the August numbers. Bottom line is that not many traders and fund managers are trusting the numbers. They are acting just like business execs: we ain�t believing until we are seeing.
Unemployment numbers worst scenario for economic lifeline.
There is more than just the numbers. The lower percentage and upward non-farm payroll revision in August keeps the Fed on the sideline. That is not huge because there is little the Fed can really do at this point unless it cut rates by 50 basis points minimum to put the Fed Funds rate significantly below the 2-year treasury note.
The corollary is that the administration will not press for necessary fiscal stimulus either. It will trumpet the improving employment picture at most as it ducks the real economic issues before the election. Perhaps the better political strategy, but awfully hard on those wanting and waiting for some action to help an economy that needs a lot of help.
CEO conference revealing.
CEO�s were candid. A very few said that business was picking up. Some said things were still getting worse for their sectors. Some others said that things were not getting worse, but they were not improving either. As noted, some in manufacturing (and a few outside of it but watching) said manufacturing was in a depression, not a recession. Over 2 years of contraction would lead rational minds to draw that conclusion.
Conseco�s CEO hit the nail on the head: at least half of the business investment and employment in the country comes from small business. However, even with low interest rates banks are not loaning the supposedly �easy money� and the CEO admonished that the banks needed to open up and loan the money. This shows the problems with the Fed�s rate cuts: not far enough ahead of the 2-year treasury to make it conducive to borrow, too many banks still on Fed restrictive status, and too many banks worried about the solvency of potential borrowers with the record number of bankruptcies. Money is not �easy,� and the money supply is currently contracting. Heck, even when banks should be cleaning up on low interest rates by shear volume they are suffering declining revenues and profits.
THE MARKET
Friday was a two-faced day. You had to look to see it, but there was the outward face (another failed rally attempt with high oversold indicators and ugly sector trashing) and the one behind the mask (very calm action despite all the gloom and selling). Which is the real face? You would be hard pressed and in the minority to say the action was positive. With the Nasdaq hitting a new low over 77% off of its all-time high and no immediate prospect of improving earnings as indicated by EMC et al, it is not hard to conclude the selling will continue.
Indeed downside targets were popping up with frequency all session as stocks of many different stripes were hammered. Financials were torched yet again, but Friday also saw some of the stronger stocks getting the wood put to them. Some of the safe haven health services stocks were pasted and the strong education stocks were given a lesson in bear market politics. The financials are often considered a necessary ingredient to a recovery. They were blitzed lower in July, one of the last holdouts. They recovered but the past three weeks have been unkind and the last few days downright ugly.
On the other side or face there was some curious action. The VIX was up intraday to its August high near 50. The TRIN, a.k.a., the Arm�s Index, jumped up to 4 intraday. At one point NYSE down volume outpaced up volume 10 to 1. Once again NYSE volume easily surpassed volume on the more speculative Nasdaq. All of these point to a very oversold condition and one would think they would have accompanied a frantic downside move. Thing is, traders on the floor said the action seemed as if coated in molasses. There was no panic, no frantic selling, just continued selling at the �normal� clip.
Those two faces make things a bit more interesting than it looked Friday. The S&P tapped below 800 intraday and then recovered to close at that level. Despite the continued waves of bad news it is holding on. The Dow made a new closing low for the year, but it held above its recent intraday low. The Nasdaq had broken to a new low for the year as it starts to break down from the short descending triangle. Will the S&P, the last major index to hold the line at the July lows, actually make that stand?
Again, you would be in the minority to think so, and given the current downtrend that hounds the market it would be foolish to bet on it. Friday did not answer the question as to what the large caps will do at this juncture; on the face the action did not look conducive to an upside resolution, but the S&P 500 and Dow have formed big double bottoms the past 2.5 months. They have not done that the entire bear market, and the action fits into the �perfect� scenario we laid out back in August: the rally up, the selling in September, the bottom in October. There is no good news out there and most everyone says the market is still going down. Even with that there was something under the surface Friday that did not fit the action. One trader we talked with said it felt like a coiled spring. In any event, Friday did not decide whether it was coiled to the upside or downside.
