Option Investor
Market Updates

Great Commentary, but how do I make money\?

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Here's where that trader's logbook comes in handy. It's tough to remember all the stuff I write about on a daily basis. There are so many things that can take place. That's why I talk about scenarios and trading plans. Earlier this morning we saw bond- yields rise, correct? But the NASDAQ Composite wasn't moving higher. If the market was selling bonds, that money was doing one of two things. Moving to the sidelines, or rotating to some defensive stocks. Here's a look at my trading screen. For those of you looking for index symbols, print the chart below out and keep it for future reference. Maybe some traders can put it in their newly created logbooks!

My Trade Station Set-up at 01:09 EST

The above is a snapshot at 1:09 EST and it looks markedly different than it did just an hour ago. What I'm noticing right now is the Dow is moving compared to the SPX and COMPX. I'm also making a mental note that the SPX has now turned positive!

I've set up my trade station much like the Option Investor "Market Posture" section (who do you think updates that part of the web-site?" Notice how the "red" portion of my screen is related to technology? NASDAQ-100, Morgan Stanley High-tech, Biotechnology, Computer Technology, Software, Semiconductor, Networking, Internet. All of these are in the red! A very important observation for short-term traders. I'm not looking long in those indexes unless the stock is near support and a stop is very near.

Next I move down into the financials. Banks, Brokerage and Insurance. Observation is break-even to fractionally higher. How does this relate to interest rates? They usually do well when the Fed is cutting rates. No input from them today during Greenspan Testimony.

Next are the Retailers. Aha! This is one of my "key" groups. In my scenario for a strong economy, this index should be strong. Yesterday this index was trading at the 50% retracement level and a downward trend, but started violating key levels of resistance. Wow! The index is up today! Observation... as it relates to today, the market seems to think strong economy down the road!

Getting defensive. The Drugs and Healthcare stocks. These performed very well at the expense of the NASDAQ and technology from September to December. Hey! The NASDAQ is down and so is my technology indexes. Hey, the drugs and healthcare are strong today. Observation! Short-term rotation taking place from technology into Drugs and healthcare. Pull up some charts and determine what to do. We talked about this yesterday, built a scenario so everyone should have had a plan to implement this morning.

Airlines and Oil. These two interact with each other on both the broad health of an economy and often times the oils can give confirmation to higher energy prices that could affect the airlines. With both being up, I ascertain a strong economy as it relates to today.

Cyclicals section. Forest & Paper Products, Chemicals and Cyclical index. The engine of the economy. How are they doing? They're nicely higher. These can be the companies with big information technology budgets that all the tech stocks eventually will benefit from. It's "trickle down" economics but if they don't do well, technology has little hope of ever seeing a dime or increased spending on technology. If the big cyclicals aren't making money, there may not be any money of IT spending.

Telecom... Almost the same story as the Cyclicals. Who buys all this fiber optic stuff and networking equipment?

Disk Drives... Relates to technology. I have it down here because it throws off my quick fire updates in the Market Posture for OI. Subscribers can put this index up with their technology indexes. Hey... the DDX.X is down 3% today. No interest in technology today. Great observation for short-term traders that only trade bullish. You probably shouldn't be doing any buying today unless very close to support where risk/reward is favorable.

Very bottom... Gold and Treasuries. I've talked in great detail on how to use these.

Conclusion. For those that have a system in place for tracking their indexes, it's very easy to see that money on the long side is being made in the more defensive areas. Short-term we would say there looks to be some rotation taking place from big tech gains into a pullback in defensive stocks. It could also be from short-covering in some of the defensive areas. This is why it's so important to monitor trends and support levels. As long as upward trends are in place, then I'd be leaning toward profit taking instead of full-scale rotation. Once upward trends start getting broken in technology indexes and downward trends get broken to the upside in defensive groups, the past three week's surge in the NASDAQ looks to be some profit taking and adjustments being done before the Fed's next move. This is what I call "risk management" by institutions. That's another reason for traders to think like an institution. If you think they know what the Fed is going to do, you're wrong. All they're doing is assessing risk and trying to limit it as much as possible. Wow! Now that's what I call a market update!

Jeff Bailey
Staff Analyst

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