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Index Wrap

Durable Goods, Housing Sales - Biggest Decline in Years

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       10-25-2001           High     Low     Volume Advance/Decline
DJIA     9462.90 +117.30  9462.90  9177.90  1.3 bln   1902/1189
NASDAQ   1775.47 + 43.93  1775.51  1683.61  2.3 bln   2155/1403
S&P 100   565.62 +  6.93   565.62   548.02   Totals   4057/2592
S&P 500  1100.09 + 14.89  1100.09  1065.64
RUS 2000  435.96 +  8.31   435.97   422.20
DJ TRANS 2239.99 + 18.98  2241.35  2175.10
VIX        31.36 -  1.51    35.08    31.18
VXN        56.93 -  4.98    64.20    56.93
TRIN        0.82
Put/Call Ratio       .93

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To finish that headline, "Markets Rally!" Markets Rally? Really? Go figure. There is no rational explanation for today's rally in the wake of deteriorating fundamentals. The good news is that while markets may defy all logic on a daily basis, they will ultimately correct themselves over the long term. A rising market in the face of poor economics only gets us closer to another correctable extreme. Does this signal the MOAPA about to emerge? Not on your life. . .or mine. However, it does serve as a stinging reminder that the "buy the dip" bullish mantra is still intact despite the absurdity of investor behavior.

That being the case, we can only play the charts, which are bullish until proven otherwise.

Now having said all that, the rally did not materialize as soon as the "bad" news was released. Anybody predicting a selloff on the news release would have been correct - at least during the first hour of trade following. It wasn't until after amateur hour that bears realized they were in the path of a bullish stampede.

Just what happened to cause the selloff in the first place? First, the ECB in its valiant fight against inflation refuse once again to lower interest rates. That keeps European capital (yearning to be freed for productive use) locked up a bit longer.

Second (and this is a biggie), durable goods orders fell an astounding 8.5% vs. economists estimates of a 1% loss, thus proving that the attack on America had instant and widespread, but perhaps not long-lasting effects on the economy. Aircraft and motor vehicles were the hardest hit with a 29% and 15% decline, respectively.

Not to be outdone, initial jobless claims were up 8K to 504K for the week of October 20th. But more importantly, continued claims rose 56K to 3.65 mln accelerating the pace of unemployment, of which improvement seems unlikely soon given the darkening or our economic doorstep with deepening recession.

An half hour after the markets opened came followup news that existing home sales fell 11.7%, also much sharper than expected. 5.2 mln homes were expected to sell. But only 4.9 mln did, making this the first sub-5 mln sales month this year. The median price not widely reported also fell by 3.6% nearly halving the gains so far this year to 4.6%. Housing has acted as one of few strong legs in our economy, and it now appears to be weakening.

If you believe in fundamentals, today's news should have had markets gouging a mile-wide crater in the Earth. Instead, we get a rally in decent volume, which sprang from a small stirring in the semiconductor sector that spread to technology, which spread to the broader market. What had been red ink spread across every stock on the Down Industrials had turned to green for all but a handful by the close. No catalyst here really. . .some things just happen for no apparent reason.

But let me add my own two cents worth here. Operating on the theory that most traders, not investors, operate on the theory that it is darkest just before the dawn, many might well believe that all the pain and suffering in the general fundamental conditions since the horrific attack September 11th might have already caused the capitulatory bottom of the market. The reasoning is that, "how much worse can it get?" After all, it was a true "event" that heightened the fears of many to an unsustainable level, and perhaps that did represent the highest fear and the lowest prices. That said, remember I'm only theorizing what other traders might be thinking. Personally, I don't buy it for minute and think the rally over the last month will correct itself and again test new lows. But that's just me, and in the meantime, we will have charts to trade while indecision reins. The trading might very well remain bullish for a bit longer. We'll see.

Dow Industrials (INDU):

The Dow is looking pretty strong right now. But looks are deceiving. Though the Dow closed at a new high since the attacks, it will still find a ceiling to bump its head upon at 9500. Note the upper daily Bollinger band too that has gone flat. That too will contain price action to the upside. Still, don't ignore the trading strength in the bounce off the 20-dma and the bullish daily stochstics. 60/30 oscillators still have technical room to run too, but Friday being the day before a weekend, traders may opt to take some money off the table prior to the weekend as the oscillators reach overbought. Perhaps a daytrade for puts is in the offing, but no clear long-term direction yet.

NASDAQ 100 chart (NDX):

NASDAQ is showing real strength too thanks largely to investors' misplaced belief in tech stocks. Still we can't help but be impressed by the new recent closing high and the full bull weekly and daily oscillators. Fundamentally, this defies gravity (and reality). Realizing that though means that a downward correction may not be far off, especially given the state of the 60/30 oscillators in overbought territory. Yet the upward sloping upper daily Bollinger band is extending an invitation to come up higher. I would look for support at roughly 1430-1435 to take a daytrade in calls assuming other factors support it at that time.

S&P 500 chart (SPX):

Now for the Granddaddy SPX. Same story here - defies gravity and reality in a single bound! While SPX has traded higher, it has not closed higher since the attacks. Nonetheless, the bounce from the lows just under the 20-dma is testimony to some underlying trading strength if not quite fundamental strength. All oscillators say bull, yet resistance is firm at 1100 as the weekly stochastic enters overbought and the 60/30 suggest a trading rollover from overbought will happen soon - perhaps tomorrow. I am however keeping my eye on the daily stochastic to see if it turns back at the black trendline. It has already shown some divergence and if it does so again at a higher high would signify weakness ahead. Also not the upper Bollinger band sloping down. In all likelihood, it will deflect price action downward at 1111. Watch that level.

Meanwhile the VIX had its lowest close at 31.36 showing waning (but still present) fear in the markets. Put activity is thin right now, which is a contrarian indicator suggesting that bears may starting their warmup show in anticipation of some "in your face" time with the bulls, who would least expect it. Still plenty of fear compared to the norm, but oscillators suggest we may see a rising VIX from here as VIX oscillators reverse out of oversold.

For tomorrow, I have no clue except to hazard a guess that traders will want to take some $$$ off the table in front of the weekend, which would coincide nicely with a topped out stochastic on short- term charts. We might get a daytrade-like put play early on but the bigger trend is still up for now and I would expect dips to bought at support as soon as the put play exhausts itself. Switching to calls then might yield some strong results.

Remember, despite today's positive technical action, one day does not a new trend make! Expect a jumpy trading range, as has been the norm.

See you at the bell!

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