Here’s What Traders Should Be Wary Of

June 4, 2003
Kevin Haggerty

What Yesterday’s Market Action Tells You

Whenever the daily range on the SPX
(
$SPX.X |
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PowerRating) is less than 10 points,
as it was yesterday at 8.5 points, it doesn’t tell you much. Unless
there is a significant amount of volume as range narrows, which often precedes
turning points, you usually have a choppy day, and that’s what it was yesterday.
NYSE volume dropped off to 1.36 billion, volume ratio neutral at 45, and breadth
a meager +157. A 2:00 p.m. ET mini-rally saw the SPX close at 971.56, +0.5%. The
Dow
(
$INDU |
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PowerRating) closed at 8923, +0.3%, the Nasdaq 1603, +0.8%. Some technology
stocks did a flip-flop, as the
(
QQQ |
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while the
(
SMH |
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PowerRating), which is the semiconductor HOLDR, closed at 29.96, +2.7%
vs. a -2.5% on Monday.

There is some new money still being put to work from the retail investors
chasing price, but the indices and some of the major sectors still remain at
extended levels, which gives you no edge on a position entry for any of the
index proxies or mutual funds that are just quasi-index funds, and there are too
many portfolio managers doing just that these days.

For Active Traders

The QQQ and SMHs have led the SPX and Dow, and as I said yesterday, the VIX
has not made new lows, while the SPX and Dow have made new rally highs, and now
the VXN has rallied from a 28.61 low to a 34.79 high in five days, closing at
33.51 yesterday. Many different sentiment indicators are also at overbought
levels, and there are some negative divergences in a few good early indicators.
Overbought can remain overbought for a while, and much longer than most expect.
That might be the case now if the mutual funds can keep the second quarter
ending in June very positive because they will probably be dropping off a
negative quarter depending on which time frame you look at, and then their
marketing pitch for your money will look a lot better.

At these levels, and entering some key time dates in mid-June, traders must
be wary of the air pockets below many of the stocks that have doubled and
tripled. Trade them during the day, but don’t take them home unless you have an
option strategy with a defined risk. That pertains to individual stocks, not
necessarily to index proxies depending on your strategy.

The trading action did yield some positive opportunities yesterday,
especially in some of the semis, like
(
KLAC |
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PowerRating),
(
MXIM |
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PowerRating) and
(
NVLS |
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PowerRating).
They all had trades from the module strategies, as did the E-mini futures. The
semis remain a primary focus both ways because of their volatility. Many of the
semis have 10-day average implied volatilities of 40 or more, and with
significant volume, so they are excellent two-way intraday traders because of
the excellent travel range. The volatility band service gives you the AIV for
all of the S&P 500 and NDX 100 stocks, including the indices and HOLDRs that
have options on them.

Today’s Plan Of Attack

Have a good trading day.

Here’s What Traders Should Be Wary Of

BUY THE FEAR, SELL THE GREED

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