Option Investor
Index Wrap

Up week, but a downer month for stocks

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The major indices finished the week with gains and broke a 4-week losing streak where some positive economic readings from July helped offset "slowing growth" reading from late spring.

Oil jumped to record highs with shipments threatened by a legal battle between Russia's government and the country's biggest oil exporter, OAO Yukos Oil Co., by attacks on oil infrastructure in Saudi Arabia and Iraq and by civil unrest in Nigeria and Venezuela. Oil gushed higher with September futures (cl0u) $43.80 +2.45% posting its fifth weekly gain, the first time that has happened in more than a year.

U.S. Market Watch - 07/30/04 Close

The CBOE Internet Index (INX.X) 171.99 +0.19% edged higher on Friday, but holds the top spot among equity sector gainers (listed in the Market Watch) for the week, while mixed earnings and perhaps the Democrat's platform for restructuring the nations healthcare system in an attempt to slow the rise of healthcare costs sent the Health Provider Index (RXH.X) 348.37 down 4.32% on the week.

Not listed in the U.S. Market Watch above is the Dow Jones U.S. Steel Index ($DJUSST) 126.18 +0.52%, which surged 8.87% on the week and 13.11% the past 20 sessions. It closed at an all-time high on Friday.

Did you know there was a Dow Jones U.S. Toy Index ($DJUSTY) 275.47 -0.36%? I didn't until last night. It was down 2.79% this week, and has fallen 6.68% the past 20 sessions.

A weaker than forecasted initial/preliminary second-quarter GDP reading, which showed the U.S. economy growing at a more modest 3.0% annual rate in the second quarter had Treasuries reversing much of their earlier week losses, where the benchmark 10-year yield fell a sharp 10 basis points in Friday's trade. The yield curve would have steepened this week, usually a bullish sign for equities with the shorter-dated 5-year yield rising 1.5 basis points, the belly of the curve rising 4.3 basis points, while the longest-dated 30-year yield ($TYX.X) rose 3.4 basis points.

On a 4-week basis, the yield curve flattened notably, with the 5- year YIELD ($FVX.X) down 3.6 basis points, the 10-year YIELD ($TNX.X) down 8.9 basis points, and the 30-year yield ($TYX.X) falling 8.6 basis points.

In last weekend's "Market Sentiment" column, I thought we might want to monitor the Broker Dealer Index (XBD.X) 119.39 -0.73% this week. The brokers carved out a 1.92% gain on the week, and that just about matches the indices gains.

Here's a good index to again... MONITOR right now, get a feel for things after this week's release of July consumer confidence/sentiment readings, which were stronger than economists' forecast. Remember, these are SURVEYS and consumers don't always do what they say over the phone.

Earnings season is starting to wind down a bit, with just about 75% of the S&P 500 Index (SPX.X) components having reported their quarterly earnings. Whew! Thank goodness.

However, next week, we're going to get slammed with a bunch of economic data, so I would want us to have an additional "sentiment" index to keep track of.

It's a beauty! By that I mean it looks WEAK, suspect to decline! It has something to prove! Or, I should say, it provides a test of which the MARKET has something to prove, buyers and sellers.

What is it? Hint.... there's only 147 days left until the Christmas holiday. While I always wait until the last minute to buy holiday gifts for friends and family, institutions should have their list together, be accumulating some of their favorite names if a strong consumer, economy and holiday shopping season is to unfold.

S&P Retail Index (RLX.X) - Daily Intervals

When we look at the S&P 500 Index (SPX.X) later, you're going to see some similarities between the SPX.X and the Retail Index (RLX.X). Where relative to the SPX.X, the RLX.X looks a little stronger as it relates to its 21-day SMA and 200-day SMA. I think the RLX.X is a good sub-index to monitor the next couple of weeks. The MARKET's received some upbeat news on consumer sentiment surveys. Hey, that's fine, but those are surveys. Will the MARKET believe it and commit capital to it? The RLX.X holds that key.

With rising oil and gasoline prices, economists are worried, with good cause, that higher gasoline prices are using up consumer's expendable cash they might otherwise be spending on camouflage clothing, new boots, goose decoys, a new shirt, a blouse, a skirt, washing machine, laptop computer, you name it. Heck, last week I filled up the 40-gallon tank on the "land yacht" and it set me back $72.00. That's a decent set of duck decoys. Ouch!

Pivot Analysis Matrix -

I've highlighted some of the support (green) and resistance (red) correlations in the Pivot Analysis Matrix where we have new MONTHLY pivot levels, which are derived from July's high/low and Friday's close.

Now, I marked the Dow Industrials' (INDU) WEEKLY S1, WEEKLY R2 and MONTHLY R1, where I see some similarities with these levels as found in MAY's MONTHLY Pivots, where the INDU traded lower to start the month out, violating its then MONTHLY S2 (9,986) where I see this WEEK's (8/02-08/06) WEEKLY S1. In May, the INDU fell to a low of 9,852 and staged a rebound to close the month of May at 10,188 (just now seeing Monday's DAILY R2 of 10,188), where in June, the Dow Industrials (INDU) traded a high of 10,487 (would be ABOVE August's MONTHLY R1).

