Option Investor
Index Wrap

Line of Buyers, and Bears (Oh My!)

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       9-27-2001           High     Low     Volume Advance/Decline
DJIA     8681.42 +114.03  8681.42  8471.97  1.69 bln   1930/1197
NASDAQ   1460.71 -  3.33  1465.70  1418.15  2.04 bln   1799/1910
S&P 100   521.96 +  5.67   522.39   510.73   Totals    3729/3107
S&P 500  1018.61 + 11.57  1018.92   998.24
RUS 2000  392.96 +  3.17   393.32   384.43
DJ TRANS 2069.05 -  7.74  2081.25  2036.63
VIX        37.59 -  1.56    39.65    37.20
VXN        65.19 -  0.75    68.63    65.19
TRIN        1.03
Put/Call Ratio       .81

Line of Buyers, and Bears (Oh My!)
Contact Support

Having traded flat and down for most of the day, and just when it looked like bears might re-assert control over major market indexes, buyers grabbed the ball and ran.

Touchdown bulls? Not quite. Wrong sport. Wrong team. Major resistance coming up. But before we tackle (sorry, couldn't resist the pun) the technical charts, spend a moment with me on the fundamentals. I promise to keep it short and meaty.

Major economic news today included jobless claims, new home sales, durable orders, and the help-wanted index. Starting in order, jobless claims rose to 450K, the highest number in 11 years, which was above even the loftiest upward revisions of 420K following the NYC and DC attacks. Bulls will argue that this is OK because lower mortgage rates are offsetting the expected confidence decline. Plus, they argue that further Fed interest rate declines next week up to perhaps a half point (50 bp) will act as stimulation to get the economy turned around in 2002. Cry the bulls, "Buy now, prices have never been better.

Next up, housing starts actually rose 0.6% to 898K, spurred by falling interest rates and supposed increased demand in the South and West. If you thought 7% money was cheap, just wait until you see sub-6%! That should keep Americans buying and refinancing for a while. But the numbers mask reality. Reality is that typical with government numbers, they are subject to major revision. Anybody hazarding a guess that revised June and July figures might be revised downward by 20K units and 57K units (total of 77K LESS than originally guessed) wins the gold star.

Notice the acceleration of downward revision, and it doesn't take much to see that Augusts will likely be revised down 50K or more, which would remove the title of "second strongest month on record". Hindsight following revisions next month will prove today's numbers not so great after all.

Third, durable orders, which consist of transportation, defense computers, appliances, and capital goods, fell by a modest 0.3%. While that may seem tame, it masks the up and down volatility of individual components, including the substantial drop in transportation and defense industries. The latter being industries in which many recent layoffs, especially at Boeing, will similarly show in coming months just how much capital spending has been cut. This will not improve soon. We have witnessed 18 month of business and market declines. Everybody (except analysts who are forbidden to do so) may now call this a recession. "If not now, when?"

Finally, as for help-wanted ads, there just are not as many column-inches showing up. Demand for employees is waning as foretold by the want ads. Granted, this index probably does not rank at the top of Greenspan, O'Neill, or Rubins's watch list, but it does act as a strand in a rope from which the economy will swing.

In a small but comforting note, it is worth recognizing that OPEC voted to cut production today in recognition that there is a worldwide economic slowdown taking place. While that in itself does not sound good, we can find temporary solace in knowing we have an assured supply of oil and that we have not been shut out of Middle Eastern oil flow.

Notice that we have not even got to earnings warnings and analyst calls. They just don't matter much. We all know earnings are on the decline - well, OK, all except analysts who continue to tout this as "the bottom", and a compelling opportunity to buy given current prices in relation to where they have been. I take exception to that claim. Disney is not a compelling buy at 92 times 2002 earnings just because its price is now $17, down from $43. We can all get a better return from a passbook savings account than a 1.1-cent return on a $1 investment in DIS.

From bonds too for that matter, which is why the flight to buy bonds has not quit. Declining bond yields are a big, giant, flashing red warning sign that says investors expect that 3-5% returns are better in the future than what we will see in the market anytime soon.

