Option Investor
Index Wrap

Looks bullish, yet suspicious

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Aside from a fractional loss in the narrower S&P 100 Index (OEX.X) 502.04 -0.37% on declines in healthcare and financials, bulls pressed the major indices higher as economic data showed the manufacturing base of the U.S. economy may have turned a corner.

The regional Philadelphia Fed Index jumped to a 22.1 reading in August, well above economists' forecast of 10.00 and a marked rise from July's 8.3 reading, as new orders rose to 14.6 while shipments/sales showed a 7.2 point rise to 16.3.

As the recent 5-month readings for the total Philadelphia Fed Index have improved (August= 22.1, July= 8.3, June= 4.0, May= -4.8, April= -8.8) so has the 6-month outlook with a reading of 62.0 (August= 62.0, July= 56.9, June = 52.8, May= 45.2, April= 45.8).

Philadelphia Federal Reserve Senior Economic Analyst Mike Trebing summarized the survey saying, "The region's manufacturing sector showed significant improvement this month. For the third consecutive month, firms reported an increase in overall business activity. Indexes for new orders and shipments also indicated increases for the second consecutive month. However, firms polled say employment in factories was lower this month than last. According to the future indicators, a majority of manufacturing executives anticipate growth in the industry over the next six months."

Data on the jobs front found skeptical optimism, if not major disagreement as to the future state of the consumer. While new filings for jobless claims in the recent week (ending Aug. 16) came in at 386,000, well below economists' forecast of 395,000, some economists' question the true validity of the report with some economists' thinking that the blackout in the Northeastern part of the U.S. may have had some recently laid off workers delaying their filings until this week (Aug.18-22). Also drawing skepticism that the trend for layoffs has fully abated was an upward revision to 403,000 from 398,000 for the week ending August 8.

U.S. Market Watch - Major Index/Sector

There was a lot of green on the screen and a slight tint of red and its unusual to find this much green (many sectors up 1% or more) on a daily basis in the sectors to then find the Dow Industrials (INDU) gaining a somewhat modest 26 points and the S&P Indices posting such mixed results. Financials along with healthcare sectors weighed on both the S&P 500 Index (SPX.X) 1,003.27 +0.09% and S&P 100 Index (OEX.X) 502.04 -0.37%, while tech-bulls betting on increases in IT spending pushed the NASDAQ- 100 Index (NDX.X) 1,314.65 +1.14% and its Tracking Stock (AMEX:QQQ) $32.64 +1.08% to new 52-week closing highs.

It will be my presentation/observation tonight that its the smaller caps packing on the weight in a broader market gain, most likely on investor/MARKET optimism that the economic recovery unfolding in the U.S. is going to be stronger than most have been imagining/forecasting. And while I (Jeff Bailey) am not an economist, nor portend to be, include me in the group that will be rather surprised on the pending economic data in the months to come, compared to my more modest thoughts of a slow, but steady economic recovery dating back to March and April.

Gold stocks found profit taking after their recent moves higher, with sector bulls most likely paying themselves for a job well done after today's Philadelphia Fed report showed the prices paid component jumped to a reading of 16.0, compared to a more modest 1.1 reading from the prices received components. Still, economists' expressed optimism in the prices received moving back above the 0 level, which gives hope that manufacturers are beginning to find some product pricing stability, if not leverage, with their customers under the umbrella of an improving economic backdrop.

I want to quickly show the top-50 market cap stocks in the S&P 100 Index (OEX.X) 502.04 -0.37%, which I hope will build a framework of what took place today, and perhaps brings to thought that its not just the big guns attracting bullish capital. I received upward of 20-emails from S&P index traders on just what the heck was going on, beginning with the opening bell as the S&P 100 Index dipped red, despite a broad sector picture in the very early going. I too thought "there's something wrong with the way my charting system is calculating current trade from Wednesday's close." While I "guessed" correctly in the 11:00 AM EST Update that Pfizer (NYSE:PFE) $29.79 -3.09% might be the culprit, it is educational to see just how a market-cap weighted index can give a trader/investor a sometimes misleading look of what's taking place on a broader scale.

50-largest Market Cap in S&P 100 - Note: INDU ** and NDX/QQQ

A quick glance shows 6 of the top 10 OEX market cap weighted stocks putting in a negative trade today, with Pfizer (PFE) -3.09% perhaps offsetting all of General Electric's (GE) +2.41% gains if we were to account for percentage gain/loss and market cap. While I have sorted the S&P 100 Index components by their market cap, my list doesn't necessarily reflect the exact weighting each component may have in the OEX, but gives us the general observation of how each stock may have impacted today's trade.

From left to right, I've underlined in pink, some of the NASDAQ- 100 Index (NDX.X) 1,314.65 +1.14% and Tracking Stock (AMEX:QQQ) $32.64 +1.08% larger weighted stocks.

Those stocks with a blue ** are components of the Dow Industrials. However, traders should note that the Dow Industrials is a PRICE weighted index, not market cap weighted like the S&P 100, S&P 500 and NASDAQ-100. A INDU trader might perform a similar observation of that above, but sort by price to get a general observation of how each stock may be impacting the index itself.

On the far right of the above chart, I've shown a general sector association made to each stock represented. Red dashed, for no other purpose than drawing attention, was placed on those stocks with a financial sector association, and perhaps tie in with recent commentary regarding some of my "concerns" for the financials not having been participants in the recent weeks gains.

