Equity Index Update

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Brad Sullivan

Thus spoke the FED…and the market could not make up its mind in terms of what to
do with the new information. After the initial spike lower, the indices came roaring back to new intraday highs, followed by another push lower, then onto contract highs. After a nice consolidation period below intraday highs, the indices made a final push – and failed to gain higher ground. At the close of trading, longs (mostly of the day trading ilk) were selling out positions and this led to a respectable discount from fair value readings across the index board. This morning, the offer continues, with the SPM trading lower by -4.25 at 1511.25 and a full -6.00 from fair value. Asian trading was mixed to lower and Europe is trading moderately lower.

Today’s action should provide a solid litmus test for the indices as the FOMC
provided about what was anticipated. Is there enough fuel in that statement to push us higher? Or are the indices a bit tired and looking at a trading decline? Tomorrow’s PPI reading, next week’s CPI reading and option expiration should help provide the marketplace with a catalyst for our next directional move. In the meantime, it appears as though the indices are trading in a “capped” rally environment. If we look at the SPM contract, the inability to push through the resistance zone of 1515 to 1518.50 (for any extended period of time…as I know we traded up to 1519 yesterday) is a short term negative. We have now tested this zone each day this week and have yet to make a strong foothold at this zone. Accordingly, there seems a good chance that the index will make a push for the support zone between 1507 and 1504. And this is where it gets a little tricky. IF we get selling pressure in this zone, there is potential to push the contract back towards the 1491 level, creating a trading range scenario that could provide numerous buy and sell points over the ensuing weeks. However, the net change in that time frame would be negligible in the market. In fact, this scenario holds up pretty well with some of the extension readings we are seeing in various indices.

Now that I have put out a longer term scenario, let’s focus on today’s session. In the SPM contract…Resistance remains between 1515 and 1518.50; a 30 minute close above
this zone is CRITICAL for the upside to continue. However, as I wrote earlier in the
week, it is no place to chase ‘em. Wait for the market to forge into the 1521 to 1522 zone and look for afternoon buying pressure to build for a late pop towards 1526. On the flip side, given the weak close (relative to fair value) and the negative open – I suspect we will see the index make a push towards the key support zone between 1507 and 1504. IF this zone is taken out on a 30 minute closing basis it will shift the momentum to NEGATIVE and should lead to a trade around the 1500-1498.50 support zone. One should be careful on the timing of these trades as the potential for a 1502.50 print followed by a bounce to 1508 or so is certainly in the cards and it will be critical to focus on the closing prints at the 30 minute intervals to get the proper trade setup. Again…don’t chase ‘em at points that are too extended as we are still in a contained trade and in these sessions you must counter the moves at key support and resistance levels.


I have include a few charts today…the MIDCAP 400 extensions on both the 20 and
200 day MA readings is getting a little top heavy at current levels. In addition the DJIA 20 day MA extension is quite elevated. The final chart is one showing the volume in SPminis on a YTD, 5 day MA and yesterday basis. Notice the explosion after FOMC (and that is to be expected) and its subsequent failure to generate both volume and price at the key resistance zone in the late afternoon.

Equity Index Update

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Brad Sullivan

The index markets held serve after an attempt to push the indices lower failed to pick up steam at short term support levels. A late morning, lunchtime push higher allowed the market to probe, but never get above the unchanged level in all but the NQ futures. Volume was moderate ahead of both the CSCO earnings report and today’s FOMC statement.

As for CSCO, the stock was not able to match “whisper” expectations in its report and during the subsequent conference call. The issue is called to open about -1.45 at 26.90. This has put moderate pressure on the futures with the NQ contract trading lower by -5.00 at 1900.50. The SPM is trading lower as well, at 1510, down -2.25 on the session.

