Brad Sullivan's Morning Commentary

[Hamzei_Analytics]

Posted 09:00 CST

Equity Index Update
Thursday January 26, 2006

The index markets participated in a volatile back and forth trading session that ended with little net change. However, underneath the final results where some critical shifts in the trading background. In my opinion, the key seemed to be the final hour of trading as the sell side could not maintain the pricing of each index below key support zones. Further, the strong buying into the bell, which settled each index well above their respective fair values, should be seen as a clue for more upside gains this morning.

The ER2, or Russell 2000 mini contract, remains the most interesting play on the index board. The contract, after settling at all-time highs yesterday, spent the majority of the session bounding between 1715 and 1717.50 before aggressive final hour buying pushed the market to positive territory by the session close. This puts the index at a critical juncture as far as my extension and standard deviation readings are concerned. The contract is now at levels of extension, +10% from its 200 day moving average and its standard deviation, +/- 1 STDEV is 13.92 points or nearly 2% on a 22 period reading. In my opinion this leaves the index with one of 3 possibilities from current levels. First, this could be the beginning of a blow off top as money pours into the index and we move towards 775. Second, the index suffers a sharp 7 to 10% correction - which is in line with previous extensions of similar size the past 3 years. Finally, the final option is that the index works off its overbought state with a sideways move that stays contained within a 3% band.

I have chosen to speculate on the second possibility, a sharp correction. I initiated option positions in February and March to take advantage of what I see is a solid odds play. If it does not work out it will be interesting to witness which option the market takes - further rally or sideways contraction.

This morning the markets are called to open sharply higher on the heels of a strong rally in both the Nikkei and Europe. The SPH is trading near 1279, up significantly from settlement and closing in on +1% from its fair value reading. Normally, this leads to a solid opening scalp short trade as the futures get out of whack with fair value before the cash open. Normally, by the end of the first 15 minutes of trading that trade is rectified. The key question concerning the upside is this...can the buyers push the SPH above the resistance zone from 1275 to 1277 and hold it in order to challenge another critical resistance area from 1279 to 1282. Given the winds of momentum, a 1.4% rally since the afternoon low yesterday, I would have to say the odds are for this to occur. The bigger issue then becomes can the index close above 1282? If the answer is yes, I suspect we will see some solid earnings from MSFT this afternoon and further upside as the markets attempt to take back the Friday debacle.

Clearly yesterday's action was a blow to the sellers. With everything going their way, the players could not close the market below key levels. Like a boxer coming off the standing 8 count, the buyers were able to defend and force short covering into the bell. Maybe this is the beginning of wide trading range or maybe it is the start of another leg higher. Only time will tell and today should provide more clues to the eventual answer. In the meantime, day trading should continue to provide opportunities at inflection points, but, be wary of the whip.

Good Trading to all,

Brad

 

[Hamzei_Analytics]

Posted 08:50 CST

Equity Index Update
Friday January 27, 2006

The index markets participated in a choppy back and forth session that ended with strong gains in both the large and small cap markets. MSMFT and BRCM were all the focus after the market closed as their earnings reports provided a lift in the post cash market session. Further lifts were provided from the Nikkei, which closed up nearly 3% and Europe which remains higher across the board. However, the GDP reading was a touch light and sent off some warning bells about the domestic economy. In addition, Crude Oil is working its way back up and is trading over 1.5% higher at 67.30.

The continued rally in the ER2 contract seems to be the talk of the index trading community...less clear is whether or not this sharp money flow increase into the small cap arena is bullish or bearish for the large cap issues. Here are the facts, the ER2 is up +7.88% on the month, compared to a +1.87% rise in the Russell 1000, the index that represents the largest 1000 cap equities in the United States. Another way to show the strength in small caps rests in the index spread trade. In 2006, a spread trade of long 4 ER2 contracts and short 7 SPmini contracts has netted a profit of over +13,000. This spread represents 1 unit, or the closest measure we can get to fair value between the indices given their dollar value and implied volatility levels. Simply put, this rise is startling as their appears to be a ground shift happening underneath our feet in the domestic index dollar flow. While I contend that this flow is bearish for large caps...it does not mean large caps cannot rise. It does mean that they have the potential to sharply underperform the small and mid cap sector for yet another year.

The SPH continues to be stopped by the 1279 to 1282 resistance zone...our overnight high hit 1283.75, before the GDP report knocked the SPH down to 1277.50. The market is called to open around yesterday's high level of 1280.50. I would suspect some choppy range action between 1281 and 1278 in the first half hour of trading, followed by an attempt to hit 1285 in the index. The key question is if this rally attempt will have enough underpinning to move the markets higher. Clearly, the largest strength issues appear to be the Broker Dealers, led by GS and MER...however their respective weightings are relatively light in the index. The critical question is this...can the rally in Japan, Europe, domestic small and mid cap indices lead the large caps higher?

