Saturday, May 12, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

The market is seeking a catalyst. 10 days ago the S&P 500 was at this same level. In that time we have seen a decent round of earnings and they have exceeded expectations. With most of the numbers "in", the earnings growth rate is over 6%. That should be enough to sustain the uptrend. As I mentioned last week, I expected choppy trading and a negative reaction to the Fed’s unchanged rhetoric. The initial bullish reaction was reversed Thursday and the market also took issue with the weak retail sales numbers. Over 80% of the retailers missed their sales numbers. Friday, we got a bit of inflation relief from the PPI. The core inflation rate increased a modest .7%. In the grand scheme of things, the market is just chopping around looking for a piece of news that it can sink its teeth into. One day the economic releases show strength; the next day they show weakness. Another day the releases show rising inflation and the next day they show a decline. Now that the earnings season has ended, the market will place greater weight on the week to week economic releases. These knee-jerk reactions will mean little and the market will zigzag until it has something substantial to digest.

Per normal there is a chance that we will wake up Monday morning and read about a new merger. M&A will kick start the week and given the recent rally, the path of least resistance is up. The market is also likely to benefit from bullish option expiration activity. It's easy at this juncture to get lulled into thinking that the market can only go higher.

This is a time to be cautious. The market is "sleepwalking" its way higher. Thursday we saw the dramatic affect that one negative piece of information can have on prices. It will take two or three consecutive pieces of information to topple this market. We will use a series of lower closes and a technical breakdown as our guide. In today's chart you can see that minor support held Friday. The uptrend from March is also still intact. The steeper and shorter term the trend line, the easier it is to violate. I don't give this trend line as much credence as I do the horizontal support levels at SPY 148 and SPY 146. This week I have a very unique stock to add. I went fishing and once I reeled in the catch, I liked what I saw.



Friday, May 11, 2007

Equity Index Update

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Brad Sullivan

The index markets suffered through a day of consistent selling to settle sharply lower on the session. Key short term support levels were violated in most of the indices, particularly the SPM7 which fell below the key 1507 to 1504 support zone and could not muster any sustained buying when retesting that area. Today’s action will be influenced, on the open at least, by the PPI and Retail Sales reports. PPI came in better than anticipated on the core rate (I wish I could exclude food and energy costs each month as well) and Retail Sales was on the disappointing end of the spectrum. That being said, the Retail Sales figure is likely to be discounted as the market will give the consumer the benefit of the doubt for a couple of more months…however, on a longer term basis, this reading is worth putting in your files as a potential turn in the consumer. The PPI reading continues to show elevated levels in food pricing and I know that it cost me $80 to fill up my car the other day, yet the marketplace continues to downplay any meaningful impact on the economy from these pricing pressures. It reminds me of the quote I used the other day…FOCUS ON WHAT THE MARKET IS PAYING ATTENTION TO, NOT WHAT YOU WANT IT TO PAY ATTENTION TO. Right now, in my opinion, the marketplace is focusing on the supply shrinkage in the equity market due to private equity takeovers and global liquidity. Until these underpinnings slow or stop, this market will continue to be firm…with hiccups along the way.

The question today is this…was yesterday’s hiccup on the downside the beginning of something more? As I have written this past week, nearly all of my readings are at extended levels and it provided a good entry to flatten longs or establish a moderate short line. One of two scenarios play out from these readings…a sharp drop of nearly -4 to -5% or a moderate drop of around -2% that turns into a trading range just underneath recent highs. Right now I am leaning to the trading range scenario, but that could change with a shift in any key inputs – particularly Euro/Yen and Dollar/Yen. I will continue to use these pairs as key barometers for index trading.

Here are the levels I am looking at for today’s session in the SPM contract. Resistance will be found between 1502.50 and 1504 in a moderate and choppy zone type of trade…above this is the key 1504 to 1507 zone. Only a 30 minute close above this zone will begin the reversal process from yesterday’s downside damage. If we do get a close above this zone, I would shift to playing from the long side – HOWEVER, be prepared for probing BACK into the 04-07 zone. In other words, the 30 minute close gives the signal but the odds are you can get better pricing by being in 04-07 zone than outside it with a little patience. On the downside…Support will range from 1499 to 1497.50. Below this level, look for some spike moves lower towards 1495 and 1494.50. Only a 30 minute close below this zone will produce more selling…in the interim I would look for program type spikes lower that would generate trading into the 1491 area.

