Option Investor
Market Wrap

March Madness

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Top seedings for this year's NCAA Men's Division I basketball tournament may have had many market-watchers focusing more attention on filling out their brackets than trading stocks, but the major indexes managed to post gains in a light volume.

With the S&P 500 Index (SPX.X) 1,406.60 +0.26% having retraced roughly 43% of its February 27 to March 5 decline of 75 points, it's "game on" with sellers still looking as if they have a slight over buyers on an intermediate-term basis.

Buyers sent 102 stocks to new 52-week highs at the big board, the most since February 20th, when new highs outnumbered new lows by a hefty 374 to 7 margin. Meanwhile, sellers managed to push just 20 issues to new 52-week lows, which is well shy of the 88 found on March 5th.

Two figures that I would be measuring against here are the 374 new highs from 02/20/07 and the 88 new lows from 03/05/07.

NASDAQ's new high/new lows measures are still trying to stabilize, but today's close does have the 5-day NH/NL ratio reversing back up above the needed 32.00% measure, which confirms the recent bounce, if not signaling some resumption of bullish leadership forming near-term. This action follows the NYSE's 5-day NH/NL ratio reversal back higher from Wednesday at 64.00%.

To figures that I would be measuring against for the NASDAQ NH/NL here are the 234 new highs found on 02/20/07 and the 183 new lows found on 03/05/07. For instance, if we were to see 300 new highs tomorrow in the NASDAQ, then watch out to the upside as prices would likely ramp in impressive fashion. Conversely, if we were to see 250 new lows, then the recent price lows for the NASDAQ Composite (2,340) would likely become very vulnerable.

There are many similarities between new high and new low measures as there is to filling out a tournament bracket for this year's office pool.

Who are you picking in the first round of the Midwest bracket? Last year's national champion and number 1 seeded Florida? Or their opponent Jackson State, which is seeded #16 in the Midwest regional?

New highs and new lows, as well as their fluctuations aren't all that different.

There's nothing wrong with betting on an underdog, and Jackson State should be commended for making it to the big show after winning the Southwestern Athletic Conference.

However, the likelihood that this year's four #16 seeds ending up in the Final Four would be a far-fetched prognostication. Instead, a "safer bet" would most likely be to have either the #1, or #2 seeded teams advancing to the final rounds.

I'd have to think that if all four of the #16 seeded teams upset their #1 seeded opponents in the first round, there's going to be some very shocked, and grumpy bracket fillers in the office come Friday.

In summary, if the WEAKER #15 and #16 seeds (new 52-week lows) start gaining over the STRONGER #1 and #2 seeds (new 52-week highs) there will likely be as many disappointed bracket-fillers for this year's NCAA pool as their will be broader-market equity bulls.

I began filling out my "bracket" last week, but it wasn't an NCAA basketball tournament bracket, it was an investment bracket where Friday's quarterly expiration gets "top seed," near-term, with the dollar/yen #2, the euro/yen #3 and the homebuilders rounding out what I feel will be the top four seeds that traders and investors will be monitoring closely in coming sessions.

Closing U.S. Market Watch

Some of today's top news stories had shares of subprime mortgage lender New Century Financial (NYSE:NEW) $3.11 halted with news pending the entire session. Late this afternoon a company filing with the SEC said it received letters from Wall Street lenders, including Bank of America (NYSE:BAC) $51.09 +0.27%, Goldman Sachs (NYSE:GS) $202.60 +0.44%, Morgan Stanley (NYSE:MS) $76.06 +0.07% and Citigroup (NYSE:C) $50.36 +0.05% that they were cutting off funding to the lender, and that is no guarantee the company (New Century Financial) will receive additional financing.

New Century is the nations second-largest subprime lender, specializing in lending money to prospective home buyers (new and existing) who have poor credit histories.

Homebuilders as depicted by the Dow Jones Home Construction Index ($DJUSHB) 630.91 -4.07% gave back all of last week's gains and then some, as investors continue to contemplate a near-term liquidity crunch in the subprime mortgage arena should lenders tighten credit standards.

News travels fast and Thursday's action in New Century Financial, which was noted in the OptionInvestor.com Market Monitor as the stock fell below $5.00 was probably already "known." Last Monday's gap down from $14.65 was likely the bigger hint that another shoe was about to drop for the stock.

Fremont General (NYSE:FMT) $6.73 -16.18% and Novastar Financial (NYSE:NFI) $4.24 -19.08% were notably weak as well. Shares of Countrywide Financial (NYSE:CFC) $35.14 -2.65% came close to testing last week's low of $34.50 to finish down 96 cents.

M & A activity grabbed headlines too.


