Option Investor
Market Wrap

Trick or treat?

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        WE 10-23         WE 10-16         WE 10-9          WE 10-2         
DOW     8452.29 + 35.53  8416.76 +517.24  7899.52 +114.83  -244.08 
Nasdaq  1693.86 + 72.91  1620.95 +128.45  1492.49 -122.47  -128.61 
S&P-100  527.78 +  6.83   520.95 + 37.31   483.72 -  2.77  - 19.78 
S&P-500 1070.67 + 14.25  1056.42 + 72.18   984.32 - 18.25  - 42.11 
RUT      367.05 + 24.18   342.87 + 24.47   318.40 - 31.31  - 19.31 
TRAN    2777.01 -  3.86  2780.87 +351.35  
VIX       30.67            35.84            45.69            42.36
Put/Call    .64              .61              .81              .85

Trick or treat?

That is what investors are wondering this weekend after the Friday
drop on profit taking. Was the 700 point bounce a Federal Reserve
treat or a bear trap rally trick? 

This pundit is leaning to the treat side. I feel the Fed just gave
us a taste of the candy and will continue to tantalize our taste buds
until diet doctor Greenspan says enough sometime next summer. 

As I said last week, several times, there had/has to be a period of
"rest and test" after such a strong bounce up. Wednesday and Thursday
was the equivalent of running in place as we spent time in negative
territory but sprinted to a positive finish at the close. The drop
on Friday was just another loss to the Yankees. With the entire
New York trading profession out on the street for a large part of 
the day to watch the parade, the lack of interest in the market was
apparent. The drop came on the lightest NYSE volume in a month.
Analysts like to see light volume on declines. The Nasdaq however
closed out its strong run for the week with more than moderate
volume but far less than the billion share up days we are getting 
used to seeing.

So I am not convinced that we topped out last week. The advance/decline
ratio for the week was strongly positive. There is no sign of any 
other lurking LTCM type hedge fund about to meltdown. The Fed heads
went out of their way last week to tell us they see no recession on the
horizon and if they did they would head it off at the pass. Liquidity
is returning to the markets. The Russell-2000 has had a great two
week run with no sign of a downturn.

Let me try something different today. They say a picture is worth
a thousand words so a chart must be worth more.


Look at the Dow chart above. See how the last three days are leaning
to the down side with lower highs each day. Also note that the volume
was dropping each day as well. What the chart does not show you was
the reason the Dow was dropping. Exxon, Chevron, 3M, MCD all took 
strong losses the last three days accounting for -50 points or more 
each day. Was the entire Dow sick? No. Check out this table.

STOCKS IN THE DOW - 10/23/98

Company    Price   Change  Week CHG 

WMT        68.00    +1.19  + 1.38 Up +$16 last 3 weeks
KO         70.25    +1.13  + 1.06 Up +$16 last 4 weeks
S          44.75     +.88  + 2.13 Better than expected earnings
JNJ        83.75     +.63  +  .63 Setting new highs
PG         87.44     +.56  + 3.69 Close to new high
HWP        57.96     +.13  + 3.94 Up +$10 last 2 weeks
GE         86.56     +.06  + 2.75 Up +$16 last 2 weeks
MCD        64.50     +.06  - 3.69 Post earnings downgrade
MO         50.00     -.13  + 2.00 Setting new highs
DIS        27.75     -.13  + 2.25 Moving up slowly
IBM       141.56     -.25  + 5.63 Up +$25 last 3 weeks
CAT        47.06     -.19  +  .06 Flat - going nowhere
GT         54.88     -.39  + 1.88 Up +$10 last 2 weeks
XON        71.25     -.50  - 4.88 Earnings warning
CHV        80.96     -.56  - 6.00 Earnings warning
T          63.81     -.56  + 3.06 Now at new high
BA         35.69     -.75  + 3.44 Earnings caution
ALD        37.56    -1.00  -  .44 Problems with AMP earnings
UK         39.81    -1.06  - 1.94 Selling before earnings Monday
EK         73.50    -1.06  - 1.06 Sliding after bad earnings
GM         60.31    -1.19  - 1.38 Profit taking on $14 gain
AXP        87.63    -1.38  - 1.25 Profit taking on $20 gain, 
AA         76.06    -1.44  - 3.19 Profit taking on $20 gain
IP         45.56    -1.63  - 2.31 Missed earnings
UTX        87.94    -1.81  + 4.44 Profit taking on $20 gain
DD         59.13    -2.50  - 5.00 Conoco backlash
JPM        93.00    -2.63  + 3.50 Post earnings depression
MRK       130.56    -2.88  - 5.44 Profit taking & downgrade
MMM        77.44    -4.00  - 7.69 Missed earnings

