Option Investor
Index Wrap

Inline with guarded optimism

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Equity markets cheered and bond markets sighed relief as the Fed that said little and did little when the Federal Open Market Committee left its fed funds rate unchanged at 1.0%, saying its economic risk indicators are weighted evenly toward strength and weakness.

For the most part, the Fed said exactly what both the bond and stock markets may have wanted to hear. Nothing! There was no jawboning from the FOMC, with clear statement that a still anemic jobs market and little signs of inflation continue to allow the Fed to maintain a monetary policy to allow further time for more signs of sustainable growth to present itself, and maintain a more friendly monetary policy for the foreseeable future.

Equity bulls appeared cheerful, pushing the Dow Industrials (INDU) 9,310.06 +1% higher into the close, finishing just 51- points shy of its 52-week high set on July 31st, with tech- component Hewlett Packard (NYSE:HPQ) $20.95 +4.95% reversing recent losses ahead of next Tuesday's quarterly earnings report.

Sectors finished broadly positive with the Securities Broker/Dealer Index (XBD.X) 570.67 +3.11% and Biotechnology Index (BTX.X) 445.39 +3.13% vying for today's sector winners, while sector declines were limited to both gold equity sectors with the AMEX Gold Bugs Index ($HUI.X) 177.46 -1.49% pulling back from yesterday's 52-week high.

The broader bullish sector trade found the S&P 500 Index (SPX.X) 990.35 +0.99% closing at its best levels of the session with a 9.7-point gain, while the narrower S&P 100 Index (OEX.X) 499.74 +0.93% flirted with the 500 level to close up 4.6 points. Equity bulls made deposits in both the money center banks as the KBW Banking Index (BKX.X) 886.30 +1.29% gained 11.3 points, while the more regional S&P Bank Index (BIX.X) +0.94% gained 2.8 points.

Technology shares broke above their recent monthly lows with the tech-heavy NASDAQ-100 Index (NDX.X) 1,240 +1.43% rallying back to test its intermediate-term 50-day SMA of 1,241, while its Tracking Stock (AMEX:QQQ) $30.86 +1.51% gained 46 cents on the session, before easing back to $30.78 in after-hours trade after semiconductor-equipment giant Applied Materials (NASDAQ:AMAT) $18.45 reported Q3 (July) earnings of $0.05 per share (excluding $0.07 per share restructuring charge), which was a penny better than forecasted. However the company's guidance for Q4 (October) for EPS of $0.04 to $0.05 and revenues being "flat to slightly up" from Q3's $1.09 billion, would be below consensus estimates of $0.06 and $1.21 billion respectively. The company also said it is cautious on the remainder of 2003 and looks for calendar year 2003 capital spending to be "flat to slightly above calendar year 2002 levels," which assumes an up tick in the second half of the year. Shares of Applied Materials (AMAT) finished the regular session with a gain of 11 cents to $18.45, but fell to $18.21, or 1.3%, in after-hours trade.

The Semiconductor HOLDRs (AMEX:SMH) $31.59 +1.57% saw active trade at $31.40 in tonight's late session.

Treasuries found buyers in the major maturities, with the 5-year September futures contract (fv03u) 112'115 +0.24% gaining 8/32 with its YIELD ($FVX.X) falling 4.6 basis points to close at 3.209%, while the benchmark 10-year YIELD ($TNX.X) slipped lower by 1.4 basis points to 4.357%, with its September futures contract (ty03u) 112'080 +0.14% gaining 5/32. The longer-dated 30-year September futures contract (us03u) 107'02 +0.14% edged up 5/32, as its YIELD ($TYX.X) edged back fractionally to 5.293%.

The dollar as depicted by the U.S. Dollar Index (dx00y) 96.15 +0.29% gained 0.28 points, with September euro futures (eu03u) 1.1297 -0.46% lower by 0.0053, while September yen futures (jy03u) .008453 +0.24% gained 0.000021.

Pivot Analysis Matrix

The Dow Industrials (INDU), S&P 500 (SPX.X) and S&P 100 Index (OEX.X) reached their WEEKLY R1's in respective fashion today, with the NASDAQ-100 Index (NDX.X) reclaiming its weekly pivot.

The bulk of today's gains for the indices came in the final hour of trade and intra-day volumes showed interest among trader after hourly volumes were building at just over 100 million shares per hour from 01:00 PM EST, to build by approximately 400 million shares on both the NYSE and NASDAQ in the final hour of trade, which gives me the feel that there may be some carry over bullishness into tomorrow's trade, with the major equity indices closing near their highs of the session.

