Impending boom or impending bust?
It depends on who you talk to but the actions of the Dow for the last two weeks are becoming increasingly disturbing. That loud noise you heard Friday afternoon was the Dow hitting the upper limit of our recent trading range, 11200, and stalling again. The Dow closed at 11,201 at exactly 4:PM but inched up another 8 points as late trades were settled. This was the second record close this week but don't start celebrating just yet. The total points gained this week were only +16. That's right, only +16 points for the week. Remember this was the week that saw very benign PPI, CPI, Retail Sales, Jobless claims, etc, etc. The market should be blowing out to the upside according to conventional wisdom. Instead the chart below shows the dead stop and the extremely narrow trading range.
The Dow this week was held up by the Nasdaq which hit three new record highs. The earnings this week were very good with many companies beating the street by big numbers. Next week will be very important to the future of any rally.
As you can see by this Dow chart, not only has the Dow stalled but the advance/decline line is now definitely trending lower. Again, this is very disturbing in light of the strong earnings season in progress.
The Nasdaq looks really strong but if you look behind the numbers on Friday you will see that of the top four Nasdaq stocks only one was positive. Microsoft was up +5.06 on news of a win in the trial against Bristol Technology AND news that they may create a tracking stock for their Internet businesses. This was an exception and likely a one day event. The other three pillars of the Nasdaq traded down even with MSFT soaring. INTC -.56, DELL -.69, CSCO -.56. This is not a good sign!
The most troubling factor to market technicians is the very low volatility. The VIX hit a twelve-month low of 17.7 intraday on Friday. The last time the VIX was this low was the day before the start of the July/August crash last year.
If you doubt the relationship between the VIX and the DOW simply examine the two year VIX/DOW charts below. There is an exact inverse relationship between the two.
Remember the old saying, "when the VIX is high it is time to buy, when the VIX is low it is time to go."
This is a very critical week. With millions of traders sitting with their finger on the sell trigger, watching for signs of a repeat of the last two years drops, every market event will be crucial. The only two events that should impact the market are the Housing Starts on Wednesday and the Greenspan testimony on Thursday. Housing starts could show an increase or decrease in the growth of the economy. This number is watched by the Fed.
Clearly the biggest event will be the Greenspan testimony to the house banking committee on Thursday. There is a strong feeling by some analysts that Greenspan will "bless" the recent CPI/PPI numbers and claim inflation to be non-existent and therefore kill any worries of another rate hike this year. The other side of the coin would be the camp that expects him to continue to be cautious and warn again that the Fed stands ready to continue raising rates to "preempt" any inflation problems. (and keep the stock market in check)
The Dow on Friday was held up not only by the Nasdaq but also by the July options expirations. With the major move up from 10,500 in June there were many call sellers forced to cover their positions last week. In spite of the heavy options covering we still were only able to add +23 points and traded in negative territory over half the day. Last Sunday I talked about the S&P, DOW and Nasdaq setting new highs two Fridays in a row and could we dare ask for three. We got the three, a triple triple, but you could not have seen it from the internals. The declines beat advances and were picking up speed at days end. Declining market breadth could be the first signs of the crack in the bulls armor. Secondly, the OEX (S&P-100) and the SPX (S&P-500) were both up on the big Microsoft gain. Microsoft is the biggest company in either index and will impact both strongly. MSFT is 9% of the OEX. Take away the MSFT gains on Friday and the OEX, SPX, NASDAQ and DOW outcomes could have been substantially different.
The only thing we need now is an international crisis to detract from market stability. OOPS! China attacking Taiwan maybe. All eyes are trying to avoid contact as the two Chinas trade verbal volleys but there is an all too real possibility that this could escalate into a real battle. You never know where the next market bomb could appear. Last week Argentina, next week China or maybe an inside stealth attack by Greenspan. Keep your eyes open and your ear to the news.
This week is packed with earnings from big names. Monday we will see IBM, MSFT, QCOM, BAC, C, DCLK, EGRP, LXK, S, TLAB, just to name a few. Tuesday is known as super Tuesday because of all the financial stocks that report. There will be no shortage of earnings news and the market should move up in reaction. Failure to move up would be another sign of things to come. Don't get me wrong, I would love to see the market breakout of the current range and run for 12,000. The internals are just not pointing in that direction. Please remember however that the longer we stay at this level the stronger the base and more likely a breakout to the upside. This week will be critical.
I would be cautious this week and look for direction before making a significant play. If the market explodes out of the gate on Mon/Tue and runs up significantly I would look at any major intraday reversal as a strong warning. Most major market changes come on the heals of a major move in the opposite direction. I would be a buyer of DJX or OEX puts if you see a major spike up intraday and then a pull back.
We have heard a rumor that Intel is going to enter the ISP business soon in a big way. Rumor has it that they are buying 120,000 servers from Dell which are being shipped in quantity to different parts of the country. Dell announced on Friday that they are going to start offering their Dell.net ISP service and would not be buying an ISP. Could Dell have seen the writing on the Intel wall and are trying to beat them to the punch? Rumor also has it that Intel is going to partner with a broadband company to jumpstart their ISP business. On Friday Cisco and Intel announced that Intel would start making high speed DSL modems compatible with Cisco's DSL equipment. Is this another way to get them into the prime ISP position for DSL accounts? Also in June Intel announced that it will colaborate with Hughes Electronics on a wide range of set top boxes that deliver Internet access to a television. On Wednesday Intel announced that it was restructuring several of its business groups to focus more on Internet opportunities. Intel recently invested in World Online International, an ISP which operates in 12 countries and has 815,000 subscribers. Anybody see a pattern developing here? Maybe we should look at any current pullback on Intel as a buying opportunity. Just a rumor but the more we dig the more we uncover.....
If you did not see it on Thursday, we started an "Insider Trading" section. This section will feature actual plays made by OIN researchers and staff and their reasoning behind the play. We received many positive comments about wanting to see more real life. You asked for it, you got it.
We are still looking for some additional researchers who are willing to commute by email. If you are a successful options trader then please email us if you are interested. (kimo@OptionInvestor.com)
Good Luck, Sell too soon.
As a single female which one of these would have been your best investment in 1978?
Another milestone was achieved on Friday other than records by the various indexes. Microsoft became the first company to exceed $500 bln in market cap. Bill Gates also became the first individual to exceed $100 bln in net worth. Larger than the Fidelity Magellan fund which just hit $100 bln this week.
PS: If you are only reading the email version and not viewing these sections on the website you are missing out. The imbedded charts and links are provide a much more visual image on the website than is possible in an email format.