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
 
Posted 08:55 CST

Equity Index Update
Wednesday February 8, 2006

The index markets drifted lower yesterday, however, the large caps, which have received the brunt of the recent selling were able to consolidate at support levels. The shift in the marketplace was felt in the ER2 and EMD as both the indices had strong downdrafts that produced technical damage in the short term. This morning the indices are called sharply higher on the heels of CSCO's earnings report last night and an upgrade in DELL as well as upward guidance in PEP on the earnings front. The key question is this...can CSCO turn the tide of the NDX? The index has held key support the last two session and breadth has stabilized during this test of 1650. Keep in mind...on Monday I wrote that the key to this market will be if the index makes a push for the -10% decline or stabilizes between -5 and -7%. Thus far, the ladder is proving correct.

Today's action should be dominated by early trading action off the CSCO news and gap higher. Potentially, I would expect the Mid cap and Russell 2000 to under perform in a relative manner versus the large caps. The DOE stats at 9:30cst, given the recent decline in Crude Oil, should have a large impact on the trading session. Keep in mind...we have been following the oil market in terms of equity pricing for quite sometime and this reading will be important for the large cap issues such as XOM,CVX and others.

The SPH should have resistance from 1260 to 1262, above this zone and the trade looks a touch better. The next key spot for the market will be 1265 to 1266.50. Only a settlement above this zone will turn the index from negative to short term positive. On the support side...if the indices ignore the CSCO news and focus on the current "drivers" of this down leg, I would expect the SPH to test the 1255 level with an outside chance to hit 1250. CRITICAL SUPPORT IN THE SPX (CASH INDEX) RESIDES FROM 1251 TO 1245. A SETTLEMENT BELOW THIS ZONE WOULD NOT BE HEALTHY IN THE SHORT RUN FOR THE MARKET.

The two indices with the most to "lose" in the near term seem to be the Mid cap 400 and Russell 2000. Keep a close eye on support in the ER2H contract at 715, 712 and 709. The current trade in the index leads me to think we will test these areas shortly, possibly as soon as today. Only a settlement above 725 would change this outlook. The EMDH contract should remain under heavy pressure, in large part due to the index component weightings. Two of the top four issues are home builders, and the lead issue is an oil company, MUR (Murphy Oil). Further troubling in this makeup is the amount of natural gas and drilling issues that account for the largest sector weighting in the index. Given the current selling in these issues, I suspect we will see lower prices, most likely a play towards the 760 - 755 zone before we neutralize.

Good Trading to all,

Brad
 
Posted 08:00 CST

Equity Index Update
Thursday February 9, 2006

The index markets put in a strong performance yesterday as final hour buying turned minor large cap gains into significant one's by the closing bell. When it was over, the SPH reversed Tuesday's decline, the NDX settled at its highest level for the week and is now +1.8% off the intra day low - which also happened to equate with unchanged on the year - from Tuesday afternoon. The DJIA also proved strong as large cap issues produced gains, while small and mid caps finished moderately higher.

Within the small and mid cap arena, it is important to dissect yesterday's trading action. Both of these indices made bounced sharply off their respective support zones, however, they were unable to generate further gains above key short term resistance levels. In the ER2 contract, I continue to look at the 725 to 730 resistance band as critical. A move above this zone is a positive for the upside, however, I tend to think most of the strength in the small caps is behind us. This statement should be viewed in context of relative performance. Given the updraft in this index since the start of the year, the corresponding large cap issues spreads are trading at a large discount to their historical levels. If one believes in any type of mean reversion, this is the opportunity to get long large caps and short small or mid cap issues. On a weighted basis, including implied volatility of each index, my current unit size for the ER2-SPmini spread is 4 ER2's against 7 SPminis.

The large cap performance was helped by the turnaround in shares of GOOG. the stock traded as low as 354 and change (margin call anyone) before rebounding to 369 by the close of trading. I continue to believe that this issue is the most important stock in the marketplace right now. Particularly when one measures the psychological impact it has on small and large investors alike. If the stock can consolidate at slightly higher levels, and the money that has flowed out of this issue the past week can be rotated into other issues, then we have the ingredients for a sustainable rally in large cap's. Another key factor in today's trade will be the reception of the 30 year auction. As this auction has approached, the index markets have had a divergence with the fixed income markets. Yesterday's 10 year auction was not overly well bid in the fixed income market, leading to lower afternoon pricing in these contracts. However, equities rallied once the bond market closed. Divergence. I have discussed the past week my thoughts on money being taken out of equities and put into fixed income - specifically the 30 year - ahead of this auction. The equity rally in the afternoon confirmed my speculations that part of the reason for our recent decline has been money flow out of equities and into fixed land. Keep a close eye on this action today.

Overnight...the SPH is trading higher at 1270.50, up 2.25...the NDH is up 6.00 at 1681.50...the USH is lower by -10 ticks at 112 '07, and is closing in on last week's employment report low of 112 '03...the dollar is moderately weaker ahead of tomorrow's International Trade reading and should remain quiet...Crude Oil is slightly higher and GOLD is sharply higher, up 7.50 at 561.30.