We continue to get clues to this answer, but, the largest clue may have been the shot that was fired last Friday. Something is brewing beneath the proverbial surface...and until we can put that sessions debacle behind us, a sell the rally large cap scalp trade appears a good way to play the day trade.

Good Trading to all,

Brad

 

[Hamzei_Analytics]

Posted 08:50 CST

Equity Index Update
Monday January 30, 2006

The index markets participated in a sharp rally, led by the underperforming large cap issues on the heels of a better than anticipated earnings report from MSFT. The NDX was able to push higher, but, failed to hold the sizeable early gains that drove the index as high as 1717, just a notch below the key 1725 level. This level was the breaking point on Friday January 20th, that led to a quick plunge towards the 1670 zone. The index was able to rebound from early afternoon trading lows, and settle just a bit below session highs with a solid % gain. With so many events on the docket for this week, it is critical to have a sharp understanding of what the marketplace is anticipating.

The first question on the board is whether or not the indices will put in a Greenspan premium ahead of tomorrow's meeting. Will the chairman end his career as everybody anticipates, with a final rate hike? Will he surprise us and not raise rates? Will he signal that the rate hike cycle is over? The key question... is will any of it matter? The facts are pretty simple...in the face of rate hikes the market has been able to perform near historical results in the large cap arena and blow the door off in small and mid cap historical performance...will that change when the fed pauses? Years ago, Marty Zweig discussed his cardinal rule which was don't fight the FED. However, the FED began to ease while the equity market tanked earlier this century...and has rallied as the FED has increased rates. Is this concept no longer valid? So many questions about where this path leads for equities, and the answers should be found in short order. In my opinion, the indices look like they have potential to vault significantly higher in the short run. That being said...I am long Russell 2000 puts and flat everything else. Why? I cannot decipher whether or not this updraft is a "false" trend destined to be reversed like the action on 1/20. Or if this updraft is the real deal and a type of brave new world, led by small and mid caps domestically, Asia and the emerging markets globally, with Europe just behind.

As you can see...too many scenarios without the answers for today's action. My trading instinct tells me that the longs will attempt to close the markets near the session highs, but, lots of chop for much of today's session. Tomorrow will be critical as the FOMC decides and GOOG reports. Save the powder until then.

Good Trading to all,

Brad

 

[Hamzei_Analytics]

Posted 08:20 CST

Equity Index Update
Tuesday January 31, 2006

The index markets traded in a quiet, narrow range ahead of today's critical data. This data entails the end of a very solid month in terms of net performance in the marketplace, the FOMC meeting and the final day of Fed Chair Greenspan, GOOG earnings after the close of trading and the State of the Union address this evening.

The ECI was released earlier this morning, however, its market impact was slight. At 9:00cst we will receive the Chicago PMI and Consumer Confidence for December. While these reports may influence the trade in the short run, it is evident that the 3 main events - outlined above - are the drivers behind today's trade.

Accordingly, I will be on the sidelines until this afternoon's announcement in the equity world. Players will be keying on any potential shift in the statement. The largest question in my mind for this statement is whether or not the market is "spent." By that term I mean this...have the indices used all their juice to get these sharp January gains on the news that is destined to come - that the FED is just about done with the rate cycle? Or is there more upside once the all clear signal is officially flashed? Difficult questions with no clear cut answer in the short term. Today's events should provide the marketplace with more clues and some volatility, but not a clear answer.

Good Trading to all,

Brad

 

[Hamzei_Analytics]

Posted 08:15 CST

Equity Index Update
Wednesday February 1, 2006

The index markets were jolted with late session selling on the heels of disappointing earnings from GOOG. The NDH's last trade was about -1.2% from fair value...however, due to month end settlement procedures, the contract actually settles at the recognized fair value level. In this case it was 1719.50, versus a last trade of 1699. The miss from GOOG overshadowed the action from the FOMC meeting. Fed Chair Greenspan's final meeting pushed through another +25 bp rate hike, increasing the Funds rate to 4.50%.

The most relevant part of the statement centered on the committee altering its forward guidance for future policy actions to be more ambiguous. The FOMC noted that "some further measured policy firming may be needed." This compares to the guidance provided at the 12/13 FOMC meeting, which stated that "some further measured policy firming is likely to be needed." Classic Fed speak. At the end of this statement dissection, the index markets did not seem to know what to make of it. Early selling, followed by strong buying that took the indices back to their respective highs for the day. However, the index market could not build on the buying and fell back well before the GOOG report hit the wires. One of the fears I had moving into the session yesterday was that the "juice" may be over as far as the buyside is concerned with respect to the end of this tightening cycle. Clearly, players would have enjoyed a "clean slate" for Bernanke and some funds seemed to exit positions when this did not happen.

