Option Investor
Index Wrap

WHERE'S THE GOOD NEWS\?

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I may have been thinking it week before last, but the last spurt up, especially in the tech-heavy Nasdaq may have finally gotten the Composite Index (COMPX) Index ready for a correction. At a minimum, I anticipate that the S&P 500 (SPX) will now have better relative performance as these sectors get more of a play from investors and traders as they play catch up.

Market psychology has changed significantly to the glass is half full, from half empty. It's part of the "charm" (how about perversity?) of the market, that when it reverses it doesn't take too many along for the ride. In the present instance, too many don't believe that the market is suddenly now "undervalued" or should be rebounding so strongly. Hey, if there were a lot of pauses along the way, we would say, "see I told you that it wasn't going anywhere".

My dear ol pappy said to me about the market: "Son, it ain't what ya know, its what ya don't know" that makes it go". So, maybe I didn't know what the heck was going on - except that market participants were in a mood to buy. Cause, last week saw such great news as the Commerce Department saying that outlays on construction spending fell 0.3% in April, the lowest level since December of 2002. The Labor Department said initial filings for state unemployment benefits rose by 16,000 to 442,000 in the latest week. Factory orders fell 2.9% in April after a 2.2% gain in March. The 2.9% decline in April's factory orders was the biggest drop since November 2001 when factory orders fell 4.1%.

LAST WEEK'S ECONOMIC/MARKET NEWS -
Well, there was some news that the market took as encouraging -

For instance, the Institute for Supply Management (ISM) said that the service sector expanded in May, with its services index rising to 54.5 from April's 50.7 reading, and above economists' forecast of 52.0. Economists had forecasted the ISM Services Index to come in at 52.0.

The U.S. Department of Labor last week said workplace efficiency improved by more than first thought as non-farm productivity rose 1.9%, which was more than the 1.6% first reported.

I suppose that the tone of the market last week might have been set by a minor revival of merger mania as "Merger Monday" as enterprise software maker PeopleSoft (PSFT) and J.D. Edwards (JDEC) said they would join forces. PeopleSoft indicated it would acquire rival J.D. Edward in a $1.7 billion stock deal to create the world's second largest enterprise application company.

Of course, by week's end Oracle (ORCL) was trying to muscle in by an unsolicited bid for PeopleSoft, with their management issuing a press release saying that "Oracle's bid shows atrociously bad behavior, from an atrociously bad company."

Hey, these guys seem to have some bad blood! PeopleSoft and Oracle have actually a pretty bitter rivalry, not only in product offerings but at the CEO level. I doubt that they play golf together.

FRIDAY -
It was reported that Nonfarm Payrolls for May fell 17,000 versus economists' forecast for a 30,000 drop. The May unemployment rate rose to 6.1%, a record going back 9 years I think, but in line with the consensus estimate. Average hourly earnings for May rose 0.3%, which was slighty higher than economists' forecast of a 0.2% rise.

So, what happened on this "bad" news? - not only a rally but such a strong one that trading curbs kicked in as the Dow (INDU) went to 9,163, up 122-points at the time - but this was even down from ts session peak of 9,215.

McDonalds (MCD) accounted for significant strength in the Dow 30 average as the stock was up substantially after the company said it had a 2.2% rise in global May (comparable) unit sales and a 6.3% rise for the U.S. And we thought the overseas nasties were doing nothing but trashing MAC's overseas restaurants and boycotting the made in America hamburger king!

Just goes to show, it IS what you DON'T know that is the surprise. Anyway, the aforementioned news lit a fire under some Street of Dreams analysts as they talked up the bullish implications after expecting some negative global comparables. And its noteworthy that those Francs, D-Marks, etc. going into the tills, buy more dollars these days.

The Dow was up 21.49 points on Friday on good volume, after touching its highest intraday peak sine December (2002). The Nasdaq Composite however ended down 18.6 points (-1.1%) to 1627.42 as traders took profits by selling into a sharp morning advance.

The Standard & Poor's 500 Index (SPX) finished the week at 987, up 24 points for a 2.5% gain. SPX even traded above 1000, for the first time since June of last year. The Dow Industrials(INDU) finished at 9,062, up 212 points on the week for a 2.4% gain, from its week-ago close down at 8,850. In terms of the Dow, the market is up almost 9% on the year - the close above 9,000 was the first time since July of 2002.

The Nasdaq Composite (COMPX) ended the week at 1,627, up 32 points, or 2% from its week-ago level of 1,595. The Nasdaq has gained a whooping 22% since Jan.1st.

As I mentioned already, U.S. nonagricultural companies cut some 17,000 jobs in May versus holding steady in April. However, by way of explaining some of the bullish enthusiasm for stocks, the expectations were for a decline of 25,000 jobs. April's figure had originally been reported as a drop of 48,000 jobs.

The report, particularly with the April revision, seemed to show a slowing of job cuts.

The Street was less impressed with consumer credit, which grew about $10.7 billion to a seasonally adjusted $1.756 trillion according to the Federal Reserve - this versus a predicted credit rise of by about $1.9 billion in April. Households borrowed more on credit cards and also took on more non-revolving loans like car and boat loans, according to the Fed. AND, NEVER underestimate our collective addition to plastic!

Intel, (see it's chart below) held firm its forecast for Q2, noting improvements in its core microprocessor business - but also continued weakness in communications chips. Sun Micro rallied on some merger speculation, gaining nearly 6% (to 5.20). The market loves mergers as can be seen from the PeopleSoft/JD Edwards story at the beginning of the week.

The Friday gains ends a strong week, with more investors now talking about the market and actually putting some money back into stocks. The Journal quoted someone who said that "For the first time in months I am hearing people talk about stocks at cocktail parties" - ah oh! The quote went on to say that there is finally the feeling that the "the train is leaving the station without me." Must be correction time - sorry, can't help my contrarian nature!