The only stocks seriously down were OIL stocks and several with
earnings problems. Very few should continue down. The top of the
list is either setting new highs or actually profit taking from 
huge gains the last three weeks. Only about six were really down
hard. What you would notice the most is simply the large number
of Dow stocks with double digit profits the last two weeks. We
could still see some profit taking here on some of the leaders.

Now take a look at these charts. The S&P-100, S&P-500 and Russell.


Both S&P charts are still climbing. They are leveling out as they
approach resistance at 530 and 1083 respectively but still show
strength that the Dow does not show on the surface. This is the
problem with an index that only has 30 stocks. (Dow) It can't
accurately show the true picture of the market. If one or two
stocks stumble hard the entire index crashes. Unfortunately
we live and die by the Dow as a measure of the market.

Look at the Russell-200 chart. It has made a much stronger gain
over the last two weeks. It was the only index to finish positive
on Friday. This is the index that counts this week. As long as the
Russell continues upward the rally will continue. This is the
real sign of money coming into the market from the sidelines.
The blue chips are the first to move because they are the most
liquid. The smaller stocks are the last to move because investors
want to see confirmation before committing money to a stock they
may not be able to sell fast without taking a bath.

We have our work cut out for us. If you take a good look at all
four charts you will see all four sitting right at their upward
resistance. About 8600 on the Dow, 530 and 1083 on the S&Ps and
370 on the Russell. Is there any wonder why we paused last week?

Technicians see this as the real test of market resolve. We could
languish here for some time without any market push to get us
over the hump. All are pretty much in agreement that a breakout
here would be the sign to party because there is not any strong
resistance above these levels until we get to new highs.

We could see a couple weeks here of rest and test or even until
the Fed meeting on Nov 17th. We could experience some of the 
recent choppiness of +100/-100 days as we see where the new 
bottom has formed. 8350 on the Dow and 510/1025 on the S&Ps is 
my guess. Lets hope we are not afflicted with this plague again.

If we do go through this trial period we can still see some decent
gains in specific stocks. This will be another chance to pick out
the new leaders and be positioned for the next big run.

Any pause here could also be brief. Pit traders said on Friday
that the DEC S&P-500 futures were very actively traded with over
105,000 contracts changing hands. THERE WERE STRONG BUYERS ON
EVERY DIP. These traders seldom make heavy bets on the wrong side.

One of the stronger influences on the market is the perception
by the retail investor that the crash is over. In the week ended
Wednesday 10/21 $9.3 billion flowed back into mutual funds. This
is a huge amount of money and as long as the perception continues
so will the money. 

We have a full newsletter of long call plays again this week. 
Remember, just because they are listed does not mean buy them first
thing Monday morning. They are listed because they are good call
plays in a rising market. Wait until upward movement is confirmed
again. When the market starts back up you will have plenty to
choose from.

Make no mistake. The market has factored in the November rate cut
and any news that makes this less of a sure thing will be very
detrimental to the market. Earnings are starting to wind down.
Over 65% of S&P companies have announced and of the few that do
so this week there are not many notables. AXP on Monday is probably
the one to watch. Investors will want to see how consumers
spending patterns have impacted their earnings to forecast the
spending for the next quarter.

I feel like a drug addict without a fix when I am writing on Saturdays
without the benefit of the S&P futures on Globex and the market
activity overseas. Sundays are stressful until these indicators
come on line in the evening. As of 4:am Sunday morning, no one
is bombing, defaulting or melting down anywhere in the world and
that is a good sign. 

Wait, watch, learn. Be very selective about any trades until we
see which way the market is going this week. Plan your trades and 
when the time is right, execute your plan !

Good Luck


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