Friday's Action: Stocks built on Thursday's rally for much of Friday's session, only to give up those gains at the closing bell. Economic reports were mixed, giving little in the way of market direction and volume was light. Major world markets finished mostly higher on Friday. London's FTSE closed down 0.37%; Frankfurt's DAX closed up 0.27%, and Paris' CAC 40 closed up 0.62%. Japan's Nikkei closed up 2.08%, Hong Kong's Hang Seng finished down 0.30%, and Sydney's All Ordinaries Index closed up 0.84%. In economic news, Personal Income in February rose 0.4% while Personal Spending increased by 0.2%. Consumer Sentiment for March was revised to 95.8 from 94.1. Volume came in at 1.32 billion shares traded on the NYSE and 1.58 billion shares traded on the Nasdaq. Market breadth was positive, with NYSE advancing issues over declining issues by 1.20, and up volume over down volume by 1.27; Nasdaq advancing issues over declining issues by 1.05, and down volume over up volume by 1.05. Leading sectors were Airlines, +2.42%, Forest Products, +1.46% and Broker/Dealers, + 1.37%. Laggards were Semiconductors, -1.25%, REIT's, -1.12% and Biotechs, -0.76%. Nasdaq 100 futures closed 5 pts lower to settle at 1419.50, while the S&P's settled up 0.10 pts at 1106.10.
Weekly Recap: Despite Thursday's huge rally, the market posted another down week as investors weighed the opportunities presented by deeply oversold conditions against concerns that geopolitics could sink equities once again. On Monday, Israel's assassination of a Palestinian leader and Taiwan's controversial presidential election re-ignited fears associated with the Spanish terrorist bombings two weeks ago. The Dow came within 12 points of the psychologically important 10,000 level and the market spent the rest of the week trying to recover. The political uncertainty, however, did not translate into losses for all investment vehicles. Gold, known as a safe-haven, rallied throughout the week and reached $423.50 the ounce on Friday, its highest level since the first of the year.
Economic data were largely in line with expectations (final Q4 GDP at 4.1%, February Durable Goods at 2.5%) and earnings reports were sparse. Chip maker Micron Technology beat Q2 consensus estimates by $0.02 Wednesday night and helped launch the SOX index to a 4% gain on Thursday. Goldman Sachs's blow-out Q1 report, however, did not have the same effect on the brokerage sector. Broker/dealers were one of the worst performng groups for the week. Other sectors that followed the brokers into negative territory were tobacco, biotechs, breweries, and oil services, with a 5% drop in the price of crude oil hitting the energy sector. However, a statement Friday by a member of OPEC's economic board that the cartel will cut quotas April 1st suggested that the oil price would not be headed much lower anytime soon.
For the week, the Dow lost -2.3%, the S&P 500 finished -0.3% lower, while the Nasdaq fell -2.2%. The small cap Russell 2000 lost -2.9%. Next week, the market will probably tread water until Friday, when activity should pick up with release of the March employment report. The market will need to see job growth above consensus estimates of 100K to abate concerns regarding the stalled labor market. On the earnings docket, some of next week's major reports include CarMax, ATI Technologies, Bed Bath Beyond, Best Buy, Circuit City, Monsanto, Gucci, Pier 1 Imports and Schnitzer Steel. Best Buy (BBY) is of particular interest as the sentiment toward the company is near exuberance.
Trading Futures on the VIX: The CBOE began trading futures on its CBOE Volatility Index (VIX) Friday, launching the newly created CBOE Futures. VIX futures will trade under the symbol "VX" on the CBOE electronic platform. The CBOE Volatility Index (VIX) Futures will track the level of an "Increased-Value" Index (VBI). The Options Price Reporting Authority (OPRA) will publish VBI data as VXB for OPRA subscribers. Check with your quote vendor for real-time data availability. The VBI is 10 times the value of VIX. The contract size is $100 times the Increased-Value VIX (VBI). Contract months will be the two front-month contracts plus two contract months on the February quarterly cycle (February, May, August, and November). The VIX is an interesting trading vehicle because it tends to move in definite patterns bounded by its upper and lower standard deviation (Bollinger) bands. You can learn more about CBOE Volatility Index Futures at the CBOE website.
