Option Investor
Index Wrap

Attention! Some valuations are stretched

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The major indexes traded lower today as there were more sellers than buyers. If you're a client of First Albany, you might want to take notes.

I shouldn't single First Albany out as a broker that tells investors that a stock trading at multiples in excess 100-times current EPS has some "valuation concerns" relative to the broader market and forward estimates, but that's exactly the revelation First Albany came up with today after Yahoo! Inc. (NASDAQ:YHOO) $32.56 -7.73% reported inline earnings and may have given one of the more positive forward looking conference calls on future business prospects I would expect to hear this quarter.

Heck, I'd argue that YHOO could have doubled analysts estimates and reported a $0.16 bottom line EPS and the stock would still have valuation concerns relative to the broader market, but would First Albany still have chimed in with a downgrade based on valuation? We'll never know, but I doubt it.

Perhaps today's smelling salts call out of First Albany on Yahoo! Inc. now has some investors becoming aware that there may be a few stocks that currently trade at lofty valuations. I'm sure if I had some type of stock screening tool for valuation screens based on current and future valuations, I could fill a couple of 8.5 x 11 inch pieces of paper. I'm thinking I could have started a two-page list a couple of months ago, and it might now stand at 4 pages.

Now that we've got the "valuation thing" out of the way and a nice round of profit taking under our belts, which had all of the major indexes trading lower, and found all sectors except for the Gold/Silver Index (XAU.X) 77.54 +0.36% trading lower, most of the things discussed in last night's wrap came to fruition for the move lower, but I didn't think that bonds traded nearly as bullish as I had thought they might and leaves me with the thought tonight that there's a shot at a short-covering rally in the cards for tomorrow.

After I finished last night's Index Trader wrap, I posted an intra-day chart of the 10-year YIELD ($TNX.X), which saw some buying today with YIELD falling 2.9 basis points to 3.677% by the close. However, after the gap in YIELD lower at its open (8:20 AM EST), and a little dip lower on the jobless data released at 08:30 AM EST, we didn't see a rush toward the safety of Treasuries, as if the recent backup in YIELDS since the FOMC meeting are still all that attractive for investors. Either that, or the import price gain of 0.5% had some bond traders sniffing some pricing pressure gains being seen on a global scale, which helps alleviate some fears of global deflation.

Here's my 10-year YIELD Chart ($TNX.X) which I've set up to reflect the head and shoulders top formation that has been created this week, with left shoulder on Monday, head on Tuesday, lower right shoulder yesterday, and break of neckline this morning.

10-year YIELD Chart - 10-minute interval

When the bond market opened for today's trade and gapped open almost "exactly" at the 3.646% YIELD level, I was thinking today's trade for equities was going to be lower than we ended up. While the jobless data continues to show that of a "jobless recovery," the export/import prices data showed export prices falling 0.1% June (fell 0.1% in May), but import prices rising 0.5% and I think the IMPORT data is what kept some sellers in Treasuries, and may have kept stocks from really getting whacked, with some bulls looking to stick things out for tomorrow's June Producer Price Index (May -0.3% "deflation") with economists' forecast for a +0.3% rise. The June Core PPI (excludes the volatile food/energy components) is forecasted at +0.1% after a +0.1% rise in May.

While the bond market should "hate" any type of inflationary data, I still argue that the equity markets, or economic bulls want inflation when coming out of an economic slump. Equities have obviously priced in some type of economic recovery and the PPI is one area to look for any type of pricing pressures, which only comes from some type of demand outstripping supply.

So lets take a quick look forward at next week's scheduled release of June consumer prices and CPI due out on Wednesday July 16th, as this number will be closely compared to the PPI data. Right now, economists are forecasting June CPI to rise 0.2% after May's unchanged level, while the core rate is forecasted for 0.1%.

Based on economists' forecast this would have me believing that the market might be looking for prices to rise at the producer level and that some of the price increase will have been passed on to the consumer. You see, you really don't get the full picture of "earnings potential" for many consumer products makers until next week, and I would think that equity bulls want to see PPI come inline, if not a little higher, and then see the same for the CPI next week.

Now, I would also be remiss as it relates to tomorrow's bond/stock market trade if I didn't note that May's Trade Balance is also scheduled to be released at 08:30 AM EST. Economists look for the May trade balance to show a -$41.5 billion deficit (import more than we export), which would be slightly less than the -$42.0 billion deficit in April.

Here's a quick recap of year-to-date exports starting with January's +$82.0b, Feb. +82.9b, March +$82.8b and April's +81.0b import data for matching months starting in January at -$123.3b, -$121.5b, -$125.7b and April's -$123.0b.

Now, I can't quote a source, but I've heard on a number of different occasions that many U.S.-based technology companies derive approximately 65% of their revenues/earnings from foreign markets.

So lets look at the NASDAQ-100 Tracking Stock (AMEX:QQQ) $31.60 - 1.86%, which in after-hours trade ticks by at $31.50. I think QQQ traders (all traders really) will have a close eye on the Exports data (even though it's from May) and wants to see a rebound from April's dismal $81.0 billion.

Ninety-percent of my "reasoning" for even thinking the QQQ might find intra-day support today at WEEKLY R1 for a bullish entry is based on shorts/bears looking to cover after the June highs were taken out at this level. It was NOT because I felt the bulk of its components trade at attractive valuations or lower risk levels as depicted by the bullish %.

