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Childhood Memories

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        07-02-2001        High      Low     Volume Advance/Decline
DJIA    10593.75 + 91.32 10638.87 10467.38 1.11 bln   1600/1471	
NASDAQ   2148.72 - 11.82  2181.05  2140.65 1.51 bln   1555/2234
S&P 100   639.96 +  7.94   642.08   632.02   totals   3155/3705
S&P 500  1236.72 + 12.34  1239.78  1224.03           46.0%/54.0%
RUS 2000  498.39 - 14.25   513.28   498.25
DJ TRANS 2806.50 - 27.06  2836.63  2802.80
VIX        20.29 -  1.34    21.58    20.26
Put/Call Ratio      0.60      

Childhood Memories
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"Daddy, tell me again about how you and Mommy borrowed yourselves into prosperity by taking loans against our house, your credit cards, and bubble-stock portfolio." How would that go over as a bedtime story? Well, apparently pretty good since Americans seem to be losing no sleep over it, and are more willing than ever to spend more than they earn thanks to Easy Al's pay-it-if-you-can credit policies. Income woes got you down? No problem! Al will lend you money based on your inflated assets!

All parodies aside, that is exactly how our economy remains propped up when income consistently rises less than the rate of spending. For those keeping score, personal income rose 0.2% while spending rose 0.5%. But instead of reminding investors about the dangerous house of (credit)cards, those looking through rose-colored lenses figured increased consumer spending must be good for business, and raised stock prices accordingly.

Not only that, the National Association of Purchasing Managers (NAPM) Index came in at 44.7%. Anything under 50 is considered a contraction, but no matter! The rate of contraction has slowed from last month's reading of 44.5% - over 2% improvement! Sorry folks. A skydiver whose defective parachute slows his descent down by 10 mph still hits the ground pretty hard.

Did we mention that 3M warned too? Nothing major - FY01 earnings will still be in the $4.50-$4.75 range, though $4.83 is the current consensus estimate. They cited a strong dollar, slowing sales in Europe and Asia, plus the slowing U.S. economy as reason for the expected shortfall. Any yes, the price rose $3.16 on heavy volume to close at $117.26. Incredible!

So what the heck is going on in the markets? Should prices be falling? Rationality says yes. But rationality has never been and never will be part of a trader's market as long human emotion is part of it. That said, investors perceive a bottom and nothing, not even reality, will stop them from not missing out on the next bullish move happening right now.

How do we know? We never do for sure, but rising stocks when economic news gets an investor upgrade from "horrible" to just "bad" is a pretty good sign. Human emotion runs in waves from euphoria to depression, and oscillators oscillate accordingly. Stock prices move up or down as a result, and stocks want to rise right now, at least until the next peak on the stochastic indicators. Shall we take a look?

Down Industrial chart (INDU):

I hate to be bullish in light of still negative fundamental news, but the Dow chart does not lie. The weekly candles have flattened out and found support at the 20-dma. But the daily candles (I am about to make a blanket statement here) have given birth to a new upward trend. The daily stochastic is the big green flag for me. As we noted last Thursday, one day does not make a trend. However, the fast (blue) over slow red) stochastic cross all but assures full bull ahead for perhaps the next few days or a week, especially now that the slow red line has finally poked up from 20% oversold. To me, this reads, "buy the dip", scary as it may be. The ascending trend line is a good show of strength too.

The only detractors here are the 60/30 oscillators in overbought territory, and rolling over. We have seen dips in the past two days, and they have been buyable though the oscillators have not reached oversold. 10,500-10,550 looks to be the magic support level. Any less says, "Stay away".

NASDAQ-100 index chart (NDX):

Like the Dow, the NDX is stable on the weekly chart. The daily is in full ascent mode too, but is further up the scale indicating that it may be running out of steam, but probably not just yet. The gap created last Thursday needs to be filled too. Meanwhile resistance building around 1850 is cause for bears to take notice. Take heart. Though the 60/30 oscillators are rolling down, that might be merely a buying opportunity as suggested by the bigger bullish daily stochastic trend. Look for support at 1775-1800.

S&P 500 chart (SPX):

Similar situation here on the SPX too. Stable weekly candles, bullish daily stochastic. Unfortunately, despite the rise in the oscillators, the candles are not keeping pace. SPX was stymied again today at 1240, which also happens to be the 20-dma. Meanwhile support is around 1210, and the 60/30 setup is overbought and forming a bear flag, suggesting the next move is down. On the other hand, if SPX can get back and hold over 1240, resistance would be broken and allow for the next move up to around 1248. Dip buying might work this week, but the signals tell us that the prospects of marching up strongly are debatable.

One decidedly bearish sign is the extremely low VIX at 20.29. It has not been this low in nearly a year. While we have seen it lower, it is signaling investors' (over)optimism in the future. Many calls are being bought or puts are being sold. Either way, there are too many bulls in the market now, which tells the contrarians to get ready for bearish action coming to a trading floor near you! No need to check your local theatre for details. You will see it on the charts first!

As for tomorrow, the exchanges close early so we likely will not see much volume, though prices can still move drastically. The markets are closed Wednesday in honor of Independence Day. Once again, conflicting signals make it hard to call the direction. Stochastics are pointed up; the VIX is dangerously low for bulls. However, on any minor weakness, we tip our play toward the bulls as long as the daily stochastics keep moving up. The VIX will ultimately turn, but it may not be tomorrow. Remember too that as irrational as the market seems in light of negative fundamentals, we do not have to be right about it. We just have to make money playing what the market gives using support and resistance.

See you at the bell!

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