Option Investor
Index Wrap

NOVEMBER FOOLS DAY!

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       11-1-2001            High     Low    Volume Advance/Decline
DJIA     9263.90 +188.76  9284.45  9014.46  1.3 bln   2223/ 880
NASDAQ   1746.30 + 56.10  1746.65  1683.99  1.7 bln   2060/1477
S&P 100   558.24 + 13.81   559.15   542.09   Totals   4283/2357
S&P 500  1084.10 + 24.32  1085.61  1054.31
RUS 2000  434.88 +  6.71   434.88   424.84
DJ TRANS 2232.98 + 37.14  2242.96  2179.83
VIX        34.18 -  1.19    36.97    33.83
VXN        61.18 -  1.17    63.13    60.92
TRIN        0.88
Put/Call Ratio       .64

Contact Support

Isn't Fools Day supposed to be in April? By most accounts, yes. However, today's market gains were enough of a complete surprise to traders given the awful economic news that they did not want to miss the train leaving the station. All kinds of reasons to worry at the Wall (Street) Of Worry, and the bulls scaled it with ease.

To wit: Initial jobless claims came in at 499K - a huge number - but not as huge as last week and 10K less than expected. OK, but that is like getting admitted to the hospital just you can eat the ice cream, in my opinion. Also, personal income and spending declined by -1.8% led by a 2.4% decrease in retail sales resulting most directly from the 9/11 attacks. That is three times the biggest decrease seen previously over the last 15 years. Consumers are clamming up, which leads to a softening economy. In the meantime, incomes remain flat.

What does that mean? I can't believe I'm saying this, but the first meaningful positive saving rate actually happened in September, yet today, was viewed as a negative by pundits and government types since that means consumers are not spending their tax "pre-bates" and saving them instead. While that isn't necessarily a bad thing, those are money that many had expected to be spent in the broad economy on goods and services, a.k.a. stimulus. That hasn't happened.

Did I mention that the NAPM numbers came in way under expectation of 44% at a not so whopping 39.8%? It actually made a bearish dent in the charts just after 10:00 a.m., but was soon shrugged off.

Here's another economic zinger. Auto and truck sales are way ahead of projections for GM, F, and DCX simply because they are offering 0% interest. Take the price of the car, divide by number of monthly payment, and that is the payment amount - no interest for the term of the loan to the consumer. Obviously that spurred the sales, however, it is also lost revenue for the Big Three and will affect earnings accordingly despite the surprise sales figures.

In reality, all those factors had little effect on the market, and it was not enough to put a damper on the bulls who started buying right out of the gate - buying presumably because MSFT announced it was nearing an anti-trust settlement with the DOJ just before tomorrow's judge imposed deadline. The upshot is that MSFT will not likely have change anything about their operating systems as part of the settlement, and that had analysts, investors, and cheerleaders - err financial news anchors - cheering. Software companies as you might imagine did very well today with the GSO.X up 4.6%. Semis got a boost too perhaps based on a rosy outlook uttered by the release of an industry report - I am very unclear on the details. So if somebody has a better handle on this, I would love to hear from him or her.

Needless to say, the focus of attention on every tidbit of news from anthrax, rumors of a bombing at the U.S. Embassy in Japan, potential threats on suspension bridges in the western U.S., astounding auto sales, and MSFT settlements has investors' heads spinning. That shows in the market, and I think it is important to note that 24% of today's trades on the NYSE were done by program trading. That says to me that recent volatility has been driven by machine, and that market moves do not necessarily reflect investors' true sentiment. Of course, we can gauge sentiment in the oscillators, which have been all over the board lately.

Speaking of oscillators, let me address two issues - MOPO and oscillators - with the same answer. Our readers, as Jeff Bailey pointed out today are on their toes and questioning every move this market makes - rightfully so. Many times throughout the day, I get a question asking essentially if MOPO is upon us. That is excellent! Keep up the good work! However, I will never be able to answer that question with 100% certainty. Every trader will need to decide that for him or herself, based on what the charts say. Our charts will improve the odds for our chances of profit, but will never be infallible.

That leads to the second issue of, "What do the charts say?" Another excellent question in which I am unable to give a definitive answer, mostly because I ran some subjective experiments today on stochastics looking for better signals than I had been getting with the 5(3),3 on the weekly and daily charts, and the 10(3),5 on the 60/30/10/5 charts. Without getting into massive detail, I settled on 5(3),3 for the weekly and changed every other time frame to show 10(5),5. I'm going to use these in the charts for a few days and put them in the articles that way too. I think they give a smoother signal and behave well without all the noise of the previous time frames.

This became especially apparent when resident rocket scientist, Mark Phillips at OIN pointed out to me that oscillators had reached oversold or overbought extremes on many charts before the move was actually over, which might be causing to leave money on the table.

OK, everybody with me? I'm going to run the charts with the above parameters for a few more days to see how they work. Austin, I believe will keep his the same for now. So just be aware of the possibility that we may come up with slightly different charts for the same index. Try these settings yourself if you like and see how they work for you. I would love to have your comments and feedback on the subject. Tell us what you think!

That said, I'm running out of time before deadline, so let us see if this dog will hunt!

Dow Industrials (INDU):

NASDAQ 100 chart(NDX):

S&P 500 chart (SPX):

Like Tuesday and yesterday, all three major indices are looking pretty similar as they have, in fact, bounced off support outlined in Tuesday's Wrap. Weekly charts are stochastically rolling over at major candle resistance. Daily charts also hit previous resistance today despite closing at their highs, which might otherwise signal more upward pressure at the open tomorrow. Meanwhile the stochastic settings change is showing daily oscillators still on their way down rather than oversold like in the previous settings. Daily candle/stochastic divergence is also still present.

But more to the point, the 60/30 charts have ambled their way to overbought on yesterday and today's action. While I am not convinced this is MOPO, it does appear to me that some pressure is about to happen based on the condition of the stochastics. It would certainly coincide with points of previous resistance. Accordingly, I took a VERY small and quite speculative position in QQQ puts after the bell today on the belief that the MSFT settlement news is a non-event and that the economy did not change from its flagging state overnight. Today's rally, I believe fooled a few people into believing that we have once again seen the bottom. I don't believe the gains are going to stick and may have given us the possibility of profitable put plays to come.

Without much volume (1.3 bln NYSE; 1.8 bln NASDAQ) and 24% of it program trading on the NYSE, a strong bullish case will be hard to press. The VIX while still high by historical standards looks like it may be poised to climb higher on short-term support. Even that is suspect as no clear signal is generated there right now.

For tomorrow, be on the lookout for the standard unemployment rate and factory orders, which could jigger daytrades, but not likely move any markets unless there is a BIG surprise, which we will know nothing of until it happens. News aside, the major trend is still down and the short-term trend is nearing overbought, which suggest downward pressure ahead. A weekend may provide some reason to sell too. However, markets have surprised of late and made logic-defying machinations in the process. I cannot rule out a continued rally, but I think it would be absurd.

Be on your toes. See you at the bell.

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