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 Market Needs A Bernanke Treat

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gastaoss



Number of posts : 440
Registration date : 2007-07-01

PostSubject: Market Needs A Bernanke Treat   Mon Oct 29, 2007 9:34 pm

Market Outlook
Market Needs A Bernanke Treat
Bernie Schaeffer, Option Advisor 10.29.07,
3:10 PM ET



Slow and steady won the race for the bulls last week. Three successive sessions of topsy-turvy price action, defined by sizable pullbacks and near-break-even closes, finally culminated Friday with solid gains. The Dow Jones Industrial Average rose 1% Friday, tacking on 2.1% for the week. The Nasdaq Composite, which had underperformed its peers at mid-week, surged nearly 2% higher Friday to end the week with a 2.9% gain. And the S&P 500 gained 1.4% in Friday's session and 2.3% for the full week. Finally, the Russell 2000 Index moved up 1.9% on Friday and closed 2.8% higher for the week. These gains occurred despite a wide selection of challenges, from record-high crude prices to disappointing Amazon.com
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) earnings and Merrill Lynch's
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) higher-than-expected write-down figure, along with mixed housing sales. Post-expiration week since January 2006 is now moving toward a coin flip between negative and positive returns; taking last week's positive close into account, 12 of the past 22 post-expiration weeks have been negative.
The major indexes' weekly gains helped take them back above some critical thresholds that again serve as support. The Dow is back above 13,500, but continues to look up at the 14,000 mark. The SPX bounced from support at its 80-day and 160-day moving averages and remains above the critical 1,500 mark. The SPX also managed to close above its March 2000 weekly closing peak of 1,517.68. And the S&P Depository Receipts enjoyed mid-week support from its 32-week and 40-week trendlines. The S&P 100 Index seemed at risk of breaching the 700 level, but closed solidly north of this century level. Special Offer: $10,000 speculated in late June on Southern Copper August $100 calls would have produced profits of $55,000. A similar speculation with ISRG October $290 calls would have netted even more. Click here for high-percentage and high-return options trades in Bernie Schaeffer's Option Advisor.
Moving to techs and small-caps, the RUT headed back above the 800 level and the Nasdaq hurdled the 2,800 mark with the help of a monster rally in Microsoft
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) Friday, following blowout earnings. Both these levels have been speed bumps to watch in recent weeks, and the 2,800 level has historical significance to boot. The Nasdaq managed just four closes beyond the 2,800 mark in 2001 before a steep plunge began. Friday's close above 2,800 marked the fourth since Oct. 9. On the sentiment front, we're seeing a mixture of caution that skews toward bearishness, as well as some complacency--but on balance, the picture bodes well for the market from our contrarian perspective. The sentiment as reflected in the financial media leans strongly toward the belief that this market is in for a "comeuppance," along the lines of the peaks in 2000 or in 1987. But one critical difference between these past market peaks and now is, ironically, this very air of caution. Before the bubble burst in 2000, complacency--nay, euphoria--was palpable, and the "wall of worry" was nonexistent. For example, in 2000, as certain indicators pointed to recession, phrases such as "new economy" and "This time is different!" predominated--and the Nasdaq soared to an astounding 83% above its 80-week moving average. In 1987, investors were so confident the uptrend was going to continue indefinitely that they flocked to put options--not to buy them for downside protection, but to sell them to earn extra "income." These days, the various risks to the market and the economy are continually emphasized, and rallies are very well contained, with the S&P currently just 9% above its 80-week moving average. Special Offer: Ceradyne is up more than 70% since November, but still has a price-to-earnings ratio of less than 13. Click here for more undervalued "best buys" in Upside.
Today's wall of worry has several more layers, including one constructed by the nation's small investors. The latest poll from the American Association of Individual Investors (AAII), which queries its 150,000 members weekly, showed a very high reading of bears, at 48%. Our quantitative analysis department looked back at past AAII survey readings where the bearish total exceeded 45%, dating back to 2000. Eliminating duplicate signals within a 30-day period, the study yielded 17 results. Subsequent to these 17 signals, the S&P returned, on average, 4.02% in the next 40 trading days. This compares to an at-any-time 40-day return of .32% in the S&P since 2000. The 10-day, 20-day, and 60-day S&P returns were also quite favorable following such steep bearish readings from AAII. Short interest on the New York Stock Exchange continues to build, and is now near another record-setting high, at 11.6 billion shares at the end of the October reporting period. Since mid-2006, the number of Big-Board shorts has been in sharp uptrend mode, rising roughly 70%. A growing and ongoing "short trade" will cap rallies due to the continual supply offered by short sellers--thus prevent the upside from getting out of hand--and will support pullbacks due to short covering. As an added "bonus," the shorts will periodically panic out of their positions on rallies and create the short-covering "explosions" that can be so profitable for the bulls.The options-trading collective is also exhibiting some caution, with the Schaeffer's put/call open interest ratio for the S&P 500 at 1.83. Out-of-the-money puts are in vogue, most notably at the November 1300, 1400 and 1500 levels, all of which have more than 100,000 open contracts in play. I guess these guys like round numbers. Special Offer: Tech stocks led by Intel, Oracle and Apple are moving higher. Click here for more than a dozen undervalued tech stocks with stellar fundamentals, now in Prudent Speculator TechValue Report.
And this "sky is falling" sentiment isn't contained to the front month: The majority of put open interest in the December and January series resides significantly out of the money, implying the portfolio-protection trade is extremely popular. As is the case with heavy short interest, a big put protection trade will tend to be very supportive for the market on pullbacks.We do continue to have concerns on the volatility front, with the CBOE Market Volatility Index (VIX) still 8% above its 32-week moving average. But the VIX did end the week below the 20 level, which has been an important round number for most of the year. The bottom line is that a backdrop of caution and bearishness ultimately helps the market bounce back from "bad news" pullbacks because expectations are modest, so good news--i.e., Microsoft earnings--sets the buyers ablaze and sends the shorts and the put buyers scrambling for cover. Speaking of expectations, this week, we have another Federal Open Market Committee meeting. The fed funds futures market points to another 25-basis-point rate cut, and if Bernanke's coterie doesn't deliver, the market is certain to endure some short-term pain. The rate decision is scheduled for Halloween afternoon. Aside from that, earnings season motors on, with results expected from Procter & Gamble
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), Exxon Mobil
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), Sirius Satellite Radio
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) and others. The employment report rounds out the week Friday, and we'll also bid adieu to October and welcome the penultimate month of 2007 as we head into a seasonally strong final two months of the year. Click here for more ideas and recommendations from Bernie Schaeffer, and to learn more about Bernie Schaeffer's Option Advisor.
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