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.

HOTS Weekly Options Commentary

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Peter Stolcers

In last week's commentary I mentioned that the market would be influenced by earnings releases more than by economic data. Currently, 50% of the S&P 500 companies have reported. The earnings growth rate for this quarter stands at about 6% which is significantly higher than the forecasted 3.5%. The market responded by making new multi-year highs and even tech stocks participated. Cyclical stocks led the way and it’s apparent that the US economy is lagging the rest of the world. Companies that generate substantial revenues overseas fared the best. They benefited in two ways, they sold their products and services in growing economies and they realized windfall profits when they converted those revenues into US dollars.
The dollar has continued its plunge and it is close to making a new 30 year low. Friday the GDP came in weaker than expected and it showed a 1.3% growth rate in the first quarter when 1.7% was expected. This was the weakest rate of expansion in four years. To make matters worse the GDP Price Index increased 4%, the most in 16 years. Normally, this would raise stagflation worries and the market would have a huge negative reaction. In this bullish environment the market is able to shrug off all negative news.

From an interest rate perspective, Friday's news will not have a material impact on the Fed’s policy. The weaker economic activity would justify easing, while the "hot" inflation number would justify a rate hike. These two conditions offset each other and rates will remain unchanged. Next week the big number to watch will be Friday's Unemployment Report. A rise in the unemployment rate and wage inflation could spark a sell-off. I still believe that earnings will be the focal point and here are a few stocks that will announce earnings:
HUM, RSH, VZ, TSN, ZBRA, APC, MTW, XRAY, VRTX, ADM, MHS, RAIL, MRO, NVT, PG, MET, OII, GRMN, MA, SPW, RIG, TRW, AGN, DVN, NVEC, PRU, TRN, SNY, CELG, OSK, TRMB, WLT, RIO, QLGC, SBUX, EK, WY.

We have positions in a few of the stocks and I believe the earnings will be positive. As long as the earnings keep beating estimates and the growth rate is above 6%, I believe the market will continue to rally. The SPY needs to stay above 143 during the next few weeks for me to justify a bullish bias.

In the chart this week you can see how the market has broken out to new highs. The decline in February was a mere head fake. At the time, I had to play the percentages and trade as if there would be another leg down. With where the positions marked Friday, we are almost back to even and that maneuver simply cost us some momentum. The good news is that I’ve modified the service so that it can be more adaptive and effective.
Relative to last week, this week’s releases will be subdued. There don't seem to be as many market movers. Many traders will have the old adage, "sell in May and go away" in the back of their minds. It is possible that we will get a pullback that will test the breakout. If that price level holds, it will present a buying opportunity.

Gasoline

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Sally Limantour

Gasoline prices are on the rise with prices up another 2.46% today. Nigerian rebellions are increasing and threatens to destabilize the region’s sole source of oil. In addition we have more US refinery problems, threats to European gasoline supplies, talk of Belgium union oil workers going on strike in early May (Belgium accounts for 4% of Europe’s refining capacity) and the current stocks-to-consumption ratio at 21.0 days. This is more than 2.0 days below the seasonal average and below levels that typically follow summer’s peak demand season.

Keep this on your radar - on May 21st Iran will begin rationing gasoline domestically, and shall raise the price of gasoline to the public by 25%. This will undoubtedly get interesting as Iran sits on 10% of the world’s proven oil reserves and yet after 5/21/07 the Iranians will be allowed to only buy less than one gallon of gasoline per day. What will those people do in Tehran and other cities? We can be sure the black market for gasoline which is already a “thriving market” will become more active.

Neurochem (NRMX)

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David Miller

Keep an eye out on Neurochem (NRMX) today. The option prices have been very high on this one because it has become yet another battleground stock in the biotech sector. The company’s Alzheimer drug, Alzhemed, has been derided and praised on Wall Street, and the biotech bulls and bears have been shooting the heck out of one another for months in the name.

This morning the company announced, in quite an impressive press release, that their primary analysis of the trial had failed. They blame imbalances between the treatment arms for confounding the results. They are going to an alternate analysis, which we presume is a Cox regression analysis, that has the ability to account for and correct those imbalances.

The problem is that when a primary analysis fails, the FDA can choose to ignore any subsequent analyses. The company is careful to say in their press release that the Cox analysis was prespecified, but there can be a great deal of variation in what “prespecified” means in terms of what the FDA might accept.

