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Market Wrap

Hard to Predict

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01-29-2003                   High    Low     Volume Advance/Decl
DJIA     8110.71 +  21.87  8158.02  7945.00   1855 mln  1081/727
NASDAQ   1358.06 +  15.88  1363.31  1320.35   1466 mln   961/459
S&P 100   437.54 +  2.89    440.16  427.95    totals    2042/1286
S&P 500   864.36 +  5.82    868.72  845.94
RUS 2000  374.84 +  1.67    375.27  367.16
DJ TRANS 2163.38 -  2.06   2177.24 2121.67
VIX        35.22 -  0.30    38.28   35.20
VIXN       43.64 -  3.09    47.19   43.39
Put/Call Ratio 0.81

Hard to Predict
By Steve Price

Rather than predicting the next move in an extremely jittery environment, it is probably best to simply highlight just how reactive the current market is to a number of issues. It is getting tough to predict market direction in the current environment. With so many earnings reports and political events playing tug of war, hindsight is playing a bigger role in evaluating moves than foresight. For instance, I talked about the possibility that yesterday afternoon's rally being just short covering ahead of the President's speech. When we opened down sharply, that's what it appeared to be. We really got no new news from the President, other than a new deadline of February 5 when Colin Powell will present evidence to the UN, yet we opened with a triple-digit Dow drop today. It seemed to tell us that outside of the news event, the market sentiment remained down. An earnings miss and profit warning from Kraft didn't do much to change that impression. However, what we saw later in the day indicated that Iraq is still the heaviest weight on the markets. In fact, shortly after the Iraq announcement mid-day that it would pro-actively cooperate with inspectors, we got a big rally, erasing all of the day's losses. So maybe the cost of war is being factored in by enough investors that we need to very careful trying to short such a jittery market. It also raises the possibility that investors are simply waiting to hear that war is behind us before getting back in from the long side. A look at the charts still shows a market that is heading south and there has been little on the economic front to cause a bounce. Today's rally stalled at Dow 8158 and that still qualifies as a failed rally below the head and shoulders breakdown level at 8200.

Of course, Iraq is just one of many news concerns and earnings reports this week and even though the indication is that market sentiment remains down, we really didn't get much of a sell-off below the point we were at prior to the speech, so it is not as though investors are running for the hills. To the contrary, we are bouncing repeatedly in a support area that indicates the big move down following the rally during the first couple weeks of January has exhausted itself and we are seeing a hard fought battle between bears and bottom feeders. Those traders/investors who felt they had missed the December bottom when the market rallied to start the year apparently still believe they are getting a deal at current prices. I'm not sure if they are right, but so far we haven't seen anything to make us think there is another big rally in the immediate future. It seems the best news for investors, which was the President's non-taxation of dividends idea, is behind us. As are the beginning of the year retirement account contributions. The earnings reports we are getting are positive for the most part for the fourth quarter. However, the guidance going forward has been shaky and that's really what we are concerned with - future action. Or at least how the market will react to how it perceives the future.

An intraday chart of the Dow shows just how volatile and reactive the market is in the current high-charged environment. We took out both Monday's low, and then made it all up and took out Tuesday's high. While it seems we are headed lower based on the technical damage we've seen to the previously strong support levels, trying to day trade the current market for more than a few points has rarely been harder to do.

Intraday Chart of the Dow

Daily Chart of the Dow

The techs have also continued to show resilience after the big drop of the last two weeks. The last three days have seen the Nasdaq Composite repeatedly test support in the 1320 range. That level served as support on the rollover from the November 6 high of 1419, just prior to rally up to 1521. That November 6 high coincides with the highs in the Dow, SPX and OEX that I have pointed out in previous columns as a possible left shoulder in a head and shoulders pattern. The fact that the pullback support level in the COMP has held is significant for one big reason - it diverges from what we have seen in the other indices. The Dow, OEX and SPX have all broken through those previous pullback support levels to the downside. The COMP and NDX have both held above those levels. In fact, in many instances, the techs have led the market over the last several years and the fact that they are holding that support should throw up a red flag for the doomsayers (myself included) that predicted another swoon following the support break in the broader indices.

Chart of the COMP

The Semiconductor Index (SOX) also broke out from its range of the past few days, bouncing off support that it appeared on the verge of breaking. The 280 support level was broken on a closing basis, but just barely, on Monday. The chip stocks have since found buyers, forming a small saucer bottom and look intent on testing prior resistance at 300. Part of the reason behind the move was an upgrade to chipmaker Applied Materials (AMAT) +3.3%, which was upped from neutral to buy at UBS Warburg. Chip equipment maker Cymer (+4.8%) also released earnings after the bell on Tuesday. The company posted a narrower than expected loss and raised revenue guidance going forward. The SOX finished the day up at 290, but it will take a decisive move back above 300 to signal a trend reversal.

Chart of the SOX

The FOMC concluded its two-day meeting today, with no change in interest rates, as expected. It also left its bias unchanged, saying that risks are balanced between inflation and economic weakness. The FOMC statement said that, "Oil price premiums and other aspects of geopolitical risks have reportedly fostered continued restraint on spending and hiring by businesses." It also said that it expects the economic climate to improve as those risks are lifted. Basically the Fed is stepping out of the way with interest rates at a 40-year low and allowing the Iraq situation to work itself out.

The Market Volatility Index (VIX), which has mirrored the range bound activity of the broader markets, but broken out as they broke down, is also on the verge of pulling back below the previous resistance line. That line could now serve as support, reflecting continuing fears for more downside. If we are truly ready for a bounce, it is likely we will see the VIX move back below 35%, as the fear abates. So far, however, we are holding above that level, even on Tuesday's bounce and Wednesday's intraday recovery from the big drop. The VIX is based on the premium levels in OEX options. Because the OEX is heavily traded, it generally takes quite a bit of order flow to move the VIX and reflects the activity of large institutions. If the VIX reflects more fear than the big boys feel there needs to be, then we see the VIX drop, even if the market does not move significantly higher that day. It almost always drops on big moves to the upside as institutions reduce the cost of long positions by selling out of the money premiums. However, if it drops to the point where it looks cheap, compared to current market risk levels, then we also see support. By holding above the 35 level, which at one point institutions were willing to sell, it tells us that the big players still have downside concerns. Today's close at 35.22 is still above that mark, although just barely.

Chart of the VIX

Deciphering what we saw today was no easier than it was yesterday, or the day before. We know that Iraqi developments will continue to lead to big market swings. Between now and February 5, when Colin Powell makes his UN presentation, we may see some digesting, without any real developments. Of course, that's what we thought today until mid-day, as well. After the bell, AOL-Time Warner missed forecasts and announced the biggest corporate loss ever, at $45.5 billion, as it wrote down the value of America On-Line. It also announced the departure of Ted Turner. If today was simply a relief rally following the tension of the State of the Union address and FOMC meeting, we may get yet another rollover tomorrow. However, shorts who decide to act on that rollover below the aforementioned H&S breakdown level (which I still believe is the favorable play) need to keep in mind both the possibility of unpredictable action from world events and the fact that the COMP and NDX are still holding there November support levels. To the upside, playing long will have plenty of resistance between Dow 8200 and 8400 to get through, so traders may want to play on partial positions over 8200 until that congestion is cleared on a rally. If one thing is certain, it is that we are still in one of the toughest trading environments in quite some time.

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