Option Investor
Index Wrap

I'm counting on you for strength

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It's a hot summer's day and four sweaty and somewhat exhausted- looking teenage kids are dizzily walking down a dry and desolate road. All four pause, cheeks red, throats parched, when in unison they look at each other and say, "I'm counting on you for strength."

After sprinting along this road youthful fashion, not unlike a young bull's first romp through green pasture after being corralled, the four kids, each counting on each other for strength would still be considered young. Due to their youthful age their true identities cannot be revealed, but will be named Dow, SPX, OEX and QQQ. Dow is older and perhaps wiser of the three, while QQQ, still shows his youthfulness from time to time and during this journey, tends to sprint instead of walk and will often times show lesser degree of stamina and has been known to hitch a ride on one of his friends backs in order to rest.

As if connected by relation, perhaps brothers, both SPX and OEX look down the road, and through a mirage, while difficult to see through, there appears to be two figures walking toward the group of four, carrying something between them. It looks like a bucket, or a basket, but it's hard to tell. QQQ, pre-occupied with an annoying pebble in his shoe, seems unaware of what may be on the horizon.

An interesting story to start, and may have the reader wondering... through this mirage, how can we tell if the two figures really exist, and if they do, are they walking toward the group of four, or walking away? If walking away, the starting to weaken internals, certainly give hint our group of four doesn't have the strength to make a sprint, or at least a sustainable sprint.

However, if that vision, way down the road does indeed have the two figures, (I'll name them banks and bond) walking toward the group of four exhausted teens, then the odds grow greater for the four kids named Dow, SPX, OEX and QQQ to show some stability in their knees as they dizzily wander between the roadside ditches.

This "bank/bond" and major equity index trade really began surfacing several weeks ago, when we first noted some weakness presenting itself in the homebuilders.

A more favorable Treasury auction in the 5-year note, compared to yesterday's more dismal demand for 3-year notes, was perhaps today's top story as Treasury YIELDS fell, helping to put at ease, at least for a day, some concern regarding the negative impact of higher rates of consumer interest rates.

More notable gains among the sectors, which may be tied to today's declines in Treasury YIELDS saw the Dow Jones Home Construction Index (DJUSHB) 424.27 +4% lead today's sector winner list, with the PHLX Home Construction Index ($HGX.X) 282.22 +2.2%, which contains a broader array of construction-related names like Temple-Inland, Inc. (NYSE:TIN) $45.10, which has a building products group that produces lumber, particleboard and other construction-related product.

Financial sectors had the Securities Broker/Dealer Index (XBD.X) 544.97 +2.31% getting a boost from Lehman Brother (NYSE:LEH) $62.65 +3.04%, where if you turned its chart (Lehman's) upside down, a trader might think he/she is looking at a Treasury YIELD chart, as Lehman is one of the larger bond trading firms.

Sector weakness today was once again lead by the HMO Index (HMO.X) 679.79 -4.28% for a second-straight session, with a growing number of comments coming from analysts that near-term upside is limited as enrollments from a still stagnant job market give little catalyst for further gains.

Technology sectors, weighed lower by Cisco Systems' (NASDAQ:CSCO) $17.66 -6.3% forecast of sequential 2% to 4% revenue growth, were broadly lower with the Disk Drive Index (DDX.X) 107.47 -3.49%, Networking Index (NWX.X) 177.75 -1.88%, CBOE Internet Index (INX.X) 133.2 -1.7% and GSTI Software Index (GSO.X) 123.44 -1.08% giving up ground, and finding the tech-heavy NASDAQ-100 Index (NDX.X) 1,215.13 -1.18 falling 14.5 points, while its Tracking Stock (AMEX:QQQ) $30.19 -0.06% slipping 2 cents below yesterday's 04:15 PM EST close.

Traders that may have been a bit confused by today's percentage gains/decline between the cash indexes (INDU +0.28%, SPX +0.16%, NDX -1.18%) and their trackers (DIA +0.69%, SPY +0.58%, QQQ - 0.06%) should understand yesterday's post 04:00 PM close and lower trade out of CSCO, which would have had the negative impact on the trackers (DIA, SPY, QQQ) into their 04:15 PM EST marking close, where today's percentage gains/losses would have been benchmarked to.

Tonight, there has been little after the close market moving news, and we should see the trackers more closely match the cash indexes in tomorrow's trade.

A quick example is that while the NDX closes at 04:00 PM, yesterday's 04:00 PM EST had the QQQ trading $30.47, but by its 04:15 PM EST official close, had fallen to $30.21. A quick review of last night's Index Trader Wrap, and U.S. Market Watch showed the QQQ down 3.94% in yesterday's trade, while the NDX showed a more modest 2.97%. Today was simply an adjustment between the 04:00 PM cash close and 04:15 PM EST tracker close.