Now, for July, we saw the indices fall from their opening bell on July 1. In this past Monday's "Market Wrap," fellow analyst Jonathan Levinson titled that wrap "Doji Day," and while Jonathan noted that Monday's intra-day action was not "the stuff of classic doji bottoms," the major indices did move higher from Monday's doji.

Dow Industrials (INDU) Chart - Daily Intervals

Some of my yellow zones haven't budged in a couple of weeks, so I'm leaving them right where they are. Stochastics seem positioned that near-term resistance is going to be formidable at all that confluence of SMA's and WEEKLY R1 and WEEKLY Pivot retracement of 10,226. Note from your Retail Index RLX.X the position of its 200-day SMA, which did see trade on Thursday (07/29/04).

Again... I am not a candlestick expert, but other analysts at premierinvestor.net and OptionInvestor.com give better insight to the implications of "doji" patterns.

Before I even knew about candlesticks, I observed on my own that a bar chart, where a bar shows an almost identical opening price and closing price created what I called an "iron cross," kind of like the male gymnast will perform on a set of rings.

Envision yourself trying to perform an "iron cross" (I'm laughing to myself as I picture my arms being ripped from their sockets) and where after such a TRADE is seen, where it would appear the MARKET has agreed on a price, that a break up or down from that "iron cross" then has the MARKET further agreeing on price direction, whichever direction price breaks (up or down).

Look at some weekly interval and monthly interval charts of stocks, or indices for this type of pattern.

The Semiconductor Index (SOX.X) made a beautiful "upside down iron cross" as I call it in March of 2003. Just as its sector bullish % at Dorsey/Wright and Associates reversed up to "bull confirmed" status at 28%. Current sector status for the Semiconductor's is "bear confirmed" at 8% and would take a reversing higher reading of 14% to turn up to "bull alert."

Speaking of bullish % indications. One of the best analogies I read this week, was from Dorsey/Wright. In the 09:00 AM Updates, I post the various major market bullish % readings. In one of their special e-mail updates, THEIR NYSE bullish % (not www.stockcharts.com, which I reference at 09:00 AM) reversed back lower this week. The analogy maid is that this action, in the very broad NYSE Bullish %, where NYSE listed stocks are more often a "buy and hold" type stock among institutional investors (mutual funds, pension funds, etc.) is that the DEFENSIVE team is on the field again.

The analogy that I liked was .... "that the generals are still fighting the battle, but the soldiers are leaving the field. How long can the generals hold out? I don't know."

This is why I (Jeff Bailey), like to try and pick out a couple of sectors that I feel might be "key" to figuring out the "how long" it might last question.

The Broker/Dealer Index (XBD.X) is VERY WEAK, but did make a near-term "bottom" on July 19, while the broader S&P 500 Index (SPX.X) traded a recent "bottom" this Monday. To me, when a VERY WEAK index makes a bottom first, it is usually a sign of SHORT COVERING? The reason I think this is because SMART money must have shorted at the top, and perhaps that same SMART money is locking in some gains. It would be that SMART bulls sold the top and are just showing up again, but I've never been so smart as to buy long the extreme bottom of anything. It's much safer to wait for some signs of meaningful strength before getting long. However, its SO easy to buy a bottom when your short when all you're doing is locking in gains at a target.

According to Dorsey/Wright and Associates, their Wall Street Bullish % (BPWALL) is still "bear confirmed" at 28%, would take a reversing higher reading of 34% to achieve "bull alert" status, and 44% to achieve "bull confirmed" status.

S&P 500 Index (SPX.X) Chart - Daily Intervals

Rebounds in the SPX from the 1,095 level (March and May) have shown some confirmation of strength with a trade above 1,111.

As it relates to Friday's GDP data, some things run through my mind.

Some economists and market analysts said they thought the upward revision to first quarter GDP (January-March) from 3.9% to 4.5% "offset" Friday's release of second quarter GDP (April-June) of 3.0%, which was below economists' forecast of 3.7%.

Bull-chips! I say. What the upward revision to Q1 GDP does, is most likely "assure" 2004 total GDP coming in at 4% or more, but I don't think it "offsets" the preliminary Q2 GDP of 3.0%. While Q2 GDP will be revised (we're just getting the FINAL Q1) I would think that company's earnings, revenues, cash flows, whatever measure fundamentalists use, was already reported.

First quarter is over and done with. If the MARKET is all- knowing (and I believe this to be true) then I say the SPX accurately depicts first quarter GDP figures, revised upward and all. Perhaps the "dashed red" cheaters trend, currently at 1,140 depicts the slowing rate of economic growth here in the U.S., where the solid red trend was perhaps reflecting the more bearish scenario of "inflation, banks crater, etc. etc" that was laid out in May.

NASDAQ-100 Tracker (QQQ) - Daily Intervals

QQQ $35.45-$35.41 should be a formidable near-term challenge and resistance. I don't dwell on my mistakes, but try to learn from them and review them. I got my bullish head handed to me on the most recent "pop" above the new MONTHLY Pivot on a 1/2 bullish long, and was stopped at $34.50 the very next day.

