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Equity futures weak

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Equity futures are weak this morning and we're currently looking at S&P futures trading off 8 points, NASDAQ futures are lower by 42 and Dow futures are off 70. Last weeks option expiration is out of the way and now stocks should "trade on their own" for the next three or four weeks until option expiration rolls around again.

Where were we then? Where are we now?

It seems like eons ago, but December 21, 2000 wasn't really that long ago. What's important about December 21st? Perhaps it is just a relative low for the S&P 500 Index and it doesn't mean anything. That's what I thought until I started doing a little digging. If you get a chance later today, I'd strongly suggest a serious trader and investor go to the archive section of the intraday commentary and read that day's updates. Here's what I'd like you to pick up on. Look at the 09:00 Update. Take note of the different vertical counts we had made and what we were thinking could happen in the short-term and longer-term. Then test what eventually happened (short and long-term). 09:30 Update was about risk/reward. As I read that update, I get the feeling we were thinking that the SPX was at a major pivot point. Something big was about to happen. 10:30 looks like the SPX was falling apart, but we were watching Qualcomm (NASDAQ:QCOM) as a potential bullish candidate at $78 after recently trading it short. 11:30 we noted that VIX was above 36 and looked to be indicating a short-term "too bearish" indication. 5-minute chart of SPX looked like index had made major reversal after gapping lower at the open and trading as low as 1,254 in first 5-minute of trading. 12:30 the SPX had launched higher to 1,280! 01:30 VIX had a major reversal from above 36 to 34! QCOM surging to as high as $82.50! Noted how SPX and QCOM were having troubles with a key level of resistance. 02:30 we stepped back and looked at different time tables to make sure traders weren't getting overly aggressive on the buy side. 03:30 Talked about risk/reward and the QQQs trading at $55.50. 04:30 (HERE'S THE MOST INTERESTING AND PERHAPS IRONIC as it relates to Friday's 04/20/01 update) we resumed at "test" of previous day's 04:30 update and uncovered two "mystery stocks" International Paper (NYSE:IP) and Cisco Systems (NASDAQ:CSCO). IP was trading $37 on point/figure chart, CSCO was trading $36 and had been getting crushed.

What does it mean?

December 21'st seems like we thought it was going to be a fairly pivotal market day as it related to the S&P 500. On December 21st, the SPX traded as low as 1,254 and shot higher for the next four session. 1,254... why does that sound familiar? Oh yeah, 1,253.71 was Thursday and Friday's highs on the SPX. Well, if the SPX is where it was at on 12/21/00, then CSCO, QCOM and IP should be fairly close to their levels too shouldn't they? NOT! CSCO is down about 47%, QCOM is down about 14% and IP is at the same level the stocks were at when the market opened on 12/21/00. As it relates to "large cap growth" and "large cap value" how would you classify CSCO and QCOM? I'd classify them as "large cap growth." I'd classify IP as "large cap value." Now think about relative strength as it relates to these three stocks as measured against the SPX. This is exactly what we touched on yesterday at 04:30 when I fell off my rocker and compared a large cap value fund (Washington Mutual Investors AWSHX) and a large cap growth fund (Fidelity Magellan (FMAGX).

S&P 500 Index - weekly interval

I've marked the chart above with relative highs on a weekly interval. Of course the low on 03/2201 is not a relative high, but does help show a trader and investor some of the recent gains for the SPX. What I've done here is to recognize the intervals or levels if you will, to better understand where I've been and perhaps where I'm going. The percentage declines and percentage gains help me also understand the chart on a risk/reward basis. I've also added an upward trend to see if it looks "reasonable" and should I expect the SPX to follow this trend over a period of time. As you can see from the above chart, if the current upward trend were to hold, then in October of 2,002 the SPX should be back near its September 2000 level of 1,530. Notice on the above chart that last week the SPX finally took out a relative high on my chart at 1,183. This is perhaps the first time a relative high on the chart was violated to the upside. This tells me that there is some type of change in MARKET sentiment taking place. Perhaps this adds some confidence to our analysis a couple of weeks ago when the 30-year YIELD broke our long-term downward trend.

Relative strength

How are your current holdings performing relative to the SPX back on 12/21/00? Has the MARKET been accumulating or distributing the shares? That stock you feel has gotten away from you. Has it really? Take some time this week and analyze your longer-term holding and potential short-term trading candidates.

Jeff Bailey
Senior Market Technician

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