Option Investor
Index Wrap

Airlines lead advance to close at post 09/11 levels

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Stock surged early, but faded late after the latest weekly jobless claims boosted investor optimism that last week's September nonfarm payrolls report, which showed the economy adding jobs for the first time in eight months, shows the job market trying to stabilize.

The economically sensitive Airline Index ($XAL.X) 70.44 +5.59% posted the session's largest percentage gain and closed right near its post 09/11 terrorist attack open, after upgrades from analysts on shares of AMR Corp. (NYSE:AMR) $14.85 +11.23%, the parent of American Airlines, had optimism surging in the group.

The improvement is due to rising airline traffic and leisure fares. Analysts think business fares are beginning to pick up as well, though the data aren't as conclusive.

Susan Donofrio, analyst with Deutsche Bank in New York, said stronger economic indicators are also contributing to optimism that the airline industry is healing. She said the decline in jobless claims for the week ended October 4, as well as reports from retailers of higher sales last month, bode well for the airline industry as the consumer remains strong.

The S&P Retail Index (RLX.X) 375.63 +2.4% and Retail HOLDRs (AMEX:RTH) $92.10 +1.71% jumped to 52-week highs. Sears Roebuck (NYSE:S) $50.18 +2.97%, which has gained roughly 170% from its March lows set a 5th consecutive 52-week high after it reported comparable store sales increased 3.2% year-over-year for the month of September, which was well ahead of consensus estimates for a 0.4% increase.

Sector action finished broadly positive. While early session gains faded into the close for the major indices, early weakness in the AMEX Gold Bugs Index ($HUI.X) 196.79 -0.59, which fell to a session 191.68 rebounded late to finish fractionally lower.

Economic data regarding Import/Export prices showed September import prices falling -0.5%, but rising 0.2% when the volatile petroleum complex was excluded. Export prices rose 0.4%, but slipped lower by 0.1% when agriculture was excluded. The September data showed annual import price growth rising 0.8% (+0.9% ex-petroleum) and export prices rising 1% year-over-year (+0.6% ex-agriculture).

The Oil Service Index (OSX.X) 89.50 -1.23% and GSTI Software Index (GSO.X) 145.38 -1.08% were the only sectors that posted declines greater than 1%. Oil service provider Halliburton (NYSE:HAL) $24.76 -1.97% lowered its Q3 EPS guidance, while software maker Computer Associates' (NYSE:CA) $25.95 -10.3% CEO called for, and received, resignations from the company's CFO and two other VPs after the SEC's Chief Accountant, who is leading an investigation of CA, announced that CA recognized revenue prematurely if fiscal year 2000, where software contracts "appear to have been signed after the end of the quarter in which revenues associated with such contracts had been recognized."

Here's a quick look at our QCharts U.S. Market Watch window, where I've marked in PINK those major indices or sectors that traded new 52-week highs, while in BLUE I've marked those sectors still off their highs.

There's a lagging theme to health-related sectors right now, with market participants putting greater focus toward sectors more sensitive to the undertones of the economy. Among technology, the Biotechnology Index (BTK.X) is still off its June 6th 52-week high of 514.11, while the HMO Index (HMO.X) and Pharmaceutical Index (DRG.X) still trade below their summer-setting 52-week highs. We may come back to the table below, as I would expect some rotation to take place back to these healthcare-oriented sectors in the not too distant future.

U.S. Market Watch - 10/09/03 Close

I've also added a column labeled "5DyNet%," which shows the percentage gain/loss found in various indices/sector the past 5 trading days. As it would relate to last week's Index Trader Wraps, when it appeared the INDU/SPX/OEX were making a move above their then MONTHLY/WEEKLY pivots, it was the QQQ that followed and now holds a 4.29% gain in the past four sessions. That's a pretty good gain for those playing follow the leader, and in today's intra-day commentary, I thought some bullish swing-trader stops should have been snugged up under the $34.75 level to try and protect some of those gains.

Today's trade saw the INDU/DIA, NDX/QQQ see trade at their WEEKLY R1's, while the SPX/SPY and OEX came up just short of WEEKLY R1 trades. There was little news I could find this afternoon to explain the late session giveback of gains, and was left to summize that there were some institutional computer set near the SPX WEEKLY R1 for some profit taking, perhaps on stock that was purchased last week below the WEEKLY/MONTHLY pivots. This might fit with some comments we noted out of Briefing.com and some of their various institutional trading desk contacts, where those contacts felt buy-side mutual fund managers were taking on a shorter-term trading strategy to protect yearly gains, but still looking to pad results with short-term bullish gains.

Here's a quick look at the pivot matrix for tomorrow.

Pivot Matrix

There was little that I saw today in the matrix or intra-day session that looked bearish, with the possible exception that there just wasn't enough buying to get an SPX/SPY/OEX test of WEEKLY R1. With that observation I suggested the raising of some bullish stops. The inability of an index to not trade a higher level of resistance at 52-week highs is NOT BEARISH! I just would have thought that a break to a new 52-week high would have put upside risk to the SPX WEEKLY R1, where the SPX would be my more logical choice for institutional programs to be set for more meaningful buying selling. Certainly I understand there is always a tomorrow, but when I originally profiled some bullish action points last week, with bullish intentions for the major indices to rally back near, but not above their then 52-week highs, today's upside surprise was icing on the cake to those thoughts, and I wouldn't feel bad if a trailing higher bullish stop was triggered today.

