Option Investor
Index Wrap

A little road bump toward deflation

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A funny thing happened on the road toward deflation when May consumer prices actually showed a little inflation with a an unchanged reading when compared to Friday's producer price report, which showed a -0.3% for the same month.

Bond traders that were looking for a more aggressive Fed rate cut of 50 basis point were quick to sell some Treasury holdings in today's trade, while the market quickly adjusted its view that next weeks FOMC meeting most likely has the Fed cutting just 25 basis points as July Fed Funds Futures (ff03n) fell to 99.10, signaling just a 40% chance of 50 basis point cut next week after forecasting more than a 60% chance just yesterday. August Fed Funds Futures (ff03u) 99.13, which fell from 99.13, slipped lower and now show just better than 50% chance of 50 basis point cut between now and the August FOMC meeting.

A quick review of our June 5th Index Trader Wrap discusses the August Fed Funds futures, which also leads to today's biggest sector winner. Gold!

In the June 5th Index Trader Wrap, we discussed a downward trend on the XAU.X, which was broken higher yesterday, and the squeeeeze was on today, with the stock-weighted Gold/Silver Index (XAU.X) 82.24 +3.61% surging to a session high of 82.53, which amazingly enough comes right at our 19.1% retracement, and the AMEX Gold Bugs Index ($HUI.X) 156.44 +3.51%. For sector/stock traders in the sector that didn't take some profits off the table yesterday, I'd look to do so near-term with partial positions.

Why? I've been more interested in bullish trades for gold on thoughts that there were some misplaced bearish bets, and my bullish bets have paid off. While I'm more "convinced" that deflation fears were moved to the back burner today, the economic side of me isn't convinced that inflation is ramping up.

One reason I think "short covering" is largely due to today's rise is sector bellwether Newmont Mining's (NYSE:NEM) $33.84 +4.38% trade. In recent weeks, I've noted that short interest had been building on the stock and had grown to 15.7 million shares, and highest days to cover of 4.21 in over a year. Today's surge in Newmont, certainly looks like shorts got squeezed to a new 52-week high.

I'm just not sure that an unchanged CPI for May, when compared to a declining PPI in May is all that "inflationary." I'm just more comfortable with my analysis of a short squeeze building in the sector from weeks ago, and more than willing to take some profits in as the gains mount.

Now, I don't want to get into individual stock selections in an Index Trader Wrap, but if today's action doesn't show there are some rather impressive moves being had in sectors and stock, while the major indexes remained little changed, then traders that are simply focused on the major indexes may be missing something.

The Dow Industrials (INDU) 9,323 +0.04% gained 4 points by session's end, and while not unusual for the Dow to trade a 83- point intra-day range, just seemed stuck in a range for the bulk of today's trade.

Despite some impressive sector moves with the "sleepy" Drug Index (DRG.X) 347.02 +2.23% posting today's second-best sector performance, along with HMO's (HMO.X) 733.99 +1.4% and Health Providers (RXH.X) 288.65 +1.15%, both the S&P 500 Index (SPX.X) 1,011.66 +0.09% and narrower S&P 100 Index (OEX.X) 510.56 +0.24% just couldn't seem to "bust a move" higher as financials hovered at unchanged with the S&P Banks Index (BIX.X) 312.72 -0.58% holding the flat line after a brief spat of bullishness faded at the open. "Healthcare" (drugs, HMO's, etc.) represents roughly 14% of the S&P 500 by market cap, while "financials" (banks, brokers, insurance) represents roughly 21% and is the largest segment based on market cap.

If not for Microsoft (NASDAQ:MSFT) $25.95 +2.24%, and its 9.7% weighting in the NASDAQ-100 Index, one could only guess that the fractional 1.95-point decline in the NASDAQ-100 Index (NDX.X) 1,239.63 -0.15% and 12-cent decline in the Tracking Stock (AMEX:QQQ) $30.76 -0.38% might have been more.

All said and done, today's trade simply looked as if traders and investors were repositioning cash, where the "moves" were more apparent in stocks/sectors than they were in the major indexes themselves.

If there was one thing that I saw "disproved" today, or at least a shift in thought by the market, it was the thought of "deflation" being at the doorstep suddenly being swept under the proverbial doormat for another day.

If I've said it once, then I've said it a thousand times. I hate to try and interpret option expiration week, and Triple Witching expiration, which comes 4 times per year, is probably the toughest to interpret.

Are stocks/sector/indexes moving based on some type of economic scenario? Or are they simply moving based on repositioning capital by institutions?

Morgan Stanley said it was adjusting its "Model Portfolio" and taking 5% out of the bond market and 5% out of stocks to raise cash, with weighting now at 65% equities, 20% bonds and 15% cash.

Merrill Lynch said its polling of institutional clients had money managers saying technology stocks were too expensive, but today's dip lower in biotechnology and semiconductors seemed to have somebody pinching there nose and buying the dip at around 10:45 AM EST. I'm wondering if these are the same clients that warned gold bulls on June 10th that a commitment of trader's report showed there was too much of a net long position in gold, which was a contrarian way of signaling a big decline in the making?

