InvestmentHouse Weekend Market Summary
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10/11/02
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investmenthouse.com
TONIGHT:
- Second day of rallying spreads out a bit more.
- Economic news not any better but market ignores it ala 1974.
- Indexes blow past 18 day MVA resistance on lower volume, but it is too early for claimed �follow through.�
- Team Trades.
Market scores first up week in six with back-to-back gains.
Friday was a day of positives and negatives. The market rallied again, this time moving past near term resistance with more breadth, and it overlooked bad news in doing so. Those are bullish characteristics. Disappointing was the poor NYSE volume and the failure of many stocks to rise on rising volume. There were other pros and cons to discuss, but those sum it up. All in all it was nothing to scoff at as many were ready to do, but it was also not the grand day others were calling it. Suffice it to say that Friday did nothing to take away from Thursday�s reversal and rally higher as we wait to see if it can deliver a real follow through session, and that is something the market has not been able to do in a long time.
THE ECONOMY
The market did not get any help from the economic news but rallied in spite of it. As we have pointed out in the recent weeks, in the bottom of the 1974 bear market the economic news was horrid but in a really ugly way with many parallels (and some important distinctions) to the current economic conditions. When all seemed the worst and getting worse the market found a bottom. We cannot say that this week was the bottom because we need to see if there is real follow through next week to this short covering that started this rally. What we can say is that the market stared down the barrel of some really pathetic economic news the past few weeks and has started to rally. All the bears could do was cause a 7-point breach of the S&P 500 July intraday low for about 7 minutes even with the help of some of the lamest economic numbers in a decade, the threat of war, rising terrorism costs, etc. In a grisly way that is a positive.
Retail sales sag 1.2%.
They were down just as expected. Slice out autos and they were up 0.1%. That seemed to help some even though August was lowered to +0.6% from 0.8%. Following Thursday�s same store sales reports and Kohl�s (KSS) sales drop for the first time in 1.5 years, the lack of a nastier surprise was a relief. It does show how the consumer has slowed down with spending growing even less than it did in September 2001. Still, this is a slower time of the year but it will take some improvement in the market to get consumers revving back up.
Michigan Sentiment plunges 5.7%.
The preliminary number showed a continuing drop in sentiment, the fourth straight slide in the Michigan numbers. 80.4 actual for October versus 85.2 expected and 86.1 in September. That shoved the market back for 15 minutes, but it bounced right back. Future expectations were crappy at 72.4 (79.9 September); some say this has a correlation on consumer spending. It can if it gets low enough, and this is getting closer. It will be interesting to see where the Conference Board�s numbers come in two weeks from now; they have been holding in the 90�s as far as expectations, and in past recessions things did not get dicey for the consumer until they were well into the 70�s. Indeed in those recessions future expectations were in the fifties. Helps put it all in perspective other than just the headline.
Producer Prices post a modest 0.1% rise.
Both the overall and core PPI were up 0.1% as inflation remains under control. As we have pointed out in the past, however, inflation cannot be the real concern. Core prices year over year fell 0.4%. We have discussed how tanking bond yields and stock prices coupled with lack of pricing power as signs of deflation. When prices fall year over year when it is not being driven by productivity gains that is a concern. It shows that producers are lowering prices in an attempt to sell product, but that continues to pressure profits. Lower profits mean lower stock prices and the cycle continues. Now some of the reductions have been from continued productivity increases (less are doing more given the layoffs the past two years), but not all. Great care needs to be taken by our leaders.
THE MARKET
Everyone was ready to call Thursday and Friday either a bottom and follow through or just another bear market rally that should be used to sell into. It certainly looks like the latter as it is acting just as it has all during the downtrend, yet there are characteristics that also raise the possibility that this could be a significant bottom. Either way it is too early to tell; starting Tuesday through Friday there needs to be another (preferably more than one) big gain on breadth of at least 2.5:1 and very strong rising volume. That is a characteristic of all serious rallies after the first short covering moves (Thursday and Friday) have taken place. The longer term buyers need to come in after the shorts have covered and take the baton.
The positives.
