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Looking for some confirmation

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I'm probably as skeptical as anyone that today's economic data is truly a sign that the economy is out of a recession as many analysts are now saying. However, I take it with a grain of salt and turn to our scenario that the transports and deeper cyclicals will tell us the truth and give us a confirming read on things from what the market thinks.

It's been my thought that bulls were better off avoiding many technology stocks and instead focusing on transportation and many of the deeper cyclicals as depicted by the Dow Transportation Average (TRAN) and Morgan Stanley Cyclical Index (CYC.X). It will be these two groups continued bullishness that makes me a believer in the recession having come to an end and not necessarily a bunch of short covering in some beaten down telecom and telecom equipment stocks for sign of recovery.

We know that a rising tide will lift all boats, but for true MARKET conviction, the leaders should continue to lead and the weaker segments of the economy will then begin to benefit.

Dow Transportation Index Chart - Daily Interval

Bullish gains are still found in the TRAN, but not at the levels found in many technology-related sectors. One reason my be that there are/were fewer bearish bets placed on many transportation stocks, or those bets that were previously placed were closed out recently above the 2,720 level (61.8% retracement) and break of downward trend that has been in place since May 1999. To maintain of "feel" of just how bullish the MARKET may be toward the thoughts of an economic recovery and the "pace" of that recovery, then this is a sector we will monitor closely. Bulls that have placed some bets in this group should do well if the economy truly is in recovery mode. If not, the group may falter, but not nearly as sharp as many technology stocks that may not see any bottom line benefits under a more slow economic recovery scenario.

Morgan Stanley Cyclical Index Chart - Daily Interval

Action in the Cyclical Index (CYC.X) is steadily higher, but not what I'd consider "euphoric." Today's economic data was very "industrial-based" yet we don't see 8% gains for the more economically sensitive groups like the TRAN and CYC.X. This gives hint that there is a lot of short covering going on in the technology space and most likely will add to volatility near- term.

SanDisk trades bullish triangle

Recently we noted that one "technology" stock that was setting up a potentially bullish chart pattern in SanDisk (NASDAQ:SNDK) may have been on a tech-bull's watch list to trade bullish with a trade at $16.50. That level was reached today and this would be a stock for bulls to consider. The stock broke a longer-term downward trend (bearish resistance) and relative strength has been strong versus the market.

For any tech investor, I strongly suggest that a bullish trader stick with stocks that have strong relative strength versus the market as this is a sign that the stock did NOT fall out of favor as much as other stocks and will most likely benefit most should a prolonged rally continue.

For those that feel they have "missed the move" in technology stocks, I will remind you that the NASDAQ-Composite closed at 1,950 on December 31, 2001 and currently trades 1,784, down roughly 8.5% in the past two months. Stay disciplined and don't let one day's action turn you into an out of control technology bull.

Jeff Bailey
Senior Market Technician
Option Investor

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