wmeubank@ocp.kcmo.com
THE OPTION ADVISOR
Prepared by
Investment Research Institute, Inc.
The stock market's technical strength in the past month has been impressive in the face of investor complacency over the past two months. The scenario we envisioned last month with the Dow Industrials moving below its 50-day moving average to retrace back to the 200-day did not occur, with the Dow posting a weekly close above the 50-day three weeks ago. And the reaction to this past Tuesday's FOMC meeting was very impressive, given that all economists and market watchers already expected no action from the Fed. Most impressive was the major breakout in the bond market, which pushed yields below the 6.3% level on the 30-year Treasury that had previously been so difficult to penetrate. And the Dow Industrials have now posted two consecutive closes above the key 8000 level, which we haven't seen since this consolidation began in early August. With tomorrow's Employment report as the final key short-term event for the market, we like how both the bond and stock markets are shaping up into this news. Our sentiment measures are not particularly encouraging, primarily our readings of options and sector fund speculators, both of which appear fairly convinced the market will not decline. This was of great concern to us last month when the technical picture appeared weak, but now that price action has strengthened significantly, such sentiment no longer appears irrational. The other key factor in October will be the reaction of stocks to third-quarter earnings reports. Again we see a relatively upbeat tone in what we read about earnings expectations, as negative earnings pre-announcements are assumed by the consensus to be the exception now rather than the rule in past years. The bottom line of all of this optimistic sentiment is that it doesn't give us the same level of bullish conviction within a strengthening market that we've had in past years when sentiment was unduly pessimistic; however, we must stay with the long-term uptrend, especially when it is reacting positively to key news events. At the same time we are seeing plenty of bullish opportunities within the sectors. The clearest sign comes from the economy-oriented industry groups, known as cyclicals. Sector fund speculators are relatively undercommitted to recent outperformers such as paper, automotive, and airline funds. As a result, we advise a fully invested position with a heavy cyclical orientation, as more money is apt to flow into these sectors to allow them to continue to perform as well or better than other sectors, with significantly less risk since expectations remain relatively low here.
October 3, 1997 Price Headley
Investment Research Institute, Inc.
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