WEEKLY OUTLOOK Jan 23
By Chris Tyler, Optionetics.com
1/23/2006 7:00 AM EST
WEEKLY SUMMARY
optionetics.com
The trading week officially showed four business days on the calendar; however, it was the last three trading sessions that had market participants going through an extra hard spin cycle. For the four day period, the market—as represented by the S&P500 ($SPX) and tech-heavy NASDAQ ($COMPQ)—showed some debilitating losses of 2.03% to 2.99% on heavy trading activity.
Some might be rethinking the adage, “the trend is your friend” after the very aggressive and volatile price activity of the past three sessions. The week opened up to little official news in Tuesday’s trade, but geopolitical news had the February crude contract jumping to over $67 a barrel and causing slight profit-taking on below average volume in the major averages. In contrast, the next three sessions offered up extreme volatility, the likes of which haven’t been seen in more than a year. Wednesday offered up a tumultuous price gap in the NASDAQ before rallying to close strongly within the day’s range. Thursday went on to deliver upside trade-thru conditions marked by accumulation, but an investor about-face in Friday’s session had the markets closing aggressively lower on the day and for the weekly period.
In Wednesday’s session, the NASDAQ witnessed an opening price drop of about 1.5% and looked reminiscent of the Internet boom. Disappointing results and guidance from both Intel (INTC) and Yahoo (YHOO) weighed heavily on investors’ early decisions to aggressively reduce equity exposure. Pressure increased caused by escalating geopolitical tensions over Iran’s nuclear ambitions, militant problems in Nigeria (the world’s 8th largest oil exporter), and an unsightly sequel to the treasury yield curve inversion. Also reminiscent of days gone by (and not a welcome memory at that), allegations surfaced of earnings tampering overseas. A Japanese Internet high-flier and crowd favorite called Livedoor sent the Nikkei tumbling on the news and forced an early closure of the exchange.
Thursday offered up the market’s first batch of generally decent earnings and positive guidance from companies releasing. Meanwhile, economic and geopolitical news was mixed, but the market essentially shrugged off concern in favor of the reports. After the declines of the prior two sessions, it may have looked like an ideal pullback situation. News of Osama bin Laden threatening the U.S. with fresh attacks, a weaker-than-expected housing starts report and a wage-inflation threat as evidenced by a hard decrease in the weekly initial claims figures were no match; with the end result being a broad-based trend day with institutional accumulation. Not even news of the DOJ requesting search data from institutional favorite and Internet heavyweight Google (GOOG) could keep bargain hunters, shorts covering and fresh longs from the buy side. Helping investors locate their wallets were well-received reports out of Advanced Micro (AMD), Merrill Lynch (MER), QLogic (QLGC), eBay (EBAY), and Lam Research (LRCX).
While the blinders were well-worn Thursday, participants decided to go for clarity with different eye gear in Friday’s trade as the major averages suffered their worst single-day performances in more than a year. An all-too-familiar Mulligan of earnings disappointments with names like Motorola (MOT), Citigroup (C) and General Electric (GE) had investors quickly turning tail and trumping the prior session’s donning of the party horns. With seemingly no end in sight to the week’s geopolitical threats, fresh 25-year highs of nearly $569 in gold (close 554, down 3 on week) and a four month high of 68.80 in the Feb crude contract (close 68.35 up 4.44 on week) continued to weigh on investors’ collective thoughts and actions. Also, with a continuation of the yield curve inversion the stage was set for what became a session-long retreat into fresh weekly lows and key intermediate support zones.
As for some of the other market-moving catalysts and potential factors of importance going forward; we can highlight the generally bullish, bearish and the outright perplexing.
Bullish
CBOE Volatility Index ($VIX) sees a price spike of nearly 22% and largest in 8 months
Short-term very oversold into key intermediate testing zone for most major averages
Uncertainty, selling conviction…sounds like an inversion of recent activity
CNBC ‘the voice of concern’. From Dow 11K alerts to the S&P500 Largest Drop Since 2003
‘Google 2000’ nowhere to be found
Bearish
Yield Curve inversion bounces back into the spotlight
13-week cycle highs in place off October lows
Elliott Wave 5 counts and Fibonacci resistance look confirmed in many major averages
4-year cycle lows are set to occur in 2006
Presidential 2nd year stock market woes
5 days of distribution over four week period has many IBD investors sidelined as of Friday and manyother intermediate traders close to towel throwing
Spin Factor & Mixed
Oil politics is very much all the rage on the airwaves
Spike in the CBOE Volatility Index is off historic low levels of investor complacency
Investor conviction over uncertainty will need to be replaced
ON TAP THIS WEEK
Thus far with about 20% of the S&P500 ha
ving reported, earnings are coming in 13% over the same quarter in the year ago period. While that figure is on track to match analyst estimates, the guidance thus far has been a major disappointment and one of two primary catalysts for the market’s sell-off this past week. After more than 2.5 years of strong percentage increases the adjustment to shrinking earnings growth is currently being played out from the sell side.
