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Philly Fed finds stocks just off best levels

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Throw in some better than expected earnings and mixed economic data, you get a recipe for some uncertainty, but find stocks just off their best levels of the session.

After a surge higher at the open, the Dow Industrials (INDU) 8,038 +2.38% are off their morning highs of 8,318 after the Federal Reserve Bank of Philadelphia reported that its gauge of regional economic conditions fell to -13.1 in October from 2.3 in September, the second negative reading in the past three months.

Economists were expecting a slight decline to +0.6. The Philly Fed report is one of the first indicators of manufacturing health that is released in any month.

Despite the weaker than expected Philly Fed report, bulls continue to get an upper-hand after this morning's upside surprise from a much stronger than expected housing starts number, which many economist's believe bodes will for a rebound in industrial activity in the months ahead.

The Dow Jones US Home Construction Index (DJUSBH) 315.80 +7.3% is one of today's leading sector gainers and has the sector breaking to an intra-day high as I write.

Construction Services - % gainers

Home builders are among the most actively traded stocks in the Construction Services group with Lennar Corp. (NYSE:LEN), KB Home (NYSE:KBH), D.R. Horton (NYSE:DHI) and Centex (NYSE:CTX) all trading more than 1 million shares today.

S&P 500 Index Chart - Daily Interval

Today's stronger-than-expected housing starts number throws a fly in the ointment of a bears scenario that the housing sector would be the final bubble to burst and send the economy back into a double dip recession. An SPX close above its 50-day SMA has the 900 level in play tomorrow. In recent Index Trader Wraps, the 900 level had shown heavy open interest among option traders. With downward trend up at 945, that becomes a potential risk level that bearish traders might be assessing risk against.

Traders looking bullish can protect downside risk with a stop just under 854. Even those traders holding specific stocks can measure their trades against the broader S&P 500 Index (SPX.X) and potential support/resistance levels they've identified as broader market action often dictates trader/investor response to individual stocks.

Current assessment is that with a mixed picture still present from weaker job's data and the Philly Fed report, being offset by stronger-than-expected housing data and some upside marginally positive earnings announcement so far, smaller positions sizes allows traders to better handle the recent gaps up and down at the open of trading.

Treasuries continue to see strong selling again today and has cash freeing up that certainly looks to be finding its way toward equities.

Jeff Bailey

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