Equity Index Update

Brad Sullivan
February 12, 2007

The index markets took a sharp turn from multiyear/all-time highs around the late morning Friday. The SPH7 contract traded from early morning/contract highs of 1457 to a low made just before the final hour of trading at 1436.75. Heavy selling was reported in the pit – a rarity these days – through Bear Stearns’ desk…the talk was that a fund sold nearly 5,000 SPH7 contracts from 1448 to 1438. Essentially, this puts the index markets in a rather interesting position, just underneath the highs of the move, but losing momentum as the market continues to grind at certain price zones. The question at hand seems to be – what will drive the market over the next several sessions? The answers could be at hand this week as Fed Chairman Ben Bernanke testifies before congress beginning on Wednesday, Retail Sales and PPI later in the week as well as option expiration. Keep in mind this statistic…in 2006 we had a total of 4 expirations that witnessed significant downside price action.

One trend that continued on Friday afternoon was the “mark up” into the session’s end. This phenomenon is particularly strong in the Midcap 400 and Russell 2000 contracts. Both of these contracts rallied 0.4% on closing orders and have once again left a significant differential between the cash market and futures fair value calculations. Over the last two weeks this game of marking ‘em up has been at its strongest during sessions when the indices are lower. Keep this little nugget in the back of your mind during sessions that “look and feel” like they should settle on the lows.

Today’s action should be critical in terms of market psychology. I suspect we will continue to widen our intraday trading ranges, which should lead to a greater opportunity for day traders. Could it be that volatility is starting to show its shadow?