A note from Brad Sullivan

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Dear Friends,

I would like to announce that earlier this month I accepted a trading position at a proprietary firm here in Chicago and will no longer be able to appear in the HA Virtual Trading Room for live commentary. From a subscriber point of view, this clearly comes out of left field, yet I felt this opportunity to be too good to pass up.

As a compromise, I will supply Hamzei Analytics with my morning commentary and two intraday updates to be posted in the SuperPlatinum Virtual Trading Room only. Feel free to continue emailing any questions or comments to brad@group6trading.com.

I have enjoyed our trading discussions online and believe that we have created a unique venture within our virtual trading room. While I may not be on the screen each day, you will have my market thoughts and feedback throughout the session, albeit in a different format.

Thanks for all the fun over the past several years,

Brad

SubPrime Worries Persist

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Sally Limantour

Last week the main focus was on the subprime mortgage mess, hedge fund blowups and widening credit spreads. The contagion effect is making folks nervous and the S&P closed under the 50-day moving average for the first time since March. Whether this is a pause, a consolidation or the beginning of a big correction remains to be seen, but higher interest rates are definitely not supportive. As the technical analyst John Roque recently wrote when looking at the 10 year yield and seeing that it has moved above the 50 and 200-day moving average, “It’s a trite line, but if the yield were a stock we’d be getting long.” A black cloud hanging over the bond market creates a vicious circle – more subprime downgrades increased counterparty risk, potential belly up hedge funds and liquidation which can feed on itself.

Bank stocks are vulnerable as Bank of America is breaking an important trend line and has been under the 200 day moving average since May. Wells Fargo, Wachovia and JPMorgan are also technically weak and looking as if they are struggling under the 200 and 50 day moving averages. This does not bode well for the market in general. Adding to the list of negatives Friday 14 Democrats from the US House of Rep. proposed a bill that would raise taxes on “carried interest.” This would double the tax rate for this type of income and take billions away from private equity chiefs.

While everyone cheered the $4.1 billion Blackstone IPO, on Friday, Andrew Barry ponders in Barrons this weekend if it “could be a high water mark for the private equity business.” He is concerned with higher rates, more conservative lending standards, tax changes and increased competition for the buyout business.

The week coming up we will be focused on the FOMC meeting starting Wednesday and any hints as to the direction in interest rates. The bulls are hoping they will remove that annoying inflation language, but I doubt we will hear that. Friday will report the core personal consumption expenditure deflator which is an inflation gauge the Fed likes to watch and the consensus is for an advance of 0.2%.

Speaking of inflation, Pizza Hut is forced to raise its prices on our favorite American food due to a 55% increase in the price of cheese. The signs are everywhere and I am afraid that producers cannot contain price increases and it is popping up in the food you buy and the places you dine.. Now, when you go to order your large cheese pie they will charge what it costs to purchase a large cheese and pepperoni pizza, but you won’t get the pepperoni.
It will be interesting to see what ConAgra Foods and General Mills has to say about commodity prices this week as they report earnings.

The week is full of economic reports with Friday being the most active day. Traders will be watching oil prices, subprime news, hedge fund fall outs and interest rate wording from the meeting. Technicians will be paying attention to the 50-day moving average, the percentage of Dow stocks above their 50-day moving average and the number of new highs at the NYSE which has been constricting lately. We will also be monitoring volume which was large on this last downdraft. In market profile terms 1528.00 is an important level and if we are unable to capture that early the market should stay on the defensive. Trades that worked well last week were shorting opportunities as failures at the previous day’s value area low were rewarding. Once the market failed there it was typically a fast run down.

This morning we are coming in with the Shanghai market off 3.7 % and most commodities down with gold off $4.00.

Finally, A psychologist/trader I admire has this to share about a health crisis and trading lessons: http://traderfeed.blogspot.com/2007/06/three-life-and-trading-lessons-from.html

HOTS Weekly Options Commentary

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Peter Stolcers

I’ll start by saying that I am bullish over the next six-month period. Earnings are strong, valuations are in-line, interest rates are relatively low, employment is high, inflation is in check and global economic growth is robust. On a short-term basis I'm starting to see some warning signs. The market has run up and we have not seen a decent correction in a very long time.

In the chart you will notice a few developments. The volatility has increased greatly and it is depicted by the long red-bodied candlesticks. Two recent events tell me that the resistance level at the all-time high is growing. The first event happened two weeks ago when we had the gap down after the all-time high was established. That was followed by a very bearish down day. After the market had one of its typical snap back rallies, it was not able to challenge the previous high before it was slapped down. That move came this Wednesday. The market had a positive opened and it looked like it might make a run at the high. Instead, it made a key reversal and by the close the S&P 500 futures had lost 20 points. Thursday’s rally was a half-hearted and once the market was unable to add to Wednesday's decline, the buyers came in to shakeout the short sellers. Today the market is off to a weak start and I’m writing my comments an hour after the open.

Concerns over the Bear Stearns hedge fund bailout (exposed to sub-prime lending) are putting pressure on the market. Overnight, the Shanghai Index fell 3% as traders believe that a rate hike there is eminent. In the U.S., interest rates have been creeping higher and next week the FOMC convenes. I believe their comments will dictate stock prices for the next month. The Fed has already stated its bias favors an increase. Earlier in the year, traders were wondering when the Fed might ease, now they are wondering how long the Fed will hold off on a rate hike. This realization will be bearish for the market as traders adjust their models. Short-term, I am starting to think that the SPY 146 level will be tested soon. That will ultimately set-up a great buying opportunity. The market needs to get accustom to higher interest rates. Once it does so, all of the other pieces are in place for a continued rally.





The economic releases from this week were balanced. Slower housing starts were offset by an increase in building permits. A robust Philly Fed number showed the highest level of manufacturing in two years, however, manufacturer’s sentiment for the next six months fell to its lowest level this year. Next week will be filled with economic releases (Consumer Confidence, Durable Goods, PCE price index, Chicago PMI) but they will all take a back seat to the FOMC comments.

Two earnings releases are of particular interest next week (WAG, LEN, NKE, CAG, BBBY, MU, PAYX, RHAT, MON, RIMM). RIMM and MON have run up and we will see if they are able to meet raised expectations.

Given my longer-term bullishness, it will be difficult for me to short this market. The snap back rallies have been extreme and I don't want to get caught in any of them. I will adjust by reducing my long positions and by selling call credit spreads on stocks that I feel are weak. The retail and restaurant groups are strained and they will experience selling pressure for the next quarter. The key is to identify the underperformers in each group.