Posted 07:45 CST Equity Index Update Monday November 28, 2005 The index markets continued their rapid ascent last week as players on the sidelines used the FOMC minutes, released on Tuesday afternoon, as a reason to get into the current rally. Wednesday and Friday's action was muted, at best, due to the holiday. Today, the indices are called to open higher as the SPZ is trading above its high from last week at 1272.50, up 2.50 overnight. Retailers are reporting sales gains that came in above estimates, Crude Oil is sharply lower, the dollar is mixed, fixed income is moderately lower and the metals are sharply higher. The indices have been in a vertical move since mid-October's trading lows and are poised to challenge key psychological levels shortly. These levels are DJIA 11,000, SPX 1275, NDX (already there at 1700) and the Russell 2000 at 700. I suspect these levels will hold some value as a point of reflection and should lead to a breather. However, in a breakaway move like this, forecasting a breather should not be confused with getting short. A couple of weeks ago, I discussed at length the need for traders not to "lose" their long positions during sideways consolidation. That consolidation occurred between 1229 and 1215 in the SPX. I would argue that the market is due for a similar consolidation phase, not a correction. Having said that, with such strong historical tendencies for higher prices around the first few trading days of December, I wonder if the pause may not happen until next week? If this scenario turns out to be correct, there is a chance the SPZ could see 1300 by Friday's bell. The more likely scenario is a test and failure of the above levels today, followed by moderate losses in the market that get reversed in a big way on Thursday, the first day of trading in December. One issue that has me concerned is the current ramping up of my Standard Deviation readings. Using a 22 day STD reading, the SPX is currently registering a +/- 1 STD of 21.54, the highest reading since last NOVEMBER'S reading of 30. The importance of this reading is more akin to a yellow light when driving. The odds for a consolidation or minor pullback have been historically their greatest when this reading breaks above 20. Another light flashing caution is the moving average extension. This reading measures the % difference between the simple moving averages (200, 135, 50 and 20) and the current index price. The Midcap 400 and NDX are trading at resistance levels of approximately +10% from their respective 200 day MA's. Since the bull move began in 2003, neither index has crossed above or below the 10% threshold for more than a couple of sessions. It is worth repeating that I use this reading as an âexit typeâ of reading from my positions. Currently, it is flashing yellow. The NDX settled at 1700 on Friday. That level had been my trading target for long positions, accordingly I am selling out 65% of my NDZ long position on the open this morning. I will carry the other 35% into December option expiration, where I plan to exit that Friday. The Midcap 400 (EMDZ mini contract) continues to hold at all-time highs, but with my extension reading flashing yellow, I will cover 60% of my long position on the open. Technically, keep a close eye on the SPZ at 1275 as it should pose key resistance. Support remains between 1268 and 1266. Globally, the Nikkei is closing fast on the key 15,000 level. For those of you that think our domestic market has momentum, take a look at Japan as it seems to have forgotten how to finish a session in the red. Europe is higher. Trend-wise, Soybeans, Wheat and Corn continue to lay down at lower levels -- still looking for 5.50 on the beans. Feeder and Live Cattle are just below key high levels. Good Trading to All, Brad
Posted 08:20 CST Equity Index Update Tuesday November 29, 2005 The index markets dropped yesterday as players seemed to take trading profits that were generated around the historically bullish Thanksgiving holiday period. Early sellers were able to push the indices lower as the buyside seemed to go "hand in pocket" and wait for lower price levels before stepping in for accumulation. Volume was moderate, but each index futures contract settled significantly higher than its respective fair level. This leads me to the conclusion that much of the selling was done on a day trading basis and few players were building net short positions below 1265 in the SPZ. Today's trading should be largely focused on the economic data due to come out today and tomorrow. At 9:00 CST the market will receive the November Consumer Confidence survey, which most are expecting/hoping to show a sharp rebound higher. In addition, the market will begin to prepare itself for tomorrow's release of Preliminary Q3 GDP. Given the impact that the GDP reading has had over the past 2 years, I would argue that this reading could be the most important economic release for the week, including the employment report on Friday. As I discussed yesterday, a consolidation phase in the current rally should be expected as several of my indicators are proving to be extended. I anticipate a potentially strong 2 day rally Wednesday through Thursday as more money comes into play at month-end. If this scenario occurrs, it would leave the markets in a very extended state that could lead to volatile rangebounde trading in a 2% band (respective to each contractâs volatility). For the ER2, this would equate to roughly a 4% range into December option expiration. Overall, the index markets suffered no damage from yesterday's decline. The trading was interesting across-the-board in everything from commodities to currencies. The dollar was whacked against the Euro amongst others, but this morning is gaining 1% of its substantial loss yesterday. Crude Oil traded down significantly, hurting XOM, CVX and COP, and in turn hurting the SPX. The trade of long XLF, short XLE continues to gain steam into year-end as dollar rotation picks up steam into the financials and out of the oils. The long end rallied sharply in fixed income, taking out key resistance levels as players seem to be ignoring the initial surge after the FOMC minutes last week and keeping the market on course for inversion. The obvious debate is: What will be the net impact on equities if this inverted yield curve takes place? I expect today's session to be moderate in terms of overall movement and volume. Keep it close to the vest as the next couple of sessions have âfireworks-typeâ potential for movement. Good Trading to all, Brad
