Option Investor
Index Wrap

"M" was a reoccurring theme

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The major indices moved modestly higher as Dow component 3M (NYSE:MMM) $75.48 +1.93% marched to a new and all-time high on strong than expected earnings, while a weaker than expected reading from the Conference Boards September leading indicators index, which was adversely impacted by money supply, kept gains for the broader market to a minimum.

The bullish side of me was hopeful this morning that bulls might get a pullback entry at the WEEKLY S1s in this weeks pivots as the major indices moved to their morning lows and declines in money supply were cited by the Conference Board for September's 0.2% slippage, which was below economists' forecast for a -0.1% decline.

The Conference Board said four of the ten indicators that make up the leading index increased in September, with the largest positive contributor being average weekly manufacturing hours, which was then followed by gains in stock prices, manufacturers' new orders for consumer goods, and manufacturers' orders for nondefense capital goods. The negative contributors in orders, beginning with the largest negative contributor, were real money supply, interest rate spread, vendor performance, the index of consumer expectations, building permits, and average weekly initial claims for unemployment (inverted).

While the Conference Board's LEI index uses a more complex method for measuring money supply, I did go to the Federal Reserve's web site to check the September money supply data and did find that both M2 and M3 had fallen in September. We've began discussing money supply and potential implications in past Index Trader Wraps (June 18, 19) as well as an Ask the Analyst column from July 20, 2003, but my main notes today would be that the decline in money supply was seen at M2 and M3, which might not be as negative as a decline in M1 might be, which might be impacted to a greater extent by the drop off in mortgage refinancing due to higher Treasury yields and therefore mortgage rates.

Still, today's revelations from the September LEI index gives us a chance to review some of the money supply figures, along with the U.S. Dollar Index (dx00y) 92.59 +0.33%, the 10-year YIELD ($TNX.X) 4.380%, the iShares Gs $ Investment (AMEX:LQD) $110.04 +0.09%(corporate bonds), Pacholder High Yield Fund (NYSE:PHF) $8.64 +0.46% (junk bonds), the S&P 500 Index ($SPX.X) 1,044.68 +0.51% and Amex Gold Bugs Index ($HUI.X) 332.68%.

My quick analysis as to why the market didn't take today's decline in the September LEI as overly concerning, is that I would have to assume that the declines in M2 and M3 may indeed be attributable to the increases in capex spending. With M1 still showing modest gains, the consumer still looks to be in good shape and may not be drawing on reserves at this time. I've also included the recent weekly data reported by the Federal Reserve, which is subject to revision, and for the various asset classes I'm posting today's data. I should also make note that the monthly data seems to be revised from when we last looked at this data, and I would expect revisions are constantly being made.

One addition thought I had as to today's September LEI not getting too much of a lasting negative reaction, is when we think about stock prices having been the second most positive contributor in October, when in actuality, the S&P 500 Index (SPX.X) had lost 12-points in September, the SPX is currently up 48 points from their end-of-September close.

Table of Money Supply, dollar and asset classes

It is interesting that the Conference Board lists money supply as a negative contributor in the September LEI. And while we do see that M2 and M3 are showing declines for September, it may well be that corporations are actually starting to spend. Remember that M1 is currency in curculation, demand deposits and checking account deposits. While M2 is comprised of M1 plus rainy day funds at banks and thrifts, along with retail money market funds. M3 combines M1 and M2, but also includes large time deposits at banks and thrifts, institutional money market funds, repurchase agreements as well as eurodollars.

The reason I say "it is interesting" that the Conference Board lists money supply as a negative contributor, is that it was a subscriber's observation back in July that money supply was "swelling," but stocks just were not moving all that much.

I've also noted that September's second most positive contributor of the 4 categories in the report was stock prices. Even at today's lows (October 20, 2003) of 1,036.13, this leading indicator component would have been up 40-points from its end of September closing value.

The AMEX Gold Bugs Index ($HUI.X) 201.65 +0.51%, which we've been using as a pulse for inflation, which might come from economic growth, has seen price improvement for the past 6.5 months.

While I'm not trying to be "perma-bull," I'm just looking at some of the things we've followed from update to update, to try and find out why we didn't see an overly negative reaction to the September LEI data, where money supply was the largest negative contributor. While we will never know for certain, if M1 had fallen off, or falls off, then money supply might get a more negative reaction. We should know from the weekly Mortgage Bankers Association data, that refinancing of mortgages hasn't been putting a lot of money into consumers pockets of late, and its going to have to be up to the economy to get some job creation going. And that thought, is perhaps the positive takeaway from today's LEI report, where average weekly manufacturing hours was the most positive contributor in September.

Whew! With all that said, I'm more willing to buy a pullback than a breakout, and would like to see some pullback entries to the WEEKLY S1s, with upside targets to WEEKLY R2s. Here's a quick look at the pivot matrix, where we have new WEEKLY levels to be monitoring for some institutional computer buying and selling.

Pivot Matrix

I was pretty excited Friday evening when I saw $34.20 in the QQQ at this week's WEEKLY S1, as $34.25 or thereabouts was an eyeball level I was looking for a pullback entry, when QQQ Stochastics might reach oversold levels, while MACD might still be above its signal.

