الساعي للخير
14-10-2003, Tue 9:26 PM
Weekly Market Analysis
Tuesday, October 14, 2003.
John A. Mendelson
A View Of The Market
The Value Line Index (KVY - 1421) is an equally weighted and arithmetically averaged composite of 1650 stocks. It is widely followed on Wall Street as it has less price or capitalization bias than any other broad index. Its chart of the past year shows a solid uptrend since early March 2003 with a June-July as well as a recent correction in time rather than price, the most positive type of market correction/consolidation. Along with this broad index reaching an all-time high yesterday, the NYSE Advance/Decline Line, a cumulative total of daily advances minus declines, rose to a 45 month high yesterday.
In another life, I once worked closely with several Specialist firms and grew to respect their market judgement, particularly when they shifted sharply to one side of the market or the other. With all the changes in regulations over the past fifteen or so years to allow more "upstairs" hedging, etc., I continue to follow their trading pattern when it moves to an extreme in one direction. It was emphasized in my weelky report of March 18, 2003 that the Specialists had no appetite for the short side at that time, a period when gloom and doom prevailed in the market. It was noted that Specialists did only 33%, 32%, 33%, and 34% of all NYSE short selling in the prior four weeks. This compares to a short selling level of 54% in March 2000 near the top. Recently, over the last three reporting weeks, the Specialists continue to avoid the short side doing only 32%, 34%, and 28% of all NYSE short sales, last week being the lowest percentage since the rally began in March. Specialists have never been voted "most popular" on Wall Street, but one does not go to many charity benefits on their behalf.
For years, I have stressed the significance of leadership by financial stocks. It is my view that in a sustainable advance, financial stocks must at least participate if not provide market leadership. Yesterday, the NYSE Financial Index (NF - 622), a capitalization weighted composite of 945 issues, rose to a new 52-week high and has outperformed the S&P 500 Index (SPX - 1045) since the rally started in mid-March for the year-to-date.
There has been a feature article in the financial press perhaps once a week since the current advance began in March about how "everyone is bullish". September 22's Wall Street Journal on page C-1 noted under the headline "Many Are Throwing Caution Back To The Wind" that the mood of investors has become quite optimistic. The C-1 page of the Wall Street Journal on July 7 noted "Sentiment levels are at caution levels for investors. The stock market's warning lights are flashing." On the contrary, I have thought that one of the most prominent features of the period since March has been the persistent "wall of worry" surrounding the market, as illustrated by what investors are doing rather than saying.
I have always stressed the importance of investor sentiment in the stock market, but with one major difference from many other analysts... I only watch what investors do rather than what they say. Perhaps the most fascinating aspect of the rally that began on March 12 has been the three forays into put buying that have accompanied the 30.6% advance in the S&P 500 to date. My June 3, 2003 weekly report detailed the four consecutive days of very high CBOE put/call ratios from May 19 through May 22, all of them 100 (parity between call buying and put purchases) or higher. It was noted that prior to these bearish actions, the S&P 500 was up 4.5% over the prior month. Based on trends during the decades I have followed these statistics, one would expect to see a very high put/call ratio of @100 or more for several days only after a significant decline. For instance, during the bear market year of 2001, there were only seven days with more puts being bought than calls purchased... Four of these days were during the sharp decline when the market reopened after 9/11. Also, on October 7, 2002, put volume exceeded call purchases for three of the previous six trading sessions as the DJIA made its 2000-2002 low. We witnessed a second surge of put buying, as the CBOE put/call ratio was 99 on Friday, June 27, 94 on June 30, 96 on July 1, and 108 on July 3. This string of bearish actions followed a brief consolidation at the end of one of the best quarters since World War II. The third round of heavy put buying occurred in late August with three days of the CBOE put/call ratio bueing 121, 108, and 129. Also on September 10, the CBOE put/call ratio rose to 100 after only a two-day decline of 160 DJIA points and it was 106 on a one-day drop of 100 DJIA points on September 30.
