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^SPX
· ^IXQ
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· ^MID
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· ^CRB
· ^HUI
· ^BTK
· ^TYX
Sector Performance Since:
8 Apr 1999
· 18 Oct 1999
· A Week Ago
· A Fortnight Ago
Sector Acceleration Since:
8 Apr 1999
· 18 Oct 1999
· A Week Ago
· A Fortnight Ago
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Stocks:
The market sold off Thursday as expected. We checked the Maximum Pain Theory
values for the OEX and QQQ options and found that, as of Thursday, the maximum
pain for OEX options is 460 and for the QQQ options, it is 27.
The downmove on Thursday took the OEX to near 465 and the QQQ to near 28.
If the option writers are going to maximize their gains — and they do so fairly
often — they will move the market down a little bit more to force call option
buyers to sell out, then they will move the market back up to wipe out the put option
buyers as well. Overall, from a purely Maximum Pain Theory perspective, the market is
likely to be trapped in a narrow trading range until next Friday as the option writers
maneuver the market between the two poles of call and put buyers.
There was strong Money Flow into the blue chips on the dip Thursday, so it does appear
that buyers are eager to buy the dip. That was evidently stronger in the S&P 500
Index rather than the NASDAQ-100, however, which mutes the bullishness of the indicator.
The broad market held up well, with the Value Line trading well within its uptrend
channel on the intraday chart. The blue chip S&P 500 Index did slightly breach its
uptrend channel support line, suggesting it is likely to be weaker until it finds lower
support. The NASDAQ-100 also broke its intraday uptrend support line and looks likely
to find support on the violet-colored support line just above 1100.
Our ES-NQ spread moved up slightly, but not robustly. This behavior leads us to
think this correction has limited downside potential. But, of course, we will need to
see the NASDAQ-100 Index start to "circle the wagons" on Friday. One of the most bearish
of factors here is the plight of the US Dollar, which has considerable downside momentum
going for it. Traditionally, a rising US stock market in the face of a falling US Dollar
has been the perfect setup for a stock crash. All it takes is one careless match in the
forest to set off a forest fire of selling.
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· ^SML
· ^CRB
· ^HUI
· ^BTK
· ^TYX
Sector Performance Since:
8 Apr 1999
· 18 Oct 1999
· A Week Ago
· A Fortnight Ago
Sector Acceleration Since:
8 Apr 1999
· 18 Oct 1999
· A Week Ago
· A Fortnight Ago
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Stocks: Sell in May and Go Away?
The stock market, if it has not topped already, is very close to a top. Here's why:
- Our ES-NQ spread bottomed in the $350 area on Monday. After three higher
lows on the intraday chart, that spread has soared to over $900 by the close Wednesday,
strongly suggesting that the top is in or will be in on the next rally. This spread tends to rally when the market sells
off.
- The sentiment figures registered an intraday reading for the OEX in the overly-bullish
zone on Tuesday (although they closed under that official overly-bullish mark).
Moreover, the QQQ options figures closed in that overly-bullish zone on Wednesday. This bout of bullishness
on a dip is a bearish sign.
- The S&P 500 cash index hit the trendline which connects the August and December highs on Tuesday and
found it was still resistance. Under one Elliott Wave interpretation, this may have completed the
final wave, wave E, within a contracting triangle, with the implication that a thrust decline
to new lows is getting underway. Another Elliott Wave interpretation would have wave C complete,
implying a drop in wave D to near prior lows.
- The bond market soared to new contract highs on Wednesday as interest rates plunged. Moves in interest rates tend to
precede similar moves in the stock market, suggesting new lows are ahead for stocks. When there is a
divergence of opinion between bonds and stocks, bond investors are usually right and stock investors wrong.
According to our interpretation of the data, the economy is sliding as the recession again picks up
steam to the downside.
- Studies show that stocks have a seasonally weak performance between May and October, hence the
Wall Street adage, "Sell in May and go away."
- The sector index which has led the market higher — the Semiconductor Index or SOX —
is faltering badly and has a Time Ratio High due Thursday.
This extremely bearish stock picture may not immediately yield to a waterfall decline, however. That's
because we are 7 trading days away from options expiration and the normal monthly market manipulation by
option writers should levitate the market for the next week. If the market is able to hold up for the next week,
the action after expiration should be interesting to say the least. The broad market continues to hold
up better than the blue chips, so a selloff from this price area in the blue chips might not
see a big decline in the broad market, suggesting big opportunities in the area of spreading:
simultaneously buying and selling two indices. The index expected to hold up better is bought
and the index expected to be weaker is sold short. The difference in performance between the
two indices provides the profit potential.
