Pork n’ Bonds

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Sally Limantour

Various commentaries over the weekend point to many reasons why interest rates rose recently. Bill Gross throwing in the towel; massive duration hedging required by portfolios; a 12.5 billion reduction in foreign holdings of US Treasury and Agency securities, and yes pork prices climbing 43 percent in the first three weeks of May from a year earlier.

Bloomberg reports: “China's inflation probably accelerated in May as pork prices soared, increasing the likelihood that interest rates will be raised”. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aNDCG3kLYQqg

Seriously, we have pointed out here that food prices together with rising money supply (around the globe) and recent labor price increases have lead to bond yields increasing.

On a technical basis I have been charting two things – the pattern of lower highs on the weekly 30 year Treasury futures and the 50% level from the highs on 6/20/03, of 122 27/32, to the lows on, 6/18/04 of 10228. That 50% level is 11300 and we continue to reject it.

While Mr. Gross of Pimco “capitulated” last week this was something in the making as he was beginning to get uncomfortable with his bond positions the summer of 06. I quoted his discomfort at HamzeiAnalytics.com from an interview in the WSJ back on August 23, 2006:
“The Bond King, Bill Gross, of Pimco, who had bet on the economy slowing, was so stressed from positions going against him that he took an unplanned vacation. “I just had to leave for 9 days, I couldn’t turn on business television, I couldn’t pick up the paper, and it was just devastating.”

So what now? My guess is we continue this pattern of lower highs and I will continue to sell decent rallies. Bond yields are not high by historical standards and typically once a trend change in bonds is started it continues for years.

Higher rates remain a long-term theme.

Food accounts for a third of the consumer price index and meat alone for 7 percent. ``The size of gains on stock markets, as well as the likelihood that food prices will keep consumer price inflation high in coming months has depressed bond prices in anticipation of rate hikes,'' M2, the broadest measure of money supply in China, probably jumped 16.9 percent in May from a year earlier, exceeding the government target for a fourth month, according to the Bloomberg News survey. The central bank may release the figures as early as today.
China's producer prices may climb 3 percent in May from a year earlier after increasing 2.9 percent in April, the survey showed. The statistics bureau will release the figures today.

Outlook on Gold, US & Global Equities

Tweet Outlook on Gold, US & Global Equities

Frank Barbera

Our medium term Outlook on Gold is now bearish, and we are bearish on Gold Stocks. Over the next few months, we expect Gold to fall below $550 to the low $500 area, where another long term bottom should develop.





The US and Global Equity markets are also completing major topping patterns, but should manage to hold up on the current rally for another 5 to 7 days. The S&P has a near term target of 1525-1530, and massive resistance at 1540-1550. We believe that within a few short weeks, the Chinese Shanghai Composite Index will begin an extended, multi-week collapse on the order of 40% or more. That decline, when it unfolds should trigger heavy selling in US Cyclical stocks, and in stock markets around the world, with Brazil, Mexico and Germany especially over-extended. The S&P could tumble initally on the order of 10 to 12%, bringing the index back down to the vicinity of the mid-March lows near 1360, possibly somewhat lower. Readers are advised to assume maximum defensive positions and seek the safety of cash.

HOTS Weekly Options Commentary

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Peter Stolcers

This has been a bloody week and I suspected that we were in trouble Monday when the market completely discounted the 10% drop in the Shanghai Index. After the muted reaction to that decline, our market finished a little higher. It wasn't until Tuesday that the real fireworks started. Concerns over higher interest rates were fueled by Chairman Bernanke's comments and England's quarter point rate hike. England's increase was largely expected and it should not have caught anyone off guard. Some analysts blamed the sell off on the surprise rate increase by New Zealand. I find that rather amusing given their small GDP and high 8% rate. The true culprit was a lack of news and a round of profit taking after a recent run-up to an all-time high. It took the market seven years to get to this point and heavy resistance should be expected.

Interest rates might be creeping up, but they are still near the low end of the 50-year range. Rates are not increasing because of inflation; they are rising because of global economic expansion. A positively sloped yield curve is good for the market and this rise will correct the current inversion. Corporate earnings have seen double-digit growth for 14 consecutive quarters. As a result, their balance sheets are strong and they are using cash to buy back shares or acquire companies. Last quarter was considered to be weak and earnings rose a healthy 6%. As you can see in the chart, over the last year the market has established a pattern of sharp declines that follow relative highs. The corrections are very short and steep and the recoveries are brisk. I do not see any evidence that the macro environment is changing. I do feel that many analysts have had to raise their interest rate expectations. None are more significant than Pimco's Bill Gross. He has been leading the charge for lower rates and he manages the largest bond fund in the world. This adjustment process creates chaos. I believe the market will get accustom to the "tight light" bias and it will put the relatively low interest rate picture back into perspective. Employment is strong and wages are increasing due to a tight labor market. Companies are profitable and the P/E ratios are reasonable. Inflation is relatively contained. Given these factors I do not see a doomsday scenario unfolding. I do see a market that needs to work off some excess and this is not something to stand in front of.






