Remembering market cycles
Sometimes it pays to review good entry and exit management. Often in the euphoria of a rising market (much like we saw in the final three days of last week) or the noise of media commentary, we ought to remind ourselves that nothing goes up (or down) in a straight line, and that there will be down days even when the market is doing its best "rocketship to the moon" imitation. Given that the DJIA launched 500 points between Wednesday afternoon and Friday of last week on NYSE volume exceeding 1 bln shares, it was due for a pullback. Today, the pullback was orderly, with market internals actually still showing strength, despite the numerical loss. This is good, especially for target shooting our entry point. We want the market to come to us. We don't want to chase the market. And by the looks of today's close, the trend may continue into tomorrow morning. Thanks also to last week's favorably received GDP and ECI numbers, inflation isn't as big a concern, which served to drop long term bond rates a quarter of a point from 6.40% to 6.15% during the same three day period. That's a fast drop, and will be subject to some back filling just because of the sharp initial downward move. We saw a bit of that today as rates edged slightly up to close at 6.18%. Even so, sellers couldn't get a strong grip on today's market. We'll get to the technicals in a minute, but let's get right to the numbers.
The DJIA closed down 81 points today at 10,648. Compared to the billion shares a day traded on the NYSE last Thursday, today's volume was modest at 842 mln. The action was sedate, the selling orderly, with no panic or "have to sell" mentality apparent. Investors appear comfortable at this level, seeming to have only mild profit taking on their mind. However, we caught one media analyst complaining of a lack of short covering. His take was that Shorty still thinks there's plenty of room for the market to fall. Actually, anybody that sold short or didn't cover a short position last Thursday or Friday is either bleeding from not buying too soon (remember, you have to buy to cover a short position) or from trying to catch a falling knife (probably lost some fingers in the process). If the trend is your friend, there probably are not many shorts left with enough blood to sustain life. Thus, it should come as no surprise that shorts are not covering. For the myopic reporter, we can only say "right facts, wrong conclusion". Anyway, back on the NYSE despite the negative number, internals held up well in a 50/50 split of advancers to decliners. New highs were fewer than new lows by 73 to 90 - no blood in the streets here. While re-arranging your sock drawer tonight, ponder this thought: the addition of MSFT and INTC to the DOW-30 had no psychological effect in today's trading. It was a real non-event.
(A note of clarification: the addition of INTC and MSFT to the DJIA, typically the home of NYSE issues, did not remove these two from the NASDAQ. It's Dow Jones' average and they can add or drop whatever stock they want. Now, both the NASDAQ-100/500 and the DOW-30 (or DJIA) will include both issues, making them a bit more closely related.)
The only caution flag we throw here is that the DJIA closed at its low of the day right on its 50-dma, a level of current support. This makes technical watchers nervous, since it opens the possibility that we may in fact have reached another level of resistance, which we will then fall through. However, technical traders should recall last week's ECI and GDP release (not to mention today's ho-hum NAPM survey, which was quickly disregarded) portends low inflation and lessens the possibility of a rate hike on November 16. In short, the sentiment appears strong enough to steam-roll the technical indicators borne of coincidence. Just be sure to keep Friday on the radar. While we really don't expect inflation to rear its ugly head given last week's benign reports, that's the day the Unemployment Rate and Non-farm Payrolls are announced, something Greenspan will pay attention too, as the FOMC meeting on November 16 moves in.
On the NASDAQ, we ended with a whopping one-point gain for the day at 2967, which qualifies as a new record despite it being the low of the day. Actually the index made a run at the 3000 mark but fell short early in the day never to return. Technology issues took some darts in a round of profit taking, but more from the report of another large earthquake in Taiwan, thus rattling the metaphorical earth under chipmakers, including INTC, which had been up in the morning. The bright spot was ORCL, which benefited from Merrill Lynch raising its price target to $60 following a "good meeting" with management. They are convinced Larry Ellison is going to deliver the growth he promised when ORCL last announced earnings. Anyway, advancers trailed decliners 19:21, a negligible loss given volume of over 1 bln shares traded, and a close at the low of the day. The real show of strength was that new highs trumped new lows 193 to 99. This is a real positive, again given the strong volume despite the low of the day close.
One thing we want to point out - some financials gave back a few cents today as interest rates crept up 3 basis points, however, Morgan Stanley added AIG, BK, MEL, and CB to their model portfolio. As an adjunct, we'll be looking at some of the online brokerages as potential plays, perhaps in the covered call section, since the increased brokerage volume portends new revenues not anticipated due to poor outlooks based on their last quarter. Plus, they didn't participate in last week's rally and may need to play catch-up this week.
Okay, so what about the rest of the week? October is officially over, which is a psychological positive. Non-farm payroll and Unemployment reports are out on Friday, which should be within tolerable limits given the benign inflation indicator reports from last week (ECI, GDP), though we expect some jitters prior to Friday, barring any other news that might grab more investor mindshare. If the numbers are well received, many will take the view that the FED won't raise rates on the 16th, which could spark a tasty Q4 rally. Now that INTC has said its revenue stream won't be particularly affected by Y2K spending, others could make the same discovery in its wake. In the short term, today's profit taking lacked conviction, while market internals remained positive. The down side is that earnings season is coming to an end, which means the market will need to find something else to focus on if it's to keep moving up. The season is winding down. Overall, we have reason to be cautiously optimistic and think there will be some good trading opportunities this week. Plan your trades; trade your plan; remember market cycles; and sell too soon.