I AM LOOKING FOR THE TRADING BELOW 1494.50 TO BE SPIKE ORIENTED WITH SWINGS OF 3 TO 4 POINTS BACK AND FORTH.





Finally, keep in mind one fact and that is that Friday trading has been extremely quiet the past several weeks…is it time for a change? I have included a chart showing the 30 minute closes in SPM7 since May 1st. Notice the failure to get back above 1504…interesting.

Thursday, May 10, 2007

FOMC and The Morning After

FOMC and The Morning AfterSocialTwist Tell-a-Friend
From our Virtual Trading Room Transcript
May 10, 2007
about 0549 PDT

Jason_Roney> With expiration next week, the monthly patterns suggest further upside by next friday's open. In fact the SP500 is just 1% from the March 2000 all time high close (1527 in the cash). Given the solid uptrend, there's reason to think we'll hit that level sometime next week. But in the short term, the next few days would seem to offer the bear's best chance for downside. As I'll note in the afternoon discussion, there is often a counter-trend move towards the end of the week prior to expiration week. As well, the market tends to struggle with any follow-through on the day after an FOMC meeting. But a look at the daily patterns suggest an even greater probability of short-term pause.

Jason_Roney> Here's some observations: (1) the SP Futures have 7 consecutive closes above the open price. there have been just 10 occurrences over the last 10 years (in 2007, April 23 and Feb 23 were next day - both closed down) and 7 of those closed below the open; (2) the NDX finished higher for the first 6 days of the calendar month. looking back to 1995, this happened just 3 times before and each time the index finished lower; and finally, (3) the Treasury Bond closed below the prior day's low while the SPX finished above the prior day's high. this happened at the March Meeting and resulted in a flat next day's trade with close below the open.

Jason_Roney> The bottom line is that Thursday's action has a higher probability of finishing below the day's open. The overall trend remains solidly higher into expiration but the next 1-2 days offer more downside than upside risk.


Click here to read the complete transcript of Jason's chat.

Click here to read the Trading the SP Gaps by Jason Roney.



Equity Index Update

Equity Index UpdateSocialTwist Tell-a-Friend
Brad Sullivan

Thus spoke the FED…and the market could not make up its mind in terms of what to
do with the new information. After the initial spike lower, the indices came roaring back to new intraday highs, followed by another push lower, then onto contract highs. After a nice consolidation period below intraday highs, the indices made a final push – and failed to gain higher ground. At the close of trading, longs (mostly of the day trading ilk) were selling out positions and this led to a respectable discount from fair value readings across the index board. This morning, the offer continues, with the SPM trading lower by -4.25 at 1511.25 and a full -6.00 from fair value. Asian trading was mixed to lower and Europe is trading moderately lower.

Today’s action should provide a solid litmus test for the indices as the FOMC
provided about what was anticipated. Is there enough fuel in that statement to push us higher? Or are the indices a bit tired and looking at a trading decline? Tomorrow’s PPI reading, next week’s CPI reading and option expiration should help provide the marketplace with a catalyst for our next directional move. In the meantime, it appears as though the indices are trading in a “capped” rally environment. If we look at the SPM contract, the inability to push through the resistance zone of 1515 to 1518.50 (for any extended period of time…as I know we traded up to 1519 yesterday) is a short term negative. We have now tested this zone each day this week and have yet to make a strong foothold at this zone. Accordingly, there seems a good chance that the index will make a push for the support zone between 1507 and 1504. And this is where it gets a little tricky. IF we get selling pressure in this zone, there is potential to push the contract back towards the 1491 level, creating a trading range scenario that could provide numerous buy and sell points over the ensuing weeks. However, the net change in that time frame would be negligible in the market. In fact, this scenario holds up pretty well with some of the extension readings we are seeing in various indices.

Now that I have put out a longer term scenario, let’s focus on today’s session. In the SPM contract…Resistance remains between 1515 and 1518.50; a 30 minute close above
this zone is CRITICAL for the upside to continue. However, as I wrote earlier in the
week, it is no place to chase ‘em. Wait for the market to forge into the 1521 to 1522 zone and look for afternoon buying pressure to build for a late pop towards 1526. On the flip side, given the weak close (relative to fair value) and the negative open – I suspect we will see the index make a push towards the key support zone between 1507 and 1504. IF this zone is taken out on a 30 minute closing basis it will shift the momentum to NEGATIVE and should lead to a trade around the 1500-1498.50 support zone. One should be careful on the timing of these trades as the potential for a 1502.50 print followed by a bounce to 1508 or so is certainly in the cards and it will be critical to focus on the closing prints at the 30 minute intervals to get the proper trade setup. Again…don’t chase ‘em at points that are too extended as we are still in a contained trade and in these sessions you must counter the moves at key support and resistance levels.