OK.. so now I'm rambling. I admit it! I'm struggling to come up with any type of interpretation on what to expect into Friday.

My basic premise right now, is that many fund managers are struggling to get their mutual fund investors money invested by the end of the month. I don't disagree that technology stock valuations are "stretched," but today's CPI data now gives bulls some "hope" that there's some slight amount of favorable pricing pressure seen (falling PPI, but stead CPI) which can create an expanding gross margin, and maybe, just maybe this euphoric run from the March lows still has a way to go. If so, then a way to address this type of trade was covered to the best of my ability in Thursday evening wrap.

Last night, I said I wanted to pay a little more attention to the buy/sell program premium alerts. Shoot.... we got one right at the open when cash caught up with the higher futures, then got one more about 5-minutes later. Even when the S&P 100 Index (OEX.X) 510.56 +0.24% kissed its WEEKLY S2 of 512.44 this afternoon at 512.67, I didn't get any type of program alert. That trade took place at about 03:35 PM EST and the OEX saw selling into its close. So, one buy program after the opening bell, and that was it. Will have them set again tomorrow with the Dow/SPX and OEX all closing above our MONTHLY R2's.

One thing I think a trader needs to do right now is simply take some stock of things.

Recent trades I've profiled dating back the past couple of weeks that have been winners have been from the long side. I had a losing trade from the short/put side in the SPX, but kept losses small.

The "best" trades seem to have come from buying a pullback, with biggest mistake of taking profits too soon. I can live with that. What I can't live with is holding a loosing trade too long and not at least doing something to offset the loss.

With the bullish % indicators so high and RISK for bulls high, I think it best to continue to try and buy pullbacks, but keep losses to a minimum (which I've managed to avoid from the bullish side).

Today's trade had me profiling no type of trade action from Friday's bullish profile in the SPX from 988, but here, with option expiration and "Triple Witch" Friday drawing near, I've simply got to rely on the pivot matrix to guide me.

As a trader, I can't start "guessing," which is what I'd be doing, if I told you for certain what type of hedge positions institutions may have on stocks/indexes that may still not have come off at this point.

However, from the perspective of bullishness, here's how I'd have to look to the pivot analysis table for some help right now.

I won't say that I threw my hands in the air for any hopes of a euphoric rally this morning when I commented that the S&P Bank Index (BIX.X) wasn't lending itself to a bullish session for the SPX/OEX, but I do think that was a decent observation today, and even last night we thought the BIX.X had to gets its "vault" above 316 to get the SPX/OEX to WEEKLY R2.

Well.... the OEX did get to WEEKLY R2, but just barely.

One thing that "concerns" a shorter-term bull in the OEX/SPX at this point is that unlike the OEX/SPX, which are BOTH above their MONTHLY R2's, the BIX.X isn't. Why? It may be that the some bank bulls were "banking" on a 50-basis point rate cut next week and today's "shift" more toward 25 basis points takes some umph out of things. I've marked my BIX.X observations in "pink boxes."

OK. So if I'm long, or even thinking bullish the SPX/OEX from here, then where's my SHORTER-TERM level where I look for support? By goodness at DAILY S2 and WEEKLY R1, that's where! If you're a RISK AVERSE bull from SPX 988, then how about a profit stop at 999 (just below round number 1,000) or below 1,003. You make the call! At the same time... new bulls that are looking for bullish entry, are probably best served to be looking for support entries there too! What's your target? Same type of target resistance discussed last night near 1,018 (DAILY R2, WEEKLY R2).

Same type of trade for the OEX.

Now... if you're trading Thursday evenings Index Wrap and "finite" stopping points, then STICK WITH THAT, if that's what you are comfortable with.

What I'm doing tonight with more focus on the matrix is really trying to fine tune things for those that ARE NOT comfortable with stops at the unconventional technique discussed Thursday night, and LAST NIGHT for the QQQ.

Yes! Triple Witching can be volatile and I've seen some wild trades over the years. With the BULLISH % indicators at such high levels, I'm more concerned at this point that those of us holding bullish trades don't get our HEADS RIPPED OFF. While big hedges can come off for June, some BIG hedges can be put on for next quarter (September) and a measly little 4% move in the SPX may mean nothing to a Goldman Sachs that was BIG bull in March at the lows where he and a couple of friends want to hedge some inventory ahead of the summer, which is a seasonally slow period for equities.

Now, I wasn't making derogatory comments today when I said the NASDAQ-100 was "lagging in the pivot." What I was saying was based on the observation that the NASDAQ-100 has tended to trade a level of support BEFORE one of the other major indexes, and was perhaps LAST to trade a level of resistance, as if following the Dow/SPX/OEX as it relates to the pivot.

