The Option Queen Letter

A question for you, the reader: Answer if you know how to judge when a market is expensive? One way to know if your market is expensive is to note when it is that companies buy other companies for their inflated stock by providing the kicker of a little cash. Think back to the last time the market was on a tear; remember all the mergers for stock? Hint! hint!

And, there’s the other thought that really continues to disturb us: If the market is soooo cheap, why, then, aren’t companies gobbling up their own stocks and why then, are insiders still not sellers of these “cheap securities?” Yes, we hear of some companies announcing a stock buy-back but if it is so cheap, why not buy more or: go private?
Analysts are convinced that this recent run-up is attributable to money coming into the market from the sidelines; yet, money-market asset levels increased in this past reporting week. Perhaps, the draw of safe parking spots with 4.80 or so yields are enough to entice the cash to stay there, rather than to fight the crowd, trying to get onto a crowded subway train, chasing the next Google. This will all ultimately shake out, but probably not for the better.
Instead, we have insiders as net-sellers and companies, purchasing other companies, using their inflated stock, in lieu of cash. We did see this behavior in the dot-nothing era, but few listened at that time, too. Yet, we see the Dow Jones Industrials chugging higher. Remember: The Dow Jones is only 30 stocks; not a market. True, the US Dollar was the beneficiary of some tensions in the world, such as a possible test of the North Korean Nukes. We continue to be grateful for their current inability to reach our shores. This strength in the US Dollar kept a lid on commodity prices. “Lid” is an understatement: Orange Juice decided that no hurricane was a-comin and promptly fell, like a frozen fruit. Cotton became cheaper, and most all of the commodities that we watch, were in the RED, in the Friday session.
The Jobs report, missed most analysts’ estimates, but hey, just keep those estimates for another month, they could be right on, when the revisions are published. The US unemployment rate dropped from 4.7% to 4.6%. We continue to believe that these reports fail to show the true reading. The bug that will catch the Fed’s eye, was the average weekly earnings figure, which rose an unexpected 0.2%. This is inflationary pressure, or so, we were taught, in school. What can come out of this data party? Certainly not a rate drop, but then again, not a rate hike; sounds like a pause to us! Yes, we know we are going to have our opinions changed, by each and every data point, but that is today’s results. Don’t forget, we get the FOMC dove’s nest results, with the release of their meeting notes, on Wednesday. That should add something to the confusion, as we read how this group acted, all cooing together, that is, except for Richmond’s, Fed President Lacker, the lone hawk in the group. He will be giving a speech, also on Wednesday, and we get another look into his thoughts, not that these thoughts have had any ability to convert the doves. Perhaps, the doves are converting the hawk; who knows?
Here we are, in the season of ghosts, goblins and earnings; why yes, it is again earnings season! This month, we have the added amusement of some rather dirty congressional campaigns, the end-of-the-year portfolio adjustments for mutual funds, and yes, Halloween. The witches and warlocks will soon be stirring the cauldrons of dirt into a soupy mess; thus applying some downside pressure to the elated elves on Wall Street. Remember too, these wizards of markets are closing in on their last quarter, wherein they’ll have to extract every last penny for that year-end bonus. It should be interesting to watch this one shake out; or should we say, “snake out.”
Monday: Columbus Day Holiday; banks and bonds are closed. Tuesday: August wholesale inventories are released at 10:00. Wednesday: FOMC meeting minutes from September 20th will be released at 02:00 and Richmond Fed President Lacker speaks (remember he is the lone hawk in a dove’s nest; has he been converted?). Thursday: August international trade is released, the beige book is released at 02:00, Chicago’s Fed President Moskow speaks in the evening and the ECB monthly report is released. Friday: September import prices are released at 08:30, September retail sales are released at 08:30, University of Michigan sentiment for October is released at 09:45-09:50 and August business inventories are released at 10:00.
The put/call ratio closed the week at 114/ 100, up 2 ticks from the previous 112/100. The VIX is stuck in fantasy-land and closed the Friday session at 11.56 down from the previous week’s 11.98, down from the previous month’s 13.16 and the previous year’s 14.59.
