Brad Sullivan's Morning Commentary

Posted 08:55 CST

Equity Index Update
Wednesday February 22, 2006

The index markets finished lower on the heels of sharp selling in the NDX, specifically tied to the Semiconductor Index as Citigroup downgraded the entire sector. The broader indices fared a bit better...on the encouraging side of the ledger for the buy side was the late afternoon rally in the Midcap and Russell 2000 indices. In fact, the Midcap future finished the session in positive territory. The SPH seemed to hit a bit of a "air pocket" after a strong open above last week's highs. However, the index was able to hold minor support located around the zone of 1285 to 1282.

This morning, the indices will focus on the CPI report, which was in line with the Core rate at +0.2%...the headline rate was a touch higher than expected at +0.7%. In response, the fixed income market has rallied sharply off their earlier session lows and now stand in positive territory. The dollar is mixed and the indices are called to open slightly higher.

Given the decline in yesterday's trade it will be interesting to see which direction the market takes today. We appear to be grinding around towards the higher end of our 2006 range, with the technicals pointing towards higher levels after this consolidation. Accordingly, I suspect the indices will attempt to recapture some higher ground left from yesterday in the early portion of the session. If this attempt to hold higher prices fails...look for renewed selling interest with another attempt to push the SPH towards 1280. In my opinion, today's trade will be critical as we discover whether or not yesterday's decline has any "legs" in the NDX. If it does, the larger question then becomes...can the broader indices hold their ground with the tech market declining?

Overall...today should be a setup day for our next leg in the marketplace. I suggest keeping a close eye on volume in the mini contracts as the last couple of sessions have been on the light side. If volume flows expand today with a directional move, it should be taken as a next leg signal.

Good Trading to all,

Brad
 
Posted 08:35 CST

Equity Index Update
Thursday February 23, 2006

The index markets took another step higher yesterday as the NDX recovered from its Semiconductor led sell off on Tuesday. The one resting fly in the ointment was our settlement in the futures arena. Each contract settled well below their respective fair value's and in some cases below their cash index closing prices. Much of this was tied to a large institutional seller that came into the SP arena around 2:55 CST and held the offer into the closing bell. The key question in terms of this morning's activity is whether or not the selling into the close of trading will have much carry over impact?

Given the overnight performance, or lack thereof, it appears that the final selling thrust has pared some of the buyers ambition at higher levels. So far, the buy side has focused on defending support zones, however, there has been little appetite at the higher end of our established trading zone. Certainly, this will need to change if the collective indices are to put another leg higher in this current rally. If this fails to happen, it appears as though we may find ourselves drifting back lower in the near term. However, unless the established support levels in each index are taken out, this appears to be more of a time situation. At the core, the domestic index markets have not moved quickly or traded out of range much since this bull market began. In response to that, players have become accustomed to buying the dip, but not chasing gains in fear of top ticking the market. Until this mantra changes, much of the movement at higher and lower price bands tend to create back and forth type of trading situations within a 1 to 2% band. The question now is this...after last week's sharp net gains, cant the indices utilize that momentum and push higher? Or was it nothing more than some short covering on a Bernanke based rally that will quickly fizzle? The answer will play out over the next week or so.

I would anticipate the market to follow lower during the first hour or so of trading today. After that, we may take our cue from the DOE weekly stats and whether or not any supportive bids are found at various levels in the indices. If the sell side is unable to press the markets below support zones built up from yesterday's session, I would look for a retest of the trading highs and a possible carry above the 2006 high in SPX. Technically speaking, volume flows remain light...NDX needs to build on support from the 1670 to 1675 level, below this things could get a little dicey on the downside.

