Equity Index Update
Brad Sullivan
February 14, 2007
The index markets recaptured the majority of losses associated with Friday’s mid-session plunge. In fact, both the DJIA and Midcap 400 settled within a whisper of all-time highs. Many were explaining the rally on the AA news of a possible takeover, however, that seems a bit too simplistic. The fact remains that since the indices began their steady march higher in August of last year we have survived quite a few vicious one day declines. In each of these instances the sell-side failed to capitalize on any ground, gained both in price and market psychology. Accordingly, a spat of dip buying and short covering pushed the indices to new high territory for the move – will it occur again?
One aspect of the current environment that pushes me towards uneasiness (at least from the selling perspective) is the constant and growing chorus of those anticipating for a correction. The discussion about a -2% correction in the SPX on an intraday basis and low volatility and liquidity and selling premium and too many hedge funds and – well you get the point. These are the ingredients needed for a “melt up”… too many players on the sidelines, expecting a correction in order to get their positioning. The fact is this – if you waited to buy this rally, you would still be waiting. Strong markets do not let you in very easily. This discussion is running counter too much of my writing on Monday of this week. In that piece, I discussed liquidating long positions into Friday’s option expiration. I still believe that is a prudent move…however, at this point, given the information at hand I would liquidate only partial longs.
This morning brings testimony from FED Chairman Ben Bernanke…as he discusses the economic outlook in front congress for the next two days. In addition, we will receive Retail Sales. This morning, the dollar is sharply lower against its European counterparts. One trade that demands examination is the Euro vs. Dollar. The Euro has based for over one month in a narrow 1.5% range, well below the late 2006 contract highs. There is a potential – assuming the Euro closes over 13100 that we could see a sharp rally ensue over the next 6 to 8 weeks.
