Option Investor
Market Wrap

Dollar, Treasuries, Energy Commodities Gain

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Equity bulls locked in gains on Thursday after the United Kingdom's Prime Minister Tony Blair said he would step down as prime minister on June 27, after a decade in office in which he brokered peace in Northern Ireland and provided major war efforts for the U.S. in Afghanistan and Iraq.

Prime Minister Blair won three straight terms as prime minister.

President George W. Bush described Blair as "a man who kept his word, which sometimes is rare in the political circles I run in." Bill Clinton praised Blair for taking the lead on climate change, debt relief for poor countries and aid for Africa, and for bringing peace in Northern Ireland and Kosovo.

Geopolitical watchers believe Mr. Blair's successor will likely be Gordon Brown, who is often cited for Britain's economic prosperity, and a major force in helping Mr. Blair transform the Labour party from a social democratic party to a centrist "New Labour" party.

While Mr. Blair's announcement was anticipated, the timing wasn't certain.

A day after the FOMC left its target for fed funds steady at 5.25%, the Bank of England's Monetary Policy Committee raised its key interest rate by 25 basis points to 5.50%. Meanwhile, the European Central Bank's Governing Council left it key interest rate unchanged at 3.75%.

Today's Global Economic Calendar -

I won't have time to review many of today's global economic reports in detail, but those in RED and ORANGE are deemed of great interest to traders and investors.

If anything, some of the economic reports abroad, compared to recent economic reports here in the U.S. serve as a snapshot comparison.

The U.S. trade balance (deficit) rose 10.4% to $63.89 billion in March, its highest level in six months as a jump in oil imports and oil's price (rose from $50.71/bbl to $53/bbl) offset a narrowing of the deficit with China.

The imbalance with China fell by 6.4% to $17.2 billion after hitting an all-time high of $232.5 billion in 2006. Still, for the first three months of 2007, the deficit with China ran 20.4% higher than the same period a year ago.

In March, nearly two-thirds of the deterioration in the deficit showed a 17.6% jump in oil imports, which climbed to $24.6 billion.

The deficit with Canada, America's biggest trading partner, rose by 21.7% to $5.7 billion in March. Meanwhile, the deficit with the European Union increased by 21.3% to $7.7 billion even though U.S. exports to both regions set records.

The Commerce Department said increased shipments of U.S. autos, consumer goods and oilfield drilling equipment helped to offset declines in sales of civilian aircraft, computers and machine tools.

So far this year, the overall U.S. trade deficit (all trading partners) is running at an annual rate of $722.6, which is slightly below the $765 billion deficit set in 2006, the fifth consecutive record deficit.

Import prices were up 1.3% month-over-month, largely a reflection of imported oil prices.

Additional economic data had U.S. jobless claims falling for a fourth-straight week. The number of U.S. workers filing new jobless benefits fell by 9,000 to 297,000 on a seasonally adjusted basis, the lowest level since January 13.

The U.S. Dollar Index (CEC:DXY), which is a weighted basket of foreign currencies against the dollar, broke above what I see as a key near-term resistance level at 81.98 and with some major counties like the U.S., Britain and the European Union releasing interest rate decisions, I could only imagine some currency trader's were hopping in today's session.

I made some notes in tonight's U.S. Market Watch that may not depict "all asset classes" up on the year.

With so many interpretations bantering about regarding what the dollar is "saying" about the economy (inflation, banking system, Fed policy, etc.) and what gold and silver may be saying about the very same list.

Equities are an asset class, where an index like the AMEX Gold Bugs Index ($HUI.X) may not always depict an asset class like gold as depicted in the U.S. Market Watch by the StreetTracks Gold Trust (NYSE:GLD) $66.00 -2.14%, which is now down 6.2% from its 5/10/06 close of $70.38.

Commodities as a whole, as depicted by the CRB Index (CEC:CRY), where oil prices carry great weight, is also lower.

I wanted to follow up on some comments/analysis I made in Monday evening's Market Wrap regarding the outcome of yesterday's (Wednesday) EIA reports.

It was wild, and very confusing. Even now!

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The jump in crude oil inventory (+5.5 million barrels) was the biggest shock in my opinion. Especially when I saw an increase of 174,000 barrels/day of crude oil into refineries.

In essence, even though refiners were starting to pull more oil into their refineries, and we did see a build of gasoline (+372,000 barrels) for the first time in 13 weeks, its is the build in crude oil stockpiles that "doesn't make sense."

As I review my "fundamental" analysis, I still can't figure out where the oil build comes from. Or at least, where refiners put it.

Look back above at the U.S. Market Watch, and near the bottom, you will see that tonight, I post both the June Unleaded (rb07m), which settles at a new relative high today, and see that daily Net% +4.48%. Then right below it, I post the July Unleaded (rb07n), which was up 2.78% at time of screen capture.

While I'm admittedly confused regarding the EIA crude oil stockpiles build, the action in the June Unleaded contract makes for a short squeeze into its expiration, that I would not want ANY short to be a part of.

And yes, into June's unleaded expiration, a "squeeze" to the upside in unleaded, could be damaging for an EQUITY short in any of the refiners.

As such, even though a double-edged sword, I found myself HOPING for a broader-market equity decline to have refiner Valero Energy (NYSE:VLO) $72.59 -2.07% pulling back to Monday evenings close of $72.48.

In today's Market Monitor, I asked traders that where holding the VLO May $70 Puts (ZPY-QN) to close them out at the then bid of $0.35.

One of my comments this morning was that the developing action in the equity markets was that of PROFIT taking.