It would appear that the actions of put buyers disagree with the weekly articles in the press about everyone being bullish. If one watches actions not words, it would appear that a latent high level of anxiety has been just below the surface of the market since the rally began in mid-March. I regard this phenomenon as unusual and quite bullish.
Since the early Spring in my weekly conference calls, in client meetings, and in my weekly reports of May 27 and July 8, 2003, I have estimated an upside target for this market of @ 10,5000 on the Dow Jones Industrial Average and @ 1150 in the S&P 500 Index or a strong advance back up into the 2000-2002 market top. This view is unchanged.,
Industry Group Studies
The Oil group has lagged the market this year with the AMEX Oil Index (XOI - 504), a price-weighted composite of 13 leading companies in the exploration, production, and development of petroleum, rising 12.9% year-to-date against the 18.8% gain in the S&P 500 Index. However, things appear to be looking up for the oils.,
As seen above, the XOI Index has formed a series of "higher lows" since March and recently broke out to a new 52-week high. Three stocks in this index, in particular, strike me as interesting on a technical basis. Exxon Mobil Corp (XOM - 38)2 rose to a 52-week high yesterday as it broke out of a five month trading range. Royal Dutch Petroleum Co. (RD - 47)2 moved above a three-month trading range yesterday, but remains below its mid-June high. Essentially, the stock has been in a high 30's - 50 trading range for fifteen months. A move above 50 on a closing basis would be viewed here as an important upside breakout. Finally, Marathon Oil Corp (MRO - 30)2 reached a new 52-week high yesterday; its basic trend appears to be higher but it currently appears somewhat extended to the upside after a strong move since early August. The major oil stocks look like they are attempting to narrow the 2003 gap between them and the S&P 500 Index and may well show improved relative strength over the next several months.,
Chart Source: Bloonberg; Charles Schwab & Co., Inc., produced by Anita Rovere
Prices reflect close of 10/13/03 as reported by Bloomberg.
Tuesday, October 14, 2003.
John A. Mendelson
A View Of The Market
The Value Line Index (KVY - 1421) is an equally weighted and arithmetically averaged composite of 1650 stocks. It is widely followed on Wall Street as it has less price or capitalization bias than any other broad index. Its chart of the past year shows a solid uptrend since early March 2003 with a June-July as well as a recent correction in time rather than price, the most positive type of market correction/consolidation. Along with this broad index reaching an all-time high yesterday, the NYSE Advance/Decline Line, a cumulative total of daily advances minus declines, rose to a 45 month high yesterday.
In another life, I once worked closely with several Specialist firms and grew to respect their market judgement, particularly when they shifted sharply to one side of the market or the other. With all the changes in regulations over the past fifteen or so years to allow more "upstairs" hedging, etc., I continue to follow their trading pattern when it moves to an extreme in one direction. It was emphasized in my weelky report of March 18, 2003 that the Specialists had no appetite for the short side at that time, a period when gloom and doom prevailed in the market. It was noted that Specialists did only 33%, 32%, 33%, and 34% of all NYSE short selling in the prior four weeks. This compares to a short selling level of 54% in March 2000 near the top. Recently, over the last three reporting weeks, the Specialists continue to avoid the short side doing only 32%, 34%, and 28% of all NYSE short sales, last week being the lowest percentage since the rally began in March. Specialists have never been voted "most popular" on Wall Street, but one does not go to many charity benefits on their behalf.
For years, I have stressed the significance of leadership by financial stocks. It is my view that in a sustainable advance, financial stocks must at least participate if not provide market leadership. Yesterday, the NYSE Financial Index (NF - 622), a capitalization weighted composite of 945 issues, rose to a new 52-week high and has outperformed the S&P 500 Index (SPX - 1045) since the rally started in mid-March for the year-to-date.
