Posted 07:30 CST Equity Index Update Monday December 12, 2005 The index markets participated in a quiet session that finished with moderate gains. The DJIA was able to crawl back above the unchanged level on the year, while the Russell 2000 and Midcap 400 continued holding ground just below all-time trading highs. The SPX and NDX settled marginally higher, with the NDX settling near the session high on the closing bell. Volume flows were light ahead of Tuesday's FOMC meeting as players continue to hold the indices within their respective trading ranges. This morning, market action will focus on the buyout talks between ConocoPhillips (âCOPâ) and Burlington Resources (âBRâ) as well as a significant dollar decline overnight and another leg higher in the metals markets. Crude Oil is back above $60 per barrel and the index markets are trading higher, but off of the best levels of the overnight session. Tomorrow's FOMC meeting should bring another 25 basis point rate hike, the fourteenth such increase during this FED campaign of policy neutrality. Given the current Fed Funds Futures market, another 25 basis point hike is fully anticipated, which suggests a muted potential reaction to the event. However, there still is risk that there will be changes within the language of the policy statement. The interpretation of these possible changes will be critical to the fixed income market's short end, the dollar and the equity market. Let us not forget that a key supporting theory of this current equity rally is the belief that the FED is almost finished. A couple of week's ago, I discussed at length the extended nature of the index markets. A number of indicators I employ were signaling for a short-term consolidation beneath the recent high price levels. Interestingly, the markets behaved in a similar fashion LAST NOVEMBER AND EARLY DECEMBER. In fact, the lows for the indices, on a whole, were made on December 9th 2004. The SPX tacked on another +2.6% into the year end. I am not a huge analog believer; however, the pullbacks from highs in the main indices (SPX, DJI, NDX) have been similar to '04. Further, the gyrations within a trading range also represent similar action to '04. All told, I have maintained longs throughout the past several weeks with an eye towards an expiration rally. I think this rally will continue through Christmas and the indices are likely to settle '05 near or at the highs for the year. Accordingly, I have added to my current longs on the DJI (using DOW futures, DJH6) and the SPH6 for the next few weeks. My feeling is that even if I am dead wrong, and the market declines below 1245 SPX and 10600 DJI, the risk/reward is too favorable to pass up on this trade. Good Trading to all, Brad
Posted 09:55 CST Editor's Note: Brad's commentary was delayed a bit this morning due to his active overnight currency trading. Equity Index Update Wednesday December 14, 2005 "Accomodation" â this is the key word that can move markets across the globe, and did just that yesterday. The FOMC removed this word from its language, leading to a sharp index rally as players took the cue that the FED is near completion in the rate hike cycle. The trading was violent from 1:20 to 1:25 CST as the SPH rallied from 1272 to 1280. The Emini SP contract traded nearly 80,000 contracts during that 5 minute period, easily passing the largest 5 minute volume bar since the contractâs inception. However, the SPX was unable to move above its intraday or closing high for 2005, throwing some cold water on the parade. Overnight, the Nikkei hit the skids on a weaker than anticipated Tankan Survey, which in turn led to a sharp rise in the YEN vs. the dollar. That rise has continued as the trade deficit report widened more than expected. The YEN is up nearly 2% vs. the dollar and the European currencies are rising as well. The domestic bond market is higher, ahead of tomorrow's CPI report and on the heels of the FOMC language change. The index markets now find themselves in a tricky position, that is, not only a position of testing the trading highs for the year, but also the high end of the recent trading range I have outlined the past few weeks. The market's action yesterday, particularly in the 5 minute zone I outlined above, leads me to speculate that the next leg is likely higher. Only a settlement below 1272 in the SPH would lead me to believe we will not break above the current trading range and head to new highs for the year. That being said, the spark may come from CPI or the typically bullish Thursday before expiration session, but I am suspect that the indices will be able to make much headway today. The NDX is due to open soft on an Apple (âAAPLâ) downgrade and unless all cylinders are firing, I fail to see much progress today. As I wrote a few commentaries ago, I added to my core long positions in the DJI and SP futures. I still think that on relative value, the upside potential in the DJIA is the best odds play. I would anticipate this index to play some potential "catch-up" before the year is out. As for today's session, keep it close to the vest as far as day trading is concerned. I am expecting choppy trading with a retest of yesterday's highs, but most likely a failure and minor push back towards the lower end of yesterday afternoon's session. Good Trading to all, Brad
