Option Investor
Index Wrap

Consumer Confidence Down, Stocks Up

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       9-25-2001           High     Low     Volume Advance/Decline
DJIA     8659.97 + 56.11  8695.54  8506.36  1.9 bln   1896/1290
NASDAQ   1501.64 +  2.24  1528.33  1480.69  2.2 bln   1975/1978
S&P 100   517.92 +  4.89   521.00   510.13   Totals   3871/3268
S&P 500  1012.27 +  8.82  1017.14   998.33
RUS 2000  396.18 +  2.39   397.29   392.20
DJ TRANS 2092.80 - 37.19  2150.63  2062.53
VIX        38.87 -  2.46    40.41    38.38
VXN        67.56 -  1.85    69.81    66.34
TRIN        0.99
Put/Call Ratio       .51

Consumer Confidence Down, Stocks Up
Contact Support

What's fundamentally wrong with this picture? When confidence is down, consumers don't buy, smaller (if any) profits happen, and stocks should go down to reflect that. Not so today.

Bulls will point to the strong 153-point bounce back on the Dow to 8659 from its low of 8506. They can also point to the volume of 1.6 bln NYSE shares traded with advancers beating decliners 3:2. Based on that, it is pretty tough to support the notion that shorts were covering. With that kind of volume, buyers were spending money too. Why?

Sure consumer confidence was down more than anticipated, but most expected that following the terror that ground the country to a halt two weeks ago. Said the bulls, "it can't possibly get any worse". Since the lowest confidence level in 11 years (97.6 act. Vs. 105 est., even after the attack) takes into account the horror of the last two weeks, there is nowhere to go but up. Right, just like after I fall off a cliff. As long as I live to tell about it, I'll have the capacity to utter those words too, "it can't get any worse." But to draw the conclusion that I'll return to normal in no time is a big stretch. Do not bet on the market's return to "normal" [formerly defined a 25% annual gains] either.

Some other news that might have also stimulated the market was Greenspan's meeting behind closed doors at the Senate Banking Committee. As reported by Briefing.com, "Market News reporting that Senator Grassley is saying that Greenspan recommended that if there is another stimulus package, it should be "significant" and that Greenspan and former Treasury Secretary Rubin discussed $100 bln in stimulus. If true, Greenspan's support of such a large stimulus package would be bullish for the economy and the market." It may very well be bullish for the future, but it says a mouthful too about the current state of the economy - not good.

At least the market no longer cares that much about tech stocks! How do I figure that? Well, AOL warned and finished the day fractionally positive anyway. Exodus Communications (EXDS), a former darling of the Internet tech boom made the front page of the Wall Street Journal today, not for its greatness, but because it is reported to be filing bankruptcy. While its stock price suffered, it had no effect on the NASDAQ.

One other "has-been" stock from the tech boom that went largely unnoticed today was Cisco (CSCO). Though it hasn't made much news at all lately, it was interesting that UBS Warburg reduced it earnings estimates citing coming economic fallout from the NYC and DC atrocity. Warburg lowered FY01 and FY02 earnings to $0.13 and $0.35 respectively. Both were down from prior estimates of $0.18 and $0.43. That would have qualified for headlines a few short weeks ago. While I'm not suggesting CSCO is a has-been company by any means, its price is still in high P/E territory. (OK, it has no "E" and the potential for E is shrinking, oh well.) Austin's reference last night to Polaroid as a fallen market leader that never returned may foretell the fate of many more market leaders to come. Still CSCO was in the green by $0.04 today whereas news like that in the past would have dug it a mile-wide crater.

Oops. Almost forgot to mention too that AMD is laying off 2600 people and closing two fab plants. Adding insult to injury, Gateway will discontinue use of AMD chips in its machines. And as long as we're at it, it's worth noting that Micron (MU) missed revenue by a long shot. . .down 79% on same quarter sales. Ouch! At least they beat earnings estimates by penny and were unaffected in after hours trading! Yet the SOX gained fractional ground today.

Surprisingly, Oil stocks did not do that well despite a $2 increase in crude prices following a 15% one-day decline yesterday.

Before we move on to the charts, which separates fundamentals from sentiment and makes trading for profit possible, let me leave you with this summary comment from Patrick O'Hare of Briefing.com. I think it sums up the market situation pretty well. "Is it good to see the market trade higher after a discouraging economic report? You bet. Is it the start of a sustained uptrend? Probably not as it is likely consumer confidence will continue to weaken. While that trend will leave the Fed in a rate-cutting mood, it bodes poorly for the economy, and corporate profits, over the near-term.

'Nuff said. So how about those charts?

Dow Industrials chart (INDU):

First a correction - the horizontal lines of resistance on the above chart should have been slightly descending to catch the highs on the 19th. But for trading purposes, we now have a nice 60/30 chart pattern with up-swinging stochastics signaling the bullishness. Daily and weekly confirm this same uptrend in place.

Dow 10/5 chart:

Our only hitch in making a bullish play on the Dow is that 10/5 charts are still in overbought. The best we could hope for is a pullback to 8580 as the stochastic hits bottom and beings to cycle up. That would put the weekly/daily/60/30/10/5 charts all in unison swinging up. For daytraders, we will rarely see a better entry than that. Until then, patience is a virtue.

NASDAQ-100 chart (NDX):

There is a similar situation going on with the NASDAQ 100. Weekly, daily/60/30 charts have all lined up. However the 10/5 charts are overbought and subject to a pullback just like the Dow. The bearish wedges on the 10/5 charts above tell us it is likely to happen. Mild support can be found in 5-point increments down to 1160. Let the cycle down happen, then prepare for call entries.

S&P 500 (SPX) chart:

Now for the SPX, granddaddy of indexes. Once again, the weekly/daily charts are stochastically bullish as are the 60/30, which have shown a mid-day reversal today (not shown, but take our word for it). The only gotcha keeping us from a call play is the overbought 10/5 stochastic and the need for it to cycle down. Like the Dow, that would have all time frames emerging in unison from oversold for the next bull move. Daytrading support can be found at just under 1000 while resistance is 1018. If you trade this, be sure to recognize the severity of volatility decay and bid/ask spreads big enough to drive a truck through. Even if the index moves up, the position can lose money.

All that said, you might think we at IS have switched to become perma-bulls overnight. Not so. While we have a trading rally based on charts in which we expect to make some money, this is still just a trading rally for few days perhaps until the next Fed meeting on October 2nd.

What I find disconcerting from the bullish stance is a VIX (now at 38.87, down 2.47) that continues to drop even as prices stood virtually still today. Fear is leaving (though a 38 reading is still plenty fearful), but prices are not advancing. We wrote recently that if fear should dissipate while markets did not advance, may our maker protect the candlesticks when fear returns! The downdraft would be severe, and it was. Candles got whacked over 1500 points on the Dow. We are setting up for a similar scenario all over again.

For tomorrow, indexes could still go either way. While we would expect some selling in the early going tomorrow to ease overbought pressure on the 10/5 charts, it will likely be void of much downside opportunity for all but the most skilled traders. The real opportunity as shown by the stochastic emergence across all time frames is toward the upside for now. Much as I am chagrined to say it based on fundamentals, the charts are clearly signaling that the near future should run in favor of the bulls.

Still. we all need to be careful of deflating volatility that evaporates value from our option prices. That said, this might be a good time to consider entering some spread trades as outlined in the Gameplan. While surprises are always possible, there are no economic reports tomorrow to gum up the works. However, remember that any positions we hold over tomorrow's close will be subject to Initial claims, durable orders, help-wanted index, and new home sales first thing Thursday morning.

See you at the bell!

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