HOTS Weekly Options Commentary

Peter Stolcers

Last week was shortened by the holiday. Traders often struggle to get their bearings after a long weekend. The tone was set two weeks ago when the S&P 500 dropped 16 points on Thursday. Jitters going into the week were exacerbated Wednesday when the Shanghai Index dropped 6% overnight. A .2% increase in the stamp tax placed on Chinese stock trades was to blame. The media sensationalized the event by emphasizing that the rate had tripled. While accurate, it made the news seem bigger than it actually was. From a trader’s perspective, if I'm trading a parabolic market, higher margins or commissions or exchange fees are not going to impact my activity - especially when it only amounts to .2%. Our market opened lower and it looked like profit taking might set in. By mid-morning, prices stabilized and the stage was set for a huge intraday reversal. This pattern has been very pronounced over the last few months. The market has a big one day drop and then it reverses and surges higher. The take away from all of this is that the China "bubble" is factored into prices. That market has made a huge move and everyone is expecting a pullback of decent magnitude. It’s a "closed market" and judging from this week's reaction, the consensus is that the selling can be quarantined. This was not the same reaction we saw after the one-day 10% drop in February. The Chinese can change the rules of the game at a whim and that market is treading on thin ice.

As the week progressed our market digested economic numbers and it continued to make new all-time highs. The biggest move came on Friday’s Unemployment Report. Despite a .3% rise in hourly wages, the market pushed higher. Two months ago the reaction to wage inflation would have caused a sell off. That's because some traders still hoped for a Fed ease and that component of the release would have dashed their spirit. The market is growing accustomed to the Fed’s "tight light" bias. Now it's almost a matter of how long they will wait before raising rates. I believe interest rates will remain unchanged the rest of the year.






The week ahead is very light in terms of economic releases (ISM services, productivity, unit labor costs, wholesale trade, consumer credit, trade balance) and I don't see any of these numbers driving the market. When the earnings calendar is highlighted by stocks like GES, ZQK and SFD, you know it's going to be a quiet week.

Next week we can expect dull summer-like trading. There is no news to drive the market. We are past end-of-month fund buying and we are a week away from option expiration. The path of least resistance is up and until I see a breakdown with follow through, I will stay bullish.

Equity Index Update

Brad Sullivan

The index markets reversed overnight worries from a Chinese decline and pushed significantly higher. In fact, the SPX joined the All-Time High Club as the index finally pushed through the 1527ish previous high close registered in March of 2000. Now the index has the intraday highs of 1552 and change in its sights. Without question yesterday’s sharp move caught many traders flat-footed. Given the China news, and the fact that this time there was a catalyst for the decline (raising the stamp tax on stock transactions from 0.1 to 0.3%) it should have come as no surprise that the indices were not going back down the Feb. 27th path. However, to predict new highs across much of the board was not something many were thinking when the SPM was trading around 1516.

And there lies the proverbial rub of the index trade in our current climate. By most measures we are overvalued/stretched and should be looking for a moderate decline. However, the indices keep on chugging higher and for those fighting the tape it has been a painful experience both psychologically and financially. As I pointed out last week in a couple of comments, the indices were stretched on a variety of readings…normally this plays out 1 of 2 ways: either a sharp decline or a moderate decline followed by sideways action. Neither of these scenarios is playing out. The decline was shallow, but only a couple of sessions of range oriented action followed. This leaves me with a scenario that rarely comes into play and that is the blow-off rally. Simply put, the DJIA and SPX have POTENTIAL to stretch this rally significantly higher throughout the summer. There are now 3 options on the board and it should make for some very interesting trading over the next 6 to 8 weeks.

For today’s session here are the levels in SPM I am focusing on: The first area of resistance should be found between 1535.50 and 1537.50…above this look for a push towards 1541. I would be looking for the zone between 1540.50 and 1542.50 to establish a moderate short line. Above 1545 on a 30 minute close, the white flag is waived on this transaction.

On the downside, support should be found in our old resistance zone of the low 1530’s…essentially look for support between 1533.50 to 1531. If this zone fails to hold, look for selling to accelerate towards 1528. Support is found within the 1529 to 1527 zone and again from 1525 to 1524. Clearly any move towards this area would leave many scratching heads.

All told, with the month end and tomorrow’s employment report, I would asses the odds of a significant move higher or lower as remote. Keep it close to the vest, but be ready to play if something changes during the session.