The markets rallied slightly from their oversold conditions but came to a stop exactly on critical technical levels. The rally came on rumors that UBL had been captured or killed. While just a rumor the shorts did not want to hold positions over the weekend and be faced with a patriotic bounce at the open on Monday should the rumor be found true. After the close a defense dept briefing was held and the rumor proved to be untrue.
Other than the rumor bounce it was a very slow day. You can tell just how slow when the three biggest news stories were on McDonalds, Home Depot and GE. Not normally news drivers they shared the spotlight as traders struggled to maintain interest a week before Christmas.
McDonalds said they were on track in their recovery program but they would come in at the low end of estimates and a penny below consensus. The European business was recovering from the mad cow scare but the Japanese unit was now suffering the same fate after three cows have tested positive since September. Weak Asia/Pacific economies were also weighing on their business. Still on a slow news day McDonalds "soared" +1.16 or +4.5% on the announcement. Are you excited yet?
Home Depot "rocketed" +1.81 on news that holiday shoppers were spending money on home improvement items and stores were seeing heavier traffic even though normal holiday retailers were facing slowdowns. I know this is exciting stuff but please try to control yourself while I wade through this market moving news. It appears Lowes and Home Depot actually added some merchandise that would appeal to shoppers as impulse gifts such as coffee makers, crock pots, home electronics and Christmas lights. Wow! A major marketing breakthrough! Stock what people will buy, I wonder if it will catch on in the entire retail sector? This novel approach to retailing caused HD to post the biggest gain of any Dow component. I told you this was an exciting news day!
I hope your sitting down because you may need a drink after this next paragraph. At least that is what the liquor industry hopes. GE component NBC opened the spigot on allowing advertisements for hard liquor on national television. The decades old informal prohibition will come to an end with a spot for Smirnoff vodka which will air on Saturday Night Live. The advertising market has gotten so bad that it appears past taboos may become prime time gluts. Once the door is opened to liquor ads all the major brands will have to ratchet up their campaigns and throw massive amounts of money at the major networks. The change in status could provide a replacement for the tobacco ad revenue which disappeared many years ago. GE "spiked" the markets with a +.60 gain.
I told you it was slow. Even the economic news was dull and uninspiring. The Industrial Production number came in at -0.3% which was much better than the -0.6% decline that was expected. Still it was the thirteenth month of decline in the last fourteen months. Capacity utilization fell to 74.7% and the lowest level since 1983. The good news was that five of the twenty industries that make up the manufacturing component showed gains and new orders are beginning to show signs of improvement. This indicates that growth over the next two months will likely remain negative but it is starting to get better.
Business inventories fell -1.4% which was twice the consensus and the inventory-to-sales ratio fell to 1.39, the lowest level since June 2000. Many analysts believe the inventory correction is becoming so overdone that the rebound off the bottom will be very strong. Once inventory reaches maintenance levels orders will have to be processed to maintain those levels and not slip into shortage territory. Once this maintenance level is reached and manufacturing stabilizes then analysts will feel more comfortable about predicting future trends.
The Consumer Price Index continued to gyrate and posted a flat month when analysts had expected a drop. The Fed was expecting more drops in inflation and the zero change in the rate was probably a shock. One month does not make a trend but any resiliency in the core price inflation will undermine support for further rate cuts. Of course there are not many rate cuts left in the Fed's arsenal anyway. What could happen would be a rush to take back those rate cuts if the inflation monster starts to shadow us again. The calendar for next week is very light with the only major report being the 3Q GDP on Friday. Friday is triple witching option expiration day and coupled with all the year end portfolio shuffle the volatility could be dramatic.
The biggest problem we will face next week is not the economic calendar but the tax selling calendar. Most funds will want to be done before the holidays which means we could see more selling before Santa arrives. The bounce at the close on Friday was simply short covering in case the Eastern Alliance serves up a well known turban on a platter for U.S. troops. The major indexes rose up to rest exactly on support, now resistance, of 9800 (9811) 1950 (1953) and 1125 (1123). You probably recognize those numbers as my entry- exit points from the last two weeks. Could that many traders really be reading my material? Just kidding. I obviously did not pull those numbers out of my hat since they have now become something of a battle ground between the bulls/bears. Since the indexes came to a stop exactly on the edge of a breakout/breakdown we need to look a little closer at the market movers to decide what direction next week might take. To do this we can look at all the Dow stocks to see which are likely to go up or down.
Dow 30 Stocks
The bottom line from all the Dow analysis above is that there are 17 down trending stocks, 7 up trending and 6 flat. The difference between current prices and support on the down stocks totals slightly more than $22.50. Using an average weighting of seven to get Dow points you arrive at a downward risk of -157.50. That would put us at 9656 but it also does not take into account the up trending stocks. The stocks moving up have a total of $7 between them and resistance which equates to +49 Dow points. You cannot draw any specific point conclusions since on any given day some stocks will be up and some down.
The conclusion you can draw is that the Dow is heavy. That means that it will require more effort to produce a rally than it will to cause a drop. With down trending stocks outweighing stocks moving up by better than a 2:1 margin the odds are better for another drop or at least no major gains. This analysis is only good for a couple days since the internals for each Dow stock will change daily based on hundreds of factors.
The top Nasdaq stocks breakdown like this. I added the
percent of the Nasdaq for each stock.
Notice anything? With 42% of the Nasdaq represented in the eleven stocks above, there are zero stocks trending up. With the exception of QCOM however there is only $6 between their current prices and support. While there are no winners there are no losers either other than possibly QCOM. This means that the Nasdaq is stronger than the Dow and could wage a tough battle here at 1950 before giving up ground.
