InvestmentHouse Newsletter 26.10.00

[reg]

[Brigitte]

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10/26/00 Investment House Daily
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Investment House Daily Subscribers:
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TONIGHT:
- Another test of the 3000 level, another reversal. These 'reversals' are
occurring once a week; eventually one will stick, but for now they are
just showing us that 3000 is support and 3500 is resistance.
- Leaders are shot a few more times today; the intraday reversal helped,
but we are not sure it was the cure.
- JDSU ignites after hours rally with strong earnings and raised
expectations for future earnings per share.
- Wage costs lower than expected. Some say that means the Fed won't raise
rates; we say it means the Fed can lower with more peace of mind.
- Team Trades
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Let's see, that's 4 reversals to the upside in twelve sessions. Must be
another bottom.
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It was downright ugly in the morning. Sure the Nasdaq was trying to move
up with the old line tech stocks such as MSFT, CSCO, DELL, ORCL, and INTC
a point or so higher. But the market leaders (e.g., JNPR, BRCD, AMCC)
were getting annihilated. The market was up, but they were getting
hammered. When things turned negative, it was downtright brutal. BRCD
down 50; JNPR down 36; AMCC down 27. For one session, that is about as
ugly as it gets without any specific, negative news about a company.
Indeed, AMCC and JNPR blew out earnings as they previously announced, and
BRCD said it is on track for blowout numbers itself. No, this was just a
continuation of Wednesday's bloodletting as the latecomers got their
whacks in on the leaders as well.
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Mid-afternoon the Nasdaq touched down at 3081.36 and then reversed with a
vengeance. It started up and never stopped until the closing bell, a mere
190.82 point reversal and a positive finish. As is usual with reversals,
volume was higher than the day before good price/volume action on an up
day.
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What does this mean today? Technically, as the Nasdaq never undercut last
Wednesday's reversal low (3026.11), so the rally that started that day is
still alive. That means today's 1.3% gain on the Nasdaq coupled with its
rising volume is a confirmation day. But we have to doubt the strength in
that it sold back on heavy volume just Wednesday, and that is not what
strong rallies are made of. Specifically, the institutions were selling
on Wednesday, and the fundamental logic behind confirmation days is that
institutions have bought into the rally and are ready to buy more. If
they are still selling right after a rally starts, that indicates money
managers are still undecided. Moreover, the A/D line is not the stuff of
great rallies (declines led advancers today by a slim margin). Thus, in a
practical sense we are left with about what we had last week when the
market reversed with one new wrinkle: the leaders have been the object of
investor ire. That is another stone on the side of a found bottom on the
scale of the markets. Again, however, as we noted last night, bottoms do
not equal automatic rallies.
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Earnings are 'good' again.
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After hours JDSU unleashed its much anticipated third quarter earnings.
They were always important, but the NT debacle focused every spotlight on
the company. It, of course, showed the NT problems to be NT problems, as
it beat the street by 2 cents and grew revenues a mere 242%. Even better,
the company raised its own EPS estimates 2 to 3 cents for the next
quarter, and to 80 cents from 70 cents for the next year. Wow. That is
huge. We now see JDSU, SDLI, AMCC, and JNPR all crushed earnings. NT
missed a one part of one section of its numbers. All of the above lost at
least 25% of their values in one session, and were doing the same today
before the reversal. You can stack up 12 good earnings reports from the
same sector, and if one company then misses in the slightest way, they all
get crushed. Investors always, always overreact. All of the above stocks
and more were up sharply after hours; not as much as they were down
Tuesday night, but showing strength.
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Up or down?
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This may give us another rally toward the 3500 level. Quick to the
downside to test the bottom of the range, and then quick back up to test
the top of the range. The market has not shown the strength indicative of
a reversal that will take it up over resistance. Moreover, we have the
prospect of a GDP in the morning that can test our resolve; The Fed's
McTeer gave us a warning shot, and our research indicates a possible 2.9%
growth number at the low end. That kind of number would shock investors;
the realization that the economy was falling much faster than anticipated
with even more slowing to come would do nothing for raising the value of
stocks over the short term until the Fed actually took action or said it
was going to do so.
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THE MARKETS
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Overall market stats:
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VIX: 31.05; +1.16. Intraday the VIX was back up to 34, well into
reversal range. Indeed, the markets did reverse just as the VIX hit its
high (as it should). Again we have volatility hitting the level of
reversals, giving us another turn off bottom. Looks as if 3000 is very
salty right now, but as fast as the Nasdaq bounces, the tethers from this
level pull it back.
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Put/Call ratio: 0.65; +0.07. Put buyers grew in strength, but the close
was not high enough to give us another confirmation that fear was at the
level to send the markets higher. It just showed us that, again, 3000 was
trying to act as a bottom.
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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: Ugly in the morning even as the old line techs rose; the leaders
were being bludgeoned once again. Once it broke under 3100, however, it
was ready to reverse again, this time managing a positive close unlike the
last reversal. That is a much better sign as it showed buying all the way
up to the close. If you recall, last Wednesday the index rallied
positive, but then gave that part of the rally back in the last half hour.
Things keep looking better (e.g., leaders being hit finally, rallying to
the close on the reversal), but they are not overwhelming. It just has
not shown us it is going to break out of the range. This may be the time
it does, and if so, it will let us know by showing us the right
price/volume action, the right A/D line, and leaders breaking out of good
bases. The fact that there are not many of those good bases and there are
lingering earnings worries casts doubt over any move. Still, that does
not mean we cannot play the move, as a rally back to 3500 is certainly
tradable.
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Stats: Up 42.61 points (1.3%) to close at 3272.18.
Volume: 2.294 billion shares (+5.76%) as the index reversed off its lows.
Up volume managed a slight lead, 1.199 billion to 1.033 billion shares.
A/D and Hi/Lo: Decliners edge advancers 1987 to 1918. New highs fell to
32 versus 207 new lows.
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The Chart: http://www.investmenthouse.com/ch/nasdaq.html
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A touch below 3100 again (3081 on the low) sent the index back up,
clearing the April intraday low (3227.04) in the process. From positive
in the morning to a breakneck drop to a powerful recovery. This market
has certainly helped Dramamine sales. The Nasdaq now faces some
resistance at 3350 should we get an acceptable GDP report that shows
strong productivity and is above 3% overall. It is by no means out of the
woods as the same problems of earnings worries based on economic slowdown
have not gone away.
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Dow/NYSE: The Dow was positive at the outset, but the drag was too great
as the Nasdaq folded. MSFT, INTC, and IBM had been up early, but they
were sold when the Nasdaq was really hammered.