Thus what we continue to do is what we discussed Thursday: go with the current trends and sub-trends with existing positions while we watch whether the current trends and sub-trends hold or are broken. We will let the market tell us what it is going to do at this key inflection point and key our plays off of that.
Sentiment Indicators
VIX: 46.28; +1.32. 48.85 on the high, close to the August high but off the intraday spike on 7-24 to 56.74.
VXN: 60.28; +2.07. 61.77 intraday, right at the 62.50 highs in September. Nothing spectacular here, and that goes with the session overall despite the selling.
Put/Call Ratio (CBOE): 0.97; -0.07
Nasdaq
New 6 or so year closing low, sinking on lower volume and well below the NYSE volume.
Stats: -25.66 points (-2.2%) to close at 1139.9
Volume: 1.591B (-3.29%). Volume backed down closer to average on the continued selling, a trend of the last half of the week. There is no real dumping going on, just no one interested in stepping into the void to buy.
Up Volume: 279M (-151M)
Down Volume: 1.294B (+169M)
A/D and Hi/Lo: Decliners led 2.37 to 1. The A/D line was harsher today.
Previous Session: Decliners led 1.4 to 1
New Highs: 16 (-3)
New Lows: 365 (+96). Starting to ramp higher but still not as high as they were (over 400) at the July low. That means more Nasdaq stocks are trying to hold at the prior lows.
The Chart: (Click to view the chart)
Nasdaq undercut its recent low logging another multiyear low not seen since 1996. It is in its continuing downtrend that resumed on Wednesday when it could not take out the 10 day MVA and rolled over. It has broken down from the small descending triangle it formed, opening the door to further downside action. Now that it has cut to a new low, however, the typical action in the downtrend is for the index to rally back toward the 10 day MVA (1190.90).
S&P 500/NYSE
Rallied back if you can call it that to close at 800, just above the July closing low.
Stats: -18.37 points (-2.24%) to close at 800.58
NYSE Volume: 1.801B (+7.42%). Volume rose to the highest levels in over 2 months.
Up Volume: 260M (-302M)
Down Volume: 1.535B (+438M). 6 to 1 but it was 10 to 1 at one point.
A/D and Hi/Lo: Decliners led 2.95 to 1. The selling spread out.
Previous Session: Decliners led 1.38 to 1
New Highs: 39 (-35)
New Lows: 375 (+164). Getting a bit on the high side as more sectors broke down.
The Chart: (Click to view the chart)
The S&P managed to recover off the low (794.10) to close just above the July closing low (797.70). Small victory but it may turn out to be important. We went back and looked at some more trendlines, and there is the September 2000/January 2001 at 800 as well. That provides a bit more backbone to that level. The S&P holds the key to the market direction at this point.
Dow:
Stats: -188.79 points (-2.45%) to close at 7528.4
Volume: 1.801B (+7.42%)
Along with the Nasdaq the Dow notched a new closing low though it managed to hold above the recent intraday low water mark at 7460.78. The pattern is very similar to Nasdaq, breaking down from the short descending triangle. Dow suffered from several key components: MO, BA, IBM, UTX. This week we will see if it can hold up in the lower part of the range.
The Chart: (Click to view the chart)
THIS WEEK
Friday brought the market a step closer to a breakdown to a new lower leg in the bear market, but it did not push it over the edge. The market has set itself up for an October bottom pretty much along the lines we laid out back in August. As always when a turn comes things seem to be degenerating right at the critical point in a final shakeout.
