Thursday, May 17, 2007

Behind the REITs Slide

Behind the REITs SlideSocialTwist Tell-a-Friend
Fil Zucchi

As the drumbeat of falling REIT stock prices picks up steam, here is a look at the Commercial Mortgage Backed Securities' (CMBS) spreads as calculated by Morgan Stanley. The first shows AAA rated credit, the second BBB. Without getting into the underlying quality of properties for specific REITs, purely from a capital structure point of view REITs' stock prices probably correlate better to the BBBs than the AAAs credit.

I do not believe there are any "bombs" waiting to go off in REIT land. The elephant in the room however may be the large pension/insurance groups which have dumped billions and billions in private and public REIT's as a failsafe source of double digit returns. Those kind of returns are equal part greed and need, the latter as an effort to balance their returns to their long term liabilities. If these guys don't get their double digit returns on a consistent basis, they're gonna have "issues". It stands to reason that they may have a short fuse if things start moving against them, as any drawdowns would totally screw up their models. We also know that real estate is not exactly the most liquid of asset when "katie starts looking for the door".







Equity Index Update

Equity Index UpdateSocialTwist Tell-a-Friend
Brad Sullivan

The index markets chopped back and forth in a rather uneventful morning session before turning on the headlights and pushing to high contract closes in the SP and DJIA. Mr. Buffet and Buffet Jr. (Eddie Lampert) both made splashes with investment stakes in JNJ and C respectively. That news gave investors another reason to be buy stocks as the general assumption is that if two value oriented players are raising stakes in equity holdings, why not me? Amidst the buying in mega-caps came a sharp move lower in metal based commodities. It is worth noting that over the last three months there has been a “linked” move with these commodities and domestic indices. If the metals roll over…will equities follow? I hardly think it will be that smooth, however, this divergence is worth keeping close tabs on over the next few weeks.

Overall, the SPM market remains contained within a tight trading range…essentially 1518 to 1505 with some outside push attempts. From a trading perspective this has been an excellent pattern as the market continues to bounce off the 1507-04 zone and fail in the 1518.50 to 1515 zone. Given the strength of yesterday’s close in the large cap SP and DJIA one has to wonder if today will be the day to finally break above our resistance. Keep in mind that – TYPICALLY SPEAKING – the Thursday prior to expiration is a one-way street. In other words, the odds are suggesting a choppy morning, followed by a late morning push into the close of trading.

Accordingly, the zone of resistance from 1515 to 1518.50 remains crucial for the session. Any 30 minute close above this zone should be purchased – HOWEVER, if it is early in the session (within the first 2 hours of trading) I will not chase ‘em up. I will try and get long in that zone with some reasonable breathing room for a stop (30 minute close below 1513 would do it for me). IF the index takes off higher and does not allow entry, we should be on the cusp of a strong one-way street rally session. Typically, I would look for a net change greater than one Standard Deviation…now my 8 day reading in STDEV are very small (only a net of +5.50 would take it out) however the 22 day reading is at a more reasonable +10.20. Essentially, if a one-way street develops I would look for the market to trade +10.50 to +1300 on the session or 1528 to 1531 in a zone for exiting longs. Along the way look for some stoppage around the 1525-1526 level, but expect any dips to be shallow.

On the downside, if the market fails to make any inroads above the key resistance zone, one has to play for a move back towards the 1512 to 1510.50 support zone. Below this, look for a choppy move for a trade into the familiar 1507-1504 zone. Only a 30 minute close below this zone will open up the selling door for a move towards 1496. HOEWEVER, much like I wrote yesterday, in this scenario expect lots of chop and spike oriented action.

I have gone a little chart crazy today and have included several that are worth examining. One of the key elements in trading is focusing on what the market is focusing on. Accordingly, I have the resurgent IBM (now 6.5% of the DJIA weighting), the Yen Futures vs. SP futures chart, a possible divergence in the Copper and SP chart as well as potential blow off top move in the long DJIA vs short Russell 2k chart. These charts represent a nice cross section of what has moved the market the past few months.



















