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Futures hit lower as economy sheds jobs

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Stock futures were edging higher in early morning trading, just ahead of this morning's nonfarm payroll number, but have taken a turn lower after the Labor Department reported that the U.S. economy lost 101,000 jobs in December.

Jobs were scarce in December as the economy unexpectedly shed 101,000 jobs, which was a big surprise considering economist's forecast for a gain of 32,000. The unexpected 101,000 decline in December was the largest one-month drop since February 2002, when 165,000 jobs were eliminated.

Some economists also looked for November's decline to be revise upward, but found November's originally reported 40,000 job cuts revised to 88,000.

With downward revisions in November, combined with December's 101,000 decline, the unemployment rate held steady at 6%, which was what economist's had forecasted. For all of 2002, a net 181,000 jobs were lost.

The news has seen stock futures get hit rather hard to the downside as S&P futures (sp03h) are now trading down 8 points at 916.70. NASDAQ futures (nd03h) are lower by 15.5 points at 1,061.50, while Dow futures (dj03h) are off 71 points at 8,670.

The rather sharp reversal in futures now has stocks below their fair value. Fair value for the S&P 500 today is $0.19. That price will not change during the session. HL Camp & Company has their computers set for program buying at $0.42 and set for program selling at $-2.06. Fair value for the NASDAQ-100 today is $2.60.

The information provided below should not only be useful to traders in the coming sessions, but education to some. I wanted to "save" a subscriber's question from a yesterday afternoon e- mail for this weekend's "Ask the Analyst" column, but I thought it might actually come into play today. It might, and ties in well I think with a "key" resistance level in the S&P 100 Index (OEX.X) at 472.50 and a "key" resistance level in the QQQ at $27.00.

On the surface, this morning's economic data and early response from the stock futures market has it looking like the two resistance levels just mentioned above in the OEX and QQQ are going to hold, and challenge bulls once again to really see a technically significant break-through session.

Awesome, awesome, awesome!!!

I didn't get to cover all of the indexes in last night's Index Trader Wrap at OptionInvestor.com, because we spent quite a bit of time doing a "historical" check of the S&P 100 Index (OEX.X) as it relates to last February-April, and how the Bullish % look very similar to that same time period right now.

Then, after completing the Index Trader Wrap, I found and e-mail from a subscriber asking about the Market Volatility Index (VIX.X) 26.88 and how current levels of VIX are at similar levels found in mid-November.

While I was thinking of saving this question for this weekend's "Ask the Analyst" column, the VIX might just be another indicator that gives traders some market direction in the coming weeks. And may even currently hint of a higher market into the end of January.

For those not familiar with the VIX, it is considered a contrarian indicator. When the VIX is "high" then that's often when there is a lot of put option buying taking place as market participants are buying puts to hedge underlying stock, or speculating on further price declines. When the VIX is "low" that is often during periods of more extreme bullishness and bulls are buying calls on speculation of higher price action or bears are buying calls in order to hedge underlying bearish positions that have moved against them.

However, the subscriber's question "fits" very nicely with last night's Index Traders Wrap at OI, and poses a great question where the answer will eventually be found, and may answer the question of market direction today, or in the coming sessions.

From last night's Index Trader Wrap, with the OEX Bullish % ($BPOEX) just 1% away from reversing back up into "bull confirmed" status, and the S&P 100 Index (OEX.X) close to giving a "double-top buy signal" and breaking above trend at 472.50 on its $2.50-box scale, it is obvious in my mind that the OEX is currently at a "key" level of technical resistance and should a break come to the upside in the OEX itself at 472.50 then traders should be alert. At the same time, we don't get the bullish % readings until after the market close, so the VIX may help traders on an intra-day basis.

The question a subscriber posed was this. "Jeff: Does the VIX come into play here, as it is at its lowest level in 6 months?"

Is this subscriber a bull or a bear? I don't know and I'm thankful that I don't as it doesn't "bias" my thinking in an answer. You be the judge.

Is the VIX going to reverse UP from current levels, which match November's relative low reading of 26.41 and spell the demise of the indexes, which I think are at "key" levels of resistance and pivotal levels near-term? Or will the indexes be able to break above resistance and have the VIX FALLING back near 21, which has been some historical low levels?