Next week's big economic numbers are the PPI and CPI. If they continue to show contained inflation, the market will rally. On the earnings front the only stock worth mention is ADBE. Overseas trading and M&A will have a bearing on Monday's open. If the market can get off to a good start and the PPI comes in on target, we could build on Friday's bounce. Option expiration weeks have been bullish and if the market starts grinding higher, buy programs could "goose" it even higher. Conversely, if the market can't sustain a rally next week, there is a chance that the lower support level of SPY 146 will be tested. I expect that level to hold. As long as it does, I will have a "buy the dip" mentality. This is a time to look for stocks with support and to wait for the market to show us that the 'bid' is back.

Timer Digest: We are SHORT SPX from 1490.72

Tweet Timer Digest: We are SHORT SPX from 1490.72

Fari Hamzei

In the chart below we are using the Weekly SPY (as a proxy for S&P-500 Cash Index).

The run-up in S&P-500 Cash Index came to a halt this week. This prompted us to SHORT SPX for Market Timing purposes. We have informed Timer Digest of our decision this evening.



The next two charts use Daily Bars. The first one shows our Sigma Channel Indicator. Notice how the Zero (0) Sigma line, which gave us an uptrending support line since early April, was broken decisively today. And, we closed at -2 Sigma Level with a massive spike in down volume. As a matter of fact, NYSE up volume was 103 Mil vs its down volume of 1.71 Bil (16.6 to 1).



The last chart is also daily but we have plotted our Monthly Support, Pivot & Resistance Levels Indicator on it. Yesterday Close (1517.38) was a tad above the Monthly Pivot (1514.29). As we projected in our Virtual Trading Room today, the Today's Low broke the Monthly Support One (1) at 1493.03 and closed at 1490.72.

Tomorrow we will discuss additional data points and inputs that were incorporated in our decision to go SHORT SPX. While this sell off may be short-lived, we expect it to be fairly violent.

You may join us at no cost by using our ONE WEEK FREE ACCESS Link located at http://www.HamzeiAnalytics.com/SuperPlatinum_Special.asp

HOTS Weekly Options Commentary

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Peter Stolcers

Last week was shortened by the holiday. Traders often struggle to get their bearings after a long weekend. The tone was set two weeks ago when the S&P 500 dropped 16 points on Thursday. Jitters going into the week were exacerbated Wednesday when the Shanghai Index dropped 6% overnight. A .2% increase in the stamp tax placed on Chinese stock trades was to blame. The media sensationalized the event by emphasizing that the rate had tripled. While accurate, it made the news seem bigger than it actually was. From a trader’s perspective, if I'm trading a parabolic market, higher margins or commissions or exchange fees are not going to impact my activity - especially when it only amounts to .2%. Our market opened lower and it looked like profit taking might set in. By mid-morning, prices stabilized and the stage was set for a huge intraday reversal. This pattern has been very pronounced over the last few months. The market has a big one day drop and then it reverses and surges higher. The take away from all of this is that the China "bubble" is factored into prices. That market has made a huge move and everyone is expecting a pullback of decent magnitude. It’s a "closed market" and judging from this week's reaction, the consensus is that the selling can be quarantined. This was not the same reaction we saw after the one-day 10% drop in February. The Chinese can change the rules of the game at a whim and that market is treading on thin ice.

As the week progressed our market digested economic numbers and it continued to make new all-time highs. The biggest move came on Friday’s Unemployment Report. Despite a .3% rise in hourly wages, the market pushed higher. Two months ago the reaction to wage inflation would have caused a sell off. That's because some traders still hoped for a Fed ease and that component of the release would have dashed their spirit. The market is growing accustomed to the Fed’s "tight light" bias. Now it's almost a matter of how long they will wait before raising rates. I believe interest rates will remain unchanged the rest of the year.






The week ahead is very light in terms of economic releases (ISM services, productivity, unit labor costs, wholesale trade, consumer credit, trade balance) and I don't see any of these numbers driving the market. When the earnings calendar is highlighted by stocks like GES, ZQK and SFD, you know it's going to be a quiet week.

