Option Investor
Market Wrap

Low Range, High Anxiety

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      11-01-2004           High     Low     Volume   Adv/Dcl
DJIA    10054.39 + 26.92 10076.59 10010.15 1.72 bln 1633/1164
NASDAQ   1979.87 +  4.88  1983.91  1969.32 1.53 bln 1574/1492
S&P 100   540.50 -  0.15   542.24   539.21   Totals 3207/2656
S&P 500  1130.51 +  0.31  1133.43  1127.53
SOX       413.71 +  1.46   415.00   409.39
RUS 2000  587.00 +  3.21   587.42   581.11
DJ TRANS 3504.07 +  6.65  3521.82  3485.70
VIX        16.27 -  0.00    16.76    16.18
VXO (VIX-O)16.31 -  0.26    17.07    16.27
VXN        22.61 +  0.71    22.85    22.43
Total Volume 3,256M
Total UpVol  1,843M
Total DnVol  1,347M
Total Adv  3207
Total Dcl  2656
52wk Highs  284 
52wk Lows    57
TRIN       0.86
PUT/CALL   0.92

It was a relatively quiet day, punctuated by small number of sharp, narrow range moves. Volume was light overall, not surprising as we approach the elect with its attendant direct and indirect uncertainties. Option volatility increased despite the tight range for the day, perhaps caused by option purchases by market participants seeking to hedge open positions.

One year daily Dow Chart

I've squeezed one year's worth of daily candles into a single chart to provide some perspective on today's action, or lack thereof. The Dow rose 26.92 points to close at 10054, just above The Number but below 10080 confluence and trendline resistance. The daily cycle upphase currently in progress is so far delivering excellent price traction, and while the market feels to me like it wants to correct, the small wedge/flag atop last week's sharp rally should act as a continuation pattern with the upphase. A close above 10080 will suggest that the breakout is in progress, targeting 10130 and 10175-200 next.

Daily SPX Chart

The SPX rose less than a point to close at 1130.51, one of those rare days when every fraction counts. The daily cycle upphase has been very strong since last week as well, but the climb has outpaced the oscillators, leaving a potential bearish divergence here if the price reverses back below the 1115 support level on a closing basis. Until then, this is merely a potential divergence, and only a daily cycle signal will change it. Above 1136, 1142-44 looms large on the way to a possible test of the year highs.

Daily Nasdaq Chart

The Nasdaq is the closest to a test of this year's declining resistance line, looking for a close above the 1985 level (today's close was 1979.9) to target 1995-2000, 2025 and 2060. The pattern of stochastic highs suggests that the 1980-2000 level will be a key battle between bulls and bears, and conveniently we have major market moving news due tomorrow. Below 1950, next support is at 1920 and 1900.

Weekly TNX Chart

Bonds were weak today, gapping slightly and spending the day above the bulk of last week's range. On this weekly chart (see tonight's Futures Wrap for a discussion of the daily chart), the most recent weekly candle is based solely on today's data. Despite the strong move higher in the ten year note yield (TNX), which added 1.51% in a 6.1 basis point move to close at 4.09%, the downtrend off the springtime highs has yet to be violated. A move above the 4.14% level will be the first sign of trouble for bond bulls/TNX bears, followed by EMA resistance in the 4.2% area. A break below the 3.85%-.88% level would suggest that the current decline is in fact a bear wedge breakout targeting the low 3.0% level below 3.59% support.

Weekly Crude Oil Chart

Last week's pullback was being lightly retraced this morning, with December crude futures reaching a high of 52.475 as the financial press discussed production concerns amid reports of wildcat strikes in Nigeria. The spin abruptly reversed course as crude oil took a plunge, with reporters attributing the fall in prices to the workers not formally having agreed to strike and Iraqi production reaching its highest level since the first attacks on that country. Reuters attributed the action to speculation of a Kerry win, citing analysts who expect a more interventionist petroleum policy, a less aggressive expansion of the Strategic Petroleum Reserves and a more conventional diplomatic policy in the Middle East under Kerry.

Whatever the reason, oil was back below the 50 level for the first time in a month, lending some credence to the bearish divergence in the 10-week stochastic that has been steadfastly holding its ground. Wildcat strikes, kidnappings and fighting in the Middle East, and news of the sabotage of a pipeline in northern Iraq were ignored. There's support at 49, with stronger confluence at 45-46. Obviously, the election results will have their own impact on this chart, always assuming that the more than 10% price drop in the recent days approaching the election were merely technically driven. For the day, crude oil for December delivery closed at 50.20 on the Nymex, a 3% decline.