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

With the SPX and OEX both regaining their weekly R1's, the BIX.X lags in its WEEKLY pivot slightly. With the SPX/OEX back at levels where I was looking for resistance and a bullish target for this current rebound, I'm monitoring the BIX.X for resistance tomorrow at/near the 305 level, and would think the BIX.X hard pressed to reach much above its WEEKLY R1 and MONTHLY Pivot near 308.

The bond market didn't have the additional hour of trade that equities did, and that's when the bulk of today's gains took place for the major averages. Should bonds open "flat" tomorrow, an equity trader might look for stock to show modest bullish gains in the early going.

While the week is young, the 10-year YIELD has traded in a rather tight YIELD range of 4.4% to 4.3%, perhaps giving equity sellers little reason to sell stocks the past couple of days, but looking for rally points in what I consider a still range-bound market.

S&P 500 Index Chart - Daily Interval

Option expiration is quickly approaching (this Friday) and today's declining Market Volatility Index (VIX.X) 20.21 -5.4% back below the 21.22 level (I like to place a retracement on the VIX.X from 40.00 to 16.78) after seeing a VIX.X test of 25.66 last week (when the SPX just recently traded 963) gives the impression some near-term put holders may be looking back higher at 1,000 near-term and are rushing to close out some long puts. I say this because I (Jeff Bailey) wouldn't be rushing to establish new call positions here.

I would perhaps associate the BIX.X 305 with SPX 995 right now (add some further tech strength) and BIX.X 308 back near SPX 1,000.

I'm no over relying on Stochastics to immediately reverse lower, but looking for something closer to a few days of consolidation, and choppy trade before we ease back to the lower end of the range.

Today's trade saw the broader S&P 500 Bullish % ($BPSPX) see a net gain of 2 stocks to point and figure buy signals. This has the bullish % still "bull correction" status at 74.00%, after reading 73.40% late last week. It would currently take a lower reading at 68% to achieve "bear alert" status, and a reversal high reading of 80% to get back into "bull confirmed" status.

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

While the indices may indeed see some choppy trade into this week's expiration, today's continued rally from the 485 lows brings the OEX right back to what I would consider the apex of a wedge the OEX had been building back in July, which points right to the psychological 500 level.

One thing I made note of recently with the VIX.X was that little spike up to 25.66 last week, when the OEX traded this recent low of 485. That little spike up in the VIX.X is what has me now alert to a potential change in sentiment of institutions where they might be more apt to sell OEX 405 calls and hedge some inventory with OEX 485 puts. This type of options strategy isn't necessarily appropriate for every individual trader that doesn't have the stock inventory to hedge or deliver long against the naked call portion of the trade, but may be a mindset that I'm in that is a little more defensive.

Today's trade saw no net change in the narrower S&P 100 Bullish % ($BPOEX) and remains "bull confirmed" at 80% for a fourth- straight session. It would currently take a reading of 78% to reverse into "bull correction" like the broader S&P 500 Bullish % did just recently.

NASDAQ-100 Tracking Stock (QQQ) - Daily Interval

I wouldn't say the QQQ "blew through" its WEEKLY pivot of $30.64 and I mentioned there were some sellers there just after the FOMC announcement when the Q's made their session highs. However, the intra-day pullback from that selling sure as heck found the buyers lined up at $30.45 and multiple buy program alerts that followed got the QQQ moving into the close.

Dell Computer (NASDAQ:DELL) $31.77 +2.38% reports quarterly earnings after Thursday's close of trade and marks the last of "big tech" earnings.

Today's trade saw no net change in the NASDAQ-100 Bullish % ($BPNDX) and still holds at "bear confirmed" status and 64% for a third-straight session.

Dow Industrials Chart - Daily Interval

If there's one major index right now that makes a bear a little jittery, it has to be the Dow Industrials (INDU), which look to challenge the 9,340 level for a third-time. It has always been a very tough trade for me personally to put/short a stock or index that trades back near a high, with little overhead supply.

However, I do think for a bearish trade setup, look for resistance at the 9,340 area, but put/short weakness back below near-term. I will admit I was looking for the Dow to stall out right in here, but not test the WEEKLY R2 of 9,344.46 and perhaps this is what has the bearish side of me a little jittery yet again. In a range-bound trade Stochs have marked near-term tops, but the pullbacks have been finding 9,000 support.

Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU) and still remains "bull correction" status at 80% for a eighth-strait session.

Jeff Bailey

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