Next week we can expect dull summer-like trading. There is no news to drive the market. We are past end-of-month fund buying and we are a week away from option expiration. The path of least resistance is up and until I see a breakdown with follow through, I will stay bullish.

Equity Index Update

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Brad Sullivan

The index markets reversed overnight worries from a Chinese decline and pushed significantly higher. In fact, the SPX joined the All-Time High Club as the index finally pushed through the 1527ish previous high close registered in March of 2000. Now the index has the intraday highs of 1552 and change in its sights. Without question yesterday’s sharp move caught many traders flat-footed. Given the China news, and the fact that this time there was a catalyst for the decline (raising the stamp tax on stock transactions from 0.1 to 0.3%) it should have come as no surprise that the indices were not going back down the Feb. 27th path. However, to predict new highs across much of the board was not something many were thinking when the SPM was trading around 1516.

And there lies the proverbial rub of the index trade in our current climate. By most measures we are overvalued/stretched and should be looking for a moderate decline. However, the indices keep on chugging higher and for those fighting the tape it has been a painful experience both psychologically and financially. As I pointed out last week in a couple of comments, the indices were stretched on a variety of readings…normally this plays out 1 of 2 ways: either a sharp decline or a moderate decline followed by sideways action. Neither of these scenarios is playing out. The decline was shallow, but only a couple of sessions of range oriented action followed. This leaves me with a scenario that rarely comes into play and that is the blow-off rally. Simply put, the DJIA and SPX have POTENTIAL to stretch this rally significantly higher throughout the summer. There are now 3 options on the board and it should make for some very interesting trading over the next 6 to 8 weeks.

For today’s session here are the levels in SPM I am focusing on: The first area of resistance should be found between 1535.50 and 1537.50…above this look for a push towards 1541. I would be looking for the zone between 1540.50 and 1542.50 to establish a moderate short line. Above 1545 on a 30 minute close, the white flag is waived on this transaction.

On the downside, support should be found in our old resistance zone of the low 1530’s…essentially look for support between 1533.50 to 1531. If this zone fails to hold, look for selling to accelerate towards 1528. Support is found within the 1529 to 1527 zone and again from 1525 to 1524. Clearly any move towards this area would leave many scratching heads.

All told, with the month end and tomorrow’s employment report, I would asses the odds of a significant move higher or lower as remote. Keep it close to the vest, but be ready to play if something changes during the session.

Equity Index Update

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Brad Sullivan

The index markets took a spill yesterday on heavy volume. The SPM opened in my support zone between 1524 and 1526, quickly finding a bid just before the release of New Home Sales which rose by a staggering +16% and well outside the highest end of expectations. Accordingly, players bid the indices in the wake of this number…however; the key resistance area in the low 1530’s put a ceiling on the session. Once the day trade longs were forced to liquidate the downside picked up some serious momentum and pushed through a variety of support zones established in the last two weeks of trading. Program trades were the flavor of the session as -1000 readings on the NYSE TICK were plentiful. When the session ended, with a minor bounce off the session lows, the SPM lost -13.50 for the session. However, measured from high to low on the session, the contract fell nearly -25.00.

This morning the indices are called to open higher as Europe remains moderately higher for its session. The SPM is trading at 1515.50, up 4.00 on the session and +5.20 above fair value readings. Keep a close eye on the 1515-1518.50 zone as the trade unwinds this morning. Early closing in the US debt markets should leave many traders heading out for the weekend after the first hour of trading. Accordingly, keep a close eye on some volatile trading during this period. In addition…if I hear one more pundit on CNBC talk about the bond market and the 10yr. yield approaching 5% being the reason for equities reversing course yesterday I may have to turn it off for good. During the past four years, yields have generally moved higher while equities have taken off to the upside. Now…if we were to push the 10yr to 5.25% in a velocity driven/inflation fighting trade – THEN I would say the yields are impacting equities. Until then, too many people looking for a reason that the indices broke -2% from All-Time highs.

Here are my levels for today’s session in the SPM contract: On the upside we are scheduled to open in the 1515 to 1518.50 zone…this zone is acting as resistance once again and only a 30 minute close ABOVE 1520 will change that picture. If we were to push above 1520 on a 30 minute basis I would not chase em up. Rather, the picture would become mixed for the rest of the session. Given the anti-upside momentum that I outlined yesterday, we could very well hit the 1524 to 1526 zone and fail there. In other words, rally selling remains the key in the short term.

