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Friday's surge repairs earlier week's losses

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I'd have to say today's gains for stocks was most likely a relief rally that was fueled after the July 4th holiday here in the U.S. passed without any terrorist activity. As such, market psychology had traders hitting the "buy button" and stocks surged into their close, recouping the bulk earlier losses found in the week.

While some may laugh that market psychology could in no way have played a part in today's rally, then here a statistic that may surprise you. In the last two weeks, the broader S&P 500 Index (SPX.X) 989 +3.67% has closed at the 989 level each of the three past Friday's. In essence, on a week-to-week basis, the S&P 500 Index has finished unchanged.

Surprised? I am a little. Probably because my "psychological" side, which I check on a regular basis is quite negative when it comes to the markets. The reason for that? Most likely because of all the different articles I read on a daily basis when trying to keep track of all the different thoughts and ideas of analysts and economists.

I'm guessing if you ask the "average Joe/Sue" on the street what the S&P 500 Index (SPX.X) has done over the past two weeks, he or she would say that it has taken a drubbing.

I'm not sure if any subscribers watched last night's 4th of July spectacular from New York that was broadcast on television. I did and at the end of the gala, I'll admit to have had some type of allergic reaction, as my eyes were tearing up a bit. It sure as heck couldn't have been this "tough" and unemotional trader was displaying any type of inner-pride in America and all the emotional swings that many Americans and American allies have had since September 11th may have been rather positive after last night's performance.

If you missed the program, I thought it was quite fitting and rather uplifting as the final display of fireworks came to the national anthem "Star Spangled Banner."

Nope. Those watery eyes must have been Britney Spears' perfume emanating from the television set. Regardless, I felt pretty good when the head hit the pillow last night, and I think a lot of traders/investors felt the same way and that "positive psychology" carried over to today's trading.

Weekly and Quarterly Performance - Averages and Indexes

Today's gains in the broader market averages and indexes helped reduce some of this week's earlier losses. Only the Dow Industrials (INDU) 9,379 +3.58% was able to put together more than a 1% gain on the week as it relates to the major market averages.

Perhaps conventional retracement on the S&P 500 Index (SPX.X) helps explain the 989 level on the S&P 500 Index. I'm starting to think that two consecutive session closes above this level may have the 1,032 level in play on a rally attempt.

S&P 500 Index Chart - Daily Interval

The S&P 500 pegged its session high into today's close. I was monitoring some NYSE listed stocks (more institutional) and there were a lot of large offers that were taken out and stocks pushed higher into the close. This has me looking for a potential gap higher Monday morning.

Early next week, I'd look for a test of the psychological 1,000 level on Monday. If that were to happen, then look for some type of "test" of the 988 level. If we don't see buying in Treasuries and YIELDS hold steady and the US$ as depicted by the U.S. Dollar Index (dx00y) can continue to firm, then I think the SPX has a shot at the 1,032 level.

The last week or so, I thought that any firming in the US$, coupled with a higher YIELD in Treasuries (caused by selling in Treasuries) could be a bearish equity trader's nightmare.

This week, the US Dollar Index (dx00y) showed its first gain in over 7 weeks and the 10-year Treasury ($TNX.X) found selling for its second week, despite earlier cancellation in Treasury auctions, which would have limited supply.

The weakness again this week in the Gold/Silver Index (XAU.X) 69.62 -1.34% gives some hint that the US Dollar may be finding a bottom and the selling in Treasuries hints of some asset shift from bonds back toward stocks.

One of my "key" economic sectors has the Dow Transports (TRAN) 2,652 +2.15 falling on the week (-2.9%). In Wednesday's market monitor, I noted the close below the 200-day MA (2,618) and felt an "economic bull" needed to see this group get back above its 200-day quickly like it had back in January and February to have the MARKET saying it still believed in an economic recovery. The TRAN responded kindly today, and quickly reversed back above its 200-day MA. Commercial air carriers as depicted by the Airline Index (XAL.X) 64.38 +4.46% continues to weigh on the Dow Transports (TRAN) as debt levels keep investors concerned about the groups prospects.

Jeff Bailey
Senior Market Technician
Option Investor

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