Today's action will seemingly be centered on the GOOG news...however, underneath the surface is AMGN trading significantly higher on news and solid earnings from BA, helping the large caps in the pre market. GOOG itself has rebounded from some panic type selling in the 350's to a current price of 391. I won't get into speculating on the merits of the earnings report in GOOG and the newfound fear of its tax rate...I will focus on the psychological impact of the stock and the impact it will have on today's session. From a market sentiment point of view, the current decline in GOOG is critical for the main reason that this stock is a "feel good" issue. In other words, everyone knows GOOG - its used as a verb in modern english. Now, when a verb gets hit on earnings it operates differently than say INTC. The response in today's trading action will be interesting to watch. Will the market focus on other issues - such as BA, AMGN and the bounce in Europe...or will GOOG psycholigically damage the indices? I think the odds are for a bounce that could turn into some vicious covering and momentum higher by the close.

Keep a close eye on the Midcap 400 which closed at an all-time high yesterday.

Good Trading to all,

Brad

 

[Hamzei_Analytics]

Posted 08:15 CST

Equity Index Update
Thursday February 2, 2006

The index markets participated in a narrow range driven session as the indices worked off the GOOG overnight news and moved higher from the overnight trading lows. All told, the markets remained bid at lower band price levels...however, the indices also struggled to find wanting buyers at higher prices. The Midcap 400 pushed through its all-time highs, but did not accelerate from that level. Instead the index stayed range bound for the afternoon. The Russell 2000 was also unable to push back to its recent high and remained in a choppy sideways trade. The NDX and DJIA were the best performers on the session - and the DJIA is back towards the 11,000 level. The SPX meandered for the session in a quiet back and forth trade.

Today the markets are called to open modestly lower, with the SPH trading at 1283.25, -4.00 on the session. There was little in the way of news overnight to be the catalyst behind this move. Japan finished higher and Europe is fractionally down. The domestic fixed income market is quiet and the dollar is higher against most of the major currencies - particularly the YEN. For those of you trading the Dollar/YEN, the market appears to have shook off the sharp short covering witnessed towards the end of 2005. The YEN is now quietly drifting back towards 2005 lows in what appears to be a very manufactured type of movement.

Tomorrow will bring the employment report, leaving me to speculate that the odds of staying within yesterday's trading ranges in the indices are quite strong. From a day trading perspective, I think keeping it close to the vest today is the best idea.

Good Trading to all,

Brad

 

[Hamzei_Analytics]

Posted 08:20 CST

Equity Index Update
Friday February 3, 2006

The index markets suffered through some aggressive mid-morning selling yesterday. Strong institutional selling hit the SPH contract around 9:35cst yesterday, the estimates were that one house sold the equivalent of 7,000 contracts from the opening bell until 10:30. This order was handled on both the emini and in the pit traded contract. This morning, the indices are called to open lower once again on the heels of today's non-farm employment report.

The actual report came in a bit lighter than expected at +193,000 versus the estimates of +250k...however, the fear in the marketplace seems to be centered on the UNEMPLOYMENT RATE. That figure came in at 4.7%, substantially lower than the 4.9% anticipated reading. The wager being laid right now across the global spectrum is that the FED will not be done with the current rate hike cycle as quickly as many had predicted. The DOLLAR has staged a massive rally against the global currencies on this reading, while the fixed income market is trading lower, but, significantly off the highs of the session. Another issue in the report is the growth on a year over year basis in the wage component of the report...all of this action is leading to a potential global 1 way street today. What I mean by this is simple...lower bonds, higher dollar, lower equities. If this slide or one way street develops in the equity market I would suspect we would be in for a decline of significant proportions.

I would anticipate some volatile price action in the first 90 minutes of trading, but, by the end of the session I think the odds are tilted towards a downdraft that carries the SPH below 1260. Key issues along the way would be any reversal in the dollar and bond market. Support points in SPH are 1265, 1262 to 1258. Finally, 1253 to 1250 is the last line of defense. The NDX, which was in the midst of a very confusing 3 day pattern appears to be hanging by the proverbial thread. If you include overnight data in the NQH contract, the issue had 3 consecutive sessions within the same wide trading range, roughly 1692.50 to 1725. Yesterday's breakdown below the 1692.50 level on the close should open the way for a test of the 1650 zone.

Good Trading to all,

Brad

 

[Hamzei_Analytics]

Posted 08:05 CST

Equity Index Update
Monday February 6, 2006

The index markets suffered another decline in the large cap issues as the SPH, DJIA and NDX fell for the second straight session. Disturbingly, for the buy side, the NDX settled at its lowest point of 2006 at 1664.53. The index still is in positive territory for the year at +1.5%; however, it is now -5.5% from the high print of the year at 1761 on January 11th. The large cap weightings of INTC and GOOG have clearly hurt the index during this decline...the key question moving forward in the near term is pretty simple...are we in for a 10% correction from the recent trading highs, or is the market attempting to bottom out somewhere near a -5 to -7% downdraft? Given the current momentum on the downside, it would appear that this move will attempt to trade towards the 2005 closing price of 1645...conveniently for dip buyers, this would put the current downleg at about -7% from the January 11th high. In my opinion, this would be an excellent chance to get long the index for a move back towards the 1725 level.

