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Global markets rebounded on Monday and helped set a positive tone for today's trade, where the major indices recouped the bulk, but not all of yesterday's losses.

President Bush asked Fed Chairman Alan Greenspan to stay on for a fifth-consecutive term, ending speculation that the 78-year-old central banker's future employment was mired in election-year politics.

The Senate still has to confirm Mr. Greenspan's appointment, where general belief is that the Senate will approve the appointment.

If approved, Mr. Greenspan must leave the Fed when his separate 14-year term as a governor expires in February 2006.

Greenspan's reappointment drew little reaction from either the equity or stock markets, but for some, gives some clarity to current and future Fed policy, where without a vote of confidence from President Bush and his administration, an already jittery and interest rate sensitive market environment may have been further jolted.

Equity sectors finished broadly higher where by session's end, the Airline Index ($XAL.X) 50.14 +3.65% held today's top spot among sector winners. While I made an intra-day note that the XAL.X was nearing its mid-session high and might be the first equity-based index to breach prior session highs of 49.66 when Reuters reported that jet fuel prices had fallen 8 cents in the L.A. spot market, I'd still have to think that tensions in the Middle East and continued threats/acts of terrorism ahead of the handover of sovereignty on June 30.

Airline Index ($XAL.X) - Weekly Intervals

While a decline in oil prices with June Light, Sweet Crude futures (cl04m) slipping below $40.50 after spiking to a contract high of $41.85 yesterday morning along with some news that jet fuel prices were retreating can't help but improve sentiment towards the airlines, some two-day abatement in oil/fuel prices may have only triggered some short covering in the sector, as the XAL.X retraces roughly 50% of its March-October 2003 gains. While there may be some RISK ties as to "overbought" and "oversold" internals as depicted by Dorsey/Wright and Associates Aerospace/Airline Bullish % (BPAERO), oil prices haven't necessarily depicted price action. Many stocks, as depicted by the major equity indices saw strong rebounds begin in March of 2003, where the Airline Index ($XAL.X) more than doubled after breaking above the 34.60 level as early success with the war in Iraq unfolded.

I view the airlines as a VERY psychological trade at this point, where daily events and news regarding threats and acts of terrorism can have immediate impact on the group.

A reason to at least keep an eye on this sector is to perhaps begin gathering some observations as to MARKET SENTIMENT as the June 30 deadline approaches.

Many Middle East watchers expect threats and acts of terrorism to pick up as the June 30 deadline approaches.

Should energy prices decline into the June 30 deadline, then certainly a bullish catalyst would present itself, but only if market sentiment were to shift to a less violent Middle East.

Market Snapshot / Internals - 05/18/04 Close

After a higher open, which seemed to be in relief that global markets stabilized in their Tuesday trade, the major indices held a relatively tight trading range for the session.

The one thing I do note at the conclusion of today's trade is in my handkept spreadsheet of NH/NL indications, where at the NYSE, the 5-day NH/NL average ratio has improved for a fourth-straight session to now reach 12.5% and crosses above its still declining 10-day NH/NL average ratio of 10.8%. It was on May 12 (last Wednesday) that we noted the NYSE 5-day NH/NL average ratio had fallen to 3.7%, and MIGHT have been an indicator that Barton Biggs viewed as being "the most oversold I've seen in 20-years."

Trade volumes at both the NYSE and NASDAQ were light again today, which had many traders feeling there was little conviction among buyers.

Pivot Matrix -

All equity-based indices covered in the pivot matrix saw trade at their WEEKLY Pivots, except for the Semiconductor Index (SOX.X). Only the S&P Depository Receipts (AMEX:SPY) $109.65 +0.5% and S&P 100 Index (OEX.X) 533.82 +0.65% were able to close above their WEEKLY pivots, and just fractionally so.

The S&P Banks Index (BIX.X) 335.35 +0.95% posted a more impressive close above its WEEKLY Pivot, and suggests banks are doing most of the work for strength in the SPX/OEX.

As I monitored trade today, my general impression was that the major indices weren't going anywhere unless the Semiconductor Index (SOX.X) 453.36 +1.89% could give some type of confirming strength above its WEEKLY Pivot. While the NASDAQ-100 Index (NDX.X) 1,397.47 +1.27% did try and lead a broader tech rally, the move was tentative at best without the Semiconductors.

Key earnings after today's closed from Applied Materials (NASDAQ:AMAT) $18.85 +2.16% found a muted response, with last trade in after-hours at $18.81.

I'd continue to monitor the SOX.X for resistance at the 456 level, where traders will be reminded that many "max pain" levels into Thursday's index expiration are above current levels of trade. While we can't rely on the indices to gravitate toward expiration "max pain" points, a SOX.X break above 456 could lend to a sudden unwinding of option positions if traders sense and index expiration gyration taking place.

NASDAQ-100 Tracker (QQQ) - Daily Intervals

Today's 65.2 million shares of volume in the QQQ was the lightest volume day since April 26, when the QQQ traded its recent relative high on first test of the current downward trend. Buyers and sellers may well have rather waited things out for AMAT and HPQ earnings. While Hewlett Packard (NYSE:HPQ) $19.83 +1.69% is not a component of the QQQ/NDX, it can have impact on technology. HPQ moved higher at $20.65 over the New York ECN after reporting quarterly earnings of $0.34, which matched Wall Street's estimates.

Dow Industrials (INDU) Chart - Daily Intervals

How did I feel about yesterday's bearish profile in the Dow Diamonds (NYSE:DIA) $99.97 +0.41% July puts this morning? Not very good, but after having suggested any SPX May put holders close out trades last week, I thought I needed some put exposure should global markets continue lower in today's trade.

With the DIA July $100 puts (DIASV), I feel that I've at least got some rather formidable near-term levels of resistance for computer selling above me, where if nothing else, the INDU below 10,000 and its longer-term 200-day SMA has some negative market psychology in a bears favor.

Certainly the INDU looks "oversold" or trying to find a near-term bottom, but with some time and a still rather high bullish % reading of 66.66%, I think the INDU works its way lower.

The DIA's "max pain" theory level for May expiration is $103.00, which would be just below the MONTHLY Pivot.

S&P 100 Index (OEX.X) - Daily Intervals

While the SPX's May "max pain" theory value is 1,125, the OEX's May "max pain" theory value is 535.

My comments that it would take a sizeable move (up or down) from either the SOX.X or BIX.X to have the OEX moving too far away from its May option expiration "max pain" value isn't a stretch.

Away from equities, and probably most pertinent to the BIX.X is Treasury YIELD. Today's trade in the 10-year YIELD ($TNX.X) had it finishing almost smack in the middle of today's range.

I would think a NEGATIVE equity reaction would be found only if the TNX.X were to break back higher above correlative YIELD resistance levels highlighted in the pivot matrix, while the recent strength from the BIX.X in its weekly pivot matrix relative to the other equity indices is probably explained by the recent little decline in Treasury YIELD.

Jeff Bailey

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