Summary for Week Ending 28th June 2003

A somewhat blue mood this week as the Fed once again decided the time was right to fiddle with the knobs of economic state. The reaction of the markets this time however ranged from general boredom to quiet unease. There was no bellowing from the ramparts that it was time to throw caution to the wind and dive in instead, the reaction was almost immediately against the current trend and assisted with recording the 7 straight days of decline. Friday only just managed to hold off enough to stop it recording an 8th straight day of declines.

Looking at the week a little closer, Monday saw the markets start with a slump and the rest of the week was spent trying to digest the significance of the move down and also the significance of the rate cut. Tuesday followed Mondays wide range day down with a not to be unexpected inside day. This left the stage finely balanced at this point and the move to new lows on Wednesday closed the picture. Thursday saw a down day and Friday saw a weak up day in the S&P ( but a weak finish ) and an outside day in the DJIA and an even weaker finish although higher than the Thursday lows. Overall the weeks behavior was one of a sudden move and then consolidation, not unlike the previous weeks, except in reverse.

Last week I highlighted the curiosity in the swing movements in the S&P and behavior this week indicates that these have held. Of greater interest to me is the depth of the correction in the S&P as I have been highlighting this on and off for the past month. The magic number to watch regarding this decline is 43 as this is the largest decline plus one point since March 31. In this run upwards we have seen reaction to the main trend of 42, 37 and 35 point respectively. This reaction do far has been ..yes you guessed it.. 42 points, so I find it difficult not to smile when I seen the markets tormenting me this way. The market is also banging against the June 9 low which is the first level of obvious technical support. When its this obvious I am generally inclined to bet against it holding but stranger things than this can happen in markets. If the wave pattern concerned is a true Elliot pattern then the classic target for the decline is the bottom of the 4th wave, in this case.. 912. I do not expect it to be there next week, but it is a comfortable target in this kind of market. The next point to consider is a longer term look, and that is: was this entire rally a bear market rally or was it the start of something on the bullish side of the register. From this far out its a 50/50 bet but I am leaning more towards the bear market rally as there still seems more room for something bad to happen. Also on the standard PE front and all the other technical indicators, we are still on the bullish side. If markets do indeed swing from one extreme ( overvalued) to the other ( undervalued) then we have seen undervalued just yet. This is purely my opinion and stems more from a gut feel than anything technical you might find in a text book.


Looking ahead I hope to see a break to push the market past the 43 point target level as Gann said that this was an initial indicator of a possible change in trend. If we do get a rally, the 3-4 days would seem logical as we had a 7 day decline, but I do not expect the June high to be taken out. If Monday and Tuesday is up but weak then I will be willing to take a put or two. Low volatility has options nicely priced and any swift downside will see this volatility rise dramatically also enhancing the Option value, so its really double kick effect which makes the trade look attractive. But only if the confirmation comes in.