Good Trading to all,

Brad
 
Posted 08:25 CST

Equity Index Update
Friday February 24, 2006

The index markets were unable to hold early gains and finished with slight losses across the complex. Volume flows remained light and players did not seem interested in taking the market above key resistance areas in the SP or NDX. The Russell 2000 was able to print a new all time high, by a fraction during the lunch hour...however, the index was met with aggressive late session selling which leads me to believe that much of the upside thrust we witnessed in the late morning yesterday was day trade related. This puts the overall market psychology in questionable zone. If longs fail to produce buyers at higher levels it will lead to a markdown in prices as liquidation occurs near our resting 2006 highs. However, the counter point to that last statement has been the ability for the indices to hold key short term support levels which have allowed the market to hold onto last week's sharp gains.

This morning the indices will be paying close attention to any new developments on the oil refinery attack in Saudi Arabia. Since the release of this event, the SP futures have slid from 1292 to 1288 and have steadied around 1289.50. Gold has rallied a bit and Crude Oil is up nearly +3% on the overnight session. Given the light volume flows we have seen, coupled with it being a Friday, it seems to me that this event in Saudi Arabia will hold much of the market attention today. I would anticipate some follow selling early from day traders as they try and push the market towards the lower trading zones for the week. If this attempt fails, it should produce a replay of what we have been seeing this week...players buying the first hour low prints and walking the market up through the late morning.

One chart that has attracted my interest repeatedly during the last week is breadth statistics in the NDX...the cumulative breadth readings for 2006 closed at their second lowest level of the year at -47. More disturbing is the fact that the top 26 components in the index (which account for nearly 64% of the total weighting registered a new low tick on Tuesday's close. This action typically foreshadows choppy trading action within a tight 2% range before producing a leg lower. This market needs to stabilize in the near term if there is to be a collective push higher. Keep a close eye on the breadth readings as we move forward in this index.

As for today...keep an eye on the headlines and expect relatively light volume and pretty thin conditions dominated by the local and prop traders.

Good Trading to all,

Brad
 
Posted 08:05 CST

Equity Index Update
Monday February 27, 2006

The index markets survived the initial downdraft over a spike in Crude Oil prices after the attack in Saudi Arabia and settled moderately higher across the complex. Volume flows were bordering on non-existent as players continue to wait for a spark to drive the next round of pricing movement. In the interim, the markets have officially worked off the overbought conditions that were registered on Standard Deviation readings as well as moving average extensions.

The best example I can give in regards to the overbought condition being worked off resides in the Russell 2000 index. The index closed at its all-time high on Friday, however, its 22 period Std. Dev. reading has declined by nearly 60% since its former closing high was registered the last week of January. At that point, the index had rallied off its consolidation zone that lasted the last two weeks of December. The 2006 rally in the index produced a move from 670 to 733 in January. February has brought a shallow dip, followed by new highs and lower Std. Dev. readings. Typically, this signal in the STDev relative to price will lead to a sharp move in one direction. Historically, the odds favor higher pricing, particularly as this move is centered around the month end and potential month beginning fund flows. If the move is sharp in this index, I suspect we will move towards the 755 to 765 zone before the upside tires. However, the downside risk would be more substantial in terms of velocity and price probing. If the lower odds scenario played out, and the downside was triggered, I would suspect 680 would trade before the move ended as many a long is levered up here at the highs. The one confusing and lowest odds play would be a further crunch in the STDev readings within a tight trading range at moderately higher levels, 730 to 745 for example. If this scenario plays out, the odds of a volatile move lower in the spring raises its head.

As for today's trading, INTC received an upgrade, the dollar is mixed...SPH is trading higher by 1 point after pressing up to last week's high zone overnight...the NDH is higher by 3.00. This performance in the indices overnight is impressive as the markets settled substantially above their respective fair values on Friday's close. The final 15 minutes of trading brought a significant buyer in the ND futures. This buyer seemed to help the other indices higher and the markets certainly "feel" poised to make a collective push to higher ground. The key to the whole parade of indices moving higher is resting with the NDX and its current downtrend line established off the January highs. This technical issue has been discussed frequently during the last week as players try and explain away the lack of follow to the upside. The question then becomes, can the rest of the indices rally much more without NDX participation? The answer depends, much like it did in 1999, on money flow. If large cap technology continues to be a choice of last resort among the buy side and momentum players I suggest the other indices could rally significantly as money moves into their respective coffers. Certainly, over the long haul this would become a divergence that could have negative ramifications. However, in the short run, let's look at the facts...the Russell 2000 is at an all time high, the DJIA is at a 5 year high, the SPX is a fraction off its 5 year and 2006 high and the Midcap 400 is within 1% of its all-time high. Meanwhile the NDX is -5.3% FROM ITS 2006 TRADING HIGH. As we move into the final month of the quarter, it will be fascinating to watch the money flows in and out of these indices. If the current sale of NDX continues, and that money finds a home elsewhere, it should be more of the same. NDX underperforming to the other indices. Can anyone remember when the DJIA was given up for dead in 1999?