The NASDAQ-100 Index (NDX.X) traded right down to its WEEKLY R1 of 1,230.5 with a session low of 1,229.73. See how the SPX and OEX session lows (1,007.14 and 508.38) came without testing WEEKLY R1s? It's my only observation that the "reason" they didn't is that there was enough "tech-buying" at an important WEEKLY R1 level for the NASDAQ-100 to keep the SPX/OEX from trading THEIR WEEKLY R1s.

Right now, my alert to weakness observations for SPX/OEX and even the Dow are, BIX.X first (what are they doing?) and if BIX.X are just sitting flat, then what the heck are the techs doing as depicted by the NASDAQ-100?

Now, this is why I think SPX/OEX and even Dow traders have a slight upper hand as index traders right now. You've got the financials or BIX.X as a sector AWAY from the major indexes, and you can also monitor the NASDAQ-100, which is "WEAKER IN THE PIVOT" as an alert to FURTHER weakness in the SPX/OEX/INDU.

I think and NDX/QQQ bull right now is more likely to see his/her bullish trade break a level of support in the matrix first, and then, he/she has to count on the SPX/OEX holding support at WEEKLY R1.

Enough about downside correlations of support, and lets look at the upside, levels. Today's trade tells us that the OEX and SPY can indeed trade a WEEKLY R2 and for that to happen, there's got to be some type of bullish undertone, which makes it ENTIRELY FEASIBLE that the INDU, DIA and SPX can do the same! That's been the path of least resistance since April hasn't it? Heck, its been the path of least resistance for the NASDAQ-100 too. I haven't forgotten early May when the bullish % for this index was first to reach the 70% level and had me legging into a 1/4 bearish position in the QQQ Sept. $27 puts! Ugh!

NASDAQ-100 Tracking Stock (QQQ) - 60-minute intervals

I'm currently watching the QQQ's tick by in after-hours trade at $30.83. Go figure! While the QQQ was a bit "sloppy" at WEEKLY R1 and Monthly 19.1% retracement, this isn't all that unusual as we tend to see more day traders in the QQQ and if they're trading penny stops (a penny below a level) its not unlikely that push either side of a level of support/resistance sees a sloppy trade. While the WEEKLY R1 is "just a level for this week," we also see it has some historical significance late last week as resistance.

If the QQQ were to slip much below the $30.50 level, I would have to begin wondering about a QQQ $30.00 option expiration type of pegging into Friday.

S&P 100 Index Chart - 60-minute chart

As we look at the OEX 60-minute chart and compare it to the QQQ 60-minute chart, then pivot analysis traders begin to see that the OEX found its daily support (where there wasn't a level) from the QQQ, while the QQQ found its morning resistance (where there wasn't a level) from the OEX at its WEEKLY R2.

As it relates to the above chart and question asked within the pivot, I certainly would have had a difficult time answering "yes" to the "is it worth the risk" for new bullish entry. If you're a shorter-term bull from a Friday bullish entry from OEX 498, it would probably be an "easy sell" for profit taking on any type of weakness in the morning. The 60-minute chart and oscillators on this type of "swing trader" time frame also looks to show that best bullish entries have been on pullback when Stochastics have been oversold, and MACD begins to round back up.

Again.... I'll "weigh" the oscillators with about a 10% weighting for Stochastics, which tend to not work so well in a trending market, but MACD indicators will get a 20% weighting as my observations over the years is that they tend to be a little more "accurate" when trying to predict a markets move.

Dow Industrials (INDU) - 60-minute chart

Other than trading at the upper end of our bullish regression channel, which seemed to be a level of hourly closing support, I still like the Dow on thought that this group of stocks may tend to find a few more buyers as it relates to index type trading as there are some nicer dividends. Hey. If I'm a fund manager, have cash I need to put to work before the end of the quarter and have to do it at higher levels of risk as depicted by the bullish %, then might as well carry the risk, but get a dividend with some preferential tax treatment to boot!

Speaking of bullish %. Today's action saw no net change in the NASDAQ-100 Bullish % ($BPNDX) and still holding at 87%. The S&P 100 Bullish % ($BPOEX) saw a net gain of 2 stocks to point and figure buy signals which has this bullish % growing to a bull cycle high reading of 81% (I know Pfizer (PFE) was one of them). The broader S&P 500 Bullish % ($BPSPX) saw a net loss of 4 stocks to point and figure sell signals, with the bullish % slipping 0.8% to 82.04%, and just off yesterday's bullish cycle high reading of 82.83%. The very narrow Dow Industrials Bullish % ($BPINDU) saw a net gain of 1 stock to a point and figure buy signal, which has this bullish % reaching a new bull cycle high of 83.33%.

Yesterday, the NASDAQ Composite saw 13 stocks hit new 52-week lows, and today's trade was an improvement with just 2 stocks at new 52-week lows. This had some "strength" from the tail taking place, which is something we wanted to monitor and continue to monitor. The daily NH/NL ratios for both the NYSE and NASDAQ showed good bullish breadth type of leadership with the NYSE daily NH/NL ratio at 98.7%, and NASDAQ NH/NL ratio at 99.3%.

Jeff Bailey

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