Just a few days in front of turkey overload, we wonder if our simmering markets could be getting to the stock overload level. Just as with turkey overload, a mean that lasts a week because of the large quantity cooked, we have overload on stocks with the inflated prices they are commanding. Friday, the NMX shares went public. These shares were priced at $59 bucks a share, if you were lucky enough to get the IPO.
For those who bought these shares on the open, the price paid was $120 per share and then those who put in to buy after the opening, well the price rallied to $152.00 per share before the flippers sold out their shares. Just incase you were not able to profit from this IPO you could have bought CME or ICE to have participated in the helium adjusted price at the open. Both of those issues rallied when the NMX issue began trading. Adding fuel to the fire was the chairman of the Nymex, Richard Schaeffer’s statement that he might consider a merger with ICE, Intercontinental Exchange. This comment caused a spike in the ICE shares to 101.26. ICE is in an agreement to purchase the NYBOT which is a tenant in the NYMEX building occupying half of the seventh floor trading floor. All this speculation led the shares of exchanges to rally to levels of high speculation. There is further speculation about the purchases of other exchanges with this inflated stock to be used as cash.
Last week we discussed the usage of inflated stock values to pay for mergers. It seems only logical that this will be seen in these markets that may span the Atlantic Ocean, such as the Deutsche Borse, to find their targets or, perhaps be the targets. The giant markets of yesteryear are combining improving the ability of the investor to have a global portfolio. True this is early in the game but it is coming and coming soon. The good news is with the advent of electronic trading, the volumes will increase as all learn and enjoy playing the electronic game. We continue to believe that the floor will play a role in our future, but a much smaller role than in previous times. We are sure that the advent of the Automobile drove the horse breeders and carriage makers to the same worries that are being felt of the various exchanges that are shrinking their personnel but increasing their revenue at the same time. It is something to make your heart beat faster when you are able to watch money multiply right in front of your eyes. We have been watching other issues just rally up a storm. Now that the Thanksgiving Holiday is in front of us we can look to further merriments, and exuberance in the market, but we really don’t believe it that much this time. We wonder if the mass exodus from the Bear camp into the Bull camp isn’t a bit excessive. It appears that investors are just throwing money at the markets just to get a sliver of the rally. Much of this behavior is exhibited by portfolio managers who continue to under perform the indices. The Bull/Bear ratio has tilted decidedly to the bullish camp. This is a contrarian indicator so; as more bulls jump into the ring the market becomes more of a sale.
TECHNOLOGY INSPIRED BUYING SPREE
We think that the recent technology rally is well deserved. Why? Because as Microsoft releases its newest operating platform, Vista, it becomes abundantly clear that new machinery will be necessary to run this new software. Businesses that want to upgrade to Vista likely will buy the hardware necessary to run this OP in front of the close of the tax year 2006, thus, stealing sales from 2007. It has been clear, that many businesses have deferred any purchases of hardware until the release of Vista. Now, they know what will be needed and are likely to book the cost of that need. So, what affect will that have on the suppliers? Likely, the increased purchases will lead the suppliers and sellers to believe that the rate of replacement of hardware will continue into 2007 and they will restock their shelves. We had an opportunity to see this affect in the past when purchases were made before we entered 2000. Then as will be today, shelves were bloated with products that took years to remove. Are we heading there again? Could be.
HISTORY OF TWO POLES
When we reviewed the chart of the S&P 500 we did notice a similarity to the rally that began in March of 2003 which paused in July of that year and continued into March of 2004. The only differences we note are: the 2003 rally rested from June of 2003 to the end of August of that year and then took off again, and secondly, that rally was not as vigorous as the rally we are currently seeing which began in July of 2006. The current rally is much steeper than the rally seen in 2003. There is another pattern that has continued in this rally and that is the S&P 500 has remained above the 20 day moving average for most of the rally only breeching it two or three times for about two consecutive days. This tells us that it would be safe to use a 20 day moving average as a stop on any long position in the S&P 500. What we see also is that this index has been clinging to the upper line of the Bollinger band as though there were a magnet on that line. The market is grossly overbought by all the measure that we follow and has signs of exhaustion. Yes, we are in a holiday shortened week with a historic upside bias. We advise caution in this market. Many have said that the market is cheap, we hardily disagree with that and feel, because of cheap interest rates, that the market is expensive as demonstrated by the many mergers being undertaken using the corporate stock as currency. These guys aren’t stupid. Further, take a look at insider sales! What do they know that you don’t?
