Option Investor
Market Wrap

Bear Season Remains Open Until Population Under Control

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The major indices shrugged off early morning weakness to finish mixed, but the downtrodden AMEX Gold Bugs Index ($HUI.X) 210.32 +5.42% surged as rosier European economic data lifted the euro to a two-month high against the greenback.

Eurozone data showed after a measure of the services economy showed expansion, edging up to 53.5 in July from 53.1 in June and had some economists in the region sensing a turn for the better as the euro-zone economy sputters along. Also fueling euro gains were rumors of Saudi Arabian and Kuwaiti buying of euros.

Now take note of this all you technicians (currency, commodity, stock, bond, any tradable security) out there. Some euro technicians say today's action in the euro also found a key break above technical resistance at the $1.2250 level, where several times this past week, the euro kept hammering away at this level, only to be knocked back. That is, before today's successful charge took the euro as high as $1.2343 intra-day.

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I'm using today's "commentary" of euro technicians to solidify a key technical measure that can sway one side of a trade to another. It is thought by many that the more times a HORIZONTAL level is tested as resistance, or support, once broken, that level can become a MASSIVE reaction point for a strong directional move in the direction of the break!

I'll touch on this in one of my "key sectors for the month," and traders that have been following my commentary over the years, will know this equity sectors as a pretty good indicator of BULLISH aggression, or lack thereof.

Economic data released here in the U.S. had the Institute of Supply Management nonmanufacturing index slipping to 60.5% in July from 62.2% in June. Economists were expecting some slippage, but to a reading of 61.4%. As a reminder, this is a diffusion index, where readings above 50% signal expansion, while levels below 50% signal contraction. This services index has been above 50% for 28 months. While the overall ISM reading slipped to 60.5%, July new orders rose to 61.9% from June's 59.5%. The employment component fell to 56.2% in July, after a 57.4 reading in June. The prices-paid component jumped to 70.3% from 59.8%, its highest level since December. Ralph Kaufman, chairman of the ISM's nonmanufacturing survey committee, said survey participants blamed the increase entirely on higher oil prices.

Speaking of oil, September Crude Oil futures (cl05u) settled down $1.03, or -1.66% at $60.86 after spiking to $62.50 in the first minutes of this morning's floor trade. The morning highs came just shy of the contract high of $62.90 set on July 8, 2005.

Weekly inventory data showed crude oil inventories rose by a very modest 196,000 barrels, the first build after four weeks of decline! Gasoline inventories fell by a sharp 4.02 million barrels, while distillate inventories rose by 1.49 million barrels.

September Heating Oil futures (ho05u), a distillate, settled down $0.0362, or -2.10% to $1.6889. Meanwhile, September Unleaded Gas futures (hu05u) settled down $0.0107, or -0.60% at $1.7709.

The longer-dated 30-year Treasury yield ($TYX.X) fell 3.5 basis points to 4.505% with the Treasury Department confirming it will reintroduce the 30-year bond with semiannual auctions beginning early next. Buying was evenly spread among the major maturities with the shorter-dated 5-year yield ($FVX.X) falling 3.6 bp to 4.127%, while the benchmark 10-year yield ($TNX.X) was down 3.6 bp to 4.300%

U.S. Market Watch - 08/03/05

What a difference a day makes with the AMEX Gold Bugs ($HUI.X) 210.32 +5.42% now up 6.81% since last Wednesday's close (see 5DyNet% column).

How about them HMOs!? Shares of Cigna (NYSE:CI) $115.57 +6.61% surged to an all-time high after the employee benefits provider joined recent other health insurers such as Aetna (NYSE:AET) $76.89 +0.01% and Wellpoint (NYSE:WLP) $73.96 +0.80% in posting forecast-beating results.

In last Wednesday's Market Wrap I noted that the "healthcare" sectors had been a drag on the broader S&P 500, and I do think the week-to-week gains helped broader-market bulls.

Tonight I'm going to focus in on the FINANCIALS, with some focus on the S&P Banks Index (BIX.X), which is at a near-term levels of rising support.

But first, let's talk a little about "bear season."

S&P Depository Receipts - Daily Intervals

In last Wednesday's Market Wrap, we did some "fine tuning" on the S&P Depository Receipts (AMEX:SPY) $124.72 +0.26%, which would have close juuuust above the 50% retracement of $12.66.

For several weeks I've been reading about "bullish complacency" as depicted by the various volatility measures (VIX.X, VXO.X, VXN.X). However, I could never find anyone that could show me, or prove to me, that it was BULLS doing all the call buying and put selling to have these various volatility measures falling to multi-year lows.

Last night I was snooping around for any confirmation to my thoughts that it might be BEARS (often times their own worst enemy) that might be doing the call buying and put selling. After all, options were "created" as an instrument to help hedge RISK. Recent short interest data on the S&P Depository Receipts (AMEX:SPY) $124.72 +0.26% shows that SHORT INTEREST on the SPY has built to a 12-month high! Meanwhile the SPY is at a 4-year high!