Equity Index Update

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Brad Sullivan
Thursday May 24, 2007

The SPX index failed to close above the All-Time High close yesterday, and for the third consecutive session this index could not generate any “follow” buying. Accordingly, late selling has hit the market each session, pushing the index below its ATH close from March of 2000. The question on everybody’s mind is pretty simple…are we beginning to move into a resistance area that will hold prices down for the next few weeks?

On any technical measurement, the indices are clearly overbought – IN THE SHORT TERM. Consider the performance of the major indices from their respective March trading lows (seems so long ago doesn’t it?) to their recent highs. The DJIA is up about +12.8%, the Midcap 400 is up 11.5%, the SPX is up 11.2%, the NDX is up 9.9% and the Russell 2000 is higher by +8.8%. All of this taking place in about 9 trading weeks. That is a tremendous rally in both net change and velocity (measured in time). The odds are favoring a pause/contraction/slowing of this move. However, let’s keep in mind that ODDS only tell part of the story and if this is a stealth/blow off move to the upside there is plenty of room left in higher price zones.

As for today’s trade, the housing reading at 9:00cst should add some intraday volatility and the Durable Goods reading was able to push the SPM from -2.50 at 1523 to the current +0.50 at 1526. In addition, all eyes remain squarely focused on the holiday coming up this weekend as well as any happenings in China, where it appears that Mr.Greenspan does not have the same pull as he did several years ago. His overtly bearish comments on the Chinese market produced a settlement of -0.5% in their session…not exactly the earth shaking response one would anticipate.

Here are my levels for the SPM today…We are called to open within my key support zone from 1524 to 1526, I anticipate this zone to be the transitional area for a red light/green light type of session. Above it, is green light (buying) and below it is red light (selling). Above this zone we should hit resistance between the 1528.50 and 1530 area, followed by 1532.50 to 1534. The levels above 1528.50 have been probed for 3 consecutive sessions with yesterday’s action creating a new contract high…however, the failure to close any of these 3 sessions in positive territory has to be considered a NEGATIVE. Whether or not strong selling appears at LOWER pricing zones remains to be found, however, what should be important from a trading perspective is the ability to sell this market in the lower 1530’s for a move lower by the close of trading. In other words, we are not finding a boat of sellers at 1520 (assuming we get there) but we are finding them at 1533. It is the opposite of momentum, one in which a trader can sell higher highs and profit. Keep this thought in mind the next two sessions.

On the downside…below the opening support zone, 1522 to 1520 is CRITICAL support. If we move below this zone on a 30 minute closing basis it should create a trade towards the bottom end of the old resistance zone 1518.50-1515. That zone is now neutral/transition…below this is key support between 1512.50 and 1510. Barring an outlier news event, I see no reason to chase ‘em down below this level.

I have included a chart on the DJIA and its 200 day MA “extension.” We are holding at the highest levels since the start of 2006, but more importantly, the highest levels since the 1980’s. Is this a sell signal? Possibly, but remember this…in 1999 the NDX went to +51% above its 200 day MA.

Equity Index Update

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Brad Sullivan

The indices continued their divergent path in yesterday’s session and for those that use one index as a lead indicator to trade another index, it has been nothing but a painful existence over the past couple of weeks. Indeed, the only game in town right now is the spread trade between the mega-caps (DJ and SP) versus the small caps (ER2) and to some extent the NDX. As I outlined earlier this week, the volatility has been nothing short of amazing in these spreads, and the highest levels I have seen since the run higher in 1999 and subsequent collapse in the NDX. Rumors continue to abound about the trade over the last two weeks in these spreads, but, the only thing that really seems to matter is what we examined the other day with a couple of spread charts. Simply put, it was “mean-reversion” time. The last 2 sessions have been a painful reminder of how these spreads can operate – at least for those that stayed too long at the party. I have included an updated table that I first put into Monday’s update and a chart to show the extremes.


This morning, the SPM is trading higher on the heels of another +1% rally in China (why I’m not long the great wall I’ll never know) and more all-time highs in the DAX. Currently the SPM is trading at 1531.50, up 6.50 on the session – just shy of yesterday’s high and contract highs. Without any hint of economic today, save the DOE weekly inventories, one has to wonder -- is today finally the day the SPX takes out its All-time closing high?

The SPM was a pretty interesting trade yesterday as the market attempted to consolidate below my key 1528 level, but could not muster any sustained selling and gradually firmed up between 1527 and 1529. Lunchtime provided a bid and pushed the market a bit higher…however, by the time the final hour was underway the index could not hold onto the gains. In the final 30 minutes of trading the contract was sold into the bell, producing a new session low at 1524.75. Much of this seemed to be spread related and day trade long selling. This theory has gained traction in my mind with today’s solid open higher. Now the question becomes…where do we go from here?