As I review my recent analysis, I must say that I have perhaps put too great a weight as to their negative impact on the INDU/SPX/OEX, but this is where my suspicions and caution currently come from.

My current thinking regarding the financials, more notably the lagging in the banks is that a shoe is about to drop in the sector, or that the MARKET sees the Fed raising it fed Funds rates in the not too distant future, which historically has been a negative for the banking sector.

Here is a list of the lower 50 market cap components of the S&P 100 Index, with similar notations made as those above.

50-smallest Market Cap in S&P 100 - Note: INDU ** and NDX/QQQ

Those counting the number of Dow components represented in the S&P 100 Index (OEX.X) will note that despite its 25 billion market cap, Caterpillar (NYSE:CAT) 73.41 +1.59% is the only Dow component not represented in the S&P 100.

I just about fell out of my chair when looking at this year's Dow Dogs portfolio, which we benchmarked from December 31st (10 highest dividend yielding stocks) to see that CAT is up 60.5% at today's close, while JP Morgan (NYSE:JMP) $34.60 -0.66 is currently up 44.17% this year. CAT just recently achieved a bullish vertical count of $72.00, while JPM may have a ways to go to achieve its bullish vertical count of $73.00.

Russell-2000 Index (RUT.X) - Daily Interval

Smaller to mid-caps as depicted by the RUT.X have shown similar technical action as the major indices, but have had sharper inflection points. The recent break below my aggressive trend (green) may be considered an alert to weakening, where I now place a second trend at the most recent pullback low of August 7th at 449.97. Make note how close 449.97 may be to a psychologically round 450, and any new bullish positions on excessive optimism may want to see a RUT.X break above 500 with downside risk assessed to the rising 50-day SMA near 465.

Let's cover the pivot matrix real quick. All but two of last night's correlative resistance failed to find notable selling in today's session, but the tie between the S&P Banks Index (BIX.X) 304.47% and perhaps the S&P 100 Index (OEX.X) 502.04 -0.37% as it relates to today's highs and level of correlative resistance in last night's Pivot Matrix is perhaps was has me "suspicious" and the bullish side of me rather apprehensive on new bullish entries at this point. I will admit this caution in toward the BIX.X may have cost bulls a great deal of opportunity/profit potential dating back to last week's decision to cut a bullish trade quick, but on a day where Treasury YIELDS jumped higher, housing stocks as depicted by the Dow Jones Home Construction Index (DJUSHB) 450.85 +2.06% didn't seem to mind the YIELD trade, but banks, if not broader financial sectors certainly weren't as enthusiastic.

Pivot Analysis Matrix

Correlation levels in the BIX.X and OEX.X were noted last night at their respective WEEKLY R1 and WEEKLY R2. Neither were tested today and raises my suspicion as to "why not" when stocks were trading at/near session highs.

I haven't seen any "notable" weakness in the BIX.X to signal a shoe about to drop, but I'm just suspicious as to why this sector and financials are lagging, especially as the home builders have shown gains in 5 of the last 6 sessions.

Bulls that may have held on longer than I with bullish trades, may look to guard those gains at various noted levels of correlative support.

S&P 100 Index Chart - Daily Interval

Despite some rather positive economic data today (Philly Fed especially), even at the climax of the session, the OEX wasn't quite able to muster a move above WEEKLY R2 at 506, which has been a level of CLOSING resistance since early July.

It would be my thinking that institutional computer programs are going to more than likely be set to the broader S&P 500 Index (SPX.X), not the narrower S&P 100 Index. This has me thinking "something is amiss" in the banking stocks.

S&P 100 Index Chart - Daily Interval

Yesterday a trader asked about seeing the OEX chart with similar regression channels used in the SPX. OEX does appear to be struggling with this trend the last couple of sessions and while my thinking of 1.5 steps back for every step forward has been invalidated in the INDU and NDX/QQQ, still looks to be in play for the OEX. Tech strength has me bighting my lower lip in the SPX.

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

A new entry bull today at 1,005 would most likely have wanted to see a close above the WEEKLY R2 of 1,004, but for now will take the close above the upper-end of regression channel. First sign of any type of weakness in my opinion would be a move back below the 996 level.

I never have enough time to show multiple charts, but also make note that the SPX came just shy of trading the 1,010.00 level, which on the conventional 5 and 10-point box scale (10-point increments above 1,000.00) lacked juuuust enough bullishness to get that trade. I didn't make note of this, but the day after the high on July 14th, that July 15th bar high was 1,009.61. I've never been that good of a trader to pick those tippy tops, nor bottoms.

Dow Industrials (INDU) Chart - Daily Interval

INDU may be experiencing some resistance from our 9,440-9,460 zone of resistance. Very nice move from the 9,040-9,078 area and may finally be time for a rest and digesting of those gains. I'm just noting when looking at the Dow's chart that while it and the smaller to mid-cap Russell 2000 Index (RUT.X) have NOTHING in common as it relates to market cap, both are nearing some rather round-number resistance, where bulls might be looking to take some trading profits after some impressive moves back higher.

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

Tough new entry on QQQ, but I've place tomorrow's DAILY R2, long with MONTHLY R1 on chart. Since the move off the bottom at $30.05, QQQ has NOT traded below the previous day's low. Decent place to protect any gains with a stop. First hint of weakness is move back below $31.95.

My stockcharts.com connection hasn't been working this evening, and will try and update the bullish % data tomorrow morning.

Jeff Bailey

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