Breadth improved on the move after the poor showing when the rally started Thursday. Thursday was very narrow following a -6:1 NYSE drubbing Wednesday. That is indicative of the short covering. Friday saw NYSE breadth at 3.58:1 (4:1 at one point); that is indicative that there was some actual buying ongoing as it was just not the shorts covering up the big name stocks they had been selling.
The market also shook off bad news what with the poor economic reports, Lucent laying off 10,000 and the like. The ability to rally in the face of bad news is a characteristic of a stronger market. Indeed, the news has been bad for the past several weeks, and though the market was selling off, the volume was much lower than during the July selloff. It was not plunging to new lows on volume even as the news grew worse.
Certainty regarding the war also helped. There has been a lot of talk about what will happen; UN sanctions, immediate invasion, a coup, or even if Congress would support the effort. Thursday the House overwhelmingly passed a resolution supporting the President�s wishes and key democratic senators agreed that the changes were what were needed. The President now can take the appropriate actions to deal with regime change in Iraq; that seemed to give some certainty on that front.
There are others. Sentiment indicators hit some extreme levels even as no one seemed to care. Not all stocks were taken out and shot on this last round of selling. In short, the test of the S&P 500 low was quite tame even though gloom and anxiety rose as no one seemed to care.
The negatives.
Volume was mixed with the Nasdaq rising on increased volume but NYSE volume backed off, failing to show another strong session. You prefer to see gains on rising volume. Still, the volume remained strong after a very powerful move Thursday, and it is too early for a follow through at this point. What would have been worse would have been an immediate reversal on stronger volume.
Many stocks moved up Friday on lower volume, some without even strong volume on Thursday�s move up. The financial stocks were a continued disappointment as many tested up to near resistance Friday and could not pass through as volume backed well off on the move. Without the financials it is hard for the market to sustain moves; not impossible, but the financials tend to broadcast economic recovery and many of these stocks are in fairly wretched patterns.
There is also a dearth of stocks in good patterns. The market needs leadership to make sustained moves on the backs of stocks with growing earnings and sales that have been under accumulation. As seen on the reports, there are stocks that fit this criteria in their good patterns (more broke out Friday), but there are not dozens and dozens of them. There are many, many stocks that have jerked up and down. Some have formed double bottoms, a pattern that can result in sustained upside moves, but not many of the strong cup with handles that demonstrate an orderly weeding out of sellers. Lack of leadership has killed off all rally attempts in the bear market. Health services are decent as a group, but most of the remaining solid patterns are scattered among many different sectors. Good patterns can form after a follow through, but it would be very nice to have a slew ready to make moves. After such selling and poor expectations, however, there are not many to pick up the torch immediately.
Sentiment Indicators
As stated Thursday, the sentiment indicators had hit levels that set the foundation for a bottom for either a significant bottom or the bottom. The market has started the move and now it needs to follow it up this coming week.
VIX: 43.44; -2.85
VXN: 58.87; -3.95
Put/Call Ratio (CBOE): 0.93; -0.04. Still quite high considering the strong gains the past two sessions.
Nasdaq
Cleared the 18 day MVA on stronger volume, holding onto most of the gains and recovering from the selling attempt in the last two hours.
Stats: +47.10 points (+4.05%) to close at 1210.47. A second huge gain.
Volume: 1.92B (+4.23%). A continued increase in volume.
Up Volume: 1.522B (-49M)
Down Volume: 344M (+102M). Strong but not blowout at 4.4 to 1. On a follow through 10 to 1 would be solid.
A/D and Hi/Lo: Advancers led 2.21 to 1. Much broader move indicating a bit more than just short covering as on Thursday.
