Option Investor
Market Wrap

Majors Stabilize as Financials Get a Bounce (Part II)

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Stocks recouped the bulk of Friday's losses to start the week, where after Friday's late-afternoon conference call from Bear Stearns (NYSE:BSC) $113.81 +5.03%, which sent markets reeling back lower to their close, it would appear that mortgage finance company Fannie Mae (NYSE:FNM) $62.50 +10.36% asking regulators to raise the maximum amount of home mortgages and related securities it can hold in it investment portfolio, helped calm investors nerves.

Fannie Mae (FNM), which finances roughly 20% of all home loans in the United States, was ordered last year to keep its mortgage holdings at or below a fixed level, now under $727 billion, after a multibillion-dollar accounting scandal in September 2004.

And while today's Market Wrap title and first paragraph may read very SIMILAR to that from last Monday, it has become rather apparent that market participants are focused on the "same story," with a varying "cast of characters" sending the financials and major market averages higher and lower faster than a mortgage lender can quote you a rate on a 30-year fixed-rate mortgage!

Even as I review today's NYSE and NASDAQ new high and new low ratios in the above table, they look strikingly similar to last Monday's NYSE 5-day NH/NL ratio of 9.1% and NASDAQ's 5-day NH/NL ratio of 19.3%.

In essence, over the past 5-days, bullish leadership remains very anemic, but appears to be trying to "firm" from a very oversold measure.

Intermediate-term leadership (20-day NH/NL ratio) continues to deteriorate as investors/traders sell their losers, or those stocks that have become disappointments versus price levels found more than a year-ago.

Closing U.S. Market Watch -

I haven't checked all of the indexes in my U.S. Market Watch, but for the most part, the S&P Banks Index (BIX.X) 361.90 +6.29% grabbed today's top spot among sector winners. I do know that money-center, or more super-regional KBW Bank Index (BKX.X) 107.30 finished up 5.46 points, or +5.36% from Friday's close of 101.84.

On Friday, both the BIX.X and BKX.X were the only two equity-based indexes in my U.S. Market Watch to CLOSE at new 52-week lows.

Both rallied strong today, and the major indexes responded.

Yes, even the NASDAQ-100 Index (NDX.X) 1,954.37 +1.86% and its tracker QQQQ $47.97 +1.15%, neither containing as single bank, broker, or insurer.

Oil, unleaded and heating oil futures were notably weak today. Last week I was alerting traders in the OptionInvestor.com Market Monitor that the U.S. Oil Fund (USO) $54.20 -2.24% was nearing, then achieving its point and figure chart bullish vertical count of $59.00 on Wednesday, right as the EIA released its weekly crude oil inventory data that showed a "surprising" draw of 6.49 million barrels. A draw that was much greater than some of the higher estimates of 2 million barrels.


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Today's weakness in oil gives some reversing LOWER point and figure sell signals for this energy commodity and is near-term bearish in my opinion. The September contract traded as if it was VERY SHORT the last couple of weeks, and it would not surprise me to see it settle around $75 going into its expiration.

However, the October, November and December contracts, which do begin to "look beyond" the summer driving season, and hurricane season (usually end of September) would suggest to me that oil prices either stabilize, or trade lower to the end of the year.

On Friday, Colorado State University "cut" its 2007 hurricane forecast. On April 3rd, CSU's initial forecast was for 17 named storms, 9 hurricanes and 5 intense. On Friday, CSU's revised forecast was for 15 named storms (-2), 8 hurricanes (-1) and 4 intense (-1). CSU did say that the hurricane season will likely be "much more active" than the 50-year average.

While many traders and investors will be focused on tomorrow's FOMC statement on interest rates, and language from the Fed, I would have to think that there may be just as many traders and investors focused on what regulators have to say to Fannie Mae's (FNM) request to increase their purchases of existing mortgages.

While it would be my opinion that the Fed could ease some concerns regarding the current illiquidity in the credit markets with words that it is seeing less of an inflationary threat, which would further signal that it remains on "hold" with its fed funds rate at 5.25%, the response from regulators, specifically the Office of Federal Housing Enterprise Oversight to Fannie Mae's request may become equally as important.

Having followed Fed commentary rather closely the past several years, any RATE CUT message could send the "wrong message" to market participants. In recent weeks, Fed commentary has been that the current weakness in the housing market, and credit market, has NOT shown up as WEAKENING the U.S. economy.

Should the FOMC actually CUT RATES tomorrow, or give "too strong" a statement regarding a potential near-term rate cut, that could further spook investors that developments in the housing sector are MUCH GREATER, or WORRISOME than initially thought.

If we think Friday's comments out of the Bear Stearns (BSC) conference call that the "housing bubble" is looking similar to the "internet bubble" helped stocks reverse gains, then I'd have to argue that a rate cut, or overly worrisome comments from the FOMC could be viewed similarly.

That is not to say that market participants don't want the TRUTH from the Fed, which I feel we've gotten over the many years, but a sudden, or DRASTIC change in "Fed speak," or monetary policy would do little to calm investor jitters.

Pacholder High Yield (PHF) - Daily Intervals

At this time, the "best I can do" to display a market's view of the HIGHER RISK bond market, is to continue to follow the Pacholder High Yield (PHF) $8.97 -1.84% that is in my U.S. Market Watch.

On Thursday, August 2nd, PHF updated its net asset value for that day as $9.50.