Friday's trading action put a few questions on the table in regards to wage inflation. Given the updraft in that area, it seems the Bernanke FED is destined for at least 1 more rate hike, and potentially as many as 2 more as he decides to err on the side of inflation beating. Certainly, this is not the news that many equity investors had hoped to hear. Accordingly, the indices have been selling down on this news. Today's action will prove interesting as the bears have a chance to put a dent into the marketplace. However, each time this opportunity has presented itself - recently - the sellers have decided to cover their positions and not press the advantage. If that were to occur today, I would speculate that we have seen a short term bottom in the marketplace.

Keep a close, close watch on the Midcap 400 and the Russell 2000 as neither index has shown any serious signs of deterioration from their recent all-time highs. If these two indices were to have heavy selling in the next couple of sessions, it would be a blow to the overall market's health. Finally, this week brings very little in the way of earnings, but, it does bring the 10 year and 30 year auctions. Keep tabs on any impact this will have on the yield curve as Friday's reversal in the 30 year could be a sign of things to come. Demand is expected to be heavy for that issuance.

Key support in the SPH remains at 1262 - 1258...any settlement below this zone should lead to a move towards 1250-1249 and that is a level that the buyside must hold. On the resistance front...1273.50 to 1276 is a critical zone. Any 30 minute close above this zone should lead to a test of the 1281 level.

Good Trading to all,

Brad

 

[Hamzei_Analytics]

Posted 07:00 CST

Equity Index Update
Tuesday February 7, 2006

The index markets traded mixed as early large cap technology weakness led the NDX to challenge the key 1650 level, and each of the remaining indices challenged their respective Friday session lows. However, the sellers were unable to hold the offer at lower levels and a final hour of short covering launched the ER2 and EMDH to their highest close since Thursday's mid-morning selloff. Volume was extremely light as players seemed to be on holiday post Super Bowl. Today's action will be interesting as the indices are clearly at a critical support juncture and thus far have seen continued divergences amongst themselves. How these divergences play out in the near term should determine the next path of market price action.

One of the divergences continues to be the action in the large cap vs. small cap performance. The RUSSELL 1000 INDEX, which represents the 1000 largest domestic cap companies, is currently higher by +1.2% for 2006. The RUSSELL 2000 INDEX, which represents the small cap issues, is higher by +7.8% for the year. Consider that this divergence is not something new...since the March 2003 trading bottom, the Russell 1000 is higher by +53%, while the Russell 2000 is up 123%. What is fascinating in this divergence is the insistence among money managers and analysts that this divergence will end sometime soon. Seemingly, these analysts must be focused on the P/E compression that so many discuss when it comes to large caps. However, my take on the small and mid-cap rallies is quite simple. These are the areas that speculative money is flowing towards. Whenever this speculative liquidity dries up - assuming it does - it will leave some serious treadmarks on those buying in late to the game. The $$$ question is obvious, are these indices in the late stages of a buying panic that eventually fails badly? Or, are these indices the brave new world when it comes to index investing? I know this much, after watching many a great trader sell the NDX on its way to the moon in 1998 and 1999, the top will be higher in these indices than many will see in their respective tarot cards.

Overnight the index futures are trading lower...the SPH is currently at 1265.50, -3.20 on the session and the NDH is trading lower by -7.00 at 1262.50. European markets are lower, but, contained and the Nikkei was down a sliver at the end of its session. Crude Oil and Natural Gas continue to move lower overnight, with Crude off -.67 at 64.44. The contract seems to have the recent lows of 63.10 in the target. Natural Gas is now trading at fresh 2006 lows, nearly 50% below it December trading highs. As I have discussed at length, the current makeup of the SP 500 and the Midcap 400 is heavily weighted towards energy components. If Crude were to move below 60, I suspect that many will be dismayed anticipating a rally in the equity market that does not materialize. The correlation between strong Crude pricing and higher index pricing is nearly lockstep. Certainly, this correlation can change, but, given a 3 year bull market, led largely by this sector the question then becomes...who would the market look to for new leadership?

