Brad Sullivan's Morning Commentary

Posted 08:05 CST

Equity Index Update
Friday January 6, 2006

The index markets are well bid this morning behind a softer-than-anticipated non-farm payroll report. The reading was +108k vs. expectations around the +218k zone. Accordingly, the indices have used this information to build on the dominant trading theme established on Tuesday afternoon when the FOMC minutes were released. The trading theory suggests that with the Federal Reserve in its final stages of tightening, it is time to buy equities.

If this idea for the long side plays out today, it would likely produce a substantial rally that would take each index above their respective 2005 trading highs. At this point, only the MidCap 400 has been able to achieve this on a closing basis. The SPX and Russell 2000 appear poised to open above their respective '05 highs. The NDX will be a “coin flip” at the current futures level of 1730 as the cash '05 high is 1716.65 intraday. Meanwhile, the DJIA will need to cross 10955, and at the time of this writing it should open about 25 points below that level. What does it all mean? Simply put, if the buyers on Tuesday continue their appetite today, I would suspect DJIA to challenge 11,000 by the end of the session, SPX around 1285 and so on up the ladder, with a major milestone in the headlights for the Russell 2000 at 700.

The downside reversal is something that is critical to watch for on Employment Friday's. However, unless the indices on whole can get an intraday hourly close below UNCHANGED, I do not expect the sell side will have much powder to hold the market lower. If we do receive an hourly close below UNCHANGED, I will use it to liquidate position longs and go flat.

I wrote in detail the other morning about the "corkscrew" type of situation the domestic index markets currently find themselves. For sake of reiteration, the index markets had been stagnant for nearly 30 trading sessions. On Wednesday's close, the MidCap 400 broke out and closed at all-time trading highs. Considering that this index has been the upside leader since this bull run began back in the spring of 2003, I think it adds validity to buyside case across the equity complex. In my opinion, we have potential for a serious move higher from current trading levels. As for intraday trading today, I am anticipating heavy volume flows early in the session. Technically speaking, it is difficult to have many targets of resistance as we move into waters not seen in nearly 5 years. I intend to stay long and look to day trade on the long side around the tops and bottoms of the hours, looking for buy program momentum plays.

Good Trading to all,

Brad
 
Posted 07:55 CST

Equity Index Update
Monday January 9, 2006

The index markets continued their ascent behind the Non Farm Payroll (NFP) report, which most felt was not too strong and not too weak. The headline figure in the NFP came in well below consensus at +108k. However, the unemployment rate fell to 4.9%. Additionally, the net upward revision to November's report by +71k helped quell any notion of hiring weakness and economic contraction.

The indices opened trading higher, only to fall off and test levels around unchanged in the first 45 minutes of trading. However, buyers held firm at those levels and began a slow push back to the opening price levels, followed by a breakout over the lunch hour. The final 2 hours of trading were sideways, with little volume flows or price change. When the bell rang, each index that I discuss - SP, ND, DJ, MID and Russell 2000 - closed above its respective 2005 trading highs on both intraday and settlement readings. For the week, the one-way nature of the move was aggressive as the indices put up impressive net gains. The range in gains was from the DJIA up 2.2% to the NDX up over 5%.

Technically speaking, there is nothing holding the basket of indices back from probing higher and higher price levels. The breadth readings were impressive, volume flows were solid and each index broke above a several-week trading base. In my opinion, the key driver behind the potential for probing higher price levels is the amount of time the indices spent consolidating after the huge rally from our October '05 lows into the Thanksgiving holiday. From a technical perspective, that range trade was healthy and now buyers are adding fuel to the fire. Certainly, this does not mean we won't take a collective breadth and trade sideways to lower over the next week. However, the odds appear to favor another leg for this rally that may not end until we are through earnings season. If this scenario plays out, I would expect a crippling blow to the VIX and VXN over the next few weeks.

Good Trading to all,

Brad
 
Posted 08:10 CST

Equity Index Update
Tuesday January 10, 2006

The index markets continued their new years winning streaks as the indices rose across-the board-yesterday. The DJIA finished above 11,000 and now stands around 7% from its all time trading highs. However, selling in the final 15 minutes of futures trading put each index below its respective fair value reading at the close. Further selling hit the markets on the open of globex trading and continued throughout the Asian and European hours. While losses have been contained, each index is called to open at or near their trading lows from yesterday's session.

