Option Investor
Market Updates

Time to test the long-term scenario

Printer friendly version

Back in October, I began laying out the scenario of what traders and investors alike should be trading and monitoring if the MARKET ever believed that the economy was about to recover. That scenario was a bullish one as it related to the deep cyclicals as characterized by the Morgan Stanley Cyclical Index (CYC.X) and some of the biggest companies in the world that made up the Dow Industrials. Today or the next week could be the BIGGEST technical event for stocks if a new bull market is truly cutting its horns. It may seem outlandish to think that a scenario laid out in October could come together any better or at a point like we're seeing happen or potentially happen today. Here's why and here's what EVERY TRADER should be monitoring.

Morgan Stanley Cyclical Index (CYC.X) - Weekly Interval

The CYC.X is an index every trader or investor should be watching today and over the next couple of sessions. I truly believe the fortunes of the current MARKET rest on how this index acts at current trend. If we see the eagerness by institutions to get long this market, like they were back in April of 1999 just after the "Asian Flu" and fears of an economic slowdown were put to rest, then we're in for a wild ride. If the CYC.X has trouble getting through current trend, then I'd expect hopes of an economic recovery to be squashed until trend is broken. If trend is broken to upside, monitor the rate of the move to help understand what can take place in other sectors of the economy. Note how aggressive the gains were for this index in 1999. What took place in the NASDAQ during that time? In October, I felt investors would be well served to play some of the more boring names of the deep cyclicals and leave technology alone. So far, that analysis looks to have been correct. If the deep cyclicals can power higher here, then I'd be looking to begin getting more aggressive with technology stocks on the upside. The deep cyclicals are big conglomerates that will have big technology spending budgets if they start putting money to the bottom line. If I were to monitor the technicals from October, I'd say the 20% gain for this index since that time is perhaps an indication that things are improving. The real test is now. The CYC.X failed this test in early March of this year and technology suffered the consequences as the NASDAQ Composite traded to another low. If you're a technology stock trader/investor, you'd better keep an eye on things here. Just a final note. While some may laugh that the CYC.X is up only 20% since October of 2000, the NASDAQ Composite down 27% from its LOWS in October of 2000. Yes, the cyclicals have been "boring," but they've also been quite profitable.

Now does Du Pont (NYSE:DD) make sense?

On May 1st, PremierMarkets.com profiled an option play in shares of De Pont (NYSE:DD) and my e-mail was less than favorable. We were bullish the July 45 calls (DDGI) and still are. On May 1st, we profiled this option when the stock was trading $45.02 and the option ask price was $3.20. My thought process is just what is outlined above in the deep cyclicals. In October is was International Paper (NYSE:IP) at $30, and I guess today it's DD at $45.02. Neither of these have been "exciting," but if the MARKETS and even technology have a hope, these deep cyclicals need to lead the charge. Technology will follow.

Jeff Bailey
Senior Market Technician


Intraday Update Archives