At this point, we don't know the answer, but this subscriber adds another excellent indicator, which combined with the commentary from last night's Index Trader Wrap and the OEX Bullish %, along with the S&P 100 Index (OEX.X) technicals itself, will soon bear the answer!

My thinking is simple. IF the VIX trends lower, then that would indicate lower volatility, which usually comes with a more bullish environment for stocks. IF the VIX reverses back higher, then current resistance levels should hold and the markets should trend lower.

Here is a "historical" look at the VIX in comparison with the S&P 100 Index (OEX). I've tried to point to recent "inflection" points of higher VIX and lower VIX levels, and correlate that against the OEX inflection points.

Comparison of VIX (upper) and OEX (lower) - Weekly Intervals

I admit, I'm more of a "bullish %" chart watcher than I am a VIX watcher, only because the bullish % is bound by a range of 0-100. The VIX can range from 0-infinity, and doesn't give me as good of a feel for "market risk." However, the VIX and the Bullish % are two types of indicators that many deem "contrarian" When the VIX is high, it usually comes when a market is under more extreme selling pressure. When the VIX is low, it is usually when a market is environment is more bullish.

Again... I'm being unbiased. If both charts (weekly) were stocks, wouldn't you say that the VIX might be "technically" weak, especially if it drops below the November low reading of 26.41, and then my "fitted" retracement level of 25.66? At the same time, doesn't the weekly chart of the OEX look somewhat bullish and perhaps look able to test the recent highs?

As I look at the oscillators of both, the VIX stochastics have turned lower, and MACD is trending lower below zero. Both look "bearish" or LOWER trending on the VIX. Hmmmm.... if the VIX goes lower, then that might correlate with a more BULLISH equity environment. OK.... I've got may OEX alerts set at 472.50 and 475.00. For grins, I'll set a DOWNSIDE alert on the VIX at 26.41 and 25.66.

Then... if I get UPSIDE alerts on the OEX and DOWNSIDE alerts on the VIX, I will have alerts to bullishness at what looks to be some correlative levels we've identified.

For you QQQ traders, that may be analogous with a QQQ above today's R1 of $27.06, which is also just above our key "volume pivot" level of $27.00, which is where the QQQ broke BELOW $27.00 on December 4, on volume of 130.4 million shares and then continued trending lower to the recent low of $24.28 on December 31. In our nightly Index Trader Wraps, we've been following the NASDAQ-100 Bullish % ($BPNDX), which yesterday gained 2% to 64%, and not unlike the OEX Bullish % is pretty close (2%) from reversing back higher to "bull confirmed" status.

Remember... it was on Tuesday that the VERY NARROW Dow Industrials Bullish % ($BPINDU) reversed back up into "bull confirmed" status at 56.67%, from its recent low reading of 50%. Again, each stock that gives a reversing buy or sell signal in the Dow bullish % is worth 3.33% as there are only 30 stocks in this index. By nature, the narrower sample (just 30 stocks) tends to be "faster moving," but that's why we follow it, for the early "heads up" to internal strength/weakness on reversal up or down.

Then do you see how we build more observations with the NASDAQ- 100 and S&P 100 bullish %? While the Dow gives us just 30 samples, we get 100 samples (some overlap) in the NASDAQ-100 and S&P 100 bullish %. Which are close to reversing back up.

Then, we build a larger sample of observations in the broader yet S&P 500 Bullish % ($BPSPX). Last night's reading was 62%, which was a net gain of 1.8%, or a net gain of 9 stocks to reversing higher point and figure buy signals. The S&P 500 Bullish % ($BPSPX) needs a reading of 64% or a net gain of 10 more stocks (2% of 500 is 10) to trigger reversing higher point and figure buy signals to reverse back up into "bull confirmed" status.

Then... the broadest of broad bullish % are the NASDAQ Composite Bullish % ($BPCOMPQ) and NYSE Composite bullish % ($BPNYA) which have NOT reversed lower like the "narrower" S&P 500, S&P 100, NASDAQ-100 or Dow Industrials Bullish % and they (NASDAQ Comp. and NYSE Comp) remain in a still bullish condition.

