Bill Cara: A last hour save for the Nasdaq 100, Tues., August 1, 2006, 5:59 PM

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August 1, 2006

A last hour save for the Nasdaq 100, Tues., August 1, 2006, 5:59 PM

I had the distinct feeling this afternoon that the Nasdaq 100 was going to cave in.

If you draw a line below the low of the day for July 25, 26, and 27 and today August 1, you will see an important support level at 1476.

I believe that had the Nasdaq 100 (not the Composite) index closed decisively below 1476, there could have been a major wave of technical and emotional selling in the final hour.

We'll have to watch this tomorrow.

Posted by Posted by Bill Cara on August 1, 2006 05:59:10 PM | Category: Cara Today in the Market

Discourse

Bill: I'd be interested in your rationale for why this support level might be so important. Or is it just a (well-tempered) intuition? Are there so many short-term, chart-driven traders of the Q's? Are the Q's massively used as hedges against tech portfolios? How important are longer-term individual investors as Q holders? I'm ignorant as to just which kinds of investors drive pricing in the Q's.

Jock

Posted by: Jock at August 1, 2006 6:37 PM [link]

Jock,

Call it intuition. Through the latter three days of last week, I had a sense that the large cap stocks (Dow 30 and S&P 500) were being juiced, let's say by parties acting in concert. But whenever the big Nasdaq stocks looked like they wanted to go into a free-fall, the trading on the NYSE seemed to prop them up.

Today, I really thought the Dow would follow in the afternoon and once again there was a boost from wherever late in the day, and that pulled the NDX off the 1476 level for a 4th time.

I think the average trader is selling now and Humungous Bank & Broker (via their prop desks) is trying to hold them in. The NDX stocks are traded largely by people, and the bank prop desks are largely traded by algorithmic programs. Those programs can be "tweaked" whenever it serves the needs of the Gnomes who control those banks.

The Russell 2000 Small Cap index, comprised of stocks largely traded by the public, was also quite weak, and was "saved" each time the NDX was. Look at the Hourly data chart to see that.

We'll see how this plays out tomorrow. This Bear market hasn't really started to get rolling yet.

Posted by: Bill Cara at August 1, 2006 7:00 PM [link]

As Birinyi has made comment on, the 1st of the month has held an unusually good risk:return. In fact providing over 1/2 of the gains recorded in the bull phase... think about that- being at risk only one day a month outperformed being invested the other 19 days at risk for a lower return.

The fact that the 1st day of Aug (even with that save at the end) was pretty bad doesn't bode well for the rest of the month. JMHO

Posted by: stockman at August 1, 2006 7:16 PM [link]

This was a "Bill" day.
Whereas miners have recently "hedged" short position in the indexes, today they both had their oars in the water.
Could it be that the slow (but steady) acceptance of inflationary reality by the general public cause more retail investors to think about hard assets? ....and become increasingly scared of the general market?
The perfect storm.
Thanks, guys.

Posted by: Rigdon at August 1, 2006 7:38 PM [link]

John Embry from Sprott Asset Mgt. on Rob today, worth a look.

Posted by: tgifbipo at August 1, 2006 8:56 PM [link]

Stockman,

You are right about the first day of the month. Historically, it is the most bullish day. However, the only month with an historically negative bias on the first trading day is August. So yesterday's action was in keeping with tradition.

Posted by: leewhee at August 2, 2006 2:15 PM [link]

So, we can imagine quants in several mega-banks studying where the least buying (in which issues) will provide most support to the index.

One contacts the other to buy those key issues where his inventory is low, and sell those where his inventory is high. Their analysis is common (and simple, based on price/volume of particular issues and index composition).

So, I imagine they can coordinate a campaign to support NDX or RUT without even having to discuss the subject overtly.

Hmmm, hadn't ever thought that through. But, it's an obvious thing to do, and wouldn't even cost them much. In a sense, they're just trading inventory between themselves ....

Posted by: Jock at August 2, 2006 3:41 PM [link]