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Recouping some losses

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It has been a rather quiet morning session as the major indexes hold fractional gains and look to digest and assess some of yesterday's declines.

Home Depot (NYSE:HD) $30.92 +10.2% is today's market bright spot after the company reported earnings that beat analysts expectations and helps buoy the Dow Industrials (INDU) 8,529 +0.41% to a 34-point gain, and offset weakness in drug giant Merck (NYSE:MRK) $55.10 -2.78%, which sees some follow through downside after yesterday's Supreme Court ruling in the Maine RX case, which had the court ruling in favor of the Maine case that would require drug makers to charge less for drugs to consumers that are not covered by their own insurance.

The broader S&P 500 Index (SPX.X) 922.31 +0.16% holds a 1.5-point gain, with mixed to modestly higher sector action. The Pharmaceutical Index (DRG.X) 308.89 -1.56% leads this morning's sector loser list and only sector that trades down more than 1%. Other sectors exhibiting fractional weakness has the Gold/Silver Index (XAU.X) 73.42 -0.75%, Oil Service Index (OSX.X) 93.21 -0.64% and Airline Index (XAL.X) 41.60 -0.54% all lower.

Sector gains have the Morgan Stanley Healthcare Index (HMO.X) 639.44 +2.3% making a bold move higher and trading new multi- month highs now look set to challenge their June 19, 2002 highs of 664. Multiple new 52-week highs are found in sector components in today's trade with Coventry Health (NYSE:CVH) 42.29 +2.89%, Mid Atlantic Medical (NYSE:MME) $47.78 +2.64% and Wellpoint Health Networks (NYSE:WLP) $83.37 +3.48% trading new highs in today's session, and PacifiCare (NASDAQ:PHSY) $37.22 +0.97% just off a 52-week high set yesterday of $37.65.

Retailers as depicted by the S&P Retail Index (RLX.X) 301.35 +2.61%, which has Home Depot (NYSE:HD) +10.2% comprising a large weighting are this morning's sector winner.

I'm still keeping an eye on the Market Volatility Index (VIX.X) 23.09 +0.21% after Friday's commentary where we were on the alert for a potential asset allocation shift or profit taking in equities at what have been an "inflection point" on the VIX.X at the 21.22 level. It's notable that the VIX.X closed right on its trending lower, but attempting to flatten out 21-day SMA yesterday, and holding that value today.

In this morning's market monitor, I discussed a bullish % chart that Dorsey/Wright and Associates has comprised, that is a bullish % chart of only those stocks that trade option. Similar to the major market bullish % that we've been discussing that are at or nearing more "overbought" levels of bullish % near 70%, this indicator of only stocks that trade options, is also nearing a historic high of 68% at 66.98%. While I'm not allowed to show any of Dorsey/Wright's bullish % charts due to copyright, the symbol for this bullish % chart is (BPOPTI). Notes made in this morning's market monitor is that the "purpose" or thought behind this bullish %, which only tracks those stocks with listed options, is that these are often the most heavily owned, if not institutionally considered stocks, as institutions that carry large positions for a buy and hold type of positions, will often times implement hedge strategies in an attempt to capture or hedge gains after a move higher, but look to hedge their gains when the bullish % charts reach more overbought levels, when institutions, that are "experts" at managing risk then turn to the options market to hedge that risk.

The reason we discussed the VIX.X in rather great detail at the 21.22 level, is that the VIX.X might give us some indication of put buying and call selling, that might show up in the Market Volatility Index (VIX.X), should some institutional hedge strategies begin to be implemented with the higher levels of bullish %, indicating higher bullish position risk.

Yesterday's "profit taking" becomes interesting, so soon after Friday's intra-day comments and to me, hints that we may indeed be starting to find some institutions taking some defensive option strategies to hedge some of the handsome gains the markets have given investors in the past couple of months.

Jeff Bailey

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