Brad Sullivan's Morning Commentary

[Hamzei_Analytics]

Brad Sullivan Daily Market Commentary

Posted 08:25 CST

Equity Index Update
Friday July 7, 2006

The index markets received the news the bulls were looking for this morning with the employment reading coming in at +121k verus consensus estimates of +175,000. Initially, the SPU surged to 1290, up +7.00 from the close, however, a closer inspection of the report started to get players a bit nervous as the average hourly earnings component moved sharply above expectations to +3.9% year over year. As the index began to dip from the initial post-report trading highs, individual equity related news had a negative impact on the trade. First, JPM upgraded shares of MMM, however, a few minutes later MMM cut their earnings forecast sharply for the near term...the stock is called to open -4.00. Confused?

In my opinion, this reading is about as bad a scenario as one could have dreamed up. The reason is simple, slowing job creation with inflationary pressures being felt in the actual labor arena. The actual report is not that bad, but, the report continues the confusion that is gripping the equity market. That confusion is what is a sharp negative for equities. Essentially it boils down to this...why add to longs at the current index levels? We have had a sharp bounce off the June lows and earnings season - as well as all the negative surprises (see MMM) - are waiting. In other words, you need to have some CLEAR economic reports to drive the buyers back into the game at these levels. This report failed to accomplish that task.

At its core, the current trading environment is being moved by anticipatory decisions. Those that bought near or around the June lows are plenty happy and see no reason to lever in at these levels. In contrast, those that are short or looking to add to shorts view this report as another opportunity to sell at a reasonable zone. Why? Because there is no clarity from a report that most were hoping would provide some. Remember this...when it comes to speculating, you have to focus on what the market is focusing on at the current time. As I pointed out in yesterday's update - and I may be proven incorrect on this scenario - I felt lower pricing was in store for the indices over the next couple of weeks. The reasons are multiple, but, it really boils down to a 50% bounce from the 2006 lows and the belief that no employment reading would work for the market given the current environment. I still hold to this view.

Good trading to all,

Brad

 

[Hamzei_Analytics]

Brad Sullivan Daily Market Commentary

Posted 07:40 CST

Equity Index Update
Thursday July 20, 2006

Mr. Bernanke silenced critics with dovish testimony and forecasts of a perfect soft landing for the U.S. economy in the future...of course, what was he going to say? That the FED has raised too aggressively, the housing market is tumbling and a recession is in the cards? Skepticism aside, yesterday's testimony on the hill was the tonic this market needed in the near term. However, the question on every trader's mind is can we sustain the current bid? It doesn't take a genius to look at a chart of the SPX from June 28th to June 29th and see that the index rallied from 1237 to 1273. The past two sessions, the SPX has carried higher by a similar amount in point terms, from 1225 to 1260. Strangely enough, this market continues to act like old bear markets, in which the rallies are vicious and filled with short covering and cries that a bottom has formed. I suspect, it is far too early to call this current downdraft (since the May highs) over...of course that does not mean that the sell side should be the only play for the trader. Keep in mind, we are in a volatile trading range since the initial down leg of this move, which in the SPX equates to 1245. A subsequent bounce took the market to 1290, before the low of the move was made in June at 1219, back to 1280 then down to 1225. Essentially, we are trading in a range of nearly 6%...these are fertile grounds for the short term trader, whether day trading or swing style trading.

The action surrounding yesterday's close in the futures was interesting to say the least as heavy selling hit the ND futures after the earnings report from QCOM, INTC and EBAY. In fact, the futures actually closed at the same level as the cash market, a discount of nearly 10 points. However, after the close AAPL reported better than expected earnings and is called to open nearly +7.00 today. That has helped the futures regain footing, currently the NDfutures are trading at 1504.50, +13.75 on the session. As I have been discussing the past couple of sessions, I continue to think that this earnings season will allow good entry for a longer term spread trade of long NDX/short SPX...today could be a critical session in the action for this trade in the near term. If the NDX fails to hold this opening bid and settles near the UNCH level, it would be a sharp negative moving forward in this marketplace.

Tomorrow will bring option expiration, accordingly one should be prepared for a potential "one way street" during today's session. The odds seem to be placed on another bout of buying if that scenario were to play out today. Keep in mind, that during expiration weeks, much of the institutional activity that is directional in nature takes place after 10:00cst. Prior to that time frame, I suspect we will be involved with some choppy downward early action. However, I would caution against getting to involved with forecasting a sharp move...simply put, yesterday's move was the sharp one. Keep it close to the vest...until the market shows you what to do.

Good trading to all,

Brad

 

[Hamzei_Analytics]

Brad Sullivan Daily Market Commentary

Posted 08:25 CST

Equity Index Update
Monday July 24, 2006

The index markets suffered another bout of selling during Friday's expiration as the Russell 2000, MidCap 400 and NDX led the way lower. All told, the session was highlighted by aggressive early selling that pushed the indices sharply from their respective opening levels. Much of this early selling seemed tied into option expiration, particularly in the small amid midcap indices. The remainder of the day was spent in a back and forth range type of trade, however, the indices all settled at or near their session lows on the closing bell.

