Timer Digest Commentary

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Fari Hamzei

1410 on SPX is our next support.

Since we have not seen the much needed volatility retest (see my February 28th post http://www.hamzeianalytics.net/2007/02/volatility-my-two-cents.html), the current hostage crisis with Iran (British Royal Marines arrested during a routine patrol and taken to Tehran), coupled with Crude Oil Futures at six-month highs and the SubPrime Contagion, should be the impetus for this all crucial retest.



I suspect, unless Iran Nuclear Issue with the UN and this hostage crisis with the UK are resolved quickly, we will visit March lows (1364) and shake the trees till we get rid of the weak longs.

HOTS Mid-Week Options Commentary

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Peter Stolcers


I've been pretty vocal about how the market has discounted every shred of bad news. Even now, as the evidence mounts, the "spin doctors" are looking for a silver lining. Normally, the Fed Chairman has a positive influence on the market. That might still happen today, however, I heard concerns about a slowing economy and elevated fears of inflation. Productivity has slowed and resource utilization is very high. If companies absorb higher costs, the profit margins will be impacted. If they pass on higher costs, the consumer will experience higher rates of inflation. Neither outcome is desirable. I can't wait to hear the first positive twist on these developments. Chairman Bernanke is always very hedged in his statements and there were comments about full employment and a "resilient consumer". He also stated that the recent $2 spike in oil was not factored into his statements and it needs to be. In other words, sustained oil prices above this level could cause them to move rates higher. Gasoline inventories are low and there has been a draw on crude. Driving season is upon us and with the unrest in the Middle East; prices are not coming down anytime soon. The market spiked when it broke above SPY 141 and part of that rally was short covering. As you can see in the chart, we are not able to hold the gains. It is likely that we will test SPY 141 today and we may see a sharp decline. The market has been able to string 3 negative days together and that could be very damaging for the bulls. The bears would prefer to have a steady decline because it is sustainable. The large "air pockets" and snap back rallies are more noise than anything else. If we close below SPY 141 and there continue to be consecutive declining days, get short. The option implied volatilities are on the rise, but they are not expensive. I will buy in my put credit spreads and I will buy puts on weak stocks if that happens. I believe the bears will be able to drive the market lower today.

Crude Oil, VIX and S&P-500

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Sally Limantour

The relationship between oil and stock prices is on the front burner again as prices skyrocketed with May crude oil trading to $68/ barrel. “Oil surged $5 in 7 minutes late yesterday on speculation the U.K. would mount a rescue attempt.” (Bloomberg)

As the situation between Iran and the UK gains attention and concerns over the stability of the Persian Gulf and the Straits of Hormez move to center stage we now have concerns over the US naval forces there. This many ships in the Persian Gulf are of great concern… but should we be surprised?

Back in late January I voiced concerns over the changing “guard” in the Middle East. For the first time President Bush was putting in a US Navy Admiral as the US Central Command Commander-in-Chief. Admiral William Fallon was appointed on January 30, 2007. That seemed suspect to me as what had been up until now a protracted land war was soon, in my opinion, “going to see water - lots and lots of water. Can you really have a navy admiral running things and not have some ships in the picture? The geography of this war may be shifting.”

Stocks are acting defensive. We have geopolitical concerns, a slowing economy and inflation in some of the commodity prices. My favorite trade is long gold/short stocks right now and will continue to hold this.

The VIX is still relatively low when looking at a monthly chart and I wonder how long the VIX will find support in the 12-13 area. Will it soon have a higher low – 15-18 as its support line as we move into heightened concerns in the Middle East and inflation kicks up?

The next two are market profile charts for S&P-500 and Russell 2000 e-minis . The long horizontal letters represent supply above the market.

Commodity Prices

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Sally Limantour

Commodity prices have been moving higher as all three indices are up. While many of the markets are higher, the grain prices are lower. Many of you have emailed me asking why in last week’s class I was liquidating all of my grain positions. What technical indicators were telling me it was over? Other than RSI being over bought and trading near the top of the BB it was really a money management decision. All of these markets – corn, wheat and soybeans are up exponentially since first accumulating long positions in September and with the USDA report looming ahead of us on March 30th, I felt it was prudent to say “Thank You” and stand aside. It is not often that prices double in a matter of months as we saw in the corn market. A lot is riding (both politically and economically) on this report, so why be a hero? We can always get back in and hopefully at lower prices.

The energy markets are all moving higher and crude oil is 1.0% higher, while RBOB gasoline is 3.4% higher. The world is watching the situation with Iran and the UK and concerns over the Persian Gulf and the Straits of Hormuz are moving to center stage.