While we may have some moderate trading around the CSCO news in the first 45 minutes today, the odds play seems to be one of hands-in-pocket until the 1:15cst FOMC release. Attempting to handicap this release is generally futile as one verb added or subtracted can mean a few billion in market cap changes hands in the SP over the ensuing minutes. In other words…keep it close to the vest post announcement. Expectation wise, the markets are continuing to expect similar wording from the FOMC as it has received in the recent past. A change in this wording will move the markets…but to what extent?
From a trading perspective, the question we have to ask ourselves is pretty simple…is it time to fade this move and put a counter trade to work? So far, only the DJIA (as I showed yesterday) is extended from its 200 day MA. All things being equal, this represents a good time to get flat (if long the DJIA) or look to premium sell/outright sell the index. HOWEVER, the warning trade in this environment is that we are at the cusp of a major mega-cap upside explosion. If this scenario occurs, the extension readings could move sharply, possibly towards the +15% zone. Accordingly, proper use of stops and such are needed when fading a beast.

The other night I pulled down a book from the coming of age master J.D. Salinger and turned to a page that had a Taoist tale. Without rehashing the whole section, I will include this portion which is the tale end of a conversation between a Duke and his horse breeder that is about to retire. The breeder has sent the Duke to another breeder…a few months later the new breeder sent the Duke a horse that was supposed to be a dun-colored mare, but, turned out to be a coal-black stallion. When given this news the old breeder was amazed at how advanced his friend had become in choosing horses.

“In making sure of the essential, he forgets the homely details; he looks at things he ought to look at, and neglects those that need not be looked at.”

A traders mantra if I have ever read one…accordingly I have enclosed 4 charts for viewing today. One is the NDX extension readings for the 200 and 20 day MA’s. So far, the readings are elevated but not overbought.

Also included is an analog chart showing the performance of the Euro/Yen and SPX over the past year. The linkage is simply amazing. The third chart is showing the cumulative SPX breadth for the top 100 issues only. This continues to show the mega-cap extension as the upside ride continues. Finally, the last chart shows the 2007 performance for both the NDX and SPX top 100 from the OPEN print, in terms of net breadth for that session. You will see that yesterday showed a divergence in the NDX/SPX performance…it can possibly be explained by buying into the CSCO number. However, that seems a bit simplistic and it could be that mega-tech will continue to move higher.

Equity Index Update

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Brad Sullivan

24 wins and 3 losses over the last 27 sessions for the DJIA as it moved ahead of 13,300…should one dare look to fade this beast? I have enclosed a chart that shows the differential from the current price and the 200 day simple MA in the DJIA. The chart begins on the first day of trading in 2006. As you will see there has been a move to higher ground or “extension” away from the MA. Historically, an extension this large in the DJIA has led to one of two scenarios. A sideways trade that allows the MA to catch the current pricing levels or a fast bout of selling that ends around the -4 to -5% levels.

I have also enclosed a chart on the MIDCAP 400 and its 200 day MA differential. This index is showing similar action to the DJIA, however, it has not extended to new recent highs. Still, it is worth paying close attention to as this index was the first major one to hit all-time highs during the current rally.





This morning, the indices are called lower on global index selling. After the close of trading, CSCO will report its quarterly earnings. This morning, HPQ announced stronger growth forecasts for the next year and the stock is called moderately higher. More importantly is the currency situation which has seen a bid placed in the Yen/Dollar and Yen/Euro. Keep in mind the strong correlation between these pairs and the global index markets…indeed we are inextricably linked.





Given our called to open area of around 1511 in the SPM contract, few zones of support and resistance have changed from the past two updates. 1515 to 1518.50 remains as the first resistance zone and with yesterday’s moderate probe it is becoming even more formidable in the near term. Support is seen from 1511.25 to 1509.50…below this zone we should move towards the key support zone from 1507 to 1504. This zone should be choppy and liquid, leaving plenty of opportunity for short covering. A 30 minute settlement below this zone could lead to increased selling around the close of trading. IF THIS SCENARIO PLAYS OUT it will be due to buyers going hand-in-pocket ahead of the FOMC tomorrow. As I pointed out yesterday, the indices have not been at their highs moving into one of these meetings and a reversal trade is potentially upon us. In the meantime, don’t chase ‘em at areas that are too low as bottom fishers and short covering could provide a lift at any juncture…and keep an eye on the currency pairs.

