Brad Sullivan's Morning Commentary

Posted 08:25 CST

Equity Index Update
Wednesday March 8, 2006

The index markets felt broader selling pressure throughout yesterday's session as the small and midcap issues were pounded lower. The large cap's were able to fair better as the NDX and SPX sustained only moderate losses, while the DJIA actually finished with a slight gain. The drawback in yesterday's action for the buy side is that the momentum issues, the sector of the market that has performed so well in the last three years took a large hit. In the past, when these issues have rolled over, it has led to trading declines of nearly -10%. For the Russell 2000 that would equate to an eventual target of around 672 in the cash index. Interestingly enough, that is about where the 200 day moving average currently resides for the index.

The largest issue facing the index markets at this time is not, in my opinion, the yield fears on the 10 year note, rather it is the correction being felt across the commodity markets. From energy to livestock, these markets are taking a well deserved break from their rapid ascent. The problem rests in the makeup of index components for the Russell 2000 and Midcap 400, particularly the Mid cap with regards to its dominating presence of energy issues. As these commodities struggle to maintain their bid, it has produced the long awaited chance for their spread trade that, as one trading buddy puts it "has killed more Irish than the potato famine" --- yes the long DJIA or SPX short Mid cap or Russell 2000. We'll see how this plays out in the near term...my current readings have a 1 unit position of 4 ER2 contracts to 7 SP mini contracts.

After the close of trading yesterday, GOOG announced another mistake as it included sales forecasts in last week's analyst presentation that were for internal eye's only. The stock is called to open lower by -11.00 around the 352 level. That takes some of the luster away from the AX/NYSE merger which officially begins trading today. Ahead of this, the index markets are trading lower as Europe, particularly Germany (lower by -1.2%) is struggling lower today. Currently, the SPH is trading just above yesterday's session lows at 1273.50, -4.00 on the session. However, the real damage is being seen in the ER2 (Russell 2000 mini contract) as the index is called to open below yesterday's lows of 719.00. Currently the ER2 is trading at 717.50, -3.60 on the session. In addition, the Mid cap 400 mini contract (EMD) is also called to open below its low from yesterday as it trades at 760, -3.10 on the overnight trade.

The overall session yesterday was one of the more interesting we have seen in quite sometime. The large caps consolidated at slightly lower levels, while the overall issue list on the NYSE produced a reading of nearly 3 declines per 1 advance. In addition, the cumulative breadth readings on the NDX reached their lowest levels of the year (this is measured only from 1/3/06 so is not without some whip in the data). So, the obvious question is...what does it all mean? If one examines the rally from our October lows in the SPX to the 2006 highs, it registers around +11%. Much of that advance was found between the October lows into Thanksgiving of 2005, while we have extended higher in '06, we have also had a complete absence of volatility. If there is any type of implied volatility increase, it could cause a disruption in next week's expiration, much like we witnessed during January's expiration debacle this year. The reason behind this possible scenario rests in the hedge fund trade that remains ultra hot...selling naked options to collect the premium. If this situation were to show its head again next week, it would not surprise me to see new 2006 lows across the equity complex. Again...this is one scenario only and not the highest probability play, but it is worth keeping in the back of your trading mind.

Good Trading to all,

Brad
 
Posted 09:05 CST

Equity Index Update
Thursday March 9, 2006

The index markets participated in a volatile session that saw early selling and afternoon buying. At settlement, each index finished marginally higher on the day. This morning the markets are called to open slightly higher on the heels of a sharp rally in Japan. However, the indices still face headwinds just above closing prices from yesterday.

Specifically, the Russell 2000 cash index has heavy resistance from the 724 to 726 trading zone. If the index can settle above this zone, it will relieve some of the short term market pressure...that being said only a settlement above 730 in the cash index will give the buy side the upper hand in the short term. Yesterday's sharp bounce in the index off the session lows was important for multiple reasons, the most important being the buy side able to hold just above key support levels around 710. For the sell side, given the rate of decline since Friday, it seems awfully important that the index get some type of retracement to resistance zones, if this move is built for a longer term haul. Today's action should be critical in the index as I suspect we will test the key resistance zone I laid out above. A failure back towards the 720 level should set up more downside in the days ahead.

