Option Investor
Index Wrap

NAPM Numbers, Part II

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        9-6-2001          High      Low     Volume Advance/Decline
DJIA     9840.84 -192.43 10028.35  9826.09 1.34 bln    997/2106 
NASDAQ   1705.64 - 53.37  1753.83  1702.92 1.85 bln   1101/2537
S&P 100   565.51 - 13.38   578.89   564.98   Totals   2098/4643
S&P 500  1106.40 - 25.34  1131.74  1105.83             
RUS 2000  453.39 -  9.12   462.51   452.60
DJ TRANS 2804.84 - 30.33  2834.83  2800.66
VIX        32.42 +  3.46    32.80    30.12 
VXN        62.01 +  3.28    62.01    60.06
TRIN        2.38 
Put/Call Ratio      0.98

NAPM Numbers, Part II
Contact Support

"Never turn your back on the ocean." I first heard those words uttered by my Grandmother as she let me explore the beach for the first time as a toddler. It is pretty hard to understand that concept at two years of age and I was promptly swamped by the incoming tide.

After it receded, I regained footing and looked up at her with a plea for guidance and explanation as the salt water dripping off my head stung my eyes. She again said, "Never turn your back on the ocean". Then I understood and have applied that concept throughout my life to avoid unpleasant surprises.

My Grandmother was a pretty smart cookie. If she were around today, she might be cautioning me to never turn my back on the market instead. But since she cannot do that from the hereafter, I will say it for her. Never turn your back on the market.

Why do I bring this up? The Dow's fluctuation of 140 points in the first hour of trading on NAPM services disappointment, followed by the DOJ's announcement that it would NOT seek the break up of MSFT, should serve as a reminder that whipsaw markets are as dangerous to our financial well being as the ocean is to our physical well being should we turn our back on either, even for a split second.

Unpredictable is the word that best describes today's action. Down, up, down, flat, down, up, flat, down. All moves without warning are enough to give even experienced traders a bad case of vertigo. We might also compare it to Jell-O squeezing, cat herding, or trying to catch a greased pig. Some activities are a no-win situation, or at least come with little reward for much effort. It is more fun to watch than participate.

So what is offered as explanation for such turmoil? For starters, the NAPM numbers for the service sector were released this morning to investors ready to greet them as a disappointment. NAPM numbers? Wasn't that on Tuesday? Yes, but there are two NAPM releases: one for manufacturing; one for services. Their release dates are different. Tuesday was the manufacturing number, which got investors excited because it was not as bad as expected. Today was services, which was worse than expected. Expectations still favored minor contraction under the 50% reading at 49.5% - nearly neutral. Instead, it showed 45.5%, well under expectation and deep in contraction-mode. Recession isn't just happening in the manufacturing sector. It is now happening in the services sector too.

"Look! There is an elephant in the cherry tree! I'd recognize those spots anywhere!" Anybody still holding the belief that consumers will hold up the economy before we get to a real recession need to adjust their thinking. The consumer is already on the wane. Real estate activity and values appear to have peaked despite the lowest mortgage rates in years. Retailers reporting same-store sales, especially clothing, but excepting discounters, are getting flushed like tech stocks. It goes hand- in-hand with the NAPM numbers.

"Oh wait. Those spots are just the cherries!" Or so investors thought, as the Justice Department announced that it would not seek a breakup of MSFT after all. We all kind of figured that, but today the DOJ said it. MSFT rallied up $2.34 for exactly 4.5 minutes on the news before investors re-spotted the elephant and whacked MSFT for $2.25 of that $2.34 over the next 11 minutes.

The Dow, SPX and the NASDAQ whipsawed right along with it. After immediately stopping us out of call plays held overnight, we stayed out all day despite our best attempts to find a trade in there somewhere.

Again, never turn your back on the ocean, the market, or the elephant.

Suffice it to say the economy has a long way to go before we see any signs of the hoped-for economic recovery, but analysts still don't get it. No joke, this morning I heard Dan Barry, a Merrill analyst say on Bubblevision, "Consumers are going to keep this bull market going." What bull market is he referring to? I have news for Dan in case he missed the last 18 months of market declines, or retail sales reports and the NAPM services numbers. Consumers are shoving their wallets deep into their front pockets and slowing their spending. Never trust an analyst on TV. They have an agenda, which is to get you to buy an overpriced product (even if they know it is defective) because it means revenue for them. Rational people see this for what it is - smarmy, stereotypical used car salesmanship. Don't believe anything the analyst tells you either.

