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Index Wrap

So Much News, So Little Meaning

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       11-27-2001           High     Low    Volume Advance/Decline
DJIA     9872.60 -110.15  9992.72  9831.15  1.3 bln   1396/1724
NASDAQ   1935.82 -  5.27  1965.09  1902.89  2.1 bln   1758/1914
S&P 100   590.83 -  5.41   598.57   586.86   Totals   3154/3638
S&P 500  1149.49 -  7.93  1163.38  1140.81
RUS 2000  460.71 -  0.51   463.25   457.92
DJ TRANS 2509.30 - 16.55  2539.62  2500.64
VIX        25.21 -  0.03    26.35    24.08
VXN        49.27 +  1.05    51.30    48.01
TRIN        1.09
Put/Call Ratio       .74

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Austin Passamonte made a great point last night about fundamentals having little place in the battlefield of trading. He rightly noted that fundamental information is better suited to long-term investing while the only thing that should matter to a trader is the movement on the charts.

We complement each other in that regard. He is an outstanding technician with an excellent grasp of fundamentals. I, on the other hand, am a fundamentals junkie. While my ability to parse technical charts has served me well as a trader, my soul finds a home with Fundamentals Guy. And Fundamentals Guy is incredulous with disbelief with the current dogma that this is a renewed bull market.

Hogwash! This is a bear market hyped to the sky on irrational exuberance born of cheap interest rates and a flood of liquidity, nothing more. Once scorned by the Fed, now these have become the tools of choice in an attempt to support the equity and housing markets so that we remain convinced that all is well in the economic world. I am not saying the sky is falling. I am saying stocks are grossly overpriced for earnings they generate, especially in light of the hocus-pocus accounting practices cleverly disguised as "one-time charges", "EBITDA", and "pro-forma earnings". What a farce. In another era, it was called "losing money". While nobody was proud of it, at least it was called by its proper name then.

Fortunately, this site is about trading, which all but eliminates the need to know about fundamentals in the heat of technical battle. Still I can't help but think how silly it is to bid stocks up right now. I know, I know, earnings are expected to recover in 2002, which will prove that now is a great buying opportunity. But why do earnings have to improve in 2002? There is a pre-supposed notion that they just will without explanation. So-called experts conveniently evade the answer because they haven't a clue, as any self-respecting analyst should admit. But the rationale goes something like this. "Profits will recover in 2002. Why? Because stock prices are rising in anticipation of it. Everyone knows that the market leads the economy by 6-9 months."

Did you get that? Equity prices are rising because earnings are assumed to rise. Earnings will rise because rising equity prices foretell it! In the words of hedge fund manager, Bill Fleckenstein, "If that sounds like the cat chasing its tail, it is!" Stoooopid. But as we have noted many times in this column, the market can remain irrational much longer than we can remain solvent.

Enough grousing - here is the news that drove the intraday moves. The market was off slightly this morning at the open. But at the top of the 10 o'clock hour news of slightly more than expected (5.17 vs. 5.0 mln) existing home sales hit the market. While that had little effect, a smaller than expected consumer sentiment (82.2 vs. 86.5) was a big surprise that sent markets reeling into the basement, as we might expect with a weakening labor market. That is the lowest reading since 1994.

It was interesting though that the same pessimism was lacking in the expectations component with a reading of 74.6 vs. last month's 70.7. Even with expectations slightly improved, those planning to buy a car fell to a six-month low. At the low this morning, the Dow was off 151 points at 9831 with the S&P 500 off 16 at 1141. The NASDAQ was off too, but not of significance.

Well, we can't a determined bull down. In fact bulls responded well to the strong language of Fed Governor Larry Meyer noting the Fed should not move slowly on lower interest rates further. That actually took the indexes into positive territory and their highs of the day. Wish I could say what caused them to fall apart from there to take them all down near their earlier intraday lows. But I have no clue. Suffice it to say, many acted on a presumably better news source than we did, as heavy-volume selling began - 2.1 bln shares on the NASDAQ and 1.3 bln on the NYSE. Still the major indices closed off their lows of the day telling us that bears have no traction and bulls have hope. Can the charts bring anything to light? Let's have a look.

Dow Industrial chart (INDU):

Try as the Dow might, 10,000 has become a resistance barrier for the sixth time this month. Seventh time is a charm? Maybe - bulls have proven time and time again that dips are buyable as long as the trade is entered at some semblance of support in stochastically overbought territory. The 200-dma and upper Bollinger band suggest there is more upside over 10,000 here. But other than the weekly chart, the stochastics across all time frames are inconclusive. However, the 30-min chart has proven tradable using the DJX as a proxy.

NASDAQ-100 chart (NDX):

The NASDAQ-100 has remained slightly stronger nearly touching its 200 dma today. While the daily candle formed a doji today indicating investor indecision, my be guess says that this will be tested and perhaps broken if the other two indexes are to test their 200-dma's as well. Stochastics are inconclusive too. Daytrading the QQQ looks to have the highest odds of profit - no buy and hold here.

S&P 500 chart (SPX):

More of the same for the SPX - choppy ascent with the Daily Bollinger band and 200-dma offering an invitation to further gains with no clear indication given by the oscillators. 30-minute chart is plenty tradable right now for the gun-slinging daytrader only. There's points in them thar charts.

So what for tomorrow? VIX hovering near 25 tell us nothing. But I suspect based on the 200-dma of the major indexes (save the NASDAQ-100), there is more upside to capture despite how irrational it may seem. After all, bulls will be bulls and we still live in a market bubble ripe for the popping - or further expanding until the popping begins. I certainly don't see any MOPO here. That said, daytraders in for the scalp are earning the spoils or their hard work. This is certainly no place for the long-term investor.

For what it's worth, I talk on occasion with highly successful businessman generating over $100 mln in sales from his company. What is he doing with his money? Selling into strength with the intent of being in cash by Spring - not a single equity in any of his accounts - cash only.

That said, daytrading is about the only way to make money in this market. Entry and exit points are critical. Chasing the herd ends in lost money as equities bounce from low to high range and back in a single session.

I can't say where the market goes tomorrow. As J.P. Morgan often pointed out, "markets fluctuate". We will have to be content to wait for direction from the open tomorrow. But, sloppy as they may be, bullish plays are making the most money and I will go bearish only when the charts say I should. Be on the lookout tomorrow at 2:00 p.m. ET for economic numbers from the Fed's beige book - a collection of anecdotal economic evidence - that may offer the bulls another shot at the brass ring of "2002 recovery". They'll try to get us to believe it, and many may buy into it evading rational thought. Only trade that direction if the charts say to do so. Avoid the temptation to buy and hold out of fear of the train leaving the station. Use good judgment and let the trend be your guide.

See you at the bell.

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