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Index Wrap

Latest additions helped fuel NASDAQ-100 gains

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In the OptionInvestor.com March 12, 2003 01:00 PM EST update, we noted the NASDAQ's announcement of changes being made to the NASDAQ-100 Index (NDX.X) 1,448.17 +1.14% and one of eight newly added stocks to this index, Research in Motion (NASDAQ:RIMM) $69.61 +51% helped the recently lagging NDX and its Tracking Stock (AMEX:QQQ) $35.84 +0.75% play catch up to the other major indices, in what otherwise was a rather quiet pre-holiday trade.

NASDAQ-100 Heatmap - 12/23/03 Close

I've captured today's closing percentage changes of the 100 components of the NASDAQ-100 from the NASDAQ market site, which shows RIMM's incredible gain after the company reported upside earnings that shocked Wall Street.

According to NASDAQ's December 22nd update, Research in Motion (RIMM) carried a very fractional 0.3156% weighting in the NASDAQ-100. Traders and investors can view daily updated weightings of the various components by clicking this
http://dynamic.nasdaq.com/dynamic/nasdaq100_activity.stm

Using the above NASDAQ-100 Heatmap, I've also highlighted in PINK, the other 7 additions to the NASDAQ-100 Index, which also showed some above average gains in today's session and helped breath some renewed life into this actively traded index.

If there would be one thing I take away from today's trade, its that "overvalued" and "undervalued" are most likely opinions, that are subject to the MARKET's confirmation. Many investors trader may have felt RIMM's valuation was stretched before Monday evening's quarterly earnings report, and similar opinions may be carried over to the broader market as well.

It's a day's trade in RIMM, which always has kept a trader from over leveraging in a trade (biting off more than we might be able to chew if the trade moves against us).

After writing this morning's 09:00 Update and quickly analyzing RIMM's point and figure chart, I'm not sure there were many bulls, even those long the stock, that thought RIMM would do what it did today. I certainly didn't!

Market Snapshot / Internals - 12/23/03 Close

Today's internals and hourly price measurements show slight divergence from recent sessions, where the broader NASDAQ Composite (COMPX) 1,974.78 +0.97% and broad smaller-cap Russell- 2000 Index (RUT.X) 555.03 +1.03% showed some strength. While it has been a very bullish year for the small cap RUT.X and they have not shown as much lag as the COMPX and NDX/QQQ relative to the INDU/SPX/OEX in recent weeks, they're just off their 12/02/03 52-week high of 557.42.

Aside from the NDX/QQQ or broader COMPX making new 52-week highs, traders might monitor the smaller-cap RUT.X for further strength above the 558.00 level as an alert to buyers becoming more aggressive, or willing to take on what some might deem a higher degree of risk. Here again, the perception, or thought that smaller cap stocks, which have had a very bullish year, might have "stretched valuations" similar to RIMM, where the RUT.X breaking to a new 52-week high, might have that fundamental evaluation not being confirmed by the MARKET.

While it would be way out of line to think EVERY stock could be as undervalued by the MARKET as RIMM appeared to be prior to today's trade, the seed may have been planted.

Despite improved demand for today's 2-year note auction, where the government auctioned off $26 billion of these shorter-dated notes at 1.95% yield, with a bid to cover ratio of 2.15 versus 1.75 last month, Treasuries were hit with selling with the benchmark 10-year YIELD ($TNX.X) jumping 10.5 basis points to 4.269%. Some bond traders cited longs that bought on the recent heightened concern regarding terrorism got squeezed out of their trades, in today's light volume trading session. Some bond traders cited the upward revision to the University of Michigan's index of consumer sentiment (revise up to 92.6 from 89.6) also putting a squeeze on shorter-term bond bulls.

Pivot Analysis Matrix -

In PINK, I've marked today's HIGHS for the INDU, DIA, SPY and BIX.X, which did see trade at their WEEKLY R1s. It would be my thinking, that there might be some institutional computers selling at these levels, but at 52-week highs, would be selling to provide liquidity to a market that simply lacked supply for buyer's demand.

The Dow Industrials (INDU) was the only major index (not a tracker like the DIA, SPY, QQQ) to see a trade at its WEEKLY R1, and the INDU did trade a session low of 10,296.15 after it traded its WEEKLY R1. I'm going to show an intra-day chart of the INDU, where my analysis is that this trade at WEEKLY R1 may indeed have had some pre-holiday selling, or distribution take place, but intra-day observation of the INDU's comeback to the close still hints to me that there may be bulls still looking for some holiday gains. The test becomes... can the STRONG INDU continue to lead a charge.

I look forward to reading tonight's Market Wrap from Keene Little, where in tonight's Futures Monitor, Mr. Little wrote... "I will offer up some more details in the market wrap tonight, but I think tomorrow will be easy--short the opening high. I believe one more leg higher, but not by much, will end this rally. The interesting thing is that the YM may not make a new high, or if it does, ES will get taken higher than I expect. I had expected ES and NQ to make a new high, but will be watching very closely for NQ to stay below its Dec 3rd high of 1455.50. NQ had a steeper pullback going into the close, which is making that pattern a little more difficult to figure out what's going on with it. Did it already make its high just before the end of the day? Not sure but will be watching that one closely."

For those that may not be familiar with futures talk, the YM is the Dow futures, the ES is the S&P 500 futures, and the NQ is the NASDAQ futures.

I don't want traders to think I'm "calling Keene to the mat." He's talking about futures, and a 30, 40 or 50-point move in the futures market is MUCH different than that in the cash market.

Dow Industrials (INDU) Chart - 15-minute intervals

I like reading "both sides of the story" and getting a bullish and bearish view, then test the thoughts on why I should do something.

While Keene Little will lay out his scenario, I'm more bullish than Mr. Little as the current path of least resistance is up and past INDU "tops" have yet to hold as resistance. While history is no guarantee for future trade, the Stock Trader's Almanac has noted that the INDU has traded up 8 of the last 12 years on the day before Christmas. The day after Christmas (Friday) the INDU has traded up 9 of the last 11 years.

For a BEAR to get a BULL'S attention would be to break below the DAILY S1 tomorrow, where show bulls the weakness below DAILY S2 and correlative 38.2% in the WEEKLY pivot retracement.

For strength? I've lost track at this point, but another 52-week high would be a place to look for further strength.

S&P 500 Index (SPX.X) Chart - 15-minute intervals

I can perhaps see what Mr. Little is looking for when he thinks traders will/should "sell the open." I've marked this on the SPX 15-minute interval chart above, where on Monday, the SPX jumped in the first 30-minutes of trade and traded back from there.

Now here at least, I see the WKLY R1 possibly serving up some resistance, but today's sell program alert, which did have the SPX falling to a session low. Was this a sign that the top is in, or an institutional computer providing liquidity to a market, which was trading at a 52-week high?

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

While I profiled a bearish trade in QQQ February puts, this morning's break above $35.69 and that little zone of resistance which had been keeping the QQQ in check, didn't hold back some of the bullishness that may have been brought on by RIMM.

I still think the QQQ VERY dependent on INDU/SPX/OEX strength to continue to find a bid, and NASDAQ new high/new lows not nearly as impressive as that found at the NYSE, so I'm not seeing a great deal of bullish leadership at this point. Certainly it makes sense that the NASDAQ, which is still off its prior 52-week highs wouldn't be showing as many new 52-week highs at this points, but this is the ONLY major index that would show any sign of a top being formed.

Jeff Bailey

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