Option Investor
Market Wrap

Letters of engagement.....

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It truly was a mixed session for the major indices with the Dow Industrials (INDU) as well as the S&P 500 (SPX.X) both edged up to multi-year highs at one point in the session.

Modest gains and losses were found by the close considering Friday's display of bullish optimism.

In the OptionInvestor.com Market Monitor, I like to "keep a pulse" of market internals and key index benchmarks during the day, as well as other "trading" measures such as the TRIN, TRINQ and VIX.X.

Energy sectors as well as June Crude Oil futures (cl06m) were under pressure early in the session after comments from Iran hinted at a moderating posture over its nuclear program.

An Iranian government spokesman told reporters that President Ahmadinejad wrote a letter to President Bush proposing "new solutions" to their differences.

June Crude (cl06m) fell as low as $68.20 in the first minutes of its floor trade at the NYMEX, only to settle down a modest 17 cents, or -0.24% at $69.77.

Later in the session, U.S. Secretary of State Condoleezza Rice dismissed the surprise letter, saying it didn't seriously address the standoff over Tehran's disputed nuclear program.

In an interview with the Associated Press, Ms. Rice said the letter from the Iranian leader was about 18 pages long and covered history, philosophy and religion. "This isn't it. This letter is not the place that one would find an opening to engage on the nuclear issue or anything of the sort," Rice said. "It isn't addressing the issue that we're dealing with in a concrete way."

U.S. Market Watch - 05/08/06 Close

Shares of chip-giant Intel (INTC) $20.11 +3.07% jumped higher at the open and built gains to the close after American Technology's analyst Dough Freedman sent a "letter" to clients saying the company could be gearing up to sell or take its flash-memory business public. Mr. Freedman raised his investment rating on Intel to "buy" from "hold."

But the gains for Intel weren't enough to bridge the recently widening gap (see 20-dayNet%) among many 4 and 5-lettered NASDAQ stock symbols and the 1, 2 and 3-lettered variety at the NYSE.

There will be times when there isn't just "one equity market," but two, perhaps three markets depict various measures of strength and weakness.

The U.S. Dollar Index (dx00y) edged fractionally higher. A note of interest here may be that the U.S. Treasury Department said it plans to release a semi-annual report on currency policies of major trading partners at 04:00 PM EDT on Wednesday. The report will be watched closely for assessments of foreign exchange policy in China.

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With the Dow Industrials (INDU) up an impressive 4.6% the past four weeks, it might behoove traders/investors to consider foreign exchange and "foreign trade" as it relates to the 4.8% decline in the Dollar Index (dx00y) during the same period.

It has been discussed that the tumbling dollar could mean "doom and gloom" for U.S-based assets. It has also been discussed that the weaker dollar could benefit large multi-nationals that derive revenue earnings from overseas/border trading partners.

We're at multi-year highs for some of the major equity indices. Dollar Index has retraced about 61.8% of its January 05 low to October 2005 relative high.

Dollar Index (dx00y) - Weekly Intervals

Ask anyone (bull/bear) their opinion on what the dollar is telling you, and you'll get a minimum of at least two, if not three different answers.

In October of last year it was "bearish" that the dollar was showing strength. My "bear notes" had it that the dollar's rise from January 2005 was a clear market signal that hyperinflation was at hand.

It is not uncommon for any security to retrace 38.2%, 50%, or 61.8% of "its move." However, when a security does retrace more than 61.8% of "its move" as the U.S. Dollar Index (dx00y) has done (from Dec05/Jan06 to Oct05/Dec05 relative high) there's another "four letters" that could drive dollar action this week.

The Federal Open Market Committee (FOMC) meets on Wednesday and many market participants see another 25 basis point tightening.

I want to quickly discuss "one item" that still sticks in my mind regarding ex-Fed Chairman Alan Greenspan's comments regarding Fed policy. And I think we should tie some of his comments to the dollar.

Mr. Greenspan had mentioned that the rapid rise in housing prices was JUST ONE (emphasis on just one) indicator of inflation that was on his radar screen and having some influence on future Fed policy.

Dow Jones Home Construction Index (DJUSHB) - Weekly Intervals

At different times, I do believe "markets are telling a story." I received a question just more than a week ago from a trader/investor that had set some downside alerts on the Dollar Index (dx00y) and DJUSHB and was wanting some follow up as to "why" both indices triggered his downside alerts (per 04/24 and 04/27 Market Wraps).

My historical "research" (looking at charts of the dx00y and DJUSHB) was inconclusive that there has been much of a "lasting tie" between dollar (up/down) and DJUSHB (up/down).

But that does NOT mean that some near-term relationships aren't being developed that might need to be monitored, or understood.

Scenario stated: The dollar's recent weakness is a sign from currency traders that the Fed may be reaching a near-term end to its tightening policy as one of the Fed's inflation concerns (housing prices) abates to more realistic growth measures.

We've heard the term "one and done" for Fed raising its target for Fed Funds so many times, I truly have lost track.

However, the dollar does/has tended to move higher/lower the past year based on FOREIGN market participant's views of Fed policy regarding rates. Where the dollar tends to "bid" or rise in anticipation of Fed tightening. Where Fed tightening has been construed with "economic growth" that could accompany, or lead to inflation.

As I look at the dollar's recent decline, one could draw a conclusion (which should be continually tested over time) that FORIEGN (substitute GLOBAL) market participants see a "key" indication of housing prices (falling if DJUSHB is a measure) as reasoning that the Fed may begin to pause.

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

In last week's Market Monitor at OptionInvestor.com, I got a little "excited" (my convictions get me excited) I feverishly started explaining how important I thought SECTOR analysis was as it relates to DAY trading, SWING trading, or INVESTING. And how important I (and most institutions) feel (based on historic observation) how important it is to know what stocks and sectors have "more importance" or weighting on an index that other stocks, or sectors.

As a trader or investor observes tonight's U.S. Market Watch, it might be worthy to observe that the "financials" (BIX.X, BKX.X, XBD.X and IUX.X) have had a relatively IMPORTANT role in the S&P 100's (OEX.X) recent advance the last couple of weeks.

"Financials" as an industry make up the GREATEST WEIGHTING of the SPX, OEX and RUT.X. Yes! Even the "small caps" are heavily weighted on the financial side. When we see these small, relatively obscure, yet publicly traded banks jumping 25% in a day due to their being acquired, the small cap RUT.X reflects some of that weighting too.

In a recent "Trader's Corner" article (5/03/06), fellow analyst Leigh Stevens discussed the potential reverse head/shoulder pattern in the OEX.

Which looks to be "in play" after Friday's action.

With the dollar showing weakness (market once again thinking Fed pause?), and financials strong the several weeks, combined with some "cooling" in the homebuilders (Fed/FOMC point of interest), it would have to be a CONSIDERATION that different portions of the market may have put some of this together.

It should be "clear" that the equity index fluctuations aren't ENTIRELY DRIVEN by dollar action (up/down), but a tie with past Fed commentary, dollar action, and DJUSHB price decline certainly get the letter A for "Attention!"
 

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