Wednesday, May 16, 2007

Equity Index Update

Equity Index UpdateSocialTwist Tell-a-Friend
Brad Sullivan

The index markets suffered a lunchtime reversal from higher levels in action that was whippy and aggressive. Volume flows were heavy, particularly around certain price zones in each contract. After the market pushed lower from its lunchtime high prints, the selling was reminiscent of the old days (think mid 1990’s) when the markets would have big swings during expiration week. The last couple of years volatility during expiration week has been infrequent…however, when it has appeared the moves have been violent and typically on the downside. I recommend caution on any rally buying for the remainder of the week.

Yesterday’s trading action continues to show that we are in a trading range. How long we stay and the size of this range remains the proverbial X factors. However, it is worth noting that given the sharp rally over the past 8 weeks (wasn’t it just March’s expiration week when the indices printed collective lows during Wednesday’s lunch hour?) we SHOULD expect some type of sideways to downside action. In fact, that downside action has been playing out in the Russell 2000 and NDX. The Russell is essentially trading at UNCH for the month and the NDX is holding just above its flat line level for May. Both indices are severely underperforming against the SP and DJIA. If this rotation out of small and into large caps continues it should bode very well for higher ground in the world of mega-cap indices.

Here are today’s levels for the SP : On the upside…Resistance should be found between the 1510.50 and 1512.25 zone. I suspect that this zone will find many willing sellers that are looking to capitalize on yesterday’s selling from contract highs. A 30 minute close above this zone brings us back into the critical 1515 to 1518.50 zone. Only a 30 minute close above this area will turn the dial to “buy”…however, at the risk of sounding like a broken record, DO NOT CHASE ‘EM UP HERE. Wait for the trade to settle back into the 15-18.50 zone and attempt to position build for a sharp bid into the close of trading. If unable to build the position, wait for the final 30 minutes before playing the “chase” game. In this scenario we should see a continuation move higher into the close of trading. The levels would be a guessing game, but I think 1525 to 1526.50 would be worth targeting.

On the support side of the equation, 1507 to 1504 remains my CRITICAL SUPPORT ZONE. Any 30 minute close below this zone should produce a CHOPPY downward push towards 1496. Be on the lookout for violent program trading spike moves both higher and lower in this scenario. In other words…1502 new low, 1505.50 trade, 1501 new low, 1504 trade is a sequence that could play out. Accordingly, one should get the chance to build a short position on any 30 minute close below the zone, in the actual zone itself at a later time (1504-1507). HOWEVER, I would look to put on a partial position on the first 30 minute close below this zone – at levels lower than 1504-1507 – in case the above scenario does not play out. If the market moves above 1510 after creating a 30 minute close below 1504, then all bets are off. On the way to 1496 look for support points at 1501.50-1500…1498.50 and 1497.

I have included three charts today…one 5 minute SP mini chart over the last 4 sessions with comments, a NDX daily chart and the spread chart that keeps on giving of long SP-short Russell 2k.











Tuesday, May 15, 2007

Equity Index Update

Equity Index UpdateSocialTwist Tell-a-Friend
Brad Sullivan

The table above was all the excuse needed for the index markets to move sharply higher at 7:30:02 CST. Currently the SPM is trading higher by 1.80 at 1510.50…however, that does not tell the whole story as the contract was trading around 1504 before the CPI release. The question now becomes this for today’s trade…can the indices hold this pre-market turnaround bid?

On Friday I wrote that the odds were moving towards a trading range type of environment of roughly 2% in SPM…essentially 1519 to 1488ish. We have yet to test the downside of that target range and actually came within a whisper of challenging the high level of the upside range yesterday morning. However, the indices could not sustain any buying at higher pricing zones and the SPM failed to generate anything but SELLING interest in the key 1515 to 1518.50 resistance zone. That zone is becoming more powerful with each failed attempt to push above it. The subsequent selling yesterday took the SPM to a shade under 1503 where it challenged a 30 minute close below the KEY 1507-1504 support zone. HOWEVER, the contract could not generate any sustained selling underneath 1504 and it proved to be a solid entry point for a trade higher into settlement as the SPM contract finished at 1508.70.

