So we got through October 19. The much-ballyhooed anniversary of "Black Monday"," which – had the market replicated its drop from 20 years ago – would have seen the Dow suffer a 3,000-point haircut. Instead, we saw a drop of about 370 on Friday. But the nervous bears aren't breathing a sigh of relief just yet. It's likely that they are still anxiously anticipating today's session ... a Monday ... following October expiration, which was the staging ground for the market collapse two decades ago.
While the Nasdaq Composite (COMP) attempted to outperform its peers mid-week, it succumbed to selling pressure as well, closing Friday with a loss of 2.6% - its worst single-day slide since February. By the time the books were closed on this expiration week, the Dow had lost 4.1%, the S&P 500 was 3.9% lower, and the COMP dropped 2.9%. The Russell 2000 Index (RUT) surrendered 5% and the S&P 400 MidCap (MID) shed 3.9%.
Friday's decline was indicative that anxiety is still running at a fever pitch, and this contributes to the negative market bias we've seen of late. Into this cauldron of superstition, stir in record-high crude prices and higher-than-expected jobless claims, and it's no wonder that the week was a very long one for the bulls (including ourselves). (Although we're back in a bad-news-means-good-news environment; less-than-ideal jobless claims can be interpreted as fodder for another rate-cut).
The next week could prove to be a turning point, provided that investors collectively begin to breathe easier once the market doesn't run off the rails today (as some may still be dreading). But even a "relief" rally could briefly meet its maker in the form of some short-term technical hurdles. Let's review some important levels to watch.
Nasdaq Composite: The COMP is now about 2.8% south of the 2,800 mark, but as Bernie mentioned last week, this level is worthy of a continued look. In 2001, the index closed just 4 sessions above 2,800 before taking a sharp plunge. In recent days, the COMP chalked up 3 daily closes north of this threshold.
Dow: The 14,400 level could challenge the Dow down the road as it is roughly double the blue-chip average's October 2002 low. But for now – with the DJIA hovering near 13,520 – we're looking to its 10-week and 20-week moving averages as having the potential to help support the Dow. Beyond this is the 10-month trendline. Perched around 13,150, this trendlines was supportive of the DJIA during pullbacks this year and last.
S&P 500: Some good news for this broad-market barometer ... it failed to close below the 1,500 century mark. Not only is this psychologically significant, but it is approximately the site of a 38.2% Fibonacci retracement level between the index's August 16 short-term low and its October 11 high.
S&P 100: The large-cap-focused OEX, meanwhile, closed just north of the 700 mark, which is also good news. The index danced around this level in May through July, but then found the century level to be resistant in August and September.
Russell 2000: The small-cap index, which we still feel should be critical in powering any rally forward, lost more than 3% on Friday to close beneath the 800 level. This century mark acted as resistance through late July and all of August, was toppled in mid-September, and acted as support at the end of September. Now breached again, it may be a short-term challenge for the index.
The CBOE Market Volatility Index (VIX) responded to Friday's market weakness by zooming 24% higher, overtaking its 80-day moving average, and closing north of the 20 level, which has been important on a closing basis for the past 6-8 months. The VIX also muscled above its 32-week trendline by the time the session was finished. The VIX's surge continues an advance from the 32-week moving average, which we have previously pointed out as a critical level to watch based on its importance as support/resistance in '06 and '07. We would have preferred to see a less panicked reaction, because price action in the VIX has proven to be smart. In other words, a depressed VIX in response to the market's sharp decline may have been indicative of upcoming declining volatility consistent with a rising market. But the VIX's rise from intermediate-term support and above potential resistance areas adds risk to the short-term bullish case.
There's also some definite ugliness on the VIX-futures front. The futures "curve" is currently anything but (in fact, it's flat as a pancake). Looking back to May, 2006 to times when front-month VIX futures are within 1% of futures that are five months out, there is a slight negative market bias. Following such a "flat curve" signal, the SPX has returned negative 0.66% during the subsequent 10 trading days.
Looking to the options pits, sentiment is a bit mixed, and we'd frankly prefer to see a bit more pessimism in order to dismiss last week's performance as Black-Monday jitters. For example, the 10-day call/put ratio data culled from the International Securities Exchange, which measures buy (to open) option activity only, reached 176 early last week. Previous high-water marks in this figure – 189 on May 5, 2006 and 182 on July 13, 2007 – coincided with short-term market tops, as the ISEE ratio was indicative of short-term optimism. Combine this optimism with the aforementioned VIX rally (a potential signal that the optimism is unwinding), and it's a bit of a short-term concern in our book.
By the end of Friday's trading, more than 50,000 puts had traded on the SPX 1,300 put (SXY WT). This newly front-month position is more than 13% out of the money with four weeks of life. If options players believe they are hedging themselves against some sort of market crash, this type of speculation could continue into next week (and maybe the week after) and could create some headwinds for the market. Again, perhaps players were simply spooked by the specter of October 19, setting up the potential to recover from these growing fears later in the expiration cycle. But we're very disappointed that we saw no bounce last week; and we wouldn't be betting the farm on a perceptible rally should the market – and we're anthropomorphizing here – exhale.
Market watchers will be keying in on earnings once again this week – Apple reports, along with Motorola, Merrill Lynch, AT&T, and others. Economic reports are fairly slow, but we'll get more doom and gloom from the housing sector with existing and new-home sales numbers for September. Also, durable goods for September will hit the Street on Thursday. Keep in mind as well that it's a post-expiration week; 12 of the past 21 have been negative, although last month's was actually in the black by a nice margin.
And now a few sectors of note...
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