Wednesday, July 26, 2006

Strike Three?

Let’s start with our favorite index the NDX, the NASDAQ 100, and its tracking stock, the QQQQ’s.  This is now the sixth full trading day since our “important” low back last week Tuesday and there has been very little power for this index.  Out of the Tuesday low we saw a good rally into last week Wednesday’s high much more muted than the reaction in the Dow.  Going into last Friday, the index quickly traded down near its Tuesday lows but did manage not to break them.  Starting on Monday we have seen another rally to those Wednesday highs from last week.  

In case you weren’t reading that very closely, we think that this “pattern” represents a possible end to the upward correction of the NDX.  The first leg up into last week Wednesday was the “a” wave and then the pullback into Friday was the “b” wave and then this week has been wave “c”.  A three wave pattern is corrective and in this case signals the correction may be over.  Strike one.  

We have felt fairly confident in our position that the NDX needed to correct an oversold condition.  Looking at the Dow, we see a similar pattern but the magnitude of the upward correction has been significantly better.  By definition, this pattern difference in the two indexes is bearish since the Dow is “out performing” the broader indexes.  Strike two.    

We can only say that corrections are dangerous to play and we have had ample opportunity for the bulls to get a little serious about rallying the NDX.  In the context of the entire market, the bear doesn’t seem to be letting up much even though the headline number, the Dow Industrials, has been showing stronger numbers.

Underneath the surface a lot of bad things are going on, one of which is the Dow Transports which we mentioned yesterday.  After UPS’s news on Tuesday, the Transports got hammered by 80 points and by nearly another 125 on Wednesday.  This index is down well over 4% in two days but no one ever really watched the Transports so it doesn’t really matter—right.  

The tech news is punishing many investors if you look at some of those stocks.  We think of AMZN more as a tech due to the way it interacts with the customer and it was down over 20% on Wednesday after its news on Tuesday evening.  Looking through the list of NASDAQ 100 stocks there are several with 4% plus declines for Wednesday, make that 10 or 10% of them.  

Probably the biggest “news” of the day was the Fed’s beige book which was, how shall we say this, Flashing subliminal messages about the course of interest rates.  After that report, there can be little doubt that the Fed is preparing the market for at least a pause in the interest rate hikes when it meets on August 8th a couple of weeks away.  This Big message from the Fed was Meant to give the market a chance to rally without the Fed actually being able to say they were pausing.  But, the dollar did not like the news as you might expect (check the BEGBX below and compare it to yesterday’s number).  Not only that, the stock market couldn’t hold its gains into the closing bell.

We leave you with this tonight:  The market could very well have completed its upward correction on Wednesday or may do so on Thursday morning.  Normally, this time of the month is the strongest but we have not seen the strength we thought we’d see in the broader indexes.  We thought the NDX and friends would out perform to the upside relative to the Dow.  That has not happened so we have become very cautious in here.  We thought we could wait until the middle of next week or even later but our senses are on full alert.  The Asian markets are up this evening and pulling the US overnight futures up a little in the process.  Please review your positions.  We’ll be back again tomorrow for more information.  See you then.

Dow Industrials:  11,102.51  -1.20
QQQQ:  36.59
RYVNX:   24.15
RYAIX:  25.37
TLT:  85.34
BEGBX:  13.45

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