Option Investor
Index Wrap

Gradual

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Fed governor Ben Bernanke described his forecast on inflation as "relatively sanguine," saying that he expects the pace of tightening to be gradual, but cautioned that the Fed might have to move more quickly depending on the strength of the job market and developments on inflation.

What most economists took away from Mr. Bernanke's comments was that he sees the need to get the fed funds rate back to a more normal level, but any disagreement among FOMC governors will be how quickly, or how fast the fed funds rate should rise.

Stocks took things in stride as the major indices finished unchanged, but some bond bears may have been filing out the doors after Mr. Bernake's comments regarding the strength of the job market.

After all, economic data released this morning showed weekly jobless claims rising for a second consecutive week, which had Treasury yields gapping lower at their open.

Treasuries, which have seen a seesaw trade in recent sessions closed at their highs with yields falling. The benchmark 10-year yield ($TNX.X) fell 7.6 basis points to yield 4.718%.

Junk bonds, while difficult to track on a broader basis seemed to gather interest from bond bulls for a third-straight session as the Pacholder High Yield Fund (AMEX:PHF) $8.65 +1.76%, a closed- end "junk bond" fund that we like to track in the Beetles Balanced Fund, benefited from Mr. Bernanke's comments.

The CRB Index ($CRB) 269.43 -0.88% gave back some of yesterday's gains as June Crude Oil Futures (cl04m) $40.92 -1.39% edged back $0.58.

Market Snapshot / Internals - 05/20/04 Close

We did see the major indices reach session lows just after today's 12:00 PM release of the May Philadelphia Fed index, where the reported 23.8 reading, while still showing manufacturing growth in, wasn't nearly as strong as economists had predicted when they forecasted a 31.0 reading.

Now orders and shipments both fell off in May, where the abatement in new orders would be more worrisome than shipments.

My impression of today's trade, which may well be clouded by some thoughts that this week's option expiration might be artificially influencing trade, was that we may well be seeing markets do what markets do.

As Treasury yields have risen notably in recent weeks, as well as various commodity price (especially oil), today's Philadelphia Fed reading and Monday's New York Empire State Index reading (30.21 versus consensus of 34.0 and May's 34.03) showed continued expansion, but just not as fast as found in April and certainly not as fast as economists had forecasted.

On May 28th, we'll get another regional reading of manufacturing activity and the May Chicago PMI, where economists currently forecast a reading of 62.5 (above 50 is expansion), which would follow a reading of 63.9 for April.

Any guesses as to the over/under on this one versus economists' forecast? I haven't been tracking any changes to the current consensus, but I'd think economists are a little high after seeing both the NY Empire and Philadelphia Fed numbers.

Pivot Analysis Matrix -

After yesterday's trade and late session declines, I thought today's trade was rather range-bound, and while some traders will mix in a day trade now and then for a HOLDR or the QQQ, it was a tough day to make a buck, even if you caught extreme inflection points on an intra-day basis.

Aside from the Dow Industrials (INDU), the major indices seem content around the weekly pivot headed into tomorrows trade, and while I'm hesitant to even try and predict an outcome based on what I think is a psychological market focused on oil prices, I think tomorrow's trade may well mimic what we saw today.

S&P 500 Index (SPX.X) Chart - Daily Intervals

After looking at some "max pain" levels for individual stocks last night, I made some notes in this morning's 09:00 AM intra- day update of the top 5 weighted components of the S&P 100 Index (OEX.X) 533.20 +0.17% as to their rather close trade to Friday's option expiration "max pain" levels. I was looking at this week's daily pivot levels and while we have seen some swings from SPX 1,080 to 1,106, the SPX closes are all pretty darned close on a daily basis, as if there's been a compression of price towards a level.

Just seems like things are a little "manipulated" around option expiration, but even today, when the SPX reached its low of the session after the Philly Fed report, the SPX and other major indices found their session lows as the CRB index traded its session low of 270.

I was tracking, or monitoring for, buy/sell program premium alerts today, and aside from a sell program premium at the open, and a buy program premium at the close, I didn't get a premium alert during the day. Things just seemed to be quiet and content.

Dow Industrials (INDU) - Daily Intervals

It takes some doing to get a 9,900 point index to close within 0.07 points of the prior days close. We've seen similar closing action before, which can hint that things are being compressed as the market agrees on price.

Oil prices along with inflation worries will most likely be the overriding theme for the next several months, where I do think the MARKET will continue to slowly take out some risk (as depicted by the bullish % indicators).

Eventually, I think the bullish % will be aligned nicely for a very good longer-term bullish entry setup, and one thing I'd be listening for are the words "recession."

That's when commodity prices will be down from where they are currently, and similar to what we may be starting to see from the overall region surveys, the FAST PACE OF GROWTH will have slowed to a SUSTAINABLE PACE OF GROWTH.

NASDAQ-100 Tracker (QQQ) Chart - Daily Intervals

The QQQ found its session low just above our WEEKLY 61.8% retracement of $34.54, which coincidentally came as the CRB Index traded its then session low of 270.

I didn't try and trade that from the bullish side at the time, but later in the day, with the thought that things were going to be rather tight, did get what I feel was a rather "predictable" and safe bullish entry point in the Semiconductor HOLDRs (AMEX:SMH) $36.56 -0.51% at $36.46 (there was a nice intra-day zone of support at $36.43 that I thought would be a little pullback level of support since the CRB Index had fallen below 270 and Treasury YIELD was at session lows), and all be darned if the SMH didn't pull back to $36.42, I then profile long at $36.56, and while we got a little bounce back to $36.70, we didn't get my day trade target of $36.80 and yesterday's close.

While I thought we were going to most likely see the QQQ close back near its WEEKLY Pivot by today's close, the SMH and SOX just wouldn't cooperate (SMH WEEKLY Pivot is $36.79).

Well... sometimes you've got to take what the market gives you, and today, that wasn't much at all.

Jeff Bailey

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