BIG TECHS DO IT AGAIN -- SEMIS SHOW THE WAY -- THE RETURN OF MICROSOFT AND INTEL -- TAME CPI STOKES BONDS -- CORPORTATE BOND ISHARES SURGE -- RETAIL STOCKS REMAIN WEAK -- ANOTHER LOOK AT THE PUT/CALL RATIO
BIG TECHS LEAD THE WAY... Today's Market Message was written by Arthur Hill. John Murphy will be back tomorrow. - Editor
After positive news from Intel (INTC) and Yahoo! (YHOO), stocks started the day with a bang and surged higher. However, broad strength gave way to choppy trading and the market finished mixed. The Nasdaq 100 ETF (QQQQ) led the way higher and large-cap techs continue to show good relative strength. The current trend for QQQQ is clearly up, but there are early signs of slowing momentum as the ETF stalled over the last five days. It all started with a big bad bearish engulfing last Thursday and QQQQ then formed four inside days. Trading for the last four days has been within the high-low range from last Thursday. This shows indecision and represents a small consolidation. Look for a move above 54 to trigger a breakout and a move below 52 to start a pullback. MACD and the MACD-Histogram are shown on the QQQQ chart below. MACD moved below its signal line on Tuesday and this caused the MACD Histogram to turn negative.
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SEMIS LEAD THE CHARGE... The Semiconductor HOLDRS (SMH) and Semiconductor PowerShares (PSI) have been lagging the Nasdaq 100 ETF (QQQQ) over the last few months and both broke below their 50-day moving averages last week. Despite this weakness, both firmed the next three days and then surged today. PSI found support at the 50-day and 200-day moving averages with three inside days. Today's surge back above 18.75 keeps the two month uptrend alive and I am now setting key support at 18.25. SMH firmed around 36 with three inside days and then surged above 36.5 today. The ETF has been trading flat since early September and a move above the September highs is needed to break range resistance.
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INTEL AND MICROSOFT LEAD... Intel (INTC) and Microsoft (MSFT) led the charge today and were the two volume leaders on the Nasdaq. Talk about old school. Positive news from Intel spurred a rally in PC related stocks and Microsoft was right up there. I noted a cup-with-handle formation for Intel in the 3-Oct market message and Intel broke rim resistance with a high volume gap today. The gap and breakout are bullish as long as they hold. Failure to hold the gap and a move below the October lows would totally negate this breakout. Microsoft is playing a bit of catch after lagging the Technology sector in early September. The stock broke out with a three day surge on high volume in mid September and never looked back. Upside volume continues to outpace downside volume and the stock is closing in on its July high, finally.
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BONDS SURGE ON CPI DATA... The Labor Department released the Consumer Price Index (CPI) today and the results lifted bonds. There are two Consumer Price Index numbers to watch. Overall CPI includes Food and Energy while Core CPI excludes Food and Energy. The overall CPI rose .3% and this was .1% above expectations. Core CPI rose .2% and this was in-line with expectations. Core CPI showed that inflationary pressures were under control and this provided a lift for bonds. Bonds rise as interest rates fall. The tame reading from Core CPI takes some pressure off the Fed to raise interest rates to combat inflation. On the price chart below, the iShares 20+ Year Bond ETF (TLT) broke resistance in August and broken resistance turned into support in September-October. The ETF also found support from the rising 50-day moving average. TLT gapped down on 5-Oct and today's surge is starting to fill the gap. Follow through with a break above the early October high would be bullish.
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CORPORATE BONDS FOLLOW SUIT... The iShares iBoxx Corporate Bond ETF (LQD) followed the bond market higher with a break above its September high. The ETF broke its 200-day moving average with a surge in August and then consolidated in September. The surge over the last three days broke resistance from the September consolidation and this is bullish price action. Also notice that the 50-day crossed above the 200-day for a golden cross.
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CONSUMER DISCRETIONARY SECTOR TESTS SUPPORT... The Fed released its Beige Book this afternoon and the report noted weakness in housing and slower consumer spending. This report is published two weeks before every Fed meeting and the next FOMC meeting is on 31-Oct. Bad news from the Beige Book is hardly surprising when one looks at the charts for the Consumer Discretionary SPDR (XLY), Retail HOLDRS (RTH) and Retail SPDR (XRT). We have been talking about relative weakness in these groups and they are now starting to break down. XLY met resistance at its 200-day moving average in October and declined sharply the last three days. The ETF is testing support from the August trendline and 50-day moving average. RTH broke down in late July and returned to broken support in late August, mid September and October. There were some valiant attempts to breakout, but all three attempts failed and the ETF broke back below its 50-day moving average today. XRT failed at its 200-day twice this month and fell back to its 50-day over the last five days. Even though SPY is trading near its July high and QQQQ remains above its July high, it is hard to have a lot of confidence when looking at these charts.
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PUT/CALL RATIO REVISITED... I received a few questions on last week's chart for the CBOE Put/Call Ratio ($CPC) and will try to clear the air. The first chart below shows the CBOE Put/Call Ratio in its raw format -- no smoothing and no indicators. The data series is quite volatile and some smoothing is required for analytical purposes.
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Here are the steps I used to create the next chart. After entering the symbol ($CPC) and pulling up the chart, I went to "Chart Attributes", "Type" and selected "invisible". This hides the raw data and keeps the chart clean. Under "Overlays", I selected "Simple Mov. Avg" and "10" for periods. This smooths the data series for analysis purposes. In the "Indicators" section, I selected "Price", entered "$SPX" under "Parameters" and then selected "behind" under "parameters". This allows me to compare the movement in the CBOE Put/Call Ratio to the S&P 500. The indicator is red and the S&P 500 is black. You can click on this chart to get a duplicate in your browser and then save it to your favorites.
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The CBOE Put/Call Ratio ($CPC) is a contrarian indicator that measures excessive levels of bullishness and bearishness. It does this by comparing total put volume against total call volume. Put volume increases as option players become more bearish and call volume increases as they become more bullish. CPC moves higher as put volume increases and lower as call volume increases. The indicator is contrarian because excessive levels of bullishness are viewed as bearish and excessive levels of bearishness are viewed a bullish. What constitutes excessive is both relative and subjective.
On the chart below, the CBOE Put/Call Ratio has been rising the last three years. The peaks are higher, the troughs are shallower and the 200-day moving average is rising. The 10-day SMA surged above 1.20 in May 2006, March 2007 and again in August 2007. These levels showed that total put volume was surging and option players were becoming extremely bearish. The S&P 500 bottomed soon after these extremes. The CBOE Put/Call Ratio ($CPC) recently moved below .90 and is currently near its lowest levels of the year. This 10 month low shows that call volume is relatively high and option players are getting excessively bullish. This is not a standalone indicator and should be used in conjunction with other tools.
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