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Rate-Cut Rally\?

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        06-28-2001        High      Low     Volume Advance/Decline
DJIA    10564.73 +131.37 10646.45 10438.66 1.30 bln   1882/1213	
NASDAQ   2125.32 + 50.72  2157.32  2096.88 1.93 bln   2319/1398
S&P 100   635.33 +  8.89   640.63   626.69   totals   4201/2611
S&P 500  1225.82 + 15.13  1234.44  1211.07             
RUS 2000  502.99 +  7.41   503.31   495.58 
DJ TRANS 2765.56 + 65.36  2780.21  2700.78 
VIX        22.58 -   .99    23.34    21.65 
Put/Call Ratio      0.50

Rate-Cut Rally?
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Just note that one day does not make a trend. While on the surface things looked positively bullish today, we stand ready with a bucket of cold water.

Sure this looks good. The Dow was up over 200 points, The NASDAQ COMPX was up over 80 and the SPX was up over 20 by mid-day. Then gravity took over and all fell substantially back from their mid-day highs into the close making for some ugly short-term chart patterns, which we will get to in a minute.

Still, investors wanted only to acknowledge the positive and ignore the negative. Hear no evil, see no evil, speak no evil!

This action was undoubtedly born at yesterday's rate cut, but not for the reasons you might think. The crux of the matter is that bond owners gave hints that they might be selling their holdings, thus raising cash for other endeavors. The followthrough today was pretty convincing, as bond rates rose on the 5, 10, and 30-year notes/bonds. A big chunk of the proceeds likely made its way into equities.

Many in the news media would have you believe today's rally was a result of the appeals court decision on Microsoft (MSFT). No so fast. While rumors began to circulate prior to today's open that a ruling would come down substantially favorable to MSFT, which did generate enthusiasm for technology and other issues, MSFT halted trading just after 11:30 ET. The market also halted its advance pending the news, and traded flat for the next few hours until the announcement. Once MSFT reopened at about 2:45 ET, the market began a precipitous selloff into the close. This is not the stuff major market reversals are made of.

Not that it matters much to anyone but holders of MSFT stock (there are a number of us out there), but the verdict was that MSFT is still a monopoly, though not nearly as evil originally judged, and a breakup was deemed too harsh a punishment. The appeals court also held that the presiding judge, Thomas Penfield Jackson, was biased in his ruling against MSFT, stemming from a very UN-professional magazine interview where he compared Bill Gates to Napoleon Bonaparte, this during the middle of the trial. Oops! Bad judgment, Tom. In the end, it was a win of the battle for MSFT, but the bigger war goes on.

Anyway, back to the markets. In the end, the Dow finished up 131 at 10,566. The NASDAQ 100 tacked on 53 to close at 1808. And the S&P 500 closed up 15 at 1226. But volume still fits in the "moderate" category, which has me convinced there is no real conviction behind today's move. This is a tiny bull in a big bear's valley. It was just mom and pop in today's move. Institutions are nowhere to be found except on the sell side. Buyer beware!

Concerning economic news, it did not hurt either that initial claims came in under 400K. (Never mind that NOK, DE, and DCX announced a total of roughly 3500 layoffs this morning.)

Aside from the volume, the other evidence we have is that there was no 3-box reversal on the SPX on the point and figure ("pointy finger") chart as astutely pointed out by Jeff Bailey in a Premier Markets update this morning. Nor was there a 3-box reversal on the NDX. We still see a column of O's on both. The Dow got a 4-box reversal though, but must hit 10,800 for bullish confirmation.

But here is the clincher for of us who believe that history repeats. There has been a rally on the day of, or the day following, all of the last five rate cuts, which acted as a prelude to a selloff. Personally, I see only one reason to think today's action might be sustainable, perhaps for as much as the next week. Maybe not even that long. That one reason is the daily chart stochastics on the major indexes.

Let us take a peek, shall we?

Dow Industrial chart (INDU):

The first thing we notice is a weekly chart in steady decline and likely to stay that way. The second thing to notice is the daily candle pattern in a steady decline of lower highs. In fact, had we drawn the declining trendline two weeks ago, today was a perfect touch, then retreat. There is a lot of congestion at 10,700-10,750 to help keep it down. Not only that, but the 60/30 stochastics are rolling down fast in a bearish current.

But for the bulls, (trumpets please!) there is no denying the oversold stochastic condition just dieing for a breakout over 20%. That is most likely going to happen someday soon, and today may have been that start if only for a short trip back to what bulls should hope will become overbought.

NASDAQ-100 (NDX) chart:

NDX looks just like the Dow - weak all over except the daily stochastic. Except in the case of the NDX, there is yet again a brand new gap up created this morning that now needs to be filled to the downside. Make no mistake, it will happen. But it is anyone's guess as to when. The point now is that the long wick, the bump into resistance at the descending trendline, the difficulty of breaking through 1850 congestion, and the falling 60/30 stochastics from oversold could make it really tough on the bulls. Their saving grace? Again, the daily stochastic clearly going their way (for now).

S&P 500 (SPX) chart:

SPX? In a word, "ditto". Long tail despite the white daily candle, and a fallback from the descending trendline. 60/30 stochastics suggest further retreat. The bulls' saving grace is that the daily stochastic is still emerging from oversold. Well, gotta have something in which to sharpen the horns! Resistance is still formidable at 1241-1248. Improbable as it seems, the daily stochastic is signaling that it is time to move off the bottom.

Then there is the VIX, still at odds with the stochastic oscillators. At 22.58, it came off its lows in the 21 range earlier today. It still shows bullish optimism is nearing a high in the form of call buying or put selling. 18-22 is considered to be a contrarian indicator signifying that too many people are on the bullish side of the boat, and realizing their situation, stampede to the other side to even things out, thus creating a new downward price trend in market terms. Fact is that VIX has been in the 18 range in August of last year. If stochastics are any indicator, the VIX could sink further while we wait for bearish players to assert themselves into the VIX formula again.

As for tomorrow, I would expect a weak opening, though anything is possible - 60/30 oscillators say so. The daily trends are decidedly up though. I cannot argue with the instruments. They work generally. However, the final word of caution again is that any bullishness following recent rate cuts has made hamburger out of participants within two days of the announcements. Do not get caught up in the rally without a clear understanding that is likely only temporary. This is not the time to be going long in order to live happily ever after. Burger, er. . .buyer beware!

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