Today's session should be a bit more volatile than yesterday's, particularly after the final hour short covering and the overnight selling in the SPH. For the second time in 4 sessions, my night trading desk informed me that there was a size seller in SPH all night. The seller did not move large block of volume at panicky prices, rather, they stayed on the offer all night and all the way down. The last time this type of overnight selling happened was last Wednesday evening/Thursday morning. SPH has key support from 1264 to 1262. Below this a zone of support should come into play between 1260 and 1258. Any hourly close below this zone is a negative. On the upside, 1268.50 to 1271 should produce a choppy resistance type zone. Above this level, the 1274.50 to 1276 zone is critical for the buy side. Simply put, the buyers need to make a stand by adding longs at higher price levels.

One final note...the USH continues to be well bid ahead of Thursday's 30 year auction. Could this auction be one of the reasons the index markets continue to be offered?

Good Trading to all,

Brad

 

[Hamzei_Analytics]

Posted 08:55 CST

Equity Index Update
Wednesday February 8, 2006

The index markets drifted lower yesterday, however, the large caps, which have received the brunt of the recent selling were able to consolidate at support levels. The shift in the marketplace was felt in the ER2 and EMD as both the indices had strong downdrafts that produced technical damage in the short term. This morning the indices are called sharply higher on the heels of CSCO's earnings report last night and an upgrade in DELL as well as upward guidance in PEP on the earnings front. The key question is this...can CSCO turn the tide of the NDX? The index has held key support the last two session and breadth has stabilized during this test of 1650. Keep in mind...on Monday I wrote that the key to this market will be if the index makes a push for the -10% decline or stabilizes between -5 and -7%. Thus far, the ladder is proving correct.

Today's action should be dominated by early trading action off the CSCO news and gap higher. Potentially, I would expect the Mid cap and Russell 2000 to under perform in a relative manner versus the large caps. The DOE stats at 9:30cst, given the recent decline in Crude Oil, should have a large impact on the trading session. Keep in mind...we have been following the oil market in terms of equity pricing for quite sometime and this reading will be important for the large cap issues such as XOM,CVX and others.

The SPH should have resistance from 1260 to 1262, above this zone and the trade looks a touch better. The next key spot for the market will be 1265 to 1266.50. Only a settlement above this zone will turn the index from negative to short term positive. On the support side...if the indices ignore the CSCO news and focus on the current "drivers" of this down leg, I would expect the SPH to test the 1255 level with an outside chance to hit 1250. CRITICAL SUPPORT IN THE SPX (CASH INDEX) RESIDES FROM 1251 TO 1245. A SETTLEMENT BELOW THIS ZONE WOULD NOT BE HEALTHY IN THE SHORT RUN FOR THE MARKET.

The two indices with the most to "lose" in the near term seem to be the Mid cap 400 and Russell 2000. Keep a close eye on support in the ER2H contract at 715, 712 and 709. The current trade in the index leads me to think we will test these areas shortly, possibly as soon as today. Only a settlement above 725 would change this outlook. The EMDH contract should remain under heavy pressure, in large part due to the index component weightings. Two of the top four issues are home builders, and the lead issue is an oil company, MUR (Murphy Oil). Further troubling in this makeup is the amount of natural gas and drilling issues that account for the largest sector weighting in the index. Given the current selling in these issues, I suspect we will see lower prices, most likely a play towards the 760 - 755 zone before we neutralize.

Good Trading to all,

Brad

 

[Hamzei_Analytics]

Posted 08:00 CST

Equity Index Update
Thursday February 9, 2006

The index markets put in a strong performance yesterday as final hour buying turned minor large cap gains into significant one's by the closing bell. When it was over, the SPH reversed Tuesday's decline, the NDX settled at its highest level for the week and is now +1.8% off the intra day low - which also happened to equate with unchanged on the year - from Tuesday afternoon. The DJIA also proved strong as large cap issues produced gains, while small and mid caps finished moderately higher.

Within the small and mid cap arena, it is important to dissect yesterday's trading action. Both of these indices made bounced sharply off their respective support zones, however, they were unable to generate further gains above key short term resistance levels. In the ER2 contract, I continue to look at the 725 to 730 resistance band as critical. A move above this zone is a positive for the upside, however, I tend to think most of the strength in the small caps is behind us. This statement should be viewed in context of relative performance. Given the updraft in this index since the start of the year, the corresponding large cap issues spreads are trading at a large discount to their historical levels. If one believes in any type of mean reversion, this is the opportunity to get long large caps and short small or mid cap issues. On a weighted basis, including implied volatility of each index, my current unit size for the ER2-SPmini spread is 4 ER2's against 7 SPminis.