INDEX OUTLOOK -

FIRST, SOME BELLWETHERS -
With some key tech stocks having downside momentum confirmed by a sharp jump in their average daily volume, it tends to reinforce some things I'm seeing on the Index charts. Microsoft looks lower and if the software giant is behaving so poorly, it casts some doubt on how much higher the Nasdaq indices can go. Also, IBM is suffering on some troubles with the regulatory bodies, but technically watch for a close (or rebound from) its 200-day average at 78.75 currently.

Intel (INTC) will bear watching per my notes on its chart above. It needs to close above 22 and find support in this area on subsequent pullbacks to it. Absent that - if there is a retreat from 22, it looks like at least a temporary top.

AND -
What's with gold stocks? Dollar strength is most likely what is pulling up the XAU index - it sure ain't an inflation push-pull.

GE's price action and its solid breakout move, suggests that the S&P may start to gain or outpace the tech heavy Nasdaq.

S&P 100 Index (OEX) - Daily & Hourly charts:

My sentiment indicator has moderated from the week before, showing that option traders are not giving up on the put side - hey, I would want to lock in some gains on some stocks by taking out some put insurance especially with relatively low volatility.

When I drew the likely trend channel on the daily chart (below, left) it suggests that OEX could be hitting some practical resistance - and in terms of those big round numbers (1000 in SPX and 500 in OEX), these price levels seem to draw some profit taking. Unless we get couple of OEX closes above 500 next week, this last leg up may be the best gains we'll see for a while. Am I willing to buy OEX puts on the prospect - one more spurt to around 510 would suggest a good risk to reward in puts, by exiting on a move to 515.

Downside potential is back to technical support in the 485 area. Next lower support is around 475 - I would be a buyer of calls in this area if reached.

A "typical" trading range for the S&P 100 or OEX relative to the (21-day) moving average envelope bands, also suggests that OEX has reached an extreme. The 14-day RSI is saying the same thing. Being at such "extremes" doesn't cause me to play the potential downside automatically. These kind of extremes will tend to keep me out of any new call purchases as the risk to reward ratio is not in my favor.

As I said last week, if OEX went to 495 it would test 500. Its like the rule of thumb about a stock hitting $90 - it will usually go to a 100. Repeating one comment - the 500 area is my exit point for OEX calls and is where I want to look closely for put buying opportunities. Even though the current rally is taking on a life of its own, seeming ahead of the current fundamentals for stocks and the economy. Some bad news comes along and suddenly its wake up time on the Street of Dreams!

Dow Industrials (INDU) Daily & Hourly (DJX.X) charts:

The Dow hit my upside targets and then some, as I thought it would struggle to get above 90. Well, it came down pretty sharply from 92, so we'll see if 9000 becomes a new "line" of support.

I peg DJX resistance - assuming is stays in its hourly channel- at around 91 and technical support at 88.5, then 86.5. Going by the way the trend channel looks on the DAILY chart, it looks like resistance comes in at 92-92.5, and support at 87.5 in DJX.

If the Dow for the most part stays above 9000 this week, it brings into play my long-standing expectation that the Average would at least get back up to 10,000. What I look for is whether there is more than a 1-day close under 9000. Two consecutive days under this level suggests that an interim or temporary top is in place.

My revised (maximum) expected range on the Dow is 8400-8450 on the downside and 10,000 on the upside.

Nasdaq Composite Index (COMPX) - Daily & Hourly:

I thought 1620 might be the maximum upside for COMPX for awhile - WRONG! Never underestimate the ability for the indices, especially tech, to overshoot any "reasonable" target, once the bulls (or bears) get the bit in their teeth and you get MO (mighty MOmentum). 1550 continues to look like key near technical support.

The 14-day RSI has gotten to a reading that is about as extreme as it gets, without a correction developing - either a pullback or at least a sideways move.

I noted on the daily chart below, at the peaks at the 6% envelope line, the tendency for 3 distinct upswings or rallies, followed usually by a 2-part corrective downside correction. Wouldn't be surprised to see this here next.

Tech stocks have gotten probably as far extended as they're going to get without earnings follow through in the next reporting period. Hope can get em up, but earnings are needed to keep em up.

I went back to the drawing board and redrew the hourly uptrend channel by going further back in the hourly price history. (One advantage I suppose of keep your own price history.) And, as the below channel outline on the hourly COMPX chart suggests, a "natural" peak on this last spurt may have been reached.

The big volume that came on Friday in the Nasdaq (see the QQQ chart at bottom) suggests a volume "climax". It's hard to pick tops when (in the words of our Chairman) "irrational exuberance" kicks in, but the more extreme it gets the higher the probability of an opposite "reaction" setting in. Stay tuned!

QQQ charts - Daily & Hourly:

I suggest shorting QQQ now in the 32-32 price zone and looking to the buy side on a re-test of technical support in the $29 area.

Last week, I thought that resistance would come in in the 30.3 - 30.5 area, which was a bit low from an intraday standpoint but look about right on a closing basis.

Key near technical support looks like 28.75-29.00.

The minor reversal on the sharp jump in Friday's volume looks like a minor top. Note the overbought 14-day stochastic, although this is the third time at an extreme reading - the third time being the one to short? Hard to see in the crystal ball, but the Nasdaq 100 does register as overbought/overextended on most technical indicators that I trust. Indicators don't offer as much to go on as the chart pattern however. The hourly channel offers the best suggestion that QQQ hit at least a short-term top on Friday.

The 14-day RSI (not shown) did finally "confirm" the new high however. No sooner than it did then traders seemed to want to take some profits off the table.

Good Trading Success!

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