Investors Are Short Enthusiasm By Aaron L. Task
02/10/2003 18:16
Save for a brief rally on news that Iraq will allow U-2 surveillance flights, major stock proxies hung close to break-even Monday, finishing not far from where they started. The session was ultimately positive for shares, but trading volume remains punk, indicating investors' ongoing reluctance because of geopolitics or other concerns.
After trading as low as 7801.29, the Dow Jones Industrial Average closed up 0.7% to 7920.11. Similarly, the S&P 500 ended up 0.8% to 835.97 vs. its intraday low of 823.53, while the Nasdaq Composite gained 1.1% to 1296.70 after trading as low as 1275.20.
3M MMM and IBM IBM were the biggest positive influences on the Dow, while Johnson & Johnson JNJ made headlines with its much-anticipated buyout offer for Scios SCOS .
The Comp was aided by broad, albeit not deep, strength in big-caps such as Sun Microsystems SUNW , as well as chip names ahead of Applied Materials' AMAT earnings report Tuesday. The Nasdaq 100 rose 1.4%, and the Philadelphia Stock Exchange Semiconductor Index climbed 1.7%.
The market's intraday lows occurred at about 11 a.m. EST. A rally ensued thereafter when United Nation's weapons inspectors announced Iraq's agreement to comply with U-2 surveillance flights. Earlier, chief weapons inspector Hans Blix -- who's scheduled to address the Security Council on Friday -- said he'd seen a "change of heart" among the Iraqis but expressed disappointment that U-2 reconnaissance planes weren't flying.
The U-2 development was Monday's dominant event and helped spur the dollar higher in concert with stocks while gold slipped. The U.S. Dollar Index rose 0.76 to 100.33 while gold futures fell 1.7% to $364.20 per ounce.
But as reported earlier , the U-2 news occurred against the backdrop of heightened pressure from presumed U.S. allies as well as troubling developments along the other two lines of the "axis of evil."
In part because of all that, just 1.2 billion shares traded on the Big Board , where advancing stocks led decliners 9 to 7. Gainers led 17 to 14 in over-the-counter trading, where just over 1 billion shares changed hands.
The lackluster volume reflects uncertainty about geopolitics but also an "extremely low" level of enthusiasm among buyers, according to Paul Desmond, president of Lowry's Reports. "People are not interested in accumulating stocks at current levels, and that is one reason why we think they'll go significantly lower."
Lowry's Buying Power Index, which tracks upside trading volume among other indicators, is currently at its lowest level since April 1997 and is only a hair above levels hit in October 1996.
When I mentioned that stocks fared pretty well after those dates, Desmond cautioned that the BPI "doesn't work that way. It's not an oscillator," he said, but a gauge of the "real dynamics of buying enthusiasm," which is currently minimal. That's why he thinks "we've got more to do on downside to revitalize the buyers."
Going back to the October lows, Desmond recalled an "initial burst of buying enthusiasm" but said the BPI started rolling over in early November. "Volume is a direct reflection confidence investors have," the technician said. "If you see a rally and upside volume is diminishing, it means buyers are losing confidence and aren't willing to invest greater amounts as the rally continues. That's what we've seen since early November."
Desmond suggested there was a "rash of speculative buying" at the October lows, but traders who anticipated long-term investors arriving to "bail them out" were quickly disappointed. "If you couldn't attract strong, sustained buying enthusiasm from the October lows, what will?," he asked. "Probably lower prices and even greater bargains."
Most major market bottoms occur with a series of 90% downside days , Desmond said, noting that there was only one such session in September (vs. six in October 1990) and no corresponding 90% upside session, "which is a sign you've passed the bottom."
Reflecting on buyers' lack of enthusiasm, Desmond suggested the market isn't as oversold as many contend and Lowry's own short-term indicators suggest, as it is "underbought."
In sum, we "haven't had enough intense selling to knock the market down to accomplish exhaustion of sellers and get prices down to where investors say 'wow, these are bargain levels, what I want to accumulate for the long term,'" he said.
Yes, that's even after three years of vicious bear market activity.
Swinging for the Fences
Nevertheless, a lot of market participants are looking for a sharp rally, either the near-term trading variety or something more fundamental.
Earlier, I reported on the growing optimism of Banc of America Securities' Thomas McManus, who cited the rising put/call ratio as one factor. On Monday, the CBOE equity-only put/call ratio totaled 1.1, indicating a predominance of interest in defensive puts vs. optimistic calls.
However, as reported last week , there are some big put positions being taken that may be artificially skewing the put/call ratio higher.
Again Monday, there was big activity in the January 2005 Nasdaq 100 Unit Trust QQQ 45 puts, with 71,805 contracts traded, far and away the most active QQQ series. (However, there was no corresponding jump in the January 2005 QQQ 55 puts, as occurred last week.)
Depending on one's perspective this is:
A sign of outright bearishness, as a rising put/call is a rising put/call no matter what the reason. ( StreetInsight.com's Jeff Cooper observed: "The fact that price has continued lower, unable to gain traction despite last week's historical put/call ratios, makes the skin on the back of my neck crawl. Does someone know something?").
Someone trying to put together a bullish "put spread" trade.
None of the above.
One options trader who spoke anonymously suggested "that QQQ trade was a funding position, not a married put trade" and that the fund manager in question "was not making a bet on direction."
Last Thursday the "customer" sold the 45 puts he had bought earlier in the week "because all of his short 55 puts were exercised against him," the source recalled. The hedge fund manager was playing the "exercise lottery," trying to collect interest on the deep out-of-the-money puts until they are exercised. "Once they're exercised, he is net long a ton of volatility on the 45 puts , so he sold them back," the trader said.
Finally, overall the trade has "been a disaster" for the still-unnamed hedge fund manager, as "people were hitting bids ahead of him while he was trying to get out," he said.
That should put to rest conspiracy theories about who was doing the trade, or at what government's bequest, although I suspect it won't. |
