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What's Happening
Intel’s earnings report was better than expected, but did not
provide the silver bullet statement that the future was bright
and that all the bad news was over. Instead, the company
continued to be very cautious, and cut its own capital spending
plans more aggressively than expected. This threw some cold
water on the tech sector in the after hours setting, and it
followed into Europe and Asia.
The pre-market futures were once again flat. Crude oil was
rallying, as traders set positions up for a potential surprise
in the supply figures from the American Petroleum Institute and
the Department of Energy, both to be released at 09:00 on 1-16.
Earning reports from Yahoo, Apple Computers, Fannie Mae, Bank of
American and Genentech are also likely to influence trading.
Is the market running out of time? It’s possible, and investors
should be wary over the next couple of days as the bulls have
failed to take the upper hand. Thus, the market only has a few
sessions left to make up its mind or risk losing an excellent
chance for a momentum run. As we reported on Monday, our
indicators suggested that this could be a very powerful week for
the bulls as momentum last week was as strong as we have seen in
the last 12 months and sentiment is nowhere near signaling that
a top is here just yet. Little has changed, except that the
market is still waffling. Traditional technical indicators such
as the number of stocks making new highs and the advance decline
line are still giving very positive readings. When placed in the
context of the nice momentum thrust that the market gave us on
January 2nd, where NYSE and Nasdaq ratios of up volume to down
volume were both over 9 to 1, there is only one conclusion to
make barring a very negat! ive external event. The market sho
uld be going higher in the short term. Nevertheless, at some
point if the market continues to fail in its efforts to break
out, it’s only a matter of time before the sellers gain the
upper hand.
In case folks missed it, as time is ticking closer to February,
the action on all sides of the ledger is getting more
aggressive, as global governments are scrambling for any
advantage they can garner before the nearly inevitable U.S.
invasion of Iraq. Stratfor.com reported on 1-14 that its sources
have revealed that a top level Iraqui official will be heading
to Cairo to attempt to forge some kind of last minute maneuver
such as an Arab summit, or some kind of agreement that will
allow Saddam to step down and leave a hand picked heir in
charge. We suspect that the latter won’t go over well with the
U.S. or Britain, although the lesser powers could do their
trained seal impressions and applaud at least a little in hopes
that war will be averted.
CNN reported on 1-14 that U.S. Air Force pilots will begin to
fly U-2 spy planes over
Iraq in order to help the weapons inspectors. The planes will have U.N.
colors. Meanwhile, according to the Moscow Times.com, Russian
oil company Lukoil will be in Baghdad on 1-15 to negotiate
itself back into a contract which Iraq reneged on based on the
notion that the Russians were being too helpful to the U.S. in
the ongoing pre-war effort. One of
Russia’s fears is that when the
U.S. invades Iraq, its oil companies will lose any influence and
resources that they held under the Hussein regime. In a related
note, the Washington Post reported that Republican senators will
once again be attempting to revive plans to drill in the
Alaska wilderness, something we
pointed was highly likely in our recent Op Ed piece on CBS
Marketwatch and in “Successful Energy Sector Investing.”
The rhetoric is getting increasingly harsh and more countries
are lining up on the U.S. side of the ledger. Stratfor.com
reported on 1-14 that U.S. officials are now inspecting Turkish
bases, a likely prelude to some kind of agreement for their use
in the war against Iraq. Turkey is a key geographical location,
being in the North of Iraq. Chief U.N. weapons inspector Hans
Blix was quoted as warning Iraq that it needed to be more
cooperative or face war. President Bush on January 14, said he
was “sick and tired” of Iraq’s “games,” and warned Hussein of
rising chances of trouble. And perhaps the most significant
development of the day came from Iran, a charter member of the
“Axis of Evil,” when a highly placed National Security official
publicly stated that Iran supported Iraq’s disarmament, but not
a regime change. This was a big move by
Iran, and once again noted that the continued pressure by the
U.S. on Middle Eastern nations
is taking its toll, and that slow! ly but surely, they will
either abs tain from any opinion against the invasion of
Iraq, or in some way support it.
