Option Investor
Market Wrap

Majors Edge Lower on Light Volume

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The major indexes inched lower on Monday as options traders vie for position into this week's option expiration.

After averaging roughly 2.69 billion shares per day for the first 7 sessions in February, the big board was pressed to turn 2.3 million shares in today's session. The NASDAQ turned just 1.89 million shares, well off its prior 7-session average daily volume of 2.13 billion shares.

The number of declining issues outnumbered advancing issues from the open, but breadth improved modestly near the close after the Treasury Department reported that the federal government ran a $38.2 billion surplus in January, while December's reported surplus was revised downward 5.8% to $41.9 billion.

December's revision as well as January's initial figure has the deficit for the budget year that began October 1, totaling $-42.2 billion, down 57.2% from the same period a year ago.

The Treasury said that the amount of revenues collected from October through January were up 9.7% from the same period a year ago, climbing to a record for the period of $834.1 billion.

Meanwhile, government spending also set a record for the period, but the growth was a more modest 2.1%, pushing the total to $876.3 billion for the first four months of the current budget year.

For the full year, the Congressional Budget Office (CBO) is forecasting that the budget deficit will shrink to around $200 billion. The deficit for the 2006 budget year, which ended last September 30, was $247.7 billion, the lowest in four years.

U.S. Market Watch - 02/12/07 Close

For the most part, losses were evenly spread among the major indexes, with the small caps of the Russell 2000 Index (RUT.X) 805.79 -0.16% showing very modest relative strength.

Thursday's news out of New Century Finance (NYSE:NEW) $17.21 -5.54% and banking giant HSBC (NYSE:HBC) $89.41 -0.01% should continue to have traders and investors monitoring the broader industry/sector. Both the S&P Banking Index (BIX.X) 404.34 +0.19% and KBW Bank Sector (BKX.X) 118.48 +0.25% showed some stability today.

Traders and investors should make special note that neither NEW, or HBC is a component of the BIX.X (regional and super regional banks), or the BKX.X (super regional and money center banks).

Wells Fargo (NYSE:WFC) $35.60 +0.67% reclaimed Thursday's close of $35.56 in today's session. On Thursday, when the New Century/HSBC news hit, it was thought Wells Fargo might be vulnerable to subprime mortgage loans it had made. However, the company's COO John Stumpf said that most of the subprime mortgages it issues (72% in first half of 2006) are sold to Wall Street banks which then assume the risk.

Bears have been warning for many months of sub-prime lending woes. The news is out, but the banks sure look stable to me.

I have also been monitoring the various (May, August and November) CME Real Estate futures. On Wednesday, January 7, I just happened to grab the May Composite close of 219.00. At the time of this writing, the May Composite last trade was 219.40, with bid 219.20 and ask 220.60. Not much to say here, no whopping gain, but I'm not seeing any type of price action that would have be thinking banks were selling these futures short in order to hedge risk.

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Today's most actively traded stock found shares of ONYX Pharmaceuticals (NASDAQ:ONXX) $24.15 +96.98% surging on extremely heavy volume of 55.8 million shares (average daily volume for 3 months has been 1.68 million shares). I simply lost interest in the stock this morning at $19.38 when the stock was up 58.15% as I just couldn't "chase it!" The company along with partner Bayer (NYSE:BAY) $58.45 +1.07% said they had halted a Phase III trial Nexavar to treat advanced liver cancer. The pair decided to close the trial due to a positive outcome, and allow all patients enrolled in the trial access to the drug.

The AMEX Airline Index (XAL.X) 59.31 +1.09% was today's sector winner as energy prices retreated. Traders cited a warmer weather outlook as a partial catalyst for today's sell off in the energy complex.

March Crude Oil futures (cl07h) settled down $2.08, or 3.47% at $57.81. While some relief from frigid temperatures in the Northeast weighted on March heating oil futures (ho07h), comments this morning from Hasan Qabazard, head of research for OPEC, were also viewed as bearish for the "black gold." Mr. Qabazard forecasted a global surplus of crude supply over demand of some 300,000 barrels a day in the April-June quarter.

Both the CBOE Oil Index (OIX.X) 629.63 -1.29% and the Oil Service HOLDRs (AMEX:OIH) $136.23 -1.22% were today's sector losers.