Posted 08:20 CST Equity Index Update Wednesday November 30, 2005 The index markets suffered losses yesterday as better than anticipated economic news led to worries that the rate hike cycle may not be concluded as quickly as many anticipated after last week's FOMC minutes release. This morning, the Advance GDP came in a touch better than anticipated. However, it has had little market impact. Instead, the index markets are focusing on a downgrade in Yahoo (YHOO) and a trimmed sales forecast from Novellus (NVLS). In addition, the bond market will be in focus for equities as treasury prices were hammered yesterday on the triple whammy of Consumer Confidence, Durable Goods and New Home Sales. Yesterday's action in the treasury market warrants a minor bit of concern for equity prices. The concern is due to the scenario that the stronger economic data may put into action. That scenario is the opposite of the tenet on which many of the longs have built their case: the end of the rate hike cycle. Given yesterday's data, the equity market seems to be taking a âwait-and-seeâ approach with respect to the remainder of the week. If the data from CAPM, ISM and NonFarm Payrolls comes in significantly ahead of the current estimates, it is reasonable to think that early month money flows into equities may be negated by the data. If this scenario of strong data throughout the week plays out, I suspect we will have many of the trading longs liquidating positions into early month money flows. This would create a potential air pocket lower next week as the money flows dry up. By "trading longs" I mean funds that are active in trading the index markets, not âbuy-and-holdâ-type managers. REMEMBER -- THIS IS ONLY A SCENARIO. The rest of today brings us CAPM and the Beige Book. In addition, expect lots of program trading ahead of the month end. Also, keep in mind that the futures contracts will settle at FAIR VALUE, not last sale. Finally, I laid out the bearish scenario above, but keep in mind I am still position long. However, I have learned that you need to keep an eye out for potential bumps. Good Trading to all, Brad
Posted 09:15 CST Equity Index Update Thursday December 1, 2005 The index markets suffered another bout of selling as November came to an end. For the 3rd straight session, buyers remained "hands in pocket" seemingly content with their respective long positions. Settlement was a bit frosty as the SPX closed below 1250 and the DJIA neared 10800 ahead of the final trading month for 2005. Goldman Sachs' desk was the lead seller in SPZ, parting with nearly 2500 contracts all session. It is worth pointing out that on December 1st last year, the SPX rallied to a new high on the year. The index went from 1173 to 1191, settling on the high and setting the stage for a grinding rally into year-end. With the strong opening, it is worth keeping in the back of your trading mind that there is a chance for the SPZ to challenge 1270 by the close of trading. However, the real momentum indices continue to be the Russell 2000 (ER2Z mini) and the MidCap 400 (EMDZ mini). Both of these indices settled in the plus column yesterday, leading me to anticipate sharp gains ahead in the near term. My Russell 2000 target is 700 by year-end. I would anticipate solid early morning buying on monthly inflows today, then a pretty choppy session ahead of the NonFarm payroll report tomorrow morning. Overnight, the Nikkei crossed the key 15000 level, Europe is higher on the ECB's first rate hike of 25bp, Gold is higher, Crude Oil is roughly unchanged. We have some key economic reports with the ISM and PCE as well. Good Trading to all, Brad
Posted 08:35 CST Equity Index Update Friday December 2, 2005 The index markets celebrated the arrival of December with buy tickets as money flows poured into the Russell 2000, Midcap 400 and NDX. The SPX and DJIA also put forth strong showings and reside a bit below recent trading highs. The trigger to yesterday's rally happened overnight as the Nikkei vaulted above 15,000 for the first time in 5 years. As the ball began rolling, shorts began to cover during European hours and in early U.S. trading. Institutional flow was seen on the buyside from the opening bell, particularly in the technology issues as the Semiconductor sector became the latest beneficiary of dollar rotation. The SMH (Semiconductors Holders Trust) hit levels not seen since Q1 of 2004. The employment report released this morning was moderately received by the indices. The job creation was nearly in line with consensus estimates. However, much like a momentum stockâs earnings report during earnings season, the jobs report did not meet the whisper number, which was closer to +275k. Regardless, equities should continue to feed off yesterday's sharp rally. I would expect that this session follow a more trade-oriented pattern of lows in the morning and highs toward the close of trading. If this pattern does not materialize, and the equity market reverses much of yesterday's gains, then I suspect the scenario I laid out a few days ago in which players sell into the early month strength with the markets stagnating just under recent highs may be at play. All told, the odds are for higher prices, but I suggest day traders wait for the afternoon before pulling the trigger. Good Trading to all, Brad