Here are my levels for the SPM today: On the upside…resistance should be found between 1531.50 and 1534.50…if we can get a 30 minute close above this zone it is bullish. However, I do not think one need’s to chase ‘em up. Instead wait for a move back into this zone (31.50 and 34.50) to build up a long position that pushes towards the 1538 level. Stopping points along the way should be 1535.50-1536, then strong resistance between 1538 and 1541. IF THE SPM TRADES ABOVE THE RESISTANCE ZONE (31.50-34.50) AND DOES NOT COME BACK IN…CANCEL THE IDEA OF BIDDING IN THAT ZONE. In other words…if we trade up to 1538, I don’t want ‘em back at 1532.

On the support side…1530-1527 is a transition zone. It should provide support, but, not support that one utilizes to get long. 1526 to 1524 remains key support and should be used to establish buying points…below this 1522.50 to 1520 is CRITICAL. Only a 30 minute close below 1520 turns the switch to “sell” and even then it most likely will be tomorrow or Friday that the trade comes to fruition. In other words…don’t chase lows below 1520 to establish a position.

All told, volatility is already on its holiday and one needs to be cautious in this trading environment.

Equity Index Update

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Brad Sullivan

The index markets continued their ascent into higher ground yesterday for much of the session. However, a late reversal in large cap oil issues seemed to bring an overall sale to the large cap indices. When it was over the SPM had dropped from its new contract high area of 1534 to its session low of 1526.50 before rebounding a touch at settlement. In addition the DJIA fell for what feels like the first time in about one year. However, the big story continues to be the action in the spreading between the various indices.

Yesterday, the ER2 and NQ rallied sharply. The spreads which I discussed at length yesterday – DJIA vs. Russell 2k, SP vs. Russell 2k – gave back a substantial portion of last week’s gains. How volatile was the spread action? Consider this a 1 unit spread of long 11 DJI minis and short -9 Er2 minis lost a WHOPPING -$10,540 ON THE DAY. The Spread trade of Long 10 SP minis and short -9 ER2 minis lost -$9,250. I CANNOT EMPHASIZE ENOUGH…THESE MOVES ARE OUTSIDE THE “NORMALIZED” PARAMETERS. To use option jargon…the tails are pretty fat in these spreads right now. I would associate this with someone, or a group of somebody’s being take to the shed and forced to cover this spread. Typically, when such a move happens, the size player on the wrong side of the bet is forced to pay up in order to get out. Whether or not this has been the reason for the dramatic move in these spreads is a bit of conjecture and rumor mongering. And, most importantly, it does not begin to tell the whole story about what is actually happening in the mega-cap arena. The bullish move in the mega-caps continues to play out on a liquidity driven theme…as traders our job is stay in touch with that theme. Final hour moves like yesterday afternoon tend to make one think that the “to is in.” Yet, for all these final hour sales…the market continues to find its way to higher ground. Keep this thought in mind when hitting bids.

I had a resistance zone yesterday that encompassed the 1528 to 1531 levels…the SPM gradually carved through that zone in the late morning and continued to hold above it as the CASH index made it above the 1527ish AT closing high…however, the market could not sustain the buying interest at the highs. Around 1:45 cst the SPM made another push to get above 1534 and failed…this time day trade longs ran for the exits creating a pretty good selling vacuum. That move pushed the SPM towards the morning and session low of 1526.50, before a slight bounce into the bell. The CASH index missed closing at AT high levels by a couple of points. The question today is this…will there be more selling?

Here are my levels for today’s trading in the SPM…on the Upside : Resistance should be found between 1530.50 and 1531, above this 1532.75 to 1534.50 is CRITICAL. If the contract can get a 30 minute close above this zone, it should produce a “walk em up” type of trade towards 1538.50. If long…I would look to exit between 1538 and 1541 as this zone will be difficult to push through for the contract.

On the downside…I have a neutral zone between 1530 and 1528. A 30 minute close below this neutral zone should provide a push lower. 1526 to 1524 remains a support zone and will be difficult to close below on a 30 minute basis. However, I would look for some “spike” oriented selling that would push the index towards 1522 before bouncing. Support is found at 1523.50, then 1522.25 to 1520. Any 30 minute close below 1520 and things will get interesting…however, much of that interest will most likely be tomorrow and Thursday. I suspect that below 1520 and we will have pushed as far as possible for today’s session.