Option Investor
Index Wrap

It takes a village

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In her book "It Takes a Village," Senator Hillary Rodham Clinton discussed her thoughts on parenthood, and how children develop and what they need to succeed are inextricably entwined with the society in which they live and how well it sustains and supports its families and individuals.

Hold on.... there's a point to be made.

Stocks are like children. When things get out of hand, they need to be corrected. Right now, there's a nice correction taking place, largely in the form of profit taking, where yesterday, and again today, there were few willing buyers ready to step up to the plate.

Surround a good kid with a bunch of "bad apples," as my mom used to day, and chances are that kid is going to take on some, if not many of the characteristics of the bad apples.

"Jeffrey!" "I don't want you hanging around Rodney, as he's always getting into trouble." Mom always called me Jeffrey instead of Jeff when she wanted to make a point.

Now I have to laugh. I've never read Senator Clinton's writings, but there are some individual stocks I feel should be trading higher than they are today, which in fact traded 52-week highs in recent sessions, where the bullish enthusiasm for those stocks is simply being dampened by weakness in other stocks, that make up the various sectors and indices we may be trying to trade.

Take yesterday's trade in Sun Communities (NYSE:SUI) $40.59 -0.39%, where at mid-session broke to a new 52-week high and traded $42.00, and by session's end, closed at $40.75.

Where in the he@@ was the village to sustain and support the stock's gains to my swing trade bullish target of $42.40?

Yesterday, Procter & Gamble (NYSE:PG) $103.95 -1.49% jumped to a four-year high, but gave back the bulk of those gains in today's session. Where in the he@@ was the village to sustain and support the stock's gains in today's trade?

On Friday, Maytag Corporation (NYSE:MYG) $28.44 -1.62% traded a new 52-week high and really broke out of a nice 7-month base, but has slipped back into its base. Where in the he@@ is the village to sustain and support the break out of the base?

OK, so that's three examples of stocks showing relative strength versus the MARKET, or perhaps the VILLAGE, and while I believe, based on observation, that these types of stronger stocks will be higher months from now, the current trade I'm observing, has the VILLAGE looking like a ghost town, where buyers are few.

I'm not just talking about an observation from a hilltop, where you might think I'm looking down on a village and not seeing very many people walking around. No. I'm talking about walking into the village, looking inside the huts, and not finding much bullish enthusiasm, as internals, especially the bullish %, begin to show more and more point and figure sell signals in recent sessions.

Take a look at this village we call the Dow Industrials ($INDU) 10,128.38 -1.63%, which was today's second-biggest percentage loser among the major indices. Don't just look at today's percentage gain/loss, but the 5-day and 20-day percentage change, similar to the U.S. Market Watch from last night's Index Trader Wrap.

Dow Industrials Components ($INDU) - Sorted by price

I received several e-mail from traders that noted today's out performance to the downside in the Dow Industrials (INDU) and even the NYSE Composite ($NYA.X) 6,480.55 -1.68%. How's that for a village, where little buying was found!

Is something wrong with Walt Disney (NYSE:DIS) $24.95 -1.96%? After Comcast (NASDAQ:CMCSA) $29.05 -2.51% made its offer to buy DIS "on the cheap" as some industry analysts have called it, the CMCSA offer is starting to look better as DIS has now fallen from a post-offer high of $28.00. I'm not picking on DIS stock, as the market response toward CMCSA's stock since the offer was made has been anything bull positive.

If I were a Comcast (CMCSA) executive, I'd be strangling my investment banker that assured me the market would respond favorably to the offer made for Disney.

If I were a Disney executive, I shut my mouth about CMCSA having to up its offer, for fear they pull the offer, or lower it.

I digress, but the trade between CMCSA and DIS right now is largely controlled by arbitrageurs, where both stocks are most likely being heavily shorted, where any bullish capital looking to be directed toward stocks at this point is probably avoiding DIS and CMCSA shares.

Market Snapshot / Internals - 03/11/04 Close

While CMCSA and DIS off their 52-week highs may not be the best example of how some stocks I follow, or have made comment on in recent months, have not found a lot of bullish follow through, I wanted some of these comments to serve as a transition as to today's internals and NH/NL indications.

