What’s Different Now
The December S&P 500
futures (SPZ and ESZ) turned in respectable gains last week as market
players continued to express optimism regarding the U.S. economy and equities in
general, mainly due to further upbeat economic reports as well as a number of
bullish analyst sales calls. The equities markets were also aided by a high
number of bearish bets, whether through short-selling or put-buying, as some of
the pundits continue to try to be a hero and call a market top. All 4 of the
major indexes and their futures were able to post new intraday highs for 2003,
but the S&P 500 and the Dow were unable to hold on and close at a new high.
The December S&P 500 futures closed Friday’s
session with a gain of +2.50 points, and finished the week up +12.00 points.
Volume in the ES was estimated at 503,000 contracts, which was behind Thursday’s
pace, and below the daily average. On a weekly basis, the 1,056 area, as I
outlined last week, continues to be a heavy resistance area defined by 2 Fib
retracements. On a daily basis, the contract posted an inside day and was able
to close above the September high at 1,039. The recent open interest pattern
continues, as it increased greatly on Thursday’s slide and downticked on
Friday’s gain . On an intraday basis, 60-min and 13-min triangles broke to the
upside, and I’ll be watching for pullbacks to support at the broken trend lines
in the 1,037 area on both (see charts). The daily Banking Index (BKX) has
formed a cup with the 7/14 high, however, with the index extended here above MA
support and many of the banks scheduled to report this week, we may see some
profits taken off the table.
As the market has continued to advance
in recent weeks, many market
commentators have suggested that we are in a speculative period much like 1999
and early 2000. While it’s true that speculation is back again and most tech
stocks still trade at high valuations, I don’t think it’s fair to compare the
current action to what happened 4 years ago. Keep in mind, 1999 was a year in
which the S&P 500 and the NASDAQ Composite surged, while breadth did not confirm
the move. In fact, overall breadth peaked in 1998, which means the advance to
the 2000 top was narrow in the number of stocks that participated. However, in
the latest rally, breadth has been pretty impressive, while broader indexes,
like the Russell 2000, have outperformed large-cap concentrated indexes like the
S&P 500.
Current
interest rates are also making equities more attractive than 4 years ago. In
late 1999, the Fed was in a tightening cycle in an attempt to prevent
inflation. They were also likely trying to end the stock market bubble before
it got completely out of control, although you would never hear Greenspan admit
this. Interest rates were much higher then and still climbing, while today they
remain near 45-year lows. The Fed has continued to state that they will keep
rates low until they are sure that sustainable economic growth has returned.
While it’s true that valuations on many stocks remain high, it’s important to
remember that many institutions use models that take interest rates into account
to value stocks. These models suggest stocks are now much more attractive in
today’s low interest rate environment, than they were 3 years ago before the 13
rate cuts. Whether these interest rate dependent models are right or wrong is
not the issue, because the mere fact that so many institutions use them makes
interest rates a very critical part of valuation analysis. While I don’t
believe that equities are in the early stages of a new secular bull market, it
still does not seem as if the majority of institutions have embraced the move
that started in March. And as long as this is the case, stocks and stock
futures could continue to climb a wall of worry. I’m still in the camp that
believes longer-term problems still loom. However, as long as breadth remains
healthy, interest rates stay down, and the number of top-picking bearish bets
against stocks remain at such highs levels, the path of least resistance could
continue to be higher.
Looking ahead this week, the equities markets
will most likely be quiet on Monday, given the Columbus Day holiday and the bond
market being closed. Earnings season gets into full swing with Q3 reports from
INTC, MOT, GM, AAPL, IBM, MO, NOK, and EBAY. Many of the banks also report this
week, which should provide some good intraday moves on the ES. The economic
calendar, while quiet early in the week, heats up on Wednesday through Friday
with the September Retail Sales report, Consumer Price Index, Philadelphia Fed,
and the Preliminary Michigan Consumer Sentiment Index.
Daily Pivots for 10-13-03
| Symbol | Pivot | R1 | R2 | R3 | S1 | S2 | S3 |
| COMP | 1913.98 | 1922.47 | 1929.63 | 1938.12 | 1906.82 | 1898.33 | 1891.17 |
| INDU | 9681.15 | 9705.77 | 9736.86 | 9761.48 | 9650.06 | 9625.44 | 9594.35 |
| NDX | 1401.70 | 1409.44 | 1414.00 | 1421.74 | 1397.14 | 1389.40 | 1384.84 |
| SPX | 1038.21 | 1040.69 | 1043.31 | 1045.79 | 1035.59 | 1033.11 | 1030.49 |
| ESZ | 1039.00 | 1044.00 | 1047.50 | 1052.50 | 1035.50 | 1030.50 | 1027.00 |
| SPZ | 1038.53 | 1042.97 | 1045.43 | 1049.87 | 1036.07 | 1031.63 | 1029.17 |
| NDZ | 1404.67 | 1414.83 | 1420.17 | 1430.33 | 1399.33 | 1389.17 | 1383.83 |
| NQZ | 1404.67 | 1414.83 | 1420.17 | 1430.33 | 1399.33 | 1389.17 | 1383.83 |
| BKX | 921.89 | 924.75 | 928.00 | 930.86 | 918.64 | 915.78 | 912.53 |
| SOX | 465.71 | 469.02 | 470.83 | 474.14 | 463.90 | 460.59 | 458.78 |
| DIA | 97.14 | 97.49 | 97.70 | 98.05 | 96.93 | 96.58 | 96.37 |
| QQQ | 34.89 | 35.15 | 35.28 | 35.54 | 34.76 | 34.50 | 34.37 |
| SPY | 104.36 | 104.81 | 105.05 | 105.50 | 104.12 | 103.67 | 103.43 |
| SMH | 38.20 | 38.50 | 38.64 | 38.94 | 38.06 | 37.76 | 37.62 |
Fair Value & Program Levels
Fair Value — (1.58)
Buy Premium — (0.70)
Sell Discount — (2.68)
Closing Premium – 2.44
Please feel free to email me with any questions
you might have, and have a great trading day on Monday!