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Sunday, November 21, 2010 9:09:02 PM
Monday Morning Outlook: DJIA Manages a Slim Weekly Win and Reclaims 11,200
Traders watch developments in China and Ireland
by Todd Salamone 11/20/2010 11:11 AM
http://www.schaeffersresearch.com/commentary/observations.aspx?ID=103604
The Dow Jones Industrial Average clawed its way atop the 11,200 level in the final few minutes of trading on Friday, putting the week back in the win column. Looking ahead, Todd Salamone, Senior Vice President of Research, sees relatively firm short-term technical support for the market just below current levels, but longer-term resistance for the S&P 500 Index in the area between 1,200 and 1,230. Next, Senior Quantitative Analyst Rocky White tracks the performance of the Dow during Thanksgiving week, and uncovers a historical curiosity: the market tends to act countertrend to its year-to-date performance during the holiday week. If the pattern continues, we could see a pullback this week. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week.
Recap of the Previous Week: China, Ireland, GM Dominated Headlines
Schaeffer's Editorial Staff
The week ended in the black, although just barely, and not without a nasty scare on Tuesday. Glass half-full types might argue that the post-QE2, post-election skid bottomed out right at the 11,000 level on the Dow Jones Industrial Average, with a nice bounce back up above 11,200 by the end of the week.
The bulls made a serious attempt to halt the previous week's slide on Monday, and they found plenty on the news ticker to encourage them. The Commerce Department reported that retail sales jumped 1.2% in October, far better than analysts had expected, with auto sales in particular showing strength. Traders were also encouraged by merger-and-acquisition activity, with Caterpillar Inc. (CAT) announcing it will buy mining equipment maker Bucyrus International Inc. (BUCY). The Dow was up by as much as 80 points early in the afternoon, but couldn't maintain any staying power. The 80-point gain was whittled to 9 points, or 0.08%, by the close.
Fears about a Chinese interest rate hike and Irish debt levels re-emerged on Tuesday. The Dow sank at the outset of the session and then kept on sliding. When the smoke cleared, the Dow had lost 178 points, or 1.59%, to close barely above the 11,000 level.
It was the bears' turn to pump the brakes on Wednesday. The Labor Department reported extremely tame inflation in this country, while it appeared increasingly likely that a bailout would be arranged for Ireland. Meanwhile, excitement was building for General Motors' (GM) impending initial public offering (IPO). GM confirmed that it would increase the number of shares for sale, a day after announcing it would lift its pricing. The Dow tightrope-walked along the breakeven line all day before finally recording a slender loss of 0.14%.
On Thursday it was: Welcome back, GM! Well, it would be nice to think so, wouldn't it? In fact, the new GM gained more than 3% on its first day of trading, but the bulls had plenty of other help. The crisis over Ireland's debt began to wane, with leaders of the Emerald Isle conceding the need for outside help. Weekly jobless claims came in lower than expected, manufacturing activity surged in the Philadelphia area, and the Conference Board's index of leading indicators appeared to show the recovery chugging along. With all that good cheer in the air, the Dow leapt 173 points, or 1.57%.
All eyes returned to China on Friday, on concerns that monetary tightening there would ripple throughout the world economy. The Asian powerhouse, worried about inflationary pressures, increased its banks' reserve requirements for the second time in two weeks. Fed Chairman Ben Bernanke, meanwhile, effectively joined hands with the Obama administration's efforts to persuade China to let its currency strengthen. In a major speech in Germany, Bernanke argued that China's undervalued currency is hampering world economic growth. The Dow reacted less than decisively to these developments, spending much of the day underwater, but finally edging up 0.2%. For the week, the major market indexes were as close to flat as you can imagine; the Dow was up 0.1%, the S&P 500 Index added a barely measureable 0.04%, and the Nasdaq Composite slipped 0.09%.
