Equity Index Update by Brad Sullivan

[HamzeiAnalytics]

Brad Sullivan's Morning Commentary

Posted 08:45 CST

Equity Index Update
Thursday January 12, 2006

The indices continued their rise in yesterday's action as the SPH crossed above 1300 on moderated volume. However, the ER2 and EMDH contracts were unable to muster a positive close at the end of trading, calling out our first negative divergence in quite sometime for the buy side. This morning the indices are called to open lower across the board, analyst upgrades to note are AAPL, T, VIA.B and BBBY. On the downgrade side, APOL, JPM and KO were lowered at various houses and seem to be weighing a bit on the pre-opening prices in the index markets.

The continued slow, steady grind higher has left many a momentum day trader in the dust the past several sessions. From that perspective it is critical that the day trader must be able to adapt with the current trading flow. Right now, that flow is fewer and fewer plays throughout these tight trading range sessions. Any day trader "reaching" out to take offers or hit bids has found the environment frustrating to say the least. The reason I am writing about this is a conversation I had with a trader yesterday evening about his "ramping" up in the new year. His desire to "take it to another level" has hurt his overall ability to analyze the trade. His trading has suffered as he continues to overtrade in a market that demands the opposite approach. It reminds me of one of my favorite trading books -- "The Broken Dice and Tales of Mathematical Chance." One of the tales in this book describes the attempt by the Kings of Sweden and Denmark to ambush the King of Norway with a 70 boat attack. The King of Norway's boat was named the Long Serpent and had been seen only by one soldier in the ambush party. After several ships had passed, each one increasing in size and beauty, there were calls among the soldiers and Kings that the soldier had grown cowardice and did not want to fight. Finally, as the Kings were debating whether or not to attack one of the last ships that had passed, they saw 3 huge ships and a fourth one at last was the Long Serpent. The first ships were recognized as decoys, but when they saw the Long Serpent, it was recognized by all and no one contradicted that on it sailed the King of Norway. They boarded their ships and made ready for attack.

Whenever I get in a rut day trading, I typically overtrade. This passage about patience and anticipation tends to always bring me back in line. For the day trader, it is of critical importance to reduce activity in conditions that do not produce volatility.

This morning, if patterns hold, one should expect early selling followed by an attempt to take out the highs from yesterday. That attempt should fail and produce another retest of the session lows at some point mid-day. After that, the picture is a bit more cloudy. Can the market sustain the bids at these high levels? Currently, there is no reason to bet against the possibility of higher pricing. However, one of my lead indicators is flashing caution in the NDX. That indicator is based on a 8 period Standard Deviation reading. The current +/- 1 STDEV in the NDX on this period is registering a reading of 39.9 points. This is as high of a mark as I have recorded since the bull market began a few years back. This alone will not push me to trying the short side. However, as a position long, I am inclined to begin lightening up these positions. Accordingly, I will sell out 65% of my longs throughout today's session.

Good Trading to all,

Brad

[HamzeiAnalytics]

Posted 08:40 CST

Equity Index Update
Friday January 13, 2006

The index markets suffered their first across-the-board trading decline yesterday, with selling becoming more aggressive in the early afternoon. During the majority of the trading session both volume and movement were non-existent as each index traded in a narrow range with volume flows running well behind average. In fact, the volume reading in the SP mini contract were the lightest for a morning of trading that we have seen in 2006. However, with the upside bias unable to gain any further traction, the session had the "feel" of one that could move lower with a bit of sell side interest. Sure enough, once fresh lows were made and there was more news about the geopolitical situation in IRAN , buyers seemingly canceled their resting bids, giving the sellers a free roll on the downside.

Technically speaking, little damage was done to the overall market picture. Only the DJIA moving back below the psychological 11,000 level could be construed as a short term negative. Potentially more important is the continued action we are seeing in the breadth readings for both the NDX and SPX. While the new highs/new lows remain extremely strong, the breadth picture in the NDX has shown an average of 60 advancers to 40 decliners so far in 2006. Considering the net change in the NDX for this year of +6%, one can see the demand being concentrated in fewer and fewer top tier names. Specifically, GOOG, AAPL, MRVL, QCOM and a few others. This has potential to be damaging at a later stage this quarter. I would not count this minor divergence as anything too dramatic in the near-term.

Today's action should be dominated by any potential follow-through to yesterday afternoon's selling. Key support in the SPH resides between 1292 and 1288. If the index closes below 1288 it should lead to further selling next week and a possible test of the 1275 level. In the NDH contract, support is found between 1758.50 and 1755, and below this, 1750 to 1748 is critical in the short term. If the index closes below this level, look for an eventual test of the 1735 level.