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Popular Indices:
^SPX
· ^IXQ
· ^NDX
· ^SOX
· ^DJI
· ^MID
· ^OEX
· ^NYA
· ^VLE
· ^RUT
· ^SML
· ^CRB
· ^HUI
· ^BTK
· ^TYX
Sector Performance Since:
8 Apr 1999
· 18 Oct 1999
· A Week Ago
· A Fortnight Ago
Sector Acceleration Since:
8 Apr 1999
· 18 Oct 1999
· A Week Ago
· A Fortnight Ago
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Stocks:
Sentiment almost gave a sell signal on Tuesday as the intraday figures showed over twice as
much money going into calls as puts. However, by the close, the ratio had backed off, indicating that
the public wasn't yet willing to buy into the rally.
The ES-NQ intraday spread indicator has formed a double bottom pattern over the last couple of days
and may be indicating a top under development. On Monday, the spread put in a low around $350. Then,
on Tuesday, it bottomed around $400. And, on the daily chart, that spread closed just in the
lower Bollinger Band, a sign the spread is oversold. We expect this spread to telegraph a top
and a correction by rising.
The Semiconductor Index (SOX) has been having a great deal of difficulty in continuing to new
highs this week. The yellow resistance line forms the upper channel line on this index
on the intraday chart. Probes to the upper line have been turned back in the last couple of
days. At the same time, the AD Oscillator in the bottom plot shows bearish divergence on those
new high probes. These are signs of a top in the process of being formed.
May 8th is a key date from Time Ratios and suggests the market could be forming a top over the
next couple of days. The inability of traders to embrace the rally suggests the possibility
that the coming correction could be a normal retracement of 38-62% and a buying opportunity
for another, bigger leg up later. It also could potentially be much deeper. This is a market
which has to be respected for its powerful rally potential.
The FOMC surprised the market slightly by changing its bias to ease, citing the potential
for deflation as a worry factor (although, they invented a nonsense term, "falling inflation"
instead of using the D-word). They as much as admitted that they were wrong in attributing
weakness to the Iraq War and stand ready to ease further if necessary. Overall, the market
didn't gain much confidence in the Fed's ability to get the economy on the move again.
The weak dollar seems to be a more positive factor as it not only exports deflation to the
rest of the world, it is contributing about 200 basis points to the GDP figures. The Fed
refuses to comment on the falling dollar, leaving that to Treasury. Although Treasury's
stated policy is a "strong dollar" policy, they also say they do not wish to intervene and
to let the market set the value of the dollar.
With the world's reserve currency in a benign downtrend, the Fed probably doesn't
need to lower interest rates to achieve their goals. However, they have put the market on
notice that they aren't asleep at the wheel — even if they haven't figured out that
deflation is the correct term to use.
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· ^MID
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· ^CRB
· ^HUI
· ^BTK
· ^TYX
Sector Performance Since:
8 Apr 1999
· 18 Oct 1999
· A Week Ago
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Sector Acceleration Since:
8 Apr 1999
· 18 Oct 1999
· A Week Ago
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Stocks:
The NASDAQ continued to show excellent relative strength Monday. An indication that the rally has
more to go came from the NQ-ES spread, which rose sharply higher. However, by mid-afternoon,
that spread had reversed course and retraced some of its gains. Is this an early warning of
a trend reversal? It could be, but we will need additional weakness in NQ-ES to confirm a trend change.
We expect several days of weakness in this spread to signal a market top. If the spread cannot
move above Monday's high, it would indicate that a correction has started.
Option sentiment has not yet given a sell signal, although it did show the OEX crowd becoming a
bit more willing to bet on further upside. By the close, the Dollar Weighted Call-Put Ratio
was 1.47, below an official sell signal of 2.00 or higher. We would be suspicious of any
selloff which was not preceded by an overly-bullish reading on sentiment.
