Equity Index Update

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Brad Sullivan

The index markets are celebrating takeover news on the domestic and global fronts this morning. MSFT appears ready to launch a bid for YHOO which is higher by about +14% in the pre-market session. In addition, Reuters is bid sharply higher on another takeover bid in the news arena. European markets are higher, but not substantially and one wonders if these markets will remain quiet ahead of a Monday holiday.

As for the domestic action…up, up and away remains the singular theme, particularly in the large cap arena. The market, as I have pointed out in the last few posts, is at a critical juncture – one that has the potential to lead to continue and generate significant trading upside from current levels. This has been the “skeptical climb” in my opinion, a rally that continues to defy explanation after a frightening plunge a mere 6 weeks ago. The trail of tears seen underneath the market are those bids being placed by desperate shorts trying in vein to cover positions that, on the surface, seem to be coverable only at the markets current pricing. And that is painful for those short around the 1450 level.

Today’s trade should be interesting and potentially volatile as the SP probes into new contract highs and rests within the shadows of the ATH made in March 2000. Keep in mind that the index made its high close on consecutive sessions at 1527 and change. The intraday high was 1552 and change, followed by a sharp reversal that session. What do we need to learn from this brief history lesson? Simply this…when markets are trading to/near/through All-Time-Highs, one should always be on the lookout for the potential profit taking reversal trade. This morning, assuming we open around the current bid of 1514 in the SPM contract, and the fact that the employment report was a touch soft, I have to consider today – POTENTIALLY SPEAKING – today to be one of those reversal sessions. The key word is POTENTIALLY as selling short this market has been a nail in many traders coffin…and yet the setup is there. A news induced bid to overall marketplace and new contract highs off a questionable employment reading.

As for support/resistance zones…here is what I am looking at for today’s session in the SPM contract.
Resistance should be found in a zone from 1515.50 to 1518…any 30 minute close above this zone is a step towards a potential short covering “blowoff.” However, I would not be chasing the long side up here. Instead, I would wait to see if the market can extend into the 1522 area before making any bets. If the SPM can hold up in 1521/1522 area the table should be set for a strong move into the bell and early next week. If the SPM fails to gain traction in the first resistance zone (15.50 to 18.00) then a sale for a move towards 1509 support is in the cards. Support is found between 1510.20 and 1508. Below this zone, look for the contract to move back into its chop zone from yesterday between 1507 and 1504.50.

Akamai Technologies (AKAM)

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Fil Zucchi

Back on September 15 of last year I sold the bulk of my then very large Akamai (AKAM) position. The stock was around $46.50 and I explained the principal reason for selling as follows: “The fundies story still seems intact, in fact it may still be getting better. My concern is that everyone seems to be realizing this now. AKAM has set a pattern of beating estimates and raising big in the face of skeptical analysts. Now the analysts are beginning to get in front of the company, and the bar is getting raised.” The stock proceeded to touch $60 without me.

Fast forward to today:




the business has only gotten better; the company is growing revenues and net income at a 50% clip, and generates cash way in excess of that, thanks to $300+ M in loss carry-forwards, which will allow it not to pay cash taxes until well into the next decade; it has no net debt; its basic business is all about the efficient delivery and management of IP data. If you think that’s a big market opportunity today, wrap your head around this little statistic: as of last month, 70% of 334M Americans were internet users; as of last month 10.4% of 1.3 billion Chinese were internet users; and as of last month 3.5% of 1.1 billion Indians used the internet – can you say unpenetrated turf?

If both the top and bottom line growth rate next year slows to 37.5%, and falls by 7.5% every year thereafter until a final rate of growth of 15%, by 2011 AKAM will have revenues of about $1.5b and EPS of $3.05, and will have grown at a 26% average for the next four years; The stock closed today at $43.

