Sunday, June 24, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

I’ll start by saying that I am bullish over the next six-month period. Earnings are strong, valuations are in-line, interest rates are relatively low, employment is high, inflation is in check and global economic growth is robust. On a short-term basis I'm starting to see some warning signs. The market has run up and we have not seen a decent correction in a very long time.

In the chart you will notice a few developments. The volatility has increased greatly and it is depicted by the long red-bodied candlesticks. Two recent events tell me that the resistance level at the all-time high is growing. The first event happened two weeks ago when we had the gap down after the all-time high was established. That was followed by a very bearish down day. After the market had one of its typical snap back rallies, it was not able to challenge the previous high before it was slapped down. That move came this Wednesday. The market had a positive opened and it looked like it might make a run at the high. Instead, it made a key reversal and by the close the S&P 500 futures had lost 20 points. Thursday’s rally was a half-hearted and once the market was unable to add to Wednesday's decline, the buyers came in to shakeout the short sellers. Today the market is off to a weak start and I’m writing my comments an hour after the open.

Concerns over the Bear Stearns hedge fund bailout (exposed to sub-prime lending) are putting pressure on the market. Overnight, the Shanghai Index fell 3% as traders believe that a rate hike there is eminent. In the U.S., interest rates have been creeping higher and next week the FOMC convenes. I believe their comments will dictate stock prices for the next month. The Fed has already stated its bias favors an increase. Earlier in the year, traders were wondering when the Fed might ease, now they are wondering how long the Fed will hold off on a rate hike. This realization will be bearish for the market as traders adjust their models. Short-term, I am starting to think that the SPY 146 level will be tested soon. That will ultimately set-up a great buying opportunity. The market needs to get accustom to higher interest rates. Once it does so, all of the other pieces are in place for a continued rally.

The economic releases from this week were balanced. Slower housing starts were offset by an increase in building permits. A robust Philly Fed number showed the highest level of manufacturing in two years, however, manufacturer’s sentiment for the next six months fell to its lowest level this year. Next week will be filled with economic releases (Consumer Confidence, Durable Goods, PCE price index, Chicago PMI) but they will all take a back seat to the FOMC comments.

Two earnings releases are of particular interest next week (WAG, LEN, NKE, CAG, BBBY, MU, PAYX, RHAT, MON, RIMM). RIMM and MON have run up and we will see if they are able to meet raised expectations.

Given my longer-term bullishness, it will be difficult for me to short this market. The snap back rallies have been extreme and I don't want to get caught in any of them. I will adjust by reducing my long positions and by selling call credit spreads on stocks that I feel are weak. The retail and restaurant groups are strained and they will experience selling pressure for the next quarter. The key is to identify the underperformers in each group.

Thursday, June 21, 2007

US Equity Indices & Bonds

US Equity Indices & BondsSocialTwist Tell-a-Friend
Jason Roney

Yesterday was a very dynamic day in markets of course. Let’s first note where we are in the cycle for equities. It’s the week after expiration. SP does not trade with same underlying bid it had the week before because of the expiration. At same time, stocks are increasingly sensitive to interest rates (just look at BKX index versus fixed income).

Now we throw in the Bear Stearns fund fallout. The fund held more than 20bill of derivative investments mostly backed by subprime mortgages. as redemptions came in, the fund was forced to auction off assets from in an already illiquid market (sub-prime stuff). actually, the subprime index began to melt down very late Friday afternoon.

due to conflicts of interest between fund / house, Bear Stearns had to allow other firms to handle the liquidation. this produced the "bid wanted" lists from MER, DB, etc. buyers of these had to of course sell treasuries against.

Early part of week, stocks held in relatively well as the bear fund assets had not yet been auctioned off, treasuries were still near their pullback highs, and Asian equities remained well bid. Yesterday morning we opened above prior day high with potential for breakout. But once the other firms sent out the bid wanted list and began auctioning off the bear assets, two things happened: (1) treasuries sold off as a result of the necessary hedge and (2) market began to realize there was very little liquidity for the bear assets. Those two combined to create selling pressure in SP. Given the expiry up bias was removed stocks were highly vulnerable to a meaningful pullback. Once the outside day was in (yesterday’s move below Tuesday’s low), the hook was in. classic trend day from gap reversal.

