Equity Index Update

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Brad Sullivan

“Coleman, it was all a dream, a terrible awful dream.”
So says Louis Winthorpe III in Trading Places…

Indeed shorts came across one of the most painful of sessions in a long, long time. Wasn’t it just a scant week ago that the SPX undercut the trading low for our recent move lower and the DJIA broke below 12,000? Ah, what a few words – or in this case, absence of wording can do for a marketplace. In removing the tightening bias from their statement, the FOMC set off the buy stop heard round the world. How aggressive was the pandemonium? In the first 5 minutes after the announcement, the SPmini contract traded over 124,000 contracts with a face value of NEARLY $9BILLION. At the end of the first 30 minutes of trading post – FED, the contract traded a value of over $33 BILLION.

Rumors were abundant that institutional buy stop orders were triggered above 1430, 1437, 1441 and 1445 in the SPM7 contract. By the time the bell rang the indices, as a collection, rested just beneath February 27th levels and have seemingly announced to the world that this correction has run its course. Again…what a difference a week makes. One interesting area of trading has been the performance of the long end of the curve since the announcement. Initially, the bonds surged higher…today they rest -18/32 from yesterday’s close as players have time to reassess some of the initial thoughts. For index buyers this is not the scenario they wish to play out. Keep a close eye on potential trigger points across all markets the next several days as we adjust to this new found optimism.

A quick note on the internals…the NDX cumulative breadth reading (2006 start date) has rallied significantly since last week and now rests just below recent highs. In addition, the SPX (top 100 issues only) cumulative breadth reading reached a new high with yesterday’s close (2006 start date). These readings are used as a thermometer, and right now it appears as though there may be more upside to come.

Options Update

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Peter Stolcers

Ever watched a horror movie where the victim knocks out the villain only to see him come back to life? You just want them to strike the fatal blow while they have the upper hand. That’s how I feel right now. The bears had the bulls on the run, but a flesh wound was all they could muster. If there were a good old fashion correction, I have a list of stocks I’d like to buy at lower levels. I believe there are deep seeded issues that need to be resolved and I will not turn bullish until a few things happen.

First, I would like to see the SPY 141 level hold for at least a month. Second, I would like to gauge the impact of so called Liar Loans (aka “Alt-A” loans) as they convert from fixed to ARMs in the next month. Third, I want to see corporate earnings growth rates stabilize. Earnings are growing, but at a slower rate. The market drop that we have seen the last two weeks seems to be nothing more than a warning shot. I have included some arrows in the chart that help to explain my rationale. The big down day is very visible and to the right of it you can see the first arrow. The market made an intraday low and snapped back before the close. The next arrow is actually quite constructive. The market makes a new relative low and it closes near the low of the day. However, if you look at the next trading day (3rd arrow) you will see a snap back rally. The fourth arrow shows a big intraday drop and another snap back rally by the close. My conclusion is that the bears simply can’t destroy the “bid” to the market. Since the last decline, the bulls have regained their confidence and they know that a push above SPY 141 will create buying pressure.

To add fuel to that fire, most of the other markets are on the rebound as well, and the Chinese market is back to all-time highs. If this market decline were the real deal, we would have seen a number of down days in a row, and there would have been lower relative lows and lower relative highs. This head fake has cost me money, but my psyche is intact. I know that a clear perspective will help me identify the next opportunity and I’ll make my money back. As for today, I’m not expecting anything new from the Fed. The market has the momentum it needs to move higher and a non-event will be spun in favor of the bulls. I’m prepared to sell my puts and go to cash for a while if that scenario plays out. It will be “dead till the Fed” and you should take your lead from the SPY 141 level.

Nasdaq-100 Cash (NDX)

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Tim Ord

Today the Nasdaq 100 (NDX) rallied strongly into our targeted area near 1810 range. We have been targeted the 1810 for the last couple of weeks in that a significant high volume gap form their on 2/27. Most large high volume gaps are tested. High volume Gaps are also like magnets, drawing the market towards them. Once the market gets to the gap the gap turns into resistance. Today’s test is just a bit short getting into the gap level but tomorrow most likely the gap will be tested. If the gap at the 1810 range is tested on 10% or greater lighter volume, and then close below the gap level, a sell signal will be triggered. We have an intermediate term sell signal in force now and the gap test will be a shorter term sell signals.

On chart is of the Nasdaq 100 in the Ord-Volume format. The Ord-Volume format takes the average daily volume in each leg and display that result on the graph with a line chart. The average daily volume in a leg measures the energy that leg has. By comparing the up leg and down leg energy you can see which way the market is pushing. Referring to the Ord-Volume chart, a big expansion of energy came in on the February decline which increased 26% from the previous up leg and shows the trend has turned from up to down. The current rally leg has 21% less energy then the previous down leg and shows the down leg is still dominant and in force. The gap is being tested so far on 30% less volume and implies the gap will hold as resistance. If volume does not pick up to 318m shares tomorrow a sell signal will be triggered.


