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Market Wrap

Up Up and Away

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08-19-2002               High    Low     Volume Advance/Decl
DJIA     8990.79 +212.73 8994.12  8753.52 1536 mln  1874/869
NASDAQ   1394.54 + 33.53 1397.06  1359.14 1574 mln  1977/1317
S&P 100   480.84 + 12.40  481.21  467.67   totals   3851/2186
S&P 500   950.70 + 21.93  951.17  927.21
RUS 2000  401.29 + 5.32   401.50  395.39
DJ TRANS 2364.02 + 24.62 2368.97  2326.32
VIX        31.57 -  1.25   33.41  30.89
VIXN       47.02  - 2.41   45.57  50.57 
Put/Call Ratio 0.82

Up Up and Away

Up, up and away. That is how this market has appeared recently. The Dow, S&P 500, Nasdaq 100 and Nasdaq Composite have all crossed significant levels today. The 50-day moving average is a mark that has not been crossed in the Dow since May, in the S&P 500 since April, in the Nasdaq 100 since March and in the Nasdaq Composite since April.

The patterns have all arrived at the same point on the same day, which is significant, and the double bottom patterns on all four charts now appear to be signaling a possible true bottom. The patterns are slightly different, however.

A look at the Nasdaq patterns both show a tight, long-term descending channel. The indices both experienced a break from these channels last Wednesday, and the hold above the upper trend lines on Thursday and Friday appeared bullish. The NDX still had both the 1000-point barrier looming above, in addition to the 50- dma of 999.28. Today, it crossed both of these resistance levels. A look at the NDX bullish percentage shows that 56% of the 100 stocks in this index have now established point and figure buy signals, as well, which confirms the bullish signals we are seeing from the daily charts. This is a 10% increase from the close of business Friday.

Chart of the NDX

Looking at the Nasdaq Composite, the index has broken its descending channel and crossed its 50-dma, however it still has round number resistance at 1400 looming above. The index gained 33.53 points, to close at 1,394.54, as tech giants Microsoft ($51.99 +1.99) and IBM ($82.94 +3.14) carried the rest of the sector with them.

Chart of the Nasdaq Composite

A look at the Dow and S&P 500 shows a series of higher highs and higher lows that fit neatly in the ascending channel begun with the 488 point gain on July 24th in the Dow, accompanied by a 45 point gain in the S&P. These ascending channels appear more bullish than either of the Nasdaq based indices, which have just recently broken out of descending channels, so investors looking to jump on the bandwagon may want to focus on old-school stocks, until the Nasdaq indices establish their own trend.

Chart of the S&P 500

Chart of the Dow

Let's look at the long-term picture, now that we have established what appears to be a new ascending trend. The next significant level in the Dow is now 9000. A move above that level would most likely take the group over 9100, where it would approach a 38.2% retracement of its loss since it topped put at 11,750 in January 2000. A look at the big picture, since that high, certainly shows plenty of room to the upside. The other thing a look at the monthly chart shows is a possible double bottom last September and this past July. This is not a textbook pattern, since the second drop landed below the first, however there are 30 stocks in the average, so we must allow for individual variations within the group.

Chart of the Dow Monthly Retracement

This morning started out with a release of the Conference Board's Leading Economic Indicators for the month of July. The index was down 0.4%, which looked bearish for the market. The index now stands at 111.7, after a 0.2% decrease in June and 0.6% increase in May. A closer look at the individual components, however, may give some input on the reasons behind today's 212.73-point gain in the Dow. There are ten indicators that make up the index. Six of these were negative. The negative indicators in this morning's release, in order of largest negative contributor to the smallest, were stock prices, average weekly manufacturing hours, index of consumer expectations, interest rate spread, vendor performance, and building permits. The largest negative indicator, the stock market, has made up 80% of July's losses. Therefore the biggest reason for the decline of the index has been virtually erased.