Even from the bullish %, we get a "feel" that the "narrower" bullish % are on the cusp of all turning bullish, but they aren't there yet. The major indexes themselves are at what look to be "key levels" of resistance that just haven't been broken at this point.

This always concerns me

I just received another e-mail from a trader that holds numerous put contracts in various indexes with March expiration and his/her head is spinning as some pain is being experienced since early January. What does he do if the market responds bullish to this morning's economic data? Losses right now are at $60K.

The "positive" thing right now is that we're talking March expiration, and NOT January/February expiration. The reason I say "positive" is that at least the bullish % in the SPX and OEX are still relatively high and closer to 70% and we're not down closer to 30% with some internal signs of bullishness starting to appear.

I think, if the OEX breaks above 472.50 in the next day or so, then some risk needs to be removed from the account, as I would at least assess risk to OEX 485. But I would wait for the MARKET to prove it with an OEX trade at 472.50.

With the markets acting a bit more "bullish" than many bears have figured on, I would also look to reduce RISK in the account on a near-term decline back to 465, which is just above the 50-day SMA. In fact, that may have been what other bears did yesterday in the strong rally after Wednesday's close right back near the 50-day SMA. I don't care if its $60K or $1K in losses that has a bearish put trader nervous right now. The fact that the trader is nervous is sign that things aren't going to plan, but most likely the nervousness comes from being OVERLEVERAGED.

A cutting of 1/2 position in March expiration is probably deemed "necessary" for a trader that now feels "over leveraged."

A trader that cuts 1/2 position in an over leveraged put position, could also establish 1/4 call position. Again... look at the VIX chart above. With the VIX at least LOWER, option premiums have come DOWN compared to late December levels.

My thinking for somewhat of a partially "hedged" situation is this. With the bullish % closer to 70% in the OEX and SPX than 30%, there is the possibility that an extension of the current rally carries legs to the end of January and into February. Perhaps 1/4 calls on an OEX break ABOVE 472.50 with February or March expiration, gives some coverage or exposure to further upside on a "near-term basis."

Why still hold 1/2 of a March expiration PUT position? I don't think a war effort with Iraq is out of the picture at this point. Do you? Yesterday's news out of the U.N. inspection team was that there was "no smoking gun" found. While that may have delayed a U.S. war effort with Iraq, the U.S. will now have to reveal its "cards" or information as to why it has felt all along that Iraq has been building weapons of mass destruction.

So, the bottom line for this trader and those that may be in the same type of "predicament" is that you've GOT to establish a level and PLAN on getting things back to a more tolerable level of account risk management.

There is no way that you or I could have predicted President Bush's plan to almost double his plan for tax relief this past weekend. My "assumption" here is that the recent bullishness found on Monday was "tax relief" and talk of dividend tax cuts.

I will say this. One thing that I "don't like" about solely trying to trade the major indexes by themselves, is that it has the trader always wanting or needed to be on the RIGHT side of everything. ESPECIALLY in a market environment like we're in, with so much UNCERTAINTY (is economy recovering, tax-relief, war, terrorism, corporate fraud) things can change very quickly as each "scenario" can come into play on a daily if not hourly basis.

It is VERY rare that the Dow Industrials would trade down 2% one day, while the NASDAQ-100 would trade up 2% that day, and have a trader put the Dow and call the NASDAQ-100. Nope, you pretty much have to be one side or the other as the indexes tend to mimic each other in direction.

It is THIS very point that I have tried and tried to instill in traders that you CAN NOT OVER LEVERAGE in trades. Maybe $60K isn't a "big loss" if the account is a $1 million dollar account, but I don't know what the size of the account is. I don't care how big the account is. I DO CARE that an investor's head is spinning at a point of resistance.

While I said that there are things that I don't like about index trading, don't get me wrong. I love index trading, but in times like we're in right now, with so many potentially bullish and bearish scenarios at play, an index trader that is entirely put, should at least think about offsetting some of that bearishness with some offsetting calls in STRONG stocks that exhibit technical STRENGTH.

Heck... individual stock trader that short/put WEAK stocks and buy/call STRONG stocks tend to increase their odds of making money in uncertain environments.

Well... it's very late or should I say early this Friday morning and I've got to get some sleep, but some of the above commentary will hopefully be useful.

Jeff Bailey

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