All told, I am not quite ready to do too much into yesterday afternoon's selling. If the market can build on that action and move lower today, then I will sit up and pay attention. Otherwise, expect a pretty quiet session ahead of the long weekend.

Good Trading to all,

Brad

[HamzeiAnalytics]

Brad Sullivan's Morning Commentary

Posted 08:10 CST

Equity Index Update
Friday January 20, 2006

The index markets recovered ground from the recent selling seen from technology- related earnings and the plunge in the Nikkei earlier in the week. Large cap issues continue to underperform versus their small and midcap counterparts. The Russell 2000 closed yesterday's session at all-time highs and the Midcap 400 closed just underneath its ATH registered last week. Meanwhile, the larger cap tech issues continued to be weighed down on the earnings front in their heaviest weighted issues. On the flip side, the overall NDX breadth has been very strong the last 2 sessions as second tier issues gain momentum from strong earnings and market share increases. Typically, this market share increase is at the expense of some of the larger cap issues in the same very index and makes for a compelling pairs trading environment and reinforces the reasoning behind the small and midcap strength over the past couple of years.

In yesterday's session, the NDX's overall breadth was 78 advancers and -22 decliners, yet the index was up less than 1% and finished the session substantially below its session high. The main culprit was GOOG, which reversed from strong early gains to finish down on the day, but a further look at the weightings and their tape shows that of the top 26 issues in the NDX, only 16 advanced and -10 declined. The index will be hard pressed to have a dramatic lift without full participation from these issues – which account for roughly 64% of the total index weighting. However, it is worth noting that I find this divergence to have bullish potential. If the remainder of earnings season sees more rotation into second tier names, it continues to illustrate that capital being moved out of select large cap issues - INTC for example - is finding a home in smaller sector names - MRVL for example. My worries about the index markets occur when the capital moves to the sidelines and fails to rotate into other equity areas. Typically, that is when we find the music stops and somebody does not have a chair.

Overnight action continues to hold the indices lower as Europe and Asia are largely mixed. The SPH failed to hold above a resistance zone that stretches from 1289 to 1292 yesterday afternoon. Settlement was at 1288.25 and we are currently trading -2.00 at 1286.25. The NDH is trading a few dollars lower at 1735, well off the early afternoon high of 1753 yesterday.

The stalwart index yesterday was the Russell 2000, led by heavy institutional buying on the open of trading, this index powered higher all session and finished with a strong gain of 1.5% at new all-time highs. Open interest in the ER2 expanded nearly 5% with the rally and this index appears to be in full throttle mode for the near term.


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Posted 08:30 CST

Equity Index Update
Thursday January 19, 2006

The index markets suffered declines on the heels of poor earnings outlooks from INTC and YHOO and further weakness in the Nikkei 225 index. The bright light for yesterday's action - if one is bullish - lies in the overall performance of the indices as a whole. Little overall damage was done in the broad market as breadth readings were only moderate on the downside. Further evidence of support was the ability for the indices to hold key levels from earlier this year and late 2005. Keep in mind that the SPX went to a session low of 1272.08, below the critical support zone of 1276 to 1274 but settlement in the index came above the key zone that capped the index from Thanksgiving '05 into the year end. Technically speaking, if the market can continue to find its legs above this level it is likely to lead to a renewed assault of the 1300 level.

This morning, the index markets are called to open higher on the heels of strong earnings out of AMD and MER. Meanwhile AAPL, which was significantly lower after its earnings release yesterday afternoon, has been able to rebound towards the unchanged level. The weekly initial jobless claims reading came in below the key 300k level, adding strength to the dollar and moderate weakness in the treasuries. Crude Oil remains a bit below 66 ahead of the DOE reading at 9:30cst. Further support in the pre-market has been found in the Nikkei rally, as well as supportive gains in Europe.

Today's trade will be critical for the indices. The key question is this: Can the indices move higher in the face of earnings that appear to be solid, but not blowout in nature? The guidance thus far has been mixed. However, if AAPL can reverse the early slide and move into higher ground by the end of the session I suspect then the overall indices will follow its lead. On the flip side, if AAPL fails and AMD reverses some of its gains, I would expect the indices to test yesterday's trading lows. All told, in my opinion today's trade will not be clear until some time is spent digesting much of the last 2 sessions earnings reports. I think that once that is complete, the afternoon should provide a move that becomes directional in nature.