The weather is getting warmer and driving season is upon us as the nation’s refineries are low on gas! The spreads are reflecting this tight supply as the nearby spreads are trading to a premium to the deferred spreads. This does not look like a tight situation that is going away anytime soon.
Any breaks into last week’s range I would be looking at buying. Also the May/ June spread at 8 cents/gallon looks possible with stops under 5 cents. (note you can look at the mini contract and the symbol is QU).

Finally with commodity inflation heating up it is looking more and more to me like the bonds could trade to the 109 area. I will be looking for set ups to go short.

Equity Index Update

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Brad Sullivan

The index markets continued to show a tremendous amount of resiliency as early selling off the New Home Sales reading for February turned into a terrific buying opportunity. When the dust had settled, each index closed at their respective intraday highs in the CASH indices…however, heavy selling hit the futures market during the run session from 3:00 to 3:15 CDT and pushed each index significantly below their respective fair value readings. This morning, the indices are called to open moderately lower from those discounted closing readings, with the SP M7 trading down -1.50 at 1443.75. This would equate to a cash open of nearly -4.50. Keep a close eye on the programs as we move throughout the session as there will be many given the current disparity between the cash and futures.

Anyone want to buy a new house? Apparently not as new home sales plunged to 848,000 versus a consensus estimate of 985,000…a mere -14% below the estimates. In addition, the January reading was revised lower by -172,000 homes. Further, the inventory of unsold new homes shot to 8.1 months – a 16 year high. Accordingly, the indices plunged on this news as the SP M7 went from 1447 to 1433.50 within 45 minutes of the release of this report. However, the sell side could not build on this push and the market stabilized. Once the indices began to hold steady, around late morning, it became increasingly apparent that day traders were stuck short and players drove the bid increasingly higher. The key question remains whether or not yesterday’s rally from the lows was end of the quarter induced as funds try and mark positions higher…that may very well be the case, but, any way you slice it --- it was a pretty impressive bounce.

This morning will bring consumer confidence, but the main thrust of the markets collective focus will be squarely on FED Chair Bernanke's testimony on the Hill tomorrow on the state of the economy. In addition, with the end of Q1 upon us…it would seem plausible that we have not seen the near term highs just yet.

HOTS Weekly Options Commentary

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Peter Stolcers

The interim commentary last Wednesday explained much of what transpired and the last two days of trading was subdued after the snap back rally. The big drop that we saw in February was caused by uncertainty and now traders feel they have been able to quantify those risks. The 9% drop in the Chinese market was profit taking and now it is back to all-time highs. The sub-prime loan crisis is "contained" and the extent of the losses has been calculated. Inflation is on the rise, but the Fed removed references to tightening. Apparently, this was just a giant hiccup and there is nothing to worry about.

I'm fairly skeptical on all of the points. Chinese investors are bidding stocks up while their government is tightening credit. They are known to be huge gamblers, the valuations are stretched and they have yet to experience a major market decline. The sub-prime loan defaults might be known, but there are a large number of Alt-A loans (Liar Loans) that convert from low fixed rates to ARMS in the next month. Inflation is on the rise and I believe that the Fed changed its rhetoric because it has concerns about economic growth.

I don't like to bring up the "S" word (stagflation) but it needs to be considered. Next week Durable Goods, GDP, Core PCE and the Chicago PMI will help us gauge inflation and the strength of the economy. The only earnings release of interest next week is TIF on Monday. I expect to see the market challenge the old highs, but I doubt it will breakout in the next two months. For it to make new multi-year highs (with follow through) we need to gauge the next quarter's earnings and we need a slowdown in inflation. Lower oil prices would be a great start. As I've stated, I'm market neutral at this level and I won't get bullish until time has passed and the recent decline can truly be considered a hiccup.

The VIX almost dropped to historical lows Wednesday and I'm surprised that the market discounted risk so quickly. The IVs picked up a bit Thursday and it might signify hedging. Contrarians are jumping on the extreme put/call ratios and they are saying that this indicates excessive bearishness by option traders. I don't see it that way. Bearish retail put buying would result in higher, not lower IVs. There is much more option selling taking place than buying. Margin debt is still at the levels seen in March of 2000 and I believe the retail trader is as bullish as ever. Incidentally, the put/call ratios were very high back then too. They have been right so far and I congratulate them.

We are long oil, gold and retail and short tech and newspapers. The chart this week identifies some key levels for the SPY.

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