The US Dollar index enjoyed one of its better rallies in the Friday session. Here are some thoughts that we need to keep in mind. The jobs report was a bit light for September; this is a negative for the US Dollar index, because it keeps the Fed on hold, but the upside adjustment to the August number turned the jobs report from lousy to– well, good; this is a positive for the US Dollar, because it shows that the Fed can’t believe those light numbers and will have to suspect that the upward adjustment will follow, giving rise to the thought that the economy isn’t really slowing down all that much. This would justify another up-ratcheting. The unemployment rate dropped; who can believe that one? Anyway? But the hourly wages? Now, there is a fly in the ointment. If the hourly wages are rising 2%, the Fed will get antsy about inflation; after all, wage cost is a huge input component on inflation calculations. So, with all of this analysis, I guess we’ll opt for a pause. The US Dollar index reviewed the data and made the assumption that interest rates won’t drop, anytime soon, that is; this is a positive for the US Dollar; also, that the economy is in limbo and may be weaker than the numbers reflect, which is, effectively, a vote for the pause camp, but the hourly wage will inspire further increases in interest rates; so they voted unanimously for that data-point, throwing out the ones that they didn’t like. Add to that, the North Korean threat to test their nukes over the weekend and voila! a mega-rally. The chart is overextended to the upside, but that’s no real reason to stop the rally, at this point. There may be another day of rally left in that US Dollar index. Just expect to see a correction, once this updraft is over. The stochastic indicator is issuing a continued buy-signal and is at overbought levels. The RSI, and our own indicator are both positive, looking for more rally. The Thomas DeMark Expert indicator is not issuing a sell or a buy, but is going sideways, at overbought levels. The 5-period exponential moving average is at 85.74. The top of the Bollinger Band is at 86.09 and the bottom edge is seen at 84.70. We believe that the first resistance will be seen at 86.64, which was a previous high; above that, there is 87.05. When you look at the weekly chart, the upside move isn’t as drastic as it is on the daily chart. We actually look like we are quite range-bound on that weekly chart and, until we remove the 87.05 level, we will remain in this trading range, bounded by 87.05 on the top and 83.42 on the bottom.
The Friday sell-off in the Euro was a nasty deep sell-off opening the door to a possible revisit of the July 19^th low of 1.25050. The low of the session, 1.26180, should be a good low which will find some support but when broken, will lead to 1.25050. The stochastic indicator, the RSI
and our own indicator are all oversold and issuing a continued sell-signal. The Thomas DeMark Expert indicator is issuing a continued sell-signal but is not at oversold levels. We are getting a 10-count and some downside exhaustion, which may lead to a short-term bounce. The
5-period exponential moving average is at 1.27259. The top of the Bollinger Band is at 1.28625 and the lower edge is seen at 1.26756. As with the US Dollar index, when you look at the weekly charts you get a different view of the dramatic action seen in the daily chart. The
weekly chart, although not bullish, looks as though the Euro is at the lower edge of a trading range in which it has been stuck since about May. We will say this however; should the 1.25050 level fail to support this market, the Euro could be in for some really severe pain taking it to the 1.2150 congestion area, yikes!
The upward stair-step pattern has been very neat and well organized. The S&P 500 goes up a few steps, rests and resumes its upward trek. The Jobs data had a somewhat negative effect on the S&P 500, but reflected much of the same confusion seen in the US Dollar pit. The difference here is that the soft economy or lean Job’s-data, reminded the marketeers that they needed employment of the population to keep the economy chugging and the consumer spending. Now the revisions looked great, but the lack of new jobs in the current month, well, look at Detroit and tell us that there are jobs being created. What we are noticing is that skilled workers are able to command a greater wage than the unskilled work-force. This contributed to the average hourly pay rising 2% this past month. There are low-paying jobs and high-paying jobs and very little in the middle. The market figured that it couldn’t be all that good for the economy. The retreat in the Friday session was nothing; a mere gnat bit on an elephant! The stochastic indicator is issuing a sell-signal, as is the RSI and our own indicator. The Thomas DeMark Expert indicator is issuing nothing, but is at extremely overbought levels. The 5-period exponential moving average is at 1354.41. The top of the Bollinger Band is at 1364.57 and the bottom edge is seen at 1322.20. The weekly chart pictures the aggressive nature of this rally, painting an upward-moving trading pattern, which has remained above the 5-period moving average on the bottom, and at the top-edge of the upper Bollinger Band, at the top. That is really very bullish. Further, we have been overbought for months and there is little to tell us that we are going to change directions. What we would use as an alert is the 5-period exponential moving average on the weekly chart, as a warning. Should that level not support the market, we would then expect to see a bit of a correction, if not a decent sell-off. That level is at 1336.94 for this week. Thus, if we fall below that level, and we don’t mean by pennies, but rather, dollars; it would be prudent for us to review the data and reassess the market.