What the Trading Desk Is Expecting: SPX Bumping Up Against Longer-Term Resistance
By Todd Salamone, Senior Vice President of Research
Well, it could have been worse. U.S. stocks plunged Tuesday morning as negative headlines from overseas generated a "risk off" mentality among traders. In fact, by Wednesday's close, risk in the market was growing. With Friday's expiration looming, and heavy put open interest just below Wednesday's closing prices, major exchange-traded funds such as the SPDR S&P 500 (SPY) and iShares Russell 2000 Index (IWM) were exposed to a delta-hedging decline. Delta-hedging is a process in which sellers of options sell an increasing quantity of an underlying equity as it moves closer to out-of-the-money put strikes in order to remain delta neutral. Such activities can snowball, particularly around expiration.
But thanks to positive economic data and better overseas news, equities gapped higher Thursday morning. In a market where weak hands are holding stocks, delta-hedge selling would have been the more likely scenario. However, as we have noted in this space during the past several weeks, stronger hedged buyers appeared to drive the rally from the August lows, and with put protection firmly in place, panic selling is less likely.
The 3.8% decline from the S&P 500 Index's (SPX) 1,225 closing high earlier this month pushed the SPX down to its 40-day moving average, which coincides with a former area of congestion from mid-to-late October (see first chart below). As we move into a holiday-shortened week, this area is potentially supportive if another pullback occurs.
Longer-term resistance levels still reside just above last week's SPX close, which could continue to put a lid on the market. Specifically, the round-number 1,200 level – an area of congestion in 2005 – the 80-month moving average at 1,206, and the 1,230 area, site of the 61.8% Fibonacci retracement of the 2007 high and 2009 trough, could collaborate to cap the market's progress.
Complicating matters in the short term is that the 20 day buy-to-open put/call volume ratios for the PowerShares QQQ Trust (QQQQ), SPY and IWM have rolled sharply lower. Translation: Hedge funds are not aggressively accumulating shares like they were weeks ago.
It is IWM that has seen the largest rollover in the ratio, suggesting small caps could underperform in the short term without the support of the hedge fund buying. But our analysis of buy-to-open option activity on QQQQ suggests continued interest in the technology sector. From a longer-term perspective, this activity is bullish, as hedge funds still appear to be underweight, suggesting there is fuel on the sidelines.
Chart of SPX versus the 20-day BTO put/call volume ratio of the SPY, QQQQ, and IWM
With retail investors pulling cash out of domestic equity funds for 28 consecutive weeks, it is the under-invested hedge funds that have the capability to drive significant rallies. Without more support from this crowd, the market is exposed to the mean-reversion games of the high-frequency traders, especially with the defined areas of support and resistance as discussed above in play.
Finally, with November expiration now a thing of the past, put options purchased to guard against a correction have expired for some investors. The good news is that portfolio protection is cheap as we enter the week, with the CBOE Market Volatility Index (VIX – 18.04) trading at its lowest level since April. During the past month, the VIX has tended to move higher from this area, as demand for put protection increases when portfolio insurance is viewed as cheap. Such actions could pressure stocks in the near term, but could be healthy from a more intermediate-term perspective.
If you enjoy Monday Morning Outlook...
...why not check out Opening View, our daily preview of market activity? Each morning, we analyze the prior day, review the overnight markets, and monitor the morning wires to give you our special Schaeffer's take on the action, before the opening bell. Sign up here to have Opening View delivered straight to your inbox every morning.
Prepare for the investing week ahead. Every week, Bernie Schaeffer and his staff provide you with their insight about what has happened and, more importantly, what will happen in the market. We dig deep and show you what's happening behind the scenes, and tell you which indicators are predicting major market moves. If you enjoyed this week's edition of Monday Morning Outlook, sign up here for free weekly delivery straight to your inbox.
Indicator of the Week: Thanksgiving Week
By Rocky White, Senior Quantitative Analyst
Foreword: Thanksgiving arrives this week. You can expect some pretty low volumes around the holiday, but what about returns? Below, I slice and dice the historical returns of the abbreviated trading week. Hopefully we can gain some insight on what to expect.