Iran was not alone, as its “Axis of Evil” sibling North Korea
looks closer to coming to the negotiating table albeit kicking
and screaming. On 1-14, we wrote: “We expect North Korea to
continue to bluster and bang its head while the U.S. continues
to use weasel words to get them to the negotiating table. “ Not
a bad little sentence, given that the Chinese are now likely to
slowly move the two sides to the table and some kind of deal
should be worked out. This is another example of a rogue country
whose leader is totally insane finally caving in to the reality
that they could be next. Strange times we live in.
Technical Summary
Chart Courtesy of
StockCharts.com
The S & P 500 is
on the verge of a break out, or a failure. The index is
increasingly close to its 200 day moving average which is near
950, but is not showing signs of being in a hurry to get there.
Support is still at the 900-912 area for the short term. A break
below 900 would reverse any intermediate term up trend. Key long
term support remains at 768-775, the July 23, 2002 and October
2002 lows. Nasdaq is above its 200 day moving average, with the
next resistance being 1500 in the short term. The small stocks
are likely to move along with the general trend of the market,
but have gone nowhere of late.
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Stock Of The Day
Chart Courtesy of
StockCharts.com
The stock is of the day is Applied Materials (NNM:AMAT).
AMAT is the world's largest chip equipment
manufacturer and its action will be crucial in
determining what many tech stocks do in the next few
days and weeks. The stock failed to break above 16 on
1-14, as investors pulled away as they waited for
Intel's earnings. The cut in capital spending by Intel
hit the chip equipment stocks in after hours trading
and extended into
Europe. What investors should watch for is what happens in AMAT and others
Like KLAC and TER as the trading day continues. If
they can either open well or have a good intraday turn
around, we would expect other tech stocks to follow.
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Chart Courtesy of
StockCharts.com
Sentiment, Asset Allocation, and Background Indicator Summary
The CBOE Put/Call ratio was 0.70 on 1-14, again a neutral
number, and not one suggesting major danger. If the P/C ratio
drops rapidly as the market rallies it is usually a signal that
the rally is reaching its end. Readings below 0.5 are of
concern, but not as serious as readings below 0.40. Readings
above 1.0 are bullish. The most recent reading above 1 came on
11-8.
The CBOE P/C ratio for indexes was 1.23 on 1-14 , showing some
improvement. Readings below 0.9 suggest too much bullish
sentiment, just as readings above 2 are usually required to mark
major bottoms.
The VIX and VXN had readings of 26.55 and 41.92 respectively on
1-14. These indexes continue to drift lower suggesting that
complacency is rising. A fall below 20 on VIX and 40 on VXN
would be very negative, especially if the market rallies.
Readings above 40 and 50 are often signs that a bottom may be
close to developing.
Newsletter writers have remained bullish, but again turned less
bullish on January 10. Unfortunately, this influential group is
still too bullish overall which means that the odds of a rally
lasting for an extended period is not very large. This group has
been very wrong since the top in the year 2000. They finally
turned bearish at the October bottom and were once again wrong
as the market rallied. That means that their persistent
bullishness is now something to keep an eye on. In contrast to
the newsletter writers, the futures traders polled by Market
Vane have stayed bearish throughout the bear market, and they
turned more bearish.
Our asset allocation model moved up significantly on 1-10, and
now suggests a 65% exposure to stocks. We suggest caution when
implementing any increase in risk to this market.
Our MASI and MAGI indicators are now neutral increasing the
chances of a short term upward thrust in the market.
The NYSE specialists remained positive in their latest NYSE
Members Report. The data is for the week ending on December 27,
2002. This is a set of very smart investors, and when they turn
positive or negative, it is just a matter of time before the
market follows. For now this remains a positive, but must be
monitored on a weekly basis. Spec data is not useful as a market
timing tool, but is excellent background information.