The large cap performance was helped by the turnaround in shares of GOOG. the stock traded as low as 354 and change (margin call anyone) before rebounding to 369 by the close of trading. I continue to believe that this issue is the most important stock in the marketplace right now. Particularly when one measures the psychological impact it has on small and large investors alike. If the stock can consolidate at slightly higher levels, and the money that has flowed out of this issue the past week can be rotated into other issues, then we have the ingredients for a sustainable rally in large cap's. Another key factor in today's trade will be the reception of the 30 year auction. As this auction has approached, the index markets have had a divergence with the fixed income markets. Yesterday's 10 year auction was not overly well bid in the fixed income market, leading to lower afternoon pricing in these contracts. However, equities rallied once the bond market closed. Divergence. I have discussed the past week my thoughts on money being taken out of equities and put into fixed income - specifically the 30 year - ahead of this auction. The equity rally in the afternoon confirmed my speculations that part of the reason for our recent decline has been money flow out of equities and into fixed land. Keep a close eye on this action today.

Overnight...the SPH is trading higher at 1270.50, up 2.25...the NDH is up 6.00 at 1681.50...the USH is lower by -10 ticks at 112 '07, and is closing in on last week's employment report low of 112 '03...the dollar is moderately weaker ahead of tomorrow's International Trade reading and should remain quiet...Crude Oil is slightly higher and GOLD is sharply higher, up 7.50 at 561.30.

Good Trading to all,

Brad

 

[kriesau]

What happened to Brad on Friday and today (Monday) ??

 

[Hamzei_Analytics]

very sorry -- been running behind all day -- too busy and short-handed today -- will post in a few seconds --

there was no commentary on Friday -- Brad was up all night trading -- so he only gave on-the-run commentary LIVE in the trading room

Fari

 

[Hamzei_Analytics]

Posted 07:45 CST

Equity Index Update
Monday February 12, 2006

The index markets were able to take back the aggressive early selling in the marketplace and settle higher in the large cap arena. Small and Mid caps continue their respective under performance, however, were able to bounce off key support levels and rally about +1% - from those levels - by the close of trading. Early volume flows were cautious ahead of the Olympic opening ceremonies, locals and prop players were able to push the market down with relative ease from the opening bell in both the NDX and ER2. Near the end of the first hour of trading both the DJIA and SPH reversed course and spike lows were created in each contract. From there, it was a slow grind higher, that picked up steam in the early afternoon when the opening ceremony went off without any terrorist activity. The NDH rallied about +2% from its new low of this move - 1642.50, but, like all indices was unable to hold the bid into the closing bell. While the markets all settled off their lows, none could muster the ability to settle on their highs. Seemingly, this leaves us in a wide trading range ahead of Wednesday's Ben Bernanke testimony in front of the US Senate.

This morning the markets will focus on a couple of factors...first and foremost will be the snowstorm throughout the NYC area and the impact it will have on traders and their ability to get to work. Secondly will be any response to the sharp sell off in the Nikkei last night. The index closed below 16,000 on heavy volume. Thus far, European markets have not followed the downward path of the far east and are trading moderately higher. The final focus on the market should be the performance of GOOG after Baron's knocked the stock in a cover page article. Given the history of this publication and its front page articles, I would say the odds for a buy GOOG reversal trade will play itself out before the session is over. If this occurs I suspect we will trade towards the higher levels of our recent trading ranges.

Another issue that keeps playing in the back of trader minds is the yield curve inversion. The potential fly-in-the-ointment scenario for the domestic equity market is a recession. The debate about our current situation within the yield curve centers on those claiming that the curve is inverted due to massive demand for our longer dated issues on a global basis. Versus those that say a recession, based on historical data of past curve inversions, is looming. I have no idea which side is actually correct in this debate, and to be blunt I am not sure that either scenario is healthy for the equity market. On the one hand, a recession looming is not when one wants to go long the market. With respect to global demand for our long dated products, my question is pretty simple. Why would investors want to receive such a paltry yield on the longer dated treasuries? Certainly, there must be some alpha to discover somewhere...apparently not. With the recent auctions in the 10 and 30 year, an interesting pattern emerged in the equity markets. When the 30 year went down in price, the equity market rallied and vice versa. It seems that some of the treasury movements were directly influencing equities as pensions moved money into one market and out of the other. Now that the 30 year is on settlement from its auction, I suspect that this recent pattern may not play out...but, keep it in the bookshelf as it is bound to resurface around quarterly end.

Good Trading to all,

Brad

 

[Hamzei_Analytics]

Posted 08:10 CST

Equity Index Update
Tuesday February 14, 2006

The index markets were able to survive a quiet session that found many players at their respective east coast homes after the weekend blizzard on the east coast. Volume flows were tame ahead of Wednesday's testimony from Fed Chairman Bernanke, today's retail sales report and upcoming tech earnings from DELL and HPQ. Obviously, the big daddy in all of these events remains Wednesday's testimony. The markets are anticipating getting a "clear" feel of what Bernanke thinks about the current cycle and how much longer it may last.