Good Trading to all,

Brad
 
Posted 07:45 CST

Equity Index Update
Monday February 12, 2006

The index markets were able to take back the aggressive early selling in the marketplace and settle higher in the large cap arena. Small and Mid caps continue their respective under performance, however, were able to bounce off key support levels and rally about +1% - from those levels - by the close of trading. Early volume flows were cautious ahead of the Olympic opening ceremonies, locals and prop players were able to push the market down with relative ease from the opening bell in both the NDX and ER2. Near the end of the first hour of trading both the DJIA and SPH reversed course and spike lows were created in each contract. From there, it was a slow grind higher, that picked up steam in the early afternoon when the opening ceremony went off without any terrorist activity. The NDH rallied about +2% from its new low of this move - 1642.50, but, like all indices was unable to hold the bid into the closing bell. While the markets all settled off their lows, none could muster the ability to settle on their highs. Seemingly, this leaves us in a wide trading range ahead of Wednesday's Ben Bernanke testimony in front of the US Senate.

This morning the markets will focus on a couple of factors...first and foremost will be the snowstorm throughout the NYC area and the impact it will have on traders and their ability to get to work. Secondly will be any response to the sharp sell off in the Nikkei last night. The index closed below 16,000 on heavy volume. Thus far, European markets have not followed the downward path of the far east and are trading moderately higher. The final focus on the market should be the performance of GOOG after Baron's knocked the stock in a cover page article. Given the history of this publication and its front page articles, I would say the odds for a buy GOOG reversal trade will play itself out before the session is over. If this occurs I suspect we will trade towards the higher levels of our recent trading ranges.

Another issue that keeps playing in the back of trader minds is the yield curve inversion. The potential fly-in-the-ointment scenario for the domestic equity market is a recession. The debate about our current situation within the yield curve centers on those claiming that the curve is inverted due to massive demand for our longer dated issues on a global basis. Versus those that say a recession, based on historical data of past curve inversions, is looming. I have no idea which side is actually correct in this debate, and to be blunt I am not sure that either scenario is healthy for the equity market. On the one hand, a recession looming is not when one wants to go long the market. With respect to global demand for our long dated products, my question is pretty simple. Why would investors want to receive such a paltry yield on the longer dated treasuries? Certainly, there must be some alpha to discover somewhere...apparently not. With the recent auctions in the 10 and 30 year, an interesting pattern emerged in the equity markets. When the 30 year went down in price, the equity market rallied and vice versa. It seems that some of the treasury movements were directly influencing equities as pensions moved money into one market and out of the other. Now that the 30 year is on settlement from its auction, I suspect that this recent pattern may not play out...but, keep it in the bookshelf as it is bound to resurface around quarterly end.

Good Trading to all,

Brad
 
Quote from Fari Hamzei:

Posted 07:45 CST

Equity Index Update
Monday February 12, 2006

The final focus on the market should be the performance of GOOG after Baron's knocked the stock in a cover page article. Given the history of this publication and its front page articles, I would say the odds for a buy GOOG reversal trade will play itself out before the session is over. If this occurs I suspect we will trade towards the higher levels of our recent trading ranges.
,

Brad
More...
Why do you say "given the history of the publication... a buy reversal trade will play itself out" ?
I can remember back in 2000, when they started coming out with
negative stories on internet stocks, well we were not very far from the top, this was actually the top.

Meanwhile GOOG hasn't bounced, I have got to say this stock is quite amazing the way it trades, I would have expected a pullback here, but many times before, on the way up, I also expected deeper pullbacks
 
Posted 08:10 CST

Equity Index Update
Tuesday February 14, 2006

The index markets were able to survive a quiet session that found many players at their respective east coast homes after the weekend blizzard on the east coast. Volume flows were tame ahead of Wednesday's testimony from Fed Chairman Bernanke, today's retail sales report and upcoming tech earnings from DELL and HPQ. Obviously, the big daddy in all of these events remains Wednesday's testimony. The markets are anticipating getting a "clear" feel of what Bernanke thinks about the current cycle and how much longer it may last.

On that note, the release of today's Retail Sales report was shockingly strong, with the headline reading coming in at +2.3%, significantly higher than the anticipated +0.8% that was the consensus estimate. In the wake of this report, the long end of the curve has traded to new lows for 2006, with the USH contract hitting 111'28. The dollar has rallied sharply against the European currencies, but, is lower against the YEN. The index markets have traded lower by a moderate amount since this reports release.

The potential problem in the equity market, given this release, is pretty simple. Taken as an economic barometer, this is a very healthy reading of the current economy, however, if the equity market - which is a forward looking mechanism - is worried about data flows this reading presents a problem. The problem is simple...everybody wants the FED to stop raising rates, this type of data represents expansion, not contraction. If we continue to expand in our domestic economy, the rate hikes will continue and those that bet on a FED endgame will suffer. Accordingly, those that have made that bet - one that was made very aggressively on the first trading session of 2006 - have found themselves liquidating trading positions over the past couple of weeks. The key in the short run remains the Russell 2000 and MidCap 400 indices. If the rate cycle continues for the next few months, these contracts should feel the brunt of liquidation pressures.

