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Isn't Labor Day next Monday\?

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Volumes were their lightest for a full day of trading with the New York Stock Exchange trading just over 887 million shares and the NASDAQ churning a light 1.06 billion shares in what might as well have been a Friday trade ahead of a three-day weekend.

The major indices finished mixed as the Dow Industrials (INDU) 9,317.64 -0.33% never could shake the early morning doldrums after downgrades based on "valuation" had Alcoa (NYSE:AA) $27.79 -1.2% and Caterpillar (NYSE:CAT) $69.66 -2.83% traded lower on profit taking, after impressive moves higher earlier this month.

Mixed sector action found both the S&P 500 Index (SPX.X) 993.71 +0.06% and S&P 100 Index (OEX.X) 497.66 +0.04% posting fractional gains by the close as lower beta groups like the Pharmaceutical Index (DRG.X) 301.55 +0.70%, S&P Banks Index (BIX.X) 300.61 +0.7% and Utility Index (UTY.X) 274.27 +0.63% were today's trifecta sector winners.

Words of caution and longer-term bullishness from various brokers provided a mixed session among technology sectors and found the NASDAQ-100 Index (NDX.X) 1,306.64 +0.16% putting together an afternoon move higher to finish up 2.1 points, while its Tracking Stock (AMEX:QQQ) $32.51 +0.21% rose 7 cents on 42.6 million shares, which was impressive if only compared to its post- blackout 28.1 million shares of August 15.

Treasury bond traders cited today's selling in Treasuries not only due to the stronger-than-forecasted existing homes data, but credit rating agency Fitch Ratings downgrading the subordinated debt and preferred stock ratings of U.S. housing finance company Freddie Mac (NYSE:FRE) $51.66 +4.42%, and Moody's Investor Service saying it may cut the company's financial strength rating, after Freddie Mac's new chief executive was pushed out.

Fitch lowered their rating to AA-minus from AA and said they could be cut further. Do downgrades affect about $10 billion of preferred stock and subordinated debt, with some traders saying the debt may have had some leverage mortgage traders selling Treasuries on lowered ratings by Fitch.

The 10-year YIELD ($TNX.X) rose 6 8 basis points to 4.527% while the September 10-year futures contract (ty03u) $110'23 -0.43% fell 15/32.

I made note in today's Market Monitor that short interest data had been published over the weekend, with data current for August 15, 2003.

Bears continue to show conviction and perhaps a high tolerance for pain as short interest grew from July 15 to August 15 and continues to build to annual highs.

The Diamonds Series Trust (AMEX:DIA) $93.48 -0.24% short interest grew to 23.3 million shares by August 15, up from 21.3 million on July 15. Days to cover stood at 3.43 versus July 15 2.96. Short interest on the DIA has been rising steadily since January 15 11.75 million shares.

The SPDR Trust (AMEX:SPY) short interest on August 15 stood at 113.1 million shares, up from July 15 short interest of 96.3 million shares. Days to cover rose to 2.71 from 2.39 in July. Short interest has been growing steadily for the SPY since March 14 60.2 million shares short.

Short interest on the NASDAQ-100 Trust (AMEX:QQQ) grew to 287.7 million shares on August 15, up from 260.1 million shares on July 15. Days to cover rose to 3.75 from 3.21. Short interest on the QQQ has been growing steadily since April 15 151.7 million shares.

Diamonds Trust (AMEX:DIA) Chart - Daily Interval

I've placed the last six months of short interest data on the Daimonds Trust (DIA) chart. In mid-July, bears looked to be getting control of the DIA with a break even reading trade of $91.59 with the mid-June DIA close of $91.58. While it is often thought that shorts are eventually proved correct as they have more to lose that bulls (infinity vs. known amount to $0.00) I'd think that two months of bears might find pullback support near DIA $91.60. This may not be too far from the DIA's MONTHLY Pivot of $91.70. Let's check the Dow Industrials (INDU) 9,317.65 -0.33%, but envision some of the levels above with its WEEKLY/MONTLY retracement overlaid.

