Equity Index Update
Brad Sullivan
And the Midcap 400 shall lead them. Was it not just 6 weeks ago that the market suffered from an intense bout of “forced” liquidation? Now, here we are looking at new all-time closing highs in the Midcap 400 Cash index and watching the remainder of the indices get within shouting distance of their 2007 highs. The NDX was helped by comments from the CFO of CSCO when he stated that earnings would be towards the high end of estimates during Friday afternoon. The stock immediately shot from 26 to 27 and provided the lift needed to boost the index market on a quiet Friday afternoon.
This morning the indices are called higher based on several factors. First we had strong rallies in the Asian markets and that has carried into European trading. In addition, Sallie Mae agreed to a private buyout that put a nearly 50% premium on the stock. Finally, earnings from two key banks C and WB were much better than anticipated.
Of course, we cannot forget our old friend the currency market which was given the all clear signal from the G7 over the weekend to continue the “carry” trade with abandon. Indeed, overnight the Euro/Yen continued through its respective all time high and the USD/Yen appears not too far behind. This liquidity driven currency trade has produced one of the key elements for tracing index moves both domestically and abroad. Simply put, comments out of the G7 meeting show just how sensitive the central banks of each nation are when it comes to the carry trade. Given the tremendous growth of funds using this trade over the past several years, it is easy to imagine how ugly a liquidation of this trade would end up being for the global markets. Indeed all one has to do is look at charts from last spring and a few weeks ago when hedgies were forced to liquidate positioning under “margin call, gentlemen” types of situations. Nobody wants that again, and the banks appear both coordinated and committed to ensure that the “carry” will not end the game.
This morning there is a potential early setup on the buy side. Even with are sharply higher open, players have been getting used to selling the open and getting long somewhere in the first hour for a walk the line rally. If players get caught trying this and the dealers come in on the buy side, look for significantly higher pricing in the first hour.
Finally, the final 2 hours of Friday’s session produced a significant volume increase in the SPminis and ER2 contract, when compared to their respective YTD and 5 day averages. Considering we settled on the highs of the session, this week looks potentially quite bullish.
