stock-channel.net - Das Finanzportal - InvestmentHouse Newsletter 16.10.00

Brigitte

17.10.2000, 11:07

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10/16/00 Investment House Daily
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Investment House Daily Subscribers:
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TONIGHT:
- Today may have disappointed the television faces, but not us.
- Quiet day on the street is something good after a massive Friday move.
- Leaders continue to surge ahead while old line tech drags the Nasdaq
down.
- Subscriber Questions
- Team Trades
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Today's action was great, but you would not have known it from the glum
faces on the tube.
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We heard it 20 times if we heard it once today: whining by some floor
trader or television face about the 'lack of follow through' today after
Friday's rally. Tom Costello on CNBC even said that some wanted at least
a one-point gain on the Nasdaq on the heels of Friday. As if a 1 point
gain would mean a thing to anybody with common sense. Don't let this talk
about 'follow through' throw you. What they call follow through is not
what we or the markets call follow through. These guys are not history
students of the market. They are trying to fulfill short-term desires
with an immediate follow through, whatever their definition of that phrase
is.
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What history tells us is clear: no major market move has ever occurred
without a true follow through, a.k.a., a confirmation day. That does not
occur the session after the rally day after the selling, or the one after
that, or even the next one. Looking at the past great reversals, the
strongest follow through occurs 4 to 7 days after the rally starts. That
means at the earliest we will be looking for confirmation on Wednesday.
And what is confirmation? Not a one-point gain. That would be a recipe
for doom. No, confirmation is a move of 1% (the very minimum; 1.5% or
more is better) on above average volume that is greater than the previous
session's volume. That shows the institutions have seen the rally start,
and are buying into the move. It does not guarantee that the rally will
continue, but without one, all rallies in the past have ultimately failed.
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Today was really solid if you are following the leaders.
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Given a real understanding of what follow through is, we can see that
today's grousing about the market action was misplaced. Indeed, the
market did just what it should do if it does not move up, i.e., pull back
on lower volume. What we have seen is the markets roll back over fast on
high volume after a rally day. If the Nasdaq demonstrates small point
losses or moves otherwise sideways for a few days on lower volume, that
can lead to an explosive move up on a follow through day. It does not
burn itself out too fast. This action simulates a stock consolidating or
forming a handle after a big move up as it readies to break out. We like
to see the market stay within itself as it readies for confirmation. In
that sense, today was not nearly as bad as the television made it out to
be.
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Further proof is in the leaders. Stocks such as JNPR, GLW, BRCD, SEBL,
EXTR, SUNW, NTAP, BEAS, ARBA, all in the Leaders portfolio, shot up again
on higher volume. Leaders are leading back up after the selling. They
hung tougher than the rest of the stocks, and they are the first to race
up.
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Is this a real rally? No one knows right now, but the leaders are
leading.
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As we said, we will know more later this week if we get confirmation of
Friday's move. Until then, we have to be cognizant that this could just
be another relief rally, oversold rally, bear rally whatever you want to
call it. The leaders are moving up on strong volume, but the patterns are
not traditional breakout patterns. However the fact that they have
remained so solid in the selloff only confirms that they will lead if this
is a turning point for the market. Indeed, they are leading the market,
at least those stocks that want to move higher, even if this is only a
relief bounce.
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THE MARKETS
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Overall market stats:
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VIX: 29.50; -1.48. Volatility continued to drop today even though the
markets were mixed. We have to note, however, that none of the indexes
moved much, even intraday. It was not a day of high volatility when
compared to the 100-plus point swings we have regularly seen in the past
few weeks. Thus, the contraction of the VIX on such a quiet day is not
out of the norm. Indeed, we could have a great rally that brings the VIX
all the way back below 20. That is what rallies do. What we need to see
now is if we will get such a move, again watching for confirmation. The
VIX spiked and showed us a turning point; it did its job. Now we need to
see if the market can make a real rally out of this.
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Put/Call ratio: 0.64; -0.12. Put buyers continued to give up today as the
leaders rallied and there was no selling pressure. Last Thursday's move
into the 90 percent range was as high as anytime this year, and it may be
enough. It was obviously enough to turn off of the lows, but as we have
said, now it is up to investors and institutions to step up starting
Wednesday to drive this thing higher.
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Remember: these are secondary indicators that we use to confirm moves.
They are not leading indicators. They can be wrong as sentiment is an
ethereal concept.
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NASDAQ: After Friday second largest percentage gain every (and it missed
the highest by 0.10%), today was a calm day. The talk centered around
INTC getting another two downgrades the day before its numbers come out,
as well as the other old line techs (MSFT, CSCO, DELL, ORCL) that were
down on the day. CSCO, DELL and ORCL, however, all traded marginally down
on much lower volume. Sure they pulled back, but after Friday's moves
(over $4 on DELL), a little softness could be expected. The big news in
our minds is that the Nasdaq pulled back on lighter volume while the
leaders powered ahead on strong volume. That is good price/volume action
after a huge rally and while we wait to see if we are going to get
confirmation.
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Stats: Down 26.49 points (-0.8%) to close at 3290.28.
Volume: 1.788 billion shares (-13.5%), a significant drop over Friday's
rally volume that was just 1.8% less then Thursday's selling volume. Down
volume still topped up volume, however, 934 million to 810 million shares
to the upside. Still, given that it was a down day with the big names
being hit, this was really a good volume ratio. Much better than the 2 to
1 and higher down to up volume ratio we have seen on selling.
A/D and Hi/Lo: Decliners nipped advancers 2067 to 1936; much closer.
Again, on a confirmation day or resumption of the move up, we look for the
A/D line to be 2 to 1 or 3 to 1. If it does not get there, that is
another sign the rally is weak. New highs almost doubled from Friday's
21, coming in at 40. New lows fell to 185 versus Friday's 323. It is
trying to look more like a rally is forming up.
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The Chart: http://www.investmenthouse.com/ch/nasdaq.html
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Overall the day was a loss on low volume, as the Nasdaq turned back from
its 10 day moving average at 3350. It finished well off of its session
low (3262.37) as well as its session high (3339.85). Intraday, the Nasdaq
made a triple top, the first two in the first hour of trading that sent
the index to its session lows. From there it rebounded and climbed all
day back up to the morning high, where it rolled over in the last hour and
one-half.
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The weakness at the 10 day moving average reflected the lower volume on
the session and the selling of heavily weighted issues such as INTC and
MSFT. As we stated, we can live with that for now, but we need to see the
right price/volume action as we move toward Wednesday. We do not want to
see the index start sliding back on rising selling volume. The selling
was fairly well contained