Good Trading to all,

Brad
 
Posted 08:30 CST

Equity Index Update
Tuesday February 28, 2006

At the close of business today, two months will officially be in the books for 2006. So far, the indices are acting in a similar vane to last year with a compression in volatility and volume. Players appear to be unable to muster any price acceleration, however, the buy side has held a higher band of support in most indices since the testimony of Fed Chairman Bernanke. It is becoming more evident that the index rally witnessed two weeks ago was in response to the new chairman's plain speak and quite frankly the removal of one potential source of worry. Since Bernanke's trip to the hill, 3 of the 5 indices traded to new 2006 highs...the key will be the markets ability to hold higher support levels and eventually land a breakout upside session. If this fails to materialize, it does not signal a massive correction...instead it looks like another test of the bottom end of our 2006 ranges.

A relatively new phenomena the last couple of years has been the rise of hedge fund day trading. The past few sessions in the index market illustrates this example quite well. Yesterday, after holding a bid at new 2006 highs in the Cash SPX, the index was unable to push higher in the final hour and at 2:30 cst, liquidation longs came into play. The market held up relatively well for a stretch, but forced selling in the final 15 minutes pushed the trade back to a 1294 settlement, up only 0.75 for the session. So far, one of the most reliable patterns in 2006 and late 2005 for day traders has been the afternoon fade. Once an index rallies a decent amount, then proceeds to move sideways over the course of a couple hours, long liquidation becomes the name of the game and sellers hit 'em into the close. This trading is in direct contrast to many strategies day traders have learned and employed over the last decade. Volume flows have increased significantly while volatility has plunged...this leads to fewer and fewer opportunities for a day trader. One indicator I track closely that allows me to keep myself out of too many trades in any session is the index mini volume. When flows are light throughout the first hour of trading (such as yesterday) it becomes easier for a fund or funds to be the primary market. When this occurs much of the final push to daily highs or lows are created from smaller traders being forced to liquidate. By using an indicator such as volume flows every 30 minutes, it allows me to determine if I have a good chance of being the "sucker" that day. The player forced out by a bigger fish's relentless push against my position.

Keep that thought in mind over the next few days...if volume remains light be very cautious.

Good Trading to all,

Brad
 
Posted 08:25 CST

Equity Index Update
Wednesday March 1, 2006

"With an Uneasy Feeling in My Chest, Wondering What it All Means."

- Steve Earle

I thought that the above line described yesterday's trading action better than anything I could write. Simply put, the obvious headline excuse was GOOG and its shocking release over a web conference that growth was slowing. The stock, in a panic, dropped from 395 to 338 before stabilizing and settling at 363. The fascinating aspect of this event was the response in the index markets. The markets were trading on the soft side of the equation before the announcement in follow from Monday's final 30 minute drop from the highs. Once GOOG opened the door, the floodgates did not exactly open...rather it was a pretty calm downdraft that included just about every recent market leading sector into the month end. The question now becomes this : was yesterday another one day wonder on the sell side?

