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It was another high volatility day. Had you looked at the futures at around 8:30 AM EST and then went off to work the close would have been a huge surprise. There were only a couple sectors that gained ground in todays session. Can you guess which? Energy is the obvious choice today. However, the energy sector wasnt up as much as you might think. The $XOI was up about 1%. We will cover the different sectors later. The Agricultural sector also moved higher today with stocks like MON and MOS advancing aggressively into the close. So far the go away in May adage has been correct.

The above chart shows the four main indices year to date (YTD) returns. The $SPX is leading the losers at down 9.045% with the Dow Jones Industrials ($INDU) down a close second at 8.904%. The technology related sectors are holding up much better. The Russell 2000 ($RUT) is down 6.264% while the Nasdaq 100 ($NDX) is down 7.7% YTD.

Not all of todays internals show that we had a distribution day. For instance, the ARMs index or $TRIN closed at 1.15. The TRIN first measures the ratio of the NYSE advancing issues versus declining issues. Then it calculates the ratio of the advancing/declining volume. Finally, the TRIN equals the NYSE advance/decline ratio divided by the advance/decline volume ratio.

The basic raw calculation is as follows:

Advancing Stocks/Declining Stocks
--------------------------------------------
Advancing Volume/Declining Volume

Extreme oversold levels are usually evident when the $TRIN readings exceed 1.5. The other NYSE internals such as the volume showed that we had another distribution day. How do we determine a distribution day? The market has to decline with greater volume from the previous day. There were a total of 1,710 million shares trades at the NYSE today while the 50 day average volume is 1,570 million. The number of advancing issues totaled 563. While the number of declining issues was 2642. That is a 5 to 1 ratio and is very extreme. With the Advance/Decline ratio that low I am surprised that the $TRIN wasnt higher. Lets travel to midtown from downtown to see what the Nasdaq did. The $TRINQ, however, did exceed 1.5 with a close of 2.12. The Nasdaq has been in a free fall as it is trying to catch up to the $SPX and $INDU YTD returns. While we are on the Nasdaq, it did post a distribution day. Todays volume, at 2086 million shares, was slightly above the 50 day average daily volume (2083 million shares). Keeping with the Nasdaq the number of advancing issues fell to 713 and the number of declining issues totaled 2206 for a 3 to 1 ratio of decliners.

Todays Notable News

Four Fed officials took to the podium today to divulge their latest take on the battered economy. St. Louis Fed President James Bullard said inflation is becoming a more pressing concern, while financial market turmoil is waning. The Fed continued to hint it is likely done cutting rates, and its next move will be an increase. Specifically, Fed Reserve Vice Chairman Kohn said anchoring inflation expectations "is critical" and that the gain in oil prices is raising consumer inflation expectations. Fed funds futures suggest a 14% chance the Fed will raise rates by 25 basis points on June 25, and an 86% chance that the Fed will leave the rates unchanged at 2.00%. The Fed's Beige book results were released at 2:00 PM. The book contains economic information from the various Fed districts. The book said consumer spending slowed in March. Five regions reported stable economies, while seven reported softer or sluggish growth. There has been "tighter credit standards" for most loan types. The book reports moderate or limited wage growth.

Crude extended its gains today to close at 136.50. Prior to the crude inventories oil was trading at 135.26 per barrel. Crude inventories for the week ending June 6 fell by 4.6 million barrels. The estimate was only for a decrease of 1.5 million barrels. Oil drillers are advancing while the refiners are declining due to profit margin concerns. Oil isnt the only sector to blame for todays plummet. Financials were dragging the markets down on fears that Lehman Brothers (LEH) will report further write downs. About 96% of the stocks within the financial sector declined today.

Some good news came from the following stocks: MOS, CAT, and CME.

CME Group announced this morning that it reached the second-highest day of volume trading yesterday with 1,264,086 futures and options on futures contracts traded, only surpassed on December 8, 2006, when 1,268,883 contracts were traded. In addition, a new record in the notional value of its FX futures and options on futures contracts was established yesterday, when futures and options contracts worth $168.4 billion were traded. The previous notional value record was traded on March 31, 2008, when futures and options on futures contracts worth $167.9 billion were traded -- a total of 1,217,674 contracts.

Caterpillar is raising its quarterly dividend by $0.06 to $0.42. CAT closed down $1.17.

Mosaic (MOS) and other agricultural stocks surged today after Canadian company Agrium (AGU) increased its second quarter earnings guidance by more than 35%. Monsanto also had its 2008 and 2009 earnings estimates raised at UBS.

If you are a commodities trader, you should know that Commodities as a whole spiked up 2.7%, with grains gaining 5.5%. Wet weather and flooding is expected to decrease crop yields. Specifically, July Corn futures closed up 35 at 708, Soybeans closed up 70 at 1516 and Sugar bounced up 0.81 to 10.65. July Wheat also bounced strongly breaking above the 50 day moving average. If you arent a commodities trader and would like to be exposed to these markets you can buy a few exchange traded funds (ETF) and exchange traded notes (ETN). ETFs that provide upside exposure to agricultural include Market Vectors (MOO) and the Powershares (DBA). Barclays, the provider of iShares, has a variety of ETNs that gain implied exposure to the commodities. However, there isnt much data on whether or not the ETFs and ETNs actually use futures contracts or how much leverage they use.

