Option Investor
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"Mad cow" and raising of terror alert finds markets lower

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The earlier reported case of mad cow disease found in a single cow in Canada, appear to have spread to market bulls as an extension of profit taking looks to be taking hold on the markets with the major indexes now at their lowest levels of the session.

Late this afternoon, the Department of Homeland Security said it was raising its terror alert from "yellow" to "orange," its second highest level.

The FBI warned earlier that last week's bombings in Saudi Arabia are signs that al-Qaida could launch new attacks in the United States.

After holding in positive territory at the 01:00 PM EST mark, the Dow Industrials (INDU) 8,435 -0.67% is now off 59 points with McDonals (NYSE:MCD) $16.88 -7.04% now taking over today's loser spot from drug-maker Merck (NYSE:MRK) $54.38 -4.11%.

Sector action has turned broadly negative as traders look to use "mad cow" disease and raising of the terrorist alert to send the Airlines Index (XAL.X) 40.46 -3.27% to the top of today's sector loser list, with the Pharmaceutical Index (DRG.X) 306.51 -2.32% edging to a session low in the recent hour.

Treasuries found another impressive round of buying in today's session, with the benchmark 10-year YIELD ($TNX.X) falling 7.8 basis point to YIELD 3.374% by its close, another multi-decade low. The 10-year June futures contract (ty03m) jumped 18/32 (+0.47%) to close at 118'240, while the longer-dated 30-year June futures contract (us03m) surged 1'14/32 (+1.2%) with the longer- dated 30-year YIELD ($TYX.X) falling to 4.364%.

Sectors still holding gains of greater than 1% has the Morgan Stanley Healthcare Index (HMO.X) 639.47 +2.3% still holding today's top sector winner's list, with the S&P Retail Index (RLX.X) 298.35 +1.6% off its highs of 304.64.

Technology sector weakness is evenly spread, with the Biotechnology Index (BTK.X) 401.29 -1.57% leading tech-related sector losses. Also trading down more than 1% is the CBOE Internet Index (INX.X) 122.10 -1.8%, Disk Drive Index (DDX.X) 90.63 -1.2% and Combined Telecom (IXTCX) 130.55 -0.99%.

For the first time in nearly 2 months, the major indexes look to close below their shorter-term 21-day SMA's for a second consecutive session. With the 21-day SMA being considered a shorter-term time reference for market technicians, it is my view that BULLISH index traders as well as investors be looking to further protect bullish gains with disciplined stops.

I'm beginning to get more comfortable at this point (not complacent) with previously profiled bearish put options in the NASDAQ-100 Tracking Stocks (AMEX:QQQ) $27.53 -0.57%, which now sink back to my first bearish profile entry point of May 1 near the $27.40 level. While I do expect some support to be found near the $27.00 level, today's break below our MONTHLY pivot analysis level of $27.58 has the Q's back under a level of first bearish profile, and with its bullish % having been back at its bull cycle high of 79%, there's still plenty of bullish risk that can be reduced from current level. Today's action begins to give sign that the recent highs of $29.00 may be in for this index, and initial bearish target of $25.00 still achievable.

I am not currently looking to add to a 1/2 bearish position in the QQQ, but will look to add to 3/4 position should the Bullish % reverse into a column of "O" and QQQ trade back into the mid- $28.00 levels.

Jeff Bailey

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