THE BOTTOM LINE -
FRIDAY'S TRADING ACTIVITY -
The inflation fear was sparked by the report from the U.S. Labor Department that the Consumer Price Index (CPI) jumped by 0.5%. This was the largest increase since a year ago - 3/4ths of this came from a jump in energy prices, which is why, hey!, those fill ups are costing more and more lately. Anyway, energy costs were up nearly 5%. Excluding the more volatile food and energy costs, the "core" CPI was up a more modest 0.2%, but still double the 0.1% that was the consensus forecast.
Of course, with bond yields low already, a jump in inflation is tough to take for holders of fixed income investments. What's a poor bondholder to do but to look for higher rates. The 30-year Treasury bond, which is most sensitive to this concern, fell nearly a full point (31/32nds), which put its yield up to 4.96% from 4.9.
A new high for the dollar against the yen also was a contributor to bonds selling off - when the yen cheapens and buys less bucks, Japanese appetite for U.S. bonds is anticipated to fall off. And Japan is financing a lot of the big debt we are taking on - I've seen estimates that they have been averaging purchases that amount to some 40% of our bond sales. Dollar levels are significant when our savings rate is low and we depend on capital markets from abroad to buy our paper.
Ripple effects into equities were apparent early Friday after Japan's government raised its national terrorism threat level to its highest level. AP reported early that Japanese officials were putting heavily armed police around airports, government offices and nuclear plants. Officials there wouldn't say whether there was new information about a terror strike. But we leave the speculation about that to stock traders!
The news out of Japan sent the major equity averages to the lows of the day early on. The strong increase in consumer prices outweighed any "flight to quality" trading.
Option-related activity along with a lessening sign of aggressive buyers pressured stocks most of the day. With the Dow (off 45 pts on Friday to 10,619) and Nasdaq indices down for the week, Wall Street sentiment has been shifting to the idea that stocks are starting to run out steam - a sentiment I echoed at the beginning of the week. Not cause the Street of Dreams was thinking it, but cause that's what the charts were showing. Hey, the charts don't lie - only analysts and pundits, but that's another story.
The latest from Fed Chairman Alan-the-man Greenspan, was reassuring an audience in Nebraska (in those soothing tones he always speaks in) that he was confident that "employment will begin to increase more quickly before long as output continued to expand". By the way, the White House or specifically President Bush backed away from an earlier week report that the Administration was expecting 2.7 million new jobs created this year.
A Federal Reserve Governor, Ben Bernanke, had some soothing things to say about the January CPI number as not being a cause for alarm and not reflective of a new trend in pricing. William Poole, another Fed Board member, also reflected his expectation that inflation will remain at its current low levels for the balance of this year.
SOME STOCKS IN THE NEWS -
As Jeff reported Friday, after falling to a morning low of $32.55, shares of Netflix (NFLX) moved back up like gangbusters to close at 35.38, up 3.6%. What Jeff didn't report was that, in MY personal opinion, this company will eat Blockbuster and Hollywood Video's lunch by continuing to met consumer dissatisfaction with LATE FEES! I hates em. We hates em! And the mailbox delivery is great for us coach potatoes too!! Not so great for the lets-get-it-NOW kids. Disclosure: I DON'T own the stock. (I only wish I did, like under 10, where it was less than a year ago!)
In the Dow 30, CAT, GM, MRK, SBC and DIS were all off more than 1%. Disney (DIS) is of course the target of a takeover bid by Comcast - ex-board member Roy Disney repeated that while CEO Michael Eisner has failed to deliver shareholder value (and paid himself gazillions of dollars), Comcast's offer is too low.
SBC fell every day last week after its Tuesday announcement that it would acquire AT&T wireless (jointly with BellSouth) for $41 billion bucks - a lot of bucks. And reception/signal strength continues to be such a problem so often! - well maybe its just when I make MY important calls on my mobile.
Reminding us of what drives the market - it's the earnings stupid! - only Wal-Mart (WMT) bucked the downslide by rallying on a strong Q1 profit report - it added nearly 2%, to 59.43.
MY INDEX OUTLOOKS -
S&P 500 Index (SPX) - Daily charts:
Technically, the other key factors in assessing the likelihood of at least an interim stop, was the bearish Price/RSI divergence; i.e., the move to the prior high was accompanied by significantly lower "relative strength" as suggested by the RSI Indicator. The down sloping line on the RSI chart shows this visually. The two down arrows show the likely double top.
