Option Investor
Index Wrap

Looking for a bounce, if not, then some trouble

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I'm looking for equities to rebound tomorrow, and I'll give you some of my tests, where some of today's action, and some tests before stocks open for trading, if met, should find a nice rebound into Friday's close.

U.S. Market Watch - 01/06/05 Close

The past several days, I've been noting on my own at how the miners in the AMEX Gold Bugs Index ($HUI.X) and chip stocks in the Semiconductor Index ($SOX.X) seem to be mirroring each other. Both were among last years sector losers, and so far this year, neither group has the look that things have changed in early 2005. I'll just make note for now, but I have a feeling we'll be using this observation down the road.

Red arrows at the QQQQ, MSH.X, GSO.X and INX.X. I'll mention four stocks that represented the bulk of "tech weakness" today.

Sometimes, marriages experience a smooth sail from day one, while others begin with a shotgun at the alter and eventually things are called off.

A cursory glance of the QQQQ, the GSTI Software Index (GSO.X) 163.46 -1.63% and the Morgan Stanley High Tech 35 Index (MSH.X) 481.58 -1.09% would show either/or both Symantec (NASDAQ:SYMC) $23.18 -7.42%, or Veritas Software (NASDAQ:VRTS) $25.56 -6.91% atop the percentage loser list. Since Symantec (SYMC) announced its courtship of Veritas (VRTS), the market's reaction has been negative toward SYMC, as it doesn't appear to see a match made in heaven. CSFB and Marquis Investment Research chimed in with annulment papers in hand, downgrading Symantec (SYMC) as they don't see the synergies that Symantec and Veritas seem to have agreed upon.

Note: If a trader hold, or is thinking of establishing a bearish position on this marriage, I've found that the "best" play is to be more bearish on the company that is being acquired. In this case, Veritas. Why? Veritas agreed to the marriage for a reason. It might be that they saw some tough sledding ahead and felt it in their shareholders best interest to find a mate. If the marriage gets annulled, the acquirer (in this case Symantec) may pay some alimony in the form of a breakup fee, but the divorcee (in this case Veritas) usually gets questioned as to why they wanted to get married in the first place. Why couldn't they just go it alone?

For the Internet Index (INX.X) and again the QQQQ, shares of eBay (NASDAQ:EBAY) $106.18 -4.25%, which have been a major contributor to strength, provide the weakness. After nearly doubling in 2004, the first four days of "tax gain" selling may be taking its toll. Speaking of acquisitions.... one of the better "it makes sense" was when eBay bought PayPal.

In last night's Index Trader Wrap, I outlined some steepening yield curve action that I thought broader market equity bulls would want to see tomorrow, when the nonfarm payroll figures were released. Today was perhaps an example of that action. Buying in the shorter-dated 5-year note, which had yield falling 1.6 basis points to 3.695%, while the longer-dated 10 and 30-year yields stayed relatively calm.

Homebuilders got a little bid. Take some notes, whether you're long/call or put/short the homebuilders.

I'll touch on the 5-year bond's yield in a moment, and what it may tend to be saying not only about "inflation," but also the economy.

I still think CNBC's Rick Santelli is one of the better commentators, and analysts that the network has. Traders will tell him why they're doing what they're doing on any given day, but since Mr. Santelli has actually TRADED and can tie that with experienced reason, then traders can't "BS" him.

What Mr. Santelli said was taking place today, was pure positioning into tomorrow's nonfarm payroll data. We should have thought that the seasonal holiday pattern might slow hiring. As terrible as it is to get laid off during the holiday season, that's what happens too. This past week's jobless figures, which were released today, had bond traders quickly buying shorter- dated maturities, to compensate for a nonfarm payroll number that most likely WILL NOT BE TOO HOT.



And this is what traders want to be alert to. I (Jeff Bailey) would think it an UNPLEASANT SURPRISE if the nonfarm payroll numbers are TOO HOT.

In last night's wrap, I talked about the "Goldie Locks" trade.

