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Wednesday, March 23, 2005
Market Recap
A rather calm day in the markets today as the indices traded in a fairly tight range compared to the recent volatility we have seen. The NASDAQ and S&P closed the day virtually unchanged and the Dow finished lower by –14 points. The NASDAQ did manage to spend most of the day above its 200SMA and made an attempt at 2000 but, some last minute selling knocked it back down to flat for the day. The futures reacted very negatively to the CPI number released before the bell as inflation worries continue to mount with the rise in oil and energy prices. The Fed has indicated that it will continue to raise interest rates to help curb rising inflation so today's CPI report all but confirms that more hikes are on the way. What the market needs to decide now is will the Fed continue at their “measured” pace of ¼ point raises? Or, will they feel the need to play catch up and raise rates ½ point? These are the things that the market now must digest.
Looking Ahead
Today I executed the plan that I outlined last night in anticipation of a short-term bounce in the markets. I bought 6 stocks at the open and then 2 more in the afternoon, giving us a nice investment in the market as we wait for a bounce that I still believe we will get. One concern I do have, besides the NASDAQ being below its 200SMA, is the fact that oil was down over $2 a barrel today and had virtually no impact on the markets. It did have a negative impact on the oil sector stocks but in the past we would have normally seen a decent rally on such a large dip in oil prices.
One possible explanation for the lack of rally could be a heavy rotation out of the energy sector that kept the overall market down. Energy stocks have led the way for sometime now and money moving out of this sector, into other lagging sectors could be very good news for the markets for the long term. A quick look at the volume on the XLE index shows that this very well could be the case. Notice how the RUT lagged badly today and the SOX was up over 1%. Many of the highflying energy stocks are part of the RUT so this would explain why the RUT was down over 1%. If we indeed are seeing a rotation out of the energy stocks, the question is will the money be put to work in other sectors? Or, are the institutions getting out of the way of a market that is headed lower? We may need to wait until next week to get an answer because the markets are closed on Friday. There may not be enough participation going into a 3-day weekend to move the markets higher from these levels.
Tech stocks and more importantly the SOX index has been in a downtrend since January 2004. If you look back at the SOX index, you will see that the last uptrend was from October of 2002 until December 2004. That is approximately 15 months. I will give you 3 guesses of how long the current downtrend has lasted, and the first 2 guesses do not count. There is one other interesting piece of information that I will leave you with tonight. Yesterday the VIX closed above its 200SMA. The last 4 times that the VIX closed above its 200SMA, the markets rewarded the bulls with the bottoms in March, May, August and October of 2004. Do not run out and load up on longs however, if I were a betting man, I would say that we have a very good chance to rally from these levels. Of course, keep tight stops just in case.
Important Reminder:
The markets are closed on Friday, March 25th in observation of Good Friday. There will be no bulletin Thursday night. The next bulletin will be Sunday March 27th.
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