Option Investor
Index Wrap

God Bless The Fed

HAVING TROUBLE PRINTING?
Printer friendly version

Sometimes you're right and sometimes you just blow it. Last time I got to talk to you, I spoke that the Dow falling back to 10,400 was pretty much a lock. Nope. After a brief and mild sell off on the release of a known news event she came roaring back the next day. I hate it when that happens. At least the market is moving. Those tight, tight ranges were offering little opportunity and slicing all the premium out of options being held.

Yep, when you take a stand, you're going to be wrong sometimes. The other day I found an article profiling the Louis Rukeyser show that is seen on PBS Friday nights. The author had given glowing praise to the prescient insights of guest analyst AG Edward's Al Goldman. Al had said the market was a buy three weeks ago at a time that the market still seemed pretty shaky. The author was marveling at his intestinal fortitude. Give me a freaking break. Al Goldman had never said to sell. He hadn't seen the cliff coming and had told his clients to buy right on through it. How hard is that? If you never change your stance, you're going to be right sometimes.

Alright, glad to get that one off of my chest. Thanks.

How About This Market? Huh!! Huh!!

So the market wants to go up. Ok. The market is a forward looking entity and it says things are great. Super. I don't really believe that but with the Fed soaking all the ground with rivers of money, the tide is rising and all the debris starts floating up. The market says that if the Fed is hell-bent on inflating the way back to economic posterity, then stocks that have assets worthy of a hedge to inflation are valuable. How many of our readership own gold, copper, paper, lumber and steel company stocks? Those stocks have provided the backbone for the rally.

While the Nasdaq was in its trajectory to the moon in 1999 and early 2000, the NYSE advance/decline line was headed to the basement. Come to think of it, so was the Nasdaq's but you wouldn't have known it to see the price appreciation of the Nasdaq composite. No, about 50 stocks accounted for that parabolic rise. If you think about it, and a chart will show it, the Dow and the entire NYSE index has flopped around in No Man's Land for two years.

Carl Swenlin's Decision Point site www.decisionpoint.com shows charts worthy of peeking at every now and then. Here's the advance/decline line for the period in question:

Now take a look at the present day:

Would you buy this chart? My, my, my. Looks like a nice base to me. Can the advance/decline line "breakout?" Instead of looking at Newport (NASD: NEWP) we should have been looking at Nucor (NYSE: NUE). Instead of Avanex (NASD: AVNX) we should have caught on to Allegheny (NYSE: ATI). Broadcom (NASD: BRCM)? No way!! Try Boise Cascade (NYSE: BCC).

Maybe these aren't practical for our intents and purposes. We're options traders and are looking for volatility and swings. However, we have to look at the big picture and try to project the most likely scenarios. The facts are that the American public isn't stashing their money for retirement in a mattress or a pitiful low-rate bank account (which just got even lower thanks to Alan Greenspan and pals). No. They're dollar cost averaging into mutual funds. Those institutions have to put money to work. Where oh where should they buy? Remember when oil was so cheap? I bet they bought oil stocks back then and have been unloading them now to the public. Ever seen a lumber futures chart? I had a friend that used to send me that and the gold charts every week. How low could they go? Zero? Nope.

There really is something to this buy low and sell high thing. Those depressed sectors have several very sound companies. They're not the sexy New Era stuff though. No, they're gold and coal mining, steel manufacturers, lumber and agricultural type companies. They have reasonable P/E ratios and even have assets and positive earnings prospects. Fundamental analysis is back in vogue. They're not growing at a 30% pace year over year but they're solvent and steady. Those rascally institutions! How dare they buy stuff and make the market stay at such high levels. Personally, I thought Dow 7,500 would have been a great buy. And it will be. It's just that right now, there were still values to be had and with a Fed sponsored buyathon, the depressed sectors don't look so depressed any longer.

The market is not made up of just Cisco, Microsoft, Intel and Oracle. (Speaking of Oracle, why are all those insiders selling at any price they can get?) Anyway, the market's advance has been broad based and healthier than we've seen in a long, long time. The advance/decline line and the various sectors speak to it. Obviously, the question now is whether those sectors have seen enough appreciation that it's time to start distribution.

If you'll notice in the Commitment of Trader's report below, the commercials are lightening up their load on gold. Friday's big advance in gold was most likely a technical event. Buy programs were probably set just above the resistance of $275. When it went through that an avalanche of buy orders streamed in. Hmmmm. I bet that was fortuitous for somebody to trigger a trade at that level. *wink wink* Of course, once commercials start to disperse, it doesn't mean the rally is over. Now is about the time that the public will come in and start bidding it up. It'll be interesting to see how far they can carry it.

How About The Coming Week?

Dare I say it? I do every week. I do every time I talk to you. I'm sorry. I think it's going down. The daily charts are overbought, the Fed news is out and done for a bit, warnings season is upon us again, the equity put-call ratio is a low .41. The VIX is at the top of its Bollinger Band, which is a three month low. The VXN is once again even further on its all time lows and consequently has jumped out of its band. The first trading day after an options expiration is typically down and historically, the end of May produces a sell off as the seasonal cycle does its thing. And, and, and - there's no value out there. That last bit of fact is completely irrelevant though, as you well know.

Yet, any sell off, I think, will be nothing to get the masses all hot and bothered about. Watching the tape this week, I saw plenty of bids come in on any depression. They may let her fall, but they're waiting to buy. The S&P at 1291 is dead center of the 50 dma of 1201 on the downside and the descending 200 dma at 1335 on it's up side. The Dow has a line of resistance at 11,400. The Nasdaq . . . what's the Nasdaq? Oh yes, it's a chart that shows the price is at the foot of a very big mountain. The next line of resistance lies just 50 points ahead of where it's presently.

Now, that being said, I am of the opinion that this market is not going to return to under valuation any time soon. The Fed is seeing to that. What we'll have is a environment of deteriorating corporate earnings secondary to a global capital spending slowdown. We're a technology-saturated nation and price wars, energy and labor costs will cap profits. But, it's all buoyed by a Federal sponsored put. What an experiment. Greenspan criticizes those in his position during 1929 and Japan 1990s for not opening the money spigots. While what we're experiencing presently seems much more preferable to those disasters, it does remain to be seen what he hath wrought. Indeed, we live in very interesting times.

Good luck to you!

MKE

Index Wrap Archives