Stocks are set to add to Monday’s big gains. Yesterday, the Dow Jones Industrial Average ($INDU) surged 200 points or 2.2% and the Nasdaq Composite Index ($COMPQ) rallied 40 points or 2.5%. Tuesday, one hour before the start of trading, index futures were pointing to another 33-point gain for the industrial average and a 6.5-point advance for the Nasdaq. Investors continue to drive up stock prices amid improving economic numbers and a general sense of optimism that a new bull market is now underway.
The latest Consumer Price Index [CPI] allayed some of the recent concern about disinflation. The numbers, which were released Tuesday before the start of trading, showed consumer prices remaining unchanged during the month of May. Excluding food and energy, the core rate increased by .3%. Economists were expecting the CPI to drop .1% and the core rate to increase by only .1%. Therefore, consumer prices increased more than expected and that should ease some of the recent concern about disinflation or even deflation.
In other economic news, a report released early Tuesday showed housing starts increasing by 6.1% to 1.73 million units. The results were slightly better than expected and reversed most of April’s 6.8% decline in housing starts. Later today, industrial production and capital utilization figures are due out at 9:15 a.m. ET. Economists expect industrial production to remain unchanged from April levels. Similarly, the capitalization rate is expected to be 74.3%, compared to last month’s reading of 74.4%. The market might also react to the weekly retail sales numbers that will be disseminated Tuesday morning. In stock news, shares of AT&T (T) may be active after Merrill Lynch downgraded the stock from “hold” to “sell”. Shares of Pfizer (PFE) may move higher as the company holds an analyst meeting in New York today. Healthcare stocks were among yesterday’s top performers as investors drove up biotech and drug stocks. Also in that sector, traders might want to keep an eye on VISX (EYE). With the stock up 3.5% Monday, nearly 10,000 calls traded yesterday, compared to average total daily options volume of less than 500 contracts.
Overall, options traders seem to be showing a healthy amount of caution. As evidence, call volume has not been excessive or at levels witnessed at previous market tops. For instance, the total CBOE put-to-call ratio remained in a neutral (.65 to .86) range last week. When this indicator drops below .50 it indicates a disproportional amount of call activity and therefore excessive bullish sentiment. Yet, despite Monday’s surge in the stock market, the ratio finished the day .66. The index put-to-call ratio stayed between 1.33 and 1.42 last week and finished the day Monday reading 1.70. It signals excessive call activity when the ratio drops below 1.00. Therefore, despite the stock market’s strong run, there are no clear signs that bullishness has reached an extreme and, from a contrarian’s perspective, that is a positive sign for the stock market.
Yet, the market might be short-term overbought after Monday’s huge run-up. For example, the Trader’s Index ($TRIN), which measures volume going into advancing issues verses volume going into declining issues, fell to .48 Monday. Historically, readings of .50 or less from TRIN have been indicative of short-term overbought conditions. In addition, NYSE TICK ($TICK), which measures upticks minus downticks on the New York Stock Exchange, finished the day at +1,079. Such a high reading at the end of the day is a sign of aggressive buying into the close. This type of activity is not sustainable and generally paves the way for a short-term move lower in the stock market. For that reason, after moving higher in early trading, weakness in the stock market Tuesday would not be terribly surprising.
Frederic Ruffy Senior Writer & Index Strategist Optionetics.com ~ Your Options Education Site
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