The NASDAQ 100 made little progress to either side of the market in the Friday session. The market is overextended, overbought and just too happy, where it is. The indicators are all overbought and about to issue a sell-signal. The 5-period exponential moving average is at 1687.21. The top of the Bollinger Band is at 1706.69 and the lower edge is seen at 1630.19. The weekly chart shows that the NASDAQ 100 violated the 5-period exponential moving average, but managed to close above it. We have a 9-count on the upside, which could lead us to a retreat in the next week.
The Russell 2000 played catch-up in the Wednesday and Thursday sessions. Very little of what was gain in those trading days, was given up on Friday. What is not so pretty is, that this index looks as though it could catch up to the downside, also. The stochastic indicator is issuing a sell-signal. The RSI has curled over and is pointing lower. Our own indicator is about to issue a sell-signal, but the Thomas DeMark Expert indicator continues to issue a buy-signal and is approaching overbought levels. The 5-period exponential moving average is at 739.67. The top of the Bollinger Band is at 750.02 and the lower edge is seen at 719.37. The weekly chart, although bullish, has some features which are of some concern. We closed right on the 5-period exponential moving average; we are overbought, in a major way and the market is looking tired. We will have to watch this market carefully for clues as to the resolution of these problems.
The Continuous Commodity Index seems to have found a short-term bottom. On Wednesday, we noticed that the low of 361.19 held. This was very positive because the market had a liability to 359.07. On a very short-term basis, we have a point of inflection on Monday. We need to see a close above 367.97 to turn the trend from down to up. The stochastic indicator is issuing a fresh sell-signal, as is our own indicator. The RSI is pointing to the downside. The Thomas DeMark Expert indicator is issuing nothing, just going sideways. The 5-period exponential moving average is at 366.91. The top of the Bollinger Band is at 371.53 and the lower edge is seen at 360.58. The weekly chart shows a very oversold market. We have a 6-count on the bottom, but no indications that the market is changing directions.
December cocoa seems to be having a problem in today’s session, which may, in part, be attributable to the strong US Dollar, which kept a lid on the cocoa market. The market opened at 14.68, rallied to 14.78 by 08:30, when the US jobs report was released. The US Dollar rallied to that report and acted to hold cocoa down. When reviewing the intraday chart, it is clear when the Job’s report was issued, the cocoa market retreated. The market closed very firmly with a closing range of 14.49 to 14.50. The downtrend line for Monday is at 14.85, a level which cocoa must close above, to turn the trend back to the positive side. The stochastic indicator, our own indicator and the RSI are all issuing continued sell-signals, at oversold levels. The Thomas DeMark Expert indicator is issuing a buy-signal. The 5-period exponential moving average is at 14.60. The top of the Bollinger Band is at 15.23 and the lower edge is seen at 14.24. Here is the bottom line: if cocoa does not clear the 15.06 level, in short order, it could risk a return to the 14.15 level. The weekly chart looks as thought the market is getting ready to make a move. The pattern is either a pennant or a coil.
December coffee’s uptrend line is at 104.00. The downtrend line is at 105.20. The stochastic indicator, our own indicator and the RSI are all pointing to lower levels. The Thomas DeMark Expert indicator is oversold and is not issuing anything of value. The 5-period exponential moving average is at 104.51. The top of the Bollinger Band is at 108.45 and the lower edge is seen at 101.44. A close above the old break-down point of 105.20, would be helpful for the bullish cause, but a break below 102.50 will inspire the shorts to become more aggressive. We have noted that some roasters were in the market buying at these levels, both from England and America. The 5-period exponential moving average is at 104.51. The top of the Bollinger Band is at 108.45 and the lower edge is seen at 101.44. The weekly chart of coffee doesn’t look particularly good, either. We are oversold, but really not ready to issue a buy-signal. We notice that the market is becoming very narrow.