The weekly jobless claims data did have the U.S. Dollar Index (dx00y) 92.03 +0.32% snapping its recent losing streak, while Treasuries found selling with the benchmark 10-year YIELD ($TNX.X) rising 6 basis points to 4.302%. I've just about given up on trying to analyze just what, if any, correlation there is right now with the dollar/bond/equity trade. Some days it certainly seems that dollar weakness triggers equity selling on concern, mostly be foreign markets, that the weaker dollar will hurt their exports and smother a global economic recovery, while other days a too rapid rise in Treasury YIELDS or too much buying will have negative impact on equities.

I think it might have been Art Cashin saying on CNBC that he too finds the day-to-day dynamic perplexing and that it doesn't seem to be the direction of the move, but the RATE of the move. I'm beginning to agree with that. A slow move lower in the dollar doesn't draw as much concern as a sharp move, and perhaps the same is true for Treasury YIELDS right now.

Bottom Line: Easy does it! Dollar moves, YIELD moves. I'll also add to that... OUR OWN trading moves. Easy does it, and don't do it all at once when committing capital to a trade.

Yesterday, the major indices took a peek to what was there, today they got a good look at new highs.

NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily Interval

It's difficult to try and predict a security's price based on the oscillators, and while the QQQ is still within a regression channel we've had displayed for months, I thought it best to try and protect some gains after the QQQ traded our cloned resistance trend, couldn't get through it today, and thought a stop below the MONTHLY 19.1% retracement would have given enough room to give the QQQ further chance to potentially build more gain. With Stochastics starting to roll, the odds are for lower price near- term where I think a bull begins to look for new bullish trade setup. I view MONTHLY Pivot of $33.21 as very good support, but should Stochastic reach back to "oversold" near the $33.70 area, this may also be good new bull entry point.

I've placed a new PINK trend on the chart. I may work with our regression channel this weekend, but I want to try and understand/recognize this trend.

In today's Market Monitor, I did profile a bearish trade in the QQQ on the break below $34.75, stop above $34.99 with a very modest target of $34.18. I will note that at the lows of the session this afternoon, the BASE of our regression channel came into play as support ($34.53) and while the QQQ did trade $34.43, all be darned if the 5-minute bar didn't close back above that level! Somebody is trading that level as support today, and I'm as comfortable with a QQQ short position as I would be standing in front of a 747 hitting highs speed down a runway!

Today's trade saw a net gain of 3 stocks to point and figure buy signals in the NASDAQ-100 Bullish % ($BPNDX). Still "bear confirmed" at 77% and would take a reading of 78% to reverse back up to "bear correction" and further bullishness to 82% to achieve "bull confirmed" status.

S&P 500 Index Chart - Daily Interval

So far, I think the August pattern has played out pretty good, and sticking with that past pattern, we might look for some digestion of the recent gains, perhaps with a pullback to the 21- day SMA, similar to that found in August after the move off of 960 to 1,010. Again, I'd be a very cautious bear at this point, especially if playing a pullback similar to the August stage. Remember, we're at new highs now, and bears have very little to leverage off of. In August, there may have been some bears still leveraging off the highs, and hesitant bulls uncertain that the SPX could make a new high willing to sell on any sign of weakness.

I'm not being critical of anyone when I say this, but I've seen quite a few bearish trade profiles in the market monitor this past week. The good thing has been that those trades were followed with very tight stops. I think that strategy is what ANY bear is trying for. Willing to lose a little, in hopes of getting the big hit. I personally think there are WAY TOO MANY BEARS that are sideways, and even on a quick drop, there's plenty of buyers, especially bears that are doing some buying.

Eventually this higher high and higher low trade will run its course to completion, but until it does, I think we should look to continue to trade it until it runs out.

Today's trade saw a net gain of 3 stocks to point and figure buy signals in the broader S&P 500 Bullish % ($BPSPX). Still "bull confirmed" at 80%.

The narrower S&P 100 Bullish % ($BPOEX) saw a net gain of 1 stock to a point and figure buy signal with the bullish % edging up to 79%. Still "bull correction" status and would need a reading of 84% to reverse back up to "bull confirmed" status.

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

It's hard to buy a bottom and sell a top, but a mutual fund manager looking to pad some gains for the year in protective fashion that bought 500 and sold 520 may have just padded a little extra 4% to this year's performance. As a benchmark, the S&P Depository Receipts (AMEX:SPY) have gained 18.19% since their December 31 close. Even adding a 2% gain to that in more conservative fashion isn't all that bad. If a good trade setup exists with Stochastics back at "oversold" levels and some good action points for a bull are found, I wouldn't rule out another good pullback and rally type of trade.

Dow Industrials (INDU) Chart - Daily Interval

The INDU traded above its WEEKLY R1 for just more than 2-hours, and when its broke back below it fell quickly to 9,650, to then close right on our MONTHLY 19.1% retracement. That was the only level in the WEEKLY/MONTHLY that a swing trader might have been able to pick as a trailing stop.

Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU) and status remains "bull correction" status at 83.33%.

As I close, Japan's Nikkei-225 has opened for trading and is currently jumping higher by 225.98 points to 10,757. With session low of 10,569.72, the PnF chart would not see a new "O" (supply) entry, and session high of 10,763.45 would be enough to have a PnF chartist marking 5 "X" to the upside. Looks like Japan liked some of the dollar's strength today.

Jeff Bailey

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