Friday, March 9, 2007

Equity Index Update

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Brad Sullivan

The index markets gapped open strongly for the second session this week on the heels of a large scale reversal in the Yen vs. all its major counterparts. The reason behind the latest Yen move seems to be the rate hike in New Zealand to 7.25% will allow some of the favored carry countries to continue participating in the infamous lever trade. In response to this move in the Yen, the index markets rallied sharply overnight and continued their gains throughout much of a rather quiet session ahead of today’s February Employment Report released by BLS.

The report this morning came in right around consensus expectations on all levels…and that produced a sharp pre-opening bid in the marketplace. Currently the SPM7 contract is trading at 1424.50, which would equate to roughly 1410 in SP500 Cash index. Using the cash market, 1410 to 1415 should provide significant resistance in today’s session.

The real key behind today’s action will be whether or not the indices can hold their opening rounds of buying. Typically on Employment sessions, the move is fast and violent in the first hour, followed by a counter chop oriented trade. I suspect that will play out today, with one exception and that will be the final hour of trading. I expect to see selling across the index complex during that time frame…remember – since last Tuesday’s debacle, the final hour produced only 1 higher close. And that was a total of 0.30 points in the SPX market.

However we settle out today’s session, next week should provide fireworks as we enter the week of “witching.” There are lots of nervous positions on the books of hedge funds right now…and the fact that these bounces have occurred during overnight hours shows how much “supporting of positions” there continues to be in the marketplace. Next week should provide all the answers needed…if there is a forced liquidation trade during expiration week it will be very ugly. Keep in mind that last year we witnessed consecutive massive legs lower in May and June during their expiration weeks.

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