With regards to the SPM ( June is the front month today) I would look for heavy volume with relatively tighter ranges due to the active rollover from March to June. I would anticipate some follow buying on the heels of yesterday afternoon's rally, with key resistance coming in around the 1296 level in SPM.

All told, ahead of the employment and with a new front month contract, I would use a bit of caution in today's trade.

Good Trading to all,

Brad
 
Posted 08:15 CST

Equity Index Update
Friday March 10, 2006

The index markets reversed course after early continuation buying from Thursday afternoon's bounce failed to challenge key short term resistance levels. When the session ended, the NDX had a new low close for 2006 (fractionally) as well as its first negative close for the year. While the net change on the year is now fractionally negative, it is worth highlighting for the simple fact that the index is probing lower price levels while its upside is being contained around the 1690 to 1705 zone. The NDX intra day low around 1638 for 2006 essentially matches the 50% retracement level from the October low to the January '06 high. Any settlement below this level will leave traders looking for a fill of a large gap that remains from the November 3, 2005 open. That open produced a near +1% gap higher from a close of 1597 to 1611, the low for that day was essentially 1610. I think a challenge and gap fill in this index looks like a good odds play in the near term.

One index that I highlighted yesterday was the Russell 2000 and the first resistance zone located between 724 and 726 in the cash market. The index was able to stretch just above this zone before rolling over in the mid-morning and settling below 720. What is critical in my opinion is the fact that the cash market traded above the 725 level for 12 consecutive sessions after recovering from its Mid-February decline. We have now closed below this level for three straight sessions and appear poised to eventually test the February lows around 708. Similar to yesterday, only a close above 730 would spell the end to this scenario.

This morning, the employment report hit the tape and was a touch stronger than anticipated at +243k versus expectations of +215k. The January report was revised to +170k from +193...typically that would have added to some potential selling pressure in the fixed income market. However, the markets seemed pretty unimpressed with the readings. After an early break and subsequent rally towards the levels of the past few sessions, the 10 and 30 year issues have fallen back towards the unchanged levels. The dollar has gained moderately from the report, while Gold is trading below 540 and is at key bottom end support as it challenges February lows around the 538 level. The equity index markets have moved since the report, however, given the relatively thin volume flows in the pre market I would be a bit suspect of endorsing this move. Essentially, the indices are taking back some of the vicious final 15 minute decline seen yesterday afternoon on the cash market closing.

Clearly, the onus or burden of proof has switched to the buy side with the decline we have seen the past few sessions. Today's open and the subsequent action should give us a tell about the direction for next week. As for today, I would anticipate the markets to work off this upside open and test the downside levels established yesterday and earlier in the week. POTENTIALLY, there is a chance for some final hour fireworks.

Good Trading to all,

Brad
 
Posted 08:30 CST

Equity Index Update
Monday March 13, 2006

The index markets rallied sharply off their respective early trading lows on Friday and produced a solid uptick across the index complex. The lead performers were the DJIA and SPX, the former actually finished positive on the week as money flows seem to be rotating out of the energy issues and into more industrial type names. The SPX was fractionally lower on the week with the help of Friday's bounce, however, the NDX, Russell 2000 and Mid Cap 400 all settled at or below key short term support zones. The trading this week should be critical in terms of the near term market direction.

Last week I discussed the potential of a long DJI or SPX spread trade against the Russell 2000. Given the uptick in rates and the fear that this cycle may not be over any time soon, this play continues to intrigue me as we move into Q2. Beyond this trade, we are at a crossroads type of situation with regards to the index markets. Typically, option expiration weeks are bullish and contained in moderate ranges. But, every now and then this pattern fails and produces some outlier type of pricing. The current expiration cycle seems to have held serve (support) in the near term with the bounce witnessed on Friday. However, I think the indices will be sensitive to any quick rally in yields towards 4.9%...currently trading at 4.8% this morning in the 10 year. This rate fixation could last for a longer than normal period, much like the Crude Oil fascination the market displayed last year. Keep a close eye on this development...in my mind, unless we shoot quickly above 5.0% in the 10 year yield, this rate movement should not cause any lasting damage. However, as a day trader, it is worth keeping on the back burner.

