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Index Wrap

Easier said than done\?

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I should probably preface tonight's wrap and disclose a positive bias I have toward Fed Chairman Alan Greenspan, which aside from President Bush, may have the toughest job of any U.S citizen, as both have had to deal with more than a handful of issues in order to turn the economy around. I (Jeff Bailey) and fellow staff here at OI probably have the third, fourth, fifth and so on most difficult jobs when trying to interpret these markets.

I don't mind disclosing a bias toward Mr. Greenspan, and hope you don't hold it against me personally. Heck, while I'm at it... I voted for George W. Bush too.

Representative Bernard Sanders, an Independent from Vermont blew his gasket today, or looked to me like he had sprung a leak, when addressing Mr. Greenspan who was testifying before the Joint Economic Committee on the state of the U.S. economy and future economic policy.

I'd argue that it was Mr. Sanders' little "tirade" that had the major indexes trading fractionally lower today, as Mr. Greenspan was rather upbeat on economic growth prospects.

While Mr. Sanders gave us a reminder that the Scandinavia had a better economy than the U.S. with employment and a very good higher education system, Mr. Greenspan reminded Sanders that most of the higher educated "foreigners" often find themselves flocking to the United States to apply their knowledge, where opportunity and potential wealth prospects are much higher than in their homeland. With that, Mr. Sanders became more tranquil, but still seemed nervous (when is the next election year?) as unemployment levels here in the U.S. remained high, and Mr. Sanders has yet to see any sign of economic recovery for many of his constituents in Vermont.

At one point, Mr. Sanders told Fed Chairman Greenspan that he (Alan Greenspan) was out of touch with reality and invited Mr. Greenspan back to his home state to talk with the working/unemployed man and woman, instead of Mr. Greenspan's crowd at the country club.

If not for the sharp sell off in Treasuries today, a security where investors have been parking cash in euphoric rates in recent years, I would have been a little depressed by Mr. Sanders' tirade and seeming lack of confidence in Mr. Greenspan.

Still, Mr. Sanders and other House members were probing Mr. Greenspan on what they could do to help stimulate their local jurisdiction's economies and help boost an anemic economic recovery.

Treasuries sold off sharply on what I feel was Mr. Greenspan's positive economic comments regarding 2003 GDP growth of 2% to 2.5% and GDP growth expanding to 4% to 4.5% for 2004, with the Fed willing to keep interest rates low for however long it deems necessary to help the economy recover from the recession.

I'll point an accusatory finger at Mr. Sanders being partially liable for today's losses, as the selling in Treasuries, was coupled with a strong U.S. Dollar and selling in Gold.

If I were to paint a longer-term bullish picture for equities, it would start with three-paint brushes. One would be selling in Treasuries (thought the Fed eventually begins tightening), selling in gold stocks (no inflation, but economic growth) and a strong dollar (foreign capital coming back to the U.S. as maybe Scandinavia isn't the "best" place in the world to seek growth of capital).

The benchmark 10-year YIELD ($TNX.X) jumped 20 basis points to 3.914% as the bond REVERSED early session gains. The Gold/Silver Index (XAU.X) 74.78 -4.66% was weak early and extended losses into the close, and the U.S. Dollar Index (dx00y) 97.01 jumped 0.99%.

If there was one sector most negatively impacted by today's action, it was the homebuilders, which similar to Treasuries reversed early gains to finish at their lows with the Dow Jones Home Construction Index (DJUSBH) 434.29 -4.63% falling 28-points by the close from a session high of 462.76.

If I have any criticism for Mr. Greenspan as it relates to his testimony, it is that he was too bullish on the economy and GDP growth into 2004. One thing Mr. Greenspan has said in the past that he didn't want to see was a sharp rise in Treasury YIELDS, which might threaten an economic recovery. Perhaps his forward- looking bullishness, which moved bond bulls toward selling and sent YIELDS higher, will have mortgage rates rising further, and have one of the bright spots of the economy, homebuilding and sales, seeing less-robust growth.