Good Trading to all,

Brad


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Posted 08:30 CST

Equity Index Update
Tuesday January 17, 2006

The index markets are called to open sharply lower on the heels of a significant decline in the Nikkei 225, which lost nearly -3% on the session after a regulatory probe was announced into Livedoor, an internet portal. Further exacerbating the overnight losses is the performance of Crude Oil, which is now up over 2% at $65.21 on unrest in Nigeria. Finally, downgrades were seen in the Tech sector at AMD and AMAT. Currently, the SPH contract is trading at 1287.50, lower by -5.20 on the session and below Friday's session low.

The earnings parade begins today as YHOO, IBM and INTC will report after the close of trading. This is welcome news from a day trading perspective as it should add volatility over the next couple of weeks in the indices. In the SPH, resistance is seen from 1290 to 1291. Above this level, key resistance can be found between 1293.75 and 1295.25. Any hourly close above this zone takes much of the short-term pressure off the market. Support in the SPH will be found pretty close to the opening area -- 1288 to 1287.50. Any hourly close below this zone puts a move towards 1275 on the board. The difficulty in forecasting any type of move like the one mentioned is the fact that the market focus is squarely on the earnings reports. In fact, this opening range may end up being the bottom of today's session, so position short sellers may consider being pretty conservative with regards to today's trading session. The fact is that if we are down because of an independent event in Japan and Crude Oil rallying, the markets will only be in the red for a short time. If, however, there are greater concerns looming about the earnings reports, then we may have a different story.

Good Trading to all,

Brad

[HamzeiAnalytics]

Brad Sullivan's Morning Commentary

Posted 06:25 CST

Equity Index Update
Monday January 23, 2006

The index markets suffered through an aggressive downdraft on Friday as the SP500 had its largest 1-day trading decline since May 2003 (in % terms). The main culprits for the selling seemed to be a combination of higher Crude Oil prices, poor earnings and something very few people seem to be discussing - the expiration of options and large scale premium sale programs that have been used by hedge funds to get "alpha" as competition on returns increases. For those funds, Friday was a bloodbath as volatilities shot higher and prices moved rapidly lower. This type of action, on expiration day, creates "need" based trading on the part of these funds in order to hedge their premium before it turns into a net loss. Keep in mind that I am not discussing the market making option firms that are on the other side of most transactions. Rather I am discussing what most agree was the hottest single style trade throughout hedge fund land the past year - naked premium selling. These are un hedged positions by the funds and when a day of volatility and rapid price movement hits the market - their need based trading exaggerates the movement.

Technically speaking, Friday's action was a disaster as the large cap indices broke through key short term support levels. The Russell 2000 remained well above its key support zone, however, the index reversed all of its previous day gains which were all-time highs for the contract. Currently, both the Russell 2000 and MidCap 400 are trading at +8% above their respective 200 day moving averages. This remains on the higher end of all readings since the bull move began in 2003. Friday's dent in the overall market, coupled with the extended readings of the price and MA should lead to a choppy downward move in these contracts over the next couple of weeks.

In the large cap arena, the DJI, SP500 and NDX all settled below their respective 20 day MA's, but remain well above their 200 day MA's. Clearly the market is beginning to show some signs of weakness as earnings season progresses. Even more troubling seems to be that the "FED is almost done, let's buy 'em rally" was removed with the selling on Friday. I think the overall market will be hard pressed to find any significant traction on the upside from any further FED statements about the rate hike cycle being complete. If that conjecture is correct, it leaves the indices in a overbought state without the news to support the strength. Couple this with the earnings, oil and geopolitical worries and it is no wonder volatility is moving higher. The trouble is...at least for the bulls - that the overall index market suffered its first dent on these factors for 2006. While we may bounce higher and challenge the highs of this move, I think the table is set for a severe springtime correction.

As for today's session, I would suspect some early morning buying in the SPH as the market should mount a challenge to the 1273-1275 resistance zone. Any move above that zone - in settlement terms - would surprise me. I am looking for the NDH to challenge the early afternoon recovery high of 1701 at some point in the morning as well. The key, in my opinion, with these "days after" is to not get too excited. Most day traders use yesterday's market action to dictate today's trading decisions...if that is the case then most will be willing to sell the down ticks because that is what worked Friday. I would be highly skeptical of trading that way in today's session. I expect the range and intra day volatility to tighten. If the opposite occurs - all the better as it should lead to continued volume, velocity and volatility in the index markets - something we have not seen too often the past few years.

