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Mr. Softee to Argentina: "Don't Cry for Me."

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        07-11-2001        High      Low     Volume Advance/Decline
DJIA    10241.02 + 65.38 10274.02 10120.89 1.38 bln   1341/1747	
NASDAQ   1972.04 +  9.25  1975.79  1934.67 1.73 bln   1550/2168
S&P 100   607.01 -  1.78   610.95   601.05   totals   2891/3915
S&P 500  1180.18 -  1.34  1184.93  1168.46           42.5%/57.5%
RUS 2000  475.83 -  2.31   478.14   471.36
DJ TRANS 2819.79 + 44.10  2825.04  2773.84
VIX        26.98 +  0.45    28.21    26367
Put/Call Ratio      0.74

Mr. Softee to Argentina: "Don't Cry for Me."

Amid continued earnings blow-ups, the major market averages rebounded Wednesday. What's more, volume picked up which may have added credence to the advance. About 1.4 billion shares exchanged on the New York Stock Exchange (NYSE), while 1.7 billion shares traded on the Nasdaq. To put Wednesday's trading activity into perspective, the 30-day average volume for the NYSE and Nasdaq is 1.09 and 1.57 billion, respectively. Was Wednesday's pick-up in volume due to short covering? Or, was it due to bulls taking the lead of bonds and buying the recent dip across the broader market averages? Or did Bill Gates whisper sweet nothings into the ears of market participants?

Longer term Treasury (Notes and Bonds) yields rose across the board Wednesday, which may have lent some of the bid that equities caught. But, the shorter-end of the yield curve in the form of the 13-week Treasury Bill (IRX.X) continued to fall, which means market participants were looking for a "safe" place to park some capital in the short-term. Might we conclude, however, that some of the proceeds from the longer term Treasury sales were moved into stocks? I think yes.

However, the buying of 13-week bills (Read: Falling Yield), in conjunction with the rise in Gold Futures and Gold Equities (XAU.X), is a cause for concern. Perhaps the flight to safety that we witnessed Wednesday to short-term Treasuries and Gold had something to do with the reports from Latin America. It's been suggested that Argentina might default on some $130 billion of debt. If that event is realized, it would come at a most inopportune time for the global economy. What's especially disconcerting is that several U.S. money center banks have lent billions to Argentina over the years. Banks such as Citigroup (NYSE:C) and J.P. Morgan Chase (NYSE:JPM). And take a look at the charts of these two stocks, keeping in mind that the Fed has cut interest rates by 275 basis points this year. Perhaps the rumblings from South America partially explain the ultra tight and conservative lending practices of domestic banks that have contributed to the slowdown in capital expenditures...

Speaking of the Fed cutting interest rates amid foreign crises, aren't the current concerns over Argentina and greater South America eerily reminiscent of the Asian Flu back in 1997, which spread to Russia and came to a head with the blow-up of Long-Term Capital Management in the fall of 1998? Is it possible that the Fed drops the discount rate by another 25 basis points, in inter-meeting fashion, if the Argentina problems escalate. I think yes.

In the meantime, I suggest that bullish and bearish traders alike cast an eye to the bond market for clues. The 30-year Treasury Bond (TYX.X) will serve our purposes, but traders may want to monitor the gamut of Treasuries, starting with the IRX.X. In Monday's Market Wrap, I opined that the TYX needed to get above roughly 58.00 (5.80%) for the broader markets to substantially advance. Well, it didn't. And I'm rather disappointed in myself for not making more of the drop in yield on Monday, which continued into Tuesday's session, all the while pressuring stocks. But the TYX did rebound in Wednesday's session which, like I mentioned above, probably helped to prop stocks up.

The lack of demand due to the selling of bonds Tuesday allowed for the bears to push the Nasdaq Composite (COMPX) below the psychologically significant support level at 2000, followed by a breach of our technically significant support level around 1975. Well, not by surprise, 1975 now serves as resistance, evidenced by Wednesday's intraday high in the COMPX at 1975.79. But 1975 will most likely be a moot level Thursday in the wake of Microsoft's (NASDAQ:MSFT) guidance after the bell, but more on that later.

In terms of support, the COMPX bounced from the 1935 area Wednesday, which was the site of its gap higher opening from April 17. Alright, gap filled. Below that general area, I think it's reasonable to expect support to materialize around the 1900 level should the COMPX continue falling over the short- to intermediate-terms. (The 1900 level should serve as psychological support and technical for it's the site of the COMPX 61.8 percent retracement level. And Keep in mind the bearish price objective of the COMPX from its head-and-shoulders lies around 1875.)

The S&P 500 (SPX.X) suffered a fate similar to that of the COMPX by taking out support levels. But as illustrated on the chart below, it continues to trade fairly predictably around the key technical levels we've determined using retracement brackets. The SPX bounced from the 1170 level Wednesday, which is the site of its 61.8 percent retracement. Traders can reference this level going forward. And on the upside, keep a close watch on 1180 and 1190, followed by 1200.

One point I'd like to emphasize is that the Bank Sector Index (BKX.X), due to worries over Argentina, has traded quite poorly and needs to at the very least establish a bottom before the S&P can substantially advance. Otherwise, continued weakness in the BKX will lead the S&P lower. That's because financials are the largest component of the S&P 500, accounting for about 18 percent of the broad market index.

Although the S&P 500 has pulled back in recent sessions, it remains neutral in terms of overbought versus oversold. While the Dow Jones Industrial Average (INDU) is fast approaching oversold conditions. That fact alone may allow for a short-term pop in the Dow, but keep in mind that an weak market can always grow more oversold.

In terms of technicals, the 10,235 level is acting like a price magnet, as the Dow continues to churn around that level. On the upside, resistance lies around 10,300, while support is located below current levels at 10,200 and around 10,150.

With earnings season upon us, a trifecta of positive reports and guidance after the bell light the after hours markets a blaze. Most notably, Microsoft announced that its recorded revenues within the range of $6.5 to $6.6 billion, as previously guided. It's worth noting that rumors have ran rampant recently that Microsoft was going to warn, which had, in retrospect, unfairly punished the stock. Well, Microsoft's announcement effectively smashed those rumors and its stock exploded in after hours trading. At time of writing, the stock was up $4 in the after hours session, on top of its $2 gain during the day. Remember that Microsoft accounts for roughly 11 percent of the Nasdaq-100 and QQQs (AMEX:QQQ).

Motorola (NYSE:MOT), the beleaguered chip and handset maker, reported a lost that was slightly better than Wall Street's expectations. However, the company's CEO said, "[We are] already seeing signs of recovery." He went on to forecast a return of customer demand for handsets and double digit growth in its chip business next year. At time of writing, shares of Motorola were up by about $1 in the after hours session.

Finally, Yahoo (NASDAQ:YHOO) reported numbers that bested Wall Street's expectations on both the revenue and profit front. Its shares surged in the after hours session by $2.

The triple dose of positive tech earnings news Wednesday evening may portend a second-quarter earnings season that is better than anyone had expected. Is it possible that the Dells (NASDAQ:DELL), Intels (NASDAQ:INTC) and Ciscos (NASDAQ:CSCO) of the market will surprise to the upside over the coming month of reports? Is it possible that Wednesday evening's hint towards a recovery in corporate profits ignites a summer rally and forecasts an economic recovery? I think maybe.

But as traders, the aim is NOT to measure and manage reward. Instead, we are risk managers. That said, my suggestion is to cast an eye towards the bond market, monitor the financial complex and the Argentina issues and measure risk with the levels we have set forth.

Eric Utley
Editor
Option Investor

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