One reason I do believe that today's TOP STORY may well have been Fannie Mae (FNM) news would also go back several months to Treasury Secretary Paulson's words of caution to U.S. regulators regarding the potential "over regulation" of mortgage lending markets.

While the Federal Reserve can create some "liquidity" to the credit markets by cutting rates, we may now begin to see how regulators "capping" Fannie Mae's ability to buy, or generate loans has also added to the illiquidity of the mortgage markets.

That's not to say that regulator oversight, or closely monitoring what Fannie Mae is doing is WRONG, but sometimes, trying to "help" things, only makes things worse.

What I'm saying, or thinking here is that while the Office of Federal Housing Enterprise Oversight may indeed be trying to "help" oversee what Fannie Mae (FNM) is doing, that oversight may well be "hurting" some liquidity to the mortgage lending market that is currently needed.

In today's Market Monitor at OptionInvestor.com, Jane Fox noted something rather interesting, and informative.

Just prior to the cash market open at 09:30 AM EDT, she noted an announcement from Interactive Brokers regarding margin requirements for S&P futures (ES).

Note: Effective Monday 6 August, 2007, and until further notice, there will be a significant change in the intraday margins for most stock and index futures and futures options. Specifically, the intraday margin will be set to cover a price move of 4% in the instrument, but will not exceed the regular maintenance margin. By example, a 4% move in the ES futures would require intraday margin of 4% * 1450 price * 50 multiplier = $2900 USD. The regular intraday margin is $1400 USD and the regular overnight maintenance margin is $2800 USD so for ES the intraday margin would be the same as the overnight. PLEASE NOTE THAT THE ONLY MARGINS AFFECTED BY THIS POLICY CHANGE ARE INTRADAY (REDUCED) MARGINS ON EQUITY-LINKED FUTURES AND FUTURES OPTIONS.(End Note)

The main takeaway from what Interactive Brokers is doing, or "adjusting to" until further notice, is that they are trying to accommodate EXTREME market fluctuations on an intra-day basis.

For those that have been trading some of my Dow futures (YM) signals in the Market Monitor, you KNOW how quickly they've moved in just the span of 15-minutes!

Today, was really no exception!

Global Equity Benchmarks / Currencies

In last Monday's Market Wrap, I showed the same table above. All I'm doing here is "testing" my U.S. index analysis that BIG and NARROW is stronger than SMALL and BROAD.

Like a point and figure chart, the week-to-week comparison may remove some of the hour-to-hour and day-to-day volatility.

Yes, today's 286-point gain for the Dow Industrials (INDU) does have the NARROWEST and BIG caps relatively stronger than the other major U.S. indexes that we might trade.

We still see the SMALL caps, which is also rather BROAD (2,000 stocks) under performing.

While the S&P 500 (SPX) components are considered LARGE, it is rather BROAD (500 stocks) and its narrower brethren S&P 100 (OEX) 683.66 +2.43%, though down -0.21% since last Monday's close, should be viewed as "stronger" than a -0.42% decline in the SPX.

Very small difference week-to-week I agree.

Look at the Asian markets.

On Monday, the Hang Seng fell 601.71 points, or 2.67% to close at 21,936.73. Hardly a China "melt down" at this point.

Japan's Nikkei-225 fell just 65 points, or -0.39% on Monday, but remains a laggard for Asian equity index benchmarks.

European equity benchmarks still seem to "lead" weakness, or "lag" gains/bounces found here in the U.S.

What the above table suggests to me is that traders are rather focused on the "credit crunch" found here in the U.S. right now.

Russell 2000 ($RUT.X) - Daily Intervals

In last Monday's Market Wrap, we looked at the WEAKEST $RUT.X with only the "dark purple" retracement on the chart. Some of last week's Market Monitor commentary had me placing a "blue" retracement from the recent 03/05/07 low close to 7/13/07 high close on the RUT.X chart.

The ability of the RUT.X to muster a close back above 760.06 and 763.86 certainly suggests to me that short-covering, if not some bottom fishing bulls were doing some buying in an "oversold" index.

From a BEAR's perspective, I would place MINIMUM risk to
778.34-785.55 at this point and would strongly suggest bearish profits be protected.

Keep an eye on your "junk bond" indicator(s). Just observe a couple of days stability. Weakness tends to get SOLD first, and this is the weakest index in my opinion.

S&P 500 Bullish % (BPSPX) - 2% box chart

And here we, or "they" are. The S&P 500 Bullish % (BPSPX) from Dorsey/Wright and Associates is at the SAME LEVELS of RISK and internal weakness/strength as it has been several times before.

My "period of similarity" has been May (5), June (6) and July (7) of 2006.

Will history repeat? Will BUYERS (demand X) once again be able to outstrip SELLERS (supply O) and we begin to see point and figure charts of the stocks comprising the S&P 500 start to see reversing higher point and figure buy signals?

S&P 500 Index (SPX) - 10-point box

In last Monday's Market Wrap I began outlining a period of SIMILARITY in the SPX to that found in May, June and July of last year.

So far, I'd have to say INTERNALS (BPSPX) and the SPX itself look rather SIMILAR.

Today's trade at 1,427.37 did have the SPX chart falling to 1,430.

That's SIMILAR to last summer when the SPX fell to 1,220.

We can't chart today's trade at 1,460 at this point (blue ?), but that might be envisioned as the SPX at about 1,250 in late June of last year (prior to 7).

This can be one of those "when in doubt get out" moments for bears, and bulls are now looking for SIMILARITY to the past, in order to get long.

Easy does it, and you don't need to do it all at once!

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