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The COT Report: The latest Commitments of Traders report from the CFTC shows that Commercial Hedgers sold some 22,400 S&P 500 futures contracts last week to reverse their position to net short -17,27 contracts. Large Traders remained net short -28,429 contracts, with the entire offsetting net long position of +45,705 contracts held by Small Traders, the so-called "weak hands". For the Nasdaq 100 futures, Commercials bought some 4,600 contracts to bring their net long position to +17,997 contracts. Small Traders were net short -3,003 contracts in the Nasdaq. Commercial action in Dow futures saw the smart money sell some 13,800 contracts to bring their net long position to +929 contracts.
Commercial Hedgers made a massive shift of over 22,000 contracts in the S&P's last week to reverse their net position to short once again. Shifts of +/- 20,000 contracts in one week are rare, and in this case, should be considered a bearish sign.
Sentiment Surveys: The latest Investors Intelligence survey showed that the percentage of bullish newsletter writers came in at 45.4%, while the percentage of bears registered 23.2%. The bullish ratio (bulls/bulls +bears) came in at 66.2%.
The latest AAII survey showed a decrease to 31% bulls, and an increase to 43% bears. The bullish ratio came in at 42%, while the 4-week moving average remains high at 59%. One thing to note about the AAII survey is that, while membership in this organization is quite large as investor groups go, the number of members that actually participate in the survey is very small. Thus, large fluctuations in survey results from week to week are not uncommon.
The latest Market Vane survey came in at 61%, indicating that the majority of commodity trading advisors (CTA's) remain bullish on the future direction of the S&P's.
The Short Term Outlook; 1-5 Days: We said in Thursday night's column that the odds favored making higher highs on Friday, and that happened. Friday's price action favors making lower lows on Monday. Friday's morning climb to higher high and then a late day sell-off resulted in a number of bearish "shooting star" candlestick patterns. The QQQ, NDX and COMPQ all formed shooting stars. The pattern is characterized by a long upper tail and a small real body at the bottom of the daily range. While the shooting star suggests that we could see a little more downside or consolidation, it is not normally indicative of a major top. The chart of the QQQ below shows the formation of the shooting star and price stalling at the 20-day moving average. The fact that volume was relatively low however, suggests that the sellers didn't have much conviction.
Another short-term bearish indication Friday was the action of the NDX Volatility Index (VXN). The VXN closed on support and it's 5-day RSI closed below 30%. Our expert system generated a buy signal for the VXN at Friday's close, suggesting the index is ready to move higher. Since the VXN is inversely correlated to the NDX, a rally by the VXN would be bearish for the Nasdaq.
SMT's Pivot Point Forecast; 1-2 Weeks: Our Pivot Point forecast is currently on a buy signal. Our next Pivot Point is forecast to occur on or near March 29th.
The 60-mn NDX chart below shows that the StochRSI indicator is in the BUY zone. For Monday, resistance for the S&P's comes in at 1111.50 and then 1117.50. Support lies at 1101.50 and then 1098. For the Naz, resistance comes in at 1428 and then 1439. Support lies at 1412 and then 1407.
The Intermediate Term Outlook; 2-6 Weeks: The Risk Aversion Indicator, represented by the NDX:Dow Ratio, has been a good forecaster of the general market trend over the last couple of years. As the chart below shows, the ratio crossed below its 70-day exponential moving average at the end of January, coinciding with the yearly high for the Nasdaq Composite on Jan 26th. The slope of the EMA is trending down and the ratio is trading below it. The indicator suggests that we have most likely seen the market high for the year.
Our Market Trend Indicator (MTI) is currently positive and trended slightly higher on Friday.
Free Stock Picks! This week's free stock picks are listed below. SMT's Stock Picks is now a regular daily feature on our web site. Click HERE for details.
Top Stock PickS for Monday, Mar 29, 2004:
FTI, IFSIA
Good Trading!
Charts and data appearing in today's column are courtesy of:
StockCharts.com
