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Index Wrap

Lather, Rinse, Repeat

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      8-16-2001          High      Low     Volume Advance/Decline
DJIA    10392.52 + 46.57 10395.21 10271.57 1.06 bln   1681/1389 
NASDAQ   1930.32 + 11.43  1930.46  1879.07 1.59 bln   1755/1857
S&P 100   605.03 +  2.01   605.31   596.26   Totals   3436/3246
S&P 500  1181.66 +  3.64  1181.80  1166.08
RUS 2000  481.68 +  2.73   481.68   474.06
DJ TRANS 2864.22 + 30.56  2868.36  2826.41
VIX        23.83 +   .06    24.81    23.42
Put/Call Ratio      0.96

Lather, Rinse, Repeat
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A one-day, short-cover rally off the bottom on average volume already has CNBC asking if markets have reached a bottom THIS TIME. I suppose if I had to sell advertising and keep people glued to the set during the slowest period of the year, I would keep my comments upbeat too even if the economy was not so hot.

Be that as it may, here is what happened. Not surprisingly the markets were weak this morning following yesterday's turning to bearish indicators. Ciena (CIEN), an optical telecom equipment manufacturer beat their own numbers (I refuse to say "analyst estimates" anymore since companies give analysts their opinion in their canned Regulation FD guidance) by a penny, but alas, was forced to admit having grown a respectable 96% in sales last year, its forward growth would be in the "low teens" - still good by smokestack standards but downright lousy compared to the 53% increase they had analysts spouting until the announcement this morning. Oops, just a bit inside! CIEN cratered $8.50 to close at a very un-meteoric $19.62, a level not seen since December of 1999.

That said, the NASDAQ-100 was down nearly 50 points to 1525, the Dow was down nearly 75 points to 10,271, and the SPX off 12 points to 1166 at their lowest points.

Fret not. For surprisingly, economic figures released this morning were positive overall, though they did not help the market in the early going. New housing starts were up a whopping 13% over July last year - a real estate bubble, yes, but manageable thanks to cheap mortgage rates (now under 7% for fixed 30-yr loans) and an aggressive Fed bent on growing the money supply 20%+ per year to stave off a major recession. Until today, I would have said it was not working. Still all bubbles burst and real estate excesses will get wrung out just like stock market excesses have been wrung out. Truthfully, stock overvaluation is still a problem, but not by 52-wk comparisons that make them out to be practically free relative to history.

Initial jobless claims were reported at 380K, about 15K less than anticipated, which suggests that that layoffs are stemming. CPI too came in on target at +0.2%. But the core rate, which takes out the volatile food and energy sectors, was actually down 0.3%, 0.2% more than the forecast negative 0.1%. We all know that food and energy are major components of the budgets we all spend each month and it is truly good news that those two ingredients became more affordable. So why did the markets tank on good economic news? Beats me, but CIEN and the technical charts to be seen in a minute had a bunch to do with it.

That begs the question though as to why markets rebounded in "V"- fashion off the lows. We can find no answer there either except to say note that technicals played a big part as the put/call ratios took a substantial jump this morning - too many bears on the immediate negative side of the boat. Contrarians jumped in which is surmised to have started a short covering rally.

One could also make a case that July lows were tested and held again, which was ultimately bullish. Possibly a feeling of the train leaving the station again contributed to the volume that had the indexes closing as follows: S&P 500 up 3 to 1181; NASDAQ-100 up 9 to 1581 (excepting yesterday, still a new closing low since April); and the Dow up 46 to 10,392. All are respectable recoveries off their lows, but has the tide truly reversed? Peek over my shoulder as we dissect some charts, Dow first.

Dow Industrial chart (INDU):

While bullish investors, analysts and willing accomplices in the media feel great pointing to today's bounce back as evidence that markets have hit bottom, the bigger picture is that on both daily and weekly charts, a neutral wedge is still under formation and stochastics are rolling over in mid-stroke. On the shorter time horizon though, 60/30 charts show a head f steam still to burn off. The range between 10,400 and 10,450 represents a formidable barrier to punch through. Notice the Dow stopped short of that 10,400 figure. It still has yet to clear resistance. A little bullish followthrough tomorrow morning that would carry the 60/30 oscillators to overbought could easily roll over into the close, thus keeping the freshly turned daily and weekly stochastics favoring the bears.

NASDAQ-100 chart (NDX):

NDX is even weaker unable to obtain entry speed to the bullish sentimental on-ramp. The weekly candles stagger to another recent low while the tired stochastic rolls over with nary an effort to remotely approach overbought. The daily chart too shows a breakdown at 1600 that could easily become resistance going forward, with bearish stochastic to boot, in continuation with the downward weekly trend. However, for bulls, it is worth noting that today's candle hit the lower Bollinger band extreme and the shorter-term 60/30 charts are full of bullish life, at least for now. Whether or not that is enough to get back through 1600 resistance is a different story, but that will not likely prevent an attempt on it at some point tomorrow. It will have to be pretty strong to reverse the bigger trends.

S&P 100 index (SPX):

In professionals' estimation, SPX is the market. It too is showing long-term signs of weakness and short-term signs of strength. Note weakness demonstrated by the stochastic rollover of the daily and weekly charts. But there is a hint of strength on daily chart as today's candle touched previous support and the lower Bollinger band extreme, then rocketed back north leaving a long tail of dead bears. 60/30 charts still have some momentum behind them. It may break back over 1185 resistance, but 1200 will be much tougher and the bigger trends suggest that will not happen, at least not yet.

The VIX is still indecisive too at 23.83 having reached nearly 25 today. While it suggested fear was on the rise, it is a far cry from the 40-60 we have seen at times in the last three years. While not in diehard bull camp at 20, major fear is still missing from the markets. Meanwhile the values coil here too, portending a big break that could materialize in either direction.

Earnings tonight from HWP and DELL may provide fodder for tomorrow's market. Dell reported numbers inline with earlier FD guidelines but was a bit light on revenue. The real smack between the eyes came as they revised numbers downward in Q3, typically a good quarter for them. HWP beat their own numbers by and says seasonal sales will give them some sequential growth into next quarter. DELL says down, HWP says up. Who do you believe? The company growing market share, or the one losing it, but exceeding its own previous guidance?

LU too tossed some good news into the mix too, that is if you consider their lenders' collective blessings to amend their loan terms to be good news. It allows them to complete their spin-off of their remaining Agere ownership, fire 15-20K people, and write down $7-$9 bln in restructuring charges. That is as good as avoiding bankruptcy for now and investors should be happy about that? Beats a poke in the eye! Gap and Kohl's beat their own numbers handed to analysts too by a penny but offered negative guidance in the case of GPS and no guidance in the case of KSS.

For tomorrow, expiration day, as in the past, direction is hard to predict, but chop is a given. Filtering all noise and focusing only on the charts, the short-term trend up the 60/30 is likely to continue in the morning. But toppy short-term oscillators in the afternoon could easily encounter investors wanting to sell going into the weekend, which should leave the long-term charts intact and pointed down. Personally, I will be leaning toward shorting or buying puts into any strength tomorrow until the long-term charts tell me I should do otherwise.

And that, ladies and gentlemen is a Wrap! Make a great weekend for yourselves. See you at the bell.

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