Option Investor
Index Wrap

Bunched up and a bit out of gas

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The major indexes held up considerably well after a dose of economic data this morning that showed a weakening labor market and declining ISM Services Index.

While I don't disagree with some economists and analysts that say today's "shrugging off" of weaker economic data has the market discounting today's report as eventually rebounding when Iraq is freed from Saddam Hussein, the bond market didn't seem to necessarily agree with some of the above as buyers of shorter- dated Treasuries were found and had the look of some cash moving to the sidelines near-term.

The June 10-year futures contract (ty03m) $114'090 +0.16% rose 6/32 with the benchmark bond's YIELD ($TNX.X) slipping lower to close at 3.916%.

Technology sectors were a bright spot in today's session with the CBOE Internet Index (INX.X) 103.96 +2.2% and Biotechnology Index (BTK.X) 358.68 +1.80%. The GSTI Software Index (GSO.X) 105.63 managed to hold a gain by its close and finish above its 200-day SMA (100.98), 50-day SMA (104) and 21-day SMA (104), but tomorrows trade may have the sector under some selling pressure after PeopleSoft (NASDAQ:PSFT) $16.50 +2.16% was slammed lower in tonight's after-hours trade to $13.78 when it warned Q1 earnings would come in below consensus as a struggling U.S. economy, combined with delayed corporate purchasing of its human resource management software on concerns of a drawn out conflict in Iraq weighed on sales.

The news from PSFT had NASDAQ-100 (NDX.X) 1,064.06 +0.05% heavyweight Microsoft (NASDAQ:MSFT) $25.71 -0.03% slipping 50- cents to $25.20 in after hours trade, while the NASDAQ-100 Tracking Stock (AMEX:QQQ) $26.48 +0.45% was offered lower at $26.29.

I mention tonight's after-hours news from PSFT as a stock that trader's might want to monitor in tomorrow's session. It would be my thought that if the stock continues to trade substantially lower in tomorrow's session, then that may be sign that market participants haven't necessarily fully realized the impacts of war and other stocks that rely heavily on corporate spending become near-term vulnerable to earnings disappointments. However, if the stock should rebound back at the open of trade, then that type of action may well hint that market participants fully understand the risks of "war with Iraq" and have perhaps "baked into the cake" or are looking for a quick resolution, that may then see a pickup in corporate spending and hiring on thoughts of economic resurgence.

As a follow up to last night's Index Wrap and discussion of Relative Strength comparison between the SPX and the $UST, I'm going to watch this very close right now and today's trade saw the SPX vs. $UST (price of 10-year bond) fall 1.45 to an RS reading of 833.68. Not a meaningful move lower, but bulls didn't get the RS "buy signal" of 840.

I was following this RS relationship in today's market monitor as the 10-year Bond was actually finding buying, but stocks were also finding buying. My comments were that the action in the major indexes was most likely "short covering" from bears. Steve Price and I laughed a bit today when he said "short covering" and "profit taking" are terms traders use to explain price action that makes no sense.

However, I like to think of "bullish buying" as the more meaningful type of buying, and bullish buying can only come from cash that is either in a short-term deposit and cash coming out of bonds and into stocks. Yes, this is very simplistic, but bears are just as jittery right now as bulls are uncertain about the economy and war with Iraq. Short covering is "great" for bulls that are holding long, but only as long as it lasts.

Let's take a look at tomorrow's pivot matrix. There's a lot of correlations in both support and resistance and the indexes all looked "bunched together" in a tight range.

Pivot Analysis Matrix - Daily Interval

Early morning action from the bond market may be important as it relates to tonight's news out of PeopleSoft (PSFT). Forget about the stock for a minute, but about their comments of "cautious spending" due in part to war with Iraq. PSFT said they see Q1 revenues of $450-$455 million, which is roughly a 9.3% miss on the top line.

If bonds see buying in the morning after some intra-day YIELD resistance at 3.93% in the 10-year was found, then I'd be looking at the correlative support between DAILY S2 and WEEKLY S1 of 3.843% as a daily YIELD target. That's a fairly large YIELD move or assessment of downside and something a RISK AVERSE stock index bull might want to consider. However, if the MARKET has discounted this kind of PSFT news into things and a "quick resolution" on the war front is in play ahead of the weekend, the a move in YIELD back above 3.93% should help hold a bid in the equity indexes.

Here's a quick look at the 10-year YIELD Chart with WEEKLY (blue) and conventional (pink) retracement overlaid. With selling into the close in equities, index bulls really need to see a move above 3.93% in the morning and 3.970% to have stocks moving above today's highs. I didn't notice the "disparity" between the indexes and this bonds YIELD until this evening. However, today's selling into the close upon the bond market's close may now make "sense" as it relates to this chart. What do you think?

10-year YIELD Chart - 15-minute interval

While the 10-year YIELD is only one bond and doesn't depict the ENTIRE Treasury market, I didn't notice the "disparity" between how the Dow Industrials had traded a high of 8,335 today, which is very close to the 8,338 relative high found on March 25. How could that be if the YIELD on the 10-year was still BELOW its March 25 relative high YIELD of 4.017% (right at WEEKLY 19.1% retracement?).

While I'm bullish the major equity indexes longer-term, as long as the bullish % hold up, the little pattern of a lower HIGH in YIELD has me a bit concerned near-term that the bond market isn't as "happy" with things as stocks may have depicted for the bulk of their session.