When I think, or at least observe what unleaded prices did today, and what a stock like Valero did today, this would be at least one observation where I would have thought VLO surge even higher today. It didn't, and perhaps gave a VLO/refining bear a chance to salvage things, and move to the sidelines.

Whenever I look at a U.S. Market Watch and see "red" across all equity-based indices, and I'm not talking about -0.11%, today's trade has a rather pre-defined, "I'm taking profits regardless today" look to it.

True. Even the recently weak (last 5 days) equity sectors like the $HUI.X, $XNG.X and IXTCX (CSCO down sharply on Wednesday) that didn't have gains to protect over the last week were down today.

The Dow Jones Home Construction Index (DJUSHB), which fell 2.69% today, was up a fraction from last Thursday's close and found selling today. Even after a somewhat "upbeat" NAHB report Wednesday morning that had its Purchases Index rising for a third-straight week to 438.3. This is the highest Purchases

Index reading since 1/17/07 report date (439.7).

Confused?

Me too.

And that isn't necessarily a "bad sign." Remember, May option expiration is next Friday!

The tough thing about option expirations is the potential for some "manipulation" into an expiration.

Does it make sense that even a refiner like VLO would trade lower today, even as unleaded prices move higher? Into next Friday's option expiration, I did check VLO's "Max Pain Theory" tabulation (summation of all May Call/Put open interest) and it is tabulated at $67.50 ($2.50 increments).

If I could offer one bit of advice, and perhaps we saw it today. If you have BULLISH profits, assess them now. Don't be OVERLY long after the recent run up.

And if you're "sideways" in a bearish trade, be ready to seize an opportunity to get things under control on a pullback.

Here's an example ...

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

While I was out of the office during April's expiration, there was a rather impressive "run higher."

The "blue dashed" lines are recognizable to those that have read my commentary in past months. That's the VERY same retracement we were looking at in February, March and April.

The PINK lines are from a mathematically derived "Pivot" algorithm, that institutional computers will use to manage inventory of stocks.

Looking back, sometimes helps to understand what is taking place today, and in the future, we can perhaps see how on Monday 04/16/07 as April expiration week kicked off, a pretty good "squeeze" to the upside took place.

See that PINK 1,451.81? That was April's MONTHLY R1 (resistance 1).

Let's say for the next couple of days, that if I trade the SPX BULLISH right here, then I've got to get above May's MONTHLY R1 (1,514.8) which I've marked as dark purple.

See the "past" and a possible guideline for the future?

What's the potential REWARD? Yes. If using April's action as a possible guide, then 1,547.24 is a target. BUT, SPX has to get above WEEKLY R1.

What about the RISK?

I've marked the SPX's "Max Pain Theory" tabulation as "MP" 1,475. In essence, if we were to tabulate all open interest for options on the SPX.X, that would sum up as 1,475 (5-point increments).

Ok, now watch what I'm going to do now.

Yes, that "old" 02/20/07 52-week high needs to be remarked, with WEDNESDAY's 52-week high right?

However, I wanted to at least leave it there, and show you where the "correction low" came at around 1,369.53.

Market Monitor traders will remember that we came within about $0.10 of getting filled on a NAKED PUT (a bullish option strategy) that very day. The SPX rocket higher from there.

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

Same chart as above, but all I've done now is drag UP the 0% fibonacci to Wednesday's closing high. I leave the 6/13/06 relative low where it was.

MONTHLY Pivot levels don't move. They are the same.

Last night, Keene Little and I chatted briefly in the MM, and even the point and figure charts of the Dow Industrials and the S&P 500 Index (SPX.X), which are pressed against the "top" of Dorsey/Wright's 10-week trading bands, suggested that there was a 50/50 (to me anyway) that it might be time for a pullback.

What faces traders the next 6 days is a situation VERY SIMILAR to last month's expiration.

Remember that most option traders like you and I tend to be a BUYER of call options, therefore, the institutional market makers of those options tend to be SELLERS.

The SELLER of CALL options, especially those that may be NAKED, are feeling some heat, even at today's close.

I might also think that there are some pure shorts at prior 52-week highs, that are eager to cover on any pullback.

Trade SMALLER positions near-term.

Closing Internals


Internals at the advance/decline line was VERY WEAK from the opening tick.

Now go back and look at the S&P 500 Index (SPX.X) bar charts I just showed.

It is as if market participants had their minds made up to sell today, and really, the selling didn't let up (see TRIN and TRINQ) rise.

Not much "new" on the NH/NL, but I sure haven't seen anything overly bullish.

Again, some benchmarks for New Highs on the NYSE is 400 as found on 4/25/07 and New Lows would be the 41 found on 5/01/07.

For the NASDAQ, a New High benchmark would be 202 from 4/25/07 and New Low would be 109 from 5/01/07.

There have been NO upside reversals in either the NYSE Summation Index ($NYSI) 20-point box from StockCharts.com, or the NASDAQ Summation Index ($NASI) 20-point box.

From here, using the S&P 500 as an indicator of a market, a bull sure wouldn't mind seeing SPX above 1,515 and NYSE/NASDQ New Highs above their respective 400/202. A bear sure doesn't want to see it.

A bear wants to see SPX below 1,475 at a minimum, to at least suggest there won't be more pain coming.

A bear can easily see from April that the MONTHLY Pivot (April's was 1,407.94) will have May's MONTHLY Pivot (1,465.59) a place to be alert for institutional buying as inventories were probably deleted again with the new high.

Then check in on the new lows. NYSE benchmark 41 and NASDAQ 109. If the "tail" or weaker stocks aren't hitting new lows, that usually suggests somebody's buying that weakness.
 

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