Gold

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Sally Limantour


The metals sector was strong last week despite the Asian holiday, a stronger dollar and weaker oil. Copper jumped 7.2% and surged through key resistance while nickel (+10.6%) and lead (+4.3%) made new highs. This time of year is traditionally supportive to the metals as Chinese demand tends to recover following its New Year celebration and construction typically picks up in Europe and North America as the weather turns warm.

All eyes are on the gold market as we approach the $700 resistance area. Currently there is talk of a Peruvian gold mine going on strike which would threaten supply and overnight AngloGold Ashanti posted a $97 million profit for the last quarter ending in March. In a bigger picture there are other supportive factors occurring.

More and more gold mining companies are limiting their hedging practices and last week the Grand Daddy of them all, Barrick unwound a large hedge and took a loss on the position. Prior to this Barrick had been active in hedging - selling much of its production at pre-determined prices. Now, however they spent $557 million to get out of their hedging contracts and this allows them to take full advantage of rising gold prices.

The Yen continues its slide and reached a record low in Europe and this combined with a weaker US dollar continues to support gold. In Tokyo gold is challenging 26-year highs and traders are buying gold as a hedge against the weaker yen. What I find interesting is that while many investors/traders look at the stock market in terms of value relative to gold or euros, the “public” traditionally does not. Recently, however the media is highlighting these dynamics and people are starting to see that “value” is not necessarily what it appears to be. In the NYTimes last Saturday an article titled, A Comeback for the S&P (If the Yardstick is Dollars) speaks volumes. These articles are raising the awareness of gold as a way to measure value and more importantly, that it is rising relative to stocks, bonds and other asset classes.
http://www.nytimes.com/2007/05/05/business/05charts.html?_r=1&oref=slogin


China and India continues to be buyers of the yellow metal and even with tightening measures in China this does not seem to put a damper on demand. Money supplies are surging and while inflation numbers appear under control we cannot ignore the fact that 18 of the top 20 central banks have double-digit increases in their money supplies.


One inhibiting factor to the price of gold has been persistent legacy central bank selling. This has been a consistent theme where the legacy banks agree on an amount to be sold within a given year. As of the end of April 2007 the tonnage remaining of the announced sales will be down to 617.5 tonnes. Julian Philips of the Gold Forecaster writes that this may be ending soon. He emphasizes, “If sales continue at the rate we have seen over the last two months at around an average of 10 tonnes these sales will last just over a year before they are complete and will terminate. (http://www.goldforecaster.com/)

Finally, the technical picture looks healthy with gold consolidating above $675 and unable to go below $670 during April’s break. As you can see on the chart the trend remains up and corrections are becoming smaller.

Equity Index Update

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Brad Sullivan

The index markets continued their winning ways with another close at or near the high marks for this 50 month bull move. Further firming things was a sharp rally into the futures close of trading that led to the SPM contract settling nearly +3.50 to fair value. This morning, the indices are holding around their respective unchanged levels. There is little activity in Europe as Great Britain is on holiday.

Clearly the focus of this week will be on the FOMC meeting adjournment which takes place Wednesday afternoon. Throughout this push higher in the marketplace, the tendency has been to rally into and through the meeting. Thus far, there seems little reason to fade the conventional trading wisdom. However, I will point out one differential and that is that this meeting will mark the first time the FOMC will meet with the market trading at all-time highs. Reversal potential is worth keeping in the back of one’s mind for Wednesday afternoon and Thursday.

On Friday, I focused on the first resistance zone between 1515 and 1518.50 in the SPM contract. The trade pushed into that zone early, but did very little trading in that zone. Today’s action, particularly in light of the bullish close on Friday, should lead to greater probing and duration in this area. Once again, I will find it difficult to chase the long side up here and would rather wait for a clean move above the 1520 level before playing the long side in the late portions of the session.

Support areas today in the SPM contract will be from 1513 to 1512; 1510.20 to 1509.50. If we get below this zone, look for a push lower – most likely in a sell stop driven mode during a light volume time of day (late morning/lunchtime) towards the key support zone of 1507 to 1504. Only a settlement on an hourly basis below this zone would put the recent upside swing in short term jeopardy.