I have include a few charts today…the MIDCAP 400 extensions on both the 20 and
200 day MA readings is getting a little top heavy at current levels. In addition the DJIA 20 day MA extension is quite elevated. The final chart is one showing the volume in SPminis on a YTD, 5 day MA and yesterday basis. Notice the explosion after FOMC (and that is to be expected) and its subsequent failure to generate both volume and price at the key resistance zone in the late afternoon.








Wednesday, May 9, 2007

Equity Index Update

Equity Index UpdateSocialTwist Tell-a-Friend
Brad Sullivan

The index markets held serve after an attempt to push the indices lower failed to pick up steam at short term support levels. A late morning, lunchtime push higher allowed the market to probe, but never get above the unchanged level in all but the NQ futures. Volume was moderate ahead of both the CSCO earnings report and today’s FOMC statement.

As for CSCO, the stock was not able to match “whisper” expectations in its report and during the subsequent conference call. The issue is called to open about -1.45 at 26.90. This has put moderate pressure on the futures with the NQ contract trading lower by -5.00 at 1900.50. The SPM is trading lower as well, at 1510, down -2.25 on the session.

While we may have some moderate trading around the CSCO news in the first 45 minutes today, the odds play seems to be one of hands-in-pocket until the 1:15cst FOMC release. Attempting to handicap this release is generally futile as one verb added or subtracted can mean a few billion in market cap changes hands in the SP over the ensuing minutes. In other words…keep it close to the vest post announcement. Expectation wise, the markets are continuing to expect similar wording from the FOMC as it has received in the recent past. A change in this wording will move the markets…but to what extent?
From a trading perspective, the question we have to ask ourselves is pretty simple…is it time to fade this move and put a counter trade to work? So far, only the DJIA (as I showed yesterday) is extended from its 200 day MA. All things being equal, this represents a good time to get flat (if long the DJIA) or look to premium sell/outright sell the index. HOWEVER, the warning trade in this environment is that we are at the cusp of a major mega-cap upside explosion. If this scenario occurs, the extension readings could move sharply, possibly towards the +15% zone. Accordingly, proper use of stops and such are needed when fading a beast.

The other night I pulled down a book from the coming of age master J.D. Salinger and turned to a page that had a Taoist tale. Without rehashing the whole section, I will include this portion which is the tale end of a conversation between a Duke and his horse breeder that is about to retire. The breeder has sent the Duke to another breeder…a few months later the new breeder sent the Duke a horse that was supposed to be a dun-colored mare, but, turned out to be a coal-black stallion. When given this news the old breeder was amazed at how advanced his friend had become in choosing horses.

“In making sure of the essential, he forgets the homely details; he looks at things he ought to look at, and neglects those that need not be looked at.”

A traders mantra if I have ever read one…accordingly I have enclosed 4 charts for viewing today. One is the NDX extension readings for the 200 and 20 day MA’s. So far, the readings are elevated but not overbought.

Also included is an analog chart showing the performance of the Euro/Yen and SPX over the past year. The linkage is simply amazing. The third chart is showing the cumulative SPX breadth for the top 100 issues only. This continues to show the mega-cap extension as the upside ride continues. Finally, the last chart shows the 2007 performance for both the NDX and SPX top 100 from the OPEN print, in terms of net breadth for that session. You will see that yesterday showed a divergence in the NDX/SPX performance…it can possibly be explained by buying into the CSCO number. However, that seems a bit simplistic and it could be that mega-tech will continue to move higher.









Tuesday, May 8, 2007

Equity Index Update

Equity Index UpdateSocialTwist Tell-a-Friend
Brad Sullivan

24 wins and 3 losses over the last 27 sessions for the DJIA as it moved ahead of 13,300…should one dare look to fade this beast? I have enclosed a chart that shows the differential from the current price and the 200 day simple MA in the DJIA. The chart begins on the first day of trading in 2006. As you will see there has been a move to higher ground or “extension” away from the MA. Historically, an extension this large in the DJIA has led to one of two scenarios. A sideways trade that allows the MA to catch the current pricing levels or a fast bout of selling that ends around the -4 to -5% levels.