One thing that I saw late today, and mentioned in the 03:15 PM intra-day update, is that stocks began trading back off their best levels of the session just as the bond market closed. It would be my analysis that equity traders are either jittery ahead of tomorrow's economic data, or tomorrow's 10-year Treasury bond auction.

While the economic data will be closely monitored in Q2 preliminary productivity (forecast of +4% versus prior +1.9%), weekly initial jobless claims (395K vs. prior week 388K), both due out before the bell, along with the 10:00 AM EST release of June wholesale inventories (unchanged vs. -0.03%) and 03:00 PM EST release of June consumer credit ($6.0 billion vs. prior $7.3 billion), all of the economic forecasts would point toward improvement, so I would have to think that the last hour selling in stocks is more likely attributed to a jittery market and how receptive traders will be with the 10-year Treasury auction.

On Tuesday, the demand for 3-year notes was rather weak, Treasuries sold off (YIELD higher). Today, demand for 5-year notes was strong, Treasuries rebounded (YIELD lower).

From here, I could probably say, "read last night's wrap" for how to look to trade tomorrow's action. Focus on YIELDS and banks early to get a sense of direction in the INDU, SPX and OEX. While Cisco's (CSCO) earnings aren't necessarily a distant memory, I think the NDX/QQQ may now be counting on the INDU/SPX/OEX for strength, while the INDU/SPX/OEX wouldn't mind getting some lift from the NDX/QQQ.

Here's a quick look at tomorrow's pivot matrix, and BIX.X 297 support looks to be level of focus again tomorrow.

Pivot Analysis Matrix

Give or take a point, the BIX.X finds DAILY S1, WEEKLY S1 and MONTHLY S1 correlation at/near 297. This 297 level showed up in yesterday evening's Index Wrap and the pivot matrix for Monday, which was posted in Friday evening's Index Trader Wrap, but with 297.25 at DAILY S2.

I would closely monitor and deem Monday's low of 296.14 a rather important level tomorrow.

Why?

While a lower YIELD from the bond market will help alleviate fears toward higher consumer lending rates dampening an economic recovery, then under that scenario, it would be my thinking that the BIX.X should hold Monday's lows, if we're going to get the gradually trending lower channel, that makes for the 1.5 step backward move and 1 step forward move for the range trade.

However, lets say we see a DEFENSIVE move into Treasuries, based on Cisco's revelation of 2 to 4% revenue growth. I swear some of these technology stocks have traded like investors were thinking 20% quarter-to-quarter growth.

The reason I think it so important to monitor the BANKS along with Treasury YIELDS is that the banks give some coverage to both the consumer side of things, and bond YIELDS.

While my beginning story in tonight's wrap of 4 weary teenagers (Dow, SPX, OEX, QQQ) that sees 2 other people approaching through a mirage (Bonds and Banks), this will now be played out in another way.

In yesterday's trade, the BIX.X did show a little more firming in the pivot, relative to the SPX/OEX. Today, the BIX.X did move back higher with the lower YIELD.

The DEFENSIVE move back to bonds at this point, would, in my opinion, only be uncovered if the BIX.X declines DESPITE A LOWER YIELD!

In my story above, we might think a favorable outcome for the major indexes is that bond YIELDS move gradually back lower, calming fears of higher lending rates, and that the BIX.X moves higher, giving bullishness to the major indexes.

Now picture the banks getting smashed lower, as YIELD fall lower as investors sell all their stocks and rush to the safety of bonds at these higher-than-June historically low levels of YIELD!

You see, the only "alert" to weakness in the major indexes (broader stock market) that I can think of is that banks trade lower when YIELDS trade lower.

I'll bet you that there are some equity bulls out there that are ONLY trading with the though "if bond YIELDS go lower, then stocks will rally!"

My/our only alert to a defensive move back to bonds, where YIELD will fall, is if banks decline! If I'm looking for our two friends (BONDS and BANKS) to be walking AWAY from the Dow, SPX, OEX and QQQ, where we would look for greater weakness, then it would have to be found, or revealed in the BIX.X.

I think it is rather evident at this point that the MARKET is concerned about HIGHER Yields right now. I think we know what the near-term impact is of higher YIELDS.

The question now, after Cisco perhaps undershooting some investor optimism of 20% quarter-to-quarter growth, is if there's still enough conviction that the economy is growing fast enough to support whatever growth rates market participants have been holding for quarter-to-quarter growth rates.

If I could sum things up for being bullish at SPX 965 today, it would be that I hold that bullish conviction, as long as the BIX.X can hold above Monday's lows.

