Fading The Futures
Just one day after a fearful sell-off on Japanese bank woes, both the Asian and European markets gave the U.S. a lift at the open. Yesterday was the first time real fear could be felt in the market and it even has many talking about the beginning of the bottom. Yet, one only needs to look at the NASDAQ finish today to know that the relief was short-lived. The tech index spent much of the day above 2000, only to give up in the afternoon. The Dow(INDU) faired better in consolidating the massive sell-off from Wednesday. We're not buying this temporary hope that today's trading flashed before us, especially with tomorrow's economic numbers and the Fed being major wild cards.
Today's NASDAQ close was abysmal! Hope for a sustained rally in the NASDAQ faded around 12:30pm ET and the index slid to session lows at 1940. While the NASDAQ very well may have given us a tradable rally this morning, today's action reminds us of the true weakness in tech. However, we can't forget that triple witching expiration adds an extra element of volatility, especially on Thursday, as traders square and roll positions forward. The fact of the matter is that there still is no fundamental reason to buy tech even with all the money on the sidelines. Right now, the market is waiting on tomorrow's economic numbers and the Fed reaction on Tuesday.
This is really what will dictate the market. Tomorrow's PPI report is the headline number, expected to be 0.1% for both the Core and the PPI. If it comes in higher-than-expected, inflationary concerns are rekindled and throws into question, once again, what kind of rate cut we will get next Tuesday? Chief inflation-fighter Greenspan would be less inclined to give those optimists their 75 basis point cut. However, with the markets where they currently are, I think that the wild card will be the Michigan Consumer Sentiment number. Greenspan has made himself very clear about the importance of the consumer in the health of the economy. This typically second-tier economic figure may be the big headliner for the Fed and the market. It is expected to be released at 10am ET, estimated at 87. Watch for this release a half hour after the open, it will likely be the market mover.
The NASDAQ chart below speaks for itself. Choppy trading with plenty of gaps which can reap massive profits or horrific losses. This is exactly why holding overnight can be enough to give you an ulcer. After yesterday's fears, who would have thought that the NASDAQ would gap up? I certainly didn't and was surprised to see the futures up as much as they were in pre-market. Even Jim Cramer on CNBC, who has been extremely bearish and skeptical, called this the opportunity for a trading rally. He stressed trading. In no way are we ready to bet the farm on long-term tech. There is still downside risk that will allow for put players to make a few more bucks. Broadcom(NASDAQ:BRCM) and Affymetrix (NASDAQ:AFFX) continue to highlight our put list.
After Thursday's pullback, the COMPX now sits at the lower end of its four day consolidation. The relative low was traced Monday at the 1923 level. Going into Friday's triple witching session, we'll be monitoring the COMPX very closely if it approaches the 1923 level. If the COMPX breaks below that level, then it might be "safe" to look for shorting opportunities among weak tech stocks, as little in the way of support lies below the 1923 level.
On the upside, we'd like to see the COMPX clear its intraday high today at 2030 - that level also marks the high end of the COMPX's four day consolidation. A break above 2030 could carry the COMPX back up to the 2100 level, or beyond. As such, traders might key in on strong tech stocks if the COMPX advances above 2030. The best risk to reward in the tech sector can be found in the Semiconductor Sector(SOX.X) on the long side.
The INDU was mixed today as brokers found bids today after yesterday's fallout. JP Morgan Chase(NYSE:JPM) and Citigroup(NYSE:C) were up a buck and a half each, and American Express(NYSE:AXP) finally found some relief, up $1.32. Unlike other major drug stocks, Merck (NYSE:MRK) gained $2.12, the highest point gainer on the Dow. In the chart below, you can see the pattern of sell-offs and short covering since the INDU fell from the 10800 level. Following Wednesday's close below 10000, today's action could very well be the next phase of consolidation in the pattern. Disappointing economic numbers or prospects of a less aggressive Fed might lead to the next leg down to 9750, which was the bottom from last March. Keep this level in mind. We would hope that this time we break the trend, but charts don't lie. As the NASDAQ plunged lower into the close, there was some defensive buying in the Pharmaceutical Index(DRG.X). We also saw money flowing into the Five-year Treasury Note(FVX.X) as investors sold equities and bought bonds. This brought the five-year note to a 52-week low on its yield, closing at 4.51%. We will continue to watch the bond yields closely with tomorrow's economic numbers and Tuesday's Fed meeting.
Looking ahead, tomorrow's busy economic calendar along with triple witching expiration will make for a volatile day. PPI is released at 8:30am ET, followed by the sleeper, Michigan Consumer Sentiment at 10am ET, which we know the Fed will be watching. Technically, the NASDAQ is at a very precarious position, stuck in a narrow trading range. Trading in this range has been very choppy, so wait for a break in either direction to initiate the appropriate trades. Tomorrow certainly will shed some further light on the current economic situation and fuel the debate as to what the Fed will be doing on Tuesday. A 50 basis point cut might disappoint, and while 75 basis point will appease, it might trigger some fear that the economy is worse than thought. We'll take the 75 basis point cut and enjoy the added liquidity. We're pinned in no man's land, awaiting a clear trend. If you don't have the ability to watch this market tick by tick, sit on your hands. When you do trade, stay close to that monitor with stop losses and discipline by your side. And after they faded the futures this morning, be ready for a volatile session.
For those of you who have been kind enough to send in emails, Jim will be back on Tuesday to offer his insight on the Fed decision.
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