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Morning Cup of Jo: Tug of War


...the Sisters have been in a tug-of-war since the year began.


"No individual raindrop ever considers itself responsible for the flood."

Key Points:

  • Personal request
  • January Effect and December Low Indicator
  • Horizontal neckline on the 10-Year Yield
  • Eye on the Ball key technical levels serve as Road Signs
  • "Sisters" continue to hold the yard line
  • "Tug-of-war"

Before focusing on the financial markets today I wanted to again pass along a request from a life-long friend that works with the father of one of the two missing girls listed in the poster linked here. On January 19th, 18-year old Rachel Crites and 16-year old Rachel Smith went to see a movie close to Washington D.C. in a dark blue 1997 Subaru Outback station wagon with a luggage pod atop and Maryland plates (MBJ-485). They never returned. Their story was highlighted during the January 27th episode of America's Most Wanted. Please be alert – I know any help would be greatly appreciated.

Market Commentary:

So far in 2007, the topic of volatility has been a recurring theme in my firm's writing. On January 9th I penned a comment referencing the ol' adage "So goes the first five trading days of January - so goes the month; so goes the month, so goes the year." I discussed the issues with the "common wisdom" on Wall Street and the fact that my firm isn't convinced of its accuracy as a predictive tool.

As we pull into month-end it will be interesting to see how this dynamic plays out. Through the first five days of January the Four Sisters posted moves as follows: DJIA (-47 pts), SPX (-6 pts), NDX (+38), and the RUS (-10 pts). As of yesterday's close the MTD results show: DJIA (+60), SPX (+10), NDX (+21) and the RUS (+10). Let there be no mistake, however, today's GDP numbers and the 2:15 FOMC announcement will drive the tape for the last day of the month and could dramatically change these current figures.

To add to the discussion, I recently read Jeff Saut's missive, Slow, Muddle, or Reaccelerate: You Pick It, which noted another market phenomenon called the "December Low" Indicator. Again while my firm neither applies statistical credence nor attempts to derive a market view from this idea, we did find it equally interesting.

"The December Low Indicator was originated by Lucien Hooper, a Forbes columnist and Wall Street analyst back in the 1970s.

Hooper dismissed the importance of January and January's first week as reliable indicators. He noted that the trend could be random or even manipulated during a holiday- shortened week. Instead, said Hooper, 'Pay much more attention to the December low. If that low is violated during the first quarter of the New Year, watch out."

The December low not being violated improves upon the January Barometer. If the December low is not crossed, than according to the stock trader's almanac, the January Barometer becomes virtually perfect, right nearly 100% of these times.'

-Stock Trader's Almanac

The December low's values are as follows: DJIA (12,194), SPX (1396), NDX (1748) and RUS (780).

Keeping those points in mind, my firm's belief is that the most important indicator to the equity markets, in terms of subsequent action, is the closing price values associated with previous support levels. The Eye on the Ball section above hasn't changed since last week and the corresponding ST support levels listed should serve as substantial technical road signs to a correction getting underway.

The reasoning behind the aforementioned commentary is solely to point out that all the Sisters have been in a tug-of-war since the year began. What's more, given the massive data week already afoot, it is important for us to take into account the overall context of the equity market and its connection to the debt markets.

Looking back at the fourth quarter of 2006, the bond market was pricing in the likelihood of rate cuts based on expectations/fears of an economic slowdown. At that point in time the equity market was more excited about a potential rate cut than it was nervous about a slowing economy. In other words, good news was bad and bad news was good. Now, with the latest economic data coming in better than expected, bond traders are effectively pricing in a 4% chance of a rate cut for the first half of 2007 (down from 48% in late 2006). This has created additional upward pressure in the 10-year yields. As stated in Friday's Week In Review, the 10-year treasury yield has broken a nearly ½ year horizontal neckline at 4.85%.

Click chart for full screen

For the moment the upward yield anxiety has given equity traders even more reason to whip-saw the markets intraday everyday. Relating back to the "tug-of-war" comment, this should soon resolve itself based on the law of supply and demand. One elephant is always stronger than the other, even when so evenly matched. The question at hand is, "Have the times changed and is good news now good and bad news now bad?"

So to simply speculate on a pending direction of the equity markets would certainly not be prudent. However, as stated in the last 'Jo,' "…all the "Sisters" continue to hold their ST support levels and until they are broken, the edge is in the hands of the Bulls."

Stay tuned & good luck!

No positions in stocks mentioned.

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