Option Investor
Index Wrap


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The sideways consolidation continued for yet another week as I thought it would. There is, as of yet, nothing major unfolding to cause the bulls to do still more buying or the Bears to press the short side.

The S&P 500 (SPX) Index fell to 980.15 on Friday, off about 1 percent - as a comparison, the RUT (Russell 2000 Index) was down by 1.7%. The Dow Jones Average was down by 79.8 points (0.9%), to 9,153.9. (Down was J.P. Morgan Chase, Alcoa, Citigroup and Johnson & Johnson following an analyst downgrade. Disney was one of the Dow's best performers, reaching a new 52-week high, following improved earnings.)

The Nasdaq Composite (COMPX) gave up 19.40 points (1.1%) to 1,715.62 and the Nasdaq 100 Index (NDX) was off by nearly 13 points to 1,264.34.

THE BOTTOM LINE - If you did anything but take that road trip I suggested or to sell (time) premium (e.g., short calls and puts), which is eroding at a predictable clip in a trend-less market, you might have had a difficult trading week.

As noted on OIN last week, NYSE 52-week lows on the big board begin to creep up relative to new (52-week) highs. This reality is also very much reflected in the sideways Index chart patterns.

A sideways move - I consider this a lateral trend (rather than being "trendless") - has also been called an "indecision" pattern. This raises the question of what would it take to cause a breakout above or below the price range and for investors to make their next portfolio decisions? -i.e., add or lighten up on stocks. Answer: In a word, JOBS.

Tuesday (last) saw the release of the Conference Board's July Consumer Confidence Index, which fell to 76.6, well below expectations forecasted around 85.0 and well under June's 83.5 reading. Why do consumers remain skeptical? - a big part of it is that is NO perceived improvement in the jobs market.

The Director of The Conference Board's Research Center, stated that: "The rising level of unemployment and sentiment that a turnaround in labor market conditions is not around the corner have contributed to deflating consumers' spirits this month," .... "expectations are likely to remain weak until the job market becomes more favorable."

Look at the some of the underlying confidence numbers -

Consumers claiming jobs are "hard to get" rose to 33.1% from 31.9%, while those claiming jobs are "plentiful" declined to 10.5% from 11.2%.

Those surveyed that were anticipating more jobs to become available over the next 6 months declined to 16.8% from 18.9%, while those expecting fewer jobs increased to 19.8% from 16.9%. The proportion of consumers anticipating an increase in their incomes, declined to 15.7% from 17.1%.

This later statement regarding an increase in income is part of the problem of lack of confidence in the future - Time Magazine recently did a cover story on "Hey, where's my raise!"

Merit and cost of living increases in salaries seem to have gone the way of the Dodo bird. Factory workers are often in the same boat, especially non-unionized factories of which the trend has seen these numbers increasing.

Wednesday did not bring the bulls much help in the form of the Fed Beige book as the word they used the most was "mixed" in terms of the levels of current activity and things that would suggest an economic pick up.

Some earnings over the week came in ahead of expectations - Dow 30 component DuPont (DD) reported Q2 earnings of $0.62 per share, 5 cents above consensus. Aetna (AET) reported its Q2 income at $1.28 per share, which was well ahead of Street forecast of $1.02. (Excluding a 1-time benefit of realized capital gains, net income would have been $0.87 per share, a 24% increase.) Verizon (VZ) indicated its Q2 numbers at a penny over the 68 cent forecast.

Earnings season is winding down and the next big focus is going to be continued economic reports and Q3 earnings.

Oh, Thursday brought some tidings to gladden the bulls as the Advance GDP was released at 2.4%, well ahead of expectations of 1.5% and the prior period's (Q1) 1.4%. Q2 growth increased mainly due to defense spending, some business investment in plant and equipment and by consumer spending. Defense spending shot up by 44% and is not going to be an ongoing thing - nor, will it help boost consumer confidence, except maybe for those who work in this sector.

There was some recovery in business spending which is slightly encouraging. "Nonresidential spending", a broad category of investment, rose at a 6.9% annual rate in the second quarter after decreasing 4.4% in the first 3 months and the strongest advance in investment spending in 3 years. No doubt that some of this money was being put to work in the market.

On balance, just enough bullishness to prevent a sell off, not enough to cause a round of new buying that would lead to a second up "leg".