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The Morgan Stanley Healthcare Payors Index ($HMO.X) 1,887.31 +2.61% was today's sector winner. Shares of Sierra Health Systems (NYSE:SIE) $41.57 +15.79% jumped after the company said it had agreed to be purchased by UnitedHealth (NYSE:UNH) $53.27 +0.50% for $43.50/share in a deal valued at $2.6 billion. Some industry followers say the merger could face anti-trust scrutiny.

Today's "blockbuster" deal had discount retailer Dollar General (NYSE:DG) $21.07 +25.56% surging higher. Private equity firm Kohlberg Kravis Roberts, which recently announced the largest private equity buyout in history for electric utility provider TXU Corp. (NYSE:TXU), said it was buying the retailer for $22/share, or $6.92 billion. The deal included the assumption of $380 million in debt.

The news helped lift fellow discounters Family Dollar Stores (NYSE:FDO) $30.42 +6.10%, 99 Cents Only Stores (NYSE:NDN) $15.23 +5.69% and Fred's (NASDAQ:FRED) $14.82 +2.27%.

Today's U.S. economic calendar was light. The federal government posted a $120 billion deficit in February, up 0.60% from a year ago as tax receipts and outlays both set records. The $120 billion deficit was $3 billion less that the Congressional Budget Office's $123 billion deficit forecast.

Since Monday's Market Wrap, the Semiconductor HOLDRs (AMEX:SMH) $34.74 +0.37% and Oil Service HOLDRs (AMEX:OIH) $139.63 -0.26% have been percentage winners.

Chip stocks as a whole may be tested for strength tomorrow after tonight's mid-quarter update from Texas Instruments (NYSE:TXN) $32.59 +0.40%. The world's largest maker of mobile phone chips updated analysts on its first-quarter sales and profit forecasts. The translated revenue forecast has sales looking flat-to-lower for a second-straight quarter to between $3.07 billion and $3.22 billion, compared to an initial estimate between $3.01 billion and $3.28 billion. The company also narrowed its EPS range between $0.29 and $0.33 per share from $0.28 and $0.34 per share. At the time of this writing, shares of TXN were trading $31.90 in the extended session, down $0.69/share, or -2.11% from today's close.

Strength in the oil service sector looks concentrated on the refiners. Energy prices were weak from the open, but refinery output remains tight as refiners get set for this summer's gasoline demand season. April Unleaded (rb07j) traded as low as $1.86 in Monday's morning session, but finished up just more than a penny at $1.9105. The widening crack spread between gasoline and oil futures (see 5-dayNet% and 20-dayNet%) likely finds some healthy margins for the refiners.

Frontier Oil (NYSE:FTO) $30.87 +0.88% and Valero Energy (NYSE:VLO) $60.29 +0.09% are two stocks I keep an eye on in my "Watch List" for the Market Monitor. Both of these refiners are up 8.5% the past 20-days. Unfortunately, I've just been watching them.

My top 4 seeds....

In the OptionInvestor.com Market Monitor, I had made some notes/comments/observations to some index option activity, which on a near-term basis has me monitoring two levels for the S&P Depository Receipts (AMEX:SPY) $140.98 +0.14%.

While it would be impossible to say that two (2) trades I witnessed in recent weeks are "the trades" that depict some important levels of resistance/support headed into Friday's quarterly expiration, the RESISTANCE level of $141.40 from a March 7th (Wednesday) SELL bias in the SPY $140 calls for $1.40. In essence, there was some notable SELLING of this call (SFB-CJ) for $1.40, suggesting to me that there was either a WILLING and ABLE seller of SPY $140, or a NAKED premium seller of
$140 + $1.40 = $141.40.

Since we've seen what I consider to be some bullish NAKED Call squeeze-type of action into the last several option expirations, dating back to last summer, a key near-term levels, based on the above observation would be $140.40. Friday's intra-day high for the SPY was $141.42 and today's intra-day high was $141.34.

Let's quickly review the SPY daily interval bar chart, with the conventional use of retracement, as well as taking in the observation of where the SPY closed over the last several option expirations.

S&P Depository Receipts (SPY) - Daily Intervals

Since earlier this summer, the SPY has shown UPSIDE moves into each month's expiration. Some have been MUCH stronger, or impressive than others, but each has managed to reclaim the PRIOR MONTH'S expiration close. This MONTH, I would think the SPY hard pressed to repeat such an effort, as it would have to RISE to $145.72 in order to reclaim February's option expiration close.

But there is some intra-day and near-term (5-day) activity and the falling Market Volatility (VIX.X), which measures put buyers/call sellers (a rising VIX.X) against call buyers/put seller (a falling VIX.X) that suggests the SPY may be vulnerable to another NAKED calls squeeze.

My option trade observations suggests $141.40 is a point to be monitoring closely, while the above chart would suggest the 19.1% retracement of $141.57 becomes a "flinch point" where pure NAKED CALL premium sellers may rush to cover positions (either buy back those calls, or buy SPY, or S&P Futures to hedge NAKED CALLS) into Friday's expirations.