There is a strong Time Ratio turning point (nominally a high, but these things can invert)
due Thursday in the Semiconductor Index (SOX),
a leading sector. And, there is a Time Ratio turning point, also a high, due a week from Wednesday
in the NASDAQ-100. Signs of weakness going into those two dates should warn of a reversal to the
downside. However, it is possible that those two dates could mark lows, followed by acceleration
of the uptrend. It will pay to watch the coincident indicators to confirm which kind of turn the
market is making. The market is quite overbought here and the nature of the correction will give
us important clues about its future course.
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· ^IXQ
· ^NDX
· ^SOX
· ^DJI
· ^MID
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· ^NYA
· ^VLE
· ^RUT
· ^SML
· ^CRB
· ^HUI
· ^BTK
· ^TYX
Sector Performance Since:
8 Apr 1999
· 18 Oct 1999
· A Week Ago
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8 Apr 1999
· 18 Oct 1999
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Stocks:
Heavy call buying in the QQQs suggests hedge funds were buying Friday while OEX traders were
only tepidly bullish despite the rally. The caution the OEX traders are showing suggest this
rally has more to go. We discuss the stock market, as well as many others, in this weekend's
Detailed Comments Page . . . .
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· ^IXQ
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· ^MID
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· ^NYA
· ^VLE
· ^RUT
· ^SML
· ^CRB
· ^HUI
· ^BTK
· ^TYX
Sector Performance Since:
8 Apr 1999
· 18 Oct 1999
· A Week Ago
· A Fortnight Ago
Sector Acceleration Since:
8 Apr 1999
· 18 Oct 1999
· A Week Ago
· A Fortnight Ago
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Stocks:
MayDay was not only the first day of trading in May, but the cry from the Chicago Mercantile Exchange
as a massive failure in their emini system halted trading at mid-morning. All emini trades for
Thursday (which includes Wednesday evening) were canceled and no time for a re-opening of trading
was set as of the close Thursday.
The strength in the NASDAQ-100 emini relative to the S&P 500 was impressive before the halt, however, and
suggests that we are seeing a wave 4 consolidation ahead of a final wave 5 rally in the diagonal
triangle which has been in progress for the past few weeks. A number of short term timing
indicators point to a trend change centered on May 8th and that may very well be the time to
look for that fifth wave to top out.
Due to the relative strength of the NASDAQ, traders should now look to buy the June NASDAQ-100 -
June S&P 500 emini spread should it retest its 16-Day moving average as shown in its
daily chart (see the Daily Spreads Charts page and look for
"NQ June 2003 NASDAQ 100 e-mini - ES June 2003 S&P; 500 e-mini Spread" (corrected) — the
16-Day moving average is labeled ma). That price area has
provided solid support on several tests this week (see the SpreadWatch NQ-ES intraday
chart for a graphic illustration of that support). This is assuming the CME can get its trading
platform working again, of course.
This fifth and final wave up should finally complete the move up and usher in, at minimum,
a test of the bottom of the large trading range — and could possibly send the market
tumbling sharply lower than that under the reasonable alternative count that the trading
range is over. If the trading range is winding up, the next move is likely to be a thrust
decline to break last year's lows.
Option sentiment gauges supported one more rally wave: the QQQ call dollar-volume
was equal to the OEX volume on Thursday. Such strong volume in the QQQs tends to coincide
with hedge funds positioning for a rally. And, too, we never did get a sell signal from
the Lilliputian bulls of the OEX — we should have, by all rights, gotten a sell signal
at the top. It will probably take one more rally to send the bullish fever into the danger
zone where twice as much money goes into calls as puts.
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^SPX
· ^IXQ
· ^NDX
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· ^DJI
· ^MID
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· ^RUT
· ^SML
· ^CRB
· ^HUI
· ^BTK
· ^TYX
Sector Performance Since:
8 Apr 1999
· 18 Oct 1999
· A Week Ago
· A Fortnight Ago
Sector Acceleration Since:
8 Apr 1999
· 18 Oct 1999
· A Week Ago
· A Fortnight Ago
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Stocks:
We didn't get a sentimental sell signal, but pattern-wise, the market rally probably had its
final hurrah on Wednesday. Whether it was accidental or intentional, they may have put an
exclamation point on the old saying, ``Sell in May and go away.''
The pattern was a diagonal triangle, which we've mentioned before. This pattern tends to see
the market retrace all of its gains and sometimes more. The pattern should at least test the
support line of the contracting triangle if this was a wave C top (support in the S&P 500
comes in around 800 right now — the index closed at 917). If it was a wave E
top, it could break below last year's lows.