A couple of questions were raised from CNBC's Bob Pisani's continued comments that a source at one of Wall Street's most respected technical analysis firms saying market internals are still holding up, and that the current decline has been more corrective and not all that alarming.

The questions among subscribers is "what are they seeing?"

Market Internals - 01/28/04 to 03/11/04

Since I keep some data tabulated daily, I thought we'd quickly review some internals. I'm limited by width and apologize if the above table looks compressed, but here's my analysis.

I see very little bullishness in the NASDAQ. The only thing marginally bullish is that the NSDQ NH/NL 10-day Avg (column AF) is still in a column of "X" at 92.2, but a reading of 92.0% would have this indicator (we chart the 10-day Avg on a 2% box size point and figure chart) turning back lower to "bull correction" status.

On Monday, March 9, 2004, we noted the crossover of the 5-day NH/NL average with the 10-day NH/NL averages, which put greater emphasis on the actual price lows of the NASDAQ Composite (COMPX) or NASDAQ-100 Index (NDX.X) as a support level, where if broken could see a sharp decline. Look at the rate of change to the downside in the 5-day NH/NL averages the past two sessions. This is a rather quick loss of bullish leadership, which if anything suggests that institutional bulls are becoming much less aggressive with their buying, or bulls becoming more aggressive with their profit taking, even when a stock is breaking to a new high.

While not alarming large, we are seeing a greater number of new lows, especially at the NASDAQ (column R), which is also a sign that bulls aren't doing the "bottom feeding" they were, and when a stock breaks a level 52-week low support, its becoming a case of "sell now, and ask questions later." Another sign that bulls are less aggressive, or willing to take on risk.

Whether you agree or disagree, it is a generally accepted investment philosophy that a weak stock (trading at or near a 52- week low) is RISKIER than a strong stock (trading at or near a 52-week high) when the major market averages are or have recently been near a 52-week high.

I also tabulated 5-day, 10-day, 20-day and 50-day averages of the NYSE and NASDAQ advance/decline lines to try and pick up on any type of A/D breadth strength/weakness trends.

NASDAQ's 5, 10, 20 and 50-day averages all show negative A/D breadth.

The NYSE's 50-day average A/D breadth is still positive, but we can see that shorter-term 5-day, 10-day and 20-day breadth is weaker.

So what the heck IS GOING ON?

Longer-term profit taking?
Normal correction?
Economic slowing? Deflation?
Financial crisis on the horizon?
Dollar too strong?
Dollar too weak?
Presidential election uncertainty?
Terrorist threats?

Good gravy! How about all of the above?

My mindset is that we're just seeing a normal corrective phase. How long it could last I don't know. How low it could go I don't know. However, I still believe that by year's end, the major indices will see trade above the recent highs. The reason I think this is that I have never seen the bullish % charts stay so overbought about the 70% level for so long, where now I simply think we're seeing a corrective phase, where some price risk is being reduced.

Last night I was looking at my "Beetle's Balanced Benchmark" portfolio, looking for answers to any of the above questions.

Here's a link to a recent article in the Ask the Analyst column from January 25th, when we reviewed the REBALANCED portfolio and the UNBALANCED portfolio. click here

Let's take a quick look at both the 12/26/03 REBALANCED "Beetle's Balanced Benchmark" and the UNBALANCED portfolio, which was created back on December 31, 2002.

Comparison of Rebalancing (upper) vs. not Rebalancing (lower)

In PINK I make the comparison of the closing values (tonight's prices). Are we seeing profit taking? We could be. The AMEX Gold Bugs Index ($HUI.X) is still up 53.65% from 12/31/02 benchmark, but is down 5.91% since 12/26/03 when we rebalanced in the Ask the Analyst column. The QQQ is still up an astounding 43.09%, and it's not far behind the gold bugs losses since 12/26/03. Did your read this weekend's Ask the Analyst column where we reviewed the various sector and market bullish % bell curve? One could certainly argue that all we're seeing is a normal corrective phase and some reduction of risk from very high levels of bullishness.