Thanksgiving Week Since 2000: Below is a table showing what the Dow Jones Industrial Average did each day of Thanksgiving week for the last 10 years. The entire week has averaged an impressive 1.2% return. However, much of that can be credited to one year, 2008, when the Dow gained over 9%. Also, it may be worth noting that three of the last four Thanksgiving weeks have been negative.
It has been typical for Thanksgiving week to get off to a good start. Monday has been the best day of the holiday week, averaging a return of 0.64%. Tuesday looks to be a very quiet day, with only one time in the last 10 years showing a return in either direction of more than 1%. It's also the only day that averages a loss in the last 10 years.
Thanksgiving Week Speed Bump: Below is another table showing Dow returns over the last 10 years. It shows the year-to-date return heading into Thanksgiving week, the return for Thanksgiving week, and finally what the Dow did for the rest of the year after Thanksgiving week. It's interesting that during the last five straight years, Thanksgiving week went countertrend to the direction the market was heading. Furthermore, once Thanksgiving week is over, the market resumed its year-to-date direction. Since the market is up so far in 2010, if that tendency continues, we will see a pullback for the week of Thanksgiving, and then the market heading higher for the rest of the year.
DJIA Thanksgiving week returns versus the rest of the year
Below is a table showing more historical data of the tendency for Thanksgiving to go against the market's year-to-date trend. Since 1980, when the Dow was positive heading into Thanksgiving week, that week was positive just over half the time, averaging a return of 0.25%. In the eight years that the market was down before Thanksgiving week, the holiday week was positive 75% of the time, averaging an impressive gain of 2.18%.
DJIA Thanksgiving week returns versus the rest of the year
This Week's Key Events: Feast and Football Shorten Trading Week
Schaeffer's Editorial Staff
Traders will enjoy a short week, thanks to the best holiday of the year on Thursday. (Christmas is for children. Everyone knows that Thanksgiving is the best holiday for adults.) The feasting and the football will compress the economic calendar into a two-day crush on Tuesday and Wednesday, while the schedule of earnings releases is very light. Here is a brief list of some of the key events this week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.
Monday
* There are no major economic reports scheduled for Monday. Tyson Foods Inc. (TSN), Analog Devices Inc. (ADI), Brocade Communications Systems Inc. (BRCD), Focus Media Holding Limited (FMCN), Hewlett-Packard Company (HPQ), Jack in the Box Inc. (JACK), La-Z-Boy Inc. (LZB), and Pacific Sunwear of California Inc. (PSUN) will report earnings.
Tuesday
* The first revision of third-quarter gross domestic product is due Tuesday. The first estimate, released Oct. 29, showed subdued growth of 2%. In addition, the National Association of Realtors will report on existing home sales for October. Campbell Soup Company (CPB), Cracker Barrel Old Country Store Inc. (CBRL), Hormel Food Corp. (HRL), TiVO Inc. (TIVO), and Guess?, Inc. (GES) are scheduled to issue their quarterly reports.
Wednesday
* Wednesday is jam-packed with data: The Commerce Department will release its October figures for new home sales, durable goods orders, and personal income and spending, while the Labor Department will issue its weekly report on new jobless claims. Meanwhile, the University of Michigan will publish its final reading on consumer sentiment in November, and we'll get the usual weekly report on crude inventories. Finally, the Fed will release the minutes of its Nov. 3 Federal Open Market Committee meeting. That meeting, at which the Fed voted to unleash QE2, the second round of monetary stimulus, has been pretty well chewed over, but we might learn some behind-the-scenes details of the debate. Scheduled to report earnings are Deere & Co. (DE) and Tiffany & Co. (TIF).
Thursday
* The market is closed for the Thanksgiving holiday on Thursday.