One indicator which argues that a sea change occured on Wednesday was our favorite
stock market spread relationship, the June S&P 500 minus June NASDAQ 100 emini,
which is shown in the SpreadWatch line on the website main page just above
the Relative Strength Table. That spread bottomed around $1050 late Tuesday and closed
Wednesday at around $1550, right in the middle of its Bollinger Bands, in fact.
The key confirmation of the top will be when the indices fall below their short term
support lines shown in the intraday charts, rally to attempt to retrace their losses and fail. If that pattern occurs,
the next wave down should be large.
Is the economy on the road to recovery, or not? Alan Greenspan thinks so, but we can't
shake the mental image of Mad Magazine's Alfred E. Newman (``What, Me Worry?'') watching him testify before
Congress Wednesdsay morning. For a pair of opposing opinions on the economy, read
John Makin's Time
to Target Inflation, which suggests that a sharp stock market decline would do
wonders for the economy along with a Fed that targets inflation rather than interest rates (we agree, of course, on that and most of the rest of his discourse).
For a view from Canada which is surprisingly optimistic, read
THE BANK CREDIT ANALYST IS UPBEAT.
The BCA seems to believe that equities hit "fair value" last year. What have those
Canadians been smoking, anyway?
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Popular Indices:
^SPX
· ^IXQ
· ^NDX
· ^SOX
· ^DJI
· ^MID
· ^OEX
· ^NYA
· ^VLE
· ^RUT
· ^SML
· ^CRB
· ^HUI
· ^BTK
· ^TYX
Sector Performance Since:
8 Apr 1999
· 18 Oct 1999
· A Week Ago
· A Fortnight Ago
Sector Acceleration Since:
8 Apr 1999
· 18 Oct 1999
· A Week Ago
· A Fortnight Ago
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If no response, use this one instead:
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Stocks:
The market made another stab at a breakout Tuesday, but heavy put buying from the QQQ players (probably
hedge funds) preceded an intraday selloff. However, a late rally sent the market back up. This standoff
between the bulls and the bears is creating a clear bearish divergence on our technical indicators
which is likely to end with a slide. However, while the OEX players remain call buyers, they have
yet to reach the overly-bullish level that typically precedes a big decline in the market.
That level occurs when they are pouring twice as much money into call options as put options.
On Tuesday, they only recorded a ratio of call money to put money of 1.16, suggesting this
market hasn't done its job yet on crowd psychology of getting the small trader convinced
they should be fully invested.
The most impressive part of this stock rally is its ability to hold up in the face of extreme
weakness in the US Dollar. Contrary to the action of the last year, stocks are holding up
relatively well in the face of a retest of the bear market lows in the dollar. Of course,
what this means is that foreign investors are seeing a negative return from US stock holdings.
Apparently, they are looking across the chasm to the other side of the recession. We suspect,
however, that a break to new, lower lows in the US Dollar Index could precipitate a strong
bout of selling of US stock holdings by foreigners and would suggest that this stock rally's
foundation isn't strong.
As far as wave counts go, as long the S&P 500 stays below 954.28 — the December 2, 2002,
wave A high (as our preferred Elliott count labels that high on the daily chart) — the
market remains in a wave C rally within a contracting triangle trading range that is
in its tenth month of working off the excesses of the waterfall decline of 2000-2002. Under
that interpretation, we have a wave D decline and and a wave E rally to go to finish the
large, long and dreary trading range. However, that
pattern could potentially be in rally wave E under an alternate interpretation. If that's the
correct interpretation, once this wave is finished, it should resolve into a thrust decline.
Thus, the risk here is still strongly for more downside no matter how high this rally goes.
In fact, the higher this rally does go, the stronger the thrust to the downside once it does end.
The large trading range seems to be sending the message that, despite all the jawboning
by Wall Street that a recovery in the economy is underway and stocks are great buys, the
reality is of an economy on the verge of slipping very deeply into recession — a
recession, we remind you, that it has yet to emerge from despite massive Federal
Reserve stimulation and a modest tax cut from the fiscal policy side. We saw a preview of
a new business confidence survey on Tuesday and, although we won't can't provide any substantive
details, we have to say that business leaders do not share the confidence of the public — nor
the Wall Street brokers who want to sell them shares — that the economy is improving.
