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Index Wrap

That didn't make sense!

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The major indices found a strong round of selling today, where only health providers, junk bonds, and longer-dated Treasuries found healthy gains.

In a sea of pre-Chanuka or holiday red, the Disk Drive Index (DDX.X) 117.59 -3.13%, AMEX Gold Bugs Index ($HUI.X) 218.62 -2.67%, Biotech Index (BTK.X) 517.91 -2.42% and Natural Gas Index (XNG.X) -2.30% paced declines.

Volume at the NASDAQ showed major disagreement between buyer and seller, with sellers easily winning out as the NASDAQ Composite (COMPX) 2,114.66 -1.7% shed 36.5 points after flirting with its January highs the past four sessions, including today. I say major disagreement as the NASDAQ churned a whopping 2.71 billion shares. Easily its highest daily volume this year.

Today's trade "didn't make sense" to some traders that have been using the dollar's strength/weakness to try and predict broader equity weakness/strength as the U.S. Dollar Index (dx00y) edged down just 0.04 point to 81.24.

It "didn't make sense" that Prudential's Ralph Acompora would make a bullish call, with a 6-month Dow Industrials price projection of 13,264, to then see the Dow Industials (INDU) 10,440 -1.00% shed 106-points within 24-hours.

What really "didn't make sense" is that oil prices would plunge another 3.3%, to settle below $42.00, and still find the major indices mired in red.

U.S. Market Watch - 12/07/04 Close

Today's trade was not a bump higher at the open and an immediate dump to the close. Software, Internet, Brokers and Health Insurers all set fractional 52-week or all-time highs. Brokers reached the highs of their session just after 12:00 PM EST.

When things "don't make sense," there are usually two things traders, investors and analysts will say in an attempt to explain things. The first, where no argument will ever be won is that "valuations" were the reason (lows and highs). The second.... is some pre-option-expiration maneuvering.

At the very end of last night's Index Trader Wrap, I squared 3- boxes on the SPX.X pivot matrix, quickly a prior 11/23/04 Index Trader Wrap.

Today's trade obviously unfolded to a bear's liking, with TRIN moving higher and the VIX.X breaching its WEEKLY R1 (13.63) toward the close.

By session's end, the SPX.X fell a sharp 13.18 points, or 1.10% to 1,177.07. Not too far from the downside correlations marked last night.

It isn't all that often that we see Treasury YIELDs perform like they did today. I'm going to touch on this further, later in the wrap, but when we see this much flattening like we did today, stocks will struggle mightily. The Treasury market spent the better-part of the day under pressure on what traders will call "rate-lock selling" ahead of supply and the upcoming auctions with $15 billion of 5-year on Tuesday, and another $9 billion re-opened 10-year scheduled for Thursday.

One can perhaps see how the upcoming $15 billion auction tomorrow would have the 5-year yield rising (selling in the bond in anticipation of new supply) against the 10 and 30.

However, I think there may be more to this than upcoming supply.

This SHARP, and somewhat SUDDEN, decline in oil prices. While I can NOT be CERTAIN, I don't think it unreasonable to think that there are some BOND TRADERS that were shocked by Friday's nonfarm payroll data (not as "inflative" as thought) combined with SHARP DECLINE in oil prices (not as "inflationary" as thought) are probably scrambling if they are overly SHORT the 10 and 30-year maturities.

In this evening's Market Monitor, I made a "crazy" comment. But it could just be, that BROADER EQUITY MARKET BULLS, want to see OIL PRICES RISE a bit, back near $43-$45. If I'm CORRECT in my logic, that Treasury traders in the 10 and 30 are overly short, and were scrambling to cover (buying, creating lower yield in 10 and 30), then perhaps, a slight rebound could have the flattening YIELD curve easing a bit.

Market Snapshot / Internals - 12/07/04 Close

(Shaking my head as I type).... It was a rather quiet session until about 01:00 (NOT 03:00 when consumer credit was reported). Interviews with floor traders at that time had 3-different "reasons," being mentioned. Stocks were overbought, futures related selling, and "trouble in the Ukraine."

I agree with a Briefing.com reporter. "In short, we're still listening for a convincing explanation."

However, I (Jeff Bailey) could argue for some futures selling being related to December (quarterly) expiration.

Let's quickly take a look at the Pivot Matrix, but I need to cover some thoughts on the YIELD curve/oil price, as well as the S&P futures.

Pivot Matrix -

If you believe that Prudential Ralph Acompora's bullish call yesterday is the "top call" on this market, then you will be taking note that the BIX.X is the FIRST equity-based index to trade its MONTHLY Pivot to the DOWNSIDE. The SOX.X traded UP through its MONTHLY Pivot on December 1.