The ISM (Institute for Supply Management) Index was released at 51.8 in July, up from 49.8 in June. Over 50 is defined as showing expansionary numbers. Some highlights - new orders rose to 56.6 from 52.2 in June, the highest reading since January (59.7). The July employment reading of 46.1 was little changed from June's 46.2 and still indicates contraction in the jobs numbers, but it was holding above April's 41.4 reading.

As you've heard elsewhere no doubt, we can anticipate market participants to focus even more on what is happening in the labor market. If this component does not begin to improve along with the economic data (e.g., GDP, etc.), its not a good sign. As the existing consumer base is maybe getting a bit tapped out, especially as interest rates creep back up, the pent up demand of those going BACK to work is the one factor that could really put the economy on a solid growth track. By the way, the jobs numbers are one of last component indicators that will tend to also improve.

Other economic data released showed construction spending in June unchanged and under the consensus of economists' forecast for a gain of 0.4% - there was a 1.7% drop in May.

Personal income and spending for June were in-line with forecasts, but non-farm payrolls, which fell by 44,000 in July (after losing a revised 72,000 jobs in June) got MOST attention from traders as it was the SIXTH straight month of job losses and tallies the U.S. economy as losing 486,000 jobs since February. That's a lot of jobs - and potential spending power.

There was a drop in the unemployment rate from 6.4 to 6.2% but this is deemed to have hardly any significance relative to the lack of jobs growth.

The 10-year Treasury fell sharply yet again this past week, losing 1 and 23/32 points - this makes the 6th. decline in the last 7 weeks since the 10-year benchmark topped in mid-June. The yield is now 4.4%.

The U.S. dollar was lower against major trading rivals, falling 0.4% percent to 120.10 yen while the euro gained 0.3% to $1.1264.


S&P 500 (SPX) - Daily chart:

The chart pattern remains bullish overall as long as there is no decisive downside penetration of the 970 area. With a big leg up, then a sideways consolidation, benefit of the doubt goes to the bull case. A breakout above 1017 is needed to suggest that another up leg was underway. SPX may just continue to trade in this same 973-1017 range. The only predictor in this situation is a breakout above/below the range. Until then trade the "range".

One deeper correction to the 940 area can't be ruled out if 970- 973 gives way. Such a move would complete a "typical" a-b-c type correction. Stay tuned!

Sentiment and the RSI indicator are both in neutral areas, and reflect what we're seeing in the chart pattern.

S&P 100 Index (OEX) - Hourly chart:

The range in the OEX continues to be bound by 492 on the downside and 510 on the upside. Next lower support, implied by an earlier downswing low is 485. I still am inclined to buy calls in the 492 area, with tight stops just below 490, with a buy-back strategy at 485. Conversely, buying puts in the 505 area and above - such as a move back up to retest the 510 area resistance - is favored on rallies.

If you don't get prices right at the lower or upper end of the range in terms of buying calls and puts, it will be hard to make money in such a meandering market - so, stay on "vacation" or take advantage of strategies that achieve some profits in a range bound market.

Dow Industrials Hourly (DJX.X) chart:

I wish I had "new" charts to show you - but its sameO-sameO as the Dow and other indices drift sideways. Hey, when we get a big new move, I will have more exciting lines and notations!

Well there is actually something a bit different shown below as DJX starts finally to slip below its long-standing uptrend line. This may suggest that the Index will come back down again to what I've thought would be the low end of its trading range at 9000- 9050 in the Dow.

In line with an unchanged outlook and strategy, I'm looking to buy the Index calls in the 90 area and puts back up at 93. In between these "extremes" I don't find an attractive risk to reward outlook, at least in long options.

Nasdaq Composite Index (COMPX) - Daily:

The Composite may take out or pierce its daily chart uptrend channel - although the lows again last week held the lower channel line.

1700 continue to look like near support, then around 1650 and finally at 1600. My favored Nasdaq buying area is in the 1650 to 1600 zone. A move to 1650 would "fill in" the upside gap there.

Resistance is apparent at 1750, then at 1800-1825 based on the projected upper channel line.

Nasdaq 100 Tracking Stock (QQQ) - Hourly:

The Q's continue to look like a short in the 32 to 32.75 area and a potential buy on a dip to the $30 area. I could see a 50% retracement occurring, which would take QQQ to around 30.

A break of 30, especially on a daily closing basis, would turn the chart picture more bearish, although I would not give up on the bullish case unless 29 was pierced. In fact, would like to have a buying opportunity in the 29-30 price zone - risking to 28.70 would then look pretty good relative to upside potential for an eventual new high above 33.

Good Trading Success!

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