Thursday, June 21, 2007

US Equity Indices & Bonds

US Equity Indices & BondsSocialTwist Tell-a-Friend
Jason Roney

Yesterday was a very dynamic day in markets of course. Let’s first note where we are in the cycle for equities. It’s the week after expiration. SP does not trade with same underlying bid it had the week before because of the expiration. At same time, stocks are increasingly sensitive to interest rates (just look at BKX index versus fixed income).

Now we throw in the Bear Stearns fund fallout. The fund held more than 20bill of derivative investments mostly backed by subprime mortgages. as redemptions came in, the fund was forced to auction off assets from in an already illiquid market (sub-prime stuff). actually, the subprime index began to melt down very late Friday afternoon.

due to conflicts of interest between fund / house, Bear Stearns had to allow other firms to handle the liquidation. this produced the "bid wanted" lists from MER, DB, etc. buyers of these had to of course sell treasuries against.

Early part of week, stocks held in relatively well as the bear fund assets had not yet been auctioned off, treasuries were still near their pullback highs, and Asian equities remained well bid. Yesterday morning we opened above prior day high with potential for breakout. But once the other firms sent out the bid wanted list and began auctioning off the bear assets, two things happened: (1) treasuries sold off as a result of the necessary hedge and (2) market began to realize there was very little liquidity for the bear assets. Those two combined to create selling pressure in SP. Given the expiry up bias was removed stocks were highly vulnerable to a meaningful pullback. Once the outside day was in (yesterday’s move below Tuesday’s low), the hook was in. classic trend day from gap reversal.

To revisit things I mentioned in the chat a few weeks ago. There were several “tells”: (1) SP pit session had 4 consecutive days range less than prior day range (as of Monday close) – implying larger than expected move was imminent. (2) SP had shown clear relationship with fixed income over the prior week(s) and fixed was clearly the lead. (3) Because it was the week after expiration, any surprise move should have been to the downside.

Wednesday, June 20, 2007

SPX at a Critical Conjuncture (Monthly Pivot)

SPX at a Critical Conjuncture (Monthly Pivot)SocialTwist Tell-a-Friend
Fari Hamzei

Notice in the chart below, that for the last 11 months, only during last March, SP500 Cash Index (SPX) traded below its Monthly Pivot Level (Yellow line). Given the price action today -- we hit a number of air pockets (no buyers during upswings and then followed by massive drops on huge volume) -- the US Market, in our opinion, is ready to crack. Make sure your portfolio reflects a defensive posture going forward for the next 4 to 8 weeks.

Tuesday, June 19, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

In the last two weeks we've seen a 50 point decline and a 40 point rally in the S&P 500 futures. Earnings season has passed and the market is looking for something it can sink its teeth into. It took seven years for the market to make a new all-time high. Despite a stiff resistance level, it was able to fight-off the first speed bump – a 15% decline in the Shanghai Index. That dark cloud may have passed as traders believe that the selling can be contained to China. However, interest rates were a different story and the market cracked.

Global economic growth is putting upward pressure on interest rates. Last week England raised its rates a quarter-point and this week Switzerland followed suit. That puts upward pressure on our interest rates and the 10-year yield went above 5%. Asset allocation models kicked in and the market went through a discovery phase. Selling pressure tested the “bid” to the market and it determined the appetite for equities amidst rising interest rates. The bulls won this round and the selling never really took hold.

Higher interest rates that result from a strong economy don't conflict with a bullish market. The latest rise in interest rates resulted in and a positively sloped yield curve and that is considered bullish. Wednesday, the Fed released its Beige Book. It is published every six weeks and it is a collection of economic activity from various regions in the US. It showed rising economic activity and moderate inflation. Once the numbers were released, the market rallied more than 15 S&P 500 points. The surge was created by buying, short covering, and expiration related buy programs. Thursday the market followed through on a benign PPI number. I'm writing this report a day earlier than normal so I will take a stab at Friday's action. I believe that the CPI will be in line with expectations. It might even be a little "hot". The market will look past the number and post modest gains. Most of the expiration related fireworks have passed and the afternoon could get quiet. “Merger Monday's” have been bear slayers and the shorts will not get aggressive going into the weekend.

This week the economic numbers are very light. They will be highlighted by housing numbers, leading economic indicators and the Philly Fed. Housing starts and building permits might shed light on that sector. From my perspective the numbers can only be bullish. So much gloom and doom has been factored in to housing that I doubt a bad number will weigh on the market.

Last week LEH and GS posted solid earnings but they failed to light a fire under financial stocks. I believe this sector is a sleeping giant and it may be the source of the next rally. Here are the major companies that will announce earnings next week; BBY, DRI, KMX, FDX, GIS, CC. The electronics, auto and restaurant stocks might shed light on the strength of consumers. However, I'm more interested in FDX and GIS. FedEx’s activity will be used to measure economic growth and General Mills will provide insights on food inflation.

Solid earnings, steady interest rates at the low end of the 50-year range, global expansion, moderate inflation, full employment and reasonable P/E ratios all point to a stable market. I am firmly in the “buy the dip” camp as long as the market is above SPY 146.

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