Good Trading to all,

Brad

[HamzeiAnalytics]

Brad Sullivan's Morning Commentary

Posted 08:10 CST

Equity Index Update
Tuesday January 24, 2006

The index markets consolidated at slightly higher levels after Friday's drubbing. Volume flows were tame as the indices stayed in a tight trading range, showing little appetite on the part of dip buyers. Yesterday's action is significant in that the buy side chose to let the session pass without - save for the run higher in GOOG - putting up much of a defensive front to Friday's move. Of course...that makes sense on many levels as the market was clearly blindsided by the selling on Friday and players have chosen to wait out the storm for a couple of sessions. What I found interesting in the action yesterday was the inability for the NDX to mount any type of rally with the strong reversal in GOOG. If you would have laid out the scenario that GOOG rallied as much as it did yesterday, I would have told you that 1700 was an easy target for the NDH. Yet it did not happen...the key question is why? I suspect we will have that answer in the coming sessions.

This morning the indices are called to open higher on the back of a strong rally in the Nikkei and upgrades in some large cap issues - KO, WMT and AXP. TXN reported earnings after the close of trading yesterday and should have a large impact on today's semiconductor session. DD, MMM and JNJ all reported this morning and have not been overly well received. LXK and EMC reported great earnings and are due to open sharply higher. Keep a close eye on these companies as there are no other news worthy events scheduled for today's session.

I anticipate today's trade to act a bit like yesterday's session. Quiet and range bound.

Good Trading to all,

Brad

[HamzeiAnalytics]

Brad Sullivan's Morning Commentary

Posted 07:35 CST

Equity Index Update
Wednesday January 25, 2006

The index markets remained in their respective holding patterns - with the exception of the Russell 2000 - which printed all time closing highs yesterday. In fact, the action in the ER2 has made for difficult sledding in the other index markets as spread ratios and money flow are having a larger impact on holding the large cap issues at bay. The SPH continues to be rejected at the 1275 to 1277 resistance zone, however, the index is holding well above the low trading areas from Friday. Even more compelling for the buyside is that the sellers have not taken advantage of their Friday move. It seems that the bears may have taken some off the table with Friday's decline and do not feel the need to keep pushing the markets in the near term. That is a surprising outcome in my opinion...simply put, I would have anticipated a more aggressive tone to the trading these past two sessions. The fact that we are chopping about in a range above last week's low seems to add to the overall confusion around index trading yesterday. Clearly, the indices are hard pressed to make much headway higher or lower than moderate support and resistance points leftover from Friday. If today's trade tests these areas only to fail, I would anticipate a stronger bout of selling across the index board.

This morning the indices are called to open near their respective highs from yesterday's session on the heels of a strong bid in Europe. The key question is will this be enough to entice domestic equity buyers? The news is pretty light until we have the DOE weekly stats at 9:30cst. That reading should provide a catalyst in one way or another given the rediscovered interest in Crude Oil during its recent rally. Crude is trading -.55 this morning at 66.55. Another note of interest this morning is the aggressive move higher in Silver overnight, now trading at 9.46 up over 2% on the session. Gold has benefited from this as well and is closing in on its high for the move. Gold is currently trading up over 1% at 564.

Today's trade action has all the markings of a session where day traders get trapped. Essentially, the SPH has traded between 1269 and 1275 for 2 sessions. The vast majority of that trading has taken place between 1269 and 1272.50. Obviously, this zone has become short term support above last week's low. In my opinion, it is also a no man's land if one is looking to establish shorts, however, scalp long buyers have found this zone to be profitable. Essentially, the indices are probing levels higher and lower to find the spot where the markets will generate trading interest. Given our penchant for volatility crunching sessions one has to wonder if Friday was a fluke? If so, the lows appear to be in for the move...if not the sellers will take advantage of the growing complacency and try for another push lower.

Good Trading to all,

[HamzeiAnalytics]

Brad Sullivan's Morning Commentary

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

[HamzeiAnalytics]

Brad Sullivan's Morning Commentary

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

[HamzeiAnalytics]

Brad Sullivan's Morning Commentary

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

[HamzeiAnalytics]

Brad Sullivan's Morning Commentary

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

[HamzeiAnalytics]

Brad Sullivan's Morning Commentary

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

[HamzeiAnalytics]

Brad Sullivan's Morning Commentary

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

[HamzeiAnalytics]

Brad Sullivan's Morning Commentary

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

[HamzeiAnalytics]

Brad Sullivan's Morning Commentary

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

[HamzeiAnalytics]

Brad Sullivan's Morning Commentary

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