A couple of traders asked if Wednesday's volume spike of 155.07 million shares was a "capitulation" climax of selling?

It might have been. I'm VERY defensive in my trading when I try and pick a bottom with some longer-term call options, and on Tuesday, when JDS Uniphase (NSADAQ:JDSU) $3.45 +0.29% was falling to a 52-week low, out of admitted disgust, I profiled the writing/selling of the August $3.00 calls for $0.10 against the previously profiled December $3.00 calls. This was the WORST trade I made this week and leaves a bit of a bad taste in my mouth after a rather good week for trade profiles.

I turned on the VOLUME indicator for the QQQ and crudely drew somewhat of a bowl shape where volume has been picking up a bit in the QQQ since about mid-June.

I didn't catch the figures in time, but CNBC was quickly recapping some statistics from brokers regarding terrible trade volumes, investment banking deals, etc for recent months.

Maybe we're starting to see some of the summer doldrums wearing off. Our daily volume indications from both the NYSE and NASDAQ in our market snapshot have certainly been rebounding in recent weeks, when volume in June was often-times hard presses to reach much above 1.2 billion shares on the NYSE, and 1.5 billion at the NASDAQ.

Just for informational purposes, I averaged the daily volume for the NYSE in June, which approximates at 1.30 billion shares traded per day. In July, volume averaged approximately 1.39 billion shares, a 6.9% increase.

For the NASDAQ, June's average daily volume was 1.58 billion shares traded per day. In July, average daily volume rose 8.2% to 1.71 billion shares traded.

Market Snapshot / Internals - 07/30/04 Close

I still sense, based on observation from the internals, that the bulk of buying being done this week (look at 5-day NH/NL ratios) is being done by bearish short covering. Certainly you've got some bulls in here looking for a bottom.

NASDAQ's NH/NL indications have gotten pretty close to 0%, where late last week, and early this week, we were seeing new lows around the 200 level, where at best we saw 50 new highs and at worst, 15 new highs. As we get closer to 0% (as low as ratio can go) it's the NASDAQ NH/NL indications at both the 5-day and 10- day that show signs of greater improvement.

Remember a couple of week's ago, the NYSE NH/NL indications at higher levels were showing the improvement while NASDAQ's NH/NL indications were still headed south. Then seemingly pulling the NYSE NH/NL indications back lower.

In retrospect, as can often-times be found, it was as if MARKET participants were spending more time a couple of weeks ago buying some NYSE listed stocks, while at the same time, still distributing/selling NASDAQ listed stocks.

Then, as distribution continued in the NASDAQ, the buyers went away at the NYSE and the recent revisiting of May's lows in the major indices has been found.

For some real strength, or sign of renewed bullish leadership, I would really want to see BOTH the NYSE and NASDAQ NH/NL indications get in unison, and NOT just the 5-day NH/NL ratios turning up like they did this week, and NOT just the 5-day ratios above their 10-day NH/NL rations.

A BEAR that has been short, and holding some handsome profits is more likely to use 5-day reversal up, or crossovers, to help make a decision on whether to cover and lock in some gains or let things ride, but the more powerful and more lasting bullish moves have come when BOTH the NYSE and NASDAQ 10-day NH/NL ratios are in unison to the upside.

When Dorsey/Wright and Associates made the analogy of "the generals are still fighting the battle, but the soldiers are leaving the field," I chuckle to myself a bit, with the recent action we saw when the NYSE NH/NL indications were showing improvement as the NASDAQ NH/NL indications really didn't show too much fight.

I can now only envision a Civil War type of battle field, on a hot summer's day. The meadow, surrounded by trees is the battle field with blue and gray coats lurking in the surrounding woods on either side.

Like a swarm of bees, a small group of blue coats come out of the wood, a hoop'n and a hallering! Then a much larger swarm of gray coats (bears at this point) appear from the other edge of the forest.

They charge each other and meet in the middle, then the smaller group of blue coats suddenly turns and runs (after doing what damage they could to the blue coats) back where they came from yelling, "run away, run away" leaving their general to do battle by himself. The general either ends up meeting his maker, or turns and runs, yelling... "hey wait up for me!"

These brief battles, where the blue coats (bulls) look to do battle, can be a trader's mentality at this point.

Right now, the slower moving major market bullish % we update in the 09:00 Update has the bears winning the battle, so on a broader market basis (NYSE, COMPX, SPX, OEX, NDX, INDU) its the bulls strategy to try and take 10 troops against the bears 30 troops. If fortunate, the bulls lose just 1 soldier, while eliminating 3 or 4 of the bears.

This can be done should the 10 bullish troops strategize and pick out 3 or 4 of their opponents and gang up on them. Slowly eliminating the number of bears.

This would be more analogous to individual stock trading, in stronger sectors and stocks within those sectors.

For the index trader the bulls are really waiting for sign that reinforcements have shown up, or enough bears have turned tail yelling... "run away, run away!"

Jeff Bailey

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