To revisit things I mentioned in the chat a few weeks ago. There were several “tells”: (1) SP pit session had 4 consecutive days range less than prior day range (as of Monday close) – implying larger than expected move was imminent. (2) SP had shown clear relationship with fixed income over the prior week(s) and fixed was clearly the lead. (3) Because it was the week after expiration, any surprise move should have been to the downside.

Wednesday, June 20, 2007

SPX at a Critical Conjuncture (Monthly Pivot)

SPX at a Critical Conjuncture (Monthly Pivot)SocialTwist Tell-a-Friend
Fari Hamzei

Notice in the chart below, that for the last 11 months, only during last March, SP500 Cash Index (SPX) traded below its Monthly Pivot Level (Yellow line). Given the price action today -- we hit a number of air pockets (no buyers during upswings and then followed by massive drops on huge volume) -- the US Market, in our opinion, is ready to crack. Make sure your portfolio reflects a defensive posture going forward for the next 4 to 8 weeks.

Tuesday, June 19, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

In the last two weeks we've seen a 50 point decline and a 40 point rally in the S&P 500 futures. Earnings season has passed and the market is looking for something it can sink its teeth into. It took seven years for the market to make a new all-time high. Despite a stiff resistance level, it was able to fight-off the first speed bump – a 15% decline in the Shanghai Index. That dark cloud may have passed as traders believe that the selling can be contained to China. However, interest rates were a different story and the market cracked.

Global economic growth is putting upward pressure on interest rates. Last week England raised its rates a quarter-point and this week Switzerland followed suit. That puts upward pressure on our interest rates and the 10-year yield went above 5%. Asset allocation models kicked in and the market went through a discovery phase. Selling pressure tested the “bid” to the market and it determined the appetite for equities amidst rising interest rates. The bulls won this round and the selling never really took hold.

Higher interest rates that result from a strong economy don't conflict with a bullish market. The latest rise in interest rates resulted in and a positively sloped yield curve and that is considered bullish. Wednesday, the Fed released its Beige Book. It is published every six weeks and it is a collection of economic activity from various regions in the US. It showed rising economic activity and moderate inflation. Once the numbers were released, the market rallied more than 15 S&P 500 points. The surge was created by buying, short covering, and expiration related buy programs. Thursday the market followed through on a benign PPI number. I'm writing this report a day earlier than normal so I will take a stab at Friday's action. I believe that the CPI will be in line with expectations. It might even be a little "hot". The market will look past the number and post modest gains. Most of the expiration related fireworks have passed and the afternoon could get quiet. “Merger Monday's” have been bear slayers and the shorts will not get aggressive going into the weekend.

This week the economic numbers are very light. They will be highlighted by housing numbers, leading economic indicators and the Philly Fed. Housing starts and building permits might shed light on that sector. From my perspective the numbers can only be bullish. So much gloom and doom has been factored in to housing that I doubt a bad number will weigh on the market.

Last week LEH and GS posted solid earnings but they failed to light a fire under financial stocks. I believe this sector is a sleeping giant and it may be the source of the next rally. Here are the major companies that will announce earnings next week; BBY, DRI, KMX, FDX, GIS, CC. The electronics, auto and restaurant stocks might shed light on the strength of consumers. However, I'm more interested in FDX and GIS. FedEx’s activity will be used to measure economic growth and General Mills will provide insights on food inflation.

Solid earnings, steady interest rates at the low end of the 50-year range, global expansion, moderate inflation, full employment and reasonable P/E ratios all point to a stable market. I am firmly in the “buy the dip” camp as long as the market is above SPY 146.

Monday, June 11, 2007

Pork n’ Bonds

Pork n’ BondsSocialTwist Tell-a-Friend

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”.

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 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

Outlook on Gold, US & Global EquitiesSocialTwist Tell-a-Friend
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

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
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.

Thursday, June 7, 2007

Timer Digest: We are SHORT SPX from 1490.72

Timer Digest: We are SHORT SPX from 1490.72SocialTwist Tell-a-Friend
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.

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Friday, June 1, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
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.

Thursday, May 31, 2007

Equity Index Update

Equity Index UpdateSocialTwist Tell-a-Friend
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.

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