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Market Wrap

Never short a dull market

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        05-23-2002        High      Low     Volume Advance/Decline
DJIA    10216.10 + 58.20 10216.10 10087.00 1180 mln   1988/1150
NASDAQ   1697.63 + 24.18  1697.77  1651.89 1536 mln   2028/1417
S&P 100   547.57 +  5.65   547.57   538.73   totals   4016/2567
S&P 500  1097.08 + 11.06  1097.10  1080.55
RUS 2000  501.24 +  7.33   501.34   490.85
DJ TRANS 2762.50 + 46.30  2762.94  2715.04
VIX        20.35 -  1.23    22.21    20.24
VIXN       43.20 -  1.75    45.74    42.75
Put/Call Ratio      0.62

Never short a dull market
by Leigh Stevens

As my dear old pappy used to say, "son, never short a bull - I mean DULL - market" - stocks continued to flounder early and then came alive in the afternoon on relatively low volume. Nevertheless, I'll take the gains on the DJX and QQQ, which are the indexes I had enough confidence in to suggest buying for a rebound.

On the NYSE, volume was 1.4 billion, but up volume (UPVOL.NY) ran 2.7 times declining volume (DNVOL.NY). On the Nasdaq, volume was 1.8 billion, but up volume (UPVOL.NQ) was double that of down volume (DNVOL.NQ). Useful to check in on those numbers if you're checking overall market levels during the day. Up volume of course being total volume of stocks bought on up ticks, so its really the willingness to pay up for stocks.

The small and mid cap stocks, as reflected in the Russell 2000 ($RUT.X), have been correcting some of late, demonstrating that if you pile enough investors onto to any bandwagon, you can cause it to stall. However, the American Stock Exchange Composite Index ($XAX.X) spiritual home of small caps (except 800 pound gorilla, QQQ), went to both a new absolute and new closing high today - proving that at least this ark is not capsizing yet. Who said small is beautiful?

Stand out Dow gainer today was General Electric (GE), up 3.2%. GE is more than a big conglomerate that makes the light bulbs we have in our closets. The stock is a significant bellwether stock for the S&P - when it leads the market higher or lower, it's worth noting. Today, technically, GE broke out above its March - May down trendline. Watch to see if there is some follow through tomorrow of if just holds its gains of today.

A comparable Nasdaq bellwether stock is Cisco Systems (CSCO), which is nearing its December-May down trendline, at 17.2, which is also around the level of its 200-day moving average at 17.14. A couple of consecutive closes above this 17.2 would help get the Nasdaq in gear. As would similar chart breakouts in Microsoft (MSFT) which was up 2% today - more upside would be suggested if MSFT climbs above 55.2 at the intersection of its down trendline (slightly higher is the 50-day moving average at 55.8 which is also a level to monitor over the next couple of sessions.

Of course, a couple of low volume days and maybe quiet trade, may result by a lot of market participants being out of town tomorrow and Tuesday - in New York, they will be grateful to be out of tall buildings, off the Brooklyn Bridge and well away from the Statute of Liberty.

In fact, there was significant trader sentiment that today's rally was more due to short-covering as traders wanted to square up their positions ahead of what may be a 5-day weekend for many market participants. And, of course, new sellers were not going to step in as much in this kind of setting. (What are they afraid of, peace breaking out over the weekend?!) I know that in years toiling in Wall Street that you could fire a cannon in the executive wings and not hit anyone on the day before the 3-day Memorial Day weekend.

Bush is in Moscow collecting on IOUs, of which Putin has a few Providing a slightly negative backdrop was some soft economic data on the labor and housing markets.

The morning brought cheer to the bulls, as April durable goods orders were reported 1.1% higher. March orders were revised upward by 0.2%. The expectations from the practitioners of the dismal science (Economists), was for a gain of only 0.4%, suggesting that the economic activity was actually starting to accelerate.

Durable goods shipments were up 3.5% in March. Sometimes a build up of orders and production is more due to inventory re-building. Not so, when they ship the stuff out the door.

In the Nasdaq, the chip ($SOX.X) and Networking (NWX.X) sectors were a bit lower, whereas there were decent gains in the Internet ($INX.X: +2.6%) and the software sectors ($GSO.X: +2.6%), which more than made up for the few slightly lower sectors.

Deutsche Bank Securities lowered estimates on a group of software companies today, following a similar, though more widespread call from Goldman Sachs on Wednesday. However, the damage had already been done over the prior 3 trading sessions, and the sector rebounded today. The Internet segment was influenced by an advance in Priceline.com shares (PCLN) after the company reaffirmed its Q2 revenue and earnings targets.

