THE BOTTOM LINE -
It was not too hard to see that we were in a decent rally off the last bottom, led by tech sectors, but the last burst to the upside was a bit more then I anticipated, not in Nas 100 (NDX) but the S&P 100 (OEX) gained about 10 more points than I anticipated.
Market momentum has a tendency to feed on itself, due to how much stock money is under the control of professional money managers. They have to follow the tape so to speak and can't risk being left behind in portfolio gains at the end of the quarter. However, the market is now "overbought" by most measures, reminding me that getting into index calls is riskier as the chance of a correction is greater than usual.
This is not to say that this market will necessarily pull back a lot - bullish sentiment barely touched an extreme last week and there may not be any easy (long) put plays. Corrections need not be deep price-wise. The other kind of "correction" is when the market goes more or less sideways for a while - consolidates in this way by time - then takes off again. Buying puts has risk that prices don't move more than the amount that premiums flatten some in a shallow consolidation.
Buying new calls has risk - maybe right on slightly more upside, but difficult to make money when premiums stay high and favor sellers. If not in this thing such as long index calls from significantly lower levels, price neutral strategies are preferred. Otherwise, wait for a while to see how the indexes fare as they approach various yearly highs. We are not out of the woods on one outstanding jobs number, until we see that numbers like Friday's come round again.
FRIDAY CLOSING NUMBERS -
The Nasdaq Composite (COMP) closed out 15.3 points higher than Thursday, over 2000 at 2,038.9. COMP gained 3.2% for the week. Hey, a little bit here, a little bit there and soon you got real wealth coming back to long-term stock investors.
FRIDAY'S TRADING ACTIVITY -
Coming into Friday of course, bullish sentiment was fueled by the clear cut election result, with President George W. Bush winning a second term as well as a decline in oil prices.
The catalyst that kept the rally going was a quite bullish October employment report.
Stocks gained early after the U.S. Labor Department reported that U.S. non-farm payrolls increased by 337,000 in October, which was fully double Wall Street expectations and was the biggest surge in payrolls since early in the year.
These numbers beat even the most optimistic estimates and suggests most likely - I'm still a bit cautious - the long awaited recovery is picking up steam in terms of putting people to work, which should fuel a second stage rally in stocks.
The Labor Department report did also indicate that a large part of the job creation stemmed from rebuilding and cleanup activities in the Southeast following the August/September hurricanes. Some analysts were saying, that for this reason, this
particular report may not be indicative of the start of a prolonged and smoothly accelerating period of economic growth. It's going to take a couple of more months to tell the story on this.
U.S. unemployment for October climbed a tenth of a percent to 5.5%, whereas economists were expecting the number to remain unchanged from September. The rise may have been due to people coming back into the job market, but not immediately finding new jobs.
In other economic data, the Federal Reserve said U.S. consumer credit grew by $9.8 billion, or at a 5.8% annual rate in September. This rise was well above the increase of $6.6 billion forecasted. Borrowing is a growth market in the U.S. of A! Not so good long-term, but currently the market is not focusing on any longer-term negative like debt heavy consumers.
OTHER MARKETS -
Expectations seem to be that the Fed will raise the Fed Funds rate by a quarter percent next Wednesday - to 2%. In the wake of the payroll data, its anticipated that the Federal Reserve will go to a 2.25% level in December.
The 10-year T-note fell 27/32 to 100 18/32, to yield nearly 4.2%. What's good for stocks, not always being great for bonds.
Feeling very good about a personal Euro conversion into dollars a week ago Friday at 1.26, only to see the euro touch a high of $1.296 by this past Friday, which took out the prior all-time high of $1.293 in February. I was happy to exit at 1.26 but this sharply falling dollar is not so good otherwise.
Despite Friday's bullish October employment report, foreign exchange traders barely paused in selling more dollars, versus a good reason for the greenback to rally on the strong payroll number and the prospect of higher interest rates in the U.S. This contrary result reflects a lack of a lack of confidence in U.S. assets.
A lower dollar helps U.S. exporters, but hurts multinationals as their profits in dollars fall and weakens foreign interest in our bond market. If U.S. investors and institutions had to buy the ongoing flood of government bond debt, it couldn't be done - our savings are far too low.
Asian central banks are said to be substantial Euro buyers as worries over our record U.S. deficits are increasing, but mostly abroad so far. Well, as my dear ol pappy used to say, chickens do come home to roost - eventually.
MY INDEX OUTLOOKS -
S&P 500 Index (SPX) - Daily chart:
Friday's close was about at the maximum upside in terms of what is likely in terms of the historical tendency or average in this model. This suggests a dip, but probably only shallow, sideways to slightly lower.
The deepest correction I'm anticipating right now is back to prior resistance around 1140 - what was resistance "becoming" new support - at the old resistance trendline. 1120, at the 21-day moving average is key support - "key" meaning that if there was a close under, that's some significant damage to the bull case.
A way I measure trader "sentiment" is with the above model - daily equity call volume to put volume. At tops, call volume typically hits one or more days when it is double put volume. Hasn't happened, not yet. Even when this happens, a meaningfully (read deep) correction can be a few days off.
NOTE: the last new low was not accompanied by a bullish reading. Sentiment extremes are not seen at every market turning point, which is why I match this against other indicators, especially my up volume indicator which did hit a low when prices did.
S&P 100 Index (OEX) - Hourly chart:
I suggested last week, that the June rally peak implied significant or major resistance at 558. I would still hold to what I said then, that a close over this area is still needed to break the bearish pattern year to date of lower rally highs. Up trends are defined by the ability of rally attempts to exceed the prior peak. Stay tuned.
Implied trendline resistance is just over 560, then the April high comes in at 562 and I would be watching these areas for any signs of reversals. Near support is at 550-549, then more major technical support is assumed to be at 540-539.
Yes, on an hourly chart basis, the OEX is about as oversold as it gets, but its also true that a sideway move taking the Index down just a few scant points, causes this indicator to fall back to a more neutral reading.
Dow 30 Average (INDU) - Daily chart:
Significant overhead resistance now comes in at the 10500 area - the prior peak of significance was 10487. Above this, 10570 looms large as a pivotal point. Support is in the 10200 area and I anticipate this area holding if the next correction is shallow.
The RSI is a useful gauge of how "extreme" is extreme and when rallies get going due to major bullish developments, the market can get to areas closer to 80 (in the 14-day RSI), rather than the usual 70 level demarcation. I keep this indicator on my index charts as much as anything to remind me that its always the same - eventually, powerful big moves in either direction run their course and the market has a substantial countertrend move.
Nasdaq Composite (COMP) Index - Daily chart:
Look for near support in the 1990-2000 area, then around 1950. I've also noted the trendline that has been associated with the lows on pullbacks -
Getting overbought, but I am keying off what happens at the prior highs and the (chart) pattern trumps this indicator as when markets run, they get extreme on the technical studies that are mostly useful in trading range markets as far as being a more precise key to when an index might reverse.
Nasdaq 100 (NDX) Index - Daily chart:
1475 is support, then 1440. Upside potential is hard to measure, but I have focus on the year's high for a possible key test of whether we're in a new up leg and 1560 is the yearly high.
There's more room on the upside for the RSI before it's screaming overbought.
Nasdaq 100 tracking Stock (QQQ) Daily chart:
The On-Balance Volume (OBV) indicator has mostly kept moving in an up direction and has tended to support a bullish bias. When it starts making a reverse pattern, it will suggest that momentum is slowing - that and any break of the up trendline.
Good Trading Success!