Option Investor
Index Wrap

Jobs with inflows and outflows

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The major indices traded in a rather tight range today, where surprising strong reports from most retailers in the form of January same store sales gave pause to recent declines.

Retailers saw consumers visiting the shopping malls in January, as shopping became January's recreational activity of choice. Redemption of gift cards received also helped boost sales. As noted in December, retailers that sold gift cards could not book sales until gift cards were redeemed for merchandise.

Dow component Wal-Mart (NYSE:WMT) $56.25 +1.55% closed back above its rounding flat 200-day SMA of $55.73 and helped lead the S&P Retail Index ($RLX.X) 381.06 +1.25% to a 4.7-point gain.

But today's trade may be best described as the calm before a storm as traders and investors alike await tomorrow morning's release of January nonfarm payrolls data.

"The storm" could be that of rain, which is welcomed by the farmer after experiencing severe drought conditions, perhaps analogous to those jobseekers that have had a tough time finding work the past few years. But "the storm" could also be that of heavy snowfall, where the rancher has been unable to feed his herd of cattle, where investor's appetite for stocks may be starved if the economy still struggles to produce jobs.

I thought CNBC's senior trading correspondent Alexis Glick, who left Morgan Stanley as head of the firm's floor operations at the New York Stock exchange made a good point when she said traders and investors should keep a close eye on tomorrow's AMG Data Services release of weekly mutual fund inflows and outflows. While mutual fund investors are often-times made fun of by equity traders, it is those mutual fund inflows or outflows that can give hint of investor's appetite for stocks. Where even a floor trader will build or deplete inventory of stock based on this supply/demand indicator.

After seeing a NASDAQ-100 Index (NDX.X) 1,465.03 +0.16% pull back 5.6% from its highs, tomorrow's mutual fund flow data provides a good test for investors resolve. For the prior week/period ending January 28, 2003, AMG Data Services reported net inflows of $6.3 billion to equity funds.

But it will most likely be the nonfarm payrolls data, where economists remain optimistic for jobs growth (forecast 165,000 new jobs added) that gets greatest attention.

Monthly Payroll Data - January (Forecast) to September

In December, economists missed the mark when forecasting a gain of 148,000 new jobs, and after adding 99,000 in September and 100,000 in October, November and December data still suggest companies remain hesitant to hire back workers.

While I (Jeff Bailey) believe that a strengthening labor market is on the horizon, I also understand that the S&P 500 Index (SPX.X) 1,128.59 +0.18% is still 7.5% above its October 31, 2003 closing value of 1,050.71, and with a rising government deficit, partially due to tax cuts and increased government spending to help fuel and economic recovery, the sluggish addition of new jobs, where wages can be taxed, gets great focus.

Market Snapshot / Internals - 02/05/04 Close

After a higher open, stocks treaded water for the bulk of the session. Just as economists remain optimistic for jobs growth, comments from Federal Reserve Board Governor Ben Bernanke that he was "pretty confident" that the U.S. will be posting some big numbers on job growth soon had Treasuries traders and currency traders responding, while equity traders seemed to take more of a wait and see approach to things.

Just after Mr. Bernanke's statements hit the news wires, Treasuries found selling, while the dollar reversed losses.

It was interesting to me that spot gold was flat today, never finding a bid despite early morning weakness in the dollar, but gold equities as depicted by the AMEX Gold Bugs Index ($HUI.X) 216.75 +1.55% found a bid as when the U.S. Dollar Index (dx00y) 86.75 -0.1% fell below its MONTHLY Pivot of 86.61 and fell further to 86.30, before reversing back higher.

I'm not sure what to read into this, other than to think that the move higher in gold equities is a trade that forecast a weaker than expected nonfarm payroll report, where under that scenario, I would think the dollar finds weakness once again, where confidence in the dollar and perhaps the economy's ability to generate jobs is questioned.

I should make note too, that the G7 meets this weekend, which may also have currency traders a little jittery, bringing some volatility into currency markets.

Pivot Analysis Matrix -

I've highlighted some correlative support/resistance levels in the pivot matrix, which I would consider to be potentially important levels in tomorrow's trade, where violations of these levels could dictate price action in the weeks ahead.

I would also tie in some of the things discussed in last night's Index Trader Wrap regarding the major indices recent pullback in the scope of past pullbacks and some of the work we did with how the SPX traded in relation to its DAILY Pivots for trade setups.

Today, the SPX did edge above its DAILY Pivot, but bulls may have been cautious as the DAILY S1 of 1,133.45 was not traded.

S&P 100 Index Chart - Daily Intervals

I count 9 different equity sectors posting gains greater than 1% compared to 3 sectors posting losses of 1% or more by today's close, but the OEX was little budged and MONTHLY Pivot provided resistance, while the January 29 relative low of 557.36 managed to hold support.

My knee joint starts to ache when there is a higher level of humidity in the air. Is it rain, or is it snow?

Dollar/bond action today seemed to day rain, where job growth was the forecast.

S&P 500 Index Chart - Daily Intervals

Similar to the OEX, the SPX found resistance at its MONTHLY Pivot. A trader sent me an e-mail today wondering he hasn't been seeing as many buy/sell program premium alerts of late? I think its because institutions have the SPX at a somewhat "neutral" level, right around that 1,125 level where we saw so much option activity taking place in December. Perhaps the lesser amount of buy/sell program premium alerts is "the quiet before the storm."

One thing I would look for tomorrow to NOT happen is this. I expect volatility tomorrow, but if an index trades below or above a DAILY S1 or R1, if the move has any conviction behind it, the index should not come back through either of those levels.

For instance... if the SPX trades above DAILY R1, its should not fall back below DAILY S1. Conversely, in what might be deemed a near-term "oversold" condition, should the SPX trade below its DAILY S1, then it should not trade back above its DAILY R1. If it does the latter, it may be indicative of short covering, or economic data already factored into the recent pullback.

Dow Industrials (INDU) Chart - Daily Intervals

Not much new in the INDU's chart. IBM, which escaped yesterday's technology selling slipped back under $100 today, while some gains were found in lesser price-weighted components.

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

In last night's wrap we looked at a 6.72% decline in the QQQ and compared that percentage decline to the one currently underway. I'm also noting some very SIMILAR oscillators. While price action matters most, the QQQ witnessed some wild intra-day swings for several session back in November, and it wouldn't surprise me to see similar volatility.

Jeff Bailey

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