Commodity sector trading offsets low index volatility

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The SPX traded in a narrow 5.4 point range, closing at 1380.90 (+0.2%).  NYSE volume was the low of the week at 1.42 billion shares.  The volume ratio was neutral at 53 and breadth positive at +1025, due in part to the TLT at +0.4%.  There is a built in breadth bias because over 35% of NYSE stocks are financial issues.  The sector action was more active, led by the IBB (+1.5%), XBD (+1.4%), $TRAN (+1.2%) and SMH (+1.2%).  Gold and energy led the downside as crude oil was taken down on Friday.  The OIH has pulled back from its 143.13 last Thursday, which was a +1.1% from its 118.19 low (10/04/06).  It closed at 137.50, but any pullback is no surprise as 143.97 is the .50 RT to the bull cycle high of 169.75 from 118.19.  Retail stocks advanced on Friday, probably in anticipation of many of them reporting earning this week, such as American Eagle (AEOS), Target (TGT), Wal-Mart (WMT), Home Depot (HD), and Abercrombie and Fitch (ANF). 

The SPX 1385 key price zone was anticipated in prior commentaries, but it was just six days decline to 1360.98 before reversing back into the zone again.  The closing range is 1389.08-1364.05 over the past 21 days, so the key price zone remains intact.  There is a negative momentum divergence, but the SPX is neither short-term oversold or overbought , but remains extended on the long-term standard deviation basis.  These are normally ingredients for a reversal in the key price zone, but there is also a strong seasonality bias and incentive from the generals to make 2007 a strong performance year.  This mark-up is incentive from the generals to keep any short-term reversal from this price zone to a minimum, and probably above the 89-ema of 1330.  However, that is not the case after year-end.  The SPX has traded in a less than 2% range in the last month, and this reduction in volatility has reduced the number of daily trading opportunities.  The major trading offset has been the energy stocks, in addition to some of the commodity stocks like like Freeport-McMoRan (FCX), Nucor (NUE), and Phelps-Dodge (PD) to name a few.  The commodity sector will continue to be the primary source of daytrading opportunities.

The 4-year cycle time-frame remains 10/2006-3/2007 and based on the current sustained SPX/$INDU advance, the decline will probably be a similar sharp angle to the downside.  The same thing occurred in 1998, where the 23% decline was from July to October.  The 1990 bear cycle decline was -21%, which was also from July to October.  There was a soft landing in 1994, and the SPX only declined 10% from January to April.  That is what the pundits are betting on this time, while the bond markets bet the other way.  The bond and forex markets have always been more in-step than the equity crowd.

Have a good trading day,
Kevin Haggerty

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