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Index Wrap

Greenspan Cafe

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       11-8-2001            High     Low    Volume Advance/Decline
DJIA     9587.52 + 33.15  9721.75  9558.39  1.5 bln   1681/1421
NASDAQ   1827.77 -  9.75  1888.39  1816.56  2.2 bln   1824/1789
S&P 100   576.62 +  2.98   584.49   573.64   Totals   3505/3210
S&P 500  1118.54 +  2.74  1135.75  1115.42
RUS 2000  439.06 -  1.74   446.11   438.49
DJ TRANS 2320.98 + 13.48  2335.20  2304.04
VIX        29.91 -  0.56    30.39    28.20
VXN        58.75 +  1.55    59.57    55.27
TRIN        1.09
Put/Call Ratio       .73

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Under the "blue-plate special" side of the menu, Al's offering up a full plate of fresh money to get customers back in the door. Read that, "Inflate the money supply or die". I didn't make that quote up. The quote comes from Richard Russell of the Dow Theory Letter. Seems the real predicament in trying to keep the economy afloat with extra liquidity can only be done by maintaining a stock market and housing bubble. Can it actually be true that Al wants to see the bubble maintained? The answer is yes if we are to rely on the consumer to spend us out of the recession. To crush the market would be to crush the consumer, which would tank the economy. Unfortunately, that action only prolongs the inevitable return to value that overpriced stocks will all someday face.

Lament as I might over the Fed's actions, Al and most stock market participants are getting exactly what they want - irrational exuberance. Fresh before our open this morning, the European Central Bank along with the bank of England both acted to cut rates by 50 basis point in the Footsteps of Chef Al. No idle news event there since said banks had been mighty resistant to rate cuts in the past. While it was a tacit admission that the world's economy aint so hot, this was heralded as good news by our markets because it is assumed to mean the rest of the world will now see recovery in 2002 right along with us. It theoretically means businesses worldwide can now get back to the business of spending their way into prosperity, as has been postulated by caustic bear, Bill Fleckenstein. More to the point, it is borrowing ourselves rich.

The cynicism is mostly correct. But in strict economic terms, it SHOULD stimulate borrowing. Unfortunately, decreased rates at odds with banks' tougher lending policies have the same effect as lowering gas prices to $0.30 per gallon, but having none available at that price. Much as I hate to see it, prosperity is not likely just around the corner, as most analysts want to believe. Oh well, at some point we had to acknowledge that Tooth Fairy was not real either.

So until the existences of the Tooth Fairy and the Easter Bunny are denied en masse, we trade!

Before I got sidetracked above, I was noting that lowered European Bank rates gave our markets an immediate shot in the arm once they opened. So too was the same affect when we got same store retail sales for October. While upper end stores were slightly down to flat, discount stores, as we might imagine, did well. For those interested, Wal-Mart (Wally-World/Stuff-Mart for the imaginative; WMT for the rest of us) reported same store sales increases of 6.7%. American Eagle Outfitters (AEOS) sales were up 7.2%, with Gymboree up 21%. Clothing stores did not fare as well with ANN, ANF, FD, and DSS all reporting big declines. While reports were mixed, the consumer is not dead.

Early in the morning in Techland, semis got a boost as INTC was added to Salomon's recommended list. By golly, things will be OK as long as we all look across the valley to late next year for recovery.

The economic front also offered up some reasons for bulls to charge. Initial jobless claims came in at 50K less than expected at a "mere" 450K. Still a big number, but many are betting the worst is over.

In a nutshell, shorts were scared and dove for cover propelling markets higher on genuinely high volume. But a funny thing happened on the way to the Forum. Bulls exhausted themselves and sellers emerged. No bulls were around to defend the earlier euphoric prices, which suggest to me we are in for some negative action in coming days. No need to panic, this is not MOPO. But it may be a prelude to a few days of corrective market action. Take a look and see what I'm seeing in the charts.

Semiconductors (SOX):

We had a prelude but not an outright signal in the SOX last night that some downside might be near. Yesterday, we saw a doji indicating indecision on part of investors, which was followed today by a very long upside wick on the red candle. It's a confirmed evening star reversal pattern, coupled with a bearish stochastic cross that suggests more downside ahead. Notice that like everything else you are about to see, resistance happened at just over the pre-9/11 support, which seemed to send all candle patterns back below - plenty of overhead supply here with a fresh bearish stochastic.

Dow Industrials chart (INDU):

NASDAQ-100 chart (NDX):

S&P 500 chart (SPX):

Once again proving that market indexes move in almost relative harmony with each other, take a look at the Dow, NASDAQ-100, and the S&P 500 above. Forget the weekly charts, which we can all see are just below, right at, or slightly above resistance, and a stochastic that has entered overbought. The dailies however, have some type of bearish indicator - an expanding megaphone, which could become a diamond formation for the Dow; a bear flag for the NASDAQ; a looser bear flag or megaphone (depending on where you draw the line) for the SPX - not to mention topped out and bearishly crossed stochastic oscillators in overbought territory.

But take a look too at retracement levels. I started these lines (yellow) back in May and ended them in September's lows. What do we see? Yep, all indexes coming close to or smacking into their 50% retracement levels. Don't misunderstand; I'm not saying to load up on puts at the open tomorrow. I am saying that some correction from the current bullish move is due, but that does not mean the markets won't trade higher and provide us some daytrading opportunities in the meantime.

However, neither am I saying that bears will rule the roost beginning now for all eternity. When we get the reversal, current conditions suggest we see a bounce at the 33% retracements or the 50-dma before resuming bullish action.

Trading opportunity to make big money to the downside? Perhaps. The signs are there. But until the market acknowledges that these are still bubblehead prices and demands investment value, not speculative value investments, this market has a greater probability of rising through Q1 of next year, as Austin has pointed out. MOPO, this likely is not.

One more thing on the signpost up ahead - the VIX continues to fall as the market has trended sideways to down over the last two days. This says that investors are losing their fear, but that belief is not reflected in the prices. That is a strong sign of exhaustion. God help the bulls when fear re-enters the market.

For tomorrow, 10/5 charts are already in oversold territory with 60/30 charts still in neutral, but pointed down. For trading, not much upside in calls the way it looks now, but NVDA upside earnings announcement may provide some positive stimulus - yes, the bubble is alive and well. Nonetheless, the higher odds trades and the near-term trend may favor bears for a few days at least until daily oscillators enter oversold again when bulls will say, "Nanner, nanner! Told ya so!"

Blue-plate specials rarely have much nutritional value. But there is something about the atmosphere of a neighborhood diner and a full stomach that makes us all feel good for the moment. Please pass the R-O-L-A-I-D-S.

See you at the bell.

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