One index to key on today is the ER2 contract, which had a large burst of buying into the futures bell on Friday afternoon. The contract has traded in a 0.8% RANGE since our rally ended on Wednesday morning. In addition, this contract has a strong history of “follow” from strong/weak closings. Looking to be a buyer around the opening few minutes of trading for a push towards 840 seems plausible.

HOTS Weekly Options Commentary

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Pete Stolcers

Last week started off on a sour note. Many of the overseas markets were closed Monday and Tuesday and we did not have their strength to forge a path higher. Monday was a quiet day and the market drifted lower. Tuesday, the bears tried to get something going but by midday the market reversed and closed on a high note. The next three days all had positive price action and the S&P 500 made another multi-year high. It’s now within striking distance of an all-time high and that can be seen in this week's chart.


On the economic front, there were a number of releases that collectively had little impact on the market. Productivity was up, unit labor costs were down and average hourly earnings came in lighter than expected. A higher than expected ISM number offset a slight increase in the unemployment rate. Next week's economic highlights include the FOMC meeting on Wednesday and the PPI on Friday. I expect the Fed to stand pat and for the rhetoric to remain unchanged. The Fed has confirmation that the economy is slowing and that inflation is rising. Both conditions are offsetting (from an interest rate perspective) and a monetary policy change cannot be justified at this time. The PPI is likely to error on the high side; however, the market should the able to shoulder that news as it has in recent months. In conclusion, ignore the “noise” created by the economic releases.

Earnings, M&A and share buybacks are propelling this market. Last week, cyclical stocks with international revenues posted very strong earnings. The biggest merger news came Friday when rumors circulated about a potential Microsoft/Yahoo marriage. The market placed greater importance on that event than it did on the weak unemployment number. This week we will see the last big round of earnings announcements and here is a sampling of the companies that are about to release their results:
AMT, NILE, WYNN, FLR, MDR, MCK. MLM, MVL, HSIC, TYC, CSCO, ERTS, PCLN, ENER, LEAP, FWLT, LM, TM, ONXX, TXU, FLS, TK, WFMI, KG, LAMR, PDX, PDE, NVDA, AIG, GG.

There are a number of stocks that I like in the above list; however, these companies don't pack the punch needed to have a major market impact. All things considered, the market needs to take a break and I believe that choppy trading lies ahead this week. Most of the earnings are out, we don’t have end-of-the-month or option expiration influences and the economic news is relatively quiet. Many traders will have their golf clubs packed in the trunk in case the activity slows down. This might sound like a joke, but it really happens. Traders would rather golf than force a bad trade in quiet markets. Chances are a deal or two might get the week started, but then everything will calm down ahead of the FOMC. Once that passes, things are likely to settle down again. This week I want to look at two pharmaceutical stocks.

Equity Index Update

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Brad Sullivan

The index markets are celebrating takeover news on the domestic and global fronts this morning. MSFT appears ready to launch a bid for YHOO which is higher by about +14% in the pre-market session. In addition, Reuters is bid sharply higher on another takeover bid in the news arena. European markets are higher, but not substantially and one wonders if these markets will remain quiet ahead of a Monday holiday.

As for the domestic action…up, up and away remains the singular theme, particularly in the large cap arena. The market, as I have pointed out in the last few posts, is at a critical juncture – one that has the potential to lead to continue and generate significant trading upside from current levels. This has been the “skeptical climb” in my opinion, a rally that continues to defy explanation after a frightening plunge a mere 6 weeks ago. The trail of tears seen underneath the market are those bids being placed by desperate shorts trying in vein to cover positions that, on the surface, seem to be coverable only at the markets current pricing. And that is painful for those short around the 1450 level.

