Option Investor
Index Wrap

BORING

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Market Analysts and pundits try to find something interesting to say about the market even when its not doing much - but the plain simple truth of it is that it's a bit boring right now as the market has been in a relatively tight (trading) range. It then requires significant patience for the active trader types to wait for a move to the upper or lower end of the range, such as was the case last week. Predictably enough a rally developed after the S&P & Dow indices found support or buying interest at the low end of their ranges.

The big cap blue chip Dow closed up on Friday along with the S&P Indices, helped by McDonald's (MCD), a recent strong performing Dow 30 stock. However, the Nasdaq Composite was down for the 6th day running, as the important bellwether semiconductor group got hit - a sharp drop in Nvidia pulled the semis lower, making it the worst performing tech sector.

Optimism about consumer spending fueled a continued rise in retail stocks, as well as airlines. Gold stocks continued higher per the technical breakout seen on the charts with the Philly Gold and Silver Index (XAU).

THE BOTTOM LINE -
Last week the S&P 100 (OEX) fell again to 485, the lower lower end of its broad price range and equal to the late-June low, presenting another buying opportunity for long calls. Those selling premium - a good idea in a trading range market - could have sold the puts. The S&P 500 (SPX) dipped to the 960 area, approximately equal to its 7/1 low and in the area of the August TOP of last year - resistance "becomes" support. The Dow Index (DJX) fell to 90 which makes now 3 "touches" to this area since early-July.

The Composite fell to around 1641, almost filling in the upside gap from early-July that I mentioned last week as possibly marking a low. The jury is out on that as the tech heavy Nasdaq did not show the same propensity to rebound as the S&P. It went up more, now its correcting more and is consistent in that.

Looking the most bullish in the summer doldrums is the Dow, then the S&P. QQQ may hold the 30 area, a 50% retracement of the last up move, but I'm not stepping up to the buyer's plate yet as the Q's could still slip to 29 where I would be more willing to buy the stock.

What will it take to propel stocks into another up leg? - probably a bond market rally at some point and some further signs of job creation, as I've been saying in my commentaries and of course as suggested by many others.

The recent run up in bond yields and mortgage rates had raised some fear with market participants that the less than robust U.S. economic recovery would falter, causing consumers to spend less and businesses to cut back on the limited new capital spending they've been doing so far in 2003. However, a rebound in bond prices and resulting drop in yields, somewhat calmed these concerns.

A view of the continuous benchmark weekly bond chart versus equities -

Note: A "continuous" contract price series strings together the nearest futures contract until shortly before it expires, then uses the next most-active contract and so on. This is the only way to get a longer-term price perspective of the benchmark bond by using the futures contracts.

A further background note - since the Federal government stopped borrowing so much a few years ago, the 10-year Treasury note sometimes now called a bond even though that used to be for maturities beyond 10 years), has become the benchmark for longer- term debt securities. The "benchmark" may of course change back to the 30-year bond if the government goes back to running big deficits again; i.e., its favorable to sell more 30-year paper if the borrowing needs are major and this is especially true in a low interest rate environment such as we have currently.

LAST WEEK -

We had mostly positive economic news coming into Friday and some earning's bright spots. June factory orders were up by 1.7% and better than expected (+1.5%). I said "mostly" and this report showed that businesses were not building much in the way of inventories. However, low inventories also mean that an increase in demand will lead to more production right away, with little lag time. The July ISM index of manufacturing activity had shown a rise above 50 (to 51.8) - as reported prior to last week - the index above 50 is defined as showing economic expansion. There's still little sign of more jobs being created however.

There was also a much talked about report from a big outplacement firm that companies had stepped up their pace of planned layoffs in July - however, for the year, layoffs are down some 12% for the first 7 months relative to 2002.

Weekly jobless claims fell some and stayed under 400,000 again. The important 4-week average also dropped below 400,000 to 397,000. And U.S. productivity took a big jump, unlike what had been seen in Europe - Italy "officially" slipped into recession - with a sizable 5.7% gain. Of course workers groups will also point out that producing more with LESS employees is not great for putting the unemployed back to work.

Equity funds continued to see net inflows of money for the week ending midweek - August 6th.

FRIDAY'S TRADING -

The S&P 500 Index (SPX) was up 0.4% on Friday to 977.6, with the narrowly based Dow (30) higher by .7% or +64 points to 9191. The tech-heavy Nasdaq Composite Index fell 8 points (-0.5%) to 1644. (For the week the Dow was up 0.4%, but the (Nasdaq) Composite fell by 4%.)

The retail sector made some further gains following upbeat same- store sales results from most retailers on Thursday. Rating agency Fitch issued a report of caution on the retail group however: ".....retailers are being hurt by merchandise deflation and a lack of new products to spur shopper interest,". Deflation - there's that word again! We could just call it the "D" word instead.

By the way, here's the "J" (Jobs) word again - Fitch's report said that a sustained turnaround should depend on faster job creation, which will require a further pickup in economic growth.

There was somma good, somma bad news - ok, a bad attempt at ethic humor - relating to individual companies.

Helping the old economy big cap indices like the Dow, was McDonalds (MCD), which was up some 7% to $23.65 after the company that invented the Big MAC, said that July US same store sales were well above expectations. In fact, a nearly 10% jump in sales was reported and tied to its Big Mac promotion. Hmmmm - that would also be the big cholesterol hamburger, so guess it's not for me.

Bank of America raised its EPS estimates for MCD for Q3 also, which suggests that its analyst anticipates the company making gains in same store sales comparable to August/September. B of A said its report that it believes there may be further upside to come. Their Q3 EPS estimate went up to 39 cents, from 38. Oh, for every penny that MacDonald's takes in a week!

