Brad Sullivan's Morning Commentary

Posted 08:50 CST

Equity Index Update
Thursday April 6, 2006

The index markets continued to drift higher yesterday in moderate volume. The SPX was able to close above the 2006 intraday high at 1311.56, while the NDX benefited from further money flow rotation to begin the quarter and the index is closing in on the intraday 2006 high of 1761. It appears as though the indices have continued to find money flow to begin this quarter - not a unusual pattern as I pointed out in my Monday comment that the SPX has rallied around 1.5% the past 3 years the first Monday through Thursday in April trading. The question now becomes can the indices build upon this momentum and carry themselves higher?

This morning has been pretty busy as far as news is concerned. MMM guided higher and is up about 4%, MRK is down about -4% on a trial loss, the retailers came in with a mixed back on their same store sales. In addition, the global commodity rally continues to push forward as Gold crossed above 600 in the front month contract last night. In addition, Crude Oil continues to move significantly higher and is trading around a multi week high at 67.80. Continuing on the energy front, front month gasoline has been on a tear and is nearing $2 per gallon. The long end of the bond market continues to struggle with the 30 year future lower by -13 ticks at 108 '27. All of these add up to some headwinds for the indices today.

The program related trading we have seen the past few sessions has been nothing short of astounding as far as I am concerned. There is little question that the impact on a day trader is large as the markets become a bit more difficult to read due to the velocity of some of the price movements. Typically, today will mark the last session in which the programs dominate the overall action. Finally, the market will begin to look towards the employment report tomorrow...all told there seems to be some external resistance facing the market today, however, it may not be enough to do any noticeable damage given the underlying strength we have seen this week. All told, keep it pretty close to the vest.

Also, I included a chart that depicts just how quiet the trading is in the SPX for 2006. Included are the daily 2006 closes in the index along with its % difference from the 20 day MA. Interestingly, we have not seen the differential move to +/- 2% this year.



Good Trading to all,

Brad
 

Attachments

Posted 08:45 CST

Equity Index Update
Friday April 7, 2006

Not too hot, not too cold...this seems to be the trading theme index investors are playing this morning after the employment report came in pretty close to the consensus estimates. Some good news was gleamed from the lack of movement in the average hourly earnings component. Accordingly, the indices have put on their rally caps and are trading above the weekly and 2006 trading highs in the SPM contract. Still, for all the good news, the bond market remains in negative territory as the report seemed a bit unconvincing for players to push yields lower...it sure seems as if 5% on the 10 year note (currently around 4.90%) is a chip shot. The key question will be whether or not this has any impact on the equity market?

So far this morning, the answer seems to be no, but as I write this, the bonds continue to move lower and the SPM is beginning to take notice...it would not surprise me to see a strong opening sale in the index markets that finds a bottom in the first hour of trading. If the opposite occurs, and equities rally off the snap, I would be wary of a potential afternoon break from higher levels. Given the absolute lack of volatility in recent weeks, I suspect we may be in store for some 2-way trading in the near term, which would be a welcome change for the day trading community.

One key aspect of this trend higher has been the inability to "catch" players stuck the wrong way, that is a large part of the reason we have traded in such a quiet pattern the last several weeks. Today, given the selling in the long end, there is a potential to catch too many day traders on the short side of the parade because of the bond market. I have talked about this over the past couple of months, and the bottom line seems to be that the equity market has already priced in 5% on the 10 year and only a move that is disjointed would have a severe impact on the index markets. Thus far the uptick in yields has been very orderly and not produced any type of pressure - other than day trade related - on the indices. This could all change today of course, but, I would be very wary of selling short dips in this market. If you want to get short, sell the bounce.

Good Trading to all,

Brad
 
Why on earth should any consistently profitable trader with a working edge waste his time on reading fancy sports-reports like these instead of investing it into searching for opportunities in the market?

'Threads' like these are a waste of time.
 
Quote from Riskmanager:

Why on earth should any consistently profitable trader with a working edge waste his time on reading fancy sports-reports like these instead of investing it into searching for opportunities in the market?

'Threads' like these are a waste of time.
More...

I for one enjoy Brads updates and expert insight. Thanks for these posts and best wishes with the new addition to his family.

Rennick
 
Note from Fari ... it is my fault that this is being posed so late .... f
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Posted 13:05 CST

Equity Index Update
Tuesday April 25, 2006

The index markets traded at lower levels across the board yesterday, however, the sell side was never able to take control at lower levels and afternoon buy orders crept back in. Day trade short covering was the name of the game in the closing 30 minutes of trading in the large cap SP, NDX and DJIA. However, the biggest story of the day was the selling witnessed in the Russell 2000. Rumors circulated around desks that a hedge fund is in the process of unwinding a long Russell 2000 / short SP 500 position. Whatever the reason, the ER2 was clearly for sale at and above the 770 level.

