Option Investor
Market Updates

Quiet session

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Stocks continue to trade in a rather tight range today as the Dow Industrials (INDU) 8,584 -0.27% edge down 24 point after an early morning "pop" to 8,635. However, this morning's lows of 8,568 have served intra-day support as traders seem unwilling to relinquish much of yesterday's impressive gains.

Gold stocks, as depicted by the Gold/Silver Index (XAU.X) 79.96 +2.71% made a move higher in the last hour to trade the 80 level, and I was looking for a trade at that level to perhaps spur some short covering. The trade at 80.00 in the XAU.X triggered a triple-top buy signal, but institutional bulls and bears for that matter, may be less willing to get aggressive on the buy side as Dorsey/Wright and Associates sector bullish % for precious metals stocks (BPPREC) is back above the 70% and more overbought levels of bullish % at 72%, and may have traders cautious about a "bull trap" pattern, which is depicted by a triple-top buy signal that then gets reversed lower in quick fashion.

Since I had profiled this sector as bullish along with shares of Newmont Minining (NYSE:NEM) $30.21 +1.7% earlier this month when both the sector and bellwether stock triggered "buy signals" on their point and figure charts, I think a sector bull would feel more comfortable in adding to bullish positions on an XAU.X trade at 81.00, which would then help negate the potential for a bull trap. The sector bullish % has a tendency to reach the 82% bullish level so there's some upside to be had near-term, and the bullish vertical counts of stocks in the sector hint at much higher prices. For example, the buy signal at $27 where I had profiled shares of Newmont (NEM) has the bullish vertical count currently building to $45 and would only be negated currently with a trade at $22, which was the original stopping point since profile. In essence, the stock has done nothing but trade higher on its p/f chart since profile and currently looks to challenge its 52-week high near $32 that was achieved this past May.

While the XAU.X leads today's sector winners, a triple-bottom sell signal in shares of home improvement retailer and Dow component Home Depot (NYSE:HD) $21.61 -13% has this stock at a new 52-week low and dragging the S&P Retail Index (RLX.X) 264 -3.9% along for the ride. The retailing sector is today's sector weakness with the Dow Jones Home Construction Index (DJUSBH) 314 -1.69% and PHLX Housing Sector Index ($HGX.X) 230 -1.99% in close tow.

Technology sector are seeing a mixed trade with the NASDAQ-100 Index (NDX.X) 1,026 -0.09% relatively unchanged. Sector strength is found in Semiconductor (SOX.X) 313 +1.59%, Internet (INX.X) 94 +1.58% and Networking (NWX.X) 142 +1.17%, while marginal weakness is found in Biotechnology (BTK.X) 346 -0.61%. The most heavily weighted stock in the NASDAQ-100 Index has software giant Microsoft (NASDAQ:MSFT) $53.29 -0.7% offsetting the bulk of tech sector gains for the NASDAQ-100 and QQQ $25.54.

Yesterday I talked about wanting to create a "benchmark" portfolio that was benchmarked against Tuesday night's close that subscribers could monitor over the course of this year to get a feel for the U.S. Dollar, Government Treasuries (shorter and longer-dated maturities) and Corporate bonds. Then, to give traders and investors a feel for how those "perceived" lower risk investments are performing, I'm adding three of the major indexes in the Dow Industrials, S&P 500 and NASDAQ-100. However, unlike last years developed "fund" that we created on July 31st, after a GDP report, I'm adding the AMEX Gold Bugs Index (AMEX:HUI) to the equity side of the portfolio as this sector has really been DIVERGING from the weakness in the U.S. Dollar and trading somewhat contrary at times to the major equity indexes.

While I've set the "portfolio" up using the tools available in q-charts, subscribers that don't have access to such a trading station type tool are well served to simply set up a portfolio of their own in a spreadsheet like Microsoft Xcel, or Lotus. Even if updated once a week, traders are able to get a snapshot view of where money may be flowing and then begin analyzing what scenarios may currently be in play.

Here's the two portfolios that I've put together. The "upper" portfolio is the original "Beetle's Balanced" and shows the current results of how these different sector have performed since their July 31, 2001 benchmarking. The "lower" portfolio is this year's benchmarked portfolio, with the addition of the AMEX Gold Bugs Index (HUI.X).

Benchmarked Portfolios -

We can see from the upper 07/31/02 portfolio that a combination of U.S. Dollar Index (dx00y), a basket of short-term treasuries (SHY), intermediate-term treasuries (IEF), longer-term treasuries (TLT) and basket of corporate bonds (LQD) slightly outperformed the equity portion of the portfolio since 07/31/02. It should be noted that the portfolios do not address any interest or dividend payments and subtotals and totals are simply based on asset value.

The lower portfolio is benchmarked from the 12/31/02 close and over the following year, we will refer to this portfolio to perhaps make note of where the MARKET is moving money and begin deriving what types of scenarios may be in play for such action.

As the New Year begins, yesterday's equity rallies have the early lead over some of the more "safe" investments of bonds. It is notable in the 07/31/02 portfolio that the corporate bond basket (LQD) is currently the best performing "bond class" and this is a positive sign for equities in my view. On the scale of "risk," corporate bonds are considered "riskier" than treasury bonds as treasury bond interest is backed by the full faith and credit of the U.S. government. Meanwhile, corporate bonds, are deemed "safer" than the stocks of the company's they are issued by. In the "chain of risk" a healthy equity environment should be LEAD by the corporate bond market as investors hunt for higher YIELDS that Treasuries, and are willing to take the risk of corporate bonds over Treasuries on the thought that bottom lines of the issuer will hold steady or improve in order to may the interest payments on the bonds.

Then, as that happens and the bottom lines firm or begin to grow, the equities themselves begin to improve as investors again are willing to take on more "risk" and begin hunting for growth opportunities and not just income from the bonds themselves.

Jeff Bailey

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