OptionInvestor.com Intraday Update - Thursday, November 5th, 2009

Post-FOMC Selloff Reverses

Traders had some second thoughts about yesterday's post-FOMC selloff and apparently thought better of it all, resulting in a nice rally today. Wednesday's highs have been exceeded although as of noon we've got a little bit of a mixed picture.

Equity futures got a strong lift off their overnight lows, which were below yesterday's lows, and the gap up was given a further boost by some more "less bad" news. The unemployment news just keeps getting better with "only" a half million people newly unemployed people applying for benefits. I say that tongue-in-cheek of course--new claims were 512K which was a drop of 20K from the previous week's 523K. Now there's something we can get excited about.

Good news for companies, bad news for the unemployed--productivity improved by +9.5% in the July-September quarter, the fastest improvement pace in six years. This follows a +6.4% improvement in the previous 3-month period. That means companies are learning to do more with less (not sure how the employees are feeling about that but I'm sure most are just glad to have a job). It will unfortunately take a long time before many of the unemployed can find work. And considering the likelihood that consumers will continue to pull back and spend less it's going to be very difficult for GDP to show another gain this quarter--much of the government stimulus spending was the reason for last quarter's gain and not likely to be repeated. But that's for the future and right now the market is happy.

Foreign markets were mixed with Asian markets down while European markets were up (they started off in the hole, following the Asian markets down, but then climbed back up into the green with our market). The Nikkei closed down -1.3% to its lowest close in a month. Yesterday's +1.7% rally in the Hong Kong Hang Seng index was followed by a -0.63% decline today.

The afternoon sessions for the European markets have been kinder than the morning sessions. Thanks to some energy stocks the FTSE was up +0.4%. The DAX did only slightly better with a +0.7% gain while the French CAC-40 did even better with a +1.0% gain on the day.

This compares to +1.9% for the DOW as we approach 2:00 PM. The S&P 500 had been underperforming the DOW, thanks to the banks, but with an afternoon spurt in the banks the S&P is now up +1.8%. The techs and small caps are doing even better with the Nasdaq up +2.4% and the RUT +2.9%.

The U.S. dollar is relatively flat today, as are the metals. The stock market rally is all by itself in its enthusiasm. The VIX is dropping back down but is testing its broken downtrend line from January 2009, just below 26. A successful retest could lead to a stronger "rally" which would of course be bearish for the stock market. So it will be important to watch this index over the next few days.

The same could be said for the dollar--after bouncing strongly off its October 21st low, a higher low than 2008, it has pulled back from Tuesday's high but looks so far like a correction to the bounce. With a high short-interest ratio in the dollar and bearish sentiment thick enough to cut with a knife, this one could be ready to blast higher. A move above Tuesday's high (DX 76.96, UUP 22.81) would likely spark a significant short-covering rally. If that's the setup, along with a VIX that's ready to rally again, both would be ominous for stocks and commodities. That's the setup but we'll have to see how it plays out from here since so far today is bullish for stocks.

Let's take a quick look at charts for the major averages:

Chart of the S&P 500:

Chart of the NASDAQ:

Chart of the Dow Industrials:

Chart of the Russell 2000 index:

Chart of the U.S. dollar ETF (UUP):

A quick scan of the OptionInvestor.com play list shows not much has happened for our call plays while some of our puts plays are being threatened with today's rally. ISRG's stop at 261.00 is very close to being tagged (today's midday high so far is 260.25) while the rallies in LIFE and PCP are also threatening their stops but have a little further to go.