Currencies and S&P 500

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Sally Limantour
February 14, 2007

The Euro is on fire this morning and is now getting back into the value area that was rejected in that last sell off on Jan 3rd –Jan 5th. The market has gone above the resistance area of $1.3055. The European growth data yesterday was friendly and the boost this morning is from remarks by Austrian Central Bank Gov Liebscher when he said the bank is fearful that inflation is going to accelerate. There is other news out today that much of the euro’s rise this morning is due to demand from, “Russian names running into offers from an Asian account defending a $1.3110 barrier.” Market News.

The dollar rejected the 85.00 again and I thought we could see a fast move to test recent highs above 85.00 then fail, but it cannot even do that. Despite falling oil prices and rising bond yields the dollar cannot rally and this now has a feel of taking a more serious downturn.

The S&P (ESH7) opened strongly and had a range extension early on. Stops on short positions were hit at 1444. Closing above 1446.50 is short term bullish and put my short term model into a buy yesterday with stops below 1437 (1430 on cash index). Medium term model is neutral but expect to see a sell off in the next 1-3 months as the probability of a wave of risk aversion is rising.

Cupid Bernanke speaks today and I expect to hear the required inflation warning with the “on hold” theme.

Happy Valentine’s Day!

High Beta Stocks: This Move is Suspect

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From our Virtual Trading Room Transcript
February 13, 2007
about 0730 pst

Brad_Sullivan> pretty good buy program to start the hour
>> Roberta_Brown has joined room #SuperPlatinum
Brad_Sullivan> but...so far no follow
>> Thomas_Hall has left room #SuperPlatinum
[Fari_Hamzei] hi Roberta
[Fari_Hamzei] HBs say this move is suspect
[Fari_Hamzei] we shall see
Thomas_Bohn> yep
Thomas_Bohn> giving it up
Thomas_Bohn> with NQ underperforming now
sent sound: train
[Fari_Hamzei] BUY pgm hits NYSE

Equity Index Update

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Brad Sullivan
February 12, 2007

The index markets took a sharp turn from multiyear/all-time highs around the late morning Friday. The SPH7 contract traded from early morning/contract highs of 1457 to a low made just before the final hour of trading at 1436.75. Heavy selling was reported in the pit – a rarity these days – through Bear Stearns’ desk…the talk was that a fund sold nearly 5,000 SPH7 contracts from 1448 to 1438. Essentially, this puts the index markets in a rather interesting position, just underneath the highs of the move, but losing momentum as the market continues to grind at certain price zones. The question at hand seems to be – what will drive the market over the next several sessions? The answers could be at hand this week as Fed Chairman Ben Bernanke testifies before congress beginning on Wednesday, Retail Sales and PPI later in the week as well as option expiration. Keep in mind this statistic…in 2006 we had a total of 4 expirations that witnessed significant downside price action.

One trend that continued on Friday afternoon was the “mark up” into the session’s end. This phenomenon is particularly strong in the Midcap 400 and Russell 2000 contracts. Both of these contracts rallied 0.4% on closing orders and have once again left a significant differential between the cash market and futures fair value calculations. Over the last two weeks this game of marking ‘em up has been at its strongest during sessions when the indices are lower. Keep this little nugget in the back of your mind during sessions that “look and feel” like they should settle on the lows.

Today’s action should be critical in terms of market psychology. I suspect we will continue to widen our intraday trading ranges, which should lead to a greater opportunity for day traders. Could it be that volatility is starting to show its shadow?

Currencies and Equity Indices

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Sally Limantour
February 12, 2007

The G7 meeting is behind us and those wishing to ride the carry trade train still have a green light as there was little in the way of direct criticism, but certainly ongoing warnings of the risk. At what point these warnings become an outright threat is tough to determine. It seems it is business as usual unless we either get intervention by one party or another, coordinated intervention or some type of regulation/taxation of carry trades.

Given the continued sell off in the Yen, the seasonal weakness into April and the Commitment of Traders on the neutral side, there is still more downside with 81.50 the next target. However, March madness is set to begin and this is the time of year when traders say the yen always rises at the end of the fiscal year due to repatriation flows. It is not necessarily true, but the perception gets a lot of attention. A bear trap rally coming soon? Stay tuned…

The dollar is well bid this morning following Treasury Secretary Paulson’s message in Germany, “a strong dollar is in the interest of our country.” Here we go again, echoing the mantra of other Goldman Sachs folks who moved into the Treasury. The dollar is also reacting to Finance Minister Kamal saying Qatar is not going to turn away from the dollar and price energy in terms of Euro. Finally, we had the Fed’s Poole and Pinalto both voicing concerns about inflation which has bonds on the defensive and the dollar strengthening. We are once again flirting with the 85.00 level in the dollar index and my guess is we may push through it this time.