Previous Session: Advancers led 1.58 to 1
New Highs: 21 (+6)
New Lows: 165 (-248)
The Chart: (Click to view the chart)
The Nasdaq cleared the 10 and 18 day MVA (1188.97) though it got a bit dicey in the last two hours as some profits were taken after two strong rally sessions. Buyers stepped back in during the last half hour and pushed the index handily above the 18 day. After a stronger downtrend the ability to move past this first line of resistance is an important move but not definitive. It is still just the start of a rally attempt though it is gaining strength over the two sessions. Most likely there will be some profit taking early in the week as seen in the last two hours Friday. A pullback early in the week would be very good action for the market provided it is on lower volume. It needs a breather before attempting a follow through session Tuesday through Friday. A few sessions of lateral or slightly lower trade on lighter volume would give the sellers a chance to take some profits and give the index a rest before a follow through session. In early August the Nasdaq came back three session after rallying sharply off the July low, volume fading all the way. That set up the August rally. Nasdaq will have to clear out those remaining sellers one more time before the follow through. At least that is the usual scenario; if it is strong enough it may just keep going, but that is highly unlikely.
S&P 500/NYSE
Rallied over the 10 and 18 day MVA as well, tapping the March downtrend on the high.
Stats: +31.4 points (+3.91%) to close at 835.32
NYSE Volume: 1.848B (-8.66%). Could not bring home the rising volume. Volume was strong still relative to the prior three weeks.
Up Volume: 1.652B (+3M)
Down Volume: 192M (-202M). Impressive 8.6:1 up over down ratio. With any luck that will be just a prelude to what it shows on a follow through.
A/D and Hi/Lo: Advancers led 3.58 to 1. Very impressive. This is the caliber you want to see on the follow through.
Previous Session: Advancers led 1.64 to 1
New Highs: 21 (+3)
New Lows: 74 (-495). That is a plunge in lows.
The Chart: (Click to view the chart)
The large caps continued the move ignited by the brief undercut of the July low on Thursday. Volume faded as noted, but it was not a huge drop; it remained stronger than all but two sessions the prior month. After such a powerful reversal Thursday you could expect volume to back off a bit. On the high (843.27) the SP500 tapped the March down trendline and pulled back some to close. Actually it pulled back right to the 18 day MVA (827.38) before rebounding in the last half hour to push well above that level. There is not only the March down trendline but also price resistance at 850 and then the 50 day MVA (869.03) that would block this move without a serious follow through. As with the Nasdaq, after such a strong move the immediate resistance will most likely give profit takers and sellers the point to unload shares. We expect some softness early in the week. Needs to be orderly and on lower volume.
Dow:
Stats: +316.34 points (+4.2%) to close at 7850.29
Volume: 1.848B (-8.66%)
Cleared a lot of near term resistance (10 and 18 day MVA) in one bound. 8000 is significant price resistance from the August low and late September high. At that point if not before the Dow will undergo some profit taking after such a strong move as the other indexes. Same story; needs to be orderly and on some lighter volume and then set up a follow through later in the week.
The Chart: (Click to view the chart)
THIS WEEK
No real economic news until Wednesday with business inventories. It gets pretty heavy after that but the real focus for the week will be on earnings that really pick up the pace this week. Thus far positive preannouncements are running well above same time last year. It is still hard to draw any conclusions on earnings given the easy comparisons from last year; it will all come down once again to what companies say about the current quarter.
Some CEO�s at the recent conference said things were improving while many said they were not; not getting a lot worse, but not improving. For the millions of folks who lost there retirements, a delayed or slow recovery is like no recovery. But I digress. The first earnings reports that are positive get the red carpet treatment. Then investors start looking deeper to see if there is substance. YHOO got the red carpet; others this week will as well. Again what the companies say will be the key and it could coincide with a pullback when stocks are ready to start to run back up after some early weakness.
As noted, many stocks were back up Friday after nervous breakdowns earlier in the week. Volumes varied, however. Many were up on lower volume as they climbed toward resistance. The setups to the downside are very enticing, as much as some of the solid upside moves in the good patterns. Several downside plays rallied Friday but on lower volume and could not take out near resistance. We have found many patterns that can give a quick downside move early in the week if some early August action (light volume though price-heavy selling) recurs. We are going to be making some of those plays if they give us the entry, knowing that the market could turn back up after 2, maybe 3 days of pulling back before the possible follow through.