Two critical issue/index indicators for the overall index market (save the NDX) have been the OIH and CRX. It is worth repeating - as I am running the risk of sounding like a broken record - that the correlation between these two issues and the Russell 2000, Midcap 400 and SPX has been nothing short of astounding the past several months. With the OIH settling at critical support of 130, it is no wonder that the indices settled at their respective daily lows. The key question, in terms of forecasting, is whether or not the selling is done in the near term? Certainly, the indices are hanging in around yearly lows (in certain cases), the FED seems to be getting a bit better in telling the market what it wants to hear and the war premium has all but been taken out of the Gold and Oil markets. So, why are we not rallying the indices? Is there something more structural that the market is telling us? Or is the market lulling everybody to sleep before another rally? Questions, questions and more questions.

I will point this much out...the past few months, we have made lows in the indices during or around each month's expiration period, followed with a decent trading rally through the first week of the next month. In addition, at least as far as technology is concerned, last week market the height of the earnings parade. While the NDX did not exactly make it through unscathed, it did not have the frightening drop that many had feared or expected with such poor results. I continue to add minor units to a long NDX/ short SPX trade during this decline.

Today's action will be squarely focused on whether or not the marketplace can hold the opening bid, with the SPU called to open +6.00 at 1250.75. If we fail, expect more selling to come in at lower levels as traders, particularly momentum players, will view it as a sign of weakness.

Good trading to all,

Brad

 

[Hamzei_Analytics]

Brad Sullivan Daily Market Commentary

Posted 08:10 CST

Equity Index Update
Tuesday August 8, 2006

FOMC DAY...

The index markets continue to trade cautiously ahead of today's crucial FED announcement on interest rates and its policy intentions moving forward. The majority of the buyside continues to rant about current inflation readings being lagging in nature as they invoke the long dream of a soft landing a la the mid-1990's. In addition, the value players continue to discuss a market that has become "cheap" and a must buy in the current environment. Meanwhile, on the bearish side of the equation are the players that continue to see a weakening economy (2.5% GDP), a sliding dollar, a collapsing housing market and inflation on the rise - today's Unit Labor Cost report for example.

Which side is right? Obviously only time will tell...but, from a trading perspective the markets continue to hang near their upper ends of respective trading ranges. The key question is what are players looking for from this announcement that will drive the market one way or the other? I suspect that our beloved chair, Mr. Bernanke, will not disappoint in this request. From a speculating perspective, today makes a lot of sense to sit back and analyze the direction of the next leg of the index trade. Think of today as the setup for the remainder of the month. Tread carefully and do not become too opinionated during a need based afternoon trade. Look at the bigger picture of the trade...and that bigger picture will be played out the remainder of August.

Good trading to all,

Brad

 

[Hamzei_Analytics]

Brad Sullivan Daily Market Commentary

Posted 08:55 CST

Equity Index Update
Tuesday September 5, 2006

The index markets, particularly the large cap laden DJIA and SPX produced another solid day of buying on the heels of an employment report that came in just as anticipated. Volume flows remained extremely light ahead of the Labor Day holiday as players seemingly did not choose to return from vacation ahead of this report. Certainly this brings up a point that many analysts are discussing and that is the "light volume rally." In my trading life I have seen, read about and heard stories about the "light volume rallies and declines" and I still do not have any concrete empirical data that shows it matters all that much. The bottom line for a trader is this : the index markets have rallied sharply since the release of the PPI report in August. Simply put, that report, followed by the CPI reading was what the market needed to get an upside boost. The question now becomes this...is the market a better sale at current levels or a better long?

Last week I wrote that for my money there is more bang going short the SPU contract between 1307 and 1320 for a position trade that could last into the elections. I have a variety of reasons and inputs for this trade, but, the leading reason is the markets discounting of the spring swoon. As volatility levels creep lower and lower I am squarely in the camp that we are in a testing mode of our 2006 highs that will fail. I think the market has moved to a near extreme in terms of this trading rally and we are building a topping formation that should play out over the next couple of weeks. I am dead wrong above 1340 in the SPX and will exit with a loss if that print occurs.

At its core, trading is about odds and taking the other side when it warrants...as well as riding the trend when it warrants. The trend paid off well in the Russell 2K and Midcap 400 over the past 3 years. However, as those indices struggle to maintain their bids in a rising rate environment, players have shifted $$$ into the SP and DJIA issues. At some point, that will begin to ease...particularly if the global rate environment remains tight. In fact, I would argue that I have never seen a time in the index world where our domestic situation has mattered less. Essentially, if one believes much of the day to day movement is tied to hedge fund behavior, the ultimate key to the lock is held in Japan. If the Japanese raise rates slowly, the domestic market should continue to survive, however, if they move a quickly and the liquidity pump is turned halfway off it will be a very steep drop in our markets.

That is the broader picture...on the daily basis, look for another quiet session as players return a bit groggy from the holiday.

Good trading to all,

Brad