I think we are getting close.
Pssst, don't look now but I think a rally may be about to happen. Move slowly and carefully to your PC without drawing attention to yourself and plan some trades for next week. Have you ever been driving in the car and had a cop pull up behind you? You are trying to be nonchalant and appear carefree even though you were driving 15 miles over the limit. When the others in the car ask why you are slowing down, you say "don't look now but there is a cop behind us." What do they do? The jerk around to look so fast they could get whiplash. (do you know that in police circles, when they are bored they pull in behind cars just to see how long it takes for the occupants to pull this trick?) Back to the subject... We had the mother of all NAPM spikes on Friday two days before the FOMC meeting and the market did not crater. Yes, it went down but it recovered nicely. Take a look at the DOW chart. We had a very bad week with several tests of old lows and yet finished the week only six points lower then we started! Take a look at the market info on the top of this page! Every major index except for the Transports finished within 10 points of where it started the week!
After trading under 10100 on Tuesday the Dow held a very tight range between 10200 and 10300 the rest of the week. Even after very bad inflation news on Friday! Notice also the flattening of the advance/decline line. This could just be a plateau before the next drop or a real bottom.
The Nasdaq chart looks a little more bearish to me with the lower highs all week but still we tested 2700 on three days with a strong rebound each time. We do need to trade above 2780-2800 again to make me comfortable enough to say 2700 was the bottom. A lot of the Nasdaq weakness came from the Taiwan earthquake not from stock weakness. With chips and PC makers taking a bath in downgrades the index is holding up very well. Dell Computer, which makes up a large portion of the Nasdaq, took two huge hits on Friday and survived. Dell was downgraded by C.S. First Boston and Salomon Brothers yet finished the day up. Dell dropped to as low as $39.75, don't you wish you had some $40 limit orders in when it happened, but recovered to close up +.50 at 42.50. MSFT has been hammered but has held $89 for over a week. Dell held very strong at $40. Intel is holding at $74 and CSCO is rebounding off support at $67. QCOM held support at $184. The only major Nasdaq leader that is dropping is WCOM on the Sprint speculation. I don't see the Nasdaq giving up much ground from here. 70% of the Nasdaq stocks are under their 200DMA already and UP is looking like the path of least resistance.
Actually I was very surprised at the market on Friday. After the futures closed down -10.50 just before the open I thought -10000 was possible on a bad NAPM report. Boom! The NAPM report showed inflation was gaining speed with a jump from 54.2 in Aug to 57.8 in Sept. The prices paid component, where inflation shows up the most, jumped to 67.6 from 59.8, the highest level in five years! The highest level in FIVE YEARS! Consumer spending jumped from a +.4% in July to a +.9% in August and personal income jumped from +.2% in July to +.5% in August. Good grief! Inflation is rampant, DOW 9500 here we come. You know the rest of the story. The Dow dips to 10211 on the news but promptly rallies right back. It flattens for the rest of the day as bonds go through the floor. Another wave of selling hits at 2:30 and forces another break of the 10200 bottom but only for a couple minutes. Bargain hunting breaks out ON A FRIDAY BEFORE A FED MEETING WITH INFLATION RAMPANT. Can you spell B-O-T-T-O-M?
Contrary to any market logic the 10200 held and it looks like a rally is about to breakout. The basis for the rally is two fold. One, the market is terribly oversold and earnings are beginning next week. Two, it appears that nobody is concerned about a Fed rate increase. The telegraphing of an impending rate increase by Fed heads has not happened. Remember the last FOMC meeting? They talked up the rate increase for several weeks before the meeting. It was called the most publicized rate increase in history. This time the Fed heads have been relatively quiet. The last two times Greenspan spoke he did not even mention economic policy. Lawrence Meyers did take a jab at the market on Friday with a "the Fed must be an anchor for sustainable growth" and "the markets are considered in our decisions." Other than that it has been all quiet on the rate front. Unless of course you consider the bond yields at 6.16% intraday on Friday. Still the market did not crater as one would expect.
