Let Market Be Your Editor
Journalists
like to say that they possess “news judgment” — their supposed
ability, as experienced professionals, to spot significant, worthwhile news in the daily flood of information.
When the media report news affecting
an industry or company, I don’t depend on the judgment of journalists to decide
what’s significant or trivial. I turn to the market for answers.
To weigh the impact of news in the
financial markets, I ask three basic questions:
1. Does the news cause price moves in
multiple stock?
2. Do
the affected stocks move on strong volume? When major mutual funds and other
institutions accumulate large positions in stocks, they cannot hide their
footprints. Inevitably, they will push up a stock’s trading volume vs. its
average daily trading volume and/or prior-session trading volume.
3. Does the price action,
however bullish or bearish, come in the context of a bullish or bearish chart
pattern? If not, I have no way to trade the affected security.
Shares in health maintenance
organizations rallied Monday after the U.S. Supreme Court ruled patients cannot
sue them under federal law for giving physicians financial incentives to hold
down healthcare costs.
Aetna
(
AET |
Quote |
Chart |
News |
PowerRating), the nation’s largest
health insurer, surged 6 3/16 to 73 9/16, the stock’s highest close since Sept.
20, 1999. Trading activity surged to more than double the stock’s 50-day average
trading volume.
The stock has moved higher on five
separate volume spikes since late April. That represents the deep-pockets money
piling into the stock. (See points A through E on the following chart.)
WellPoint Health Networks
(
WLP |
Quote |
Chart |
News |
PowerRating)
gained 4 to 69 1/16 as volume rose 33% above the stock’s norm.
On a short-term basis, the move looks
mildly bullish. Monday’s gain on above-average volume constituted a little
follow-through day for the stock, which managed to rally off its June 6 low off
66 3/4. But I would make this stop work a lot more to prove itself. Shares are
still trading below their 50-day moving average, implying ample overhead supply.
Cigna
(
CI |
Quote |
Chart |
News |
PowerRating) rose 2 1/4 to 90 3/4 on
a pickup on volume. However, trading activity remained below the stock’s 50-day
average. The stock also needs to overcome resistance at 90 7/8.
To my eye, Monday’s
action suggests that the Supreme Court ruling has not fundamentally shifted the
market’s perception of the HMO industry’s long-term prospects. However, it does
show that the group still responds to positive news after advances off the lows
that began in March. The most bullish charts belong to Aetna and Cigna.
For a contrasting picture, let’s take
a look at the trading action in fiber cable and equipment makers Monday after
upbeat earnings news from Corning
(
GLW |
Quote |
Chart |
News |
PowerRating). I see clearer signs of
industry-wide accumulation.
Corning, a fiber-optics manufacturer,
advanced 18 to a new high of 230 as trade rose 53% above the stock’s norm.
Corning, the inventor of fiber-optic
cable, predicted second-quarter earnings of 78 to 80 cents a share vs. 52 cents
in the 1999 second quarter. Wall Street analysts expected the company to earn 69
cents, according to First Call/Thomson Financial.
Adding to the bullish picture, Corning
shares broke out of a cup-with-handle base. Notice the signature contraction of
volume and price volatility in the last days of the handle just before the
breakout. That indicates that selling dried up just before the breakout, a
bullish sign.
The right side of the cup shows clear
evidence of accumulation. In the past three weeks, observe how every day that
Corning’s volume rose over the prior day, the share price moved higher. That’s a
clear giveaway of institutional buying. I’ve indicated the up-volume/price days
with black arrows on the chart.
Among the other fiber-optic plays, JDS
Uniphase
(
JDSU |
Quote |
Chart |
News |
PowerRating) rose 5 to 115 9/16, overcoming recent resistance at 114 7/8
on a nice volume spike. The stock also appears to be building the right side of
a correction-recovery pattern. It gapped up its 50-day moving average on strong
volume on June 2.
Monday’s gain lifted the stock above
its mid level of 111 15/16. I use the mid level to test the strength of a
stock’s in-progress recovery from a recent correction. To find the mid level,
add the stock’s pre-correction high to its post-correction low, then divide by
2.
I generally avoid stocks that are
priced below their mid levels or their 50-day moving averages on the assumption
that they are weighed down by too much overhead supply. Overhead supply
is the amount of stock in the hands of shareholders with paper losses. These
investors tend to look for exits and sell into rallies, blunting further
share-price progress.
A stock that recoups at least half the
losses of a recent correction and pull above its 50-day has chewed through
substantial overhead supply. That’s a bullish sign.
Fiber-optic firm SDL
(
SDLI |
Quote |
Chart |
News |
PowerRating)Â
rose 11 63/64 to 261 63/64, a new closing high on nearly twice its usual trade.
The stock, however, is having trouble overcoming resistance at recent intraday
highs. This gives me the impression that the stock is running into profit-taking
resistance following a sharp climb in recent weeks.
