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Index Wrap

Inflation\? Not!

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       9-18-2001           High     Low     Volume Advance/Decline
DJIA     8903.40 - 17.30  9022.06  8861.05  1.9 bln    1226/1936
NASDAQ   1555.08 - 24.47  1605.06  1548.85  1.8 bln    1441/2303
S&P 100   526.80 -  2.30   533.74   524.25   Totals    2667/4239
S&P 500  1032.74 -  6.03  1046.42  1029.25
RUS 2000  411.66 -  6.01   419.25   410.18
DJ TRANS 2217.07 - 54.61  2296.21  2212.88
VIX        42.50 -  2.44    46.59    41.70
VXN        74.74 +  1.48    75.32    72.28
TRIN        1.09 
Put/Call Ratio      0.989

Inflation? Not!
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Chalk one up for the slugs. They are those slow-moving, slippery critters in your garden that munch on the fruits of your labor, and also seemed present in today's market. Equities covered little ground today, but certainly ravaged September contracts as triple witching drew nearer this Friday. It can only be described as, well, sluggish.

While inflation is nowhere to be found, neither are the benefits of that knowledge. News that inflation advanced just 0.2% at the core (same as estimate) fell on deaf ears as markets began refocusing attention on mundane things like an economy shoved over a cliff rather than taking a measured path down the mountainside. Same destination, quicker arrival. Volumes were distinctly lower today on both the NYSE and NASDAQ, but still hefty. Investors seem to have accepted with passive resignation that equity prices deserve to be lower than they started yesterday and have acquiesced to the idea.

Patriotic bounce? Forgeddaboudit. But if there was any bullish news, it was to be found in airlines as bottom fishers scooped up shares thought to be oversold in yesterday's selloff on the likelihood that the government would strike a deal to bail them out of their financial woes. I can understand that sentiment completely in the aftermath of last week's attack. However, the words "Trust me. I'm from the government. I'm here to help" usually cause more damage than good in the end. Accordingly, I take these gains with a grain of salt despite the nobility of the cause.

More good news for bulls is that, market wide, nobody was selling en masse. However, neither were they buying. There is simply no catalyst to push prices higher. Earnings are still down and promise to be more so this quarter. With P/E ratios still high by historical standards, and a shrinking "E" as part of the equation, fundamentals point to more downward movement in the primary trend.

As for today, speculation that airlines might get a bailout had traders doing what they do best - speculating, as you might have guessed. That dragged up some indexes, although not by much before Transportation Secretary Mineta noted that details of a hoped-for airline bailout proposal would be forthcoming next week. Next week? Apparently that is too long for some who were hoping for $20 bln worth of bailout by Friday, wherein the market shed its earlier gains. Gee, wish we could get it to you sooner, but you know how it is right now. Frankly, next week looks pretty good and complainers should be doing backflips that there is a proposal at all.

When all was said and done, internals were negative despite pockets of strength. The Dow was down only 17 points to 8903 on 1.67 bln NYSE shares traded. Decliners beat advancers 19:12. The NASDAQ-100 was no better off, down 28 to close at 1224 on 1.86 bln share traded. Internals there were weak too at 11 decliners for every 7 advancers.

Charts are a mixed picture with indicators deeply oversold awaiting a bounce that many think will never come, but hope for nonetheless. But it always comes, as it has done throughout the cycles of human emotion for hundreds if not thousands of years of commerce. While that may portend the next mid-term up-leg, the candles do not show the strength bulls are looking for. Take a peak with me at some current charts.

Dow Industrial chart (INDU):

Dow 9000. Any psychology to that nice, round number? You bet, mostly because it is a nice, round number. That might explain why the Dow found resistance there today, a level from which it fell back substantially. While the weekly/daily charts remain deeply oversold indicating that a move up is imminent, today's 60/30 candle patterns stayed relatively flat as the stochastics moved up. That is a classic sign of weakness and convinced us to stay out of call plays for now.

The NASDAQ-100 is even worse for wear

NASDAQ-100 chart (NDX):

For the NDX, we need only three little words. Oversold - no life. Note that all slow stochastic lines (red) are pointed down indicating internal weakness. It is hard to imagine just what technology issues will lift this index. INTC, MSFT, DELL, SUNW, ORCL, WCOM? Not likely. Yet it is precisely these conditions when things cannot seem to get any worse that ushers in the bulls. There is resistance at 1250 and again at 1300. While a bullish day trade might be made on a move back up through 1230 on the 10/5 charts (not shown), 1250 seems the magic number to break to perhaps breath some life back into the NDX.

Well then, you might ask, should we be loading up on puts? Not with high volatility and oversold oscillators. The NDX and QQQ will have to wait.

S&P 500 chart (SPX):

The SPX is looking pretty weak too with all oscillators oversold. Candles could not hold on to their earlier gains and fell under 1040. While a break back over 1045 might allow for a few more points of gain on any bullish play (perhaps to 1056) as indicated by a stochastic rise from oversold on the 10/5 charts, the money to be made should be to the downside once the 10/5 cycle up and falls in unison with the 30-min stochastic chart. Still, with charts this oversold, it is only a matter of time before the next failed rally.

On a side note, I am reminded of a quote from Market Wizard, Ed Seykota. He relays a story. "One evening, while having dinner with a fundamentalist, I accidentally knocked a sharp knife off the edge of the table. He watched the knife twirl through the air, as it came to rest with the pointed end sticking into his shoe. "Why didn't you move your foot?" I exclaimed. "I was waiting for it to come back up," he replied."

Everybody get that? Just like gravity, markets do not have to rise. Move before you suffer damage. Do not let the knife stick you in the foot!

On another matter as mentioned earlier, our buddy, VIX, is making it difficult to profit from long directional plays because of rapid time decay (current month especially) and the potential for volatility contractions that would likely accompany any rally. So far 47 has been hard to hold and the VIX appears to perhaps have reached a top for now.

This is not good news for bulls. A sinking VIX and a simultaneously sinking market usually means look out below. We will rue the day as bulls, should fear actually reassert itself to a greater degree than it already has over the past two weeks.

However, for tomorrow, I am still concerned about buying ANY long position without hedging. Time premium is evaporating like a rare droplet of water in the Sahara sun. It turns to vapor in minutes if not seconds. With a VIX still well above 40, the sole purchase of time premium unhedged is practically suicidal for all but daytraders of maximum agility and lightning quick executions. Even they will get burned in this environment shrouded in volatility. Smart traders will be buying or selling spreads so that they have "short" money evaporating on the other guy to offset the ravages of their own evaporating long position.

There you have it. In addition to not letting the knife stick into your foot, do not let your garden turn to slug food either.

See you at the bell.

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