All be darned if eBay (NASDAQ:EBAY) $56.60 +3.17% didn't open today's trade at $54.77, dip to $54.71 in the first minute of trade, to only close higher by $1.74 by session's end. If this is what "overpriced" stocks that disappoint on 2004 guidance are going to be doing in coming session, the bears are a lot more jittery than I've been thinking, or all this fundamental valuation stuff has not yet sunk in with the broader MARKET. It may well be a little of both.

With Texas Instruments (NYSE:TXN) $25.67 +2.84% gaining to $27.45 in tonight's after-hours trade, I'd have further confidence as a bull to pick away at bullish entries near the WEEKLY S1s this week. TXN's quarterly earnings report was rather complex, as they had gains here, charges there, but the comparable number to analysts estimates of $0.09 per share, was TXN reporting quarterly earnings of $0.12 per share, which would have excluded a gain of $0.13 per share from selling some Micron Technology (NYSE:MU) $12.85 (unchanged) during the recent quarter for a profit.

Please note that earlier this evening, my QCharts highs and lows, which hadn't been accurate all day, were still not accurate when I updated the DAILY matrix. I did go through an intra-day chart to find the highs and lows on 5-minute bars to try and accurately record the highs and lows of the session.

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

I'm really looking for the SPX to stay bullish above the 1,030- 1,033 level and really tried holding out for that type of pullback today. The only real trigger I'd use for a long would be for the S&P futures (sp03z) to threaten a close above the 1,051.20 level near a session's close at this point. This goes back to the S&P futures chart I've shown with a fitted retracement from 957.60 to 1,073.30, where 1,051.20 was the upside resistance bias from 1,029.10.

Let's quickly review this futures chart, so you can see what I'm talking about as it relates to a bullish bias still intact by futures traders, where a close above 1,051.20, may then have further bullish implications to 1,073.30. For those that traded the cash (the chart above) from the MONTHLY Pivot of 1,009, this futures chart should make some sense as to trading levels, but using the futures settlement as a guide for strength near a close.

S&P futures (sp03z) Chart - Daily Interval

I think I have some fine tuning to still do with my fitted retracement on the futures contract to better explain that relative high of 1,038.50 on September 18 and 19, but so far, each time the futures have settled above a blue level, they have NOT closed back below a prior level. Still, demand has not yet been strong enough to hold a close above 1,051.18 on the chart, which in 0.10 increments in futures would be 1,051.20. I really like the way a pullback to my fitted 38.2% retracement of 1,029.10 would tie in with my thoughts of support in the cash (SPX.X) from 1,030-1,033, where this week we have WEEKLY S1 at 1,032.66.

Today's trade saw a net gain of 1 stock to a point and figure buy signal in the broader S&P 500 Bullish % ($BPSPX) and has the bullish % reading "bull confirmed" at 81.00%.

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

OEX is toughest trade right now and one that a bull has to be more patient with in my opinion. OEX just looks and feels a little heavy, or lacks some near-term momentum and I'd much prefer a pullback to the 515 area, play support above 511, to then get the needed pullback consolidation to spring back higher and get above the 525-526 level with some umph.

Citigroup's (C) $48.12 -0.53% were today's talk that impacted the OEX the most. Strong bottom-line but weaker than expected revenue, which many analysts say will come from improving economy, and overseas results. The good news was that bottom line growth came from fewer loan loss provisions being taken, but that was also the negative and had some suspicious that the bottom line gains was more due to less loan loss reserves and not top line growth. C's chart looks almost identical to OEX as it relates to bars on the bar chart, with C finding support today at its rising 21-day SMA of $47.38.

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

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

After closely monitoring EBAY on Friday and again today, I really get the impression that BEARS are very eager to cover on weakness. Even Netflix (NASDAQ:NFLX) $54.71 +5% (not a NDX component, but stock we've looked for short-covering pulse) continues to exhibit short-covering as this short-squeeze candidate sets another 52-week high and the stock lost little ground on Friday.

QQQ should find good support building at $35.20, with more formidable support at $33.78. Aggressive bulls can play, but I'd want to see some strength above $35.44. Be careful about "chasing at the open" with after-hour finding some sellers despite the TXN good news just below WEEKLY 38.2% retracement of $35.31.

Today's trade saw no net change in the NASDAQ-100 Bullish % ($BPNDX) and status remains "bear correction" status at 79% bullish.

Dow Industrials (INDU) Chart - Daily Intervals

Of those components that have reported earnings so far, CAT has been the negative surprise, but is trying to show some stability at $74, with its rising 21-day SMA at $73.10. Keep an eye on CAT and I'd tie CAT $73 with INDU 9,700 and the base of its regression channel, which may be providing some near-term support for the eventual test of 10,000.

The Dow is greater player in psychology, and while I'm not saying bulls can be complacent with 10,000 in the bag, I'm thinking there are a lot of "retail" investors listening each day to more and more analysts calling for Dow 10,000 and higher. With some rather upbeat earnings having been reported and few disappointments, there could be few sellers in many of the Dow components and lend itself to a test of 10,000. Overlapping resistance in the WEEKLY/MONTHLY matrix levels this week is at 9,855 and that's the test of resistance, which the INDU wasn't able to get through last week. Stochastics had visited the "overbought" level for the second time on that trade, and I view the 9,641 and WEEKLY 9,648 as good near-term support.

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

Jeff Bailey

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