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Index Wrap

To The Moon\?

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        WE 10-26         WE 10-19         WE 10-12         WE 10-7
DOW      9545.17 +341.06  9204.11 -140.05 9344.16 +224.39  +272.56
Nasdaq   1768.96 + 97.65  1671.31 - 32.09  1703.40 + 98.10 +106.50
S&P-100   567.98 + 14.18   553.80 -  6.98   560.78 + 11.40 + 16.28
S&P-500  1104.61 + 31.13  1073.48 - 18.17  1091.65 + 20.27 + 30.44
W5000   10185.53 +290.64  9894.89 -154.23 10049.12 +212.01 +274.18
RUT       438.65 + 12.95   425.70 -  2.89   428.59 + 13.62 + 10.10
TRAN     2247.58 + 73.30  2174.28 - 60.45  2234.73 + 25.31 + 15.43
VIX        30.53 -  5.31    35.84 -   .61    36.45 +  1.79 -   .53
VXN        56.91 - 12.37    69.28 +  3.30    65.98 +  2.63 -  1.84
TRIN        0.87             1.19             1.08            1.14
TICK        +828             +342             +283            +290
Put/Call     .53              .80              .76             .96  

To The Moon?
Austin Passamonte

That's where most market analysts are predicting price action will go. I didn't hear a single person on CNBC nor read any in the news talking about pullbacks, support, over-extended or any bearish words like that. Nope... all I heard is how this market shows most incredible strength and those left on the sidelines are feeling like they've missed the boat.

Suits me fine: I'll just catch the next ship heading North as there is a never-ending supply of vehicles moving up & down the charts. But it seems like most other investors right now are in full chase mode and heck, maybe they should be for all I know. But the fact is I've chased what seemed to be runaway markets too many times in my career and regretted catching them soon after.

If you're wondering what the near-term future holds, so am I. Let's cruise some charts together and go from there:

(Weekly/Daily Charts: Dow)

The Dow is in a clear ascending channel the past four weeks. That is a steep ascent and the steeper a line of support is, the weaker. Not much backing & filling of lower levels yet after the V-bottom from 9/21.

Daily charts show the struggle posed near its 9450 area of resistance but stochastic values are still rising. If the Dow can close above 9500 I think the next stop is 9850 area, another sturdy measure of former resistance as well.

(Weekly/Daily Charts: SPX)

Same view for the SPX, with its sights set on the 1125 zone once Friday's highs are managed to clear. Stochastic values tell us that the bulk of this current move is likely behind instead of ahead. In usual topping fashion, the VIX is plunging along with put/call ratios as the majority of market players relax and get comfy with the idea that all is well.

Care to guess what usually happens then?

(Weekly/Daily Charts: BKX)

The Banking/Financial sector is largest single SPX component now. A look at this sector shows room to the upside still exists with the 850 area next resistance on a breakout of the current channel. However, that is indeed a four-week bear flag and we could see it break lower or at least test the lower trendline soon.

Daily chart is already overbought and consolidating in a wedge. I'd look for sideways to lower action in this sector for now.

(Weekly/Daily Charts: HCX)

HealthCare is flat-out weak. Price action broke a neutral weekly wedge the past two weeks but threatens to fall back within and 750 support would be the next logical stop. Daily chart stochastics are trending down even as price action continues to rise, a very bearish sign of divergence as well.

These are the two biggest components of the SPX and each have provided stellar gains this year compared to most. Wonder if any fund managers might shift out of them next week to lock in gains for allocation or window-dressing purposes? What might that do to the SPX index they reside in as its biggest 1-2 punch?

(Weekly/Daily Charts: NDX)

The NDX still looks fine, albeit in the latter stages of this current move. Weekly chart shows bullish stochastics and a budding breakout from the month's-long wedge. Daily charts show price action climbing a very steep ascending trendline and overbought stochastic values, so I'm not inclined to chase the QQQ from current levels right now due to that. Feel free to do so if you must, but I'll pass!

I can see room for the upside still and know for a fact that these oscillators can stay pinned in overbought extreme for some time while price action trends higher. Just because stochastic values reach overbought extreme does not mean they will immediately reverse and roll back down in bearish fashion. But eventually they will, and that is likely to be our next significant move across the board.

I do not think we will touch or break 9/21 lows until at least next spring if at all, but these markets will not go up from here to new highs without filling in some space below us. A falling VIX and put/call ratios turning bearish are further proof that markets are getting complacent during turbulent times.

It's Happening Again!
Market bulls frustrated with reality of horrendous earnings and a persistent market recession that Warren Buffett warns may linger for years now vent their denial by snapping up sectors with fuzzy math as a basis. Biotech stocks have led the Nasdaq for quite some time as momentum players seek remaining vestiges where valuations cannot be easily quantified. Each time an analyst even burps that sounds like they mean semis have upside room to run that sector gets ramped +5% in one day. Hot money must find somewhere to play.