Another level of SUPPORT, which may be influential into April's expiration is $138.74. On Thursday, here's what I saw when I had sorted the SPY Option Chain by CBOE Volume (number of contracts traded at the Chicago Board Options Exchange). By the time I had sorted the option chain by VOLUME and got the screen captured, I noticed a "jump" in volume having taken place as the April $141 Puts had suddenly traded 6,000 contracts (equivalent to 600,000 shares of SPY) for $2.26/contract. It was a SELL bias trade in the OPTION, but a bullish stance at $141 - $2.26 = $138.74. At Friday's close, the Open Interest on this put had RISEN (suggesting there has been SELL to OPEN) trades (instead of SELL to CLOSE) taking place.

SPY Put Option Chain - Screen Capture 03/08/07 10:33:21 AM

I don't stare at an SPY Option Chain, but into an expiration, I'll take some notes. It just so-happened that after the SPY moved above the $141.00 strike, I had sorted the SPY option chain to see if there were any "big bets" being PLACED, or REMOVED based on the price action. When I sorted the SPY option chain, the SFB-PK had only traded 88 contracts, but by the time I had capture the option chain, a sizeable trade of 6,000 contracts had taken place. See the DnTickVol (Down Tick Volume)? That's SELLING of that PUT option. Somebody was making a large bet that the SPY does NOT close BELOW $141 - $2.26 = $138.74 by April 20th.

Simply make this observation, stick an alert on your trading software at that level. If the SPY breaks that level, then somebody may have to take action to protect the DOWNSIDE.

My #2 seeding (Dollar/yen) ...

Last Monday's Market Wrap "Yen in Doubt," Get Out! had equity bulls getting back in, but both the U.S. Dollar and the euro found gains since Monday's wrap.

Now, look again at the above SPY chart.

Now here's a daily interval bar chart of the U.S. Dollar/yen cross rate chart. This is measuring what a U.S. dollar is worth against the Japanese yen.

USD / JPY Cross Rate - Daily Intervals

March's quarterly option expiration ends on Friday, but the dollar/yen and the euro/yen trade has a long way to go in my opinion, and a relationship with equities that I will continue to follow.

You might note how "similar" the above USD/JPY chart looks when compared to the S&P Depository Receipts' (AMEX:SPY) chart.

As the dollar WEAKENED against the yen, not only did it create some jitters among U.S. equity bulls, but Asian markets fell sharply in the day's prior sessions.

The "basic" thoughts for this relationship is that while the above chart addresses dollar vs. yen, one could also say yen vs. dollar. The STRENGTH in the yen against the dollar creates bullish jitters in Japan as they depend heavily on EXPORTS to drive their economy. Too STRONG of a yen could have THEIR EXPORTS becoming MORE EXPENSIVE to U.S. consumers should the yen RISE.

If Japan's economy were to slow too rapidly as a result, then that can have NEGATIVE implications not only for the U.S. economy, but other global economies as well. China's equity markets were also hit lower earlier this month, as the yen showed some sudden strength.

When you look at the U.S. Market Watch, you'll note the currency weighted U.S. Dollar Index (DXY) at the top is basically unchanged the past 5-days, yet the major market indexes have traded UP the past 5-days. To me, this brings greater focus on the yen and its relationship to other foreign currencies, than the dollar against other foreign currencies.

The MOST HEAVILY weighted currency in the Dollar Index (DXY) against the dollar is the euro, thus the "yen carry trade" is what is still in play. UP and DOWN.

As of tonight's trade, the more key levels for the USD/JPY trade would be 119 and 115.50.

For equity price action (i.e. SPY), we could really see some short covering action in the SPY if USD/JPY gets much above 119 (if it was yen in doubt, get out; then the opposite could be true) and the recent SPY lows become vulnerable on USD/JPY below 115.50.

Somebody made a LARGE BET Thursday, that that isn't likely to happen.

I'm running late on my editor's deadline, but will quickly show the EUR/JPY cross rate chart. Very similar to USD/JPY cross rate, and VERY similar to how European bourses have trades, as well as the SPY here in the U.S.

EUR/JPY Cross Rate Chart - Daily Intervals

If there is a BULLISH equity story to be told here, it is that Dorsey/Wright's Cross Rate charts of both the USD/JPY and EUR/JPY are back on "buy signals." That is, both the USD and the EUR show demand back in control on a near-term basis against the yen.

For homebuilders, the message the MARKET seems to be sending is that it is concerned about what lenders are going to do regarding their lending requirements for new/existing home purchasers, with less than stellar credit ratings.

Using the $DJUSHB price action as a guide, I'm rather cautious, or defensive toward the homebuilders until the DJUSHB can manage a CLOSE back above 655, which marks a current 61.8% retracement of the 07/18/06 low close, to recent 02/02/07 relative high close.

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