Timer Digest Market Commentary

Fari Hamzei

S&P-500 Cash Index 1480 is our line in the sand. Low volume market advance below this level is only noise to us. What matters most now is that we are extremely overbought on the short-term basis. Next week, a short-term pause is a given. Once the market reopens after the Labor Day Weekend, we shall look for robust market action combined with healthy volume to chart the proper course for our equity markets.

I have attached our updated Timer Chart here for your audience.

HOTS Weekly Options Commentary

Peter Stolcers

When John Vogel, the founder of Vanguard Funds, says that in his 50 years of investment experience he can't recall this type of volatility, it means something. He is one of the industry’s innovators and you would think that he has seen it all. Huge day-to-day reversals have become the norm. From a trader's perspective it means one thing – uncertainty.

The bulls are very strong in their conviction and they believe that the current decline represents a fantastic buying opportunity. They point to the low unemployment rate, solid earnings growth, global expansion, and relatively low interest rates as signs of strength. Most quantitative models show that stocks are an attractive value.

The bears also have a long list of items to substantiate their bias. They point to increasing debt levels across the board (federal, state, municipal, personal) and they believe the credit squeeze is just beginning. From 2000 – 2005, almost 50% of the employment growth came from the housing sector. This number includes lenders, realtors, construction workers... everyone. They believe that the sub prime woes will continue to spread into other areas and the unemployment rate will rise. They also believe that hedge funds are highly leveraged and that the current credit crisis could force another round of liquidations. In a worst case scenario, they believe that some of the “fluff” will be taken out of the emerging market run up. Once profit taking sets in, that could have a cascading affect as investors run for cover.

Personally, I'm going to stay out of this fight. When a winner emerges I will know who to back. In the meantime, the implied volatilities are very high and option selling strategies make sense. This is a time to rely on stocks with relative strength/weakness and to keep your distance from the action.

Timer Digest Market Commentary

Fari Hamzei

We have four charts for your review this evening: SPX, RUT, XLF & XLE.

Let us start by stating that market action today, unlike two weeks ago, was not marked by forced liquidation, but rather it was an act of deliberate selling by many players. SP-500 Index (SPX) in the last 30 minutes of trading touched its last week's lows while Russell 2000 Index (RUT) took out its last week's lows in the first hour of trading this morning.



The next major support levels for S&P-500 Index (SPX) are located at 1421 (MS1) and 1387 (MS2). The fact that our coveted CI Indicator crossed its signal line below the ZERO LINE is very ominous. Today SPX also crossed below 200 day and 20 day Moving Averages. Down Volume to Up Volume on NYSE was almost 26 to 1. This tells us that last week the big players bid the market up to get out of their troubled positions and now they are getting ready for a big push down. A top ranked technical analyst on the Street and a contributor to my book, Master Traders, on Monday August 20th, wrote us that his SPX target for the bounce from the August 16 low is 1480. Four trading sessions later, the bounce stopped 60 cents below his target last Friday !!




Another technical analyst for whom I hold tremendous respect for (yes, he works for a bulge bracket investment bank) told us two weeks ago that his SPX downside target is 1300. If you look that how Russell 2000 (RUT) has behaved in August (never crossed its 200 day Moving Average during eight sessions during each of which it had a chance to do so). Because RUT normally leads the SPX, the RUT price action today means, the 1370 retest on SPX is a given, and the 1300 target for SPX is more plausible now than ever. Worth noting is that the next major support for RUT is 745 (MS1) which on the way up last year was a key resistance level.

The next chart really drives it home. Financials are in trouble after MER downgraded them today and when 20% of SPX is in trouble, we all are in trouble. CFC problems are far from over and if our calculations are right, we have not seen the worst of XLF. The next support is its MS1 located at 31.56 which it bounced from on August 16.





Of course the Market won't sell off in a big way till the mightiest fall and that honor goes to Mega Oil. Here we present you with its ETF (XLE) which closed today at 66.88, pretty close to its MS1 at 66.5. Keep an eye on that 10% of SPX, with key support at 64 (MS2) and its 200 day MA at 63. Once these levels are broken, the free fall should begin in earnest.

Have a great Labor Day Weekend.........




Editors' Note: MS1 stands for Monthly Support 1

HOTS Weekly Options Commentary

Peter Stolcers

Thursday's price action was very telling. The market had posted five consecutive late day rallies and it received a dose of great news after Wednesday's close. Bank of America was making a large investment in Countrywide Financial. In after-hours trading, the S&P 500 futures gapped 10 points higher on the notion that mortgage lenders present investment opportunities.

As the market prepared to open Thursday morning, those gains started to deteriorate. Soon after the normal trading hours started, the futures fell back to unchanged. At that juncture it was difficult to determine if the market had reached a resistance level, or if traders simply felt that the news did not justify the reaction. The momentum from the early reversal paved the way for bears to maintain selling pressure and they were able to push prices lower. By late afternoon, the market was able to stage another rally and finish unchanged for the day. The SPY 146 level was preserved.

This price action shows that buyers are willing to step up and buy stocks. It also demonstrates that we are not going to have a melt up rally. A great deal of nervousness still exists and any rally will be hard-fought.





Friday, strong durable goods orders created a bid to the market. That positive economic news was complimented by new home sales that came in better than expected.

The market avoided a sell off Thursday and it mounted a constructive grind higher on Friday. This week there are many economic numbers that will be released. Barring any new sub-prime defaults, I believe the economic numbers will show stability and they will pave the way for a continued rally. As we move above SPY 146, greater pressure will be placed on the shorts to cover. Next week, the market should also gain strength from end-of-month buying.

Here are some of the stocks that will announce earnings: SNDA, BGP, SAFM, BIG, BWS, JOYG, WSM, PSS, COST, CIEN, HRB, SHLD, TIF, DELL, FRO. As we saw this week, most of the bad news has been factored into the retailers. HPQ announced last week and I don't feel DELL’s numbers will pack any punch. Earnings will not have much of a market impact this week.

The shorts are no longer able to sell into every financial stock rally. There is a bid in those stocks and stability there will fuel the market since they comprise 20% of the S&P 500. It's still too early to give the all clear signal. This sell off was different from the one we had in February. Back then, there were phantom lending issues. This time around, the market had a more severe reaction as it counted the casualties.

As a side note, I feel the Fed has handled this crisis masterfully. They provided assistance when needed without compromising their stance or bailing out corporations that made poor lending decisions.