Another potentially alarming trend for earnings hounds is that companies are beginning to say no to Wall Street’s guidance game. Names such as Intel (INTC), Motorola (MOT) and Citigroup (C) all issued statements this week advising of changes related to how and what information between earnings reports would be disseminated. According to some analysts this could lead to more volatility in stock prices down the road, as investors’ will have less clarity into a company’s numbers until they are presented on the actual release date.
Iran will continue to share headline space with corporate reports this week. Just how real or unreal investor concerns turn out to be, is very much open to debate. As for economic reports, the weekly claims figure may carry more significance than usual. Last week’s reading suggested further tightening of the labor market and one that is near the theoretical ‘full employment’ threshold. Further tightening leads to the possibility of wage inflation and price pressures that could be harmful to corporate profits down the road.
Monday:
Economic: Leading Indicators (.2%)
Earnings: B of A (BAC), Ford (F), Energizer (ENR), American Express (AXP), Texas Instruments (TXN), E*Trade (ET), Neurocrine (NBIX), Lone Star (LSS), Ariba (ARBA)
Tuesday:
Economic: NA
Earnings: 3M (MMM), Coach (COH), EMC (EMC), Imclone (IMCL), Agere (AGR), BJ Services (BJS), Headwaters (HW), United Tech (UTX), Corning (GLW), Netflix (NFLX), Ryland (RYL), Sun Micro (SUNW), STMico (STM), Trimble Nav (TRMB)
Wednesday:
Economic: Weekly Crude Inventory
Earnings: Amerada Hess (AHC), Allegheny (ATI), General Dynamics (GD), Ameritrade (AMTD), AmerisoureBergen (ABC), Maxim (MXIM), Wellpoint (WLP), SAP (SAP), M-Systems (FLSH), Altera (ALTR), Harman (HAR), Juniper (JNPR), Novellus (NVLS), Qualcomm (QCOM), Silicon Motion (SIMO), Stanley Works (SWK), TALX (TALX), Trident (TRID), Varian (VAR)
Thursday:
Economic: Weekly Initial Claims (300K), Durable Orders (1.0%)
Earnings: Amgen (AMGN), Cardinal Health (CAH), Celgene (CELG), Caterpillar (CAT), Cypress (CY), Dow Chem (DOW), Honeywell (HON), MarineMax (HZO), Lockheed (LMT), Nokia (NOK), OptionsXpress (OXPS), Pantry (PTRY), Peabody (BTU), Potash (POT), Verisign (VRSN), Affymetrix (AFFX), Bebe (BEBE), Emulex (ELX), Getty (GYI), Halliburton (HAL), Foundry (FDRY), Massey (MEE), Openwave (OPWV), PortalPlayer (PLAY), SanDisk (SNDK), Stryker (SYK), Sierra Wireless (SWIR), Tempur-Pedic (TPX), Western Digital (WDC)
Friday:
Economic: GDP (2.9%), New Home Sales (1235K), Chain Deflator (2.6%)
Earnings: Chevron (CVX), FPL Group (FPL), Black & Decker (BDK), HCR Manor (HCR), IDEXX (IDXX), Procter & Gamble (PG), T.Rowe (TROW), Manpower (MAN)
TECHNICAL PICTURE
You’re certainly not hearing it here first, but with Friday’s precipitous drop, the markets (except the IWM) are short-term oversold. This corner doesn’t qualify the description of oversold with indicators. However, I’m more than certain that with the spike of more than 20% in the implied volatility levels and lots of hand wringing, fun-factoid headlines about index losses at CNBC; that we do have pretty solid confirmation of that fact. On a side note, was a good part of the volatility related to options expiration, rather than the headline-driven uncertainty? That’s a question that this corner is pondering after Friday’s session. Considering all the bullishness and clarity of the prior two weeks and all of the associated directional bets, it certainly has my attention as a worthy thought.
While this corner pointed out Wave 5 highs, Fib resistance zones and 13-week cycle changes ahead of the pack and still sees lower prices in the scheme of things, you won’t find this corner looking for shorts out the gate this week. In the short-term the bias is geared towards positioning directionally long off panic selling that has taken the market into key intermediate support zones. It should be noted that intermediate-term traders are holding their collective breathe at this time as the trend as defined by IBD sits on the edge of the technical abyss. With the 50-Day MAs being tested and enough distribution (5 days over 4 weeks) to have many of these players already turning to cash, any further downside and heavy selling will certainly have the ‘Confirmed Rally’ as being all but over.
With the speed and conviction (ahem) with which participants like to play the game these days, we can only wait and see how and what will actually qualify and for how long that might last. As was the case coming into Friday’s trade, any upside goosing will be viewed with something other than rose colored glasses and the possibility to locate resistance shorts in the coming days. With volatility levels percolating, spreading off directional risk makes for a stronger trade in many products. In this environment directional fly’s or verticals are thought to be a good approach to market positioning with less initial risk and the opportunity and flexibility to adjust the trade.
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