This week the market should give an indication of the direction it will take next as it works off the S&P 500 low. There is not much reason to rally that is seen. There are 11 rate cuts still working their way into the system, a tax cut that had an early impact and still has some life in it, and a lot of government spending. Last week we listed some of the seemingly unsolvable problems confronting the economy in 1974 that the market was able to rally out from under. There are no fewer problems now, some similar, others very different. The CEO�s this week frequently mentioned the high cost of security today given the terror threat; in 1974 there was the sudden and unavoidable cost of environmental compliance that was a tremendous new economic burden. On top of that the cold war kept draining money from the economy as high tax rates and interest rates kept investment in the economy tepid. Today there are no high interest rates or inflation, but something more insidious lurks, i.e., deflation. The last thing we want to do is follow Japan. Steps have been taken, but more would help. Imagine how the market would respond if the Bush administration actually started discussing the need for more economic stimulus now instead of chiding Al Gore for bringing that issue to the table? The market would immediately improve given that it now appears the administration and the republicans are the obstacles to such action.
Regardless of the parallels of gloom, the double bottom that has formed, the lower volume test of that prior low, the �perfect� scenario, and all other possibilities, the key will be what the market shows us: to continue the trend or break the trend. Until then we are going to continue to play it conservative both ways. There is still the continued downtrend in place in the market and many sectors and a continued uptrend in some sectors. This weekend we are looking at plays both directions to be ready for what happens in the week ahead. After the selling we have seen we doubt the market will go into total meltdown. In the downtrend it has usually been rather orderly in the selling, falling to a new low and then rallying back up to resistance. Then it starts to sell again. It has sold rather hard, and after another move lower Monday for all or part of the day we expect it to make a rally attempt. From there it will either stall at resistance once more or make the move up out of the double bottom pattern for either a relief rally or a move that brings this part of the bear market to a close.
Support and Resistance
Nasdaq: Closed at 1139.90
- Resistance: The August down trendline at 1175. The July intraday low at 1192.42 and the 10 day MVA (1190.90). Then 1200 and the 18 day MVA (1216.28). 1230 and 1250 are price resistance points. 1270 is still more price resistance from the September lows. The March/May downtrend line at 1275 along with price resistance at 1300. The 50 day MVA (1285.43). 1316, an early August interim high. 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 1353. 1418, the interim test after the September low. That is followed by price resistance at 1500.
- 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 800.58
- Resistance: The first bottom channel line in the March downtrend (813). The 10 day MVA (830.68). The 18 day MVA (845.96). 850 to 855 (the October 1997 and Q2 1998 lows) have stopped the action before. The March downtrend line at 854. 875 is price resistance of some significance. The 50 day MVA (884.14). July and August interim highs at 911.64. The September 2000/May 2001 downtrend line at 915. The downtrend lines from the March and April highs (925). Price resistance at 950. 965, the September 2001 closing low.
- Support: Price support at 800, bolstered by the September 2000/January 2001 down trendline. The lowest channel line in the March downtrend channel (775). Then the July intraday 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 7528.40
- Resistance: The lowest bottom channel line of the March downtrend (7745). The 10 day MVA (7792.84). The 18 day MVA (7945.65). The August lows (8043) and the September 2001 intraday low (8062). The September closing low at 8235.81. 8250 acted as resistance before after acting as support. The March down trendline at 8210. The 50 day MVA (8334.34). 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, at some 1997 lows and highs.
Economic Calendar
10-7-02
- Consumer credit, August (2:00): $10.5B expected, $10.8B prior.
10-10-02
- Initial jobless claims (8:30): 415K expected, 417K prior.
- Wholesale inventories, August (10:00): 0.2% expected, 0.6% prior.
10-11-02
- Retail sales, September (8:30): -0.9% expected, 0.8% prior.
- Retail ex-auto (8:30): 0.2% expected, 0.4% prior.
- PPI, September (8:30): 0.2% expected, 0.0% prior.
- Core PPI (8:30): 0.1% expected, -0.1% prior.
- Michigan sentiment, prelim, October (9:45): 85.3 expected, 86.1 prior.
SUBSCRIBER QUESTIONS
Q: Where can I find the ranking of bullish advisors versus bearish advisors on a daily basis?
A: This is not available on a daily basis but is produced once each week. The information is compiled by Investors Intelligence and is released on Wednesday. You can find it in publications such as Investor�s Business Daily. |