When looking at yesterday’s trade in the SPM it is becoming more evident that the contract is biding time between the 2 key zones 1515-18.50 and 1504-1507…whichever zone breaks first should produce “follow” price action. In “follow” I simply mean a momentum based push higher or lower. Once again, I will be using a 30 minute close for these zones to initiate any follow positioning.

On the resistance side today…1510.50 to 1512.20 should be a difficult zone to get above for SPM…if it moves higher in here the contract should once again challenge the key 1515 to 1518.50 zone. I suspect that any probing of this zone will take TIME as the long side will quietly use a supporting bid at/underneath trading levels to exhaust the sellers. Once/if the index gets into this zone, all bets are off as it should provide a choppy 2-way trade that gets a little bit higher than yesterday’s 1516ish trade. Look for a probe into 1517.50 and some short sales to push the index back down. If we get the holy grail 30 minute close above 1518.50 I still will not chase ‘em up. Rather wait for a pullback into the key zone to establish longs for a late session push higher. If this pullback does not materialize, wait for the final 30 minutes to establish a run higher into the bell position.

On the support side…look for the 1509 to 1507.50 zone to be the first support zone. This zone was the first level at which the market traded after CPI was released. Underneath 07.50 we have the critical zone of 1507 to 1504. Again, a 30 minute close above this zone should lead to a push towards 1496. Along the way, 1501 to 1499.50 is support and minor levels are found at 1498 and 1497.20.

ONE KEY TO REMEMBER DURING EXPIRATION WEEK…MUCH OF THE BUYING THAT TAKES PLACE COMES IN AFTER 10:00CST. IF THIS PATTERN HOLDS, LOOK FOR AN EARLY PUSH LOWER THAT CREATES A FIRST HOUR TRADING LOW, FOLLOWED BY A STEADY BID HIGHER INTO THE CLOSE OF TRADING.

Trade Sanctions & Commodities

Trade Sanctions & CommoditiesSocialTwist Tell-a-Friend
Sally Limantour

This morning we have a slew of more buy out news but so far the market is ignoring this and yesterday’s action was telling as we quickly gave up the previous day’s (Friday) value area which indicated a trend day down. Has anything changed other than Richard Russell who has been bearish for years has now turned bullish?

One thing bothering me in the background is potential protectionist measures. We need to watch the upcoming Chinese delegation on May 22nd to see if there is any rhetoric in this direction. Morgan Stanley’s Stephen Roach believes the US Congress has bipartisan support for trade sanctions against China and possibly Japan. In front of a tripartite Congressional hearing on trade issues last Wednesday he said, “My worst fears were realized. At the end of three hours of grueling give and take, I left capital hill more convinced than ever that the protectionist train has left the station.”

Today in FT there is an article titled Globalization’s losers need support which also hints at protectionist measures: http://www.ft.com/cms/s/3e39c1ca-022b-11dc-ac32-000b5df10621.html

Commodities were bashed across the board yesterday after their recent rally and this has a feel of across the board liquidation. Gold has the upcoming rollover from June to August which typically sees selling pressure. Physical demand is strong and any trade back to $655-660 should be supported. If not, this will be telling. Keep in mind that gold was nailed last year during this time frame and bottomed in mid June.

Monday, May 14, 2007

Equity Index Update

Equity Index UpdateSocialTwist Tell-a-Friend
Brad Sullivan

The index markets zigged when many a trader was looking for a zag on Friday. A tame headline on the PPI reading and a weak Retail Sales report may have rekindled some hope of a FED easing before the calendar year ends. However, Friday’s sharp bounce seems reminiscent of many moves during the past couple of years in the index world.

Seemingly many shorts, players on the sideline and active traders continue to wait for that elusive “green light” to get short. Days like Thursday get the interest going and players tend to walk into a bull trap type of session. The strong buying that hit the market around 9:10-9:20CDT (which remains a KEY time zone for relative highs/lows intraday) pushed the SPM7 back into the critical 1504-1507 trading zone. From there the index was able to register a 30 minute close above this key zone and turn bullish. However, as I pointed out on Friday, the odds were to get long back in the key 04-07 zone for a push higher. That push happened on heavy buying near the cash close of Friday’s trade, eventually leading to a settlement in the SPM7 at 1512.20 and all but erasing Thursday’s downdraft.