Still... I keep an eye on the "junk bond" market and see the Pacholder High Yield Fund (NYSE:PHF) $8.65 +0.34% finding some buyers and in the scope of an economic recovery, buying here doesn't resemble a MARKET sense that Mr. Greenspan is out of touch with reality.

I will raise my right hand, here and now, and say, "if these darned bullish % indicators weren't so "overbought" I would be POUNDING MY FIST ON THE TABLE and telling every trader/investor to be buying stocks based on today's dollar/bond/gold reaction to Mr. Greenspan's testimony.

But... maybe a little unlike Mr. Greenspan's testimony today, I will curtail that urge of bullishness.

After all, Mr. Greenspan was concerned by the lack of jobs growth and rising deficit, and may hint that he is not as "out of touch with reality" as Mr. Sanders seems to think.

And while today's trade was lower and rather anemic, trade volumes were still quite strong. I had the impression much of today's session that traders were focused on Mr. Greenspan's testimony, but the NYSE still managed to see 1.48 billion shares trade hands, while NASDAQ volume was brisk at 1.86 billion. Aren't most of Wall Street's movers and shakers supposed to be at the Hamptons?

New highs versus new lows remained strong, but off of yesterday's level. I'm seeing a slight increase in the number of new 52-week lows at the NYSE with 14 (highest since May 22) with 233 new highs. NASDAQ new highs were 297 and 3 new lows.

S&P 500 Index Chart - Daily Interval

If the dollar had traded weak on today's selling in Treasuries, I'd feel more conviction toward a bearish trade in the SPX and SPY into tomorrow.

I personally don't think Mr. Greenspan is going to give much further insight in tomorrow's testimony than he did today, and if anything, he may temper his bullish comments after reviewing today's bond market action.

I'm going to suggest that bearish traders lower a stop to SPX 1,006 tomorrow and I would look cover weakness back near the 985 level. This decline might be allowed as Treasuries look near- term oversold and while I'm not inside Mr. Greenspan's head, I think he may "tone down" some of his more bullish thoughts on the economy tomorrow.

The lowering of a stop to 1,006 would be in relation to a bullish crossover in Stochastics, with MACD flat and still threatening a bullish crossover there.

I feel like my bearish trade from SPX 980 is "stuck in the middle" right now.

The S&P 500 Bullish % ($BPSPX) saw a net gain of 1 stock to a point and figure buy signal today and had the bullish % inching up 0.2% to 80.00% even.

While a 1,006 stop is rather tight, I'm still looking back to original bearish entry of July 1 and based on that date of entry, really thought the bullish % indicator and new high/new low indicator should have softened more than it has.

I struggle with today's selling in Treasuries and strength in the dollar, only because I can't make the observation that cash is leaving the U.S., at least not today and the pattern of higher highs since July 1 and a higher low since that time has the bearish side of me deferring toward caution and assessing upside risk to WEEKLY R1 at tonight's close.

In tonight's after-hours trade, Intel (NASDAQ:INTC) $23.67 +0.33% sees bullish trading at $25.70 after the company gave little negative news other than it still sees no upturn in the economy or long-cycle upgrades or IT spending increases. The stock did trade up (I believe) on the company saying that gross margins on a forward basis are expected to improve to 54%, which is up from recent Q2's 50.9%.

Most of what I read from INTC's release was very company specific, and not overly "industry" related.

S&P futures (sp03u) settled today's trade at 1,000.90 and tomorrow's session has seen a high of 1,006.40, with current trade at 1,004.50.

If bears are going to pull a rabbit out of their hat near-term, then I do view today's lows in the SPX/OEX as rather important support levels.

Today's trade in the S&P 100 Index (OEX.X) saw a session low of 501.82 came close to the WEEKLY Pivot of 501.71.

I'm just noting tonight the "inverted" nature of MONTHLY/WEEKLY retracement levels between the SPX and OEX, but both show very similar "zones of support" coming into play today. (SPX MONTHLY 38.2% retracement BELOW the WEEKLY Pivot, while OEX WEEKLY Pivot just below 38.2%).