SOME VIX HISTORY
If you really want to scare yourself, get a chart of the VIX dating back to 1986. That measurement of fear in the market shows that THERE IS NO FEAR in this market, none, nadda, nichts! We are at historic lows, even when moving back in time we have to access 1993 to find lower levels in this indicator. Yes, we have heard that “this time is different” but when we hear that it s a “Bad thing.” In September of 1993 we did see the VIX at 9.31. That low level was followed by a spike to 23.87 by April of 1994. In December of 1996 we saw the VIX at 10.36 and by March of that year, it was at 20.70. In January of 1987 we found the VIX at 10.43 with a slow climb into April and then a retreat in of August and September with a slight uptrend into October. So, here is some good news, the Thursday before the crash of 1987, the VIX was at 29.93, on Friday, it was at 39.07 and on the crash day itself, 152.48 for that Monday and 172.79 for the following Tuesday. No, the measurement of the VIX gave no warning of the impending disaster until the Friday before the crash. While it is true that the VIX did move from the 23 area to 29 in the preceding days it would not have turned heads or shown up on a radar screen. Interesting stuff!
The put/call ration on the S&P 100 is 137/100 which is bullish yet, is lower than the 145/100 seen last week. The VIX headed for another low reading for this year of 10.05 down from last week’s 10.79, last month’s 10.63 and last year’s 11.12. A little history here is required. In December of 1993, the VIX did retreat to 9.31. Here is interesting statistics: on January 20th of 1987, the VIX was at 10.43.
The US Dollar index shows a high-wave candle which is an outside day as a result of the trading on Friday. A high-wave candle has both a long tail and a long wick with a small real body in-between. In this case, that body is red/black on the chart, indicating that the market opened higher than it closed. The US Dollar index managed to stay above the uptrend line, although, it did pierce it. The uptrend line for the Monday session is at 85.33. The down trend line is found at 85.67 for the Monday session. We will have a point of inflection this week on Wednesday, which may start in the overnight session. A point of inflection is found when the uptrend and downtrend lines meet causing an explosion of power. The stochastic indicator is issuing a sell-signal as is the RSI. Our own indicator is curling over to the downside but not issuing a sell-signal, at this moment. The Thomas DeMark Expert indicator is issuing a continued buy-signal and is at overbought levels. The 5-period exponential moving average is at 85.24. The top of the Bollinger band is at 86.30 and the lower edge is seen at 84.54. On the weekly chart, the US Dollar index has remained below the downtrend line. The weekly stochastic indicator is issuing buy-signal but is the sole indicator doing so. The weekly chart demonstrates clearly that we are in a rather narrow trading range and not very volatile. An even clearer demonstration of this narrow trading range can be found when reviewing the monthly chart.
The Euro continues to plod along with an upside bias. The stochastic indicator is issuing a buy-signal as is our own indicator. The RSI is telling us nothing of value. The Thomas DeMark Expert indicator is issuing a sell-signal. The 5-period exponential moving average is at 1.28317. The top of the Bollinger band is at 1.29301 and the lower edge is seen at 1.26185. The downtrend line is at 1.28702 and the lower edge of the parallel channel line is at 1.27778, both of these numbers are for the Monday session. The weekly uptrend line is at 1.26567. The indicators on the weekly chart are mixed some overbought and going higher while others turning down, but none are issuing a sell-signal. The monthly chart has been going nowhere since April of this year, and is in a very narrow range bounded by 1.25050 on the downside and 1.29760 on the upside. Until and unless we break out of this range, expect to see range-bound trading as we bounce back and forth.
The Russell 2000 has made multiple new highs this past week ending the options expiration week with a whimper rather than a growl. We are extremely overbought by all measures. We have an exhausted market with a sell-set-up done. We closed above the top edge of the Bollinger band on Tuesday, Wednesday and Thursday of this past week and the very least we could expect to see is some sideways action to remove these excesses. We are ripe for a pull-back but in a holiday week, history tells us the upside probably will continue, but the chart says “no it won’t.” We have a hang-man candle as a result of the Friday session. Obviously a hang-man is not a bullish thing. The stochastic indicator is issuing a solid sell-signal, our own indicator a solid sell-signal, the RSI pointing downward but the Thomas DeMark Expert indicator is going nowhere at near overbought levels. The 5-period exponential moving average is at 788.17. The top of the Bollinger band is at 796.36 and the lower edge is seen at 748.65. The weekly chart is a bit friendlier than is the daily chart. True, we are grossly overbought as measured by the indicators, but not a single one is issuing a sell-signal at this moment. We are above the top of the Bollinger band on the weekly chart, which is an ominous sign. The weekly charts are telling us that we are overbought, and that we will turn down, but not at this moment. The uptrend line on the weekly chart is at 767.24. We expect to see a pull-back to 783.40 as a minimal retracement and then to the uptrend line.