Today’s is Spring Equinox and can mark significant turns in the market. We are expecting the market to be down most of this year. We have an intermediate term downside target to the 1400 on the NDX which is a 22% decline from current levels.

Heard on the CME Floor

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From our Virtual Trading Room Transcript
March 21, 2007
about 1214 PDT

Brad_Sullivan> hearing that LOTS of buystops
Brad_Sullivan> were triggered
Brad_Sullivan> throughout this move
Brad_Sullivan> on the institutional side
Brad_Sullivan> worth remembering
Brad_Sullivan> most RATE CUTS
Brad_Sullivan> are net bearish for the index markets
Brad_Sullivan> 6 months out
Brad_Sullivan> keep a close eye on 810.50 in ER2 M7
Brad_Sullivan> and 1440.50 in SP M7
Brad_Sullivan> if we keep drifting lower

Dollar Weighted Put/Call Ratios for Commodities

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Clyde Harrison, President and Director of Brookshire™ Raw Materials Group, Inc., a former principal and operator of Beeland Management Company, L.L.C., the manager and commodity pool operator for the Rogers International Raw Materials Fund L.L.P. said: "the dollar weighted put/call ratio for commodities is a great sentiment indicator as it helps to identify reversal points. It is a breakthrough technology with vast potential for improving a trader's timing."

Here is a sample report: www.hamzeianalytics.com/pcr_comm.htm

From our Press Release (courtesy of PRWeb)

Inflation Update

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Sally Limantour

The Chinese rate hike over the weekend initially scared traders as last night the market opened lower. Initially, the dollar fell and the metals came in unchanged to a bit higher.

The Shanghai index proceeded to gain 3% which defied the typical stock market reaction to a rate hike. Are we out of the woods? Are the sub prime woes behind us? Two things that disturb me are that unlike the sell off in May/June ‘06 the break from the recent highs has been lead by the financials. One has only to look at the chart of the bank index to see the weakness.

The other issue is inflation. With US core CPI now at 2.7% y/y (well over the Fed’s 2% cap) it is hard to imagine the Fed cutting rates. I think this is what is meant when people say the Fed is between a rock and a hard place. There still seems to be a predominant belief that the Greenspan put will be adopted by Bernanke and the Fed will, once again, save the day. I think we have to look at the reality of inflation and realize the importance of food prices in particular.

Food prices are reaching high levels, particularly the category of ‘food away from home’, such as restaurants, take away food and so on. This component alone has reached its highest annual rate since April 1991. In addition food at home prices are also picking up. After reaching a low of 0.8% in May 2006 prices have now accelerated to almost 3% annual inflation. Corn prices alone have doubled and this has caused problems ranging from run away tortilla prices in Mexico to beer producers raising their prices. No longer are producers able to contain prices and have to now pass it onto the consumer.

Another aspect of the inflation picture is that whereas last years sub component prices were dominated by oil prices we now see a broader participation by other areas. Shelter remains at elevated levels, medical care inflation is back at its higher levels and apparel inflation is unusually inflationary at the current time.

In addition money supply growth is accelerating and the high level of asset prices around the world is now a problem for central bankers. Going forward
it appears we will be finding out where liquidity begins and leverage ends.

Tomorrow the FOMC begins a two day meeting and housing starts will be reported. Last January’s housing starts fell more than 14% due to the bad weather, so all eyes will be on February’s number. For today, next resistance is 1415 with strong R at 1418.75. Breaking the 1399-1401 level will clearly put the market on the defensive while rallies that hold above 1415 area should attract buying.

Equity Index Update

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Brad Sullivan

The index market continues to mirror its recent behavior of Yen/Dollar watching and is called to open higher by nearly 0.5% this morning in the SPM contract at 1406.50. The Yen/Dollar has fallen by about -0.7% relieving fears of the carry trade unwind – at least for the time being. This week is highlighted by the FOMC 2-day meeting that begins tomorrow and concludes with Wednesday afternoon’s statement. Typically, the indices have rallied into and through these meetings over the past several instances…however, with a peculiar batch of economic data it appears difficult for the market to get a clean gauge on Dr. Bernanke’s next play.

On the Monday merger mania front…Barclays Bank and ABN Amro are in discussions to merge and become a $160 billion behemoth. Even the once “given up for dead” Service Master was able to find a buyer in Private Equity Land for nearly $5 billion. If one adds the Blackstone IPO to this picture, it is hard to be overtly bearish looking down the road. I certainly do not want that statement to be misconstrued as the Sub-Prime blowout may have ramifications that we do not see on the horizon…however, I always try and construct my ideas around the money…Follow the money, is a message I try and repeat to myself when I think the markets are at a crossroads. Simply put, the liquidity driven marketplace remains intact and that is being seen in the appetite for deals. Let’s not forget that somehow LEND was able to find a buyer for some of its debt leading to rally in the entire Sub-prime sector. In my opinion, the short term picture remains shaky, but, it is worth reminding ourselves how resilient this equity market has been during this bull move. The fact remains that this is a liquidity driven bull market. Fears are rampant about the Carry trade being unwound and if something triggers a mass covering it would be awfully ugly for the indices. However, if the unwinding is gentle one has to wonder if the worst of this move is behind us.

