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Stock futures dip on PPI and Retail Sales

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Stock futures are lower this morning after the Producer Price Index (PPI) data showed an increase of 0.4%, which was higher than many economists expectations of 0.1%. The higher PPI number shows that inflation may be running higher than expected. Coupled with the higher PPI data was a lower than expected retail sales number. For September, retails sales fell 2.4%, which was below expectations for a drop of just 0.7%. September's sharp decline in retail sales was largely attributed to the terrorist attacks on September 11th.

S&P futures are trading lower by 7 points to 1,092, NASDAQ futures are down 8 points to 1,389 and Dow futures are 85 points lower to 9,335. Fair value for the S&P 500 today is $2.60. HL Camp and Company has their computer set for program buying at $3.92 and set for program selling at $0.90. Fair value for the NASDAQ-100 today is $5.50.

Dow Industrials looks like normal distribution

Our hypothetical Dow Industrials portfolio established from September 10th with a hypothetical investment of $1,000 in each Dow stock is starting to look like a normal distribution along a bell curve. This gives hint that the market has truly begun to establish a sense of equilibrium after the September 11th terrorist attacks.

Dow Industrials Hypothetical Portfolio from Sept. 10 close

This morning is a perfect time to look at the Dow Industrials and our "hypothetical" portfolio. Hopefully this will also get subscribers to look at the market and potential investments in the same manner. When we first started this exercise, there were just three stocks showing gains (SBC, T and WMT). As you can see, there are now 15 of the stocks showing a gain since September 10th's close.

I've drawn what looks like a snake on the side of the portfolio. I've often made the analogy that the market moves like a snake. The stocks near the "head" often lead in an advance, the body follows and the tail brings up the rear. Now, note the shape of the snake right now. Doesn't it look like a distribution curve? Near one end of the distribution, the bulk of gains are found (head). At the other end (tail) the bulk of the losses are found.

Last Friday at the close of trading, the top 5 stocks in the Dow Industrials were (WMT, T, MO, SBC, MRK) in that order. DuPont (NYSE:DD) "chemical" has come out of nowhere and come from a -1.06% P/L to a +8.75%. This tells me something is either happening in the chemicals area or the technicals in DD were favorable for a launch higher.

Last Friday, the bottom 5 performers were (HON, UTX, EK, AXP and DIS) only AXP has moved out of this pack (4th from bottom to 6th from bottom), so it might be worth a look as a potential bottom feeder play as the Dow Industrials have been bullish, but unlike the S&P 500 and NASDAQ Composite, the Dow is still about 200 points from its September 10th close.

Relative strength for AXP vs. the Dow Industrials is still in a column of O's right now, but a trade at $31 would be a double top buy signal on the point and figure chart. Fellow "financial" stock Citigroup (NYSE:C) has moved up from a #7 ranking to #4, so AXP might benefit from some "financial" association.

Current market environment might find shorts looking to cover on first sing of strength. We're all surprised to some extent on how certain stocks have moved higher, much higher than we could have imagined two weeks ago. On September 17th (first day of trading after terrorist attacks) AXP traded 31.9 million shares. With the stock trading $30 as of last nights close, there's a lot of stock that was bought by somebody when the market was uncertain. Those buyers might not be so eager to sell near-term on a break above $31.

American Express Chart - $1 box

American Express' (AXP) point and figure chart gives some bullish bottom feeders a set-up for potential bullishness. Bears that have tried to "hang on" to their shorts have seen some nice profits go "poof" in recent sessions. A trade at $31 would create a double top buy signal on AXP and the stock could rally near-term (next couple of weeks) to the $35-$36 level. Since relative strength is still in a column of O's, a trader does not want to load the boat. First sign of trouble on the point/figure chart comes at $26 and would suggest a stop there at minimum. Longer-term investors should follow with a stop at $24, which would be a break to a new 52-week low.

Yesterday's call action in the October $30's (AXPJF) was high compared to other call activity from $0.80 to $1.25. I think this action is characteristic of selling some covered calls.

I think an options trader would be better off trying to buy some time so I'd be looking at the Nov. $30's (AXPKF) offered at $2 (last night's close) or the Jan $30 (AXPAF) for $2.95. One advantage of perhaps paying an addition amount of premium for January is that AXP might get a nice "tax loss" bounce in January. Again.... don't load the boat, but if the stock trades $36 at some point, you may be glad you didn't leave home without it!

Jeff Bailey
Senior Market Technician
Option Investor

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