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Inflation, inflation, inflation...

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         WE 7-30          WE 7-23           WE 7-16          WE 7-9
DOW      10655.15 -255.81 10910.96 - 298.88  11209.84 + 16.14 +54.46
Nasdaq    2638.49 - 53.91  2692.40 - 172.08   2864.48 + 71.41 +52.05
S&P-100    683.29 - 15.59   698.88 -  34.91    733.79 + 10.91 + 6.66
S&P-500   1328.72 - 28.22  1356.94 -  61.84   1418.78 + 15.50 +12.06
RUT        444.77 -  3.61   448.38 -  16.88    465.26 +  7.28 + 1.47
TRAN      3333.24 - 48.25  3381.49 -  20.38   3401.87 - 25.45 -88.67
VIX         25.83 +  2.07    23.76              18.13          19.09
Put/Call      .72              .58             .46              .46

Inflation, inflation, inflation...

The Dow has dropped -600 points (-5.3%) since I called the exact top on Sunday, two weeks ago. The Nasdaq dropped -237 points (-8.2%). I wish I could point to some support level and say the carnage is over but I don't think it is over yet. The Nasdaq has shown some strength in holding above 2620 for several days now. After all, an -8% in two weeks is significant and we should be resting as the battle between sellers and bargain hunters is played out. Eventually I think we will see 2550 as the next support level and then 2400 below that. The Dow has strong support at 10,500 and I think we will test that this week.

Both indexes closed at almost the lows of the day on Friday which does not bode well for next week. I do feel we have a good possibility of a short relief rally again Mon/Tue. This relief rally could be squashed early if the sellers decide to exit promptly and grab some 6.1% bonds to avoid the rush later in the week.

The Fed does not have to hunt for signs of inflation to appear. They are popping up almost daily and the fear now is the Fed will not wait until the August 24th meeting to raise rates. Many fear a rate hike this week. This would be very bad this far in advance of the meeting. Analysts would then worry about a third hike at the meeting just to snuff the inflation fires for good. No one expects more than three hikes at present. The theory is the Fed will take back the three cuts from last fall to put the economy back on a slower pace. Greenspan is not a fast mover. He prefers to do things in small increments to avoid sudden shocks to the market and economy.

While my market view is bearish over the next several weeks there are some pockets of resistance forming in the Nasdaq. This resistance could help keep the Nasdaq from a total washout in the next several days. Intel for instance, only closed down -.50 after trading over recent resistance of $71 during the day. Dell closed down only -.38 and looks like it will hold over $40 unless the market really craters. Qualcom closed down only -.38 and has successfully held $152 support several times recently. Cisco closed up +.38 and actually looks like it is gaining ground on its support at $61. Yahoo looks like it is resting on support at $135 and possibly building a base here. Microsoft however is tanking, -1.13, but it is news related. The Justice Dept breakup news is weighing heavily on the stock price. Actually I think a breakup of MSFT would free even more value for stock holders but that is another topic. Although these stocks held the line on Friday, nothing is sacred if the sellers start running for the exits. When the selling is over these are the stocks to play.

The Friday sell off was accentuated by light volume again and this is another reason we could see a bump Mon/Tue. The summer volume is always light and the NYSE only traded 725 mln compared to the Nasdaq 873 mln. Stock funds are still reporting negative cash flows as traders move money out of stocks and into money markets. Huge bond offerings continue to drain cash as well. New IPOs are becoming a daily occurrence which also add to the cash drain.

As prudent investors we need to continue to be cautious for another couple weeks. There is really still no reason to open new positions on other than story stocks that can buck the market trends. The market trend of flat to down could continue until the August 24th Fed meeting. That meeting should be the catalyst for the market. Normal market cycles show August to be flat to down and the next signs of life to be after Labor Day in September. This is not exciting news for call buyers but good news for put buyers and call sellers. Cash is still king and gives you many options.(pun) Yes, there are still calls on the recommendations page but that does not mean you should rush out and play them. Please, wait for the market to turn around before opening new call positions. It is entirely possible that NO CALL BUYING opportunities will present themselves this week!

The big economic report for the week will be the Non-Farm Payrolls for July on Friday. This is the next sign post for the inflation guru.

I would still be an OEX put buyer on any strong market spike.

Good Luck, Sell too soon.

Jim Brown
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