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Index Wrap

Market applauds rate hike

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The dollar, stocks and Treasuries all found gains by the close after the Federal Open Market Committee raised it target for the fed funds rate by 25 basis points to 2.25%.

Oil Service, chips and Internet sectors lead a broad advance, while networking lagged.

The very broad NYSE Composite ($NYA.X) 7,124 +0.31% closed at a new all-time high, while the broad S&P 500 Index (SPX.X) 1,203.38 +0.39% closed at a new 3-year high.

The Securities Broker/Dealer Index (XBD.X) 152.07 +0.85% closed at an all-time high, where key earnings tomorrow from Lehman Brother (NYSE:LEH) $85.65 +0.74% will be closely monitored. With Lehman's stock price nearing its March 2004 all-time high of $89.72 and consensus looking for the broker to earn $1.68 per share, which closely matches the $1.71 per share earned in the year ago quarter, its time to see if the bullishness this group began signaling with ferocity in late October meets further MARKET approval.

The Dow Transports (TRAN) 3,757 +0.86% closed at new multi-year highs and are closing in on an all-time high of 3,797 found in May of 1999.

The CBOE Internet Index (INX.X) 211.99 +1.4% closed at a new 52- week high.

U.S. Market Watch - 12/14/04 Close

I've got a lot of things I need/want to get traders and investors updated on, so I'll be brief regarding today's yield curve action, where we see further flattening.

The brokers can "get buy" a yield curve flattening with trade volumes and merger/acquisition activity, but the banks (BIX.X and BKX.X) can have a tougher time.

Some market participants wonder, or question "why the longer- dated" maturities would find buying when the Fed said nothing about not raising rates in the foreseeable future, where further Fed tightening would most likely come under the backdrop of economic growth, which would bring some type of inflation, even modest rates, for the future.

My "key indicator" to calm this worry at this point would be "junk bonds." Just last week, the PHF announced it would once again pay a $0.075 monthly dividend. If I multiply that dividend by 12 (12 months) and divide that amount by tonight's closing price of $9.99, I would derive at a dividend yield of 9.09%.

My thoughts have to be that to take on the higher RISK of "junk bonds" for a 9.09% annual dividend, compared to the safety of the benchmark 10-year yield of 4.132%, the MARKET still has to have some underpinning bullish thoughts for the economy going forward.

Market Snapshot / Internals - 12/14/04 Close

At the beginning of tonight's Index Wrap, I "focus" on new highs. This is a focus of tonight's wrap and will be discussed rather thoroughly. Why? This was something I said I would do a couple of weeks ago should the NASDAQ Composite and NYSE Composite challenge their recent or longer-term 52-week highs after we did see both the NYSE and NASDAQ NH/NL indications reach some very strong, yet "overbought" readings.

While the NYSE goes on to CLOSE at another all-time high, the NASDAQ Composite (COMPX) closes at a new 52-week high, but didn't get a "convincingly" bullish close above its recent 12/03/04 intra-day high of 2,164.63.

I want to know why, and see if there is any reason for concern.

NYSE and NASDAQ NH/NL measures - 12/03/04 high comparison

With the NYSE Composite ($NYA.X) 7,124.61 +0.31% making a new 52- week high (12/03/04 prior high) and the NASDAQ Composite ($COMPX) 2,159.84 +0.52% challenging its recent 52-week high which was set intra-day on 12/03/04, I wanted to quickly check our bullish/bearish leadership indicators and the NH/NL readings.

Both the NYSE and NASDAQ new highs are well off those readings found on or just around the 12/03/04 benchmarking of prior highs, but we are seeing some improvement, or rise in the shorter-term 5-day NH/NL ratios (columns AE and AI), which makes sense as the daily ratios (columns AD and AH) improve.

If there were one sign of BEARISH divergence that I see, it is that today's NASDAQ NH/NL daily ratio (column AH) as not as bullish as that found on 12/03/04 at an almost exact price level comparison.

Let's note that 12/09/04 was a recent inflection LOW from PRICE in both the NYSE and NASDAQ.

What I think a TRADER and even an INVESTOR will do tonight, I make reference of the December 9 price lows, where without continued bullish progress in the NH/NL indications, we would then become alert to bullish leadership falling off, and downside PRICE action.

