Option Investor
Market Wrap

Bonds starting to weigh heavily on the markets.

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        WE 11-26         WE 11-19         WE 11-12         WE 11-05
DOW     10988.91 - 14.98 11003.89 +234.57 10769.32 + 64.84  - 25.38
Nasdaq   3447.81 + 78.56  3369.25 +148.10  3221.15 +119.95  +135.86
S&P-100   753.57 +  4.27   749.30 + 18.21   731.09 + 12.29  +  1.77
S&P-500  1416.62 -  5.38  1422.00 + 25.96  1396.04 + 25.84  +  7.30
RUT       458.94 -  2.33   461.27 + 11.58   449.69 +  7.28  + 13.77
TRAN     2909.16 - 67.34  2976.50 -113.07  3089.57 + 85.58  - 54.99
VIX        22.95 +  3.32    19.63 -  2.05    21.68 -   .38  -  2.50
Put/Call     .42              .47              .51

Bonds starting to weigh heavily on the markets.

Don't look now but the stock market has not really disconnected itself from the bond market as it had appeared in the last two weeks. The Personal Income and Spending numbers for October were announced Friday morning and Alan Greenspan probably dropped his coffee cup at the breakfast table. The October Personal Income number came in at +1.3%, more than double what analysts had expected and the largest number in over five years. The Personal Spending figures also doubled estimates at +.6% for October and already been seeing yields creep upward, closed Friday with a 6.23% yield. Things are looking great for the economy but bad for the Fed outlook. Next week we have the important NAPM Index on Wednesday which will probably show some higher prices as a result of the oil price gains. On Friday we have the November Jobs Report and analysts expectations are for a possible unemployment number under 4%. This would be very bad and could prompt the Fed to reconsider their "no more rate hikes this year" posture. Bond futures are already pricing in a hike for the February meeting. The strong economy is continuing to surprise everyone with its continued gains. The Fed does not like surprises and always has the last laugh.

The Dow has been marking time in the 11000-11050 range for over a week after the big +500 points move earlier in the month. Several times it has closed exactly at the 11,000 bottom. The longer we stay in this range the more we will build stronger support and weaken the overhead resistance. The risk is a breakout under 11,000 which could have us trading back down in our previous range under 10750. I am not expecting this but it is a possible scenario. Monday should be the key.

The Nasdaq has had such a strong run with very little profit taking that we should be on the lookout for a pause to refresh before starting the December rally. I put a retracement graph on the chart above so you could see the various levels of support. When you look at retracements you are looking at levels of profit taking on the gains made from the start of the rally. I used 2700 as the start in this example. That gives us over +750 points. A -15% retracement would put us back at 3358, a -25% at 3284 and -40% at 3173. Short of a serious news event or the Fed spontaneously announcing a new rate hike, the odds of a retracement over -15% are very slim and over -25% almost non-existient. Either number would only set us back to the levels we were at a little over a week ago.

One of the more alarming charts from Friday was the VIX. After hovering in the dangerous ranges between 22-19 for over a week, it gapped up on Friday at the open and then spiked almost 1.5 points in just the last 20 min of trading. There is only one thing that could cause this spike and it is a large change in the ratio of puts and calls on the OEX. When everyone is bullish and buying calls the VIX drops under 20 like it did last week. This is a bearish sign that the market has become lopsided in favor of the bulls. When the bulls start buying puts to either protect their long positions or for speculation because they feel a correction is imminent the VIX will start moving up. So based on Friday's closing move, either a lot of people are expecting a correction on Monday or they bought "put" insurance on their long positions just in case. My experience is telling me that there are a lot of traders expecting the market to backup before moving forward. This does not make them right. It just means they voted with their wallets which carries a lot more weight than water cooler chit chat.

Everyone knew that Friday would be a light day but the NYSE only managed 312 million shares to the Nasdaq's 721 mln. NYSE advancers beat decliners for a change but only slightly. The decliners had won the last six days. Actually in 10 of the last 15 days the decliners had the edge. Market breadth has been deteriorating steadily. You will not see the Dow mount any kind of serious rally with advance/decline heading south like you see in this chart. Also the Dow has pushed over 11000 five times in the last seven months and has failed to hold it every time.

Much of the recent Nasdaq rally in the last two weeks has been due to shorts covering not positive earnings momentum. There is currently only 2.04 days of short interest on the Nasdaq compared to 2.29 in ths same period of last year. Everybody who shorted QCOM, JDSU, RHAT and company recently have been paying a stiff educational premium to learn that "the trend is your friend." Never bet against the trend. The stock news was very light on Friday with the same old story, "Nasdaq sets another new record" leading the way.

The outlook for next week is a toss up. The bullish sentiment by the retail investor, as well as the institutional investor, should keep any possible correction reasonable. The orders are still there, just under the market, and any dip is likely to meet strong support. We are due for a pullback how far depends on the Y2K fear still lingering on investors minds. This has not shown any impact recently but the closer we get the more it becomes a possible problem. The wildcards for the week are the possible fallout from an inflation strong NAPM report on Wednesday and the non-farm payrolls report on Friday. We could continue to see the Dow weaker before both of these numbers but any serious pull back on the Nasdaq is only going to be seen as a buying opportunity. There are still some analysts around that are calling for the Dow to trade under 10,000 before December is over. If this comes to pass, back up the truck and load up because you may never see it again.

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This weekends newsletter is packed full of great info. We have five articles from active traders in both Traders Corner and Womans World. Check out the many lessons you can learn without the expense of losing your own money.

My educational article this week is called "Exit Strategies, Escaping with a Profit." This is the fourth in the series. Look for it on the website.

Have a safe week in the market. Pick you entry points VERY CAREFULLY and sell too soon.

Jim Brown

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