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Index Wrap

Ostrich, The New Red Meat

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        7-26-2001          High      Low    Volume Advance/Decline
DJIA    10455.63 + 49.96 10459.02 10284.09 1.22 bln   1916/1153	
NASDAQ   2022.96 + 38.64  2025.88  1963.21 1.75 bln   2128/1531
S&P 100   619.14 +  5.19   619.85   608.67   totals   4044/2684
S&P 500  1203.20 + 12.44  1204.18  1182.65             
RUS 2000  484.75 +  8.08   485.07   475.74
DJ TRANS 2929.06 + 64.15  2931.78  2851.23 
VIX        25.15 -  1.55    27.40    25.15 
Put/Call Ratio      0.54

Ostrich, The New Red Meat
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There is a new breed on Wall Street. They are not bulls. They are not bears. But cleverly disguised as the new red meat, their flavor is frequently confused with that tasty steak investors have always loved. Why do I bring up the ostrich? In keeping with my theme of "what facts can we ignore today", it is widely accepted (true or not) that ostriches bury their heads in the sand/dirt out of fear. Their presumed thinking is that if they ignore it and cannot see it, there is no danger. No bull!

The markets today did not start off in bull mode. In fact, they started with a slow bleed that saw the lows of the day about two hours into the session. At that point, the Dow was down about 115 points, well off its pivotal 10,400 level at 10,294. The S&P was off 8 points at 1182 while the NASDAQ 100 was off about 30 points at 1604, a hair above the critical 1600 level (or $40 on the QQQ).

There was plenty to suggest the markets had good reason to fall. HWP pre-announced (for the sixth time since last year) that they would miss earnings and revenue by a long shot, and would cut 6000 jobs. And while the bureau of labor statistics initial jobless claims came in at 366K filings (50K lower than expected), which was waived off as an aberration largely due to the huge fudge factor in the numbers, durable orders figures were down 2%, twice the expected amount. Looks like few at Hewlett Packard are lining up to buy new washers and dryers.

At least for the Dow, both HWP and MO (thanks to its egregious suggestion that money can be saved by governments if smokers die early) offered heavy anchors in the early going.

Now keep in mind that Europe is seeing a slowdown, as is Asia and the slowdowns are beginning to intensify worldwide. Brazil with heavy exposure to Argentina has not just gone away because the news has not focused on it (more ostrich behavior). The difficulty is international, not just here in the U.S. In addition, there are few companies reporting earnings that have not also warned of a lousy outlook and poor visibility.

Then there is the popular refrain of, "There is not anyone surprised by crummy earnings and that is already priced in." The thinking is that prices cannot go any lower from here because all the bad news is reflected. We have heard that for the last seven months, and seen in fact that things can get worse. As Scott McNealy said (and you hear me repeat), "If no one saw the cliff, how do they know where the bottom is?" Investors are pre- supposing the worst will happen by the end of the year, and a turnaround will start on January 1, 2002. Says who and how do they know? A CFO or analyst? Don't get me started.

Be that as it may, and my personal economic beliefs aside, those pivotal levels of resistance did not hold and were taken out to the upside quite nicely in today's reversal. Particularly impressive was the willingness of buyers to step up at 1650 on the NDX (2000 on the COMPX), 10,400 on the Dow and 1190 on the SPX. Ignore the facts if they must, but investors wanted to be bullish today. Also impressive were all markets' abilities to not only close up from their lows, but completely reverse their losses to significant gains - more than a 100% retracement of the day's losses, a difficult feat, and sign of the bull when it happens.

OK, so what about the HORRIBLE earnings out of JDSU? Will that change things tomorrow? Well, the market was able to shrug off HWP news so why not JDSU? If you missed it, JDSU reported a loss of $0.36 vs. estimates of a $0.03 profit, and up to 16,000 layoffs this year, that figure significantly up from the 5K announced last quarter. They see no signs of reversal in their industry. Things are simply much worse than they expected.