I'm going to quickly show the NYSE NH/NL chart, where on 12/13/04 we would have seen the 10-day NH/NL ratio (column AF) find a 3- box reversal with a 90.00% reading after reaching 96.00%, but not 98.00% on 12/06/04.

NYSE NH/NL Chart - "f"ive day and 10-day ratios

Two things that I am currently thinking about in regards to the NYSE NH/NL indications. One is that we're in an historically bullish season, which tends to run from October (A) to May (5). Two is that there is very strong bullish leadership, which is resting a bit at the NYSE right now. First real sign of BEARISH leadership taking hold would be a 10-day NH/NL ratio falling to 62%. Trader and investors may take note how last year the NYSE 10-day NH/NL ratio stayed at readings of 98% to 92% from October (A) until March (4).

Let's take a quick look at the NASDAQ NH/NL chart.

NASDAQ NH/NL Chart - "f"ive day and 10-day ratios

The NASDAQ's 10-day NH/NL ratio would currently have to fall 3- boxes to 84% for it to reverse into a column of O. Traders and investors will probably note the pattern of higher highs and higher lows from both the "f"ive day and 10-day charting as if bullish leadership expands, then rests, then expands, then rests. The NH/NL indications are a great way to keep "track" of the October-May seasonal bullishness that tends to grab hold of the U.S. equity markets. My thoughts are that for a historical bullish tendency to remain, then bullish leadership needs to hold in there.

Current NH/NL Analysis : The recent pullback in the NH/NL ratios does give some upside room for further expansion, which can lead to higher prices for both indices. The continued test for trader/investors is to monitor these internal readings for bullish or bearish leadership.

Here's a quick update of the NYSE Composite ($NYA.X) chart with the various "stacked" (blue) and "fitted 38.2%" (pink) retracement.

NYSE Composite ($NYA.X) - Daily Intervals

It is hard to believe that we could see a "short squeeze" in an index that holds over 3,000 stocks, but when bullish leadership is strong and overhead supply becomes limited, things can get out of hand. An "ultimate" goal for a bull in my mind would be the RESULTANT 7,258 level from the "fitted 38.2" at 6,611. The ONLY reason we placed the "fitted 38.2%" retracement on the NYSE was if it broke to an all-time high.

If there is one thing I do not like about my retracement at this point, it is that it doesn't "explain" the 12/09/04 low. Why did the NYSE stop there? I'll have to work on that. If I can perhaps explain that low, then I might also be able to better identify a higher "yellow" zone of resistance.

NASDAQ Composite (COMPX) - Daily Intervals

The COMPX is nowhere near its all-time highs of 5,000, and while today's CLOSE is a new 52-week high close, this bull would have liked to have seen a little more conviction among buyers to press this very broad index above the 12/03/04 intra-day high of 2,165.

What should be concerning to any bear at this point is that in January of this year, the very broad NASDAQ Composite Bullish % ($BPCOMPQ) which we update each morning at 09:00 AM EST rose to as high as 76% before falling to 34% bullish in late August as the COMPX fell to 1,750. Today's (Tuesday's) action had this very broad bullish % rising 0.34%, to 59.78%, with approximately 10 stocks generating reversing higher point and figure buy signals.

We will continue to test our strength/weakness measures for the internals, but I would have to think that SHOULD this broad market bullish % get anywhere close to 70%, the COMPX isn't going to be trading below 2,150.

What "has to happen" for the very broad NASDAQ Composite Bullish % ($BPCOMPQ) to rise higher? I would have to think that the NASDAQ NH/NL indicators need to continue to build and hold bullish leadership.

Pivot Matrix -

If you're a trader looking for the toughest and most "unpredictable" trade in this market, then look no further than the QQQQ into Friday's close. A wild swing from Research in Motion (NASDAQ:RIMM) $85.44 -5.16% from $103.56 to $82.18, upcoming quarterly expiration on Friday, and 8 components being removed, and 8 new stocks being added may provide some volatility.

Only the Dow Diamonds (AMEX:DIA) $106.76 +0.29% have yet to see a trade at their MONTHLY R1, and the DIA missed it by a penny. A downgrade of Alcoa (NYSE:AA) $31.75 -1.73% didn't help, and my "key stock" in 3M (NYSE:MMM) $78.50 +0.02% (both are deep cyclicals) has the bullish side of me searching for clues or reasons to be more bearish.

If I can come up with any, that the market doesn't continually disprove, then I'll let you know!

Jeff Bailey

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