The S&P 500 daily futures chart is OVERBOUGHT!!!!! We are seeing signs of exhaustion and a hangman-candle. Traditionally, we expect to see a rally into the holiday so, if we pull back say Monday and Tuesday, expect to see holiday cheer return for the pre-Thanksgiving euphoria that is and has been almost a tradition on Wall Street.or should we call is cyber-street soon? The stochastic indicator is issuing a solid sell-signal as is our own indicator. The RSI is sitting at overbought levels and going nowhere. The Thomas DeMark Expert indicator is issuing a continued buy-signal at extremely screaming overbought levels. As to the Bollinger bands they are being tested on the upside on almost a daily basis. You know, that we can not stay at these levels for much longer, but the seasonality encourages us to believe in Santa Clause, and fairy tales that all work out well in the end. Goldilocks is still alive and doing well living with the Three Bulls in the cottage in the woods. The 5-period exponential moving average is at 1399.91. The top of the Bollinger band is at 1406.70 and the lower edge is seen at 1367.47. If its possible, the weekly chart of the S&P 500 is more overbought than the daily chart is. The indicators are all overbought and signaling that they can go higher, of course we are more overbought now than we have been in a while and when looking at the weekly charts, we have been overbought since August, never moving below the overbought line. We see signs of exhaustion in the weekly chart and a seven count. The monthly chart shows much the same thing with exhaustion but this char we have some sell-signals from the indicators at grossly overbought levels. Back to the daily chart, the first level of support on a pull back will be found at 1378.83, the next level down is at 1365, although the Fibonacci number is 1363.32, we believe our number is a better support number and the support below that is at 1320.85 to the Fibonacci number of 1319.06.
The chart of the Russell 2000 and the chart of the NASDAQ 100 have a very similar look to them. Both look like poles with signs of exhaustion and possible reversal of fortunes. The NASDAQ 100 differentiates itself by having traded above the upper band of the Bollinger band from the past three days. The Russell 2000 couldn’t muster the spunk to do so in the Friday session. The stochastic indicator is issuing a sell-signal as is our own indicator. The RSI is pointing lower from extremely overbought levels. Needless to say all three of these indicators are at extremely overbought levels. The Thomas DeMark Expert indicator is at neutral going nowhere. If it weren’t Thanksgiving week we would be sure, that this market is ripe for a decent correction but given the holiday spirits and feelings we can’t be that sure. The 5-period exponential moving average is at 1796.05. The top of the Bollinger band is at 1811.76 and the lower edge is seen at 1694.45. So where is the first support on a retracement, well, we see support at 1743, 1730, 1701 and then the Fibonacci retracement number of 1677.19 and 1635.25. The weekly chart shows a very overbought market, as measured by three of the four indicators with a sign of exhaustion. On the weekly charts it is obvious that the NASDAQ 100 has been clinging to the 5-period exponential moving average and the upper edge of the Bollinger band. The monthly chart is interesting in that we really haven’t broken out of our trading range. Yes, we have probed the upside but we are probing the levels from December of 2001 and January of 2002. Yes, the indicators are uniformly overbought on the monthly chart.
The Continuous Commodity index cash chart shows that this index had a bad week last week. We have a six count on the bottom but only the Thomas DeMark Expert indicator is issuing a buy-signal. The stochastic indicator is issuing nothing going sideways at neutral levels. Our own indicator looks as though it is curling to the upside and the RSI is just going sideways at neutral. The 5-period exponential moving average is at 391.66. The top of the Bollinger band is at 400.08 and the lower edge is seen at 380.51. The weekly chart looks like the market is topping. The stochastic indicator, our own indicator and the RSI are all pointing to lower levels. We have signs of exhaustion on this index. The monthly chart continues to be positive with all of the indicators we follow issuing a continued buy-signal.
March cocoa had an inside day on Friday. The stochastic indicator is issuing a buy-signal. Our own indicator is not issuing a buy-signal but is curling to the upside. The RSI is pointing higher and the Thomas DeMark Expert indicator is pointing to higher prices. The 5-period exponential moving average is at 15.12. The top of the Bollinger band is at 15.65 and the lower edge is seen at 14.73. Currently, we need to see a close above 15.76 to create a buying frenzy. Short of that, it looks as though we are going to back and fill. Three of the weekly indicator are issuing a sell-signal the forth, the Thomas DeMark Expert indicator is issuing a continued buy-signal.