The indices are called to open higher this morning on the heels of Friday's rally, a sharp continuation bounce in Japan and a firm trade in Europe. The domestic market is also being helped by a bullish call in PG and a banking merger. I continue to keep a very close eye on last week's breakdown area in the SPX...essentially 1285 to 1288. If the index can settle above this zone today, it should relieve the short term pressure and put lots of pressure on the shorts that are in at lower levels.

Good Trading to all,

Brad
 
Posted 08:35 CST

Equity Index Update
Tuesday March 14, 2006

The index markets opened firm on the strength of merger related news and continuation buying from Friday's updraft...however, the indices were unable to tack on anything substantial and by the end of the session had drifted lower, settling fractionally higher on the day. The range in the SPM contract was a paltry 6.30 for the session. In fact, only the Russell 2000 exhibited any type of interesting trading among the indices.

The small cap index opened higher and ran sharply above a key technical point at 730 in the cash market, however, the enthusiasm quickly faded and the index settled nearly -1% below its intraday high. The index seems locked around the 725 level as this price continues to act like a mangnet for pricing once we move 10 points away in either direction. Somewhere along the line this will change, but, in the near term there appears to be a lid on velocity at the recent extremes. What I mean by that last sentence is this : a trader better have a strong reason to get long at the top end of this range or short at the bottom end of that same range. The odds are continuing to stack against momentum style trading and rewards the selling of rallies and buying of dips. As a day trader, this is important but not critical as much of our sessions have been built around "one-way street" sessions. Therefore, momentum style day trading tends to perform well. As a swing type trader, the ability to buy weakness at the lower end of range and sell strength at the top end of a range is critical to survival.

Last night I participated in a calcutta for the NCAA tournament. In a room that was well represented from the trading community it struck me how interesting the emotional level becomes in an event like this. The guy who bids on everything to drive up the price, but, at the end does not really want to get long any of these teams. The guy that has to buy somebody even though the bankroll might be a bit thin. The well prepared guy that came to bid 1 team and only at his predetermined price. In the end it was an extension of what all traders do each day and it struck me that the most important aspect of trading is not technical or emotional, rather it may be the fact that what we are doing is nothing more than a game. The rules of the game are internal. By internal I mean that each of us are trying to participate in different result games. Trader X may want to make 3,000 a week, trader Y may want to make 5x that amount and so on down the line. The key to success lies in being able to understand why you are playing this game and take what you want out of it.

I have included two interesting charts on cumulative breadth...the NDX cumulative reading since the beginning of this year and the SPX top 100 issues cumulative since the start of the year as well. These readings continue to make the case that neither market can gain traction, but, more importantly that the NDX seems to be under distribution while the SPX names have held up pretty well. Tale of a spread trade? Time will tell.


http://hamzeianalytics.com/charts/Brad_SPX.jpg

http://hamzeianalytics.com/charts/Brad_NDX.jpg


Good Trading to all,

Brad
 
Posted 08:45 CST

Equity Index Update
Wednesday March 15, 2006

The index markets settled sharply higher on the strength of a strong earnings report from GS, a rally in the long end of the fixed income market and a rebound in commodity related issues. When the bell rang, the SPX settled at a new 2006 and multi year high, just shy of the psychologically important 1300 level. The DJIA settled at a new high for 2006 and now stands only 600 points away from its all-time high. As for the remainder of the indices, all had strong sessions, but remained below their high 2006 levels.

Today will bring a variety of potential issues for the market, the first being the DOE stats at 9:30 cst, this will be followed by the Beige book at 1:00 cst. Also on the docket is the potential of two bullish factors...expiration week bullish bias and end of the quarter window dressing. Given the rally we witnessed yesterday, it appears as though the die has been cast for further gains the next two weeks. That being said...this market has been the anti-momentum market and it will take continued money flows to push the buy side into waters not seen since 2001 in the large cap SPX.