Lest you think we at IS have curled up with the bears for the winter, rest assured that fundamentals are far different and completely independent of technical analysis considered absolutely necessary for successful trading. There will be bullish opportunities to trade. They just don't last as long as bearish trades in this environment. The fact is, despite a bearish economic outlook, traders do best by putting that out of their minds to become market agnostics. We should not care which direction the market moves, only that it does, and not in the whipsaw fashion we have seen over the last two weeks of trading.

Let us now focus on the charts from which we will eventually earn our fortunes.

Dow Industrials chart (INDU):

This looks like a repeat of Tuesday where higher lows were coiling bullishly up into resistance. Today, the level is a little higher at 8700 resistance. Support became really apparent though at 8500 as the Dow hung 65-70 points in the negative column just before bulls made their move. We have no clue what the catalyst was, nor does anyone else. Suffice it to say there was some buying conviction as seen in the substantial volume increase in the final two hours of trading. Nearly 1.5 bln shares traded on the NYSE with advancers beating decliners 5:3. Stochastics are now aligned across all time frames in full bull mode. The only exception is the 10/5 charts that show an overbought condition. The preference would be to buy a pullback, which could come at 8660, 8640, 8620 or 8600. The idea is to wait for the 10/5 to cycle down, and then buy calls on the rebound. However, the market has not cooperated thus far and we will have to base our strategy on tomorrow's open.

The NASDAQ-100 does not offer quite the same bang for the buck.

NASDAQ-100 chart (NDX):

And unlike its big brother, the Dow, it closed virtually unchanged from yesterday. While it has broken through some minor resistance today at 1140, a major hurdle still remains just over 1200. The weekly/daily chart stochastics suggest that NDX is not firing on all cylinders. For those interested, eight of the 100 stocks in the NDX trade at under $1. With many stocks still sporting high P/E's and a shrinking E, or worse, no E at all, NDX and QQQ would be my third choice of indices from which to profit from calls. Puts may look better soon.

S&P 500 chart (SPX):

Hmmm. . .getting awfully hard to tell this apart from the NDX. Not just by its chart action, but by its value too. Support seems to have formed at 1000 over the last three days, yet 1020 seems its upper limit. If that tight range is broken to the upside, 1050 looks like the next stop. Stochastics are still in full bull mode across all time slots. Perhaps we could be so lucky as to see a small pullback that would allow a call entry. However, lately we have been plagued with mile-wide spreads making profits nearly impossible given the small range. This goes for the OEX too.

As we can see from the above three charts using the SPX as our anchor, the Dow was only index stepping out of character today, which makes the move suspect when compared to the broader market. While stochastics clearly show the broad trend is up, candles, with the exception of today's Dow action, prove otherwise despite the strong volume on both exchanges.

Translation - this is still a sideways trading, choppy market with difficult entry and exit conditions. While we may see some bullish swing trade opportunities as we roll into an expected Fed rate cut next Tuesday, the next big profitable move looks to be to the downside. I for one am readying myself for puts then. My thinking is that the VIX will have given up more ground by then (currently 37.59 and declining), Vega and Theta premiums will be cheaper, bid/asks will be narrower, and daily stochastics could top out in overbought. But that is purely speculation on my part. We will have to wait to see what the charts say at that time. While the market may be thinking "bull" based on the Dow's action, I am looking out a few days to resumption of a fall bear feeding.

Summer rally, post Labor Day rally? Never happened. Halloween rally? If we start to hear about it next week, it won't happen. Just the contrarian in me talking. For those who follow the Dow theory, it's worth pointing out that United Airlines suspended its dividend tonight and, along with some other airlines, suspended the CEO and Board members' salaried through the end of the year. That is a giant red flag for the transportation industry of which the Dow transportation index has confirmed the bear market in the Dow Industrials. That is another reason why I am weary of the Dow's gains today.

Sorry I can't be more cheerful, but I have to call them like I see them. We trade to make money, not to be correct in our reasoning. We should all be watching charts faithfully for the next move to unfold in the morning.

See you at the bell.

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