Following Friday's news of the 70+ year low in the personal savings rate, the Bureau of Economic Analysis announced US September consumer spending and personal income before the bell. Personal income rose 0.2% for the month, while consumer spending rose 0.6%. Expectations were a .3% increase and a .6% increase, respectively. The Personal Consumption Expenditure Index (PCE), an index that the Fed prefers over the CPI, is now up an annualized 2% over the past year, with the core PCE up an annualized 1.5%. There was little reaction to this data upon its release, with bonds drifting slowly lower while equities declined slightly and then rose.

The news was notable in that personal spending continued to advance faster than personal income, as appears from the attached chart from the BEA's report:

BEA chart of Real Disposable Income and Real consumer spending

This month's income figure included an increase of 20B in transfer receipts representing net insurance settlements for hurricane damage. Wages and salaries increased by another 20B, but according to the report were "partly offset" by a reduction in rental income due to uninsured losses resulting from the hurricanes.

At 10AM, the Institute for Supply Management reported that the US manufacturing sector expanded for its 18th consecutive month in October, holding over the 50% baseline but declining to 56.8% from an unrevised 58.5% in September. Expectations were for 58.5%, and equities dipped immediately on the news. Also at 10AM, the Commerce Department reported a US Construction Spending for September. The number was flat for the month, missing expectations for a .5% increase. The August reading was revised to a .9% gain from the .8% increase previously reported. The September reading broke a 7 month trend of increases in construction spending.

At 3PM, the Treasury Department announced that it intends to borrow another $100B in the last quarter of 2004 to fund the budget deficit, to be followed by an additional 147B in the first quarter of 2005. The markets greeted this news with a yawn, with the US Dollar Index holding steady as well.

Earning season is finally slowing down, and it was a relatively quiet day for corporate news. DCLK was up strongly on news that it has retained Lazard Freres to advise the company on increasing shareholder value, including potential stock buybacks, dividends, the sale of all or part of the company and such. DCLK rose a whopping 11.95% to close at 7.12.

TYC reported fiscal Q4 earnings of 22 cents or 454M, which, excluding non-recurring items amounted to 45 cents per share, beating estimates by 2 cents. Q4 2003 had seen a loss of 297M or 15 cents per share. Led by strong growth in its healthcare, electronics and engineered products divisions, revenues rose 13% to 10.44B, meeting expectations. TYC expects to earn 40-42 cents in the next quarter, below current analyst estimates of 44 cents. TYC rose 1.77% to close at 31.70.

A Wall Street Journal story made the rounds this morning, suggesting that internal emails and other documents reveal a an effort on the part of MRK to bury the facts showing elevated heart risks associated with Vioxx. The article cited an email dated March 9, 2000 acknowledging such risk. In the afternoon, it was announced that Standard & Poor's had placed MRK's triple-A credit rating on review for a potential downgrade due the risks of additional litigation against the company. The stock got shanked for 9.68% to close at 28.28.

Petrochemical and coal mining company CVX was downgraded by Robert W. Baird from "outperform" to "neutral" following last week's Q3 results, citing an expected negative impact from lingering interruptions in the wake of this years hurricanes, as well their anticipation of a "consolidation" in oil prices. CVX closed lower by .21% at 52.95.

After the bell, chipmaker NSM lowered its fiscal Q2 targets, with the company now expecting sales to decline almost 20% to 445M- 450M from its previous forecasted drop of 8%-10%. NSM was down 8.03% to 15.35 afterhours as of this writing. MXIM was also getting sold afterhours, down 2.51% to 43.10 after meeting analyst expectations of 42 cents per share. Sales were light, however, coming in at 435M for the quarter vs. expectations of 454M. The company also announced an increase in its quarterly dividend from 8 cents per share to 10 cents.

For tomorrow, we have a light menu of economic reports, with the ICSC-UBS Store Sales report and the retail Redbook, followed at 10AM by the Challenger Job report. That, and the elections. I believe that today's lighter volume, higher option-volatility, narrow range action was the prelude to tomorrow's news. I won't bother adding my voice to the deafening chorus of guesses as to what will, will not or might happen. From a trader's perspective, we can either try for an educated guess, or wait for the market to tell us by moving through or failing to move through key levels. While the temptation is obviously to attempt to anticipate a move with a prior (directional) position, that's the higher risk alternative. With the Nasdaq near the top of an impressive rally off the August lows while the Dow and SPX continue to retrace last month's losses, there's something for everyone. While I am personally expecting some kind of selling on the Nasdaq, at least on a corrective basis, that opinion will change if bulls can break the declining resistance lines on the way to a test of the June highs. The only certainty is that the market will be making a strong move in either direction following the light volume, high anxiety action we had today. If you find yourself worrying about the outcome of the election, at least as far as your open directional positions go, consider either hedging them or lightening up. Alternatively, a straddle properly applied can help you capture the move without committing more than necessary to either direction.


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