Posted 07:55 CST Equity Index Update Monday December 5, 2005 The index markets traded mixed on Friday, with the NDX and Russell 2000 leading the upside charge as both contracts settled at new highs for the current rally. The Midcap 400 and SPX finished slightly higher, while the DJIA was a bit lower on the session. The employment report proved to be a non-event in both the equity and fixed income markets. However, comments from San Francisco Fed President Yellen added some afternoon spice to the trade. Yellen stated that the positive performance of recent indicators "suggests that the overall economy has been resilient in absorbing the impact of the hurricanes. For 2006, it seems liklely that this strength will continue in the first half as rebuilding kicks in. Then, in the second half, a couple of factors are likely to cause economic growth to settle into a trendlike pattern." More importantly, warned Yellen, "While it seems unlikely that the end of the current tightening phase is yet at hand, there obviously will come a time when these two phrases are no longer appropriate, and other changes to the statement may be needed as well." From this statement, it appears 50 bp more of rate hikes are a lock. Further, one cannot discount the potential for a total of 100bp of additional tightening. The market did little with the above statement from Yellen, but keep in mind that if the Fedspeak continues in this fashion, rates should push higher and the equity market will stagnate -- most likely around current levels until the monetary issue is completed. Remember, this is a scenario built on additional Fedspeak into the upcoming Fed meeting and thereafter. The NDX continued its ascent on Friday, and appears ready to make a push towards 1750 by year end. Money flow has been particularly strong into the Semiconductor issues. However, we have seen this parade before. Quarterly money flows into this sector are not unusual and, given the extended levels of my moving average extensions, I would expect some consolidation before the next push higher. In other words, if already long, hold the position. If thinking of getting long at current prices, be wary. The SPZ continued to struggle with the 1268 level, just below highs for the year seen last week. In general, the trade last week had a "soft" feeling to it in the SPZ, but with Thursday's rally, the index suffered only fractional losses on the week. That brings up a key point in regards to how much of this month will likely play out in terms of velocity and direction. I would expect much of the trading to be "One-Way Street"-oriented in nature. These make tremendous opportunities for day traders, so long as our market opinion does not get in the way. I would expect the month to end with a roughly 4% trading range, but some back and forth within the range along the way. If this prediciton is correct, utilize patience and let the market show you where it wants to go. Good Trading to all, Brad
Posted 07:55 CST Equity Index Update Tuesday December 6, 2005 The index markets lost minor ground yesterday after early selling pressure abated. Volume flows were light as players began to position themselves ahead of Thursday's Rollover into the March '06 (H) contract. On the economic front, the ISM Non-Manufacturing survey came in a touch light of consensus and had little market impact. This morning, the indices are bid higher amid strength in Europe and the revision to Productivity from 4.1 to 4.7. The SPZ continues to hang around the 1268 level, just below recent trading highs. Today should be another critical test in the resistance zone from 1264 to 1268 in which the contract has been trading. Moving above this zone would likely bring 1275 into play. If the market fails to produce the upside push, I would suspect another potential air pocket lower towards 1260. The NDX should be interesting this morning as Sears Holings (âSHLDâ) and (âAAPLâ) are called higher. The index was unable to sustain 1700 but shed much of the early -1% loss by the close of trading yesterday. Resistance in the NDZ contract should come into play from the 1708 to 1715 level. Much like the SPZ comment, if buyers fail to hold the bid early, I would expect a potential push lower towards the 1693 area. Good Trading to all, Brad
Posted 09:15 CST Equity Index Update Wednesday December 7, 2005 The index markets suffered a serious reversal from their respective trading highs in the final hour of trading yesterday. Volume, which was running approximately 20% below average all session, ramped higher during the decline. There did not seem too be any "real" reason for the final hour drop. Bear Stearns' desk was the lead seller in the SP futures on the way down. However, much of the decline seemed to be tied into day trader long liquidation below 1270 and fresh buying staying on the sidelines into the closing bell. This creates a tremendous opportunity for day traders to push the market lower, without any force from the other side. Today, the indices will attempt to recover from the late selling. However, I suspect that the downside action yesterday reinforces the range trading theme I have been discussing recently. The market now finds itself in a position where the buyside is seemingly uninterested in purchasing the market at higher levels. When this occurs, it tends to create melt ups and downs in pricing without any change in the overall market outlook. It seems as though more of these pricing swings will be ahead of us for the next few sessions. For day traders these markets create excellent opportunities and plenty of "One-Way" streets. In the short run, look for the SPZ to potentially test the 1259 to 1260 level of support today. If the market holds this zone, it should lead back to a test of the key 1268 level, but if it fails to hold this zone, look for a potential test of 1255. All told, I would expect the trade in all indices to be relatively tame and in a pretty defined range. Good Trading to all, Brad
