Of Mice and Cheese
By Todd Harrison Nov 21, 2003 8:50 am
You gonna use the whole fist Doc?
Good morning and welcome back to the swarming. Yesterday's lift, a seeming bull gift, got smacked pretty hard and the damage was swift. The late ursine rout removed any doubt that Boo is dead set on ending his drought. Can Hoofy claw back and thwart the attack or will he get jacked, smoked and then whacked? It's freaky Friday in the city of critters so suck it up team cause there's no room for quitters!
The turn of the tide was a swift downside ride that left little room to run or to hide. Once the morning scare sucked in more bears, the bulls took the bait and had few upside cares. The jumpy Nazz futures slowly converted the begrudging believers and, one by one, the short side rational began to wither. The breadth (heavy all session) seemed to be turning the corner, Citigroup (C:NYSE) tacked on a few shekels, the dollar found its footing, the tape felt shruggy and, finally, S&P 1045 appeared destined to be the latest casualty in the resistance movement.
A funny thing happened on the way to the moon. Just as we appeared poised for take off, the engines blew out. Traders who were poised for flight found themselves trapped in the cockpit with nowhere to go. The semis turned on a dime (led by Intel (INTC:NASD), the breadth exhaled and the floor dropped out of the market. As crazy as it sounds, accounts rushed into their trusty brokers looking for bids and, alas, there were none there. The dealers got longer as the market swept lower (negative gamma) and the trapped traders followed the futures to the south side.
We enter today's session bent but not broken. The NDX, which violated it's 50-day moving average at 1390, retested it on the upside and (thus far) failed. It's still hanging onto the October low branch but, if that goes, there's no real technical support till 1300. The S&P dogfighted at its 50-day (1035) and, while it closed lower, the bulls can (and will) still argue that it's a rounding error. Factor in the BKX 50-day (920) and, well, you understand why alotta people are watching on this one.
The word on the Street yesterday was that expiration was gonna prop up the slop but after hearing that from multiple sources, my nose began to scrunch. Once index options expire this morning, individual stocks will take center stage as they punt and pin towards their closest strike. The rule of thumb--or, at least, my rule of thumb--is that pins generally occur when open interest (contracts outstanding) are outsized relative to the average daily volume. It won't absorb (or resist) a minxy tidal wave but if the ebb and flow is drifty, look for some animal magnetism towards the outsized strikes.
With the S&P a scant two percent higher than it was this summer, it's worth thinking about how many buyers will soon be under water. Why is this important? The overall psychology of the tape is vastly different when holders are sitting on gains vs. mounting losses, particularly when sentiment figures suggest a crowded bull camp (a potential disconnect between perception and reality). The Burned Razor thesis was predicated, in part, on the notion that portfolio managers start giving back their year and look to lock it in. If that dynamic is furthered by individuals who start seeing negative returns, the mutual fund madness might morph into sadness.
Finally, I was finishing up some work late last night (yes, after the gym) and I starting fooling with my Bloomberg charts. I was looking at the 20 year chart of the Jinx (Yen denominated) and compared it with the ten year chart of the NASDAQ (dollar denominated). The Nikkei, once the bubble popped, retried the upside, suffered a deeper drop and then stayed in a 25% range (holding NKY 15000) for nine years before breaking to the downside (beginning of 2001). In today's terms, and if form holds, we're seemingly in the infant stages of that multiyear sideways range. Chart to chart (and apples to apples), the bottom of our range is NDX 1000.
As a student of the market, I like to extrapolate potential scenarios and project them going forward. I've been a big picture bear since the early stages of 2000 (lucky, not smart) and have remained too bearish this year (mea culpa). With that said, I have little doubt that it's gonna be a long, hard road. A nine year range bound market that whips the bulls and bears into submission before cracking to the downside? I certainly wouldn't rule it out--and as always, I offer these thoughts to add perspective for those who might be too bullish or bearish (myself included).
One day at a time and I, for one, am glad it's Friday. We power up this morning to find marginally green futes and a flat Europe, Asia (bounced) and greenback. I would again expect a probe lower (particularly if S&P 1035/NDX 1360 is convincingly broken) but with expiration today and a (thin) holiday week looming, I'm not ruling anything out. Watch our tells closely, Minyans, as Maximus Semis gave the signal to unleash hell yesterday. Breadth, financials, levels...you know the drill. We're seven hours from the promised land--let's end this week on a positive note.
Good luck today.
position in qqq, spx, intc
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