As for short term trading, the best indicators for market direction remain GS, GOOG and the YEN/Dollar. Odds appear to favor a short term bracketing in the trade as we move from one end to the other in a range around 1.5% in the SPX.

HOTS Weekly Options Commentary

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Peter Stolcers

Last week I did not see the activity on Tuesday's sell off or on Wednesday's rally back to tell me that the lows are in. A "V" bottom will be formed when there is fear and volume on the way down and confidence and volume on the way up. The bears want each market rally to find resistance a little sooner than the time before. Eventually, the market will drift lower and test support. When it fails to bounce after a decline and we get 2-3 consecutive days of selling, fear will set in. We have not seen that yet and bullish speculators have not been scared out - yet. The bid to the market continues to surprise me. Thursday we saw the market rally after a "hot" PPI number. Friday morning we woke up to global market weakness and it looked like we might open lower. The CPI came in "hot" and it exceeded estimates by .1%. Then, consumer confidence fell to its lowest level in 2 years. The market dismissed both economic indicators and staged an early quad-witch rally.

During the week, Norway and Switzerland were added to the list of countries that have recently raised interest rates. If our interest rates remain unchanged (as opposed to going higher), this puts downward pressure on the dollar. Recently, the market has been declining when the dollar falls.

Single digit earnings growth is expected this quarter and the market lacks a catalyst to drive stock prices higher. I feel that the price action is getting heavy and that the market has shouldered all of the bad news it can take. If you look at the chart you can see the SPY 141 resistance level. The longer the market stays below that level, the more significant that resistance becomes. Also note the blue dotted lines in the chart. You can see that the market made a lower low on the second wave of selling and the bounce was weaker. Sellers were more aggressive this time around and they started hitting bids before the market could make another assault on SPY 141. The message is pretty clear to me.

The housing market is weak and with inflation on the rise, the Fed will not be in a position to help out by lowering rates. The slump will have to cycle through the economy on its own. If you're wondering how important housing is to the economy, here is an interesting statistic. From 2001 - 2006, 50% of US job growth came from this industry. That includes lending, sales and construction. Sub-prime may be a small part of the total picture, but there is a ripple affect. There are many more marginal homeowners with adjustable rate mortgages that will convert from a low 3-year fixed rate to an ARM in the next year. This is certain to affect consumption. The economic releases are very light next week and they are highlighted by more housing data.

Equity Index Update

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Brad Sullivan

BEWARE THE IDES OF MARCH…so warned Mr. Shakespeare long, long ago. Maybe he should have written beware selling new lows for the move in the index markets the day before the ides of March. The tide turned awfully fast across the board for those trading indices yesterday in the late morning. After undercutting the previous lows made from our downdraft in the last two weeks buyers came rushing in and fresh shorts were forced to pay up in order to cover. When the dust settled it was a fabulous show of strength from the Hedgies ahead of this critical expiration…and to that end I say touché.

This morning the index markets, which had been trading higher earlier, are called to open lower on the heels of our PPI reading this morning. The reading came in at +1.3 on the headline and +0.4 on the core…well above expectations on both counts. However, this reading is notoriously volatile and fickle – my assumption is that the markets will wait until we get tomorrow’s CPI before making any rush to judgment about inflation. Accordingly, I would take this open with a grain of salt and assume that the path of least resistance will be towards the upside.

March Madness begins today, I would anticipate a lightening of the volume by mid-morning ahead of this annual gambling extravaganza. Beware…

Wednesday of Options X -- The Low we put in Today, was that the Bottom you were looking for?

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Fari Hamzei

Not exactly !!

I was asked that question a number of times earlier today, both by professional and institutional traders.

IMHO, the market is following the Script we put out two Sundays ago on this blog (see http://hamzeianalytics.blogspot.com/2007/03/market-timing.html).

Our Script calls for a volalitity retest in the +4 to +5 sigma region. That should translate to a test of our last May 2006 high (~1326 on SPX), now acting as a critical Support. If that support level does not hold, the next logical stop is 1280 on SPX (July 2006 highs).

Here are two Volatility Indices that we follow very closely. (I am in the Prof. Robert Whaely's camp (the orginal VIX inventor), now called VXO -- and yes, I don't like the new VIX, as it has to do with its construct).


During this vol retest, we should see the VXO between the high 20s to low 30s, and

We should see VXN in the mid 30s before the dust settles. As far as its timing, with this week's quad-witching March Expiry as a backdrop, market should sell thru Friday and Monday ahead of Tuesday which happens to be Vernal Equinox (First Day of the Spring or "Norouz" in Persian).