Posted 07:30 CST Equity Index Update Thursday December 15, 2005 The index markets held a moderate bid throughout the trading session yesterday and produced new high closes for 2005 in the Midcap 400 and the SP 500. The NDX, Russell 2000 and DJIA lie just below their respective trading highs for the year. Volume flows were tame, but the inability for the SPH to push towards Tuesday afternoon's low end of the acceleration zone (1272 to 1275) shows how firm the institutional buyers were yesterday. Overall the index markets have been stagnant for nearly 3 trading weeks. Yesterday's breakout in the SPX will likely signal follow-through for the upside, most likely towards the 1290 level, with a possible chance at 1300 by year end. The difficulty many traders have in this type of environment stems from the lack of two-way trading as we move higher. Volatility has plummeted over the past few weeks, and it does not appear as though it will return anytime soon. From a day trading perspective, a range-bound market provides plenty of opportunity. However, we now find ourselves with two indices at new high ground, while three remain just below. In other words, the picture appears to be changing as we venture into new price levels. Today's action should be focused on the economic data we receive from CPI to Industrial Production to Philly Fed. Further, the historicals behind Thursday's pre-December expiration are strong. Do not be surprised if today is a grind it up session with some heavy program trading within tight zones. In the SPH, support rests between 1280.50 and 1278.50, and below this 1275 to 1272 is CRITICAL. Any settlement below this zone could lead to potentially sharp selling over the next couple of sessions. On the upside, I anticipate resistance points at 1283, 1284.50 to 1285.50, 1288.50 and 1291. Good Trading to all, Brad
Posted 08:25 CST Equity Index Update Tuesday December 20, 2005 The index markets settled lower across the board yesterday as late afternoon selling overwhelmed the moderate size of resting bids. The NDX took the brunt of the selling as the index moved below a key support point at 1675 and settled around 1664. This settlement is in a key support zone that rests between 1650 and 1665. Any settlement below this zone, followed by a failed rally attempt around 1700 could lead to a significant decline in early January. Keep in mind that this is only one potential scenario. Interestingly, each major index now resides below its respective 20 day MA and only 1 index (the SPX) is making even relative headway to the positive side this month. In fact, examining the monthly performance of the indices, the Midcap and DJIA are essentially Unchanged, the NDX and Russell 2000 are lower by less than -1% and the SPX is higher by less than 1%. The reasons behind this seem to be clear and it points to something I discussed a few weeks ago as the markets reached significant extension stages after the strong rally from our October lows. The NDX, Russell and Midcap reached extremely advanced stages in terms of distance from their respective 200 day MA's. These distances continue to be worked off as the NDX has gone from a 10% extension above its 200 day MA to less than 5%. Typically, the indices will probe slightly lower before finding a support point from which a decent rally ensues. IF THIS PATTERN IS DIFFERENT AND THE INDICES TAKE OUT KEY SUPPORT POINTS BEFORE THE HOLIDAY ON A CLOSING BASIS, IT SHOULD SET UP A SHORTING OPPORTUNITY IN EARLY JANUARY. Overnight, MWD reported solid earnings and is called a bit higher, the dollar is firm against all currencies, gold and silver are up moderately, the fixed income market is slightly lower, and PPI came in softer than anticipated on both the headline and core rate, though it is having little net impact on the equity trade. A large factor in today's equity trade could be the strike in NYC leaving commuters in a bit of a lurch. Good Trading to all, Brad