A pullback will also give some of those stocks that jumped up fast and hard late last week the chance to come back some and test the moves for another entry point; there is not just one time to buy a stock. Also, there is this notion that if you do not get into the market during the very first part of a rally you are going to miss out. If there is a real rally, quality stocks will break out and give big runs out of good bases. Those are where the big returns are as opposed to a few percent on the indexes. If the rally works, these stocks will lead and really run. If the rally does not work we protect the downside with loss rules and we always keep an eye on where the market turns (at established resistance?) and how severely.
Remember, while the indexes broke the 18 day MVA, they are still in their downtrends and can run to the 50 day MVA and still be in a classic bear market rally. Clearing the 18 day MVA simply means that they had sold hard and were ready for a higher rebound. There are other aspects that make the possibility of a serious bottom more of a reality, but the final element is the follow through and breakouts that hold and run. There are still many negatives to overcome in this post-boom bust and we have to stay alert.
Support and Resistance
Nasdaq: Closed at 1210.47
- Resistance: The March/May downtrend line at 1242. The 50 day MVA (1260.71). 1291 to 1316, an early August interim high. 1357.09, the October 1998 bear market low. There is another downtrend line from the March and May highs at 1335. 1418, the interim test after the September 2001 low, and 1426 the August high.
- Support: 1200 (August closing low) to the July intraday low at 1192.42. The 18 day MVA (1188.97). The 10 day MVA (1169.05). 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 835.32
- Resistance: The first March down trendline 842. 850 to 855 (the October 1997 and Q2 1998 lows). The 50 day MVA (869.03). 875 is price resistance of some significance. July, August and September interim highs at 911. The September 2000/May 2001 downtrend line at 910. The downtrend lines from the March and April highs (916). Price resistance at 950. 965, the September 2001 closing low along with the August 2002 high.
- Support: The 18 day MVA (827.38). The 10 day MVA (814.08). Prior closing lows and highs at 800 from July and October. The first bottom channel line in the March downtrend (803). The September 2000/January 2001 down trendline at 790. The July intraday low at 775.68. The lowest channel line in the March downtrend channel (761). 750 to 760 with an intraday touch to 730.
Dow: Closed at 7850.29
- Resistance: 8000 (August low at 8043; September 2001 intraday low at 8062). The 50 day MVA (8187.53). 8250 acted as resistance before and is coincident with the second March down trendline. 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.
- Support: The 18 day MVA (7772.51). The 10 day MVA (7643.96). The August down trendline at 7590. The lowest bottom channel line of the March downtrend (7575). 7100, the March 1997 tops. 6975 is next.
Economic Calendar
10-16-02
- Business inventories, August (8:30): 0.2% expected, 0.4% prior.
10-17-02
- Housing starts, September (8:30): 1.636M expected, 1.609M prior.
- Building permits, September (8:30): 1.670M expected, 1.666M prior.
- Initial jobless claims (8:30): 384K prior.
- Industrial production, September (9:15): 0.1% expected, -0.3% prior.
- Capacity utilization, September (9:15): 76.0% expected, 76.0% prior.
- Philly Fed, October (12:00): 2.0 expected, 2.3 prior.
10-18-02
- Trade balance, August (8:30): -$35.2B expected, -$34.6B prior.
- CPI, September (8:30): 0.2% expected, 0.3% prior.
- Core CPI (8:30): 0.2% expected, 0.3% prior.
TEAM TRADES
QCOM: One of those banged up techs, but QCOM had been moving laterally and in a slight ascending triangle for 3 months, not working in a steady downtrend. More of a �building� pattern off the bottom of its base. We were looking for a move over the high in the pattern at 30, and Friday it gapped over that level and did not really look back. Waited for a pullback, got a slight one and then it started back up, moving over the session high at 31. We were looking at a quick play on this one and particularly looking at options. The January 27.50 options were 6.30 by 6.50 by the time we had issued everything and got back to the option screen. We jumped in just to see it turn back; the pullback we really wanted. Then it moved up from 30.80, rallying to 31.80 before it turned back down to again test 30.80 once again before another moved up toward the close but off the high. It was that kind of session. Playing gaps are difficult; we prefer to have a �normal� session where the index starts slightly softer and moves up. QCOM will probably give us another entry point early this week, and we will look at augmenting the position on a lower volume test as the stock has �pop.� |