S&P 100 Index (OEX.X) Chart - Daily Intervals

More "negative" responses to Lucent (LU) and Motorola (MOT) quarterly earnings announcements seem to be offset by Intel (INTC) and Washington Mutual (WM) earnings at this point.

I really have no trade conviction up or down in the SPX/OEX at this point, but become more bullish on a decline back near OEX 495.

Aggressive bulls may look to play bullishness above OEX 505 tomorrow, and look to leverage off of today's lows. From the Oscillators, its MACD that becomes the wild card right now, as it has been trending lower and flat, while the OEX has been higher since July 1st. This is shorter-term BEARISH divergence in my opinion, and why I think OEX 501 is a rather important support level right now.

There was one he@@ of a lot of selling in Treasuries today, and there's got to be some cash sitting around. I'd think quite a bit of it would have higher likelihood of buying OEX on pullback to 495 (just above July 1 reversal), but a rather bullish response to INTC's gross-margin news gives bulls a catalyst tomorrow.

NASDAQ-100 Index Tracking Stock (QQQ) - Daily Interval

At the 12:00 PM EST hour, I was growing hopeful for a chance at a QQQ bullish entry tomorrow morning, but I think the Intel news of gross potential 54% gross margins caught a lot of investors/traders (bullish and bearish) by surprise. This type of increase in gross margin only comes from a superior product, where Intel can hold some prices higher than the competition. News from Microsoft (NASDAQ:MSFT) $27.27 -0.47% that it had won a $90 million contract from the Homeland Security Department saw its stock rise to $27.68 and helped the QQQ trade $32.60 in after-hours, which is right at our WEEKLY R1. About the only bullish entry I like at this point is on some type of "fill the gap back lower" to the DAILY pivot.

I had not noted until tonight that the QQQ's intra-day low was today's DAILY S1 of $31.94.

A bull that is holding long overnight is probably eyeballing the upper-end of regression as a target right now, but a more aggressive bull may also want to be cognizant of a potential "spike" above regression like that of June 6th, which saw a gap higher at the open, make a little run early in the session, but then get reversed.

The NASDAQ-100 Bullish % ($BPNDX) saw a net gain of 1 stock to a new point and figure buy signal today, and has the bullish % inching back up to 81%.

Dow Industrials (INDU) Chart - Daily Interval

MO and BA both had some negative news developments and this was discussed in today's intra-day market commentary. MCD gave back some gains after a very impressive run higher from $13.00 to $23 the past three-months after giving inline guidance for upcoming Q2 earnings.

Of the major indexes, the Dow is the only index that has overlapping resistance in the WEEKLY/MONTHLY retracement. I'm cognizant of a "pump and dump" type of opening, as I do view much of this evening post-market trade as being rather "stock specific" to INTC and MSFT, and not necessarily news on broader recovery. If we were going to see a "pump and dump" type of open, then the Dow would be the index I'd first monitor for early resistance.

Altria Group (NYSE:MO) $40.50 -3.47% was the stock that had the Dow Industrials Bullish % ($BPINDU) seeing a net loss of 1 stock to a reversing point and figure sell signal today, and that sell signal cam at $40.00 in MO. This has the very narrow Dow Industrials Bullish % ($BPINDU) slipping back 3.33% from its recent bull cycle high reading of 86.67%to 83.33%. Still "bull confirmed" here.

Pivot Analysis Matrix

I think an SPX/OEX trader may want to set some alerts at various levels marked in the S&P Banks Index (BIX.X) tomorrow, to help guide them near term. There are multiple correlations at DAILY/WEEKLY levels. Early resistance is DAILY Pivot of 312 and WEEKLY R1 of 312.

I've noted QQQ "resistance" early based on this evening trade at DAILY R1 and WEEKLY R1, and it is my best guess at this point, that this might be a range for the QQQ to open at.

I've made note of how sharply the benchmark 10-year YIELD rose today, all the way to its MONTHLY R2.

Jeff Bailey

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