Posted 08:10 CST Equity Index Update Wednesday December 21, 2005 The index markets participated in a back and forth session with volume flows running around -20% lighter than average. Between the NYC transit strike and the upcoming holiday, few players felt the need to get any business done. One segment of the global markets that continues to shine is the performance of the Nikkei which crossed 16,000 briefly last night. The U.S. markets have been helped by this development and are trading near yesterday's highs. The action yesterday had all the makings of a reversal rally session. However, the indices could not seem to generate any buyside activity at their respective highs. Accordingly, sellers came into the market during the afternoon marking prices a bit lower. The DJIA struggled as it settled just above the key UNCHANGED level for 2005. GM hitting a multiyear low was a psychological blow for the index. It will be interesting to see if the market is able to shrug this off during today's session or if it will continue to be an overhang, providing resistance. There were not any noticeable changes in the technical index readings after yesterday's performance. The NDX held key support between 1650 and 1665, and the Russell 2000 held firm after a near -4% drop from recent highs. Considering that these two indices have been the leaders in terms of price change and volume during the recent rally (the Midcap 400 continues to be a lightly-traded futures contract), I expect these markets to show the next leg into year-end. My opinion and positioning remains long with exit plans around the last day of trading for 2005. Good Trading to all, Brad
Posted 08:30 CST Equity Index Update Thursday December 22, 2005 The index markets continued their pattern of early strength and closing weakness yesterday. However, all of the indices finished the session in positive territory. This morning the indices are called to open higher with some of the strength being attributed to the settlement discussions in the NYC transit strike. "It is too soon to declare that pass-through risk [on inflation] is entirely behind us. This assessment is consistent with the statement released by the FOMC following its meeting last week, which noted that â. . . elevated energy prices have the potential to add to inflation pressures.â To my mind, any energy price pass-through to core inflation that is more than marginal and transitory would be unwelcome. To maintain credibility for price stability, it is essential that monetary policy should respond vigorously to any visible erosion in inflation expectations." -- Richmond Fed President Lacker in comments uttered yesterday, indicating clearly that inflation is still being discussed within the FOMC confines. As for the market today, the indices will likely attempt to climb the resistance hill once again, only this time the need to maintain into the closing bell becomes more important from a psychological perspective. The reasoning is quite simple -- if there are a group of players holding onto to trading positions for a year-end rally, the longer in the tooth this sideways action plays out, the more nervous they get. That could lead to some aggressive selling towards year-end or early next year. Good Trading to all, Brad
Posted 07:50 CST Equity Index Update Tuesday January 2, 2006 Happy New Year to all. The index markets are currently bid higher than Friday's session highs across the complex. The SPH is trading at 1261.50, up 6.75 on the session, and more importantly, the contract is 9.00 above the last trade of 1252.50 on Friday's close. Remember, all contracts were marked to fair value at closing on Friday. The fixed income market is trading moderately lower, along with the dollar. The commodity metals continue their winning ways as Silver is trading 2% higher above 9.50 and Gold is higher by 1% at 524. The yield curve inversion seemed to be the final reason for players to lock in minor gains last week. Early last week, when the 2's and 10's inverted, it seemed to trigger equity sell orders. Further hurting the indices was the inability for the upside to gain any traction at higher price levels. If you recall, one of my fears about the rally I discussed was the potential for funds to move out of their long positions when fresh buying came into the marketplace. This scenario seemingly played out over the past few weeks. The question now is this: Does the flat line/inversion of the 2-10 spread mean that equities are a sale at current price zones? Assuming that the yield curve is the catalyst for the trading environment over the next couple of weeks, the release of the FOMC minutes at 1:00cst this afternoon becomes a critical piece of economic news and should lead the indices, in terms of direction, after being interpreted over the next few sessions. One trade that I am wary of is the index market sale on the open of trading that so many people seem to be discussing. Simply put, I live by one rule in trading, investing, sports gambling and just about anything that comes to odds: when everybody wants to do something, look for an opportunity to fade 'em (see the Ohio St. vs. N.D. game yesterday, for example). This does not mean that I will be buying on the open of trading today. However, unless the SPX can get a sustained trade below 1245, I see no reason to play the short side at current price levels. RANGE -- my definition of a trading range is when you look back over your trades for the month and notice the same price levels week in and week out. The