On the BIX.X, I make note of "Yld Crv." What I'm touching on there is the previously discussed FUNDAMENTALS that can come into play for the BIX.X in NEGATIVE fashion. Remember, the Fed has been slowly raising its Fed funds target rate. Banks LEND MONEY at rates determined by the BOND MARKET. If the Fed is raising its Fed funds target, and 10-year and 30-year YIELDS are falling, thus narrowing the spread, or lending margins for banks, then we have some rather "easy fundamental" concepts to grasp as it relates to the "yield curve."

I am NOT a yield curve specialist. You do NOT need to be one either. But it is IMPORTANT for us to have a grasp of what may be going on near term, so traders can THINK THINGS THROUGH, and not jump the gun, should we see OIL PRICES RISE, which could then brink SELLING to the LONGER DATED TREASURY YIELDS, which might have an trader (or analyst) screaming "the sky is falling!"

I'm ONLY showing the 5, 10 and 30-year yield, along with our "junk bond." Instead of showing the 5-day and 10-day PERCENTAGE change, I'm showing 5-day and 10-day POINT movement, with a FOCUS on the 5, 10 and 30-year YIELDS.

This is the BEST way (in my opinion) to understand the yield curve, and FLATTENING and STEEPENING. For an equity trader, FLAT is usually negative for stocks, while STEEPENING is usually positive for stocks.

U.S. Market Watch - 12/07/04 Close

Real quick. The 5-year YIELD has falling 11.4 basis points the past 5-sessions (5DyNet). The longest-dated 30-year YIELD has fallen 11.6 basis points the past 5 sessions (5DyNet). One could say they have moved in tandem.

But now look at the past 20-days (20DyNet), with an UNDERSTANDING, based on OBSERVATION of what took place TODAY! For the past 20-days, the 5-year YIELD ($FVX.X) has RISEN 6.8 basis points, while the 30-year YIELD ($TYX.X) has FALLEN 3.4 basis points. Do you see how the SPREAD has narrowed?

I don't discuss the 10-year YIELD ($TNX.X), but its is what traders call the "belly of the curve." Think of a "bell curve" where you've got two end (5 and 10), and the 10-year is in between at the "belly." Just like your "belly" is in the middle of your body.

Anyhow.... its can be the SHARP DECLINE in OIL PRICES, as well as Friday's nonfarm payroll data, that has the LONGER-DATED Treasury trader that was SHORT, scrambling to get things re-balanced that has the 30-year YIELD falling. Meantime, some near-term SUPPLY of Treasury, as well as a Fed that is currently tightening, has the SHORTER dated 5-year YIELD moving up 6.8 basis points (not that much, but enough to have yield curve flattening) that pressured the Regional Banks (BIX.X).

Now, be aware of the POSSIBILITY tomorrow, with weekly energy inventory data coming out.

My thoughts are this. IF I were a trader, that had been SHORT the longer-dated 30-year Treasury, and got a surprise from the nonfarm payroll (not as strong, or "reflationary") as I had anticipated, and now I'm seeing OIL PRICES in a free fall, or MOVING SHARPLY LOWER, then I've got to be trying to get things squared up, and get my SHORT under control. Regardless of new supply, or what the heck I think the Fed might do at Tuesday's FOMC meeting.

Now, I'm running way late, but I want trader's to QUICKLY look at my e-mini S&P futures (es04z) chart, where I've shown this chart before, with my FITTED retracement. Get in the mindset, into next week, that we're also dealing with some triple witching expiration into next week.

e-mini S&P futures (es04z) - Daily Intervals

The "fitted" retracement on the December e-mini S&P futures give us some LEVELS, away from the Pivot Matrix we use for the cash market, or the SPX.X. Into next week's FUTURES expiration, I would have to be looking at SUPPORT (1,167-1,170) and RESISISTANCE (1,192-1,203).

Go check your SPX.X Pivot Matrix.

Now, this is where I once again go BACK to that 11/23/04 VIX.X and SPX option action we talked about. At that time, I interpreted the FALLING VIX.X and the action in the 1,175 puts as the MARKET SELLING the 1,175 for $12.85 that day.

Now time has passed. If I take today's close in those 1,175 puts at $8.60, and subtract it from the STRIKE of 1,175, I still come pretty darned close to my thoughts of a trader selling this PREMIUM in view of 1,162 support.

I may have been INCORRECT in thinking that "smart money" was buying 1,200 calls. That is, as long as the SPX stays below 1,200.

Simple thought/question. If the SPX is going to get ABOVE 1,200, what MUST THE BANKS do? If the BANKS are going to reverse back higher and get the SPX above 1,200, what MIGHT HAVE TO HAPPEN in the Treasury bond market? I'm thinking the 10 or 30-year YIELD YIELDs have to RISE! Get the YIELD curve steepening again.

For BEARISH equity trade, then the opposite would be true.

Jeff Bailey

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