Option Investor
Index Wrap

It's always something

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The Morgan Stanley Healthcare Index (HMO.X) 916.47 +1.5% was today's sector winner, while the AMEX Gold Bugs Index ($HUI.X) 184.74 -2.22% gave back one-third of yesterday's gains, while the major indices finished relatively unchanged, despite a key economic reading that showed the services sector, which makes up just about 80% of the U.S. economy expanded at healthy clip in April.

While the major indices look like they want to get a continuation bounce move going and recoup some of last weeks declines, investors seem hung up on future Fed policy, and Friday's release of April nonfarm payrolls.

In other words, it's an excuse to do nothing!

Here's what I think traders are now waiting for, and we're either going to get a bounce move back higher to downward trends, or we're going to get a continuation move lower after Friday's nonfarm report.

What I think traders are simply waiting for this.

The Fed kept interest rates unchanged after yesterday's FOMC meeting, and now it appears traders and investors want to see if the Fed has its head in the clouds, or not.

For a move higher, I think the market wants to see April nonfarm payroll number show some further improvement, and a number close to economists forecast of 165,000 would be just enough job creation to show continued improvement, and keep investors happy. As long as the jobs market isn't too robust, then market psychology will be appeased that the Fed knows what its doing.

It's funny isn't it? An old market saying is "don't fight the Fed," but still, there's always some type of criticism for what the Fed is doing, or isn't doing.

For the move lower, I think the markets would view a STRONG nonfarm payroll number as being somewhat disheartening? Why? Because that would then have investors believing that the Fed's stance on interest rates, or monetary policy, as being inaccurate, where the regardless of this being an election year or not, investors may fear that the longer the Fed delays the raising of rates, despite continued signs of economic growth, it will have to raise rates at a MORE AGGRESSIVE PACE in the future, in order to catch up with an economy that has by then "overheated."

Am I saying Fed Chairman Alan Greenspan isn't doing a good job? NO WAY! But in what looks to be a psychologically tormented market environment, the two scenario's above would play into what I feel is the MARKET's current state of psychological disarray.

Market Snapshot / Internals - 05/05/04 Close

Well, there you have it! Fractional percentage gains, with only the somewhat more "beaten down" NASDAQ-100 Trust (AMEX:QQQ) $35.53 +0.79% and Semiconductor Index (SOX.X) 452.25 +0.88% showing a gain that worthy of any discussion.

Breadth at the NYSE was even, while NASDAQ breadth faded a bit toward the close, where advancers would have outpaced decliners by a an 8 to 7 margin.

Pivot Analysis Matrix

The major indices traded either just above or under their correlative MONTHLY Pivot and WEEKLY Pivot correlations for the entire session, where only the S&P Banks Index ($BIX.X) 340.07 +0.43%, which was first to trade its WEEKLY R1 this week, did show enough strength to actually hold a close above its WEEKLY R1.

The most exciting moment may have come at the close to see if the S&P Banks Index (BIX.X) could muster a close above its WEEKLY R1, which it did, and may at least be "saying" that the Fed's decision to keep rates unchanged lifted some psychological concerns regarding interest rates. Today's news that the Royal Bank of Scotland was willing to pay $10.5 billion in cash for Charter One (NYSE:CF) $43.86 +22% didn't hurt either.

Hold on! What that? The 10-year YIELD ($TNX.X) moving up to trade its WEEKLY R1 as well as the banks seeing some gains?

I struggled for about 2-hours after the close to try and come up with ANYTHING insightful to discuss about the major equity averages, here today's range was inside of yesterday's, but then I reviewed a chart of the 10-year YIELD ($TNX.X).

10-year YIELD ($TNX.X) Chart - Weekly Intervals

After being out of the office last week and not really following the markets, its only tonight's tracking of the pivot matrix and plotting of levels of trade that it dawns on me that the 10-year YIELD moved above the 4.5% level last week, and now challenges a relative high yield found back on August 14, 2003.

With the major indices hovering just below what looks to be some near-term resistance and their combined WEEKLY/MONTHLY pivots, I have to at least be alert to a 10-year YIELD ($TNX.X) move above 4.67%.

Here's my thoughts on this, which I want to tie in with where the major indices seem to be pegged just below/around their weekly/monthly pivots.

A higher YIELD isn't necessarily "bad" for the equity markets. In fact, the bond market may well be saying.... the economy is strengthening fine, and higher rates from the Fed are on the way.

I think we want to be alert for a YIELD move further above 4.67%, where from a purely technical point of view, might trigger a reaction from the equity markets.

I'm torn between a positive or negative reaction at this point, and I'd let the major indices tell us what to do, but with the Fed on hold, I think the only way the 10-year YIELD makes a move above the 4.67% level right now is if Friday's nonfarm payroll number are TOO STRONG, which brings a NEGATIVE reaction from both the BOND market and EQUITY markets.

I have to admit though. If I were Alan Greenspan, I wouldn't have raised rates yesterday.

Gold is hovering below $400.00, the bond market has seen enough selling to bring YIELD higher, so I've gotten some effect of higher rate in the form of mortgage rates, even business and consumer loan rates, which will track the bond market's yields have been rising.

I would be VERY surprised if we were to see much of a market move tomorrow, and we may well see a similar trade tomorrow as we saw today.

However, if there is one BULLISH sign we may have seen today, its that the BIX.X and the 10-year YIELD are moving somewhat in unison. Almost as if there is some "comfort" or getting used to the idea of eventual Fed tightening.

However, that reasoning, or psychology could come unglued on Friday if jobs growth is too strong, and market participants really begin thinking that the Fed is out of touch.

Jeff Bailey

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