last 28 trading sessions, spanning from November 14th's close to December 31st's close, produced a whopping range in the SPX from 1248 to 1275 â or roughly 2%. Accordingly, many players were left scratching their heads as to why the market failed to produce higher prices. While there are plenty of available reasons for this failure, I think one that is overlooked is that few players were left on the short side once the market crossed above 1250. Most of the short covering was done from Mid-October into early-November as aggressive funds scrambled to cover shorts and reverse to the long side for the expected year-end rally. The problem is that once the shorts give in, it is exceedingly difficult to move the market higher. Simply put, for velocity - on the upside or downside â there must be "need-basedâ trading -- "I need to sell/buy these, and don't worry about the price." Once those hands are played, we revert to quiet and range-bound trading. Here's hoping to more âneed-basedâ trading in '06. Good Trading to all, Brad
Posted 08:15 CST Equity Index Update Wednesday January 4, 2006 "Although future action would depend on the incoming data, this characterization of the outlook for policy was seen by most members as indicating that, given the information now in hand, the number of additional firming steps required probably would not be large." With that statement, the FOMC lit a fire under the equity market as buyers poured in during the final 2 hours of trading. How aggressive was the buying post FOMC minutes? The SPH rallied from 1256 to a session high of 1277.50 and the NDH went from 1662.50 to a session high of 1701. Simply put, this was the definition of a âOne-Way Street.â What I find interesting is that so many markets participated in similar one-way action. Take a look at Gold, Silver, Crude Oil, certain soft commodities, the short end of the curve (EuroDollars and 2 year notes), the dollar (which was absolutely hammered) the Grains and Lumber. Not to mention so many different equities which had huge sessions. Yesterday, I commented that the FOMC minutes, particularly in light of the recent inversion and flattening in the 2 year vs. 10 year yield spread, would provide the key over the next few sessions in terms of general market direction. Certainly, yesterday's action provided ample reasons for the bulls to load up their positions over the next few days. What is extremely interesting to me is that we have traded sideways for nearly 6 weeks. In my opinion, a break of the current trading ranges should lead to substantial and prolonged movement over the next 6 to 8 weeks. One indicator that I use to help determine potential movement is the Standard Deviation of trading ranges within each index. My STDEV readings are at important levels of "quiet" after our recent consolidation. If one subscribes to a "corkscrew" type of theory, the current index markets are tightly wound and looking to move. Resistance today in the SPH will reside from 1277 to 1278, 1279.75 to 1280.25. Keep in mind the SPX is only 7 odd points away from the rally highs from '05. No matter what you may or may not think of the current move, the odds in the short run are likely new highs and potentially to 1300. Good Trading to all, Brad
Posted 08:30 CST Equity Index Update Thursday January 5, 2006 The index markets added to the strong gains witnessed on the first trading day of 2006. The SPX closed at its highest level since spring 2001 at 1273.46. The index was a fraction away from taking out our recent highs of 2005 on an intraday basis of 1275.80. The Midcap 400 was able to break out to higher ground and close yesterday's session at all-time high levels. The NDX closed just shy of 1700 and has now rallied nearly 4% from Tuesday's intraday low to yesterday's high. The Russell 2000 settled less than 1% from its all-time high and the DJIA moved back into its December resistance zone between 10850 and 10950. Volume flows were a bit softer than the first of the year. However, demand did not slacken much as the breadth readings were strong across the board. Today's action should be characterized by consolidation ahead of tomorrow's Employment report. Wal-Mart (WMT) reported disappointing same store sales, but Xilinx (XLNX) released better-than-expected guidance after the close last night, helping underpin a strong bid in technology. This morning, the metals complex is sharply lower, fixed income is quiet and the dollar is higher across-the-board. In regards to the SPH, resistance levels should be found between 1278 and 1280, and above this at 1281 to 1282. All told I would expect the 1275 to 1280 zone to be heavily traded in the session. The ISM non-manufacturing survey is released at 9:00CST, and DOE petroleum stats at 9:30CST. These releases should have some short-term impact on the trade, but most likely not a lasting impact. Keep it close to the vest ahead of tomorrow. Good Trading to all, Brad