March coffee left a gap on the chart as a result of the Friday session. That gap is from 120.75 to 119.90, which was the low on the 6th, the 7th and the 8th . The stochastic indicator is issuing a sell-signal. Our own indicator and the RSI are both issuing a sell-signal the Thomas DeMark Expert indicator is issuing a sell-signal. This past week, we did see a 9-count which usually leads to a retreat. March coffee found support at the 20 day moving average 116.15, the low for the Friday session was 116.00. 116.00 seems to be a very important level for this product. The 5-period exponential moving average is at 119.80. The top of the Bollinger band is at 124.41 and the lower edge is seen at 107.88. The weekly chart shows that coffee was able to probe the upside but that it failed. The stochastic indicator, our own indicator and the RSI are all issuing a sell-signal. The Thomas DeMark Expert indicator is issuing a continued buy-signal at overbought levels.
January Frozen Concentrated Orange Juice finally retreated in the Friday session. The stochastic indicator is issuing a sell-signal as is our own indicator and the RSI. The Thomas DeMark Expert indicator is issuing a solid buy-signal at overbought levels. The 5-period exponential moving average is at 199.12. The top of the Bollinger band is at 201.83 and the lower edge is seen at 191.81. The market has not violated the uptrend line of 198.48 for the Monday session. Should we see a retreat to 192.60 we would expect to see support in the market. Should that level fall, then we have further support at 190.50 and 189.50. Under the 189.50 level we won’t have support until 186.75 and 181.20. The upside, well there is no resistance so, the sky is the limit, or is it the price point at which the market will abandon the product and replace it with another product. The weekly chart continues to look overbought as measured by the indicators. We are at the top edge of the Bollinger band and see support at the 5-period exponential moving average on the weekly chart.
The crude oil market retreated in the Friday session. We see a very range-bound chart, showing the bottom edge at 57.22 and the upper edge at 62.23. Although the media has made a lot of this retreat, it isn’t out of the ordinary. The market is very range-bound. The indicators are mixed with the stochastic indicator curling to the upside, but not issuing a buy-signal, our own indicator curling to the upside, without a signal, the RSI giving us a buy-signal and the Thomas DeMark Expert giving us a sell-signal. As you can see, there is a signal to make all happy, the bears the bulls and the chickens. The 5-period exponential moving average is at 59.34. The top of the Bollinger band is at 61.45 and the lower edge is seen at 57.54. The weekly chart shows the range-bound market. The stochastic indicator, on the weekly chart, is oversold but not issuing anything. The RSI is making higher lows but is near oversold levels. Our own indicator looks as though it could issue a sell-signal and the Thomas DeMark Expert indicator is a flat line. The monthly chart is oversold but without a buy-signal. It looks as though you can safely trade the range of this market so long as you use close stops.
Natural gas had a bullish engulfing candle as a result of the Friday trading session. The stochastic indicator is issuing a buy-signal as is our own indicator and the RSI. The Thomas DeMark Expert indicator is going sideways issuing nothing. We seem to find support at the 20 day moving average of 7.607, the low of Friday’s session was 7.700. The 5-period exponential moving average is at 7.988. The top of the Bollinger band is at 8.416 and the lower edge is seen at 7.197. The long-term uptrend line is at 7.218 and the very short-term uptrend line is at 7.953. The weekly chart shows that the market is very overbought but the indicators are mixed. The stochastic indicator is issuing a buy-signal, the RSI is pointing higher and our own indicator continues to issue a buy-signal. The Thomas DeMark Exert indicator is issuing a sell-signal. The monthly chart looks better than both the daily and weekly chart. All the indicators are issuing a buy-signal and the market needs to only clear the 8.619 level to make a run to the upside.
December gold created a shaven-headed candle in the Friday session. The low of the Friday session is an important low. It is a horizontal line of support at 621.50, this level has been tested twice and we are afraid that on the third try it will give way. The downtrend line is at 625.70 for the Monday session. The stochastic indicator, our own indicator and the RSI are all going sideways with a slight upward tilt but no buy-signal. The 5-period exponential moving average is at 623.50. The top of the Bollinger band is at 646.30 and the lower edge is seen at 584.80. Should the horizontal support fail to hold the market we see further support at 604.90. The weekly chart shows that we will have a point of inflection this coming week. The weekly uptrend line is at 625.80 for this coming week and the downtrend line is at 625.80 what happens when they meet…boom! The weekly indicators are pointing to the upside but kind of rolling over. Only the Thomas DeMark Expert indicator is overbought but continues to issue a buy-signal. The monthly chart is more positive with all the indicators issuing a buy-signal. We have decidedly broken the downtrend line on the monthly chart. We will have to monitor this chart to see the progress of the point of inflection this coming week.
Jeanette Schwarz Young, CFP, CMT
Box 1952 c/o New York Board of Trade
One North End Avenue
New York, New York 10282