In the OptionInvestor.com Market Monitor, I've been following many energy-related stocks closely and while we've been able to scratch out some gains in the oil commodity and with calls and puts, current action still has an uncertain look to it.

Last week I had upside alerts set on the Oil Service HOLDRs (AMEX:OIH) as I currently have a 3/4 bullish position profiled in shares of Baker Hughes (NYSE:BHI) from $70.05 (stop: $66.90 / target: $82.00) into Thursday's earnings report (Consensus $1.19/share on Revenue of $2.64B).

Oil Service HOLDRs (AMEX:OIH) - Daily Intervals

On Wednesday and then again on Friday, the OIH stuck its head above a rounding lower 200-day SMA ($139.43) and sellers continue to win out on this basket of stocks. Bulls had a pretty nice gain in BHI in mid-December and I thought we should exit that trade, book the gain, and then roll to shares of Schlumberger (NYSE:SLB) $63.60 -1.33% when the stock was trading $68.21!

Ouch! As you can see from the OIH itself, declines into early January for the OIH also had shares of BHI and SLB reversing their mid-December highs.

Baker Hughes (BHI) - Daily Intervals

I usually don't show charts of individual stocks, and I'm not here to try and "pump" a trade I've profiled in the OptionInvestors.com Market Monitor. However, do you see how the conventional use of a fibonacci retracement from very different dates, still brings in an observation of 61.8% being the level of RESISTANCE in mid-December, just as the 61.8% was RESISTANCE for the OIH at the SAME time/date?
At the top of the BHI chart, I mention the use of position SIZE as one way to mitigate RISK of capital. Position size can be utilized not only for LONG positions, but SHORT positions too.

At tonight's close, I could begin to measure RISK/REWARD from the LONG bias (or bullish bias) as rather unfavorable, if using the 38.2% retracement on BOTH the OIH and BHI bar charts. That is, what is the near-term REWARD (next level higher) vs. RISK (next level lower)?

So why this, and why now?

Using the OIH as a SECTOR observation and then BHI as a STOCK observation within the SECTOR, we can perhaps build out to a MARKET.

A MARKET like the S&P 500 Index.

In Monday's Market Wrap I outlined some RISK/REWARD levels from a BULL perspective. On Friday, the SPX traded my "good buy" level of 1,437, and my REWARD level was 1,451.

Since the SPX.X CLOSED at 1,450.02 on Wednesday, I'm also "dragging up" the 0% conventional retracement to that level, or close.

I get the distinct observation that last Wednesday's intra-day high (1,452.99) just didn't give market participants that great of a RISK/REWARD profile.

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

Hmmm... one does have to wonder if the "bad news" out of NEW and HBC are, or has ever been of great concern to market participants, if measured against the SPX. Certainly some weakness has come in from Wednesday's multi-year high close of 1,450.02, but last Monday, the MONTHLY Pivot retracement and MONTHLY R1 (1,451) was an institutional level we were alert for selling.

Do you see some of the RISK/REWARD game being played here too?

Yes, a "good buy" could be had at 1,437 with near-term REWARD still 1,451. But a "better buy" still found at 1,428. Better as a bull's RISK becomes "less" to 19.1% retracement, if using the above fibonacci levels.

The MONTHLY Pivot levels are STILL THE SAME as they were in Monday's Market Wrap.

Here is a 60-minute interval chart of the SPX with those very same MONTHLY (pink) pivot levels and retracement. In today's Market Monitor I also added the WEEKLY (blue with green S1 and red R1) retracement.

Remember, I thought 1,437 would be a "good buy" and today we discovered some overlapping resistance very close to that level.

S&P 500 Index (SPX.X) - 60-minute interval chart

Late Friday the SPX did undercut 1,437, but buyers pushed the SPX back above that level, just barely, by the close. Today, the SPX slips back under that level and we can see it finds some resistance at an "overlap" of MONTHLY (pink) and WEEKLY (blue) pivot retracement.

Now, while BULLS are assessing downside risk to around 1,428-1,430, what are BEARS doing? They're now assessing risk to at least 1,451.

And hoping that there is some type of meaningful reaction to the "bad news" of subprime lending they've been alerting us too for several months!
 

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