However, to their credit, the $0.36 loss INCLUDED restructuring and inventory writedown charges that other companies ignoring GAAP standards would have left out and dismissed as a "one-time charge". Also noteworthy is that JDSU has already layed off 9K of the total 16K. Nonetheless, they revised Q3 estimates down, but offered no guidance. The stock was punished when it reopened trading at just over $8.

For those who care, QCOM beat their estimates but started using the word "pro-forma", code word for, "we cannot justify our numbers on a fundamental basis". Nonetheless, QCOM was up in after hours trading.

With news like that for JDSU, and hope like that for QCOM, maybe it is a bottom! The strength in the charts certainly suggests that. Let us look.

Dow Industrial chart (INDU):

Tough to argue anything but bullish with these chart patterns. Starting with the weekly stochastic, we have been given a fast over slow bullish cross. On the daily, the stochastic decline was halted mid stroke. Notice too the bullish hammer on the daily candle chart. It has a white body with a long tail showing how bulls gored bears at today's bottom to push the index back above its opening value and above resistance at roughly 10,400. Still there remains much noise on the way to the next major resistance level at 10,600. Note too that the 60/30 stochastics reversed in mid-decline and are just now entering overbought, but buying pressure is still on. Many will be encouraged to act tomorrow on what they saw today.

NASDAQ 100 chart (NDX):

Even the NASDAQ has shown remarkable strength. The jagged tail on the weekly stochastic finally shows an uptick, but that can be easily erased. More important is the daily stochastic which gave a bullish line cross from oversold coupled with bullish divergence of the stochastic and price action. Finding support just above 1600 ($40 for the QQQ) and bouncing up through 1650 resistance was a bullish development too. 60/30 stochastics are also pointed up, but notice the porposing of the fast stochastic line on the 60-min chart. It has surfaced and looks ready to go under water again. The same is true with both lines on the 30-min chart. There is strong possibility of some retracement on those long white candles in tomorrow's early action.

S&P 500 chart (SPX):

Finally, we get to the grand daddy of them all, the S&P 500, which in my opinion really is "the market". It is not as clear-cut as the other two, which suggests to me the possibility of a headfake, and that we may still be in bear country. The case for the bulls is that weekly stochastic is showing strength and support has held up well. On the daily chart, the stochastic is attempting to reverse mid-downstroke. If successful, bullish divergence would be confirmed (two black lines). Furthermore, today's long white candle is a positive for having broke through 1190 resistance.

However, the bears would argue that 1208 is the real number at horizontal resistance to clear, let alone 1202 (current level) at the descending trendline, which can still mess things up for the bulls. Finally, the 60/30 candles and oscillators are topping out suggesting that the next immediate move may be down. Not all that surprising as traders head into a weekend following two days of nice gains. Bulls appear to be in control and may very well win the immediate battle. But bears are much more present here than in the Dow or NDX. Their strength may just a paper tiger. As goes SPX, so goes the market.

VIX is mirroring the SPX (no surprise) and has maintained its ascending channel. Tomorrow, it can stay the same, or fall out of the channel (under 24.50), which would be a very bullish indicator. On the other hand, if the channel holds, a bounce up to 29 or 30 would be short-term bearish, but also indicative of "too bearish". And that by a contrarians' definition says it's time to get long. Either way, bulls will see action, but they may be disappointed if it does not happen tomorrow.

What of tomorrow? Likely there will be some bullish followthrough after the bell. Following that, 60/30 charts are toppy and may see some reversal as investors take some profits off the table for the weekend later in the day. Overall, there are signs that bulls will ultimately prevail over the next few sessions.

It is so easy to be a bull right now. Investors want desperately for this to be the proverbial "bottom" and figure that the worst is over. Only when everyone believes the worst will never be over will I be comfortable that the market will rally. Sure bulls will have their day since human emotion runs in cycles. They always have and always will. So too will oscillators oscillate and tell us that in graphic form. It may very well be a moment of sunshine that greens the pasture for bulls - that is until the next overbought oscillator rolls over. But for now, the bulls have a fighting chance.

See you at the bell!

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