Chart Courtesy of
StockCharts.com
The Value Line
Index (VLE) is still playing chicken with its 200 day moving
average as it closed right on the line on 1-14. This is an
uncomfortable situation in the market. The index has remained
above its 20 and 50 day moving averages, and if it can close
above the 200 day line, it would be very bullish. If the index
could remain above its 200 day moving average close out the week
and not falter in the next few days that follow, by definition
the long term trend for the broad market will have turned
positive. Resistance is also still present at 1100. There is
support at 985, the 50 day moving average, and 900 below that.
VLE gauges the performance of 1700 stocks, and is not market
capitalization weighted. That means that it is a true picture of
what is happening to a very broad base of stocks, and not just
affected by the movement of one or a few major stocks.
Chart Courtesy of
StockCharts.com
The Amex Biotech
Index (BTK), remained above 360. The index got a nice boost from
the FDA decision to turn favorable on Genzyme for its Fabry’s
disease drug. The next excuse to move the sector will be
earnings, with Genentech due out on Wednesday. Overhead
resistance remains at 380-400, even on a rally above 360. The
340 support level is crucial because if BTK breaks below 340
would be an intermediate term set back. A break below 300 could
take the index to 275. See our premium Health and Biotech digest
for full details and a newly updated list of both long
opportunities and short sales for biotech.
Chart Courtesy of
StockCharts.com
The Amex
Pharmaceuticals Index (DRG) went nowhere again on 1-14. The
index is still struggling to cross above 312 and its 200 day
moving average. This has been tough resistance for the sector,
that is suggesting that a great deal of pent up selling pressure
is still present in this market as key sectors reach important
resistance levels. A sustained close above the key 312 chart
point would be very encouraging. The 320 area for DRG remains
the key. A move above 320 would be a welcome development, as
that would take the index above the 50% retracement point from
the recent bottom, and would be a sign of strength. For a full
description of the ins and outs of investing in biotech and
pharmaceutical stocks check out our book "Successful
Biotech Investing",
available at ama! zon.com, barnesandnoble.com, and bo okstores
everywhere.
Chart Courtesy of
StockCharts.com
The Philadelphia Semiconductor Index (SOX) will
likely head lower, at least in early trading. Intel’s earnings
drove down the chip manufacturing stocks in after hours trading.
If the index can close above 352 if would signal a reversal of
the long term down trend.
Chart Courtesy of
StockCharts.com
The oil complex is once again going to be driven by
news events. Supply statistics will be released on 1-15 at
9:00 A.M. Eastern
time and are likely to influence the short term. The XOI and OSX
indexes were mixed on 1-14. See our energy section for more
details on individual stocks and the latest recommendations on
our highly successful energy timing system using the Oil Service
HOLDRS Trust (OIH).
The Philadelphia Oil Service Index (OSX) will be testing the
support at the 80 level. This remains a sector that it highly
tied to news events, and a trading range could be in place for
several more months. Many of these events and the effects on the
markets were predicted in our latest book "Successful
Energy Sector Investing" (Random House/Prima Venture) .
Chart Courtesy of
StockCharts.com
The Amex Oil Index (XOI) will once again be testing
the support at the 440 area. A break below here would be
negative. A move above 500 for XOI would be a very bullish
development for the energy complex. For immediate analysis,
including stock picks, and the latest in technical analysis of
the entire energy complex, our subscriber section has a full
complement of recommendations in oil service and the rest of the
energy complex.
Chart Courtesy of
StockCharts.com
Small
cap stocks continued to go nowhere. The sector is still being
held hostage by the U.S. dollar, which in turn is being
pressured by the specter of war against
Iraq.
The dollar has broken key short term support, as the Yen and the
Euro are steadily stronger. The SML has stood still over the
last few days and could still move to 210 in the short term, but
only if the overall market improves. The index has failed to
move through short term resistance several times in the last few
weeks, and time is still ticking for the so called January
Effect on small stocks.
The dollar is an important influence on small stocks since this
macro sector of the market tends to rely on domestic business
rather than international money for its earnings. Larger
multinational companies tend to benefit from a weaker dollar as
it aids exports. But the economic weakness is a drag on the
dollar, keeping a lid on small stocks. |
