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Stocks trying to take the high road

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Stocks have staged a bit of a turnaround in the past two hours as we're off session lows and some indexes are showing gains. At around 01:15 EST, we did get an upside alert on the 30-year YIELD ($TYX.X) at the 5.34% level and this came right about the time stocks were trading near session lows. Since that time we've seen some sectors move into positive territory.

The first sector I look for strength is the Biotechnology Index (BTK.X) as this is the group of stocks I feel has shown the greatest amount of strength since the September 11th terrorist attacks. I like what I see here as the group currently leads the technology list of gainers.

Biotechnology Index Chart -

In my mind, a bullish traders needs to see the Biotechs show leadership for any type of a move higher behind the NASDAQ to show that there is some conviction toward the move. I always look for the leaders to lead to give me guidance. With that said, I like the move the Biotechs are making, but we have to wonder if the trading right back near the 500 level isn't option expiration related. I would not want to be short the group at this point, but hesitant to commit large amount of money to the bullish side here either. Options expiration can have dramatic, but short-term effects on stocks and makes for uncertain trading.

The S&P 500 has rebounded off its session lows of 1,058 and now trades the 1,070 level. If trading long technology, biotech is still the place I feel traders and investors should be concentrating. The market seems less willing to sell this group of stocks and while we've seen declines in the group as a whole during a market decline, the extent of the decline has been far less than other technology sectors. As long as the SPX remains below the 1,082 level I want to be more "defensive" or cautious with my bullish trades.

Bond YIELDS across all the major maturities we follow are higher, so it's not just the 30-year YIELD that has turned higher. It's just that the 30-year YIELD was the first to trigger an upside alert, but this goes along with everything we've written about in the past several months. The MARKET usually sells the higher risk first, which is the 30-year YIELD is this case.

Today's move looks bullish for equity traders, but I now want to see the 10-year YIELD get above the 4.689% level. Current YIELD there is 4.6% and rising. We may have to wait until Monday, when all the option expiration activity is out of the way to get a clearer read on things.

Jeff Bailey
Senior Market Technician
Option Investor

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