NASDAQ-100 Tracking Stock (QQQ) - Daily Interval

I showed an intra-day chart of the QQQ in today's 03:15 PM EST update, and the QQQ really looked like it wanted to gravitate toward the WEEKLY R1 of $31.37, which was a level I liked for an aggressive bull's pullback entry point. The QQQ did show some intra-day consolidation in the $31.37-$31.44 area, and did actually try and stage a little recovery into the close at $31.58.

I think bulls that took a partial bullish position near WEEKLY R1 should follow with a tight stop at $31.18, which is just under the mid-point of our regression channel.

Some reasons for this are.... I DON'T like the fact that Stochastics are "overbought" on daily interval and there is potential for bearish divergence to be found if the QQQ falls to overlapping $30.75 WEEKLY/MONTHLY retracement and MACD starts to roll from a LOWER high. "Bearish divergence" in the MACD oscillator would be found due to the QQQ itself trading a new high, but the oscillator not reaching a new high. I've pointed to areas in the past where BOTH the QQQ and the MACD oscillator traded in SIMILAR fashion and confirmed the pattern of highs.

A "negative response" to tomorrow's economic data, also has me trying to figure out where the bulk of bulls and bears are at on a near-term basis. I've pointed to "bookend volume" at the recent low and today's trade. It would be my thinking right now, that without a bullish catalyst reaction tomorrow; the near-term gravitation point is $30.75.

My thinking for profiling this bullish trade is simple. Bears below WEEKLY R1 have seen a new high, and are more apt to be jittery and jump to cover short positions that are INDU/SPX/OEX traders. Bears in the INDU/SPX/OEX in my opinion are still interested in patterns of lower low and lower high.

Now, I want to knock out a bullish % chart of the NASDAQ-100 Index (NDX.X) real quick, which I verbally discussed last night, but this is currently the ONLY bullish % which now has the potential for a "bear confirm" reading. Not on the QQQ chart my reference to the recent QQQ low of $29.26. Here's how I try to tie that into my mindset for QQQ trading here on out.

NASDAQ-100 Bullish % ($BPNDX) - 2% box scale

I've said before, and it is true, you can NOT place or look to derive an indexes potential price based on the bullish %, but I like to look for the inflection points to better association RISK along with strength and weakness depicted by the bullish %, and tie those inflection points to recent price action.

My main observation at today's close is this. While the Bullish % managed to show 90% of the 100 stocks showing buy signals when the QQQ/NDX traded $31.47, the QQQ actually traded higher just recently at $32.49, with the bullish % just reversing up to "bull confirmed status yesterday. This give the impression that the recent highs were found buy a slightly lesser number of stock creating new point and figure buy signals, so a bull in the QQQ has to be cognizant of some slightly narrower leadership right now. Still bullish, but cognizant of narrower leadership, so a bull is cautious, he/she isn't over leveraging and monitors for further strength, depicted by my "?" still going higher.

The MAIN REASON for a tighter stop under a bullish trade is then depicted by the next column of "?" to the right, that would be more BEARISH. The tie here is made back to potentially similar bullish % measures of December 2001 and January 2002, where a "bear confirmed" status change from a HIGH level of BULLISH RISK, really saw the internals fall apart as more and more stock generated sell signals.

This is why I was rather focused on NH/NL breadth today, which I thought still showed bullish leadership being found.

By session's end, the NASDAQ showed 219 new highs compared to 7 new lows. While the DAILY ratio fell to 94.5% from yesterday's 97.5%, the 10-day average still trending up from yesterday's 95.6% to 96.2%, still giving the observation that there is some bullish leadership holding on an "intermediate-term" basis, where some bears will be jittery.

I think bulls will play it, but they'll do it with tight stops!

Dow Industrials (INDU) - 50-point box

Today's trade at 9,100 sees a 3-box reversal back lower in the Dow and on this conventional 50-point box scale has the Dow setting a pattern of lower highs after a "sell signal" was given at 8,900. I would look for a lower Treasury YIELD and negative response to tomorrow's economic news to have Dow trade under 9,000 for a trader's short/put entry, with initial target at the lower end of what would now appear to be a forming bearish channel at 8,750.

While I "believe" that market participants would be looking for some nice dividends from the Dow components, I haven't OBSERVED much in recent weeks to give credence to that belief.

I would have had NO PROBLEM with a bull trading the Dow long today, similar to the QQQ at its WEEKLY R1, but just as good friends often rely on each other for some help, a QQQ bull certainly wouldn't mind seeing the Dow make a rebound higher to help fuel a move, while at the same time, a Dow bull has got to be thinking he needs another QQQ rebound to get a reversal back higher.

S&P 100 Index Chart - Daily Intervals

The OEX came close to testing the WEEKLY pivot, and I don't think there was enough "bad news" or rush toward bonds to really get the break below our "zone of support." A jittery bear that may have taken a bearish position last week when I profiled the SPX as bearish near 980 (OEX 492) that can snug a stop just above 498, but I thought it worth holding yet another day to see what unfolds tomorrow.

Today's action saw no net change in the S&P 100 Bullish % ($BPOEX) and still holding at the bull cycle high of 83%.

S&P 500 Index Chart - Daily Intervals

SPX very similar to OEX. I've added a downward trend. For those bears that didn't mind the heat back to the recent highs, I'd continue to play this new trend. However, since I didn't think the SPX could get much above the 1,000 level and it did, I'm more tempted at this point to cover weakness on anything back near 9,667, then look for a better rebound entry point.

Pivot Analysis Matrix

Jeff Bailey

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