Friday
* There are no major economic reports scheduled for Friday. There are no major earnings reports scheduled for Friday.
Traders watch developments in China and Ireland
by Todd Salamone 11/20/2010 11:11 AM
http://www.schaeffersresearch.com/commentary/observations.aspx?ID=103604
The Dow Jones Industrial Average clawed its way atop the 11,200 level in the final few minutes of trading on Friday, putting the week back in the win column. Looking ahead, Todd Salamone, Senior Vice President of Research, sees relatively firm short-term technical support for the market just below current levels, but longer-term resistance for the S&P 500 Index in the area between 1,200 and 1,230. Next, Senior Quantitative Analyst Rocky White tracks the performance of the Dow during Thanksgiving week, and uncovers a historical curiosity: the market tends to act countertrend to its year-to-date performance during the holiday week. If the pattern continues, we could see a pullback this week. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week.
Recap of the Previous Week: China, Ireland, GM Dominated Headlines
Schaeffer's Editorial Staff
The week ended in the black, although just barely, and not without a nasty scare on Tuesday. Glass half-full types might argue that the post-QE2, post-election skid bottomed out right at the 11,000 level on the Dow Jones Industrial Average, with a nice bounce back up above 11,200 by the end of the week.
The bulls made a serious attempt to halt the previous week's slide on Monday, and they found plenty on the news ticker to encourage them. The Commerce Department reported that retail sales jumped 1.2% in October, far better than analysts had expected, with auto sales in particular showing strength. Traders were also encouraged by merger-and-acquisition activity, with Caterpillar Inc. (CAT) announcing it will buy mining equipment maker Bucyrus International Inc. (BUCY). The Dow was up by as much as 80 points early in the afternoon, but couldn't maintain any staying power. The 80-point gain was whittled to 9 points, or 0.08%, by the close.
Fears about a Chinese interest rate hike and Irish debt levels re-emerged on Tuesday. The Dow sank at the outset of the session and then kept on sliding. When the smoke cleared, the Dow had lost 178 points, or 1.59%, to close barely above the 11,000 level.
It was the bears' turn to pump the brakes on Wednesday. The Labor Department reported extremely tame inflation in this country, while it appeared increasingly likely that a bailout would be arranged for Ireland. Meanwhile, excitement was building for General Motors' (GM) impending initial public offering (IPO). GM confirmed that it would increase the number of shares for sale, a day after announcing it would lift its pricing. The Dow tightrope-walked along the breakeven line all day before finally recording a slender loss of 0.14%.
On Thursday it was: Welcome back, GM! Well, it would be nice to think so, wouldn't it? In fact, the new GM gained more than 3% on its first day of trading, but the bulls had plenty of other help. The crisis over Ireland's debt began to wane, with leaders of the Emerald Isle conceding the need for outside help. Weekly jobless claims came in lower than expected, manufacturing activity surged in the Philadelphia area, and the Conference Board's index of leading indicators appeared to show the recovery chugging along. With all that good cheer in the air, the Dow leapt 173 points, or 1.57%.
All eyes returned to China on Friday, on concerns that monetary tightening there would ripple throughout the world economy. The Asian powerhouse, worried about inflationary pressures, increased its banks' reserve requirements for the second time in two weeks. Fed Chairman Ben Bernanke, meanwhile, effectively joined hands with the Obama administration's efforts to persuade China to let its currency strengthen. In a major speech in Germany, Bernanke argued that China's undervalued currency is hampering world economic growth. The Dow reacted less than decisively to these developments, spending much of the day underwater, but finally edging up 0.2%. For the week, the major market indexes were as close to flat as you can imagine; the Dow was up 0.1%, the S&P 500 Index added a barely measureable 0.04%, and the Nasdaq Composite slipped 0.09%.
