InvestmentHouse Newsletter 31.10.00

[reg]

[Brigitte]

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10/31/00 Investment House Daily
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Investment House Daily Subscribers:
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NOTE: eSignal has been so impressed with the loyalty of the
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TONIGHT:
- Nasdaq and S&P 500 join the Dow in confirmation moves. Since when is
Halloween part of the holiday rally program?
- Is this really the bottom? You have to rely on what the market is
showing you.
- Economy still shows signs of slowing; don't let last month's housing
starts fool you.
- Team Trades
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Tax selling abating? No more fear of a hard landing? Cyclicals already
spent?
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For whatever the reason, the Nasdaq gave us a confirmation of last
Thursday's reversal move: a 5.6% move to the upside four days after a
high-volume reversal, the move coming on strong, above average volume.
Moreover, the A/D line was better than 2 to 1. On the S&P 500, a 2.2%
move on again rising, above average volume with a better than 2 to 1 A/D
line added the third confirmation from the three major indexes. That
makes it unanimous. We have confirmations in place; will the moves up
continue on the Dow and start in earnest on the Nasdaq and S&P 500? Will
October make it three bottoms in a row? Guess we should have guessed
this; the Yankees won the 1998 and 1999 World Series, so when they cinched
the series, should have know a bottom was here.
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Confirmation basically sets the stage for major rallies. The Nasdaq and
S&P 500 confirmed moves on the fourth day; that indicates a stronger rally
if one is to come. And that is a key point. Confirmations do not
guarantee a rally, but they have historically proven to be necessary
prerequisites for any major rally off of a bottom. There are still
negatives ahead of the Nasdaq in the form of few great bullish patterns
for leadership to break out of and an overriding downtrend, though it did
break the shorter term downtrend today from the early September high.
Still, the higher volume on the move up so soon after a test of 3000 and a
reversal off of that level indicates that institutions are buying into
this move for now. We want to see that continued 'correct' price/volume
action, i.e., rising on higher volume, resting on lower volume, and then
powering back up on rising volume.
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In summary, we have to trust what the market is showing us. While there
are still negatives ahead in the form of few strong bases, a Nasdaq
downtrend, and a weakening economy, the indexes are showing us they want
to rally for now. The Dow is sawing right through overhead resistance,
and if the Dow and S&P 500 follow suit, we have a few weeks of rallying
ahead of us if this week's economic news is not too far outside of
expectations. We will see if the indexes are ready to put their heads
down and rally when the remainder of the economic news hits us this week.
In the interim, we are taking some bigger bets on our favorite patterns as
we are outlining tonight. The markets have a lot of overhead resistance,
but we are going to rely on what the market is showing us right now and
look for a treat, not a trick, from this pair of Halloween confirmations.
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IRONY OF THE DAY: Monday Lehman Brothers downgraded Cisco. Cisco fell
$2.62. Today, Merrill Lynch downgraded Lehman Brothers. LEH fell $0.75,
while Cisco gained $5.81. Looks as if Merrill was getting some revenge on
LEH for the Cisco downgrade.
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THE ECONOMY
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September housing starts rose 9.2% to 946,000 units versus the 900,000
expected units. Oh my, the economy is 'red hot' once again. Actually,
this was a response to the lowered interest rates; buyers that were put
off from buying as rates rolled higher and higher jumped right in when
they got the reprieve. This does not represent another buying binge even
in light of the Fed rate hikes.
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Consumers losing confidence.
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More to the point, as we have been concerned about (and as Mr. Greenspan
has been concerned as well), consumer confidence fell dramatically to
135.2 from August's 142.5 reading, and well below the expected 140
reading. Consumers drive the economy, and they were the one consistent
force through the year. They are falling in optimism, and they are
falling faster than expected. This is a snowball effect; enough worry
about the future, enough money (trillions) burned off of retirement
accounts, and consumers pull in the reins. We are very concerned about
the holiday shopping season. Indeed, today Merrill Lynch said to sell
retailers into any rally.
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Production falling hard.
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More less than stellar news, the Chicago NAPM came in at 49.6 for
September, down from 62.4 in August and an expected 51 reading. That is a
contraction, a.k.a., no expansion. That is the lowest reading in 21
months, and the sharpest drop since May 1980. The GDP is falling like a
stone. So is production. Remember when FOMC member McTeer warned of a
slower GDP, but said not to worry, September is a stronger month, and when
those numbers came in it would boost the GDP? They had better get better.
If the national NAPM matches this decline, the GDP revisions may be
downward, not upward.
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THE MARKETS
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Broad rally in all major indexes. Transports rallied for the second day
in a row, supporting the overall Dow move based upon Dow Theory. Volumes
were better all around. Confirmations on the S&P 500 and Nasdaq,
following on the heels of the Dow confirmation. Looks good for now, but
nowhere near out of the woods. Treat or trick?
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Overall market stats:
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VIX: 25.99; -1.80. The VIX fell on rising markets; that is normal
action. The VIX gave us the spike two weeks ago; that may have done its
trick.
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Put/Call ratio: 0.64; +0.06. The put/call ratio rose on a heck of a rally
day. Shows still some skepticism out there. That is not bad at all;
markets like that worry out there.
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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: The techs opened higher and did not take their eyes off the ball.
Two late-day attempts at selling were reversed each time, and the index
closed near its high for the day (3379.08; 3369.63 close). What a change
from waves of selling overcoming each attempted rally. The move held up
and gave us confirmation. The big difference between this rally and the
previous confirmation attempts? There was no heavy volume selling between
the rally day that kicked off the move and the confirmation day. A
fourth-day confirmation, and those are historically strong. Needs to be
with all of the overhead resistance it needs to slice through.
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Stats: Up 178.23 points (+5.6%) to close at 3369.63.
Volume: 2.145 billion shares (+23.2%). Strong, above average volume on a
confirmation day. 1.639 billion shares to the upside versus 389 million
shares to the downside (4.2 to 1). To put it in perspective, Monday's
overall volume was 1.742 billion shares. This is the type of price/volume
action we like to see after a reversal: selling on lighter volume,
powering ahead on higher volume.
A/D and Hi/Lo: Advancing issues topped decliners 2.2 to 1. That is a
confirmation-caliber A/D ratio. New highs jumped to 90 versus 135 new
lows (-25).
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The Chart: http://www.investmenthouse.com/ch/nasdaq.html
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Well, the dip below the April low at 3227.04 (3191.40 on Monday) proved to
perhaps be enough. The Nasdaq gapped back