I have also enclosed a chart on the MIDCAP 400 and its 200 day MA differential. This index is showing similar action to the DJIA, however, it has not extended to new recent highs. Still, it is worth paying close attention to as this index was the first major one to hit all-time highs during the current rally.





This morning, the indices are called lower on global index selling. After the close of trading, CSCO will report its quarterly earnings. This morning, HPQ announced stronger growth forecasts for the next year and the stock is called moderately higher. More importantly is the currency situation which has seen a bid placed in the Yen/Dollar and Yen/Euro. Keep in mind the strong correlation between these pairs and the global index markets…indeed we are inextricably linked.





Given our called to open area of around 1511 in the SPM contract, few zones of support and resistance have changed from the past two updates. 1515 to 1518.50 remains as the first resistance zone and with yesterday’s moderate probe it is becoming even more formidable in the near term. Support is seen from 1511.25 to 1509.50…below this zone we should move towards the key support zone from 1507 to 1504. This zone should be choppy and liquid, leaving plenty of opportunity for short covering. A 30 minute settlement below this zone could lead to increased selling around the close of trading. IF THIS SCENARIO PLAYS OUT it will be due to buyers going hand-in-pocket ahead of the FOMC tomorrow. As I pointed out yesterday, the indices have not been at their highs moving into one of these meetings and a reversal trade is potentially upon us. In the meantime, don’t chase ‘em at areas that are too low as bottom fishers and short covering could provide a lift at any juncture…and keep an eye on the currency pairs.

Monday, May 7, 2007

Gold

GoldSocialTwist Tell-a-Friend
Sally Limantour


The metals sector was strong last week despite the Asian holiday, a stronger dollar and weaker oil. Copper jumped 7.2% and surged through key resistance while nickel (+10.6%) and lead (+4.3%) made new highs. This time of year is traditionally supportive to the metals as Chinese demand tends to recover following its New Year celebration and construction typically picks up in Europe and North America as the weather turns warm.

All eyes are on the gold market as we approach the $700 resistance area. Currently there is talk of a Peruvian gold mine going on strike which would threaten supply and overnight AngloGold Ashanti posted a $97 million profit for the last quarter ending in March. In a bigger picture there are other supportive factors occurring.

More and more gold mining companies are limiting their hedging practices and last week the Grand Daddy of them all, Barrick unwound a large hedge and took a loss on the position. Prior to this Barrick had been active in hedging - selling much of its production at pre-determined prices. Now, however they spent $557 million to get out of their hedging contracts and this allows them to take full advantage of rising gold prices.

The Yen continues its slide and reached a record low in Europe and this combined with a weaker US dollar continues to support gold. In Tokyo gold is challenging 26-year highs and traders are buying gold as a hedge against the weaker yen. What I find interesting is that while many investors/traders look at the stock market in terms of value relative to gold or euros, the “public” traditionally does not. Recently, however the media is highlighting these dynamics and people are starting to see that “value” is not necessarily what it appears to be. In the NYTimes last Saturday an article titled, A Comeback for the S&P (If the Yardstick is Dollars) speaks volumes. These articles are raising the awareness of gold as a way to measure value and more importantly, that it is rising relative to stocks, bonds and other asset classes.
http://www.nytimes.com/2007/05/05/business/05charts.html?_r=1&oref=slogin


China and India continues to be buyers of the yellow metal and even with tightening measures in China this does not seem to put a damper on demand. Money supplies are surging and while inflation numbers appear under control we cannot ignore the fact that 18 of the top 20 central banks have double-digit increases in their money supplies.


One inhibiting factor to the price of gold has been persistent legacy central bank selling. This has been a consistent theme where the legacy banks agree on an amount to be sold within a given year. As of the end of April 2007 the tonnage remaining of the announced sales will be down to 617.5 tonnes. Julian Philips of the Gold Forecaster writes that this may be ending soon. He emphasizes, “If sales continue at the rate we have seen over the last two months at around an average of 10 tonnes these sales will last just over a year before they are complete and will terminate. (http://www.goldforecaster.com/)

Finally, the technical picture looks healthy with gold consolidating above $675 and unable to go below $670 during April’s break. As you can see on the chart the trend remains up and corrections are becoming smaller.