What the Trading Desk Is Expecting: SPX Bumping Up Against Longer-Term Resistance
By Todd Salamone, Senior Vice President of Research
Well, it could have been worse. U.S. stocks plunged Tuesday morning as negative headlines from overseas generated a "risk off" mentality among traders. In fact, by Wednesday's close, risk in the market was growing. With Friday's expiration looming, and heavy put open interest just below Wednesday's closing prices, major exchange-traded funds such as the SPDR S&P 500 (SPY) and iShares Russell 2000 Index (IWM) were exposed to a delta-hedging decline. Delta-hedging is a process in which sellers of options sell an increasing quantity of an underlying equity as it moves closer to out-of-the-money put strikes in order to remain delta neutral. Such activities can snowball, particularly around expiration.
But thanks to positive economic data and better overseas news, equities gapped higher Thursday morning. In a market where weak hands are holding stocks, delta-hedge selling would have been the more likely scenario. However, as we have noted in this space during the past several weeks, stronger hedged buyers appeared to drive the rally from the August lows, and with put protection firmly in place, panic selling is less likely.
The 3.8% decline from the S&P 500 Index's (SPX) 1,225 closing high earlier this month pushed the SPX down to its 40-day moving average, which coincides with a former area of congestion from mid-to-late October (see first chart below). As we move into a holiday-shortened week, this area is potentially supportive if another pullback occurs.
Longer-term resistance levels still reside just above last week's SPX close, which could continue to put a lid on the market. Specifically, the round-number 1,200 level – an area of congestion in 2005 – the 80-month moving average at 1,206, and the 1,230 area, site of the 61.8% Fibonacci retracement of the 2007 high and 2009 trough, could collaborate to cap the market's progress.
Complicating matters in the short term is that the 20 day buy-to-open put/call volume ratios for the PowerShares QQQ Trust (QQQQ), SPY and IWM have rolled sharply lower. Translation: Hedge funds are not aggressively accumulating shares like they were weeks ago.
It is IWM that has seen the largest rollover in the ratio, suggesting small caps could underperform in the short term without the support of the hedge fund buying. But our analysis of buy-to-open option activity on QQQQ suggests continued interest in the technology sector. From a longer-term perspective, this activity is bullish, as hedge funds still appear to be underweight, suggesting there is fuel on the sidelines.
Chart of SPX versus the 20-day BTO put/call volume ratio of the SPY, QQQQ, and IWM
With retail investors pulling cash out of domestic equity funds for 28 consecutive weeks, it is the under-invested hedge funds that have the capability to drive significant rallies. Without more support from this crowd, the market is exposed to the mean-reversion games of the high-frequency traders, especially with the defined areas of support and resistance as discussed above in play.
Finally, with November expiration now a thing of the past, put options purchased to guard against a correction have expired for some investors. The good news is that portfolio protection is cheap as we enter the week, with the CBOE Market Volatility Index (VIX – 18.04) trading at its lowest level since April. During the past month, the VIX has tended to move higher from this area, as demand for put protection increases when portfolio insurance is viewed as cheap. Such actions could pressure stocks in the near term, but could be healthy from a more intermediate-term perspective.
If you enjoy Monday Morning Outlook...
...why not check out Opening View, our daily preview of market activity? Each morning, we analyze the prior day, review the overnight markets, and monitor the morning wires to give you our special Schaeffer's take on the action, before the opening bell. Sign up here to have Opening View delivered straight to your inbox every morning.
Prepare for the investing week ahead. Every week, Bernie Schaeffer and his staff provide you with their insight about what has happened and, more importantly, what will happen in the market. We dig deep and show you what's happening behind the scenes, and tell you which indicators are predicting major market moves. If you enjoyed this week's edition of Monday Morning Outlook, sign up here for free weekly delivery straight to your inbox.
Indicator of the Week: Thanksgiving Week
By Rocky White, Senior Quantitative Analyst
Foreword: Thanksgiving arrives this week. You can expect some pretty low volumes around the holiday, but what about returns? Below, I slice and dice the historical returns of the abbreviated trading week. Hopefully we can gain some insight on what to expect.