On that note, the release of today's Retail Sales report was shockingly strong, with the headline reading coming in at +2.3%, significantly higher than the anticipated +0.8% that was the consensus estimate. In the wake of this report, the long end of the curve has traded to new lows for 2006, with the USH contract hitting 111'28. The dollar has rallied sharply against the European currencies, but, is lower against the YEN. The index markets have traded lower by a moderate amount since this reports release.

The potential problem in the equity market, given this release, is pretty simple. Taken as an economic barometer, this is a very healthy reading of the current economy, however, if the equity market - which is a forward looking mechanism - is worried about data flows this reading presents a problem. The problem is simple...everybody wants the FED to stop raising rates, this type of data represents expansion, not contraction. If we continue to expand in our domestic economy, the rate hikes will continue and those that bet on a FED endgame will suffer. Accordingly, those that have made that bet - one that was made very aggressively on the first trading session of 2006 - have found themselves liquidating trading positions over the past couple of weeks. The key in the short run remains the Russell 2000 and MidCap 400 indices. If the rate cycle continues for the next few months, these contracts should feel the brunt of liquidation pressures.

As for today...I would expect some choppy action with moderate to light volume ahead of tomorrow's big session.

Good Trading to all,

Brad

 

[Hamzei_Analytics]

Posted 08:40 CST

Equity Index Update
Wednesday February 15, 2006

The index markets put on their respective rally caps, led by a charge in the DJIA as it crossed and held the psychological 11,000 level. Further support in the collective indices was found after the Russell 2000 and Mid cap 400 tested key support zones and bounced rather significantly from these levels. The SPX closed at 1275, now lower by only a fraction for the month of February. Volume was solid across the index complex, which seemed to lead towards the idea of position squaring ahead of Fed Chairman Bernanke's first congressional testimony.

Today's trading action will be dependent upon what Bernanke says - or does not say - regarding the economic outlook and discussion on the current rate hike cycle. The key question with regards to his testimony and the indices collective response is simple...if Bernanke signals a near end to the current cycle of hikes, is their any upside left? Or has the market already priced this event in? In my opinion, the answer to this question will most likely come tomorrow. Keep in mind that it is not unusual for the indices to do a one way fake out session, followed by a 2 or 3 day reversal after the event has ended.

The FED Chairman will have his text released at 9:00cst and his testimony will begin at 9:20cst. I suspect, after the initial flurry of orders, we will see a rather tight range until the completion of his testimony this afternoon.

Good Trading to all,

Brad

 

[Hamzei_Analytics]

Posted 08:45 CST

Equity Index Update
Friday February 17, 2006

The index markets continued their probing of higher price zones with a solid rally yesterday. Fed Chairman Bernanke's second day testimony went off without any glitches and more than that, it appears that many were impressed with the direct nature of his language when answering the committee. All told, it appears to me that a portion of this current updraft has to be considered the Bernanke rally. The indices were wavering ahead of his testimony, mainly due to the fact that Greenspan had been in charge so long that there was a comfort between he and the markets. Ahead of this shift in Fed leadership, the markets grew worried, the past two sessions of testimony and the results within the index markets seemed to have provided a relief bounce.

This morning, the indices will focus on the DELL results, PPI and the Consumer Sentiment Preliminary reading. In addition, it is option expiration and a long weekend ahead of Monday's holiday. The odds would normally favor tight ranges, however, given the run higher this week, there could be some volatility as the session progresses.

The index markets are called to open around unchanged, to slightly lower as DELL is called to open -1.00...in addition, INTC is lower in sympathy as it is the exclusive provider of chips in DELL's computers. All told, this should make for some potential declines IF THE OPENING BID IS SOMEWHAT ARTIFICIAL. By that statement I mean that the bid on the open will not reflect the underlying problems in the market this morning. Instead, it will be tied into the expiration and built around yesterday's closing prints. It is not uncommon in these situations to see high prints registered at the open of trading, followed by a decline for most of the morning before the market settles into itself and reasserts the trend. Given the desire for most traders to leave early today, I would expect some attempted "pushing" in the negative direction over the first hour of trading.

The domestic and global fixed income markets are having significant rallies this morning...Crude oil is sharply higher and now rests 2.00 above its low made in the final 30 minutes of trading yesterday...Gold is back above 550...One other comment on the index front...THE SPX's RANGE FOR 2006 COMING INTO THIS WEEK WAS ROUGHLY 3.9%. SO FAR, THE INDEX HAS PRODUCED A RANGE OF NEARLY 2.5% FOR THE WEEK AND IS CLOSING IN ON MULTIYEAR HIGHS. This is not a bearish picture and moving forward, I suspect we will challenge the key 1325 level before this move is over.