Continuing relative strength in the NASDAQ-100 Index relative to the S&P 500 Index
Tuesday failed to generate a buy signal on the June S&P - NASDAQ emini futures
spread trade. That spread should do very well in a correction to the downside, but an
entry into that trade has not been triggered yet. We've been doing quite a bit of research into
entry and exit signals for these spreads lately (you may have noticed an additional
signal line in green showing up on the intraday SpreadWatch charts —
that's part of our research into a better entry signal than a crossing of the simple
20-Day moving average). Our preliminary results show that even a very simplistic
system which enters a trade on the crossing of that moving average is close to being
profitable. However, when the spread itself is caught in a trading range, that kind
of system can generate a series of small, but frustrating, losses. We've found that when the spread
is able to "tag" the outer Bollinger Band first and then move over that moving average, the probability
of profit in the position is much greater. So, at this point, if the market does tag
the outer Bollinger Band first, we'd feel more confident.
The simplistic system we've been using to evaluate trading strategy in this spread
also has suggested that a slightly shorter term moving average,
in the range of 15-17 trading days in fact, is better than the default Bollinger Band 20-Day average we have been
using. Consequently, we have changed the default to a 16-Day average on the daily spreads charts based
upon this research. The daily value of ma
reflects this quantity (see the Daily Spreads Charts section of the website for
these charts).
We're now in the part of the monthly seasonal we call the Monthly Buying Spree
after its tendency to see new buying from pension and mutual fund managers using beginning of month
cash contributions. This period nominally lasts the rest of this week and into Monday of next week —
it's the last two trading days of the month and the first three of the next month.
The last trading day of the month (today, Wednesday) tends to show gains, especially in the broad market
Value Line Index with an average 70% probability according to our research.
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Popular Indices:
^SPX
· ^IXQ
· ^NDX
· ^SOX
· ^DJI
· ^MID
· ^OEX
· ^NYA
· ^VLE
· ^RUT
· ^SML
· ^CRB
· ^HUI
· ^BTK
· ^TYX
Sector Performance Since:
8 Apr 1999
· 18 Oct 1999
· A Week Ago
· A Fortnight Ago
Sector Acceleration Since:
8 Apr 1999
· 18 Oct 1999
· A Week Ago
· A Fortnight Ago
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Stocks:
The market retraced most of last week's selloff as volume slowed Monday. Breadth was strong and although
option traders' bullish confidence was re-energized, we don't have an official overly-bullish
condition (which would be the case when twice as much money is going into call options).
The decline last week was a three-wave move and the rally this week appears to be unfolding in
three waves, so the pattern could be counted as a final wave within an Elliott diagonal triangle,
a very weak pattern which implies coming weakness.
The Semiconductor
Index (SOX), which had been leading the rally up until last week, has retraced only about half of its decline
while the other major indices retraced considerably more (the Value Line made a higher high Monday,
reflecting the fact that the broad market was stronger than the blue chips). After falling below its accelerated
uptrend channel last week, SOX rebounded to test its former support line
from underneath Monday and appears to have failed at that level. That doesn't
argue that the market is in a downtrend, but the
failure of the leading sector to lead is a warning sign not to trust this rally.
The S&P 500 Index came close to its downtrend resistance line, but wasn't able to break
through it in on Monday. A similar pattern in the Dow Industrials was evident also. Both
of those indices are diverging bearishly against their oscillators and their Bollinger
Bands and they are doing so on lighter volume.
The last two trading days of the month and the first three of the next month often bring
buyers into the market. That period starts Tuesday. However, with the recent rally having attracted many buyers back into the
market already, we doubt this monthly seasonal will show substantial strength this time around.
The spread between the June S&P 500 and June NASDAQ-100 emini futures contracts (see
SpreadWatch on the main website page — the current contract value is a link
to the intraday chart) appears to have put in a five-wave rally
and is now in a correction. No buy signal was triggered on Monday due to the fact that
the NASDAQ tends to outperform slightly on rallies. However, we still are looking for
a buy if the spread is able to surmount its 20-Day moving average as shown in the
daily spread chart (see the chart labeled
"ES June 2003 S&P; 500 e-mini - NQ June 2003 NASDAQ 100 e-mini Spread" on the
Daily Spreads Charts menu on the website — it's ma). If the position is entered, use the
red signal line on the intraday SpreadWatch chart as a stop.
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