The key in today's session may in fact rest around the 1308 to 1309 zone in the SPM contract. This zone essentially encompasses the high ticks seen in the cash index for 2006. More importantly was the amount of volume traded at within this zone yesterday. At two price points 1308.25 and 1308.50, the SPmini contract traded nearly 12% of its entire volume for the session. Keep this zone in play as a critical closing area, and one in which the buyers will most likely defend by the closing bell.

One of the difficulties in the day after trade is dealing with ramped up expectations of movement. Over the past few years, as volatility has decreased, these one way sessions are typically followed with light volume and tight trading. Today's session should be more of the same, however, with the potential sparks of DOE stats and Beige Book, there may be more of a reason for the market to extend its price levels today, but, the odds are for some quiet range trading.

Good Trading to all,

Brad
 
Posted 07:45 CST

Equity Index Update
Friday March 17, 2006

The index markets produced a session of divergence yesterday as the SPX and DJIA finished slightly higher, while the Midcap 400 and Russell 2000 were fractionally lower. However, the big swing happened in the NDX which failed at key top end resistance of our recent trading range between 1700 and 1710. The index reversed sharply on continued weakness in the Semiconductor's, GOOG and AAPL to settle around 1679, about -1.5% from the session high.

Earlier this week I included two cumulative breadth charts from the start of 2006 in the NDX and the SPX's top 100 weighted issues. At the end of this examination I put the comment about this looking like a potential spread trade of long SPX, short NDX. Given the continued weakness in the SMH, which closed at new lows for 2006 yesterday and a general dent the cumulative breadth it appears as though this trade could continue to grind higher through Q2.

Today's action will be dominated by option expiration, the NCAA tournament and St. Patrick's day. This morning the indices are trading moderately lower, the dollar is mixed, with strength against the high yielding countries such as Australia and New Zealand as the carry trades continue to be unwound by hedge funds. Weakness in the dollar continues against both the Yen and Euro. Silver is trading at contract highs, up nearly 1% and the long end of the curve is slightly lower after a major rally yesterday.

I suspect that today's action will continue to be dominated by technology concerns and whether or not the money flow out of these issues finds a home in other sectors. So far, it has been somewhat difficult to get on board with this rally in large caps due to the velocity from which we changed course. Let's not forget that one week ago the SPM was trading around 1282, so we have participated in a rally of more than +3% top to bottom in 5 sessions. Typically this would lead to some type of consolidation at levels just below recent highs. However, given the end of Q1 and the strength of the performance in this quarter, I cannot help but think that scenario seems too simple. My suggestion is to stay cautiously long large cap indices into April and see if the divergences that are taking shape continue to gain steam over the next 10 days. If this scenario plays out and divergences continue to show their head, we may be in for a rocky move to the downside in April.

Good Trading to all,

Brad
 
Posted 08:15 CST

Equity Index Update
Monday April 3, 2006

Nice to be back after a couple of weeks off to enjoy our newborn son. This morning the index markets will focus on a couple of factors, first the merger between LU and Alcatel, followed by the news that GM will sell its GMAC arm to a venture capital fund. In addition, the Nikkei had a sharp rally last night on the heels of fresh new fiscal year buying. That buying has spread to Europe, where the indices are all tracking higher and trading around key psychological levels -- 6,000 in both the DAX and FTSE 100. The question this morning in the states is whether or not any of this is enough to spark some interest on the buyside in the large cap issues?

Looking at the SPX, it is becoming apparent that the index heeded the warning of William Shakespeare when he declared "beware the ides of March." For since March 15th, the index has traded between 1291 and 1310. More fascinating than this tight range is that over those 13 trading sessions, the SPX settled between 1301 and 1307 on 10 of those sessions. The market appears stagnant - which is not necessarily a bad thing for the buyers, but, I have to wonder if those that are not fully long in here are waiting for a pullback or a breakout to buy? If the answer is the ladder, it could come early this week with potentially strong money flows entering the indices to start the new quarter. Looking back over the bull run that began in the spring of 2003, the SPX has rallied around +1.5% during the first Monday thru Thursday of April. Given our recent decline from the trading highs of 1310, a similar performance would take us right back to that level, with potential for more upside towards the key 1325 level.

