Option Investor
Market Wrap

SECTOR DIVERGENCES AND INTRADAY WHIPSAWS

HAVING TROUBLE PRINTING?
Printer friendly version
        3-21-2002           High     Low     Volume Advance/Decline
DJIA   10,479.84 - 21.73 10505.72 10354.74  1.3 bln   1627/1419
NASDAQ   1868.83 + 35.96  1870.16  1825.99  1.6 bln   2132/1332
S&P 100   582.44 +  0.27   583.43   574.86   Totals   3759/2751
S&P 500  1153.58 +  1.73  1155.10  1139.48
RUS 2000  505.44 +  6.40   505.45   497.91
DJ TRANS 2852.98 - 41.13  2900.63  2808.59
VIX        19.98 -   .75    21.76    19.98
VXN        36.98 -  1.18   39.38     36.98
TRIN         .98
CBOE Put/Call Ratio: .69

SECTOR DIVERGENCES AND INTRADAY WHIPSAWS

ON THIS DAY in 1871, journalist Henry M. Stanley began his famous expedition to Africa to locate the missing David Livingston. The end of his travels led to the famous meeting and question, "Dr. Livingston I presume?" Today, the similar question is "will the real market stand up?"

STOCKS -
What do you make of a day when the utility index (UTY.X) breaking out big time and the high-techs, including bio-tech, software, semiconductors, networking and some internet stocks are also rebounding? In a word, ROTATION! What money manager and individuals do, moving from overexploited to beaten down areas, when the market as a whole has many cross currents, reflecting the underlying mixed economy.

Some moves made sense in terms of the economic data today. The utility stocks were movers based on the expectation that rates would have to go up, making these stocks a play based on their high dividends. This stock group (per the chart below), especially the specific picks highlighted by Jeff Bailey today, looks like a good place to park some widow's and orphan's money.

Meanwhile, what else to do, but take some profits out of the S&P universe, especially with bellwether General Electric (GE) down almost 3.5%, based on the continued shock that GE may be a bit debt heavy -- a chink in the house that Jack built.

Hey, one place to put the money is to nibble in the oversold tech stocks thinks the money manager herd. The Nasdaq Composite (COMPX) rose 2%, with the Nasdaq 100 (NDX) up 2.6%. Rotational movement of money is apparent as profit taking hit year-to-date strong performers like International Paper (IP) Caterpillar (CAT) and WalMart (WMT). The Dow would have been down more of course, without the rebound of long- suffering AT&T (T) and struggling Intel (INTC) and Microsoft (MSFT).

Phillip Morris (MO) was up on their continued ability to raise prices on tobacco as evidenced by the 3,8% rise in tobacco prices according to CPI stats. Good thing we are all going to quit, at least one of these days.

EARNINGS FRONT -
Not surprisingly, there were some tech stocks that reported better than expected. Before the opening, Tech Data (TECD) reported earnings that were up 3 cents more (+.63) than anticipated. After the close, 3Com Corp (COMS), reported a 3 cent less loss (-.12) than consensus, which was good for a 3% gain in the aftermarket. Also, after the bell, Palm Inc. (PALM) shaving a penny (-.02) off the consensus of -.03 and was up several percentage points in after hours trade.

ECONOMY -
Minutes of the Federal Reserve's January meeting showed that board members were surprised by the speed of the economic recovery. Of course, these are the folks that were surprised at how fast the economy tanked last time. Reading the details of the minutes reinforces the expectation that rates will be adjusted upward from very low levels and some rate tightening will occur later this spring.

Meanwhile, consumer prices, as measured by the CPI, rose only 0.2%. Inflation did not accelerate in the past year through February. Housing prices (40% of CPI) continue to rise, up .3%, otherwise the overall CPI would have been flat. Inflation news seems good, but the market was more unsettled by the latest Fed minutes.

Last but not least, the Conference Board said its index of leading indicators was unchanged following a revised .8% increase in Jan. Rather a mixed signal, in that while the economy is out of recession, growth is likely to be slow. Slow growth means scant increases in earnings. Weekly jobless claims dropped a bit, as reported by the Labor department.

OVERALL STRATEGY -
In recent days, a lot is heard about this being a "stock-pickers" market, given the market being spooked by the prospect of higher rates and the Fed being more inclined to tighten than ease, coupled with the reality of both bright and weak spots in the economy. The truth of the market rewarding only select stocks is evident in the recent less than robust advance-decline figures which show a narrow-based advance.

NYSE net advance-decline figures (advances minus declines) during the tail end of the recent advance did not show more than a few hundred stocks advancing over declining, versus late-February/early March A/D figures that were in the +1000 to +1500 range on the NYSE.

There was also mention in our monitor and intraday updates of the anemic advancing volume totals -- advancing volume, or willingness to buy on up ticks, being a key determinant of a strong market.

Fortunately, you take advantage of some superb stock picking by our people AND index traders can simply be more selective and wait for moves to the low or high end of trading ranges, etc.

The watchword is to trade more selectively. As you are not concerned about how many times you trade (only your broker loves you for that), you need only be concerned about your profits for the year. If you took action only on 3-4 solid ideas a month, this would translate into an outstanding end-of-year bottom line.

I was looking to buy after a good-sized pullback, which is underway. Austin was suggesting playing puts and the short side at the recent highs and this strategy has been rewarding. Do you stay on the short side? Odds favor the downside with momentum oscillators moving lower and the low option volatility as seen in the recent low VIX numbers around 20.

WHAT TO WATCH- S&P 500 (SPX)
BEARISH: Any closing break of the 200-day moving average in the S&P 500 (SPX), currently at 1144.7 and the 21-day moving average at 1141, coupled with an inability for the index to climb back above the 1140- 1145 area on any subsequent rally attempts, should lead to a next downswing to the 1120-1125 zone.

NEUTRAL: An ability to hold 1140 and then to drift sideways, will "throw off" the oversold condition as surely as another drop. In which case, the correction proves to be shallow due to window dressing.

SPX has corrected close to 38%, the area of a "minimum" 33-38% retracement. I rate it more likely that the correction will be deeper, to the 1120-1125 area, perhaps after a deflection from overhead resistance in the 1160 area. Unlikely we'll see SPX closing back above 1160 in the near-term and staying short can be determined by the SPX staying below this level. 1160 is also an area to look to do renewed selling.

BULLISH SCENARIO: I'll be evaluating trading on the long side if there is a move down to the 1120-1125 zone. There is no rush to get long absent a further drop. Time is on the side of put holders in the coming 1-2 weeks. Hourly chart below is showing a pretty good top right now.

Leigh Stevens
Chief Market Strategist
Click here to email Leigh

Market Wrap Archives