These are verbatim exchanges from last week’s AKAM call with my highlights:

Analyst (Kept anonymous to avoid unnecessary embarrassment): Just from a high level perspective, I think you’ve trained the Street here that you guys put up good results and typically there’s an expectation [inaudible] numbers move up. If you look back at this quarter, is there something that surprised you in the market? Are we kind of going through the hypergrowth phase of this? Is there some change fundamentally out there?

CEO Paul Sagan: No, actually, I was very pleased with the results. What we said last year – in the first half of the year is, we were surprised at how fast the market was accelerating. I think if you look at our guidance this year it was for some pretty bold growth. If you look at the mid range, it’s almost 45% revenue growth and now that we reported a quarter almost a third of the way through the year, we still feel very comfortable that we’re going to see what I think is exceptionally strong growth off of a large number last year and even stronger expansion on the bottom line. So, no, I don’t see anything fundamentally different and extremely pleased with the performance. I think that some people may have gotten very comfortable with the fact that we kept beating the guidance early last year and decided well, that’s just the way the world works and we kept saying over and over again, we used the same methodology. We’re conservative, we’re trying to understand what’s going on in our business, we moved the guidance up very strongly that part of last year because we had confidence in the numbers, and we continue to have confidence in the numbers and people should listen really carefully to what we say.

Analyst (Also kept anonymous to avoid unnecessary embarrassment, even though given the prior question it might serve her well to be publicly embarrassed): Okay. And then if I can just follow-up on Todd’s question, so this is the first quarter in six quarters you haven’t been over the high end of guidance for the quarter. And I heard what you just said about you say over and over you can’t keep beating and raising. I’m wondering was there any disappointment for you internally in this quarter and did anything change between the time you gave guidance in January when presumably some of the prices on the renewals in December were set and the current time...

CEO Paul Sagan: Let me stop you right there. No, we always tell you exactly what we think is going to happen. We got some very pleasant surprises last year and we explained why the phenomenon that we thought was going on that we then captured in our guidance going forward. We gave what we thought was accurate guidance and actually we came in exactly there, so were very pleased. In fact I’d like to be exactly right on it, like to give you an exact dollar and exact penny number and then hit it because it says we can understand everything that’s going on in our business. We came in near the high end of the range. I thought it was a very strong quarter and we continue to be very optimistic about the year.

In my humble opinion, the two borderline demented questions you read above encapsulate the reason why the stock is down $12 in five days, and why I’m back into the stock and hoping for lower prices still to get even longer. Who says analysts cannot hand us some good opportunities.


Editors' Note: Both the Author and several HAFN Affiliates own AKAM.

Equity Index Update

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Brad Sullivan

The index markets survived the “sell in May and go away” slogan as buyers stepped in after sharp early morning selling. The brunt of the selling was felt in the Russell 2000 and NDX, with the SPX and Midcap 400 performing a touch better. However, the sell side was unable to push the larger cap indices beyond moderate net losses and buyers crept back into the session. When it was all over, the indices finished with net slight gains for the first trading day of the month.

The biggest question facing the market today will be one of “follow.” Simply put, can the indices continue to build on yesterday’s bounce and push through Monday’s trading highs? This question should be put to the test in the DJIA and SP as they are the clear market leaders at this juncture. If the SPM can get a 30 minute close above 1500.20, it would suggest a push towards contract highs can be reached today.

I have included a couple of charts, one being a YTD performance on certain commodity contracts – and looking at the performance it should be hard to fade an equity market with Copper up 20%.


The next chart is the SP minis 30 minute volume flows. This table is based on the opening 5 minutes as one reading, followed by 30 minute bar volume readings until the runoff 3:00 to 3:15cst session, which receives its own bar. The volumes are then compared to the YTD average for that time frame and a 5 day MA of that same frame. As you can see from yesterday…the SPM made its low during a massive volume bar from 9:00 to 9:30cst. Accordingly, players were able to walk ‘em back up after the sales were made.

