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Sentiment sours

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The major indexes have turned red after the University of Michigan reported that its preliminary sentiment index fell to 87.2 in June, after rising to 92.1 in May. The preliminary reading of 87.2 was well below economists' forecast of 93.1 and has raised some eyebrows among traders. Mine included!

One reason for such surprise in the preliminary reading is that we often find sentiment improve with the rise in equity markets, but the Michigan sentiment certainly shows that consumers have started to turn more negative on their views of the current economy.

The survey's gauge of consumer outlook on the future also fell to 84.2 in June, down from May's 91.4 reading, hinting that Americans are having a hard time sustaining optimism that followed the end of the U.S.-led war in Iraq as the unemployment rate by May's end grew to 6.1%, a nine-year high.

Unlike yesterday when I noted a "sell program" 15-minutes and market weakness ahead of the 10:00 AM EST business inventory data, today's reversal of fortune for the major indexes, which were broadly green at the 09:45 AM mark, saw a sell program hit the markets lower just as today's University of Michigan sentiment data was released at 09:50 AM EST. This action and the declines that have followed certainly depict that today's number is a bit "shocking" and negative surprise.

Current trade finds the Dow Industrials (INDU) 9,123 -0.79% falling 72-points after reaching a morning high of 9,122. The broader S&P 500 Index (SPX.X) 989.71 -0.88% is lower by 4.5 points after sell programs hit at the 9,200 level.

Sector action has all the sectors I follow trading in the red with the exception of the Gold/Silver Index (XAU.X) 77.42 +0.96% and Dow Jones Home Construction Index (DJUSHB) 467.62 +0.11% showing gains.

Sector losers at this hour have the Forest/Paper Products Index (FPP.X) 281.78 -6.47%, but I think there is an error here as I've gone through the components and see that Rayonier Inc. (NYSE:RYN) $35.05 -2.31% had a 3 for 2 stock split today, and may have the FPP.X calculations skewed right now. The Semiconductor Index (SOX.X) 363.26 -3.23% is leading the sector declines with bellwether Intel (NASDAQ:INTC) $21.53 -2.75% at a session low after being downgraded earlier this morning by Deutsche Securities based on valuation.

The NASDAQ-100 Index (NDX.X) 1,209 -1.65% is falling 20 points, while its Tracking Stock (AMEX:QQQ) $30.08 -1.85% reverses from its morning high of $30.73.

One trade I thought might make some sense in the QQQ, especially to those holding some bearish positions from lower levels, is to sell the QQQ June $29 puts (QAVRC) at the offer of $0.20 ahead of the weekend, and next Friday's triple-witching expiration. Thought being that the NASDAQ-100 Volatility Index (VXN.X) 35.02 +2.96% is seeing a bit of a spike higher today, allows a trader to sell some premium ahead of a 2-day deterioration in time premium, but thought is that QQQ will not close below $29 in next 5-days. This trade may not be for every trader as it does obligate the trader to take possession of the QQQ with a cost basis of $28.80, should the QQQ fall below the $29.00 on or before next Friday's expiration.

Jeff Bailey

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