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Index Wrap

Priced to perfection\?

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It has been said that markets are quick to respond to news, quickly make any needed adjustment to reflect and accurate price, and as traders and investor were inundated with numerous quarterly earnings reports, and some economic data, the major indices responded with a dash higher followed with selling, to finish fractionally lower, but just off yesterday's lows, as if all of today's data has the equity markets priced to perfection.

And where there were some imperfections, the adjustments were made as homebuilders as depicted by the Dow Jones Home Construction Index (DJUSHB) 523.70 -3.25% fell from yesterday's all-time highs after the Mortgage Bankers Association said its weekly Mortgage Applications Index, which combines purchases, and refinancing of mortgages fell 20.5% in the latest week. The decline was a bit surprising considering homebuilders were trading at new 52-week highs.

The bond markets responded to earnings and economic data in more of a bullish, in that Treasuries found selling with the benchmark 10-year YIELD ($TNX.X) rising 4.7 basis points to 4.397%.

And it may well be the recent rise in Treasury YIELDS, and a rather sharp one the past two weeks that had some impact on the weekly MBA mortgage applications data.

Mortgage Bankers Association - Weekly Statistics

While it wouldn't be that big of a surprise that the MBA's mortgage applications seasonally adjusted index would fall this week with the average 30-year fixed rate mortgage rising to 5.81%, what is a little bit shocking and may have surprised investors was that the seasonally adjusted index fell back near its trough levels found in late August and early September, when mortgage rates haven't come back to those late August and early September levels.

And it may just be some "good" with some "bad" that while economic data has been improving in recent months, the bond market has been responding of late, with Treasury yields, which mortgage rates are tied to, starting to rise again. I'm not overly surprised the number of refinancing have fallen off as I am, and perhaps the market was, that the Purchases Index actually fell below its trough late August and early September lows, yet the 30-year mortgage, while approaching those same August/September highs, have not yet reached those higher levels.

Is the above overly concerning at this point? I think not, but on a near-term basis, we might expect the homebuilder to stall, if not pull back, which could also have some dampening of gains for the broader markets.

I do think some of the earnings we're seeing, show bright spots, but earnings from General Motors (NYSE:GM) $43.55 -0.95%, which I always thought made cars, found the bulk of its quarterly earnings coming from it GMAC financing division, not from selling automobiles.

I want to quickly cover the Dow Jones Home Construction Index (DJUSHB) as the last time we touched on the DJUSHB in an Index Trader Wrap was October 1 at this link.

If you can, quickly go back and look at that DJUSHB chart in the 10/03/03 Wrap, then come back and see what we're going to do going forward, and how I think we can perhaps tie in the DJUSHB with the major indices in making some informed trading decisions. If you can, ask yourself this. Should I buy or sell the DJUSHB? Where's my risk to a stop, and where's my target? Try doing this real quick before you read anymore of tonight's wrap.

Dow Jones Home Construction Index (DJUSHB) - Daily Interval

This is the exact chart shown in the 10/01/03 Index Wrap, but the ability of the DJUSHB to have broken above BLUE 0% retracement may have had a trader establishing a new "fitted" retracement, which I've shown in RED. Note the Good Fit/Good Fit levels that are duplicated in the RED retracement as that in the BLUE.

With some fundamental weakness being seen in the MBA data, we might monitor, or look for weakness in the DJUSHB, where a pullback and some profit taking might be expected to at least the 482 level.

Now... as the economy improves, I do think the homebuilders become less of a concern in the grand scope of things as long as continued improvement in jobs data shows up. The ability of the homebuilders to have recently launched to new highs is testimony from the MARKET that there is some fundamental driver, that the MBA statistics have not accurately depicted, and it would have to be my analysis that it is the recovering economy and prospects of future job growth that has had this sector so strong. However, we know that stocks don't go up day after day, and it may be time for a pullback in the homebuilders after a nice run from mid- August.

Let us also remember that the homebuilding stocks themselves make up a VERY SMALL portion of the major indices we trade, but their direction of trade can impact broader market psychology, and draw comments from economists. Homebuilders that comprise either the DJUSBH or PHLX Housing Index ($HGX.X) that comprise the S&P 500 are Centex (NYSE:CTX) $88.48 -2.9%, KB Home (NYSE:KBH) $65.60 -3.5% and Pulte Home (NYSE:PHM) $75.30 -2.33%.

As a secondary type of stock, with some connection to homebuilders that comprise the PHLX Housing Index ($HGX.X) are S&P 500 components American Standard (NYSE:ASD) $90.15 +3.51%, Masco (NYSE:MAS) $26.18 +0.03% and Vulcan Materials (NYSE:VMC) $45.09 -0.81%.

What else has had a nice run since early August?

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

The SPX did make a comeback into the close to finish down just 2.7 points, and while I certainly held out bullish thoughts for a session test of 1,060 on the morning's response that seemed to be building on Intel's earnings report.

If there were two things that I think brought caution to today's trade it was the MBA statistics, and GM's earnings which showed little improvement in car sales. A morning guest on CNBC may have said it all. I'll paraphrase his comments, but he said something to the affect that he buys GM when he things automotive sales are strong and there's money to be made, and he'll buy a bank if we wants to own a company that has a strong lending business.