Mr. Santelli hit the nail on the head today, or so I thought, when he said traders will be HAPPY with an inline 175,000 new jobs.

What would be a TOO COLD number? I'm thinking it would take something below 125,000. TOO HOT number? I'll go 25,000 above and say 200,000.

Market Snapshot / Internals - 01/06/05 Close

Other than the a/d lines, internals look somewhat similar to yesterday's. However, today's action, combined with recent sessions, has the NYSE NH/NL 10-day ratio falling to at least a 90% reading, and I'll chart a 3-box reversal.

NYSE NH/NL Chart - 01/06/05

The "f"s are the more recent five-day NH/NL ratio charting, while the X's (demand) and O's (supply) are the measures of the 10-day NH/NL ratio. I've marked dates at what I feel are three inflection points and important observations that a trader/investor would make as it relates to the bullish and lack of bullish leadership points. Just like a roller coaster.

Today's 10-day NH/NL ratio is now marked with a "1" as this is the first entry we would make for the month of January, 2005.

I can currently make the statement that the five-day NH/NL ratio is roughly equivalent to that found on December 14. I can also say that at today's close, the 10-day NH/NL ratio is roughly equivalent to that found in December (blue C).

The ratio's can only go as high as 100%, and as low as 0%.

I had some "fun" tonight. In order for the current 5-day NH/NL ratio to NOT fall to 82%, and assuming a "bounce" tomorrow would have tomorrow's DAILY new lows still at 16, the NYSE would need to print right around 290 new highs. I do not think that is achievable, but this is something I do from time to time, to get a feel for things. Several weeks ago we entered this type of mindset after a pullback, when we asked ourselves... "for these internals to improve, what most likely needs to happen to price." Sure enough, stocks rallied.

NYSE Composite Index (NYA.X) Chart - Daily Intervals

Since the NYSE 10-day NH/NL ratio is first to reverse lower, and alert to some intermediate-term sign of bullish leadership down presenting itself, this internals weakness should become a focus of traders and investors. Here's the same chart we reviewed Tuesday evening. Things "make sense" as to where things trade.

I KNOW that the 5-day and 10-day NH/NL ratios, just like a simple moving average are determined by what HAPPENED in the past. But I can only assume if they're to improve, then PRICE action is the eventual determiner.

5-year Treasury Yield ($FVX.X) - Daily Intervals

I marked the last two 5-year yield reactions to the nonfarm payroll figures. While bond traders, stocks traders and investors alike don't just focus on labor trends, you can see how it can draw a reaction from the bond market itself. Over on the left of the chart, when the 5-year yield was rocketing higher, that's when three nonfarm reports had the economy adding a total 885 new jobs to the economy.

Today's bond market action, while hardly visible on a daily bar chart, can perhaps represent what takes place in a single day for the yield curve, when the action comes from the shorter-dated maturities.

In this evening's Market Monitor, now archived so you can go read it, I outline what to look for from the bond market, when the nonfarm payroll figures are released. It will take place an hour before the stock market opens for trade.

Pivot Matrix -

Since we covered the 5-year yield ($FVX.X) and have some idea of what its fluctuation can do to the yield curve, I look at the correlations in the 10-year yield ($TNX.X) and make some assumptions, or scenarios now.

TOO HOT on the nonfarm, and I'd think the 10-year yield jumps through the DAILY R1/WEEKLY R1 correlation. This could be good for the yield curve (if 5-year stays put), but could be a negative for the homebuilders. Watch those homebuilders!

Now, the PINK boxes with a left arrow at the 10-year yield ($TNX.X) WEEKLY Pivot and DAILY S1. My thoughts here are that TOO COLD a nonfarm, and the bond market reaction is "economic slowing" run to safety of these yields!

Now see the PINK boxes for the SPX.X at DAILY S1 and MONTHLY S1, which perhaps a steepening yield curve has the SPX closing back above? That's right! That's our support level for tomorrow, which the MARKET will decide if it likes or dislikes the nonfarm numbers in the greater scope of things.

Today's close on the QQQQ. Coincidence? I don't think so.

Jeff Bailey

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