S&P Banks Index (BIX.X) Chart - Daily Interval

The BIX.X couldn't quite make the move above 302-303 zone of resistance today, and this still gives the impression that other market participants aren't so certain about YIELD direction and potential a range trade that I think will be gradually lower. Note Stochastics are turning higher from oversold territory, similar to that found in late June. The difference between oscillator observations is that MACD is below zero, which is WEAKER than above zero level in June. Therefore, I would think a BIX.X move back to 307.6 would be a MAX move higher from these lows.

One thing I would also note, simply based on Stochastics dating back to late June, is how the BIX.X made that lower low from consolidation to the 50-day SMA. That was on July 1st. I remember all too well that I profiled a BEARISH trade in the SPX that day, with a stop above the SPX highs. While there is no guarantee that this past trade action will be duplicated, I make note of it tonight.

Another note I'll make on the banks is that according to Dorsey/Wright and Associates, there banking sector bullish % (BPBANK) is still "bull confirmed" at 81.34%, where its bullish % chart higher reading on this bull cycle high as been 82%.

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

OEX lower trade this morning was most likely due to tech weakness. If the indices could talk to each other after today's trade, they aren't disappointed that YIELDS pulled back, or that banks didn't edge up. Nope... the Dow, SPX and OEX are perhaps looking at the QQQ and saying, "hey, give me a little help, I'm counting on you for some strength."

I liked what I saw from the bond/bank relationship today to trade bullish in the OEX when SPX traded 985. To get the move back higher to a 497-500 target, need YIELDS to edge lower, banks to gather some strength, and need some help from the QQQ or technology area.

Today's trade saw no net change in the S&P 100 Bullish % ($BPOEX). Still "bull confirmed" at 81% and is the bullish % between the Dow, SPX and NDX/QQQ bullish % still in a column of X, that hasn't seen a reversal lower at this point.

Let's jump to the NASDAQ-100 Tracking Stock (AMEX:QQQ) $30.19, where I see last tick at $30.16 in extended hours trade and see what it is saying.

NASDAQ-100 Tracking Stock (QQQ) - Daily Interval

During the bullish move higher from March, there have been times when we've seen the QQQ lead and then at its most weakest looking point, when the other major indexes were trying to firm from a pullback after some technology declines, the QQQ would come through with a rebound and make for a nice recovery.

In last night's Index Wrap, we noted the QQQ was still above its July 1 relative low, so it still is considered a longer-term leader relative to that benchmark, but the recent reversal to "bear confirmed" shows the internals are weakening. Technology stocks can still benefit from some psychological relief should YIELDS trend lower.

I'm much more "bearish" on the QQQ/NDX based on its "bear confirmed" bullish % reading at this point, but do see some psychological relief back to $31.67 on a lower YIELD, but that psychological relief is going to have to come from the bond market, and banks moving back higher. Both of these (bonds and banks) bullish scenario can come to fruition and still see the QQQ not participate.

I don't know what the market is/was thinking if it was in fact thinking CSCO would give some type of outlandish/bullish quarter- over-quarter growth projections. Perhaps the bringing in of some horns by CSOC's guidance of 2 to 4% quarter-to-quarter revenue growth finds in rally in the QQQ back to $31.67 finding eager selling.

As a time reference, the OEX fell below its rising 50-day SMA four sessions ago. In trailing step fashion, the QQQ has followed. The OEX did test its MONTHLY R1 today, and only our lower-end of regression in the QQQ chart seems to provide the current support to keep the QQQ from doing the same at $29.81.

Today's trade saw further internal weakening in the also-narrow NASDAQ-100 Bullish % ($BPNDX) as it saw a net loss of 3 stocks to sell signals. This has the bullish % falling to 67% and "bear confirmed" status. It would currently take a reversal back higher to 74% to reverse up into "bear correction" status.

I would definitely look for short/put entries back above $31.50, with good trade setup if DAILY Stochastics were to be nearing overbought levels.

S&P 500 Index (SPX.X) Chart - Daily Intervals

Throw the QQQ and the OEX together and perhaps you get the SPX, which has a little more tech exposure than the OEX. It wasn't all technology that weighed on the SPX/OEX attempt at a rebound. Healthcare stocks have decided to show notable weakness in recent sessions.

Today's trade saw the broader S&P 500 Bullish % ($BPSPX) see a net loss of three stocks to point and figure sell signals. This has the bullish % slipping further lower to 74.2%, where a reading of 74% would be another O entry on its bullish % chart. Still "bull correction" status.

Dow Industrials (INDU) Chart - Daily Intervals

The INDU reached it session high of 9,134.57 about 10-minutes prior to the bond market's 03:00 PM EST close, then traded back almost exactly 50% of the day's range. Near-term encouraging for rebound from a range is that the Dow held its WEEKLY S2.

Monthly S1's in all of the indexes certainly looks to be similar support, and I think each index will play off each other in the near-term, with bond YIELDS and banks being the "key" determiners.

Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU). Still "bull correction" status at 80.00%.

Jeff Bailey

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