Option Investor
Index Wrap

A replay of 2004\?

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Not unlike the first trading session of 2004, stocks jumped higher at the opening bell on Monday, but then reversed those gains to finish lower.

A mixed reading from the Institute for Supply Management's manufacturing index, which showed robust order growth being matched by a jump in inventories, drew confusion and concern from traders. While the employment index fell to 52.7 from November's 57.6 gain, the decline in the employment reading wasn't overly surprising, as hiring at the manufacturing level tends to stall from the Thanksgiving holiday toward the end of the year.

Having discussed the possibility that tax-gain and tax-loss might influence trade in December and early January, some of last year's biggest percentage gainers and losers among the indices followed in our U.S. Market Watch may have been subject to some tax-related trade.

Two of the more notable sector losers from last year had the AMEX Gold Bugs Index ($HUI.X) 206.54 -4.08% and Semiconductor Index (SOX.X) 424.26 -2.08% not finding much of what I would consider to be a "tax-loss" bounce relief, if investors had been locking in all their losses in late December.

U.S. Market Watch -

The Market Volatility Index (VIX.X) 14.08 +5.94% rose for a third-straight session to close above 14.00. I make note of this as we'd have to go back to the November 3 close of 14.04 to find this level of volatility.

I make note of this as we saw strong price gains for the major indices continue from early November, where prior to the VIX's recent low reading of 11.14, there had been comment and observations that in 2004, VIX.X readings below 14.00 were quickly reversed, with stocks falling.

On November 3, 2004, the SPX closed at 1,143.

I've been monitoring the SPX.X option chain in recent days after Linda Piazza and I both noted some DIVERGENCE between the VIX.X and the VXO.X on December 29, 2004, when the VXO.X gapped higher at the open of that session's trade, while the VIX.X gapped lower.

Linda follows the VXO.X 14.20 +4.56% and S&P 100 Index (OEX.X) 572.33 -0.51% on an hour-by-hour basis, and perhaps she has made some notes at to suspicious option trading.

I'll note for that a third-straight session, most active puts have been well out the money in the SPX, with today's most active at the Sep.05 900 put (SXB-UT) (21,464 : 44,197), where near-term action had the Jan. 1,240 call (SZP-AH) (11,876 : 8,346) and Jan. 1,175 put (SPT-MO) (10,162 : 33,309) the top three most active options.

What I've been seeing is some longer-term out the money puts, at a rather low price, being the larger volume trade the past three sessions, where "excessive" buying of these puts can have VIX.X rising from an extremely low level of volatility.

While today's action in the 1,240 calls (SZP-AH) was at an average high/low/close of $2.87, I would have to think it was largely call selling (lower VIX.X) and if today's average premium was added to the 1,240 strike, would come pretty darned close to the newly calculated MONTHLY R2 in our pivot matrix for the SPX.X.

At the same time, if I were to take the 1,175 strike of the Jan. 1,175 puts and add the average price of $3.58, I can come close to the MONTHLY S1 of 1,184.68. My bigger note at this time would be that the 1,175 put action was a recent "Max Pain" theory value for the SPX January expiration, but that has now moved higher to 1,200, where there is a lot of open interest 25 points either side of the 1,175 strike for January.

Based on some of the very late-session selling/declines on light volume trade for Thursday and Friday, and today's action, even before the 10:00 AM release of economic data, my gut feeling is that there was some pre-determined selling already set for today's session.

Perhaps some "dollar bears" took some gains today, as the U.S. Dollar Index (dx00y) 81.37 +0.64% rose rather notably considering an "inline" ISM report.

Market Snapshot / Internals - 01/03/05 Close

Volumes at both the NYSE and NASDAQ returned to that found just prior to the Christmas holiday.

Last week, I didn't think we could read much into the internals, and price action of the major averages, as it not all market participants were around to cast their votes.

However, on Friday, I thought to myself that today's trade might be more telling and that I would think a bull wanted to see new highs at BOTH the NYSE and NASDAQ reach something above the 200 level, regardless of what today's price action brought (regardless as I don't know what impact continued tax-gain/tax- loss selling might be having).

A couple of weeks ago, when both the NYSE and NASDAQ 5-day NH/NL ratio's were easing lower, I said that when the major indices most likely resumed bullishness for their "Santa Claus Rally," I wanted to keep a close eye on the NH/NL indications, and compare them to what we observed in December, January and February of last year.

While today is just one day of trade, just as January 2, 2004 was one day of trade last year, both look pretty much the same. If I could revisit my "feelings" from January 2, 2004, I'd probably say they felt the same too as it relates to the market's internals.

On January 2, 2004, the first trading day of 2004, the NYSE 5-day NH/NL ratio was 97.7% and its 10-day NH/NL ratio was 98.1%, with the 5-day SMA just falling below its 10-day NH/NL ratio. Almost identical to that found today.

On January 2, 2004, the first trading day of 2004, the NASDAQ 5- day NH/NL ratio was rising 98.4% and the 10-day NH/NL ratio was just reversing up 3-boxes to 96.3%.

There are a lot of similarities already developing this year (2005) as we saw in early January of last year.

Are we looking at a replay of 2005?

Many traders and investors will be monitoring the first five (5) trading days of 2005, where since 1950, the Stock Trader's Almanac notes that of the 34 up "first five days," 29 were followed by full-year gains. Heck, make that of the 35 up "first five days," 30 were followed by full-year gains, as last January, the SPX traded up five days after its January 31, 2003 close of 1,111.92 close. Including 2004, this would have the "first five day" predictor of market direction bullishly accurate 85.7% of the time. Of the five exceptions, 1994 was a flat year, and four were war-related.

Of the 20 down First Five Days, 10-years were down, 10-years were up.

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

Early gains didn't quite get a test of overlapping resistance at the 1,218-1,219 level, though the SPX.X did just pierce its WEEKLY R1 of 1,217.9. A meteoric-looking 21-day SMA and MONTHLY Pivot/WEEKLY S2 would provide near-term support. If the first five day's of 2005 are going to post a gain, then WEEKLY Pivot of 1,211.46 provides the modest-looking gain.

Prior to my checking of January "Max Pain" for the SPX.X, it showed a reading of 1,175, which is correlative with the MONTHLY 19.1% retracement of 1,174.07, while today's check of January "Max Pain" would be marked at the MONTHLY Pivot of 1,201.00.

Friday night I was reviewing just how the SPX traded within its MONTHLY pivot matrix back in January of 2004. On the above chart, I make note that the SPX traded up to its MONTHLY R2, and never did trade its MONTHLY Pivot.

With internals measures almost identical to that found in January of 2004, just one year ago today, I think it important for bulls to defend the WEEKLY S2 if we're going to see some bullish "January effect" take place.

In tonight's Market Monitor archive, at 07:17:30, I posted the December 2003-February 2004 MONTHLY Pivot Matrix

Pivot Matrix -

Jeff Bailey

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