Today’s trade should be interesting and potentially volatile as the SP probes into new contract highs and rests within the shadows of the ATH made in March 2000. Keep in mind that the index made its high close on consecutive sessions at 1527 and change. The intraday high was 1552 and change, followed by a sharp reversal that session. What do we need to learn from this brief history lesson? Simply this…when markets are trading to/near/through All-Time-Highs, one should always be on the lookout for the potential profit taking reversal trade. This morning, assuming we open around the current bid of 1514 in the SPM contract, and the fact that the employment report was a touch soft, I have to consider today – POTENTIALLY SPEAKING – today to be one of those reversal sessions. The key word is POTENTIALLY as selling short this market has been a nail in many traders coffin…and yet the setup is there. A news induced bid to overall marketplace and new contract highs off a questionable employment reading.

As for support/resistance zones…here is what I am looking at for today’s session in the SPM contract.
Resistance should be found in a zone from 1515.50 to 1518…any 30 minute close above this zone is a step towards a potential short covering “blowoff.” However, I would not be chasing the long side up here. Instead, I would wait to see if the market can extend into the 1522 area before making any bets. If the SPM can hold up in 1521/1522 area the table should be set for a strong move into the bell and early next week. If the SPM fails to gain traction in the first resistance zone (15.50 to 18.00) then a sale for a move towards 1509 support is in the cards. Support is found between 1510.20 and 1508. Below this zone, look for the contract to move back into its chop zone from yesterday between 1507 and 1504.50.

Akamai Technologies (AKAM)

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Fil Zucchi

Back on September 15 of last year I sold the bulk of my then very large Akamai (AKAM) position. The stock was around $46.50 and I explained the principal reason for selling as follows: “The fundies story still seems intact, in fact it may still be getting better. My concern is that everyone seems to be realizing this now. AKAM has set a pattern of beating estimates and raising big in the face of skeptical analysts. Now the analysts are beginning to get in front of the company, and the bar is getting raised.” The stock proceeded to touch $60 without me.

Fast forward to today:




the business has only gotten better; the company is growing revenues and net income at a 50% clip, and generates cash way in excess of that, thanks to $300+ M in loss carry-forwards, which will allow it not to pay cash taxes until well into the next decade; it has no net debt; its basic business is all about the efficient delivery and management of IP data. If you think that’s a big market opportunity today, wrap your head around this little statistic: as of last month, 70% of 334M Americans were internet users; as of last month 10.4% of 1.3 billion Chinese were internet users; and as of last month 3.5% of 1.1 billion Indians used the internet – can you say unpenetrated turf?

If both the top and bottom line growth rate next year slows to 37.5%, and falls by 7.5% every year thereafter until a final rate of growth of 15%, by 2011 AKAM will have revenues of about $1.5b and EPS of $3.05, and will have grown at a 26% average for the next four years; The stock closed today at $43.

These are verbatim exchanges from last week’s AKAM call with my highlights:

Analyst (Kept anonymous to avoid unnecessary embarrassment): Just from a high level perspective, I think you’ve trained the Street here that you guys put up good results and typically there’s an expectation [inaudible] numbers move up. If you look back at this quarter, is there something that surprised you in the market? Are we kind of going through the hypergrowth phase of this? Is there some change fundamentally out there?

CEO Paul Sagan: No, actually, I was very pleased with the results. What we said last year – in the first half of the year is, we were surprised at how fast the market was accelerating. I think if you look at our guidance this year it was for some pretty bold growth. If you look at the mid range, it’s almost 45% revenue growth and now that we reported a quarter almost a third of the way through the year, we still feel very comfortable that we’re going to see what I think is exceptionally strong growth off of a large number last year and even stronger expansion on the bottom line. So, no, I don’t see anything fundamentally different and extremely pleased with the performance. I think that some people may have gotten very comfortable with the fact that we kept beating the guidance early last year and decided well, that’s just the way the world works and we kept saying over and over again, we used the same methodology. We’re conservative, we’re trying to understand what’s going on in our business, we moved the guidance up very strongly that part of last year because we had confidence in the numbers, and we continue to have confidence in the numbers and people should listen really carefully to what we say.