The S&P 500

The S&P 500 has declined over 100 points since the intraday high of 1440 reached on 5/21/08. Not only has the index broken the uptrend line, it has broken the 50% retracement line (shown above). We are looking at the Fibonacci levels from the March low to the May high, a 185 point range). With the 5 bar RSI back below 30, the oversold barrier, the index is approaching an extreme oversold level to bounce from. A popular trade is to take a long position near the 50 percent Fibonacci level (50% isnt actually a Fib number) and use the 61.8% level as a floor that provides some risk management. The next Fibonacci level is another 8 points lower at 1327. Should the market hold here it could bounce up to 1370 or the 38.20% Fibonacci level. The most recent support level was from the June 3rd low at 1370. That is a coincidence. Since that support level was broken it is now resistance. Old support is new resistance. Another coincidence is that the next support line is at 1324 from the April 15th low. The Bollinger Bands are expanding which indicates the increasing volatility of the index. As the bands expand it provides a greater range for the stock to trade in. The lower band is declining faster than the upper band is increasing. But the upper band doesnt usually increase that much during declining markets. If the move down is sustained the upper Bollinger band will begin to decline. The $SPX closed (1335) above the Lower Bollinger Band (1333). Often times when the price closes outside the bands it represents extreme levels and provides a contrary move the next day. However, the move might not be sustained.

The Slow Stochastic is also oversold at 10.83 and beginning to slow its decline. A re emergence of the indicator above 20 is considered a strong confirmation to buy. Last week I wrote that since the 50 day exponential and simple moving average couldnt be broken and closed above the 89 day Moving Average (Grey line) was the next support level to be tested. I was right about that. As mentioned earlier, the next price support is at 1324 from the price support and also at 1327 from the Fibonacci numbers. We need to watch to make sure these levels arent broken because there isnt much support until the March lows. With the weakening economy and the Fed out of ammunition the market may be left to peril this summer.

The Nasdaq 100 ($NDX)

The $NDX has been in catch up mode this week. While the $SPX failed to retest its May 21st highs the $NDX broke its previous high last Thursday and ended at the high. The move was an exhausted move because the $NDX gapped down the next day and has continued down since. The index has declined over 130 points to 1924. The next level of support after the 200 day Exponential Moving Average (pink line below) is from the Fibonacci level and not a price support.

Since early May, the 200 day Simple Moving Average (SMA) has served as the primary support for the $NDX. While it traded below the 200 day, not until today did the index close below the 200 day SMA. In one fellow swoop the $NDX broke and closed below the 200 SMA (Red line), the 50 SMA (Blue Line) and SMA (Orange Line). The $NDX did, however, close just above the 200 day Exponential Moving Average at 1919 or 5 points lower. I have a feeling that the market may open higher and then fail back to the 200 EMA. Why? The market closed at its absolute low just as it closed at its absolute high last Thursday.

The above chart is of the daily Nasdaq over the past three or so months. On this chart we are viewing the Bollinger bands, RSI and the 8 and 21 day Exponential Moving Averages. The 38.2% level (1908) may serve as both a magnet for the index to test as well as a decent support level. It would be coincidental if this level served as support while the 200 day EMA was being violated intraday. One other note of support comes from the 4/30 low at 1912. Sometimes slight discrepancies in the coincidence indicators allow for traders to establish longs just below one because the average trader will be selling, stopped and/or shorting at a break of the extreme (200 day EMA). Should the 1907 level be broken there is support again at the 50% retracement and also coincidentally at the April 22nd low of 1867 and the 89 day SMA. I realize these numbers are exact but when is anything in the market. There is a huge gap at 1849 that may need to be filled and therefore may act as a huge black hole for this market. Today the 8 day EMA closed below the 21 day EMA. I look at the short term charts for confirmation and the long term charts for support and resistance levels. Many times the market bounces after the initial moving average cross over. The 5 bar RSI is below 30 at 23.72 and is in oversold territory. The Bollinger bands on the $NDX are similar to that of the $SPXs mentioned earlier. Basically the markets are in an oversold state with some support near by. Should these levels be broken, there is a lot of room to decline.

Open Interest

I also write the Contrarian each Wednesday and we went to a Negative (short) bias last week and a Neutral bias two weeks ago. As a contrarian I also like to look at Open Interest levels of the major indices. I mainly watch the $SPX and the $NDX but will occasionally monitor the $RUT (Russell 2000) and the $OEX (S&P 100). Personally I like to trade the $SPX up to Thursday and the $OEX for Friday weekly expiration. The $SPX and $OEX ($XEO = European expiration) are the only index options that offer weekly expirations. When viewing the Open Interest, I tend to look at the front month option until the last week when many hedgers, institutional and commercial traders roll out to the next expiration.

The NDX support is achieved through the peak PUT open interest. At the close today the $NDX was at 1924. The next level of peak support isnt until 1850. However, there is some open interest at 1900. The market really broke the highest level of open interest at the 2000 strike. On the CALL side the open interest represents resistance. The peak there is simply the 2000 strike. In last weeks Thursday newsletter I wrote that the 2000 level would become a magnet for the $NDX to trade to as we approach expiration. So far the magnet was too strong and pulled the $NDX way below the floor. Perhaps a bounce will make me right by next Thursdays close.

There are a lot more strike prices on the $SPX to monitor than the $NDX. However, on the CALLs there peak resistance at 1350 with 145000 contracts open. The closest strike for the PUTS is also the 1350 strike with 198000 contracts open. The next lower level of peak open interest is at 1325 followed by 1300. The absolute peak level of resistance for the SPX is really at the 1400 strike. Major century marks are often levels of peak open interest.

I dont trade any of these but if you do, here is some EPS data.

Tomorrow is chalk full of economic data that can move the markets. Initial Claims and Retail sales probably have the greatest influence for tomorrows early action. Friday has the May CPI and Michigan Sentiment for June. The NAZ Futures are up over 8 points as I write and the SPOOZ are up 2.5. Fair value for the S&P is 1335.25 and 1925 for the Nasdaq.

As always I had fun writing and I hope you have a profitable day tomorrow.
 

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