Now that I have uttered "hoped-for recovery", please understand that there are actually two separate recoveries. One is an economic recovery. The other is a market recovery or bottom. They will happen independent of each other. We can be pretty sure that economic recovery is not going to happen anytime soon. But the markets are nearer a recovery than most think - recovery, yes; ultimate "bottom", no.

Why recovery (at least in the near term)? Oscillators are deep in oversold. Indexes are just above or below support levels. The VIX is over 30. That is not to say it will happen first thing in the morning. But investors in their cycle of pure human emotion will not stay negative forever. For those thinking the long-term put train is leaving the station, not so. It left a long time ago, and now is the time to think of hopping off.

Look over my shoulder at the charts with me, Dow first.

Dow Industrial chart (INDU):

Scorekeepers note, volume is rising as the price falls. 1.34 bln shares traded hands on the NYSE today as the INDU shed 192 points to close at 9840, just 40 points above its 78% retracement bracket from the lows in March to the highs in May. That could offer interim support. However, the weekly chart shows that 9500 is a real possibility especially since the stochastics are pointed down and have yet to enter oversold. It has a long way to go to hit ultimate bottom. Nothing but air holding this one up as expertly outlined by Austin in the Wrap last night.

Daily chart is nearly as bearish, but there are rays of hope for bulls. First, it is stochastically oversold with the slow, red line attempting to poke up over 20%. It is begging for release, as are the 60/30 stochastics (also oversold). While the oscillators can stay buried a bit longer, the pressure is building and they will not stay oversold forever. The oscillators simply favor a move back up the charts, and soon. We may get our chance, at least for a day or swing trade tomorrow.

NASDAQ 100 chart (NDX):

The NASDAQ 100, on the other hand, closed at a new low, breaking below that of March's low. It may not have much more room to fall from a weekly chart perspective. 1348 is support, only 12 points away. This is the weakest of the three major indexes and it could continue to fall drastically compared to the others. On the other hand, like the Dow, it too is oversold in all four time frames and begging for release. New high coming as a result? No way, not in this economic climate. However, the possibility of a tradable rally as early as tomorrow looks good as does the possibility of another rally for most of next week. Still failing at support is technically weak. So don't be the ranch on a return to the glory days of 1999. It won't happen.

S&P 500 chart (SPX):

How low can the SPX go? The answer so far has been, "lower than yesterday". While 1114 support fell, 1100 still remains intact. To boot, all oscillators except the weekly are oversold, which suggest at least a short-term release from purgatory in favor of the bulls. SPX being a better measure of the market than the Dow or NDX, the latter two will likely follow along the SPX's lead, whichever way it may go. That direction may be up beginning as early as tomorrow.

But circle back to the SPX weekly chart for a moment - the green circles. Some would argue that support vanished today paving the way for further downside. While that possibility exists given that stochastics are not yet oversold, let this serve a reminder that the weekly candle is incomplete right now just as an intraday candle is incomplete at lunchtime. We cannot draw any conclusion from it until it is complete - Friday after the close in this case. Should the markets rally from oversold and close above 1128 tomorrow, a higher weekly low would be achieved - a feather in the cap of market bulls. Careful though. Previous intraweek candles show that the next support would be 1091 and 1081 should 1100 fail. For now, direction unknown, but upside favored on daily/60/30 oscillators.

As Eric Utley of sister publication, OIN noted in an update today, "You ever think about a straddle?" A find idea, I think. Were the volatility components of option prices not so inflated, I'd say sure, all day long, but not with a VIX over 30, actually at 32.36. As noted in last night's Sector Spotlight, it could certainly go higher as it did back in March. However, anything over 30 is reflective of too much fear in the market and subject to reversal.

So what about tomorrow? Coin toss says. . . Seriously, there is no way to know for sure. Smoke and noise from Intel tonight (Oh, you didn't hear? INTC affirmed its earnings affirmation and said its revenues would be just below its midpoint on the range, yet declined any forward guidance) and employment figures in the morning may have investors glomming on its every word and what they hope it means. But in the end, it will mean nothing.

On the other hand, ignoring all the noise, we see charts hovering around support with oversold oscillators ready to spring up. Couple that with a high VIX, and the odds favor a bullish move in coming days possibly beginning tomorrow. No targets tonight so be sure to check in with the Gameplan in the morning.

See you at the bell.

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