The SPX advanced 20.95 points yesterday to close at 1072.28. TOT daily traders were on the sidelines for the session.
The super long term perspective for the stock market remains bearish. The long term model remains neutral, and the short term model remains bullish.
On yesterday’s hotline I said I might recommend going long “if the SPX trades down to the 1040 area and there’s positive divergence on my intraday model.” In the early morning, fear in response to the Greyhound attack caused the SPX to decline to 1041.48, but it was too early in the day and there was insufficient data to evaluate divergence. Besides, there was another consideration: I’m quite concerned about the risk of bin Laden type terrorists trying to pull-off something again quickly. When I heard the Greyhound story, the possibility occurred to me that the near simultaneous hijacking of 100 buses wouldn’t be anywhere near as hard as the simultaneous hijacking of four airplanes. And while I felt it was a remote possibility, if that’s what was happening, then the Dow could easily collapse 1000 points as whatever sense of safety we feel could dissipate significantly. It didn’t seem like a significant risk yesterday morning, but it was a risk of unknown proportions. It was an hour or so before it became clear that it was of no national consequence. Later in the morning, the NAPM non-manufacturing business activity index was announced and it was surprisingly good, President Bush announced plans for an economic stimulus package, and Cisco announced that they expected a bright future. The bulls were soundly in control, but it was all based on news – always a precarious reason to buy.
One fascinating observation is that at no time during the entire trading day did my intraday model show any positive divergence. This is an indication that the so-called smart money is either selling into the rally or at least not participating fully in it. It’s an indication that the rally is being led by short covering and the public, generally not the most successful of investors, and that it won’t last very much longer.
I’m also fascinated by the 22% jump in Cisco stock yesterday. It seems just a bit frothy. But what struck me most was the commentary on at least three television stations that buying was partly a function of imminent expectations – before the weekend was how one station worded it – of a US military strike in Afghanistan. Since US Defense Secretary Rumsfeld is touring Saudi Arabia, Oman, Egypt and Uzbekistan now through the end of the week, and British Prime Minister Tony Blair is scheduled to visit Pakistan on Friday, the odds of an attack coming before both are safely home seem extremely unlikely. Yet frothy markets believe what they want to believe. And yes, this market has become frothy.
For today, of unknown significance will be the statement made just a few minutes before I recorded this hotline by Farooq Abdullah, the chief minister of Indian controlled Kashmir. The BBC reported Abdullah as saying, in response to Monday’s attack in Kashmir, `The time has come to wage a war against Pakistan and to bomb the militant training camps there.” Obviously, any attack by Indian forces against Pakistan at this point in time would place the US in a unenviable situation. So this might be significant; on the other hand, it may prove uneventful.
I would expect the market to pull back today and take a breather, although unexpected news could always change that. If nothing bad happens, and if the pullback is limited, we could see a resumption of the advance by late Friday. But that’s quite preliminary. For today, we will go short but use a tight stop. TOT daily traders are advised to go 300% short at SPX 1069 stop or 1078 limit, whichever comes first. Use a 7 point protective buy stop. If the SPX drops 10 points from where you go short, lower your stop to a breakeven. And for each additional 10 point decline, lower your stop by an equivalent 10 points. If still short on the close, carry your position overnight and into tomorrow.
Since initiation of this service on September 30, 1993, our daily trader recommendations have gained 6603.09 cumulative SPX points compared to a gain of 613.35 points in the index itself over the same period.
Thanks for calling, and I’ll speak with you again in 24 hours.