Commodity sector trading offsets low index volatility
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The SPX traded in a narrow 5.4 point range, closing at 1380.90
(+0.2%). NYSE volume was the low of the week at 1.42 billion shares.
The volume ratio was neutral at 53 and breadth positive at +1025, due in part to
the TLT at +0.4%. There is a built in breadth bias because over 35% of
NYSE stocks are financial issues. The sector action was more active, led
by the IBB (+1.5%), XBD (+1.4%), $TRAN (+1.2%) and SMH (+1.2%). Gold and
energy led the downside as crude oil was taken down on Friday. The OIH has
pulled back from its 143.13 last Thursday, which was a +1.1% from its 118.19 low
(10/04/06). It closed at 137.50, but any pullback is no surprise as 143.97
is the .50 RT to the bull cycle high of 169.75 from 118.19. Retail stocks
advanced on Friday, probably in anticipation of many of them reporting earning
this week, such as American Eagle (AEOS), Target (TGT), Wal-Mart (WMT), Home
Depot (HD), and Abercrombie and Fitch (ANF).
The SPX 1385 key price zone was anticipated in prior
commentaries, but it was just six days decline to 1360.98 before reversing back
into the zone again. The closing range is 1389.08-1364.05 over the past 21
days, so the key price zone remains intact. There is a negative momentum
divergence, but the SPX is neither short-term oversold or overbought , but
remains extended on the long-term standard deviation basis. These are
normally ingredients for a reversal in the key price zone, but there is also a
strong seasonality bias and incentive from the generals to make 2007 a strong
performance year. This mark-up is incentive from the generals to keep any
short-term reversal from this price zone to a minimum, and probably above the
89-ema of 1330. However, that is not the case after year-end. The
SPX has traded in a less than 2% range in the last month, and this reduction in
volatility has reduced the number of daily trading opportunities. The
major trading offset has been the energy stocks, in addition to some of the
commodity stocks like like Freeport-McMoRan (FCX), Nucor (NUE), and Phelps-Dodge
(PD) to name a few. The commodity sector will continue to be the primary
source of daytrading opportunities.
The 4-year cycle time-frame remains 10/2006-3/2007 and based
on the current sustained SPX/$INDU advance, the decline will probably be a
similar sharp angle to the downside. The same thing occurred in 1998,
where the 23% decline was from July to October. The 1990 bear cycle
decline was -21%, which was also from July to October. There was a soft
landing in 1994, and the SPX only declined 10% from January to April. That
is what the pundits are betting on this time, while the bond markets bet the
other way. The bond and forex markets have always been more in-step than
the equity crowd.
Have a good trading day,
Kevin Haggerty
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