Option Investor
Index Wrap

Two Steps Sideways

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        WE 6-01          WE 5-18          WE 5-11          WE 5-04
DOW    10990.41 + 78.47 11005.37 -296.37 11301.74 +480.43  -129.93
Nasdaq  2149.44 + 38.95  2251.03 + 52.15  2198.88 + 91.45  - 84.10
S&P-100  649.61 +  3.38   658.29 - 10.09   668.38 + 22.95  - 13.31
S&P-500 1260.67 +  4.85  1277.89 - 14.07  1291.96 + 46.29  - 20.94
W5000  11671.40 + 61.20 11849.89 - 73.63 11923.52 +432.18  -195.93
RUT      501.72 +  5.22   508.62 +  2.34   506.28 + 18.92  -  5.53
TRAN    2887.05 - 58.85  2929.20 - 49.75  2978.95 + 99.39  + 10.37
VIX       23.96 -  2.00    23.15 -  1.11    24.26 -  3.22  -   .24
Put/Call    .53              .62              .47              .63

Here's a personal question: Is your house in order? Please forgive my prying but the question bears careful examination. According to the Bureau of Labor Statistics, over 60% of American families spent more than their after-tax income in 1999. The 40% of Americans who find themselves in the lowest quintiles of personal income earned an average of $12,340 per year and spent an average of $20,800. If we are to take out the retired people living off of savings and students living on their loans, 32 million households are running an approximate $8,500 deficit on their personal balance sheet. Indeed, Americans themselves are a high P/E ratio.

How are they doing it? How are they managing to stay out of bankruptcy court? Sadly, for many, they're not. According to the Visa Bankruptcy Notification Service, a record 2,250,500 filings for bankruptcy are expected for this year. Credit card debt is growing at a 12% annualized pace. Households are drawing on their lines of credit to make ends meet. According to a study by www.lowermybills.com, if bankruptcies keep pace with unemployment rates, then it could be expected that there would be over three million filings for this year.

Yes, expendable income is what makes the world go round. The crush of the middle class is coming on strong. The super rich are not hurting; a friend of mine tells me that in talking to a local landscaper that jobs over $350,000 were going as planned. However, it seems that jobs in any amount under that are being cancelled at an alarming rate. The same friend works out with a gal that manages a common ladies fashion store in a large metropolitan mall. On a Thursday of last week, total sales rang the cash register for $100 and change on the day. Her shift brought in $7.56.

Can you imagine?

Nevertheless, there is optimism. The consumer confidence number reported last week was nearly 8% higher than the previous month. Consumers say they are still planning to spend and that they feel the job market will be improving in the coming months. In that vein, the employment number reported yesterday was less horrible than expected but still 19,000 jobs were lost bringing the total of jobs lost in the manufacturing sector to 470,000. According to www.dismal.com, the share of the population that is employed has dropped by 90 basis points to 63.9%.

Obviously the market rebound from the April 4th lows has in large part been responsible for that renewed spirit in survey subjects. The Nasdaq had gained 41%, the Dow and the S&P each 17% off that bottom in just six or seven weeks. Wall Street strategists are near record highs in their recommendations for allocation of available funds to equities and the drumbeat for a second half recovery plays on. Passing through the living room last night, I heard Mary Farrell tell Louis Rukeyser that while earnings warnings are going to put a damper on things for this short-term time frame, this market is "so undervalued." I honestly didn't hear what she said to do about it because I was mouthing my protest as I walked right on out the other side of the room.

Yes, people are happy their market is "back to normal" as I have told you I've been hearing. Ralph Acampora has a new book out espousing the stealth bull market and Don Hays is as bullish as I've ever seen him to be. Optimism has been a nice respite for this bear market.

But in the week before Memorial Day, those familiar twinges of doubt started to resurface. The VIX and VXN sentiment indicators were just a bit too optimistic for the reality of approaching earnings warnings season. Maybe, investors reasoned, this market has gotten a little ahead of itself. Of course, we here at IS are just about always right. It's great isn't it? Never mind that we're always about two or three weeks early in being right. We're going to work on that!! However, as the great economist John Maynard Keynes said, "I would rather be vaguely right than precisely wrong." I have another favorite quote spoken again, I believe, by Keynes that I need to have painted or calligraphied and then framed for my office: "The market can remain irrational a lot longer than you can remain solvent." Ohhhh yes indeed! Words to live by.

To the Subject at Hand
The market was down slightly on the week though it looked like it was going to be a lot worse for a couple of days in the middle. The Dow finished down 15 points, the S&P 500 down 17 points and the Nasdaq down 102 points for a 4.5% haircut. The losses were considerably more substantial in the early part of this shortened past week. I had suspected that the first serious dip would be bought pretty aggressively, I can just never conjecture at what point that is going to happen. When the selling seemed to stall, buyers didn't wait to see if the other shoe was going to drop, they picked up the ball to run. A reversal in the decline on Thursday and then a renewed burst of continuing that movement on Friday served to sever the losses and make the week seem less eventful than it was.

At the point that the market reached lows this week, the stochastics indicators had reached what qualifies as oversold territory. There is bullish diversion in that price was equal to or better than the price where stochastics were oversold before.

Certainly the short term charts were oversold and on Friday, selling pressure abated intraday as evidenced by the up trending of price and ticks in contrast to the down trending of the TRIN.

What's it spell for next week? More of the same. The Fed injected over $30 billion into the banking reserve system last week. We can't fight that with big bets for downside. Nor should we place big bets on the upside at this point. This market is going to twist and turn; it'll be capped on the upside by the mixed economic news, investor complacency (VIX and VXN levels) and the injections of reality in the form of corporate warnings. On the flip side, the market will be supported by as much money as the Fed can print. You take your trades, you cut your losses quickly and take your profits when presented. That's just the way it is right now.

Enough of this! It's summer isn't it? Not here in west central Illinois. It rains every twenty minutes for what has seemingly been weeks now. It's cold and I'm liking it none! Had a great trip to Chicago this past week. You could have easily spotted me on Michigan Avenue. I was the only little lady clipping along with armfuls of shopping bags. Oh yes, I'm doing MY part in supporting the economy though I didn't see a lot of my fellow sisters in like form. Label me consumer spender number one! Hey, a girl's gotta do what a girl's gotta do.

Enjoy the rest of your weekend!

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