Graphics chipmaker Nvidia (NVDA) was off sharply after the company reported Q2 earnings on Thursday night that beat Street estimates - but, the company also warned that Q3 gross profit margins would remain flat to slightly down and that operating expenses were expected to rise 5%-10%, putting pressure on earnings. NVDA said it expected revenues to increase 5%-6%, but this was under their Q3 consensus numbers. Tech can still be a heck of a wreck!

INDEX OUTLOOKS -

Readers of my prior columns may remember this chart below of the Semiconductor Index (SOX), with its Price/RSI divergence and sell signal highlighted that shaped up at the top. This bellwether component sector to Nasdaq is so important that we can't really expect the Composite to do much with the drag of the all- important semiconductor/chip maker group.

SOX reflects the very anemic flow of business capital spending coming in - not enough yet to continue to boost these stocks when they get "ahead" of themselves or overvalued. You can see this technically when the advance took the Index so far about the dominant up trendline.

For more on the use of the RSI Indicator and its very important use in seeing occasional reversal tops (or bottoms) forming, you can go back to a Trader's Corner article on the following page - http://www.OptionInvestor.com/traderscorner/080102_1.asp

S&P 500 (SPX) - Daily chart:

I said before that the chart pattern would stay bullish overall as long as there was no decisive downside penetration of the 970 area. I could have said 960 if I thought that SPX would test its absolute low since the summer correction began. Note that this "line" of support around 960 that has developed so far is equal to the Sept. 2002 low to the far left of the chart (and is not far above the following rally spike peak in Nov.) - a case, to date anyway, where prior resistance is now showing up as support.

While its possible that a deeper correction will be seen, even back down to the 200-day moving average over time - SPX is already trading under its 50-day - I see nothing just ahead that would suggest it from the current more optimistic economic outlook. Of course in this new millennium, there are also other threats that are wild cards after 9/11, which took the then downturn substantially lower.

A deeper correction, such as to the 940 area, can't be ruled out if 960 if pierced. However, the risk to reward of buying in the 960 area was very favorable; i.e., risk to 955, upside back up to 980 at least, probably higher, given the oversold reading registering on the 14-day stochastic model.

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

The range on the downside in the OEX got extended back to the prior low at 485 - I though it might hold the 490 area, but it went to the next lower support implied by that earlier downswing low, which was a possibility also noted last week.

For those who bought OEX calls on the dip per my suggestion, it was tempting to take the profit that developed. However, as the alternate chart (pattern) interpretation is that of a downtrend channel, a reasonable expectation is to anticipate a move sometime ahead to at least the 500 area and this would then become a place to exit. The hourly down trendline intersects in the 503 area currently, but the slope of the line will take it closer to 500 by midweek.

The prior upswing high at 506 should be an area of selling interest and next resistance. The broader interpretation of the still-lateral sideways trading range, suggests that major resistance would develop around 510-511.

I continue to like buying puts on further rallies toward the upper end of the projected ranges: specifically, buying puts in the 506 to 511 zone if OEX gets into this area this week - my downside objective would then be to 485 again.

Or, alternatively, take the rest of August off - be like the Italians - opps! maybe not, given that their country has slipped into recession. Things are bad enough with a slow-growth economy here in the U.S. of A.

Dow Industrials Hourly (DJX.X) chart:

Picture perfect - the Dow comes down to 9000 support and wham-o, back up it goes! Wish all the markets and stocks were as "easy" as the Dow Industrials were sometimes when they trade so "technically" perfect.

Well, when the average of those 30 stocks get into a range, they have institutional buying support at certain levels - and, then the same buyers tend to back off when the key stocks get back up to their recent upper range. Especially in the summer doldrums and especially when higher valuation (multiples) are not seen as warranted without the economy going into second or third gear.

As suggested, I bought DJX Index calls in the 90 area and will look to take profits on a move to 93. I will also exit at a breakeven or better stop at 90.5 currently. Puts still look attractive to me in the 93-93.5 area.

In between the aforementioned "extremes" I don't find an attractive risk to reward outlook in being long options. I also suggested selling puts at the low end of the range as I think that the Dow will hold 9000, absent some extreme event.

A daily close over 93.5 would then suggest a further upside objective to the 95 area which is where I peg the next technical resistance. Conversely, a break of 90, would set up a next target to 89.

Nasdaq 100 Index (NDX) - Hourly:

1190-1195 looks to be support, as implied by both the cluster of prior hourly closing lows and the area of a 38% retracement. I calculate that even better support in the NDX will be found if there should be an eventual move to the 1160 area, representing a 50% retracement. A daily close under 1200 or better, two consecutive close below 1200, would suggest this kind of further downside potential.

On the bullish side, I would rather trade the QQQ's as I like the risk to reward better in owning the stock if it gets to 29. However, I may also take a small trade in NDX calls in the 1190 area if reached, but not hold them past 1185.

I would trade out of calls at 1240 and consider puts in this area.

Nasdaq 100 Tracking Stock (QQQ) - Hourly:

I suggested shorting the Q's in the 32 to 32.75 zone and would stay with this position and look to buy back the stock in the 29 area rather than at 30 as suggested previously.

If 29 gives way, next lower support looks like down around 27.50. For that reason, will only risk to 28.50 on any stock purchases if an entry at 29-29.25 becomes available this week. Alternatively, just wait for a next dip and then see where "basing" action develops.

Good Trading Success!

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