Secondly, market bulls are shrugging off bad news as another catalyst for further rate cuts ahead. Further cuts? How much lower can rates go from 2.75 that will make a difference to the economy nine consecutive cuts otherwise cannot?

Folks, this is not the stuff long-term bull markets are built upon. It's the same exact story we witnessed from late 1998 to early 2000 when Greenspan & Co. pumped free money into the Big Bubble and history is trying to repeat itself this soon. The only people jawboning an economic recovery in sight are the same tired bunch who drove followers to destitution from the first market break.

Where are all the CEOs giving clear guidance for 2002, other than those already warning? Why is Buffett growing ever more bearish as the market continues to rally? Has he gone completely daft? Are long-term investors to believe CNBC non-trading reporters instead who've grown giggly after canceling their Prozac prescriptions?

I don't know. But mantra of "The bottom is in for sure, for sure" is not how I'm banking my retirement future. If that's true, there's plenty of time to jump in as the Dow gains +2,500 more points from here to break all-time highs and beyond.

Recovery May Take A Decade
Why do many market pros believe it will take until 2010 or beyond to shake off the malingering angst of this historical crash? One reason is our Fed policy to prevent forest fires by setting controlled burns to smooth the inevitable.

Greenspan & Co. have been desperately propping up dying markets by pumping massive liquidity into the system for artificial stimulus. Their only hope now in full panic mode is to spur consumers into continued spending until the overall economy catches up. Seems like a sound thing to do... keeping our economy from crashing all at once but all it does is guarantee numerous smaller crashes after false takeoffs.

Right now we have money pouring into equities because it must go somewhere and fixed income vehicles are pigs at this time. Many of those recipients are companies who will not survive long term and ramped up stock prices will crash once more. Overall valuations are at historical highs as earnings fall faster than prices.

Speaking of earnings, those fiscal reports most companies release these days are nothing short of scandalous. A close relative of mine is partner in a CPA firm that specializes in mergers and acquisitions. A jaded veteran of dissecting balance sheets, he laughs when we talk about "pro forma" profits and loss, one-time write offs and dozens of other shams the average momentum trader swallows hook, line, sinker, tackle box and bass boat. After all, CNBC says WXYZ company beat the street by a penny... let's buy! Click it in there before someone else does!!!

If my relative's CPA firm filed an earnings report like too many companies did this quarter they'd be audited, jailed or both. But companies like Enron and many others emerge unscathed for months, years or forever while duping innocent investors purposely deceived.

Who Pays This Bill?
From tax rebates before September 11th to massive and increasing government packages afterwards the tab is increasing to staggering proportions. Our government has a blank checkbook and freedom to spend under the guise of patriotism. Speaking from a neutral voice on the stimulus package trying to clear the senate, I see a bill packed full of upper-end corporate pork that is short-term good for specific companies but little else. Lest one tries to impress upon me the failed theory of trickle-down economics, we already tried that one under Reagan's regime. Read my lips, taxes were raised and the economy collapsed beneath the burden soon after.

Bye bye government surpluses, hello budget deficits. How does our government handle budget deficits? Why it cuts spending, of course! Wait a minute, I must have inhaled some second-hand smoke there for a moment. Our government never cuts spending... that would be too sensible. They raise taxes to cover the deficit instead.

Let's assume the massive liquidity injection spurs this economy into a V-shape recovery in 2002 like the raging bulls now bellow. What does a heated economy do with sub-inflationary interest rates to work with? It catches fire! What does that do to Greenspan & Co? Puts them back on inflation watch as interest rates get ratcheted back up once again. So the endless cycle of bumpy landings continue.

But, E's Will Catch Up To P's
The latest mantra I hear is that next year's (?) economic recovery will see corporate earnings outpace increasing stock prices to rebalance PE ratios lower. Are you kidding me? Something stronger than second hand smoke is inhaled by those who believe that ludicrous fairy tale!

Can you honestly see companies announcing positive earnings while buyers hold off on bidding shares to the moon? Just let the chips, networkers or biotechs release honest-to-goodness strong earnings right now and it will be 1999 all over again. PEs will not shrink: they will balloon.

And therein lies the problem. We are destined to endure markets that move sideways in one huge trading range for years and years to come. It is predestined by Fed policy and natural cycles markets repeat. Buy & hold investors may see their former high flyers roll in a sideways range for ten to twenty years, but that will be long after they fall from favor for good.

For now the rally continues while ignoring bad news even after a run of over +20% for the big indexes from recent lows. I still believe those levels will hold until at least March or April 2002 if not beyond, but straight up bull run to new market highs will not happen under current fundamental conditions.

Until then, play the tape and don't fall in love with upside direction, it may soon break the hearts of those who do.

Best Trading Wishes,

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