As for today...I would expect some choppy action with moderate to light volume ahead of tomorrow's big session.

Good Trading to all,

Brad
 
Posted 08:40 CST

Equity Index Update
Wednesday February 15, 2006

The index markets put on their respective rally caps, led by a charge in the DJIA as it crossed and held the psychological 11,000 level. Further support in the collective indices was found after the Russell 2000 and Mid cap 400 tested key support zones and bounced rather significantly from these levels. The SPX closed at 1275, now lower by only a fraction for the month of February. Volume was solid across the index complex, which seemed to lead towards the idea of position squaring ahead of Fed Chairman Bernanke's first congressional testimony.

Today's trading action will be dependent upon what Bernanke says - or does not say - regarding the economic outlook and discussion on the current rate hike cycle. The key question with regards to his testimony and the indices collective response is simple...if Bernanke signals a near end to the current cycle of hikes, is their any upside left? Or has the market already priced this event in? In my opinion, the answer to this question will most likely come tomorrow. Keep in mind that it is not unusual for the indices to do a one way fake out session, followed by a 2 or 3 day reversal after the event has ended.

The FED Chairman will have his text released at 9:00cst and his testimony will begin at 9:20cst. I suspect, after the initial flurry of orders, we will see a rather tight range until the completion of his testimony this afternoon.

Good Trading to all,

Brad
 
Posted 08:45 CST

Equity Index Update
Friday February 17, 2006

The index markets continued their probing of higher price zones with a solid rally yesterday. Fed Chairman Bernanke's second day testimony went off without any glitches and more than that, it appears that many were impressed with the direct nature of his language when answering the committee. All told, it appears to me that a portion of this current updraft has to be considered the Bernanke rally. The indices were wavering ahead of his testimony, mainly due to the fact that Greenspan had been in charge so long that there was a comfort between he and the markets. Ahead of this shift in Fed leadership, the markets grew worried, the past two sessions of testimony and the results within the index markets seemed to have provided a relief bounce.

This morning, the indices will focus on the DELL results, PPI and the Consumer Sentiment Preliminary reading. In addition, it is option expiration and a long weekend ahead of Monday's holiday. The odds would normally favor tight ranges, however, given the run higher this week, there could be some volatility as the session progresses.

The index markets are called to open around unchanged, to slightly lower as DELL is called to open -1.00...in addition, INTC is lower in sympathy as it is the exclusive provider of chips in DELL's computers. All told, this should make for some potential declines IF THE OPENING BID IS SOMEWHAT ARTIFICIAL. By that statement I mean that the bid on the open will not reflect the underlying problems in the market this morning. Instead, it will be tied into the expiration and built around yesterday's closing prints. It is not uncommon in these situations to see high prints registered at the open of trading, followed by a decline for most of the morning before the market settles into itself and reasserts the trend. Given the desire for most traders to leave early today, I would expect some attempted "pushing" in the negative direction over the first hour of trading.

The domestic and global fixed income markets are having significant rallies this morning...Crude oil is sharply higher and now rests 2.00 above its low made in the final 30 minutes of trading yesterday...Gold is back above 550...One other comment on the index front...THE SPX's RANGE FOR 2006 COMING INTO THIS WEEK WAS ROUGHLY 3.9%. SO FAR, THE INDEX HAS PRODUCED A RANGE OF NEARLY 2.5% FOR THE WEEK AND IS CLOSING IN ON MULTIYEAR HIGHS. This is not a bearish picture and moving forward, I suspect we will challenge the key 1325 level before this move is over.

Good Trading to all,

Brad
 
Posted 08:40 CST

Equity Index Update
Tuesday February 21, 2006

The index markets participated in a quiet option expiration related session on Friday. Given the weakness in DELL and INTC, as well as some inflation turning headlines on the PPI front, the indices held serve quite well. The week ended with sharp gains for most indices, only the NDX was unable to participate in significantly higher prices. If the NDX cannot move higher in the next couple of weeks on a relative basis, this will be an important divergence and could lead to a large decline towards the end of Q1 across the indices.

Today's trading action will be focused squarely on the FOMC minutes which will be released at 1:00 cst. The minutes should solidify opinions in the marketplace as to the direction and amplitude of potential hikes as well as inflationary pressures that may be building in the pipeline. Prior to this release, look for the indices to stay in a relatively tight trading range. Little in the way of overnight equity news as Europe is higher across the board and the Nikkei was able to regain its footing after some heavy selling the previous session.

Worth noting on a technical level is the running breadth data I keep track of in the various index markets. The SP500 is interesting because the top 20 weighted issues are actually registering a cumulative negative reading since the start of 2006. However, the remainder of the top 100 issues have shown relative strength this year and are trading around their cumulative high for the data period (remember only 2006). In my opinion, this does not represent bearish action...I continue to look for the indices to be under accumulation in the near term.

Good Trading to all,

Brad
 
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Fari Hamzei
HamzeiAnalytics.com
 
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