A look at the positive indicators is even more revealing. They are, in order of largest positive contributor to smallest, real money supply, manufacturers' new orders for non-defense capital goods, average weekly initial claims for unemployment insurance, and manufacturers' new orders for consumer goods and materials. The fact that money supply, unemployment and new orders for consumer goods are all on the positive side is an indication that the recovery is on the right track.

The Conference Board also released the Coincident Indicators and Lagging Indicators. Three of the four indicators that make up the Coincident Indicators were also positive. The largest contributor to this gain was personal income less transfer payments, followed by industrial production and manufacturing and trade sales. Once again, we see production and manufacturing on the positive side, along with personal income. The Lagging Indicators also showed an increase, with the positive contributors in the index being average duration of unemployment and change in labor cost per unit of output.

According to the Conference Board, "Although the incorporated data revisions deepened the depth of the decline in the coincident index in the most recent recession, the decline of this index remains mild by historical standards. The decline from the peak of the coincident index in December 2000 to its trough in November 2001 is only 1.7 percent compared to an average decline of 3.3 percent from peak to trough in the previous six recessions." The Conference Board also predicts that economic growth will rise in the third and fourth quarters of 2002, allaying fears of a double dip recession.

The media made the numbers sound much worse than they were. The positive results in unemployment, productivity and new orders gave the bulls what they were looking for to continue the recent run.

The Retail Index ($RLX.X) got a big boost, as Lowe's released estimates that beat analyst's expectations by $0.05 and raised third quarter guidance. Second quarter earnings were up 40.5%, and sent the group flying, in spite of Wal-Mart stating that August sales would be at the lower end of estimates, due to warmer weather slowing back to school sales. The index was up 8.13, but more importantly broke through significant resistance at 300, to close at 300.14. The RLX also broke through its 50- dma of 299, keeping up with the trend established by the broader markets. This indication of health in a sector controlled by consumer spending could figure heavily into the market's direction as we try to avoid a double dip recession. Remember that consumer spending makes up 2/3 of GDP, and a reluctance to spend during the back to school season could foreshadow a return trip toward 7500 in the Dow.

On Sector that didn't fare so well was Biotech. The first domino fell when AstraZeneca (AZN) announced disappointing results for its anti-cancer drug, Iressa. Iressa belongs to a class of drugs known as epidermal growth inhibitors. They are supposed to interfere with uncontrolled growth of cancer cells, but apparently AstrZeneca saw no difference in survival rates between patients treated with chemotherapy and Iressa, and those treated with just chemotherapy. AstrZeneca lost $6.02 to close at $30.98. This finding also affected OSI pharmaceuticals (OSIP), which is currently in late stage testing of its drug, Tarceva, which is in the same class. OSIP closed down $18.77, losing 57% to finish the day at $14.01. The disappointment of this 'smart drug' failure dragged down the biotech sector, as the Biotechnology Index (BTK.X) lost 2% on a day when the rest of the market was in rally mode.

A look at the bullish percentages now shows a majority of stocks giving point and figure buy signals. The Dow stands at 52%, the S&P 500 at 52% and the NDX at 56%. If the Dow can make it past the 38.2% retracement of 9143.79, the next significant level would be a 50% retracement of its losses since January of 2000. This would land the index over 9600. Just a month ago we were talking about whether 7500 would hold and the meteoric pace at which the market has rebounded seems unsustainable. 9000 is the next test and tomorrow will tell us a lot about how much strength the bulls can muster. The fact that the rally fell just shy of this mark is not coincidence. There will be a lot of selling pressure at this level and this should provide a real test of conviction.

We should know shortly after the open who has the upper hand from this point. Keep in mind jittery investors who may not want to remain long heading toward September 11th and the fact that today's volume was not very heavy, with the NYSE trading about 1.5 billion shares and the Nasdaq trading similar amounts. On a true breakout, expect to see volume over 2 billion shares, which is something we probably won't see at the end of the summer. Get ready, get your rally caps on, and keep a few puts in your back pocket.

Steven Price
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