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Sunday, April 21, 2002

Last week went eerily according to plan.  Here is the ending paragraph from last week's commentary...

"You can see from the paucity of bearish indicators that the risk to the market on the downside should be rather limited provided we have a stable international situation over the coming weeks (and, it should go without saying, domestic disturbances as well).  Sentiment-wise, we are in the best position for a market rally since January."

We had limited downside on Monday, then a significant rally on Tuesday, then international and domestic "disturbances" mid-week.  The week thankfully ended with a whisper, which should set us up nicely for this coming week.  I expect that we will see a pickup in volatility next week, which should lead to good trading opportunities for those with a shorter time frame.

Let's look at our indicators one by one...

BULLISH

TRIN - The TRIN this week is on the bubble.  Technically, I would have to say that the current readings are neutral, but since we are coming off a significant level (over 1.50 on the 10-day moving average), it will take some time to work off the oversold nature of this indicator, thus giving it a slight bullish bias.  The TRIN.MR is as neutral as it can be at 0.

CBOE PUT/CALL AND OPEN INTEREST PUT/CALL - These readings are bullish on the surface.  The one-year open interest put/call rank reached 98% this week, and is still sitting above 90%.  Significant rallies followed each time this indicator has reached 90% and reversed, although the prior rallies were accompanied by confirming indictors which we don't have at this time (e.g. extremely oversold advance/decline readings). The three-day average of the put/call one-year rank is currently above 80%, which is also bullish.  The unusual thing is that typically when we see high readings in these indicators, we also see a rising VIX.  We don't have that this time either, as the VIX collapsed on Friday to 20, close to muli-year lows (it is possible that we're seeing an abundance of put selling - not a positive thing).  These non-confirmations lead me to put less weight on these ratios than I normally would.


BEARISH

COT - You can see clearly from the stochastics that the commercials are beginning to cover their short positions at the same time the small specs are selling out their longs.  Both are a positive development, but it is happening at a snail's pace, so it doesn't tell us much for this week.  One positive aspect is that this week's numbers include Tuesday's rally, suggesting that the commercials were not selling heavily into the rally, but the small specs possibly were.  If we have a hint that the commercials might believe in a rally here, but the small specs don't, that is a very bullish indication.  However, we need to see more of a trend develop before we can consider these numbers neutral at best.


NEUTRAL

BREADTH OSCILLATORS - Not much change from last week here, as both indicators are near the tops of their ranges while the market has gone up marginally.  We could take this as being either that the underlying market is hanging tough while the broad indexes churn, or that the underlying fabric of the market is overbought while the indexes are somewhat oversold.  It's a confusing picture and I would avoid reading too much into it.

NEWS ITEMS - We have a neutral environment here as we have had for the past several weeks, although there is one standout.  While MSFT and SUNW reported dissapointing earnings and revenue numbers (and forward guidance), and their stocks sank dramatically after the news, they quickly recovered and took the averages along with them.  That is a very positive development, but the confusion around MSFT's numbers may have contributed to that stock's dramatic decline after-hours on Thursday.  That would make the ensuing rally somewhat suspect.  Other than earnings, the stock and bond markets behaved rather predictably to economic and political news.

STEM.MR - The STEM.MR component indicators couldn't possibly be more neutral (with the exception of VIX.MR, which is slightly bearish), so this model is languishing around the 50 level.  That doesn't tell us much one way or the other, but a sharp rally or decline could change that in a hurry.  No bias here in either direction.

STEM - I would have to say there is a slight bearish tilt here, as the fast line (20-period moving average of the STEM index itself) dipped into the teens with Tuesday's rally, but the signal line (50-period moving average) is still above sell territory, which makes us neutral for the moment.  If we have a continued rally, it wouldn't take much to push this model into a sell indication.

VIX and VXN - We are also neutral here, with a slight bearish bias.  The action on Friday (with the VIX dropping to 20) was somewhat bothersome, but neither one has dropped 10% or so below their 10-day moving average.  That suggests that although there may be some complacency among options traders, it is not necessarily extreme.  I've been suggesting that subscribers pay less attention to the absolute level of the VIX as opposed to its relation to the 10-day moving average and the RSI, and I think that continues to be the correct way to interpret these numbers.  Right now that is telling us to be on guard, but not to be alert for an impending decline.

SENTIMENT SURVEYS - We are rather mixed here too.  The II numbers were surprisingly bullish (bearish to us), considering that the market declined during the survey period.  The bullish percentage increased while the bears decreased, which is not positive if you're looking for a continued market rally.  On the other hand, the Market Vane and Consensus surveys show a relatively low level of bullishness (both are in the bottom 30th percentile of readings over the past year).  The AAII survey went from outright bearishness (bullish to us) to somewhat bullish (bearish to us), all in the span of one week - which is why I continue to stress that I put less weight on this survey.  Overall, it is a mixed picture, though with a very slight bearish bias.

AIM - This model is neutral as well, although it went from over 60 to 39 this past week, which is a negative development.  The main driver for the decline was the survey numbers, which were more bullish than I had expected considering the market performance during the survey periods.  Again, neutral with a slight bearish bias.


I am expecting an uptick in volatility this week, and I wouldn't be surprised to see the rally that began last week to continue.  However, the bullish bias I had last week has diminished, and at this time I am neutral with an ever-so-slight bullish short-term bias and an ever-so-slight bearish longer-term bias.  If I were standing on a see-saw, I would have one foot planted firmly on each side of the fulcrum, ready to jump on whichever end would give me the best ride.  It's not the best position to be in, but until our indicators line up and tell us something definitive, it's most wise to stay on the sidelines.