In today's action, I would pay close attention to the ER2 and specifically the 770 to 771.50 zone of resistance. If the index can close above this zone on a 30 minute basis, it should alleviate some of the selling pressure left from yesterday. The most probable scenario in this index, particularly as we are called to open around 770, is an early failure and test of yesterday's low zone between 765 and 767. The most interesting situation regarding this index will be its performance versus the large caps today. When we have seen dollar flows out of small caps over the past couple of years, it typically lasts for a few sessions. If today, the small caps outperform the large caps I think the rumor about a fund taking off its position yesterday will have merit.

One other thing worth keeping a close eye on today...the deteriorating picture found in the breadth of this updraft. Simply put, the indices need to widen beyond energy related issues for the broader market to advance from these levels.

As for the SPM contract...CRITICAL SUPPORT IS FOUND BETWEEN 1209 AND 1207.50...any settlement below this zone puts 1295 back on the board. On the upside...resistance is found between 1315 and 1317.50, with critical resistance stretching from 1320 to 1325. Overall, this index seems stuck in a pretty tight range. Bids seem to be resting below 1310 and offers are scale up above 1315. This action is typical of long liquidation.

Good Trading to all,

Brad
 
Posted 08:55 CST

Equity Index Update
Wednesday April 26, 2006

The index markets continued their recent downdraft yesterday as the indices focused on the sharp rise in long dated treasury yields. All told, the large caps felt the brunt of the pain, while a large buy program near the close of trading brought unchanged readings for the Russell 2000 and Midcap 400. Today's action should be dominated by the current downdraft in the long end of the curve after a much stronger than anticipated reading in March Durable Goods orders. The reading sent the bonds significantly lower...even after a bounce back from the trading lows, the 10 year and 30 year are trading at yields above yesterday's highs. In addition, the market will look at New Home Sales, the DOE stats and at 1:00cst the Beige Book.

The indices clearly seem to be at a crossroads given their recent divergences. The NDX is barely holding above 1700 and has been unable to gain any ground back from Friday's vicious selling. On the flip side...the large caps remain below Friday's highs, but, have been able to hold their bid at lower trading levels. Seemingly there has been some rotation out of the small caps over the past couple of sessions. Yet, it remains unclear as to whether that money is being put to work elsewhere or is moving to the sidelines. The answer to this question will determine our next leg in this market.

The breadth over the past two sessions has been bad...not as bad as a quick glance at the NYSE UP/Down readings would have you believe due to the amount of fixed income issues that are listed on the exchange. That being said, we have seen moderate deterioration in the operating company only breadth readings - however, nothing to be overly concerned about given our current levels. As I wrote earlier...crosscurrents.

At current levels, it appears to me that the market is ready to make another move to the upside into the end of April...however I have lots of lingering doubts and the simple fact is this - this has not been much of a dip to get long into, which begs the question - can we go lower and produce a better entry? The answer of course is yes or who knows...but, it seems to me that at current levels, the crowd is behind the market and looking for more upside. It seems hard to fight liquidity and when you factor in all the negative headline news over the past few sessions the market remains firm.

Good Trading to all,

Brad
 
Posted 08:55 CST

Equity Index Update
Wednesday April 26, 2006

The index markets continued their recent downdraft yesterday as the indices focused on the sharp rise in long dated treasury yields. All told, the large caps felt the brunt of the pain, while a large buy program near the close of trading brought unchanged readings for the Russell 2000 and Midcap 400. Today's action should be dominated by the current downdraft in the long end of the curve after a much stronger than anticipated reading in March Durable Goods orders. The reading sent the bonds significantly lower...even after a bounce back from the trading lows, the 10 year and 30 year are trading at yields above yesterday's highs. In addition, the market will look at New Home Sales, the DOE stats and at 1:00cst the Beige Book.

The indices clearly seem to be at a crossroads given their recent divergences. The NDX is barely holding above 1700 and has been unable to gain any ground back from Friday's vicious selling. On the flip side...the large caps remain below Friday's highs, but, have been able to hold their bid at lower trading levels. Seemingly there has been some rotation out of the small caps over the past couple of sessions. Yet, it remains unclear as to whether that money is being put to work elsewhere or is moving to the sidelines. The answer to this question will determine our next leg in this market.

