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What is the Definition of Support?
Answer: Friday's close on the Dow and Nasdaq! Each closed within a
whisker of being exactly on critical support levels. The Nasdaq
closed at 2251, a mere one point above critical support at 2250.
The Dow also snugged in close to 11000 at 11005. The S&P remains
about 10 points above support. With a blessing from Greenspan on
Thursday the light is green for a post holiday rally if the bulls
can muster up the courage to attend.
Thank you grandpa! You could not tell it from the major indexes on
Friday but Greenspan gave the economy and the markets his blessing
in the Economic Club of New York speech on Thursday. He warned that
the manufacturing correction is not yet over, (old news) but that
the Fed was monitoring the problem and they would not be bashful
should it require a policy response. (further rate cuts) He said
"this period of sub-par economic growth is not yet over, and we are
not free of the risk that economic weakness will be greater than
currently anticipated, requiring further policy response" but there
was no sign of inflation and productivity was still growing. Count
on interest rates going lower and count on the economy recovering
in the last half of the year. That was the bottom line of the wordy
message. He did suggest that the five previous rate cuts would provide
needed support and the Fed may be toning down its aggressive posture.
The economic reports out Friday did not project a picture of glowing
economic health. The first quarter GDP was revised downward to +1.3%
from the previously reported 2.0%. Things are not as rosy as previously
projected. Couple that with Greenspan's "not out of the woods" speech
and traders were a little cautious. Also existing home sales fell an
incredible -4.2% showing that not only new homes are staying on the
market longer but all homes. It appears that consumer confidence, which
came in Friday at .92 as expected, may be about to take a turn for
the worst as evidenced by home sales. If they are not buying houses
then they are not buying appliances to go in those houses. Durable
Goods came in with a -5.0% drop which was much more than expected.
What we have here is light at the end of the tunnel with the
Greenspan comments, but the tunnel just got longer, much longer.
This was the main culprit for holding back the markets on Friday.
It also did not help that a major analyst was talking GE down as well.
Saying that short cycle products were still declining in May and there
was evidence that Jack Welch's comments, "ugly and getting worse" may
still be true. Long cycle products like aircraft engines were still
in a growth mode of about 20% for GE but consumer type items were
dragging them down. GE and HON both fell on the news as well as UTX
and MMM in sympathy. GE also fell on the news that they, along with
Goldman Sachs, would provide $7 billion to rescue Finova, FNV. Pocket
change, right?
The Nasdaq fell despite an upgrade of the semiconductor sector. The
culprits Friday were ADCT and DITC whose earnings problems tanked the
communications/networking sectors and overpowered the semiconductors.
Even JNPR, which was rumored to have won a contract over CSCO, dropped
-2.41. Lehman made a very public call saying the second half of the
year may be more challenging than previously expected. There were
no winners in anything Nasdaq with profit built in over the last
two weeks. With so much uncertainty in the U.S. a well as overseas,
the urge to go into the long weekend flat was just too strong. Still
volume was still VERY light. The Nasdaq just squeaked out a second
lightest day of the year award with 1.38 billion while the NYSE
posted the lowest volume day of the year at only 818 million.
Remember the almost 30,000 volume on the Microsoft leaps on Thursday?
There was another 15,000 of the Jan-02-120 calls on Friday. Merrill
Lynch analyst, Henry Blodget, came out Friday pounding the table on
Microsoft. That was just a coincidence, right? You don't think Merrill
Lynch would take a 45,000 leap position just before their golden
boy went bullish on the stock? It did not do Blodget any good because
MSFT lost -.81 for the day. That was also surprising since MSFT
and AOL are now kissing cousins again. The feud between MSFT and AOL,
which bought Netscape, appears over and they are reportedly going
to announce a deal where MSFT will bundle AOL software with the
new Windows XP. Could this be a condition for a pending settlement
with the Justice Dept? If MSFT and AOL do get together again it
could be trouble for RealNetworks. RNWK has refused to slim down
its software for AOL and their agreement is ending. AOL could
easily go with Windows Media Player instead and I am sure MSFT
would love to grab 28 million more users away from RNWK.
(Note: I was talking to one of the other editors late Friday night
and I went back to show him the volume on the MSFT leaps and all
the daily volume was gone as well as the open interest on the CBOE.
I mention this in case it was all a data problem at the CBOE but it
was there at 4:PM!)
Next week could be a challenge. Since both major averages have
dropped back to basically a goal line stand on their previous
breakout points, trading could be tricky on Tuesday. After the
Friday morning dip and recovery the Nasdaq held 2250 the rest of
the day. The Dow only dipped below 11000 once to 10993 and quickly
rebounded. However, the Dow does not look as healthy as the
Nasdaq and with a -117 close you can see why. It is trending
down rather steadily and not far from the low of the day. Just
profit taking? Maybe, but the line was drawn in the sand at 11000
by a beaten and battered defender not a bull with just a bloody
nose.
The VIX was behaving strangely on Friday. With both major
indexes falling the VIX was heading DOWN for a 23.15 close. This
is a number not seen since September of last year. The saying "when
the VIX is low its time to go" has always worked in the past but
how low is low? Last August the low was near 18. This was just
before the Dow rolled over at 11250 and fell to 9656. What is
strange about this is the market was falling triple digits on
Friday which normally pushes the VIX up as traders buy puts. Is
everyone so bullish they are not even considering puts? Do we
have a disaster waiting to happen here? If so, the conditions
are setting up so quietly that many may get caught by surprise.
This is something traders really need to watch next week.
With summer officially upon us and Tuesday likely to be a very
low volume day as well, it may be Wednesday before we can confirm
direction. The battle may be fought in minor skirmishes Tuesday
and as yet unknown news headlines will control our fate. The
first economic reports to worry about are the Personal Income
and Spending on Tuesday, Chicago PMI on Thursday and the biggie,
Nonfarm Payrolls on Friday. The midweek reports are noise
but the Payroll report could be trouble. With the economy possibly
weaker than expected by the Fed's own admission, falling payrolls
could trigger more uneasiness. Put worry about the payrolls together
with very low volume and we could see a volatility spike and
support levels tested again. On the other hand, investors, not
traders, have pretty much accepted the fact that the patient will
not die and the antibiotic has already been administered. Next
week it will be up to the true believers to hold the line. Would
the true believers please stand up! We are behind you all the way,
at least until the Nasdaq falls below 2250 and then you are on your
own! |