November Frozen Concentrated Orange Juice is under pressure in Friday’s session. The market opened the day session at 167.60 and retreated to 167.10. The retest of the recent lows initially found support, but that support faded. Stops were resting below the 167 recent low and more stops below 165.00. There is trade buying, but it seems to be in no hurry to get the fill. We have the crop report, due on Thursday morning, before the open of trading. We will finally discover which private report was closer to the mark, when this report is issued. At the moment, the market is trading on the private report that supports a shortage of the fruit. The volatility blew out on Friday. The stochastic indicator is oversold. All the indicators are oversold, but none are issuing a buy-signal. The 5-period exponential moving average is at 167.81. The top of the Bollinger Band is at 174.81 and the lower edge is seen at 164.62. When reviewing the weekly charts, the impression one gets is that this market is severely oversold. We are back into an area where we have had support in the past. The low of the 153.50 is an area of important support for Frozen Concentrated Orange Juice.
December crude oil looks like all the commodities look; lousy. The market has a 9 count on the weekly chart; this usually leads to a bounce. All the weekly indicators are at extremely oversold levels. We do have a mechanical buy signal, issued on the December crude oil contract. The stochastic indicator is issuing a possible sell-signal, at oversold levels. Our own indicator is not issuing anything of value. The RSI has quit trending and is sitting just above oversold levels. The Thomas DeMark Expert indicator is issuing nothing, but going sideways at oversold levels. The 5-period exponential moving verge is at 61.41. The top of the Bollinger Band is at 64.55 and the lower edge is seen at 59.82.
November natural gas doesn’t look bad; What am I saying? A commodity that doesn’t look bad, can’t be. Ah, isn’t this the one that looked lousy when all the others looked good? Yup, this is the one. Believe it or not, this chart looks like natural gas has formed a rounding bottom. We had a mechanical buy-signal, about 3 days ago. The RSI, the stochastic indicator and our own indicator are all overbought but issuing a continued buy-signal. The 5-period exponential moving average is at 6.116. The top of the Bollinger Band is at 6.444 and the lower edge is seen at 5.335. The weekly chart doesn’t look as bullish as does the daily chart. We do have agreement with all the indicators on the weekly chart. They are uniformly issuing a buy-signal, from oversold levels.
December gold was another commodity that did not drop in the Friday session. This chart shows a market that needs to close above the 5-period exponential moving average of 580.90. The stochastic indicator, our own indicator and the RSI are all issuing a continued, muted, buy-signal. The Thomas DeMark Expert indicator is issuing nothing of value and is resting at extremely oversold levels. The weekly chart shows a 9-count and exhaustion, on t
NYA CASH (8534.32)
Resistance 8573.26 8580 8598 8634.88 8651.74(H)
Support 8531.85 8499.67 8469.65 8468.97 8449 8424.56 8400 8386 8363.45
8344.67 8311 8294.64 8275.84 8268.97 8236 8209.66 8190 8163.26 8140.11
8108 8071 8022 8009 7953.14 7924.62 7901.40 7897.69 7883 7872 7855
7824.41 7805 7798.30 7780.33 7753.95 7739.47 7716 7708.11 7693 7677
7667.64 7642.81 7634.58 7621.26 7599.78 7566.02 7546.67 7529.15 7516.48
7498.75 7470.90 7455.70 7422.77 7407 7380.75 7369 7339 7316 7293 7280