The breadth over the past two sessions has been bad...not as bad as a quick glance at the NYSE UP/Down readings would have you believe due to the amount of fixed income issues that are listed on the exchange. That being said, we have seen moderate deterioration in the operating company only breadth readings - however, nothing to be overly concerned about given our current levels. As I wrote earlier...crosscurrents.

At current levels, it appears to me that the market is ready to make another move to the upside into the end of April...however I have lots of lingering doubts and the simple fact is this - this has not been much of a dip to get long into, which begs the question - can we go lower and produce a better entry? The answer of course is yes or who knows...but, it seems to me that at current levels, the crowd is behind the market and looking for more upside. It seems hard to fight liquidity and when you factor in all the negative headline news over the past few sessions the market remains firm.

Good Trading to all,

Brad
 
Posted 08:50 CST

Equity Index Update
Thursday April 27, 2006

The index markets were unable to build on a strong opening bid and settled mostly around the unchanged levels. The lone exception was the DJIA, which finished higher by +0.6% at 11,354, establishing a new closing high for 2006. The key question regarding the industrials is this...are we witnessing the peak of the earnings cycle? The answer of course will be unveiled in the future, but, it is worth considering that historically the DJIA's best performing month is April.

This morning the index markets are called to open below the weekly trading low in each index, save the DJIA. The earnings front appears to be a bit light in terms of some of the oil issues, most notably XOM. In addition, the markets were dealt another blow when China raised its benchmark interest rate by 25 basis points overnight. Certainly, this adds to the global yield pressure that the markets are beginning to see as a potential negative. Domestically, the long end of the U.S. interest rate market remains soft and trading near the high yields of yesterday's session. Obviously all of this could change in a flash with FED Chair Bernanke's testimony before congress this morning. The chair will discuss the economic outlook and should once again give a hint as to the end of this current rate cycle. At this point it is clear that the equity market and fixed income market are trading at different view points on the economic front, today's testimony should give clues as to which side has pegged the future correctly.

As with all event trading days, I would expect some quick and volatile action in the immediate response to the headline release of Bernanke's testimony. The market should slow down once we move into the Q&A portion, finishing up with a busy afternoon once the testimony is complete. The key for the index markets will be for the SPM to HOLD ITS SHARP RALLY DAY WITNESSED LAST TUESDAY. Any settlement in SPM below 1295 is a sharp negative and should produce long liquidation at lower levels over the next couple of weeks.

Good Trading to all,

Brad
 
Posted 08:30 CST

Equity Index Update
Monday May 15, 2006

The index markets suffered through another day of liquidation on Friday. The Midcap and small caps were hit the hardest as momentum players bailed out of these issues. Large cap technology remained for sale as the NDX settled in negative territory for the year and a fraction above its intra day low for 2006. The 2 day market plunge has been discussed at length by many over the weekend, some blame inflation fears, others put the onus on the FOMC. In my opinion, the action has been dictated by expectations in the marketplace. In other words, the indices were bid higher on expectations of the FED putting to rest the current rate cycle. As that chance became data dependent, instead of carved in stone, players liquidated their long positions. When will the liquidation stop? That is the question at hand...given the global decline, these things have a way of carrying farther than one usually imagines...no sense in catching the knife at these levels.

Overnight action was absolutely crazy as volatility seems to be reintroducing itself to the one way street party we have traded with for so long. The dollar opened sharply lower, only to reverse all of those losses and is now trading substantially higher - particularly against the European currencies. On the commodity front, the markets are getting hammered as the metals are trading sharply lower, with Gold below 700. In addition, Crude Oil is trading lower by -2.7% at 70.05. As for the index markets they opened soft and have remained on the defensive, with the exception of the high prints made after the European open. The overnight range for the SPM contract is 1296 to 1285.40...that is substantial given our current low volatility environment. What does it all mean for today? Quite simply, expect a sharp increase in price discovery with a severe drop in the number of contracts being bid and offered at the tick. The reason is simple, many of the trading programs that have flourished over the past few years are predicated on mean reversal type of trading. This trading does extremely well in low volatility trading sessions, due to their nature of soaking up the order flow then driving the market back a few ticks. These programs will step away when volatility trades at or above a certain level...accordingly volume at the tick will be a bit lighter and price discovery a bit wider.

I have included a chart the shows the differentials between the 20 and 200 day moving averages in each major cash index. As you will be able to see, the sharp decline in the differentials we have witnessed over the past few sessions has clearly put the ball of worry into the buyers court. Historically, when we move from elevated levels in the extensions the trend continues. In other words, the odds are for lower index prices over the next few weeks.



Good Trading to all,

Brad
 
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