Equity Index Update

Equity Index UpdateSocialTwist Tell-a-Friend
Brad Sullivan

The index markets continued their winning ways with another close at or near the high marks for this 50 month bull move. Further firming things was a sharp rally into the futures close of trading that led to the SPM contract settling nearly +3.50 to fair value. This morning, the indices are holding around their respective unchanged levels. There is little activity in Europe as Great Britain is on holiday.

Clearly the focus of this week will be on the FOMC meeting adjournment which takes place Wednesday afternoon. Throughout this push higher in the marketplace, the tendency has been to rally into and through the meeting. Thus far, there seems little reason to fade the conventional trading wisdom. However, I will point out one differential and that is that this meeting will mark the first time the FOMC will meet with the market trading at all-time highs. Reversal potential is worth keeping in the back of one’s mind for Wednesday afternoon and Thursday.

On Friday, I focused on the first resistance zone between 1515 and 1518.50 in the SPM contract. The trade pushed into that zone early, but did very little trading in that zone. Today’s action, particularly in light of the bullish close on Friday, should lead to greater probing and duration in this area. Once again, I will find it difficult to chase the long side up here and would rather wait for a clean move above the 1520 level before playing the long side in the late portions of the session.

Support areas today in the SPM contract will be from 1513 to 1512; 1510.20 to 1509.50. If we get below this zone, look for a push lower – most likely in a sell stop driven mode during a light volume time of day (late morning/lunchtime) towards the key support zone of 1507 to 1504. Only a settlement on an hourly basis below this zone would put the recent upside swing in short term jeopardy.





One index to key on today is the ER2 contract, which had a large burst of buying into the futures bell on Friday afternoon. The contract has traded in a 0.8% RANGE since our rally ended on Wednesday morning. In addition, this contract has a strong history of “follow” from strong/weak closings. Looking to be a buyer around the opening few minutes of trading for a push towards 840 seems plausible.



Sunday, May 6, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Pete Stolcers

Last week started off on a sour note. Many of the overseas markets were closed Monday and Tuesday and we did not have their strength to forge a path higher. Monday was a quiet day and the market drifted lower. Tuesday, the bears tried to get something going but by midday the market reversed and closed on a high note. The next three days all had positive price action and the S&P 500 made another multi-year high. It’s now within striking distance of an all-time high and that can be seen in this week's chart.


On the economic front, there were a number of releases that collectively had little impact on the market. Productivity was up, unit labor costs were down and average hourly earnings came in lighter than expected. A higher than expected ISM number offset a slight increase in the unemployment rate. Next week's economic highlights include the FOMC meeting on Wednesday and the PPI on Friday. I expect the Fed to stand pat and for the rhetoric to remain unchanged. The Fed has confirmation that the economy is slowing and that inflation is rising. Both conditions are offsetting (from an interest rate perspective) and a monetary policy change cannot be justified at this time. The PPI is likely to error on the high side; however, the market should the able to shoulder that news as it has in recent months. In conclusion, ignore the “noise” created by the economic releases.

Earnings, M&A and share buybacks are propelling this market. Last week, cyclical stocks with international revenues posted very strong earnings. The biggest merger news came Friday when rumors circulated about a potential Microsoft/Yahoo marriage. The market placed greater importance on that event than it did on the weak unemployment number. This week we will see the last big round of earnings announcements and here is a sampling of the companies that are about to release their results:
AMT, NILE, WYNN, FLR, MDR, MCK. MLM, MVL, HSIC, TYC, CSCO, ERTS, PCLN, ENER, LEAP, FWLT, LM, TM, ONXX, TXU, FLS, TK, WFMI, KG, LAMR, PDX, PDE, NVDA, AIG, GG.

There are a number of stocks that I like in the above list; however, these companies don't pack the punch needed to have a major market impact. All things considered, the market needs to take a break and I believe that choppy trading lies ahead this week. Most of the earnings are out, we don’t have end-of-the-month or option expiration influences and the economic news is relatively quiet. Many traders will have their golf clubs packed in the trunk in case the activity slows down. This might sound like a joke, but it really happens. Traders would rather golf than force a bad trade in quiet markets. Chances are a deal or two might get the week started, but then everything will calm down ahead of the FOMC. Once that passes, things are likely to settle down again. This week I want to look at two pharmaceutical stocks.

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