There has been a feature article in the financial press perhaps once a week since the current advance began in March about how "everyone is bullish". September 22's Wall Street Journal on page C-1 noted under the headline "Many Are Throwing Caution Back To The Wind" that the mood of investors has become quite optimistic. The C-1 page of the Wall Street Journal on July 7 noted "Sentiment levels are at caution levels for investors. The stock market's warning lights are flashing." On the contrary, I have thought that one of the most prominent features of the period since March has been the persistent "wall of worry" surrounding the market, as illustrated by what investors are doing rather than saying.
I have always stressed the importance of investor sentiment in the stock market, but with one major difference from many other analysts... I only watch what investors do rather than what they say. Perhaps the most fascinating aspect of the rally that began on March 12 has been the three forays into put buying that have accompanied the 30.6% advance in the S&P 500 to date. My June 3, 2003 weekly report detailed the four consecutive days of very high CBOE put/call ratios from May 19 through May 22, all of them 100 (parity between call buying and put purchases) or higher. It was noted that prior to these bearish actions, the S&P 500 was up 4.5% over the prior month. Based on trends during the decades I have followed these statistics, one would expect to see a very high put/call ratio of @100 or more for several days only after a significant decline. For instance, during the bear market year of 2001, there were only seven days with more puts being bought than calls purchased... Four of these days were during the sharp decline when the market reopened after 9/11. Also, on October 7, 2002, put volume exceeded call purchases for three of the previous six trading sessions as the DJIA made its 2000-2002 low. We witnessed a second surge of put buying, as the CBOE put/call ratio was 99 on Friday, June 27, 94 on June 30, 96 on July 1, and 108 on July 3. This string of bearish actions followed a brief consolidation at the end of one of the best quarters since World War II. The third round of heavy put buying occurred in late August with three days of the CBOE put/call ratio bueing 121, 108, and 129. Also on September 10, the CBOE put/call ratio rose to 100 after only a two-day decline of 160 DJIA points and it was 106 on a one-day drop of 100 DJIA points on September 30.
It would appear that the actions of put buyers disagree with the weekly articles in the press about everyone being bullish. If one watches actions not words, it would appear that a latent high level of anxiety has been just below the surface of the market since the rally began in mid-March. I regard this phenomenon as unusual and quite bullish.
Since the early Spring in my weekly conference calls, in client meetings, and in my weekly reports of May 27 and July 8, 2003, I have estimated an upside target for this market of @ 10,5000 on the Dow Jones Industrial Average and @ 1150 in the S&P 500 Index or a strong advance back up into the 2000-2002 market top. This view is unchanged.,
Industry Group Studies
The Oil group has lagged the market this year with the AMEX Oil Index (XOI - 504), a price-weighted composite of 13 leading companies in the exploration, production, and development of petroleum, rising 12.9% year-to-date against the 18.8% gain in the S&P 500 Index. However, things appear to be looking up for the oils.,
As seen above, the XOI Index has formed a series of "higher lows" since March and recently broke out to a new 52-week high. Three stocks in this index, in particular, strike me as interesting on a technical basis. Exxon Mobil Corp (XOM - 38)2 rose to a 52-week high yesterday as it broke out of a five month trading range. Royal Dutch Petroleum Co. (RD - 47)2 moved above a three-month trading range yesterday, but remains below its mid-June high. Essentially, the stock has been in a high 30's - 50 trading range for fifteen months. A move above 50 on a closing basis would be viewed here as an important upside breakout. Finally, Marathon Oil Corp (MRO - 30)2 reached a new 52-week high yesterday; its basic trend appears to be higher but it currently appears somewhat extended to the upside after a strong move since early August. The major oil stocks look like they are attempting to narrow the 2003 gap between them and the S&P 500 Index and may well show improved relative strength over the next several months.,
Chart Source: Bloonberg; Charles Schwab & Co., Inc., produced by Anita Rovere
Prices reflect close of 10/13/03 as reported by Bloomberg.