Option Investor
Index Wrap

Consumers Not so Confident

HAVING TROUBLE PRINTING?
Printer friendly version
       8-28-2001          High      Low     Volume Advance/Decline
DJIA    10222.03 -160.32 10382.83 10214.34  .98 bln   1232/1868	
NASDAQ   1864.96 - 47.43  1916.28  1864.72 1.41 bln   1337/2303
S&P 100   594.13 - 10.09   604.59   593.95   Totals   2569/4171
S&P 500  1161.51 - 17.70  1179.68  1161.17             
RUS 2000  474.20 -  4.73   479.27   473.99
DJ TRANS 2831.13 -  0.78  2838.52  2807.81 
VIX        24.02 +  1.58    24.23    22.51 
VXN        48.74 +  1.52    49.46    47.79
Put/Call Ratio      0.88

Consumers Not so Confident
Contact Support

The consumer as Atlas is beginning to shrug. We noted in last night's Wrap, "We will be keeping a sharp eye on consumer confidence to be released tomorrow in addition to the Michigan Sentiment to be released on Friday. They may foretell a waning consumer. In the mix will be the Q2 GDP growth on Wednesday, which if negative (meaning 0.0% growth or less) would be the first of only two nails needed in the coffin to officially label our economy "in recession". It could provide a big, negative psychological effect and offer proof that Atlas, the consumer, is shrugging."

The market's reaction was predictable, as a confidence level of 114 was much lower than the expected 117. It sold off. This has to make the Fed at least slightly nervous as evidence mounts that previous rate cuts, tax cuts, and "pre-bates" are failing to support the consumer, which is directly tied to the real estate bubble. But to those reading this column, this is old news, as we have pointed it out for months.

Some might think we have become too doomy and too gloomy for our own good, but we have to call it like we see it. We don't do this with heavy hearts and pining for the old days. We do it for educational purposes and potential profit. Our job is not label the market good or bad, but to paint the background picture in which we need to frame the current trading scene. The general fundamental trend is down and we cannot escape it, just as those seeking a sunset will never find one in the eastern sky.

That is also why once we establish the environment, we move to the objectivity of charts that clearly tell the oscillations of human emotion that operate with the predictability of the ocean tides. If that is negative, it is probably viewed so only by those who wonder why their trading accounts are not growing, and are in fact shrinking, as they buy each dip in anticipation that it is finally the "bottom" - the same bottom unlikely to show itself any time soon. But do not just take our word for it. Hear it from the master, Warren Buffett, himself.

I got this snippet from Richard Russell, 42-year publishing veteran who espouses the Dow Theory in The Dow Theory Letters. He paraphrases from the September 3rd issue of Business Week, "If you're looking for a rosy economic forecast, don't knock on Warren Buffett's door. The Berkshire Hathaway chairman, and King of All Value Investing, has been telling executives he meets with to brace themselves for a long, slowdown. Not only is there no turnaround in sight this quarter or even this year, according to Buffett, but those who've met with him say that he is predicting eight years of economic stagnation. Buffett attributes the standstill to a 'hangover effect' from the excesses of the late 1990s."

That is hard for even me to stomach, but there are even some analysts who are starting to get the picture. For that, I point to Piper Jaffrey who may be one of the first brokerages to point out the elephant in the cherry tree to investors that have previously refused to see it. It is timid, but makes them a maverick in a clubby business where brokers hear, see, and especially speak no evil. This comment relates to thrifts (money lenders) and is taken from briefing.com today prior to the market's open. "While most firms are defending the thrift sector after its recent battering, USB Piper Jaffray is taking a more cautious approach; the firm initiated three thrifts with NEUTRAL ratings today: GDW, GSB, and WM, citing valuation and the challenges ahead in the mortgage cycle."

Alright, enough! We know the background, how do we trade it? Start by noticing the evening star reversals in just about every major index chart. We see a green candle from Friday, a neutral or doji (or perhaps slightly negative) candle from yesterday, and a red candle today. All nearly perfect three-day candle pattern reversals. Barring some extremely positive news tomorrow news related to actually positive GDP growth (release at 8:30 ET), 20- dma resistance has been met and deflected downward. Check out the Dow for starters.

Dow Industrial index (INDU):

Dow weekly is in a bearish wedge but has yet to break it. The daily has topped out at its 20-dma and is hanged on to support by its fingernails. Note the green circle surrounding the daily candles - 1 up, 1 slightly down, 1 down big - nice reversal pattern occurring at horizontal resistance, descending resistance, and the dma. Not unnoticed is the stochastic showing a strong potential for reversal here. Nonetheless, shorter-term charts have found support in oversold territory and are begging for upside release. Though the Dow lost 160 points today to close at 10,222, it did so on typically low summer volume of 981 mln shares. Today's loss is not necessarily the death knell if there is not much participation, just as the low volume breakout from Friday did not signal a new bull.

NASDAQ-100 chart (NDX):

Similar for the NASDAQ-100 too. The weekly stochastic is pointed down, but looks to be perhaps turning. Still, in a pinch we watch the slow line (red), as it is more representative of the bigger trend, and that still points down. Of particular interest to me is the weekly lower Bollinger band making a slight turn downward, which effectively tells the candles, "Hey, you are more welcome down here than you used to be. Come on down for a visit." All this while the daily chart has touched its 20-dma, which acted as resistance. This is a perfect evening start reversal - 1 up, 1 neutral doji, 1 down. Long-term says down especially since the daily stochastic is showing signs of weakness.

Contrarily, the short-term 60 chart is showing the possibility of bullish divergence. The candle is higher as the stochastic cycles deeper into oversold. Both the 60/30 charts are also begging for upward release. Resistance would be then at 1540 where would quickly see just how much strength the move has. Best guess says not much unless SUNW dazzles the crowd with its mid-quarter update tomorrow.

S&P 500 chart (SPX):

Same story and chart for the SPX as the Sow, but different symbol. Bearish descending triangle barely hanging on to support as the stochastic is in full dive mode. The daily chart shows bear character too with 1 up, 1 slightly down, and 1 big down candle that touched its 20-dma before reversing (see green circle). No strength here either. The daily stochastic has the turnaround look about it as support barely hangs in there. Yet like the others, 60/30 charts are begging for upside release from oversold.

For tomorrow? Market conditions demand that bulls be successful only on the daytrades, for there is no long-term trend to support them. The bears appear to have a slightly stronger hand for position trading the dominant trend. Just keep in mind that low volume will likely not allow substantial profits in either direction unless gunslingers get in and out at daily extremes. It is still a very difficult market to trade without volume and wide investor participation. Market moves are abrupt, and lack duration or conviction making profits appear and disappear quick as a hare.

As mentioned above, the GDP figures could make or break the day. A GDP still showing some growth would likely be greeted as a sign that the economy is more solid than sentiment suggests. Conversely, a zero growth or negative growth would be greeted as dire and send investors a signal that rate cuts are not enough and we are sailing over the edge into a textbook-defined recession (two quarters of negative GDP growth).

Some real substance out of SUNW tomorrow could likewise put some support into the tech sector. Be on guard though for the "orders have stabilized and we are on target for earnings" platitudes favored in conference calls lately. It would signify no substance at all, but would likely trip amateurs (and buy-side analysts) into knee-jerk bullish plays, which will be great for bears who recognize it for what it is - fluff and inconsequential in the big picture. Anything delivered with quantifiable certainty (unlikely, but possible), even downward guidance and outlook, might be construed as a positive.

In short, the trading environment will depend on the news in the morning, but limited participation should keep us rangebound and down overall.

See you at the bell.

Index Wrap Archives