Analyst (Also kept anonymous to avoid unnecessary embarrassment, even though given the prior question it might serve her well to be publicly embarrassed): Okay. And then if I can just follow-up on Todd’s question, so this is the first quarter in six quarters you haven’t been over the high end of guidance for the quarter. And I heard what you just said about you say over and over you can’t keep beating and raising. I’m wondering was there any disappointment for you internally in this quarter and did anything change between the time you gave guidance in January when presumably some of the prices on the renewals in December were set and the current time...

CEO Paul Sagan: Let me stop you right there. No, we always tell you exactly what we think is going to happen. We got some very pleasant surprises last year and we explained why the phenomenon that we thought was going on that we then captured in our guidance going forward. We gave what we thought was accurate guidance and actually we came in exactly there, so were very pleased. In fact I’d like to be exactly right on it, like to give you an exact dollar and exact penny number and then hit it because it says we can understand everything that’s going on in our business. We came in near the high end of the range. I thought it was a very strong quarter and we continue to be very optimistic about the year.

In my humble opinion, the two borderline demented questions you read above encapsulate the reason why the stock is down $12 in five days, and why I’m back into the stock and hoping for lower prices still to get even longer. Who says analysts cannot hand us some good opportunities.


Editors' Note: Both the Author and several HAFN Affiliates own AKAM.

Equity Index Update

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Brad Sullivan

The index markets survived the “sell in May and go away” slogan as buyers stepped in after sharp early morning selling. The brunt of the selling was felt in the Russell 2000 and NDX, with the SPX and Midcap 400 performing a touch better. However, the sell side was unable to push the larger cap indices beyond moderate net losses and buyers crept back into the session. When it was all over, the indices finished with net slight gains for the first trading day of the month.

The biggest question facing the market today will be one of “follow.” Simply put, can the indices continue to build on yesterday’s bounce and push through Monday’s trading highs? This question should be put to the test in the DJIA and SP as they are the clear market leaders at this juncture. If the SPM can get a 30 minute close above 1500.20, it would suggest a push towards contract highs can be reached today.

I have included a couple of charts, one being a YTD performance on certain commodity contracts – and looking at the performance it should be hard to fade an equity market with Copper up 20%.


The next chart is the SP minis 30 minute volume flows. This table is based on the opening 5 minutes as one reading, followed by 30 minute bar volume readings until the runoff 3:00 to 3:15cst session, which receives its own bar. The volumes are then compared to the YTD average for that time frame and a 5 day MA of that same frame. As you can see from yesterday…the SPM made its low during a massive volume bar from 9:00 to 9:30cst. Accordingly, players were able to walk ‘em back up after the sales were made.

Equity Index Update

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Brad Sullivan

The index markets were marked lower with afternoon selling and “hands in pocket” buying as players decided not to support the bids at the recent high zones. The lead index selling was seen in the Russell 2000 and Midcap 400 indices. Both markets, which have underperformed in the last two weeks (after hitting all-time highs), were hit as dollar flows seem to be moving towards large cap indices. This can be seen in the table below which lists the spreads between the DJIA-Russ 2k, SP and Russ 2k, DJIA and Midcap 400 and the SP-Midcap. As you can see, the large cap indices put a dramatic rally on the board versus their smaller counterparts. Of course…the Midcap is still higher YTD versus the DJIA and SP. But, the relative weakness in the Russell is signaling a pretty dramatic shift in money flow. In fact, the SP has traded to its highest level vs. the Russell since 2003 – the beginning of this bull move. This is significant. And its significance lies in the fact that every bull market must rotate its leadership…if this signifies a dramatic shift towards large cap equities I suspect we will continue sharply higher throughout 2007.

I have also included a couple of other charts…one of which shows the top 100 issues of the SPX and their daily plotted net change from the opening print (on a breadth basis). What is interesting about this is that the distributions on the top and bottom end are significant – statistically speaking – than one would anticipate. Essentially, this shows the potential to let winners run in the course of one’s day trading.


The other chart I have placed is the Russell 2k and its % differential from its 20 day MA. Yesterday the index closed below its 20 day MA and this has the potential to lead to some more aggressive selling in the near term.