Bottom line is the trial failed at the first look and it will take several weeks to get it straightened out.

Look for options players to start rolling their May positions out a strike or two and for the action in the stock to be wild. Is this the next Dendreon (DNDN)? I doubt it but we have to wait and see what the data are and hope we can get a straight story from management on exactly how “prespecified” this Cox analysis was.

Equity Index Update

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Brad Sullivan

And the Midcap 400 shall lead them. Was it not just 6 weeks ago that the market suffered from an intense bout of “forced” liquidation? Now, here we are looking at new all-time closing highs in the Midcap 400 Cash index and watching the remainder of the indices get within shouting distance of their 2007 highs. The NDX was helped by comments from the CFO of CSCO when he stated that earnings would be towards the high end of estimates during Friday afternoon. The stock immediately shot from 26 to 27 and provided the lift needed to boost the index market on a quiet Friday afternoon.

This morning the indices are called higher based on several factors. First we had strong rallies in the Asian markets and that has carried into European trading. In addition, Sallie Mae agreed to a private buyout that put a nearly 50% premium on the stock. Finally, earnings from two key banks C and WB were much better than anticipated.

Of course, we cannot forget our old friend the currency market which was given the all clear signal from the G7 over the weekend to continue the “carry” trade with abandon. Indeed, overnight the Euro/Yen continued through its respective all time high and the USD/Yen appears not too far behind. This liquidity driven currency trade has produced one of the key elements for tracing index moves both domestically and abroad. Simply put, comments out of the G7 meeting show just how sensitive the central banks of each nation are when it comes to the carry trade. Given the tremendous growth of funds using this trade over the past several years, it is easy to imagine how ugly a liquidation of this trade would end up being for the global markets. Indeed all one has to do is look at charts from last spring and a few weeks ago when hedgies were forced to liquidate positioning under “margin call, gentlemen” types of situations. Nobody wants that again, and the banks appear both coordinated and committed to ensure that the “carry” will not end the game.

This morning there is a potential early setup on the buy side. Even with are sharply higher open, players have been getting used to selling the open and getting long somewhere in the first hour for a walk the line rally. If players get caught trying this and the dealers come in on the buy side, look for significantly higher pricing in the first hour.

Finally, the final 2 hours of Friday’s session produced a significant volume increase in the SPminis and ER2 contract, when compared to their respective YTD and 5 day averages. Considering we settled on the highs of the session, this week looks potentially quite bullish.

Outlook for the US Dollar

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Sally Limantour

The dollar was at this level back in the 1978.. We have tested this area a number of times and there are two predominant perceptions right now.

The dollar will be supported down here. Going back to charts in the 1970’s there have been 4 times we have tested this level and bounced – 1978, 88, 92 and 05.

Here is the logic:

Foreigners currently own roughly half of our Treasuries and securities and are Buying over a trillion dollars worth every year. It is in their best interest to not let the dollar fall much further.

The other idea is that many other countries have interest rates that are higher than the US and their currencies are more attractive.. Britain, Germany, Australia and others are all higher and their ministers of finance are talking more about concerns over inflation and raising rates to control it. The US, however is still hinting at lowering rates in the future to offset a weak housing market.

So this is the dilemma and we have to watch this closely as it will have repercussions for many markets.

While I hold CD’s denominated in different currencies ( as a way to be short the dollar), I am eyeing a potential short term trade of going long the dollar. On Friday morning, looking at the Market Profile chart we had a high level of trade occur at 81850 and I went long. It took off and I aggressively moved my stop up and captured a good part of the move and am now flat.
(see Market Profile chart – look at 4/13 and see where the horizontal line is longest at 81850. It then gapped up and traded crazy before settling at 81950.) This technical set up together with the chatter getting loud on dollar bashing while talking up the Euro (German exporters calling for 1.4000 in the euro) made me get a bit contrary in the morning).

Options may be the way to play this as a way to get long with a good risk/reward strategy. I am still bearish the dollar in the big picture, but it may be overdone and the first perception mentioned may move the market higher.

The following charts are:


1. Long term chart of US Dollar

2. 30 minute chart of US Dollar

3. Market Profile of US Dollar