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Market Wrap

Dull Beginning to an Interesting Day

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      04-29-2002          High     Low     Volume Advance/Decline
DJIA     9819.87 - 90.85  9937.09  9811.57  1.26 bln   1402/1742
NASDAQ   1656.93 -  6.96  1678.56  1640.97  1.82 bln   1437/2104
S&P 100   526.84 -  5.53   534.08   525.78   Totals    2839/3846
S&P 500  1065.45 - 10.87  1078.95  1063.62             
RUS 2000  500.54 -  0.96   502.34   498.08
DJ TRANS 2694.70 - 27.79  2751.79  2719.47
VIX        26.11 +  1.47    26.36    24.59
VXN        45.12 +  2.88    45.12    41.77
TRIN        2.40
PUT/CALL    0.80

Dull Beginning to an Interesting Day
By Buzz Lynn
Click here to email Buzz

Traders must have slept through this morning's opening bell on the casino floor. Las Vegas is a bit more advanced though in that casinos there don't have clocks to tell us what time it is. They don't want us to know because they'd rather we lost track of time and spent money staying up past our bedtime. Not so with the equity markets.

But that's beside the point. The point is that the markets opened flat with single and low double-digit gains. When investors finally returned to the floor, they saw there was no rational reason for equities to rise. Levitation over - stocks relegated to a methodical kick down the stairs into the basement where they closed at nearly their lows for the day.

Why so gloomy for the bulls? It's earnings silly! There aren't any to speak of and the much-prattled slogan that stocks would rise in anticipation of a second half '01 recovery. . .no wait, Q1. . .alright first half 02. . .sheesh, second half 02. . .DOH!, '03 or later, has hit home with the latest round of earnings announcements, income restatements, and broker/analysts' self- dealing. Why would anybody want to put their highly prized, rightfully coveted nest eggs on the line in the equity markets? The simple answer is that investors don't.

Besides that, think of the absurdity of the logic that was driving earlier gains. It is as Bill Fleckenstein, current dour Bear, once put it, the market action is like a cat chasing its tail. The ingrained belief that profits will recover by the end of the year drives the buying (as the theory goes) in anticipation of said event. How do they know profits will rise? Because the rising equity markets that were supposed to precede profits by 6-9 mos. said so!

I'm still in the long-term bear camp myself. But that doesn't mean I can't profit from an occasional short-covering rally or stochastic reversal that shows the cycles of human emotion that have driven markets (and most behavior) throughout history. Far from it. I've said before and will say again. This is a bear market in general, but we can make money from movement in either direction, up or down.

But for those of you sick of my bearish bias, and who still insist on keeping the horns sharpened ready to buy any dips, take heart. While the charts are not currently in bullish favor, all the makings are there for a bounce - big enough to convince bulls that this will be the recovery we've all waited for, and big enough for bears to short the top again for another ride down. Boy, I love this business! Can you say trading range? Sure, I knew you could.

Take a peek over my shoulder and see what I'm seeing on the charts. Stochastics are bottoming in the daily time frame and have even entered oversold on the weekly time frame. This could make for a sustainable bounce over the next few days or even weeks.

Still, volumes are low and the markets are entering the typically slow season where that is unlikely to change. Without volume, the impetus to power to new levels (even in defiance of economic laws) is not there. But the charts suggest against all odds that a bull rally could happen. . .at least temporarily.

See what I'm seeing. . .

Dow Industrials chart - INDU (weekly/daily/60)

Glaring red flag: oversold stochastics across all time frames. If the Dow is going to continue falling, it would be against the odds of setting new lows. Support looks to be coming in around 9750. Perhaps this downward move is nearing its end. Still, though the stochastics are oversold, they have yet to reverse from oversold telling us that further downward action is a real possibility. Also telling is that the 200-dma acted as resistance today, from which INDU fell to close near the low of the day. Bulls are not in control yet, but there is the possibility of bullish change soon.

NASDAQ chart - COMPX (weekly/daily/60)

Ditto for COMPX - same oversold stochastics. More interestingly, the daily has actually crossed fast over slow as has the 60-min, which is bullish (slightly) on both counts. However, before jumping into calls, I'd be inclined to wait for the lines to break back over the 20% mark. Even the weekly is not far behind. One other thing for the COMPX: it is nearly 200 points under its 200- dma and nearly 150 under its 50-dma. This is a long stretch to the downside from the mean. And having seen enough charts in my day, when that happens, a snap back in favor of the bulls is a common outcome. Who cares if techs and biotechs are weak and overpriced with lousy prospects for a huge business recovery? The charts, while not completely bullish yet, are holding their cards openly enough to suggest that a bullish move is right around the corner. Exactly when is anyone's guess. But in my opinion, this is precisely the time NOT to go short. The bearish trend is nearer an end than a beginning. But it is not time to be long either in my opinion. Wait for a bullish trend to emerge or the bearish trend to resume.

S&P 500 chart - SPX (weekly/daily/60)

Let's see, Grand Daddy chart says. . .same story. Way oversold from the 200 and 50 dmas (gray and magenta lines, respectively) and stochastics buried with pending signs of reversal. While not bullish yet, bears are going to have a hard time finding new and improved excuses to keep these oversold for long even if the support levels of February were violated today. Like the eons of history prove, human emotions vacillate and oscillators oscillate with them.

Another thing. . .how about that VIX? Markets fall, VIX rises. Scientifically, it isn't supposed to happen that way. VIX is supposed to reflect a montage of OEX implied volatility. High VIX means investors assume high price volatility ahead, no matter what the market direction. Low VIX means investors assume low volatility ahead. But I have yet to see equity prices spike along with the VIX. Empirically, that's nearly a mutually exclusive event. From that, I'll step out on a limb and say that with the VIX over 26, complacency is waning, and option prices are gearing for uncertainty.

However, people are more easily convinced that the markets will rise than that they will fall. Accordingly, bulls dominant in the media bandwagon will quickly sooth nerves that the future is "up" and the VIX will soon reflect a sigh of relief as the more people become convinced (and again complacent) that prices will rise. The VIX would correspondingly fall. Look for VIX resistance at the January levels reflected at the current reading of 26.11.

What of tomorrow? Following 7 of 9 negative days on the Dow and 8 or 9 negative days on the NASDAQ and the SPX, the trading bears' days are numbered, especially with stochastics now oversold in all time frames. I would not be at all surprised to see a short- covering rally ensue any day now, even if sparked by some flimsy piece of news that the market will interpret as "bullish". What might that be? No telling. The only economic news coming out tomorrow will be the Chicago PMI and Consumer Confidence. A small decline in both is anticipated after March's big surge. Thus negative news won't really be that negative unless there is a downside surprise. But with the Fed as adroit at numerical massage as any tech company manufacturing "pro-forma" numbers to hit earnings targets, that likely won't happen. So any inkling of remaining the same might be construed as "great news for the economy", which the bulls could use to charge ahead.

This isn't a license to load up on calls, but merely an eye opener to be on the lookout for a possible reversal of the current downslide, and to throw in a healthy dose of caution on sinking our trading accounts heavily into puts at this time.

See you at the bell.

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