The stock market finally had a slight move in volatility and a decent reversal/sell off on Friday. My short-term model is still on a sell signal. Medium and long term indicators do not warn of a wave of risk aversion, but they are building towards a high level. Short positions were established in different indices (ES, NQ, ER2) as we hit my resistance area stated last Tuesday ( 1458-1460). The high was 1457.75 and that was close enough. The fact that early Friday morning proved the 1457 area to formidable resistance made the short position a bit more favorable. Possible targets on the downside are 1434, 1425 – 1429.50. A key area coming in today is the 1446 area and closes above 1452.50 should negate the short-term picture.

The HSBC Holdings and New Century Financial news are in the background causing concerns for the housing industry as is the Thursday report from Dresdner, "The Great Unwind is Coming," FT02/09/07, which was a detailed report detailing the negative properties inherent in many hedge funds.

This Wednesday and Thursday, Fed Chairman Ben Bernanke (more affectionally known in our circles as "Uncle Ben") provides the semi-annual report to Congress. We have economic data filtering in starting on Wednesday and more on Thursday and Friday. Given the Fed is “data dependent” I guess we should be too. It will be curious to see if we reject/accept the first resistance area of 1445.50-1446 early today and how the market behaves going into Wednesday.

Here is my favorite quote over the weekend, “We are not selling a meal – we are selling a whole experience. You cannot put a price on it.” This form the manager of Mezzaluna restaurant in Bangkok justifying the 1 million Baht, or $29,240 meal for the Epicurean Masters of the World II dinner. I was not invited, but I love to see the menu.

HOTS Weekly Options Commentary

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Peter Stolcers
February 10, 2007

Last week there were only a few economic releases. Productivity rose 3% and unit labor costs were only up 1.7%. Workers are being paid more to produce much more and those statistics could be used to defend concerns over wage inflation. The Senate passed the minimum wage proposal by a landslide last week and the impact of rising hourly wages will be debated in future months. Fed official William Poole stated that economic growth is sustainable and inflation is largely in check. His comments set the stage for Chairman Ben Bernanke who will deliver the Fed's formal economic forecast to Congress when he testifies on Fed Monetary Policy next week(better known as Humphrey-Hawkins Report delivered semi-annually). That testimony will be the economic highlight next week, but there are a number of key reports including: retail sales, industrial production, housing starts and PPI.

Mid-day Friday, sellers came in and drove an otherwise flat market - lower. Earlier in the week, HSBC (the world’s 3rd largest bank) commented that it would take a much larger than expected write-off on non-prime loans. The initial response was contained, but as additional comments came in from other lenders and homebuilders, it was apparent the trough to the housing cycle is far from over. The financials and housing stocks were hit hard. Then, Micron Technologies (MU) warned of lower DRAM and NAND prices and the tech stocks joined the decline. From a technical perspective, the chart shows the long-term strength of the market. We will respect Friday’s price action and acknowledge that a 2%-3% retracement is overdue. However, we will place greater importance on the long-term trend.

In this week’s HOTS Report, we will position ourselves on the bullish side of the market while keeping our distance. The implied volatilities are still near historic lows and the VIX was only up marginally on Friday. We will sell put credit spreads on two stocks that have relative strength and well-defined support levels. One is a major financial institution that just announced an enormous buy-back and the other is one of the fastest growing gold producers in the world. We will also scale into a call position on a stock that has strong momentum and just broke out. Profits are on the rise as it caters to the rich, generating half of its revenue from Asia. If the market pulls back, we will add to the position. If the market rallies Monday, we’ll be satisfied with what we have.

Market Timing

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Fari Hamzei
February 9, 2007

Well......the PAUSE we talked about on Wednesday is here today........McClellan Oscillators foretold this move.......with both SPX and NDX putting in outside bar reversals today, we expect additional weakness next week (Feb Options X) till McClellan Oscillators get in to the oversold territory, maybe by Wednesday.

Video Part 1


Video Part 2

Heard on the Floor

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From our Virtual Trading Room Transcript
February 9, 2007
about 1136 PST

Brad_Sullivan> hearing from the [CME] floor
Fari_Hamzei > ????
Brad_Sullivan> that BSTEARNS
Brad_Sullivan> HAS SOLD NEARLY 4000
Brad_Sullivan> MAJORS
Cary_Kahn> wow
Brad_Sullivan> FROM 1447 TO CURRENT LEVELS
Cary_Kahn> nice day

Editor's Note: MAJORS is S&P-500 pit-traded big index futures contract.