Thanksgiving Week Since 2000: Below is a table showing what the Dow Jones Industrial Average did each day of Thanksgiving week for the last 10 years. The entire week has averaged an impressive 1.2% return. However, much of that can be credited to one year, 2008, when the Dow gained over 9%. Also, it may be worth noting that three of the last four Thanksgiving weeks have been negative.
It has been typical for Thanksgiving week to get off to a good start. Monday has been the best day of the holiday week, averaging a return of 0.64%. Tuesday looks to be a very quiet day, with only one time in the last 10 years showing a return in either direction of more than 1%. It's also the only day that averages a loss in the last 10 years.
Thanksgiving Week Speed Bump: Below is another table showing Dow returns over the last 10 years. It shows the year-to-date return heading into Thanksgiving week, the return for Thanksgiving week, and finally what the Dow did for the rest of the year after Thanksgiving week. It's interesting that during the last five straight years, Thanksgiving week went countertrend to the direction the market was heading. Furthermore, once Thanksgiving week is over, the market resumed its year-to-date direction. Since the market is up so far in 2010, if that tendency continues, we will see a pullback for the week of Thanksgiving, and then the market heading higher for the rest of the year.
DJIA Thanksgiving week returns versus the rest of the year
Below is a table showing more historical data of the tendency for Thanksgiving to go against the market's year-to-date trend. Since 1980, when the Dow was positive heading into Thanksgiving week, that week was positive just over half the time, averaging a return of 0.25%. In the eight years that the market was down before Thanksgiving week, the holiday week was positive 75% of the time, averaging an impressive gain of 2.18%.
DJIA Thanksgiving week returns versus the rest of the year
This Week's Key Events: Feast and Football Shorten Trading Week
Schaeffer's Editorial Staff
Traders will enjoy a short week, thanks to the best holiday of the year on Thursday. (Christmas is for children. Everyone knows that Thanksgiving is the best holiday for adults.) The feasting and the football will compress the economic calendar into a two-day crush on Tuesday and Wednesday, while the schedule of earnings releases is very light. Here is a brief list of some of the key events this week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.
Monday
* There are no major economic reports scheduled for Monday. Tyson Foods Inc. (TSN), Analog Devices Inc. (ADI), Brocade Communications Systems Inc. (BRCD), Focus Media Holding Limited (FMCN), Hewlett-Packard Company (HPQ), Jack in the Box Inc. (JACK), La-Z-Boy Inc. (LZB), and Pacific Sunwear of California Inc. (PSUN) will report earnings.
Tuesday
* The first revision of third-quarter gross domestic product is due Tuesday. The first estimate, released Oct. 29, showed subdued growth of 2%. In addition, the National Association of Realtors will report on existing home sales for October. Campbell Soup Company (CPB), Cracker Barrel Old Country Store Inc. (CBRL), Hormel Food Corp. (HRL), TiVO Inc. (TIVO), and Guess?, Inc. (GES) are scheduled to issue their quarterly reports.
Wednesday
* Wednesday is jam-packed with data: The Commerce Department will release its October figures for new home sales, durable goods orders, and personal income and spending, while the Labor Department will issue its weekly report on new jobless claims. Meanwhile, the University of Michigan will publish its final reading on consumer sentiment in November, and we'll get the usual weekly report on crude inventories. Finally, the Fed will release the minutes of its Nov. 3 Federal Open Market Committee meeting. That meeting, at which the Fed voted to unleash QE2, the second round of monetary stimulus, has been pretty well chewed over, but we might learn some behind-the-scenes details of the debate. Scheduled to report earnings are Deere & Co. (DE) and Tiffany & Co. (TIF).
Thursday
* The market is closed for the Thanksgiving holiday on Thursday.
Friday
* There are no major economic reports scheduled for Friday. There are no major earnings reports scheduled for Friday.
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