Build inexpensive homes with little production
Today's economic data could be summed up in a short sentence, "Building inexpensive homes with little production and plenty of capacity."
The building of homes saw housing starts in November grow at an annualized pace of 1.697 million, which was slightly better than consensus estimates. While housing starts was a look back at what was, the look ahead of what could be had building permits rising to a 1.725 million rate, which was slightly ahead of consensus for 1.715 million.
The "inexpensive" isn't necessarily factual as it relates to new home prices, but November's consumer price index rose a modest 0.1%, which was slightly below forecast for 0.2% and the core rate, which excludes the more volatile food and energy components rose just 0.2% and was in line with estimates.
A "little production" had November's industrial production inching higher by 0.1%, which was slightly below consensus of 0.2%, but better than October's 0.6% decline.
November's capacity utilization of 75.6% showed investors that there's plenty of excess capacity yet to be utilized and with production rising modestly, it doesn't look as if capacity will be a problem anytime soon.
In all, there was little in the way of surprises, at least from economist's forecast that made a case for traders to push the major indexes in any particular direction.
The "lack of inflationary" data in the consumer price index readings for November did take its toll on the Gold/Silver Index (XAU.X) 74.67 -4.52% today. The XAU.X hit a 5-month high and the December Gold futures (gc02z) $337.40 +0.11% traded a contract high of $342 as the dollar continued to decline. However, comments out of the White House's spokesman Ari Fleischer saying the government supports a strong dollar, saw some gold and currency traders sell gold and Japanese yen toward the close.
Still, one comment I find interesting is that of Weiss Research's financial analyst Kevin Kerr saying he could envision a scenario in which "investment banks with huge short positions (in gold) are going to start feeling the worst kind of squeeze imaginable, and they should have to start unwinding their short positions in a hurry."
James Moore, an analyst at TheBullionDesk.com in London, said that he felt there is limited physical buying in the market at the moment, but with the dollar weakness making it less favorable for gold producers to sell their commodity, gold prices are "going higher and ... next year will be very interesting."
I (Jeff Bailey) would point out that James Moore's, might be slightly biased to the bullish side of gold, but gives us some backdrop of what could be in play going forward. I'm looking for some formidable support at the 71.84-72.00 area in the XAU.X on any type of further pullback in the sector.
Dow Industrials (INDU) 8,535 -1.06%: The Dow gave back about 2/3 of yesterday's gains, but there wasn't enough movement to have a p/f chartist making any entries on the Dow's $50-box scale chart. Bulls were able to defend the 8,400 level again today, which would be a negative technical break longer-term in the Dow.
Dow Industrials Chart ($INDU) - 50-box scale
If there's one week I don't like to try and trade index options, its "triple-witching" week when some weird things can happen as institutions and option's market makers can push the indexes around to suit their pleasure and take as much option money "out of the money" as possible. There may be no better time than the present with the markets experiencing light volume. I was a bit surprised when I looked at open interest in the Dow DIAMONDS (AMEX:DIA) $85.57 -1.3% and saw the heaviest open interest in the 85, 86, and 87 PUTS. On a short-term basis, a move above today's high or the starting to round flat 21-day SMA of $86.78 (8,665 on the Dow Industrials) could trigger a move higher and take nearly 30,000 puts out of the money. Some refer to this type of action as "maximum pain theory" regarding option open interest. As such, I'd caution index traders holding current month expiration to not try and squeeze blood out of the turnip. With daily market volume rather light, it's highly likely we could see some manipulation into the end of the week and this makes for even more difficult trading.
Today's action saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU) and status remains "bear alert" at 60%. Dow component McDonalds (NYSE:MCD) $15.99 -7.99% was crushed to a new 52-week low, but was a stock that was already on a point and figure sell signal dating back to July, when the stock traded a spread-triple-bottom sell signal at $24.
S&P 500 (SPX.X) 902.99 -0.81% : Today's trading saw no chart entries on the 5-point box scale of the SPX as a trade at 915 was needed to extend the current column of X, and a trade at 895 was not found to have the SPX chart reversing 3-boxes. In essence, no meaningful price action took place today.
The daily interval bar chart of the SPX also shows "nothing new" so lets introduce some noise to the chart and take a look at the 60-minute chart. We'll not the SPX slipped back below our "cheater's trend," and closed right on converging 21-hour SMA and 50-hour SMA's.
S&P 500 Index Chart - 60-minute intervals
There is no such thing as "complacency" for index option traders holding current month expiration with just 2 sessions left in trading when index options expire. We can establish a tight range between 912 and 900 and a move "outside of this range" could trigger option related movement and near-term volatility. With open interest at 70,000 plus in each of the 900 calls/puts, there's some premiums at risk should the SPX settle at 900.
As I write, I'm just noticing that Monday's low of 888.48 is juuuust about 12-point from 900 and may match this morning's high tick of 911.22, also roughly 12-points from the 900 level. For me, the SPX is a coin toss and very difficult to trade into expiration. SPY traders may look to trade the out-edge of the 912-888 range, looking for gravitation back toward 900, but would suggest doing so with smaller positions at first and see how things trade. Any type of break from this type of range could trigger an unraveling of positions and drive index action.
Again... I don't like to try and trade option expiration week as market action can become too "unpredictable" if large positions are suddenly unwound.
Today's action saw the S&P 500 Bullish % ($BPSPX) inch up 0.4%, meaning 2 stocks generated reversing point and figure buy signals. No status change and still "bull confirmed" at 62.8%, with a reading of 62.0% needed for a reversal lower into "bull correction" status.
S&P 100 Index Chart - 60-minute interval
A quick check of the OEX December open interest shows the top 3 open interest well out of the money in the 500, 480 and 520 calls. There's about an evenly matched 8,000 open interest in the 450 puts and 460 calls, where "max pain" would be a settlement at 450, but with SPX open interest heavy at 900, then we might look for an OEX settlement of 455 or at least below 460 to take the calls out of the running.
NASDAQ-100 Trust (QQQ) - 60-minute interval
Today's high trade in the Q's was 2-cents above our market maker resistance of $26.18. A quick glance at open interest has the top 6 contracts all worthless if the Q's close $25.01 on expiration. This may be part of the reason that the Q's have found some resistance at $26.18 in recent sessions, and found suspicious support and closing trade of $25.01 on Friday. Short- term bear might look to scalp a bearish trade on a break below the 21-hour SMA of $25.60 with target of $25.05 on an intra-day basis.