Option Investor
Market Updates

Just off their highs

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Today's release of the May ISM Services data from the Institute of Supply Management gave the major market indexes a lift to new year 2003 highs as the 54.5 reading signaled expansion at the services level and was above April's reading of 50.7. Economists had forecasted the ISM Services Index to come in at 52.0.

The Dow Industrials (INDU) 9,000 +0.87% currently holds a 78- point gain after trading a session best 9,025, while the S&P 500 Index (SPX.X) 981.50 +1.03% gains 10 points, after a morning high of 983.72, on broader sector bullishness with only the Morgan Stanley Health Provider Index (RXH.X) 277.26 -0.45% showing a loss in the sectors I follow on my U.S. Market Watch screen.

The NASDAQ-100 Index (NDX.X) 1,213 +1.21% finds a 14.5 point gain, but off its best levels of 1,220 after what looked to be a surge in short-covering just after the 10:00 AM release of the ISM Services Data. The NASDAQ-100 Tracking Stock (AMEX:QQQ) $30.16 +0.97% jumped to a morning high of $30.40, but reversed rather quickly from that level, and now look to find intra-day support just above our DAILY R1 of $30.05.

Despite some of today's impressive gains, there are a couple of things I'm monitoring right now, that I think traders might want to at least be alert to, and I view both as indicators as "market perception."

While the major indexes hit new 2003 highs in today's session, I'm still monitoring the Market Volatility Index (VIX.X) 22.93 +2.13%, which begins to hint of a pickup in put buying and call selling with the rise in this index. Often thought to be a "contrarian" indicator the VIX.X spike at 40.00 back in March had us alert to a reversal of fortune for the major market averages when the bullish % indicator were all at or nearing oversold levels of bullish% at 30%. While the major indexes have marched higher in recent months and weeks, along with the bullish %, the VIX.X has been stabilizing near the 21.22 level and begins to edge slightly higher.

Market Volatility Index (VIX.X) - Daily Intervals

If anything.... the VIX.X as an indicator hasn't continued a more "bullish move" lower, which would normally come from greater amounts of put selling and call buying.

My analysis from this type of trade action is that the MARKET might not be as convinced of much more robust economic strength, or that much of the "good news" that most likely presents itself in coming weeks may be built into the market.

The reason I say/think this, is what I'm seeing in the August Fed Funds Futures contract (ff03q) 99.02 +0.01%, which today has the MARKET factoring in a 100% probability of a 25-basis point rate cut at its August 12 meeting.

August Fed Funds Futures (ff03q) - Daily Intervals

While June Fed Funds Futures (ff03m) 98.795 (unch) current show less than 20% chance of a Fed rate cut at its upcoming June 24th meeting, I'm monitoring the August contract, which is back on the rise again today. Despite the better-than forecasted ISM Services data, the above futures contract still shows some trade action that has the MARKET seemingly concerned about the economy at this point, and that the Fed needs to be lowering interest rates in order to help further stimulate the economy.

With the VIX.X rising fractionally and August Fed funds futures rising, I think a bullish trader should continue to follow bullish trades with some tighter protective stops. Especially with the major market bullish % at higher levels above 70%.

Jeff Bailey

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