As simple benchmarks, I've pointed to downside inflection points on the above SPX chart, which would match those found in the DJUSHB. From the midpoint of the August lows, the SPX has gained an impressive 8.4%, while the DJUSHB has surmounted an impressive 26% gain. That horizontal green line I keep forgetting to delete on the SPX chart at the 1,000 level, is last week's WEEKLY S1.

Today's trade saw a net gain of 2 stock to new point and figure buy signals with the bullish % edging up 0.4% to 81.2% and still "bull confirmed" status.

I will note that IBM (NYSE:IBM) $92.74 +0.02% reported inline quarterly earnings after the close, but top line revenues of $21.52 billion were shy of consensus estimates for $21.85 billion. IBM saw its stock fall to $89.59, or 3.3% in extended hours.

S&P futures (sp03z) settled 1,044.50 and currently tick by at 1,042.80, or -0.16% (05:24 PM EDT).

S&P 100 Index Chart - Daily Intervals

The OEX stuck its head above WEEKLY R1 of 523.29, but didn't stay there long (about 15-minutes) and once they slipped back below 523.29, that became resistance from 12:00 to 01:00 PM EDT. If I were to compare the OEX chart to the SPX chart, there would be some divergence found in the OEX's Stochastics, where they haven't been able to edge back up to "overbought" or 80.00 for %K. This is probably due to some lacking of technology stocks that the broader SPX has. While the after-hours trade in IBM is not necessarily a true MARKET response to their earnings, the lesser degree of tech exposure may actually help the OEX based on IBM's decline in after-hours trade.

Today's trade saw no net change in the S&P 100 Bullish % ($BPOEX) and status remains "bull correction" status at 79%.

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

There was talk that a top tier, meaning large, broker was buying Dec. $34 QQQ puts today. I checked my option chain and did see some large trades in the Dec. $34's, at $1.05. This trade has the buyer of those puts thinking the QQQ's are going to trade $33 at December expiration to break even. I've extended on of our cloned downward trends and see an December 16 intersection at $33 on December 16. Institutions don't speculate with options, but they will use them to hedge larger baskets of stocks, and the QQQ is ideal for technology stocks. I think this trade was purely a hedge trade, and the buying of out the money is more to assure a floor at $33. If an institution really saw something overly alarming, I think they would have bought at the money options with volatility low. At this morning's highs the QQQ was fairly close to $36, which is about $6 above the August relative low of $30 and $33 may also make sense as it relates to a hedge, or some type of floor value in the QQQ at $33.

I found this news on Briefing.com's site at approximately 10:40 AM EST.

I would look to sit tight early tomorrow morning, but monitor the WEEKLY Pivot and DAILY S1 for support with the QQQ already lower at $34.97 in after-hours. The knee-jerk reaction would be to sell the open on the IBM news, but above $34.76, that could be a mistake. If long and a bit jittery about the Q's (like I am), then place stop under Friday's low of $34.64 if this is within a bull's risk tolerance, and then look to sell any strength back above $35.05. While I don't have August 15 short interest data, and probably won't for another week or two, there's plenty of shorts below that should be more nervous and looking to buy weakness, than bulls looking to sell strength.

Today's trade saw no net change in the NASDAQ-100 Bullish % ($BPNDX) and status remains "bear correction" status. Those that will review this chart at www.stockcharts.com will see how this bullish % has been showing some bullish % resistance below 82% since July, so bulls strategy is to still be guarding profits closely, and trying to keep any new bullish entry positions from turning into losses. I'm not liking the oscillator setups for any new entries at this time, and would rather look to sell some strength if possible, close out any recent bullish adds, considering some of the broader selling despite good earnings from Intel. Hindsite is always 20/20, but those that sold the jump above MONTHLY R2 this morning, probably did the wise thing. However, sometimes the market gives us a second chance, so I'd try and hang tough above the weekly Pivot if at all possible.

Dow Industrials (INDU) - Daily Intervals

The Dow Industrials (INDU) finished down 10-points and did manage to close back above its WEEKLY R1. IBM $92.74 will weigh on the INDU early as it is the second largest price stock behind Procter & Gamble (NYSE:PG) $95.63 -0.37%. Before the bell earnings from CAT, KO, HON and UTX will most likely set the tone early. As it might relate to the QQQ, Friday's low in the INDU was just below this WEEK's pivot of 9,659.85 at 9,656.53. The INDU has high impact on investor psychology, so we'll be monitoring the INDU and earnings there closely in the morning. There's nothing technical, other than oscillators in the Dow that currently alert me to any type of weakness.

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

Pivot Matrix

There are quite a few correlative levels of resistance showing up in the matrix for tomorrow, especially up at DAILY R2's. This type of move higher could only come (in my opinion) from some very good upside surprised in some Dow component earnings, and perhaps why the INDU trades a little stronger in its WEEKLY Pivot.

I'm running late on my deadline, but the support correlation that stands out for tomorrow would be in the SPX at its WEEKLY Pivot and DAILY R2.

Jeff Bailey

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