The fixed income portion of the "Beetle's Balanced" shows a 2.61% gain versus the equity portion showing a 2.27% decline since the 12/26/03 rebalance.

Aha! Economic slowing! Flight to safety!

Not so fast.... I might think the same thing, but what has me thinking that's NOT the case at this point, based on observation, is that the junk bond portion (HIGH RISK BONDS with HIGH YIELD) is that the Pacholder High Yield Fund (PHF) shows a price gain of 4.23% since 12/26/03 rebalance, and that doesn't include the monthly interest payments it kicks off each month. From 12/31/02 benchmark, it continues to be one of the better performing asset classes.

I continue to monitor the PHF as a junk bond indicator. It is notable that the longer-term iShares 20-year (TLT) and PHF have been the best performers since 12/26/03. My thinking here, or their association would be HIGHER YIELDING asset classes. Certainly the PHF, or junk bond asset class carries a greater degree of RISK, but also a much higher YIELD than a basket of longer-term Treasuries, but if the MARKET sensed a great degree of economic slowing, the junk bond asset classes should see selling, and I'm not seeing that selling showing up at this point.

Bullish % from 01/28/04 - All started with NDX

One can never know for sure if a decline is a normal correction, or the MARKET smelling out some type of negative future event(s) that would then have everything becoming "crystal clear."

If you read each morning's bullish percent updates, you're eyes may have been popping out of your head when all of a sudden you've started to see a greater number of stocks showing reversing lower point and figure sell signals being generated.

The numbers in red are where a bullish percent chart of the respective index turned lower into a column of "O," while the green numbers would still show that bullish % chart still in a column of "X." You can really begin to see how the NDX showed some internal weakening first, that then spilled over to the NASDAQ Composite (COMPQ), that has just recent spilled over to the SPX and INDU.

Note how "slow" the NDX bullish % declined, but how the sell signals have started to build in a more rapid pace. Almost as if bulls have completely given up on the though of trying to bid for many of the stocks in the QQQ/NDX. Analysis right now is that we might have seen about 1/2 the bullish risk now removed from the NDX/QQQ. This last comment should NOT be construed as "the NDX/QQQ decline is 1/2 of the way completed" but serves as an observation that the inherent bullish RISK has been greatly reduced in recent weeks.

However, since PRICE does matter most, and since the QQQ closed BELOW its MONTHLY S2 of $35.06, I need some kind of level to associate with further downside risk.

Here's what I'm going to do. Since the NASDAQ-100 Bullish % ($BPNDX) was at 50% last night, I'm going to take a retracement from the QQQ close at 50% retracement, as if that would represent 50% of the bullish risk now having been removed from the QQQ.

NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals

This is not a conventional use of retracement at all, but may help give some further assessment toward further downside, as the major indices are all below their MONTHLY S2s and WEEKLY S2s. I notice that tomorrow's DAILY S2 of $34.34 might tie in with the above retracement, where yesterday, the above retracement may also tie to the $36.00 resistance found, as well as next week's option expiration "max pain" of $36.

I have had a great deal of difficulty getting bar charts tonight, and only got my data feed late in the evening to show the QQQ chart.

Here's tomorrow's Pivot Matrix, where at this point only the SPY's MONTHLY S2, the SOX.X MONTHLY S2 and BIX.X MONTHLY S2 offers any type of support for institutional buying. These and the DAILY S1 and S2 levels.

Pivot Analysis Matrix -

Traders in the Market Monitor may have gotten a good bearish trade in the QQQ late today. I profiled a QQQ day trade short just as the BIX.X approached its session low and WEEKLY S2, with the thought that if the BIX.X gave up that level of support, it could then trigger some broader market selling with downside BIX.X risk to MONTHLY S1 or MONTHLY S2. That's almost exactly what happened as the QQQ fell to today's (Thursday's) DAILY S1.

I've marked the SPX WEEKLY S2 and DAILY R2 as correlative, and I would certainly assess that as an upside bounce level if a bear were thinking of backing up the truck with a big short/put position right now.

Do NOT underestimate next week's quarterly expiration. I would only use that even to understand and PLAN for the possibility of extreme volatility.

Jeff Bailey

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