One aspect of the current rally that many technicians are raising a red flag on is the lack of volume surrounding this current thrust. There is no question that flows have declined after last Tuesday's large advance. However, a slackening in volume does not necessarily mean the buyside is dead. Keep in mind that during this bull market – moving in on nearly 3 years - the buyside has shown a tremendous amount of patience in not paying "up" in order to get filled. The velocity behind much of the price moves has been the direct hand of aggressive funds either covering shorts or longs in a "need-based” fashion. At current price levels, there appears to be very little short interest in the indices. In addition, there does not appear to be overly aggressive long positioning. This combination creates a sort of dull rise until players build up greater positioning. There is little doubt that the buyside is the more extended of the two positions and appears to be building more longs each session. If this position-building phase remains, I suspect the indices will have another 3 to 5% rally through earnings season before a spring slip. The impression I have from discussing the markets with different traders is that nobody is willing to step up on the short side at these levels. Much like a buyer looking for value, so are the shorts. That value play is at higher levels than our current trade.

This morning, Morgan Stanley upgraded the chip equipment sector to overweight. Boeing (BA) and United Technologies (UTX) were both downgraded to neutral and Goldman Sachs (GS) was upgraded to outperform. The dollar is firm, Crude Oil is higher, the metals complex is lower and the long end of the curve continues to be offered, trading at levels not seen since the Christmas holiday.

In today's session, I am looking to keep a close eye on the issues I mentioned above and whether or not they have a material impact on the trade. Support side in the SPH resides at Friday's breakout zone between 1291 and 1287.50. Any hourly close below this level should lead to a trade towards the 1278 level over the next couple of sessions. In the NDH, key support resides from 1744 to 1737. Any hourly close below this zone points to a move towards 1720.

Good Trading to all,

Brad
 
Posted 09:00 CST

Equity Index Update
Wednesday January 11, 2006

The index markets staged a solid final hour rally and were able to close the session in positive territory, with sharp gains seen in the Russell 2000 and NDX. The overall stage was seemingly set for a bounce when Apple (AAPL) took off like a rocket on comments from founder and CEO Steve Jobs. The issue closed at new all-time highs and continues to be a barometer for the momentum issues. This morning the indices are called to open higher and strength in Japan and Europe . However, earnings worries from Dupont (DD) and Genentech (DNA), coupled with a downgrade of Yahoo (YHOO), could make this opening a bit softer than anticipated.

One issue that concerns me about yesterday's rally was the disturbing lack of breadth in both the NDX and SP500. I divide the NDX into 2 specific camps, the first being any issue with a weighting of greater than 1%. That equates to 26 issues currently. These issues account for nearly 65% of the weighting in the entire index. Yesterday, only 10 of the 26 issues finished with gains. In the SPX, I weight the top 20 and the top 100 issues separately. What is interesting is that we have been pretty neutral in the top 20 issues in terms of cumulative breadth since the start of the year. Most of the strength has come in\ the secondary issues of the top 100 in the index. When similar breadth readings have occurred while the index has moved significantly -- I measure this as +/- 3% or greater over 10 sessions -- the index has had a move of 1% in the opposite direction over the next 5 sessions.

Now that the technical play is out of the way, it is apparent that volume flows have taken a holiday. Yesterday afternoon's action -- save for the Russell 2000, which witnessed sharp buying all session -- was a classic day trader squeeze. A few institutions came in with buy orders after 2:15cst and the press was on, particularly in the NDX which acted as though somebody HAD to buy those contracts on the close of trading. Today's action should be a pretty good harbinger of things to come. Volatility remains non-existent and players are getting comfortable with the afternoon buy and hold. Typically when this type of comfort happens, the market will play a different tune. All told, I am looking for sideways to slightly lower trading across the board today. However, with such limited expectations of movement, I will be waiting to see if there is something worth trading. Otherwise, it’s “sideline city.”

Good Trading to all,

Brad
 
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
 
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
 
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
 
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
 
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
 
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