The low prices, and I am not talking about PE ratios, of the stocks on the Nasdaq compared to where they started 2001 could draw more tax sellers. HOWEVER, since the techs always lead the market out of bottoms there is likely to be a lot of buyers as well. These buyers, $4.5 trillion in cash on the sidelines, have been waiting for a sign and a failure to fall any further next week after posting huge gains since the attack could be that sign.
That sign may not be seen on Monday/Tuesday. After doing the Dow/Nasdaq analysis above I went back and scanned my top 1000 stock charts. It was not a pretty picture. Many, and I repeat many, of the stocks were completely broken down. Many had fallen to support and were showing signs of failure. Chemical stocks, networking, chips, materials, banks, there were very few leaders. This appears to be a case of the soldiers getting crushed while the generals are struggling to hold the high ground. If the trend spreads next week that sign of end of year strength I spoke of above will only be wishful thinking. It is entirely possible we could see another washout drop if earnings warnings pick up speed before the holidays. In my opinion that would be the best scenario. Clear the desks, take profits, close the tax books and let the next bull market begin.
Everyone knows we are in a recession. Old news! Everyone knows that a recovery will likely appear in the second half of 2002, give or take a quarter. Our task is to avoid losing money while waiting for the next move up to begin. This is really a very easy task. Instead of wondering each day if this is the day, we only need to watch the technical entry points. We do not need to worry if there will be tax selling. Or about the possibility of a Santa Claus rally or even when the January Effect really appears. We only need to worry about our planned entry point.
Our job became only slightly more difficult on Friday as the markets came to rest exactly on those entry/exit points. Some of us went long when the markets rallied over the entry points on the Laden rumor and then saw those indexes fall right back to the entry point at the close. We should not agonize over this and simply keep to the plan. If we dip below those levels next week then simply go flat and wait for the numbers to be crossed again. The numbers I am referring to are Dow 9800, Nasdaq 1950 and S&P-1125. Stay flat below them and go long above them. So simple it is scary!
Enter Very Passively, Exit Aggressively!
I am really happy to announce this years annual renewal special. We spent considerable time and effort deciding what would be something traders could actually use instead of something to collect dust. Each of the editors was tasked to produce an investor guide covering the topics that our readers have requested most. We spent hundreds of hours compiling these five special investor guides to help our readers be better investors. Each is done with full color charts and graphs and is something you can refer back to for years to come.
Winning Option Strategies - By Jim Brown
Over 200 pages of strategies from simple calls and puts to spreads, straddles, naked puts, combination plays, leaps etc. Each strategy is explained in detail and then followed with real life applications of how to profit from each one. Jim teaches entry points, market cycles and general trading psychology as well as money management and money saving tips for dealing with your broker when errors occur.
Swing Trading For Success - Austin Passamonte
A descriptive outline providing simple guidelines that allow you to identify current market direction and profit from the high-odds price swings that occur within.
The secret of swing trading is exposed: Identify underlying price direction and wait for brief market moves counter to that trend. Enter short-term trades at key points where price action is poised to snap back with the trend and enjoy a large percentage of winning trades!
This guide has been written as only Austin can and is full of real tips and profitable trading knowledge. Lots of full color charts enhance the readers understanding.
Point-and-Figure Charting - Jeff Bailey
In this trading guide, Jeff Bailey reveals the secrets to interpreting those intriguing supply and demand charts characterized by columns of X's and O's - Point & Figure charts.
If you have never used Point-&-Figure charts in your investment analysis you're missing a vital clue that institutional traders have been using for years.
Jeff illustrates the basic interpretations for beginners while also discussing more advanced concepts like the bullish percent for advanced traders. Those readers who have seen the power in Jeff's point-and-figure charts can now understand and profit from this powerful charting method. Real winning tips from our point-and-figure pro.
Technical Analysis Explained - Eric Utley
There are myriad technical analysis tools for today's trader. Eric has sorted through the choices and found a mix that provides traders with a solid foundation for observing and operating in the market.
Long-time subscribers of Option Investor have seen tools such as Fibonacci retracement brackets used by Eric Utley and Bollinger bands used by our Leaps Editor, Mark Phillips. This manual details the aforementioned indicators and others used by the Option Investor staff. Within the manual, subscribers will discover the philosophy, integration, and application of many of the most effective technical analysis tools used by the professionals. For the first time, the tools used by the Option Investor staff will be made available in a resource that will enrich and educate its readers.
2002 Mutual Fund Guide - Steve Wagner
Our 2002 Mutual Fund Guide has everything you need to know about mutual funds. It covers the basics of mutual funds, such as what they are, how they work and are traded, as well as the different types and objectives of mutual funds. The guide also offers our top fund choices in eight broad investment objectives for 2002 and beyond. We provide an unbiased perspective on fund performance, risks and costs, speaking in terms you can understand and use.
As of May 2001, 93 million individuals, representing 52 percent of all U.S. households, owned mutual funds. Whether you are an experienced mutual fund investor or new to mutual funds, you'll find something of value in our 2002 Mutual Fund Guide.
Aggressive, conservative or income producing, there are funds for everyone. Where should your retirement savings be? Not in options we hope!
2002 Options Expiration Calendar Mousepads
You will get two of these handy mousepads with the 2002 options expirations dates including a reference of month and strike price codes. These are very popular and this will be our fourth year of providing these to our readers. You get two, one for home and one for your office. This way you will never be scrambling for that date of code.
This may be our best annual renewal special yet. Don't miss out on this offer.
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