The overbought situation can be seen by how far the S&P 500 is trading above its 200-day moving average - you know, that line hanging out why lower than the 50-day average. Another measure of an "overbought" market situation is when the RSI on a daily and weekly chart (not shown) basis gets above a reading at 70-75 as can be seen by the move above the red level line in the RSI chart above.
I use "simple" moving average envelopes to give some idea of downside or upside potential, assuming that the indices continue (they usually do) to trade in their recent historical range as measured by how far above or below prices get(in percent terms) above or below a 21-day moving average. Typically, given "normal" volatility, the S&P trades 2-3% above or below this average before falling off, or rebounding.
In an uptrend like we have currently, the upper S&P Index band can be set at 3% and prices will tend to have periods where it advances up along (hugs) this line. Eventually however, it drops back to the average.
On the downside, within an uptrend, look for declines to hold 1) above the 21-day average even sometimes even after 1-2 days spent below it; 2) to fall to prior chart support (dashed blue level line); 3) to decline to its 50-day average (shown on first chart); or, 4) to fall to the lower moving average envelope line. Simple benchmarks! Not a trading "system" however!
The 1120-1125 area is my downside objective for SPX, with the possibility of brief slippage to 1115-1128. A close above 1160 however, changes this outlook to a bullish one.
I wrote this past week on the use of the ratio of the CBOE daily volume ratios for equities options as an Indicator of when the market is vulnerable for a trend reversal within 1-5 trading days.
See the Trader's Corner article at - http://www.OptionInvestor.com/traderscorner/tc_021904_2.asp
This most recent price peak in the S&P indices was accompanied by this indicator reaching the extreme (at the red level line) that I usually consider a forewarning for a downside reversal - at least for a while. Important to know when you see index option time premiums falling fast when the market starts to correct.
Now, I will be watching for SPX's ability to maintain closes above its 21-day moving average. More than 1-2 consecutive days closing below this average suggests that I stay put in puts - no PUN intended of course.
[NOTE: E-mail me with questions related to such technical stuff - as in technical analysis - which I use for possible answer in my weekly Trader's Corner article.]
S&P 100 Index (OEX) - Daily charts:
I look would for further weakness now if there is one or, better, a couple of consecutive closes below the 21-day moving average as seen on the right hand chart. The OEX's 21-day average is at 565 currently. The Indexes tend to trade within envelope lines or percentages above or below a moving average.
When there is second drive to a top that lacks follow through AND the index then retreats to below the average (center line), there is usually a further drop - sometimes back to the lower envelope line. However, I always also look at the trend - in a strong uptrend, the surprises, and extreme moves, tend to come on the upside.
OEX support looks to be in the 557 area. Given the double top, and the line of resistance above, I expect a retreat to lower support. If so, a drop to 560 or below, would break the steep up trendline. If in puts at 570 and above per my last commentary, I suggest staying put - no PUN intended. However, a new closing high would be my stop out/exit/liquidation/get-me-out trigger.
OEX - Hourly:
As always, I like to keep aware of the tendency for short-term trend reversals, and 1-3 day price moves, when both the 5 and 21- hour stochastics get to extremes. Short term, the S&P 100 is both near some technical support and falling to a short-term oversold.
I suggest using rallies as an opportunity to purchase some index puts. At around 568-570, the downside potential looks to be to 558-560. Evaluating downside objectives is tricky but if the trendline is broken and the OEX cannot get back above this line, the short-term trend turns down by this key measure.
Nasdaq 100 Index (NDX) - Daily & Hourly:
If, on the other hand, NDX regained or got back above resistance at 1500-1505, it would be an alert that the Nasdaq up trend was getting back on track. I would then want to see an ability to hold at or above 1500 to confirm a trend change. The idea of price resistance becoming support later on brings me to a related thought.
What is the "KOD" trendline?
The idea for a trendline to do this is a variation of the idea that what was support can "become" resistance later on and vice versa. This principle would also be demonstrated if Cisco (CSCO) closed under prior key support at $23, an area that then might offer strong resistance on a subsequent rebound. (Cisco stock comment was in the first part of my commentary.)
QQQ - Daily & Hourly:
A possible tip off that such a break may be in the works ahead is seen in the way that daily volume jumped on this latest sell off. As I noted in the same Trader's Corner article mentioned already, volume, to "confirm" a bullish trend, ought NOT to jump or expand on a decline.
The consistent pattern prior weeks' pattern of expanding daily trading volume, basically expanding on rally phases and declining or contracting on downswings, was altered with the substantial volume jump on Friday when the stock was under selling pressure.
If short the stock, I suggest using a liquidating (buy) stop order at 37.8, with an objective to also exit on a profit on a dip under 36.
Good Trading Success!