The consensus appears to be that the Fed cannot afford to raise rates this close to Y2K. They do not want to be blamed for a credit crunch and decreased liquidity. If the market tanks on Y2K fears the Fed doesn't want to be the scapegoat. Others have pointed out that the Fed has authorized the printing of $100 billion in extra currency to have plenty of cash available in case there is a run on banks. Would it make sense for the Fed to raise rates and make it harder to use the money? The best guess is the Fed will change the bias back to tightening on Tuesday but leave rates alone. The stronger bias is used to warn the markets that an increase can come at any time, just not today. This leaves their options open and keeps them blameless if the market crashes. Market analysts think there is a win win situation developing here. No rate increase is a tacit blessing of the economy and the market. Since a rate increase is already priced in then a rate increase could be taken in stride without another big drop. The contrarians however believe that the Fed cannot be seen taking back the third rate decrease from last year without a major drop. Another factor in the Feds normal rate decision is the Jobs Report. The Sept report will not be out until Friday. No help there. The Fed appears to have their hands tied which is good in my book. Lets just hope they see it this way also.
Another reason I think we may have seen a bottom at 10200 is the bounce in the small/midcaps. Don't look now but there were a lot of small/midcap stocks that recovered lost ground in the last two days. I looked at over 500 charts this weekend and there were hundreds that had an upward spike in the last two days. This means there is money coming back into the market and nibbling on the most depressed sectors. Check out these examples of what I am talking about.
Another way of looking at the market direction which I talked about last week was analysis of the Dow 30 stocks. This weekend the number of Dow stocks that are lower than one week ago total only nine. Most have a ski jump on the end of their downhill slide. Here are the Sears and Goodyear charts as an example. For the complete list click here:
Remember Friday was a down day for the Dow but most Dow stocks were up. The culprits were some big names.
MO - Phillip Morris - new trial news
Several of these could bounce soon and could add to the positive momentum from the other 18 Dow stocks. (3 are flat) The earnings warning cycle is almost over with most of the big names already past their warning dates. Earnings start this week with some big names which should help refocus traders away from interest rates and economic reports. If we do get through the FOMC meeting without an increase but with a new bias to tighten then the next hurdle will be the jobs report on Friday. A very bad jobs report could cause Greenspan to use the bias authority to pull the trigger on another increase but the chances are slim. It would have to be a very bad report.
I would say the trading light is green if the market is positive and moving up on Monday/Tuesday with positive advance/declines. Cautious traders could wait until after the FOMC meeting before opening new long positions but then you are staring the jobs report in the face. (if trading was easy, everybody would be millionaires) I would start out small and then add to your positions if everything continues to go according to plan. This is October and the bottom could fall out at anytime. Any oversold rally could reverse as soon as the pressure is relieved. Protect your positions with stops and stick to them. So wait until your family is curled up in front of the TV and then ease out of the room and back to your PC. Be quiet, we do not want to give the bears any advance notice as we plan trades for the next week. We may only have a few days before oversold is over and we want to make the most of it.
Above all, avoid emotional trading. The herd is always wrong in both directions. If you wait until everything is going your way then it may be too late. If you wait until the Dow is up strong six days in a row to confirm the upward move, then it is already too late. Profit taking could then occur at any time and you bought in at the top. Same with selling. If you do not place stop losses and stick to them, you will eventually find yourself saying "if it drops another -$2 I will sell." Then after it drops $2 you say to yourself, "it has to turn around, I will give it another $1." Then, "well it is almost at support, just another $2." You all know the last sentence. "It is so cheap now, it is not worth selling, I will just keep it and hope for a miracle." Your option has dropped 95% while you talked yourself out of taking action. The bottom of any cycle is when YOU finally sell. That is the key. Sell early with stop losses and let somebody else ride it to the bottom. You can buy theirs much cheaper and ride them back up. Anybody can buy options. The secret is entry/exit points. This separates the winners from the losers. Everybody has losses from things we cannot control. Winners only take small losses. It takes a 200% profit to make up a 100% loss.
WAIT FOR AN ENTRY POINT and sell too soon.