Equity Index Update

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Brad Sullivan

The index markets were marked lower with afternoon selling and “hands in pocket” buying as players decided not to support the bids at the recent high zones. The lead index selling was seen in the Russell 2000 and Midcap 400 indices. Both markets, which have underperformed in the last two weeks (after hitting all-time highs), were hit as dollar flows seem to be moving towards large cap indices. This can be seen in the table below which lists the spreads between the DJIA-Russ 2k, SP and Russ 2k, DJIA and Midcap 400 and the SP-Midcap. As you can see, the large cap indices put a dramatic rally on the board versus their smaller counterparts. Of course…the Midcap is still higher YTD versus the DJIA and SP. But, the relative weakness in the Russell is signaling a pretty dramatic shift in money flow. In fact, the SP has traded to its highest level vs. the Russell since 2003 – the beginning of this bull move. This is significant. And its significance lies in the fact that every bull market must rotate its leadership…if this signifies a dramatic shift towards large cap equities I suspect we will continue sharply higher throughout 2007.

I have also included a couple of other charts…one of which shows the top 100 issues of the SPX and their daily plotted net change from the opening print (on a breadth basis). What is interesting about this is that the distributions on the top and bottom end are significant – statistically speaking – than one would anticipate. Essentially, this shows the potential to let winners run in the course of one’s day trading.


The other chart I have placed is the Russell 2k and its % differential from its 20 day MA. Yesterday the index closed below its 20 day MA and this has the potential to lead to some more aggressive selling in the near term.

HOTS Weekly Options Commentary

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Peter Stolcers

In last week's commentary I mentioned that the market would be influenced by earnings releases more than by economic data. Currently, 50% of the S&P 500 companies have reported. The earnings growth rate for this quarter stands at about 6% which is significantly higher than the forecasted 3.5%. The market responded by making new multi-year highs and even tech stocks participated. Cyclical stocks led the way and it’s apparent that the US economy is lagging the rest of the world. Companies that generate substantial revenues overseas fared the best. They benefited in two ways, they sold their products and services in growing economies and they realized windfall profits when they converted those revenues into US dollars.
The dollar has continued its plunge and it is close to making a new 30 year low. Friday the GDP came in weaker than expected and it showed a 1.3% growth rate in the first quarter when 1.7% was expected. This was the weakest rate of expansion in four years. To make matters worse the GDP Price Index increased 4%, the most in 16 years. Normally, this would raise stagflation worries and the market would have a huge negative reaction. In this bullish environment the market is able to shrug off all negative news.

From an interest rate perspective, Friday's news will not have a material impact on the Fed’s policy. The weaker economic activity would justify easing, while the "hot" inflation number would justify a rate hike. These two conditions offset each other and rates will remain unchanged. Next week the big number to watch will be Friday's Unemployment Report. A rise in the unemployment rate and wage inflation could spark a sell-off. I still believe that earnings will be the focal point and here are a few stocks that will announce earnings:
HUM, RSH, VZ, TSN, ZBRA, APC, MTW, XRAY, VRTX, ADM, MHS, RAIL, MRO, NVT, PG, MET, OII, GRMN, MA, SPW, RIG, TRW, AGN, DVN, NVEC, PRU, TRN, SNY, CELG, OSK, TRMB, WLT, RIO, QLGC, SBUX, EK, WY.

We have positions in a few of the stocks and I believe the earnings will be positive. As long as the earnings keep beating estimates and the growth rate is above 6%, I believe the market will continue to rally. The SPY needs to stay above 143 during the next few weeks for me to justify a bullish bias.

In the chart this week you can see how the market has broken out to new highs. The decline in February was a mere head fake. At the time, I had to play the percentages and trade as if there would be another leg down. With where the positions marked Friday, we are almost back to even and that maneuver simply cost us some momentum. The good news is that I’ve modified the service so that it can be more adaptive and effective.
Relative to last week, this week’s releases will be subdued. There don't seem to be as many market movers. Many traders will have the old adage, "sell in May and go away" in the back of their minds. It is possible that we will get a pullback that will test the breakout. If that price level holds, it will present a buying opportunity.