Typically, I try and pay attention to sentiment indicators and things of that nature to get a psychological feel for the marketplace. What I found interesting about yesterday's drop was the lack of media focus surrounding the DJIA giving up 11k. Instead, the focus was on the DJIA putting forth its best start to a year since 1998, up 2.6% YTD. I don't pretend to know a whole bunch, because as a speculator I have been proven wrong quite often...however, this focus on the good instead of the bad seems to reflect a shift in the market outlook. Since the vicious bear market declines a few years back, most of the market attention has been on negative situations. In other words, people get scared when the DJI drops -100 in a session. The fact that this did not happen yesterday is critical in my opinion. The downside may not play out today or tomorrow, however, for the first time in years there is a public complacency in the marketplace. I suspect we will see a vicious springtime cleanup of this newfound psychology.

In the near term, I continue to look for the indices to move lower and focus on a variety of cross currents. Including, the inverted yield curve, the GOOG debacle and its impact on the overall market, as well as the batch of economic data that will be delivered over the next couple of weeks. For today's trade, in the SPH contract, I am focusing on the resistance zone between 1285 and 1287. If the market were able to move above this zone on a 30 minute closing basis it would relieve much of the short term pressure and remind me of the quote I used to begin this comment. On the support side, look for 1282 to be a key level, followed by yesterday's low area of 1280.50 to 1280. Underneath this zone 1276.50 to 1275 becomes a target.

Good Trading to all,

Brad
 
Note from Fari: I just noticed we forgot to post this on time -- mea culpa
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Posted 08:40 CST

Equity Index Update
Thursday March 2, 2006

The index markets participated in a melt up higher with early month fund flows being put to work, particularly in the Midcap 400 index and Russell 2000. The larger cap indices continued to lag behind the aforementioned leaders. This morning, the indices are called to open lower across the board, leading to the speculation that yesterday may have been nothing but a early month push higher.

This morning, the indices seem to be focusing on interest rates as the yields on the 10 year and 30 year are moving towards multi-month highs. The most interesting aspect within today's session will be the determination of which side has the stronger hand. Certainly, after the sharp gains yesterday, momentum is on the buyers side...however, the rally yesterday was met with heavy offers from the 1287 to 1293.50 area and while these offers obviously traded out, it would be a negative factor if the SPH were to settle below 1285 today.

Much of today's action should be determined by the ability for the indices and specific sectors (semi's) to maintain there support levels established intraday yesterday. If these gains fail to hold, I suspect the sellers will press the advantage and try to push the broader indices back towards lower levels established during Tuesday's decline. As I wrote yesterday...a 30 minute close above 1287 in SPH would leave me confused as to the near term market direction...I am officially confused.

Good Trading to all,

Brad
 
Posted 08:10 CST

Equity Index Update
Monday March 6, 2006

Over the weekend, I drank some beers with a trading friend of mine who told me that he had a "really bad year on Friday." He came into the market selling on the open and just about every other chance he had below 1290 in SPH, building up a maximum short position for the eventual battering in the index that was to take place. Unfortunately, the market reversed course and came within a whisper of taking out the 2006 trading highs. This led to my buddy buying in his shorts near the highs and calling it a bad year. That the market eventually reversed course and settled at a level that would have given him a net profit far more damaging psychologically than if the SPH had rallied to 1310. My worst trading streaks happen when I throw in the towel on a trade like the one I just described, only to see it come right back. It is at that point that you question your ability to "read" the current conditions and so on and so on. What my friend failed to account for in his analysis (and me as well far too many times that I care to recount) was the "spark."

I use the word "spark" to provide me with a event that will push the pricing in one direction. This concept can be analyzed into any time frame one wishes to pursue, from day trading to positioning. The "spark" in Friday's session was twofold in my opinion. First, the INTC news was not crippling to the stock itself or the NDX. That should have been the first clue, that something was not right in the potential downward price direction. Secondly, after some dovish FED comments around mid day, the financials (which had been dogs the last couple of sessions) turned higher. This led to a sharp light volume short covering rally, forcing many a player out based on money concerns as opposed to their actual trading idea. This brings me to another point...when trading size, you better be right. While that seems obvious, for traders that rotate bet size to as much as 10x intraday, they have to cut losses quickly when they have size on.