So…what was learned from Friday’s session? Simply the same pattern we have seen play out over and over the past couple of years in the marketplace – the comeback rally -lives on. And in each of these instances, the market has eventually found its way higher. The fact that we recovered so much of Thursday’s decline during one session and that we are heading into option expiration week, puts the potential for another round of higher highs clearly in view. Certainly CPI and Housing Starts (released on Tuesday and Wednesday respectively) will have something to do with that. But, keep in mind that option expiration weeks tend to trade one of two ways – a slow push higher…or a violent decline. The odds of the decline look small – however, we must register them with the data hitting the tape this week. If CPI were to come in “out of line” with inflationary readings, the snowball selling potential would be in play for the majority of the week.

As for today, here are the levels for SPM7. On the upside, look for a moderate choppy zone between 1512 and 1514 as players begin to establish their positioning in here. Above 1514 we hit the key zone between 1515 and 1518.50. Any 30 minute close above this zone is bullish – however, once again I will not be chasing ‘em in here. I will, however, use any dip back into the zone (15-18.50) to enter long positions with a potential trade towards the 1520.50 and 1522 zone. If there is no chance to enter the long side in this zone, wait for the final 30 minutes and look for an aggressive push higher into the bell.

Support zones are found from 1509.50 to 1508.50…below this is the key zone from 1507 to 1504. Any 30 minute close below this zone adds a certain amount of confusion moving forward and should be sold short with a target of 1496-1495.



Saturday, May 12, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

The market is seeking a catalyst. 10 days ago the S&P 500 was at this same level. In that time we have seen a decent round of earnings and they have exceeded expectations. With most of the numbers "in", the earnings growth rate is over 6%. That should be enough to sustain the uptrend. As I mentioned last week, I expected choppy trading and a negative reaction to the Fed’s unchanged rhetoric. The initial bullish reaction was reversed Thursday and the market also took issue with the weak retail sales numbers. Over 80% of the retailers missed their sales numbers. Friday, we got a bit of inflation relief from the PPI. The core inflation rate increased a modest .7%. In the grand scheme of things, the market is just chopping around looking for a piece of news that it can sink its teeth into. One day the economic releases show strength; the next day they show weakness. Another day the releases show rising inflation and the next day they show a decline. Now that the earnings season has ended, the market will place greater weight on the week to week economic releases. These knee-jerk reactions will mean little and the market will zigzag until it has something substantial to digest.

Per normal there is a chance that we will wake up Monday morning and read about a new merger. M&A will kick start the week and given the recent rally, the path of least resistance is up. The market is also likely to benefit from bullish option expiration activity. It's easy at this juncture to get lulled into thinking that the market can only go higher.

This is a time to be cautious. The market is "sleepwalking" its way higher. Thursday we saw the dramatic affect that one negative piece of information can have on prices. It will take two or three consecutive pieces of information to topple this market. We will use a series of lower closes and a technical breakdown as our guide. In today's chart you can see that minor support held Friday. The uptrend from March is also still intact. The steeper and shorter term the trend line, the easier it is to violate. I don't give this trend line as much credence as I do the horizontal support levels at SPY 148 and SPY 146. This week I have a very unique stock to add. I went fishing and once I reeled in the catch, I liked what I saw.