In orange, I've tried to benchmark the 06/16 and recent 07/15 dates with short interest readings.

In my opinion, "bear season" is in full swing and the Division of Wildlife hasn't published any definitive dates as to when it will close.

Now, I know what a bear that is short below $123.65 is probably saying. "Those bulls haven't shown me anything. Yeah... you got your healthcare boost last week, but I'm not sweating things at all. I'm as cool as a cucumber."

But whether YOU or I am bullish/bearish this broader market measure, don't forget that there's roughly 113.1 million shares on the wrong side of the trade at tonight's close.

On a hot summer's night, when the humidity is high, even a cucumber will sweat.

S&P Banks Index (BIX.X) - Daily Intervals

"Financial" represent roughly a 25% weighting in the SPY/SPX and while the more regional S&P Bank Index (BIX.X) is not a full representation of "financials," it is a sector/index I like to use (in addition to the BKX.X, XBD.X and IUX.X, which I group together in our U.S. Market Watch).

Do you see how the BIX.X on a technical basis has been of NO HELP to the SPY/SPX bulls in the last couple of weeks? But note some of the same SIMILARITIES of a reverse head/shoulder pattern, as well as a bullish resistance trend (thick red line).

Trading and technical analysis is so much of a "what if" type of question.

"What if" the BIX.X breaks down below its near-term bullish trend and breaks below what looks to be the formation of a "right shoulder." Aha! That is perhaps a BEAR'S case for still shorting/putting the SPY/SPX.

But.... "What if" the BIX.X rebounds sharply and tries to reclaim its bullish resistance (thick red trend)?

In essence, the BIX.X can perhaps become our "key" index/sector of the week/month. It could well be the indicator of just how long bear season is going to last.

Why do I show a BLUE retracement and a PINK retracement?

The BLUE retracement may be thought of as a LONGER-TERM bull's retracement. Say for example the "smartest bull" bought the May 2004 relative lows of 322.50 and that bull also sold the tippy-top high of 382.78. It's not uncommon for those bulls to come back for seconds on a 61.8% retracement of that range.

The PINK retracement may be thought of as an INTERMEDIATE-TERM bear's retracement. Say for example the "smartest bear" sold the December all-time highs. Hey... you've got to be very smart, or very lucky to have done that. But let's assume "smart money" sold that high and THEN bought the recent 04/21/05 low of 340.63.

Hmmm... maybe a little bit STRONGER than a bear would have wanted above this PINK 61.8% retracement, and maybe, just maybe, the BIX.X firms a bit at 50% of PINK retracement.

All I want traders and investors to do is get the feel/observation of how this index/sector could be pivotal in comings sessions.

Over the past 20 sessions, I see that the BIX.X is up just 0.81%, the BKX.X is up 2.15%, the XBD.X is up 5.94% and the IUX.X is up 3.5%.

What I'm doing here tonight is focusing on the BIX.X, which is the WEAKEST of the financial sectors/indices in our U.S. Market Watch.

I like to monitor any "weakness" for further weakness, or renewed STRENGTH.

Also remember... "healtchare" represents roughly a 25% weighting in the SPY/SPX.

OK... now let's revisit some talk among traders regarding the euro, and how it hammered against a key technical level of $1.225 and finally broke through.

I'm not a currency trader, and I'd be lying to you if I told you I could "feel the power" of today's break higher. However, maybe today's $HUI.X surge was triggered by such a break higher in the euro vs. dollar.

Hmmmm.... I could perhaps envision a bunch of angry villagers pounding and pounding and pounding at the castle gates with their battering ram. For the BIX.X it may well be the 360 level that seller are trying to break.

One of my "key sectors" for buyers showing some aggressiveness is the CBOE Internet Index (INX.X) 203.19 -0.31%. Where in recent Market Monitor notes, I've been focusing on INX.X 204.50, let's round up to 205.00 to keep a round number.

My thoughts of the INX.X being a sector/index to represent how aggressive buyers are getting probably lingers from the "Internet Bubble." Yes... "no earnings and a pipe dream." In March of 2000, this index topped out at 944.

CBOE Internet Index (INX.X) - Daily Intervals

Here's an index I like to associate with buyers being "aggressive" or "not aggressive." No, I don't have "reverse head/shoulder pattern on the brain," but these patterns continue to show up, and from what I've seen, necklines keep getting broken to the upside, and the "right shoulders" held when the pullbacks took place.

See how the BIX.X becomes a "test for strength, or weakness on the current pullback.

See how the INX.X can become a test for strength, or weakness on the current bounce?

When things (indices/sectors) get in unison (up/down) that's when the powerful moves can come for the major indices. To the upside, it is when all the buyers, including short-covering bears, and suddenly convinced bulls all start getting on the same side of the trade. To the downside is when all the sellers get in unison, which includes convinced bears and doubtful bulls.

Recent short interest data in the SPY would suggest to this analyst that bears should not be overly confident, and bulls might start getting aggressive.
 

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