7263.32 7251.87 7233 7214 7200 7174.95 7160 7138 7116.60 7107 7091 7084
7060 7047 7028 6993.30 6971.22 6958 6936 6924.00 6913 6906.23 6887 6843
6800 6786 6749.41 6701.47 6699.84 6680
RUI CASH (731.46)
Resistance 733.82(H)
Support 728.59 726.08 722.35 718.67 715.95 712.54 709 707.55 704.41
701.86 697.41 694.50 690 688 686.50 684 681 678.33 675.65 672.40 670.69
667.14 665.05 663.18 661.28 658.23 656.20 653.80 650.61 647 644.67
641.46 638.70 635.58 633.87 631 628.46 624.98 621 619.20 617 614.25
611.70 609 607 604.665 602.50 599.39 595.70 593.40 590.58 588 585.27 582
Russell 1000 Value (768.27)
Resistance 770.53(H)
Support 767.82 765.05 762 759 756 754 751.62 748.55 745.14 744.82 742.95
739.24 735.58 733.51 730.19 727.53 725.26 722.96 720 718 715.11 713.53
710 708.98 705.80 703.39 701.38 700.34 697.65 695.98 693.38 690.61
687.26 684.85 683.16 679.76(just go short) 677 674 671.25 669.40 667.70
666 663.44 661 659 656 653 650 648.11 644.62 641.05 640 638.05 635
632.90 630 627.20 624.61 620 615 613.48 610.29 608.48 607.76 606.92
604.91 599.92 596 593.73 590.6
Russell 1000 Growth (531.62)
Resistance 532 534.43(H) 536 539
Support 530 527 522 520 517 515.62 514.04 511.07 508.41 505.90 503.53
501.78 498 496 493 496 493.36 490.56 488.57 485 481.43 477 475 471 468
464 462 460.87 457.82 455 450.31 445.34 443.88 442 440 438 436 434 432
429 427 425 423 421 418.68 416 414 412 410
TO A0 (Russell 2000 cash) (739.81)
Resistance 743.38 746.09 749.70 753 755 758.12 761 764 767 772.12 774.71
776 779 781 784.62(H)
Support 737 735.26 733.18 729 727 725 721 718.63 714 711 708.54 706.61
704.40 699.24 696.41 693 690 686 682 679.04 676.39 673.22 671.94
669.05(just go short) 666.36 663.65 659.35 655.95 653 650 647.35 644.33
642 638 635.33 632.73 630.40 628.54 626.91 624.41 621 618 615.31 612.71
609.41 607 601 596 593 590.53 587 584 579.38 577.93 573 570 567 565.21
559.70 558.58 554.13 551.87 548.45 545 541.96 538 536 533 529 526
SPX CASH (1349.58)
Resistance 1353.79 1454 1530.89 1552.87(H)
Support 1344.21 1340.28 1335.64 1329.35 1324.65 1314.78 1311 1306
1298.92 1295.09 1293.57 1289.49 1285.25 1278.90 1268.20 1265.48 1262.08
1257.98 1248.29 1240.29 1235.18 1231.57 1228.45 1222.52 1219.29 1211.27
1202.35 1199.71 1195.90 1192.34 1187.13 1179.59 1175.44 1171.35 1168.20
1164.50 1161.43 1152 1147 1140 1132.84 1130.54 1128 1124.62 1120.19
1118.60 1110 1094 1090.19 1087 1079 1068
NDX CASH (1684.88)
Resistance 1690.80 1706.33 1713.84 1720.15 1724 1735.50 1741.35 1749
Support 1676.63 1666.03 1650 1645.20 1622.37 1617 1611 1601 1589 1581
1589 1574.71 1570.34 1557.70 1548.07 1539.59 gap to 1534.78 1508.94 1494
1486.74 1479.69 1451.88 1448 1438 1428 1420.79 1412.63 1408.59 1399.05
1397.50 1388.20 1380 1374 1366.73 1356 1348.27 1334 1320.95 1309
DX Z6 (86.20)
Resistance 86.39 86.45 86.64 86.70 86.99 87.09 87.24 87.62 87.67 87.77
87.80 87.96 88.08 88.13 88.19 88.27 88.33 88.45 88.33 88.51 88.60 gap to
89.17 89.27 89.37 89.39 89.52 89.69 89.84 89.90 89.99 90.05 90.17 90.26
90.34 90.79 90.99 91.06 91.16 91.18 91.22 91.33 91.49 91.55 91.60 91.68
91.74 91.98 92.05 92.27 92.45 92.54 92.61 92.80 93.00 93.28
Support 86.16 85.97 85.82 85.78 85.68 85.62 85.51 85.42 85.32 85.19
84.96 84.87 84.74 84.70 84.68 84.56 84.42 84.28(I) 84.16 83.95(I)
83.85(I) 83.79 83.67 83.60 83.57 83.47 83.41(I) 83.30 83.15 83.05 82.99
82.86 82.72 82.65 82.59 82.37 82.18 82.02 81.98 81.81 81.75 81.66 81.48
81.39 81.31 81.25 81.12 81.00 80.98 80.69 80.22(4/28/95)
By Jeanette Schwarz Young, CFP, CMT
Box 1952 c/o New York Board of Trade
One North End Avenue
New York, New York 10282

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