Friday, May 11, 2007

Equity Index Update

Equity Index UpdateSocialTwist Tell-a-Friend
Brad Sullivan

The index markets suffered through a day of consistent selling to settle sharply lower on the session. Key short term support levels were violated in most of the indices, particularly the SPM7 which fell below the key 1507 to 1504 support zone and could not muster any sustained buying when retesting that area. Today’s action will be influenced, on the open at least, by the PPI and Retail Sales reports. PPI came in better than anticipated on the core rate (I wish I could exclude food and energy costs each month as well) and Retail Sales was on the disappointing end of the spectrum. That being said, the Retail Sales figure is likely to be discounted as the market will give the consumer the benefit of the doubt for a couple of more months…however, on a longer term basis, this reading is worth putting in your files as a potential turn in the consumer. The PPI reading continues to show elevated levels in food pricing and I know that it cost me $80 to fill up my car the other day, yet the marketplace continues to downplay any meaningful impact on the economy from these pricing pressures. It reminds me of the quote I used the other day…FOCUS ON WHAT THE MARKET IS PAYING ATTENTION TO, NOT WHAT YOU WANT IT TO PAY ATTENTION TO. Right now, in my opinion, the marketplace is focusing on the supply shrinkage in the equity market due to private equity takeovers and global liquidity. Until these underpinnings slow or stop, this market will continue to be firm…with hiccups along the way.

The question today is this…was yesterday’s hiccup on the downside the beginning of something more? As I have written this past week, nearly all of my readings are at extended levels and it provided a good entry to flatten longs or establish a moderate short line. One of two scenarios play out from these readings…a sharp drop of nearly -4 to -5% or a moderate drop of around -2% that turns into a trading range just underneath recent highs. Right now I am leaning to the trading range scenario, but that could change with a shift in any key inputs – particularly Euro/Yen and Dollar/Yen. I will continue to use these pairs as key barometers for index trading.

Here are the levels I am looking at for today’s session in the SPM contract. Resistance will be found between 1502.50 and 1504 in a moderate and choppy zone type of trade…above this is the key 1504 to 1507 zone. Only a 30 minute close above this zone will begin the reversal process from yesterday’s downside damage. If we do get a close above this zone, I would shift to playing from the long side – HOWEVER, be prepared for probing BACK into the 04-07 zone. In other words, the 30 minute close gives the signal but the odds are you can get better pricing by being in 04-07 zone than outside it with a little patience. On the downside…Support will range from 1499 to 1497.50. Below this level, look for some spike moves lower towards 1495 and 1494.50. Only a 30 minute close below this zone will produce more selling…in the interim I would look for program type spikes lower that would generate trading into the 1491 area.

I AM LOOKING FOR THE TRADING BELOW 1494.50 TO BE SPIKE ORIENTED WITH SWINGS OF 3 TO 4 POINTS BACK AND FORTH.





Finally, keep in mind one fact and that is that Friday trading has been extremely quiet the past several weeks…is it time for a change? I have included a chart showing the 30 minute closes in SPM7 since May 1st. Notice the failure to get back above 1504…interesting.

Thursday, May 10, 2007

FOMC and The Morning After

FOMC and The Morning AfterSocialTwist Tell-a-Friend
From our Virtual Trading Room Transcript
May 10, 2007
about 0549 PDT

Jason_Roney> With expiration next week, the monthly patterns suggest further upside by next friday's open. In fact the SP500 is just 1% from the March 2000 all time high close (1527 in the cash). Given the solid uptrend, there's reason to think we'll hit that level sometime next week. But in the short term, the next few days would seem to offer the bear's best chance for downside. As I'll note in the afternoon discussion, there is often a counter-trend move towards the end of the week prior to expiration week. As well, the market tends to struggle with any follow-through on the day after an FOMC meeting. But a look at the daily patterns suggest an even greater probability of short-term pause.

Jason_Roney> Here's some observations: (1) the SP Futures have 7 consecutive closes above the open price. there have been just 10 occurrences over the last 10 years (in 2007, April 23 and Feb 23 were next day - both closed down) and 7 of those closed below the open; (2) the NDX finished higher for the first 6 days of the calendar month. looking back to 1995, this happened just 3 times before and each time the index finished lower; and finally, (3) the Treasury Bond closed below the prior day's low while the SPX finished above the prior day's high. this happened at the March Meeting and resulted in a flat next day's trade with close below the open.

Jason_Roney> The bottom line is that Thursday's action has a higher probability of finishing below the day's open. The overall trend remains solidly higher into expiration but the next 1-2 days offer more downside than upside risk.


Click here to read the complete transcript of Jason's chat.

Click here to read the Trading the SP Gaps by Jason Roney.



Equity Index Update

Equity Index UpdateSocialTwist Tell-a-Friend
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.








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