Dow Industrials (INDU) Chart - Daily Interval

Of the major index trackers, its the QQQ and DIA that have the higher Days To Cover (DTC) and with summer-time volumes relatively light, may be first to benefit from short covering. This short-covering, where bears have perhaps been their own worst enemy could help explain the recent news highs for both the NDX/QQQ and INDU, while the SPX/OEX were unable to set new 52- week highs last week.

As the above chart shows Stochastics now barreling down and nearing oversold, I would think a bull looking for pullback entry trade would like to see the INDU/DIA pull back near their MONTHLY pivot, then look for the slingshot rebound back higher with a target of 9,500. Three levels of support currently in play above 9,270 as will as rising 21-day SMA.

Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU) and status remains "bull correction" status at 80% for the 17th-straight session.

S&P 500 Index Chart - Daily Interval

The regional banks depicted by the S&P Banks Index (BIX.X) 300.61 +0.70% went in the hole early with a session low of 296.40, and gave an early look that two reversal days from SPX 1,010 last week were sure to cave in. However, the BIX.X mustered out a respectable gain and found support at its August 8th low, which is where the SPX would have found 963 support earlier this month.

In today's Market Monitor and 11:00 Intra-day update I made note of the Stock Trader's Almanac mentioning that the last 6 years have been "murderous" with the S&P falling 4.3% on average. While the last two years have certainly seen sharp declines the last week of August, I'm also looking back at the last week of August in 2000 when the SPX was showing three-months of some topping consolidation and had been trading either side of its 21- day and 50-day SMA's, not too unlike the SPX is today. The SPX managed a 1% gain in 2002, but after Labor Day Weekend, bulls pulled the plug and the SPX fell from its September 01, 2000 relative high of 1,530 (which was just off its all-time high of 1,552.87) to 1,436.51 by months end.

Today's trade saw no net change in the broader S&P 500 Bullish % ($BPSPX). On Friday, the S&P 500 Bullish % saw a net gain of 0.60%, or 3 stocks to new point and figure buy signals. Still "bull correction" status and would need a reversal reading of 80% to get back into "bull confirmed" status.

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

July durable goods orders are due out before the opening bell (forecast is +1.0% compared to June's +2.3%), and an inline number may see the OEX hovering near the 498 level or 500, which is both "psychological," but also at the apex of the triangle that the OEX has been trading either side of in recent weeks after a sharp break below and then back above last week, into tomorrow's 10:00 AM EST release of August consumer confidence and July New Home Sales.

While MACD is rolling a bit, it is still above its Signal and zero level, so view it near-term bullish. Meanwhile Stochastics now near "oversold" and would tie in the mid-point of regression and WEEKLY S2 of 490.82 as a correlative support level. If 490.82 is tested, would then look for a near-term "oversold bounce" back to 500.00 max, and then 1.5 step backward to base of regression channel, MAX 480.

Today's trade saw no net change in the S&P 100 Bullish % ($BPOEX) and still remains "bull confirmed" at 84%.

NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals

Amazingly, the QQQ gapped to MONTHLY R1 on Friday, then reversed into the close. Bulls would have been more likely to take some profits on the gap to that resistance the bears willing to short another new high. With short interest continuing to build, but still seeing a pattern of higher highs and higher lows, I would certainly think the QQQ's build some support at $31 to $31.28 after last week's new highs.

I've marked two "shorts rush!" points on the above QQQ chart only to show some strong upward movement where shorts/bears most likely rushed to cover some positions, and good short-term bullish entry points for another pop back higher came from the $31.28 level.

Today's trade saw no net change in the NASDAQ-100 Bullish % ($BPNDX) and status remains "bull correction" status at 75.00%.

I do think institutions are the bigger short in the QQQ. The reason I say this is as the NASDAQ-100 Bullish % has reached 90% and HIGH level of bullish risk, there has likely been a lot of portfolio/inventory hedging taking place with the QQQ as the hedge instrument.

I would certainly tie in the recent low bullish % reading of 64% with the recent QQQ low of $29.93, and breaks below either would be considered bearish.

Pivot Analysis Matrix

Jeff Bailey

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