As for today's trade, the indices have bounced a bit after a vicious final hour decline on Friday. Leading the way is a proposed merger between AT&T and Bell South which has helped to build a bid underneath the telecom sector. INTC received an upgrade from Citigroup to buy from hold and RIMM is well bid after its settlement on Friday will allow the company to continue its operations. Of course, the elephant in the room is the fixed income market. Thus far, equities have held up very well in the face of a steep selloff in the long end of the curve. As long as this uptick in yields is able to find some steadiness in the near term, it should not have a great impact on equity prices. On the flip side, if yields on the 10 year were to shoot quickly over 5% it could lead to some digestion problems for stocks.

Today's session will be interesting on many levels, the first will be whether or not there is any follow from Friday's final hour selling. If the early answer is no, that does not mean that we are in for a rally session. The one constant of this market the past several sessions has been to fade the prevailing direction in the afternoon. Accordingly, I think the final hour of trading will be the most telling about the market intentions moving forward this week.

Keep in mind a couple of things...first the index futures rotate into the June contract (M) as front month on Thursday this week. Second, the Bank of Japan has its 2 day meeting ending Thursday. Finally, we have the employment report on Friday morning. This of course is followed by the following week's triple witching expiration. Amidst all of this, we are looking for a "spark." Given the continued range bound action, it will take something to drive price direction in the near term.

Good Trading to all,

Brad
 
Posted 08:10 CST

Equity Index Update
Tuesday March 7, 2006

The index markets continued their Friday afternoon decline yesterday with heavy institutional selling seen in three market phases. The first phase of the selling was on the open of trading, followed by back to back sell programs in the early afternoon. When the dust had settled moderate damage was done from a technical perspective, but, more important may have bee the psychological damage done to the buy side. In my opinion, yesterday's lunchtime selling seemed like a classic long liquidation. It is not unusual, after a Friday final hour move, for players to wait out the following Monday morning before deciding what to do with their positions. Yesterday, the market's inability to generate any buying enthusiasm early on left little choice for longs that were worried over the weekend. Accordingly, heavy selling hit the index markets at 12:30cst and again at 1:00cst. In general, if you were not trading during those times, the trade was quite choppy and slow.

One note I would like to share comes from the COT data, released yesterday for the SP Futures contract. The data shows a continued buildup on the short side from the commercials, with a combined (eminis and majors) reading of -51,000ish contracts. The large Speculators liquidated longs the previous week to some degree and now stand at a combined -15,000ish contracts. Finally, the small speculators appear to have been caught long at the top...their reported positions were +22,000ish contracts on a combined basis. Granted some of this data is skewed due to the impending rollover on Thursday, however, it is worth noting that the smalls appear to have been caught at the top.

After the close of trading yesterday, TXN disappointed the market with forward guidance that was not as bullish as anticipated. The ability for the Semiconductor stocks to hold serve today will be critical for the marketplace. During the past week, the momentum money has clearly shifted into these issues and if the boat is turned over it could get ugly on the downside for the NDX. As it stands, the NDX is has essentially been in a trading range of 1650 to 1700 since the sharp decline on February 2. If the index fails to sustain bids around the lower portion of this range, 1600 is on the board as a trading target.

The question on everybody's mind seems to be related to the bond market and its swoon over the past three sessions. This morning, the long end is again lower, but, off its worst levels. The current talk seems to be that everybody in equity land is scared of the 10 year hitting 5%. My feeling is that it does not matter, unless we were to have a sharp rise that overshoots that level due to some type of extraneous event...hedge fund troubles for example. In the meantime, I think much of the rise in yields is creating some excuses among the longs to liquidate trading positions. Core position selling would not be done until the indices moved sharply lower from current levels.

Implied volatility levels rose sharply as well yesterday in the index option arena. One of the things I have pointed out repeatedly from a day trading perspective is that if you are a momentum type trader, there are only so many sessions that create an atmosphere in which you can profit. It seems to me that we are on the cusp of that run right now...I would expect the volume flows to continue on the strong side, and the ranges to expand in the near term.

Good Trading to all,

Brad
 
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