Posted 08:10 CST Equity Index Update Thursday December 8, 2005 The index markets finished lower yesterday as players pushed the respective indices near the recent lows established on November 30. In the case of the DJIA, the index broke below the closing price of that session at 10805, but was able to gain some ground into the closing bell and settled just above that price at 10810. More importantly, the index closed in positive territory for the year, after briefly moving into the red during the session. Today, the indices will digest the mid-quarter updates from Texas Instruments (âTXNâ) and Xilinx (âXLNXâ), while preparing for the update from Intel (âINTCâ) after the close of trading. Currently, the markets appear to be locked into a trading range that has been in play since mid-November. Keep in mind, since our October trading lows each index has participated in a significant rally. The indices continue to work off their overbought status from a short-term technical level, while hitting some key long-term resistance zones. I suspect we will see more choppy "One-Way Street" trading action through next week. I would be surprised if any index breaks out of its respective trading range in that timeframe. For the day trader, this continues to mean excellent opportunities within the ranges. Yesterday's action built on the final hour selling from Tuesday's session as sellers patiently walked the market lower. Today's trade should prove to be a bit choppier as the SPH is currently trading unchanged after being lower by nearly -5.00 overnight. CASH resistance levels are 1260 to 1261 and 1265 to 1267. Support levels are found from 1252 to 1249. Below this zone, 1245 is CRITICAL and should be used to establish long positions into the year-end. REMEMBER, TODAY IS ROLLOVER DAY. FRONT MONTH CONTRACTS IN ALL EQUITY INDEX FUTURES IS "H" --- SPH6, FOR EXAMPLE. Also worth noting, fair value for the March futures contract in the SPH is +7.20 over the cash market. In the NDH6, fair value is pegged at +16.50 over the cash market. As usual, during the rollover sessions there is plenty of liquidity from arb players. Normally, this changes the trading "flow" from usual patterns. Keep this in mind as we move forward throughout the session. Good Trading to all, Brad
Posted 08:10 CST Equity Index Update Friday December 9, 2005 The index markets participated in a volatile trading session yesterday that produced little net change in the majority of the indices. The NDX and DJIA were the worst performers, while the Midcap 400 and Russell 2000 actually finished slightly higher on the session. Today's trading should be based on reaction to Intelâs (INTC) mid-quarter update and any news from Merck (MRK) and their current trial. The University of Michigan Consumer Sentiment reading will have a minor impact on the session. Yesterday's volatility deserves some attention as the market melted up on rumors of an error trade at the CME that left a brokerage group scrambling to buy 500 SPH contracts during the price acceleration from 1265 to 1272. Then, negative news hit the Semiconductors during the lunch hour and produced a volatile sell-off across the board. The ER2 broke nearly -2% from its intraday high, and the SP, DJIA and NDX all fell around -1%. However, buying came in the final 30 minutes of trading, alleviating some of the decline. Natural gas and Crude Oil received much of the attention as to the reasons for the downdraft. More likely, the decline was lead by the Semiconductor issues and their collective response to mid-quarter update season. In classic buy the rumor, sell the news fashion, the sector was pounded as fast money -- which had been pouring into the sector at the start of the month -- ran for the exits. This action disturbs me for one big reason. That reason is that the trading action in the Semi's over the past few weeks is similar to what we have seen over the past couple of years. In other words, a big push one way followed by unsustainable buying/selling in the direction of the initial surge. The Semiconductors are more than just another sector. They are a closely followed indicator for a number of traders, economists and analysts. For this rally to continue more than just a couple of more weeks, the Semi's need to return this shot for a winner. If not, I think this may be the first nail in the upside coffin. With respect to Natural Gas and its dramatic rise of nearly 10% yesterday, I think the equity market may have over-thought the potential outcome in regards to any selling associated with the commodities rise. I cannot imagine that the rise in NG will have any material impact on holiday shopping and spending. The fact is the consumer will not be hit with the bills from this cold snap until after the holiday. That being said, the movements in commodities, particularly Gas, the metals, meats and grains illustrate some tremendous trading opportunities while equities chop around the Mendoza-line of performance. As far as the indices are concerned, the trading range theme I have been outlining over the past week appears to be playing out its hand. I would assume this theme will play out through next week's expiration followed by a spirited holiday trading rally into year-end. After that, all bets are off. Good Trading to all, Brad