I have included a chart with this update...in it is a fascinating look at 4 measurements on the quarter just ended in the 5 main index futures markets. The measurements are for quarterly return, trading range for the quarter, % change at the high of the quarter and % change at the low of the quarter. What is interesting to me is that not one index ever traded below -1% for the entire first quarter. Couple this with historically tight trading ranges over this same period and one has to wonder why we just don't sell every single option out there and hold on tight. But, one thing I know for sure, is that by the time I figure out the game - it is usually too late. We may have another quarter or two of this environment, but at some point look out.

Today also marks the start of 1/4 price increments in the Emini Nasdaq 100 futures, providing another death blow to volatility...also keep in mind that the markets settled at fair value, not last trade on Friday due to month end procedures. The last trade in the SPM contract was 1307.75, but settlement was 1303.25.



Good Trading to all,

Brad
 

Attachments

Posted 09:15 CST

Equity Index Update
Tuesday April 4, 2006

The index markets staged an early trading rally, only to fall back under the weight of late session selling. The large cap indices of SPX, NDX and DJI finished moderately higher while the Russell 2000 produced the largest % loss. Once again the indices seemed to fall into the all familiar pattern of a sharp one way move during the morning hours, followed by a tight consolidation over the next couple of hours, finishing with an afternoon decline as bids are pulled out of the party. Today, the key question in my opinion will be whether or not we have a continuation of this selling? If the indices can hold an early attempts to push the trade lower, there is a good chance we could see some afternoon buying enter the picture. Typically, the first few sessions of a new quarter produce difficult conditions to "read" as players move in and out of various sectors. That action should be finished up by the end of this week.

On a minor negative note, the SPX closed below 1300 for the 3rd straight session. While the index is holding above recent trading lows, it will be important - from a psychological perspective - for the indices to firm above 1300 if new attempts at 1325 are to be made. The longer the markets hold at slightly lower levels from the highs, the more the indices feel "tired." In a bull market that is growing a bit long in the legs from a historical perspective, that can lead players to have a very short trigger on the sell side.

Yesterday, I questioned whether or not the buyers that are not fully long would wait for a dip or a breakout...if the indices can hold support this morning, it appears as though the answer will have been the dip.

Keep a close eye on the morning action as it should set the table for an afternoon move...SPM resistance for today lies between 1308 and 1309.50...above this zone expect an attempt at 1312. Any settlement above 1312 should be considered bullish moving forward this week. On the downside, the first support zone lies between 1303.50 and 1302.50. Below this zone 1300 to 1299.25 is critical...any settlement below this zone should lead to increased selling with an outside chance at 1288 by the end of the week.

Good Trading to all,

Brad
 
Posted 08:55 CST

Equity Index Update
Wednesday April 5, 2006

The index markets shook off Monday afternoon's late selling and staged a solid rebound in yesterday's session. In general, the mega cap issues performed well, with XOM, GS and GOOG settling on session highs and underpinning a strong bid as the SPX is seemingly holding ground in anticipation of new 2006 trading highs.

I pointed out in yesterday's comment that the indices needed to hold short term support in order to help the psychological makeup of the current index trade. The fact that the indices were able to bounce off early lows at minor support zones is critical as we move forward in this uptrend. Velocity continues to be the only thing hampering the index trade, as players continue to be a little spooked by the lack movement at higher trading levels. This is the potential "fly in the ointment" for the upside. Simply put, the indices need something to make players want to take higher prices and bid them. So far, we have not seen that magic piece of news. The obvious play on the news front is the idea that as the FED discusses the end of its tightening policy, the indices will stage a significant rally - upwards of 5 to 8% in the SPX. This scenario cannot be dismissed completely, however, given the rally into this potential news, it seems to me that the actual trading returns upon the FED announcing completion of its cycle will be more muted than many anticipate.

Today's session will be marked by any attempt to push the SPX through the 1310 level - and whether or not the markets are able to hold this bid. In addition, the NDX is approaching a key psychological number of 1725...that level is not unusual (the 25's in NDX) for profit taking to occur. Any settlement above this level is important, however, a weekly settlement above 1725 in NDX is more beneficial from a technical perspective. If this scenario plays out, look for 1775 before this move ends.

Good Trading to all,

Brad
 
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