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WEEKLY OUTLOOK, May 24
By Jody Osborne, Optionetics.com
5/24/2004 7:00:00 AM

http://www.optionetics.com/articles/article_full.asp?idNo=10441

The major market indices saw little net movement last week, as traders wait for more information on oil prices and interest rates. The Dow ($INDU) and S&P 500 ($SPX) extended their weekly losing streak to four, though the Nasdaq ($COMPQ) was able to rise just slightly. Technically, the fact the Dow closed below 10K on the week is a bearish indicator. However, the SPX has been consolidating just above its 200-day moving average, which has held as support so far. Low volume has made it difficult to create an accurate forecast, but most analysts do expect higher prices once traders come to grips with a rise in interest rates.

Economic news is likely to be a crucial part of how stocks trade this week, with a large schedule of reports on tap. Below is a list of these reports:

Monday: UBS Index of Investor Optimism

Tuesday: Chain Store Sales Snapshot, The Conference Board Consumer Confidence, Existing Home Sales

Wednesday: MBA Mortgage Applications Survey, ABC News/Money Magazine Consumer Comfort Index, Durable Goods, New Home Sales, Monthly Mass Layoffs

Thursday: Jobless Claims, GDP, The Conference Board Help Wanted Index

Friday: Personal Income, NAPM – NY Report, University of Michigan Consumer Sentiment Survey, Chicago PMI

Traders will have several different reports to focus on; with perhaps the most closely watched being the Personal Income report—a favorite of Fed Chairman Greenspan. Meanwhile, the Personal Consumption Expenditure Index [PCE] is the preferred inflation gauge for the Fed. Estimates are for the PCE to rise just 0.2 percent, hardly a major cause for concern. However, negative news could be found in the consumer spending component, as higher oil prices might start to show a negative impact on spending.

Over the weekend, OPEC decided to push off a decision on oil production until June and this is likely to be met with higher oil prices this week. Traders had pushed down oil prices slightly on Thursday and Friday in hopes OPEC would start to lift production sooner. This news could also be a negative for the stock market Monday, with high gasoline prices expected to impact consumer confidence as well. We’ll get a better idea of how much confidence has waned from gas prices when the University of Michigan consumer sentiment survey and the Conference Board report on confidence are released this week.

Earnings news will be on the light side this week, with very few reports left to be announced. Nonetheless, first quarter earnings were very strong, but have been overlooked because of oil prices and inflationary pressures. Traders have chosen to neglect positive earnings news, focusing instead on rising interest rates and problems in Iraq. However, this does set the stage for a strong rally once traders come to grips with these issues. This rally might have started as soon as Monday, but OPEC’s decision to push back production increases might keep the bulls at bay.

The Nasdaq might in store for some higher prices if the Nasdaq Volatility Index ($VXN) is correct. After moving above its 200-day moving average resistance two weeks ago, a sign that lower prices were in store, the VXN was able to fall sharply this past week and move back below this key moving average. Remember, the VXN is a contrarian indicator, so when it pushes lower, this normally is accompanied by buying in tech stocks. The VXN is sitting near 25 currently, but hit a low near 20 in April. Thus, if this indicator continues to move toward this low, the Naz should see higher prices.

The CBOE Market Volatility Index ($VIX) isn’t showing the same movement. In fact, the VIX didn’t show a net movement this last week and has been consolidating between 18 and 20 for the past couple of weeks. The SPX is showing consolidation as well, sitting right above its 200-day moving average. This lack of movement from both the VIX and SPX makes it difficult to predict where the indices are heading. However, a break of its 200-day moving average on strong volume would be bearish for the SPX.

Last Friday was option expiration for May contracts, which means new June contracts will be available Monday. Traders should make a habit of checking their option positions around expiration time to make the appropriate adjustments to their trades. Not all strategies need consistent watching, but every trade should be checked from time to time and expiration is a logical time for this review.


Jody Osborne
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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