I'm not sure, but I think the MARKET may have seen what I didn't during the last hour of trade in that there was some disparity between where the 10-year YIELD was at and where the Dow Industrials (probably the SPX, OEX and NDX too).

With this lower relative high being seen in YIELD, I become "cautious" as an equity index bull if this YIELD hangs below that 3.93% level. Why? Because I see some correlative YIELD support with the WEEKLY S1 of 3.842% and the 80.5% WEEKLY retracement of 38.42 or 3.842%.

Here's a 15-minute bar chart of the Dow so you can perhaps see how I'm tying in "Dow levels" with the 10-year YIELD levels.

Dow Industrials Chart - 15-minute intervals

Risk averse bulls need to be very careful in my opinion. While the 10-year bond is just one bond I don't like what I'm seeing for bulls near-term. Remember, on Friday, we did see a flattening of the YIELD curve with much stronger selling in the shorter-dated 5-year, and that most likely explains "why" the 10- year YIELD didn't approach its relative high YIELD of 4.017% today, when the Dow came very close to the 8,338 level of March 25th. Still... if I don't see some type of selling in bonds tomorrow, then I've got to start assessing downside to the March 31 lows again.

Again... by looking at the 15-minute chart, I'm looking at things "short-term," but trying to get the YIELD/stock relationship in my mind for the "bigger picture."

Do NOT take the above commentary as a reason to look for a market collapse! Use it to assess positions in your account and take a pulse on your risk management at this point.

Why? Because the VERY BROAD NASDAQ Composite Bullish % ($BPCOMPQ) at www.stockcharts.com saw a net gain of 0.38% and that has their bullish % reversing back up to "bull confirmed" status at 42.05%. I checked Dorsey/Wright's NASDAQ Bullish % (BPOTC) and while it edged up by 0.46%, it didn't achieve the 40% level to reverse back up at this point. Why the difference? Stockcharts.com adjusts their charts for dividends, and when they do that, it will lower PREVIOUS levels of trade from recent quarters and "skews" the charts. It could also be that there are a few "bad ticks" in some charts that are throwing things off. Still, this very BROAD indicator of breadth continues to show internal strength. Bulls just want to see some selling in Treasuries to keep the cash coming!

The also broad S&P 500 Bullish % ($BPSPX) saw further internal improvement today with a net gain of 8 stocks to point and figure buy signals. This has the bullish % growing to 45.2% and still "bull confirmed".

Now that I've "scared" everyone with this bond YIELD discussion, lets set up a BULLISH trade scenario. Imagine all the stock traders out there get "scared" by the PSFT news, but the BOND market sees selling as the MARKET has factored in all this "lower earnings because of pushback in orders due to Iraq, which will show up next quarter."

S&P 500 Index Chart - 15-minute interval

Now that we're alert to potential weakness should bonds continue to see buying and starve stocks for cash, lets set up a scenario for a buying opportunity. Notice that the SPX has been able to trade above its March 25 highs? For whatever reason, these 500- stocks have attracted a little more capital than the narrow 30 Dow stocks (like T, MO, SBC). Equity traders might be a little "spooked" in the morning after tonight's PSFT news. However, if that type of "news" has been factored into things and the market is thinking... "hey, they will get the orders back next quarter when this war thing is resolved quickly" then we could well see SELLING in Treasuries, which could then be slated to buy stocks on the weakness. If so, ALL index traders may want to monitor the SPX for pullback entries into the 869-873 area. Note from the DAILY matrix that SPX S1 is 873.10.

Now, I've also been monitoring S&P futures tonight and after the PSFT news, they fell quickly to 870.90 and have been edging back higher at 875.30. While a lot can happen between tonight and tomorrow morning, this futures action is somewhat positive in my opinion.

S&P 100 (OEX) - 2.5 point box

There was at least some type of "demand" taking hold for stocks today as the unconventional 2.5-point box of the OEX shows a p/f chart shows a double-top buy signal. However, we can perhaps "feel" how there just wasn't enough gas in the tank (cash) coming out of Treasuries to push the OEX further high above its WEEKLY R1 level of resistance. The two "question marks" is a little technique that I like to "envision" as it relates to today's low of 444.8. 3-box reversals are considered a "normal pullback" and the first sign of real weakness wouldn't come until 425 and a double bottom sell signal. This would be "true" for the conventional 5-point box too. 430 on the above chart is this WEEK's S1 level of support, where the OEX traded between 427.50- 435 on Monday and Tuesday before the recent rebound higher. There's NOTHING bearish in this p/f chart, but bulls want to see selling in Treasuries to help bolster further gains.

NASDAQ-100 Index Chart - Daily Interval

The NASDAQ-100 and larger cap technology is going to get a good "test" for bullishness tomorrow after PSFT's warning. This is a perfect time for the bulls to surprise and push the index higher ON THE BELIEF AND CONVICTION that a quick war resolution will increase technology spending. It can't be a "surprise" that corporations have been hesitant to spend due to war events. Can it? The NASDAQ-100 sure hasn't been hinting that it is concerned.

Today's action saw a net GAIN of 3 stock to reversing upward point and figure buy signals in the NASDAQ-100 Bullish % ($BPNDX). With the broader NASDAQ Composite bullish % just reversing up today, we now have the observation that the narrower and LARGER cap stocks have been moving higher and some of the mid-to-lower caps are seeing an increasing number of p/f buy signals. This is further sign of bullish breadth building.

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