Good Trading to all,

Brad

 

[Hamzei_Analytics]

Posted 08:40 CST

Equity Index Update
Tuesday February 21, 2006

The index markets participated in a quiet option expiration related session on Friday. Given the weakness in DELL and INTC, as well as some inflation turning headlines on the PPI front, the indices held serve quite well. The week ended with sharp gains for most indices, only the NDX was unable to participate in significantly higher prices. If the NDX cannot move higher in the next couple of weeks on a relative basis, this will be an important divergence and could lead to a large decline towards the end of Q1 across the indices.

Today's trading action will be focused squarely on the FOMC minutes which will be released at 1:00 cst. The minutes should solidify opinions in the marketplace as to the direction and amplitude of potential hikes as well as inflationary pressures that may be building in the pipeline. Prior to this release, look for the indices to stay in a relatively tight trading range. Little in the way of overnight equity news as Europe is higher across the board and the Nikkei was able to regain its footing after some heavy selling the previous session.

Worth noting on a technical level is the running breadth data I keep track of in the various index markets. The SP500 is interesting because the top 20 weighted issues are actually registering a cumulative negative reading since the start of 2006. However, the remainder of the top 100 issues have shown relative strength this year and are trading around their cumulative high for the data period (remember only 2006). In my opinion, this does not represent bearish action...I continue to look for the indices to be under accumulation in the near term.

Good Trading to all,

Brad

 

[Hamzei_Analytics]

Posted 08:55 CST

Equity Index Update
Wednesday February 22, 2006

The index markets finished lower on the heels of sharp selling in the NDX, specifically tied to the Semiconductor Index as Citigroup downgraded the entire sector. The broader indices fared a bit better...on the encouraging side of the ledger for the buy side was the late afternoon rally in the Midcap and Russell 2000 indices. In fact, the Midcap future finished the session in positive territory. The SPH seemed to hit a bit of a "air pocket" after a strong open above last week's highs. However, the index was able to hold minor support located around the zone of 1285 to 1282.

This morning, the indices will focus on the CPI report, which was in line with the Core rate at +0.2%...the headline rate was a touch higher than expected at +0.7%. In response, the fixed income market has rallied sharply off their earlier session lows and now stand in positive territory. The dollar is mixed and the indices are called to open slightly higher.

Given the decline in yesterday's trade it will be interesting to see which direction the market takes today. We appear to be grinding around towards the higher end of our 2006 range, with the technicals pointing towards higher levels after this consolidation. Accordingly, I suspect the indices will attempt to recapture some higher ground left from yesterday in the early portion of the session. If this attempt to hold higher prices fails...look for renewed selling interest with another attempt to push the SPH towards 1280. In my opinion, today's trade will be critical as we discover whether or not yesterday's decline has any "legs" in the NDX. If it does, the larger question then becomes...can the broader indices hold their ground with the tech market declining?

Overall...today should be a setup day for our next leg in the marketplace. I suggest keeping a close eye on volume in the mini contracts as the last couple of sessions have been on the light side. If volume flows expand today with a directional move, it should be taken as a next leg signal.

Good Trading to all,

Brad

 

[Hamzei_Analytics]

Posted 08:35 CST

Equity Index Update
Thursday February 23, 2006

The index markets took another step higher yesterday as the NDX recovered from its Semiconductor led sell off on Tuesday. The one resting fly in the ointment was our settlement in the futures arena. Each contract settled well below their respective fair value's and in some cases below their cash index closing prices. Much of this was tied to a large institutional seller that came into the SP arena around 2:55 CST and held the offer into the closing bell. The key question in terms of this morning's activity is whether or not the selling into the close of trading will have much carry over impact?

Given the overnight performance, or lack thereof, it appears that the final selling thrust has pared some of the buyers ambition at higher levels. So far, the buy side has focused on defending support zones, however, there has been little appetite at the higher end of our established trading zone. Certainly, this will need to change if the collective indices are to put another leg higher in this current rally. If this fails to happen, it appears as though we may find ourselves drifting back lower in the near term. However, unless the established support levels in each index are taken out, this appears to be more of a time situation. At the core, the domestic index markets have not moved quickly or traded out of range much since this bull market began. In response to that, players have become accustomed to buying the dip, but not chasing gains in fear of top ticking the market. Until this mantra changes, much of the movement at higher and lower price bands tend to create back and forth type of trading situations within a 1 to 2% band. The question now is this...after last week's sharp net gains, cant the indices utilize that momentum and push higher? Or was it nothing more than some short covering on a Bernanke based rally that will quickly fizzle? The answer will play out over the next week or so.

I would anticipate the market to follow lower during the first hour or so of trading today. After that, we may take our cue from the DOE weekly stats and whether or not any supportive bids are found at various levels in the indices. If the sell side is unable to press the markets below support zones built up from yesterday's session, I would look for a retest of the trading highs and a possible carry above the 2006 high in SPX. Technically speaking, volume flows remain light...NDX needs to build on support from the 1670 to 1675 level, below this things could get a little dicey on the downside.

Good Trading to all,

Brad