Oracle (ORCL) rallied on an upgrade - an actual upgrade! - from RBC Capital Markets to an "outperform" from a "sector perform" on belief that most of the bad news ahead is already priced into the stock and that the company's risk/reward ratio is very favorable.

In the old economy sectors, defense stocks ($DFI.X) traded lower - a group that I highlighted in my Sector Trader summary tonight - while investors bid up Biotech ($BTK.X) substantially (+7.4%), Financial ($NF.X - NYSE Financial index: +1% & S&P Bank Index - $BIX.X: +1.3%), Utility ($UTY.X: +.8%) and Airlines ($XAL.X: +2.2%).

And, gold stocks ($XAU.X: +2%) continued its unrelenting, take no prisoners, run up as nearby gold futures end up $4.50 at $322.80. Gold stocks already have probably "priced in" gold at $340 an ounce already, although these stocks are still advancing - I highlighted XAU in yesterday's Sector Trader.

As I said last week in this space the market looks headed higher still. I continue to assume that the market is telling us that the economy is starting to pull out of its slump and this is going to be a trend in the next few months.

Key support levels are:
S&P 500 (SPX): 1080-1081; S&P 100 (OEX): 536; DJX: 101; Nasdaq Composite (COMP): 1670; NDX: 1256; QQQ: 31.3. I would maintain a bullish bias as long as closing levels are maintained over these levels. Note the key word: close; e.g., COMP has finished 2 days when its intraday lows dipped under it's pivotal 21-day average in 1670 area, but then closed slightly or well above this level (today at 1697).

I also have been a bit nonplussed by the relative position of the daily oscillator levels, coming off an overbought reading - however, these momentum models are pulling back to a more neutral reading which is my minimum requirement I wanted to see in this very nervous market. Bearish events impact an overbought market more severely than one that is registering either neutral or oversold levels. The backing and filling that we may see for a couple of more sessions will continue to help out in this regard.

Even if not, the market has performed quite bullishly in the way it "needed" to, by rebounding after filling in the chart gaps from last week that I kept writing about. Like most simple, and accurate market phenomenon, this gap filling idea (as areas where buying or selling tends to come back in strongly) is too simple of an idea for most people to pay attention to consistently.

One of the psychological influences I have noticed strongly over the years is the tendency for many traders and analysts to trust more in complex ideas than simple ones. If you want an example of someone getting rich from an uncomplicated investment style and criteria, witness Warren Buffet's success. Not that he isn't very smart, rather he's just not distracted - in that sense is he simple and straightforward in his approach.


Because its hard not to see the forest for the trees, I am trying to keep a weekly chart in view from time to time, so these are the charts I find most instructive at this juncture when I think we are transitioning out of a bear market:

DJIA - Dow Jones Industrial Average ($INDU) - Weekly:

The primary thing here is that the Dow is maintaining a level that keeps the average above its weekly downtrend channel. While you probably would expect prices to keep moving higher, rather than having an "inside" week like this (highs and lows are within the highs and lows of last week), the important thing right now is that INDU is maintaining a patter of higher relative lows.

The breakout above last week's high may well come next week, especially with a bullish seasonal tendency for the week after Memorial Day weekend to be an up period, sometimes acting as the kick off period for a late-spring/early summer rally. Eventually, of course, the Dow will face a test the prior 10,675 high if the current rally is going to extend into a longer-term bull trend.

The S&P 500 ($SPX.X) - Weekly:

In case you haven't seen one before this is a Head and Shoulder's bottom pattern. Assuming a break out above the neckline, which intersects at 1143 next week and at 1133 the following week, this pattern would project a "minimum" eventual upside objective to around 1435. This may seem wildly bullish now, but merely represents a 50% retracement of the decline from the September 2000 top to the September 2001 bottom.

And, yes a "double" shoulder on the right side is a not uncommon variation of the head and shoulders pattern. And, this pattern as a top or bottom formation is one of the more reliable technical patterns, per research done by Dr. Andrew Lo at M.I.T. Dr. Lo's group had the computer power and mathematical ability to test some common technical patterns in terms of having predictable (greater than chance) outcomes. He found 5 that were so and this is one of them.

The Nasdaq 100 Tracking Stock (QQQ) - Weekly:

QQQ has continued to rise above its long-term down trendline going back to the Nasdaq top. I liked the action this week and the key Nasdaq stocks are all getting near to related and confirming bullish breakouts. Stay tuned!

Leigh Stevens
Chief Market Strategist
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