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The Softer (Under) Side of. . .Merrill?

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      05-13-2002          High     Low     Volume Advance/Decline
DJIA    10109.66 +169.74 10110.97  9920.20  1.10 bln   2002/1204
NASDAQ   1652.54 + 51.69  1653.10  1602.60  1.64 bln   2110/1408
S&P 100   533.76 + 10.52   533.76   522.31   Totals    4112/2612
S&P 500  1074.56 + 19.57  1074.84  1053.90             
RUS 2000  499.72 +  6.99   499.85   492.42
DJ TRANS 2703.51 + 60.41  2712.95  2641.64
VIX        23.50 -  1.53   25.92     23.26
VXN        45.12 -  4.61    49.30    46.12
TRIN        0.62
PUT/CALL    0.85

The Softer (Under) Side of. . .Merrill?
By Buzz Lynn
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Not much excitement in the news today that would cause a bullish spurt. But I found it interesting that Sears (S), the retail giant that has been marketing it's clothing and soft goods under the "softer side of Sears" program, announced it had reached agreement to buy Lands End (LE) for $1.86 bln in cash - nearly $10 per share over Friday's close. Smart negotiating by LE to get the cash - who wants stock these days anyway? But more interesting to me, and what really caught my attention was a Merrill Lynch analyst's notes on a competitor, JCP.

Get this. MER, which has been under investigation by the New York AG's office (tip of the iceberg in my opinion) for intentionally misleading investors by promoting crummy (though that's not the word it used) stock to the public. Meanwhile it was disparaging the companies internally while selling shares into the buying public's hands. So I found it rather odd that it would come out with the following "plug" on J.C. Penny (JCP).

As retold by briefing.com, "Merrill Lynch believes that S's purchase of Land's End has positive implications for JCP, which has the largest catalog operations in the US; firm thinks the fact that JCP has a large catalog offering should be viewed favorably, as well as the fact that JCP plans to introduce some specialty catalogs that would likely compete with Land's End.

Correct me if I'm wrong, but isn't that tacitly stating that because Sears bought LE, JCP might benefit because it has catalogue sales too? That's a mighty big stretch in logic - kind of like saying that when Ford bought Volvo, GM would benefit because it had a controlling interest in Saab. Give me a break. It's no wonder MER is under investigation. With a rousing round of bull-slinging like that, it plays right into the hands of MER's prosecutors. No wonder the buying public is beginning to keep a skeptical eye on brokers and analysts.

Anyway, Fundamentals Guy take on Sears and Merrill aside, a decidedly positive day for the bulls emerged for no apparent reason. Again, I caution readers to take days like this with a grain of salt. While today's move looked good in headlines (significant gains on all major indexes), the volume was weak, which tells us that there was no conviction. Looking at the gains on the NASDAQ too (COMPX +51), a corresponding move on the VXN.X showed a drastic drop in volatility from nearly 51 to just above 46, which indicates that all fear of bearish market just vaporized since Friday's close. So where is the wall of worry? Nowhere that I can find.

And real bull markets are built on a wall of worry. That's just another reason why I think this is a mere bullish rally in a bigger bear market, not the time to load up on all the old favorites.

JDSU? A new 52-wk low at $3.50. GLW? Ditto. Remember when those were "compelling bargains" at $50, $30, and $10? What - me worry? $3.50 has got to be the bottom now doesn't it? The bull will one day return when bears surround it, and even good values are left alone due to lack of interest. When the loan bull feels like General Custer uttering "Holy cow! Look at all those Indians!", that will be the true bottom. The market isn't even close.

Plus in the meantime, the markets are entering a typically slow Summer season. If the past two months of range-bound trading are any indication, the range could be even tighter. Contrary to popular belief, markets remain rangebound 80% of the time and make huge directional moves as an exception rather than a rule. The heady days of the late '90's are not coming back for years. If we are not already, we should get used to that.

Charts? Yep, rangebound. And there is nothing in the way of volume to suggest the chart patterns are about to change.

Dow Industrial chart - INDU (weekly/daily/60):

I've stared at this chart for a long time and I still have no opinion, though I would say the bullish divergence on the weekly chart might offer some glimmers of strength in the weeks ahead. Yet, there is two month of data on the daily stochastic chart that says bears rule. The lines can't even enter overbought before being turned back. Yet the 10-period stochastic is making a valiant struggle to reach the 80% goal line. On the bullish side, we can see the see the series of higher highs and lower lows on the daily chart, but there is no guaranty that will hold given the sorry state of the daily stochastics. That same comment applies to the 60-min chart too. But stochastics there are ready to roll over any time. In my opinion, this no time to trade. I just don't see one either way here.

NASDAQ chart - COMPX (weekly/daily/60):

NASDAQ too shows a weekly chart giving signs but not yet confirming a bullish upturn. Daily chart, as it has done in recent months of trading is falling back to fill the gap, which is reflected in the daily stochastic rollover. However, the 10- period stochastic is making a strong run in the bullish direction. Will that solid red line act as resistance or can a breakthrough happen that allows the line to become support? Jury's out. 60- min is of little help since it entered overbought at a lower high, which might show itself in the coming two days as bearish divergence. Again, no conclusions. I'm waiting for a trade to materialize.

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

Once again, little evidence to suggest the bulls are in control and that today was little more than a technical, corrective bounce. Weekly stochastic offering hint of bullish reversal, but unconfirmed. Daily shows higher lows and the 10-period stochastic flashes bullish. However, the daily 5-period stochastic has reversed at a point of resistance. Resistance? Yes, at the 1075 and 1080 level according to the 60-min chart, which has also entered overbought. Still a glimmer of hope looms as higher lows accompany higher highs. Again, waiting for a trade.

Volume was lethargic but not dead with 1.64 bln shares trading on the NASDAQ and 1.1 bln on the NYSE. Breadth was roughly 3:2 in favor of advancers on both exchanges. But those won't cause anyone to holler out, "Gas up the jet, Honey. We're gong to Vegas!" Better to protect thy wad right now rather than expose it to the casino, err, markets.

In economic news, retail sales come out tomorrow. Modest gains expected (+0.6%), but nothing out of the ordinary. The swing vote will be with auto sales. A poor showing there could cause big waves of bearish sentiment, which would spell "back to the slaughter house" for bulls since it makes up such a huge part of the economy. Of course, that could work just as easily against the bears on unexpectedly good news.

For tomorrow? One thing is for sure - the topped out 60-min stochastics on the major indexes while topping out at resistance on the SPX candle chart is going to keep me out of calls. So will the rollover on the 5-period daily stochastics. Yet the weekly charts offer hope for bulls as does the 10-period daily stochastic. My best-educated plan would then be to wait for a 60- min pullback to support and cross my fingers that the daily stochastic doesn't break down further. If those can be satisfied, scalpable calls will see my risk capital only. No moon shots of payoff right now that I can see, and thus no conclusions for tomorrow's trading. We'll have to watch what happens in the morning.

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