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Market Wrap

Stocks Post Modest Gains As Rocco and Tiger Go Extra Round

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Stocks posted modest gains to start the week as traders were either more occupied with this year's sudden death round of the U.S. Open golf championship between sentimental favorite Rocco Mediate and the world's #1 ranked golfer Tiger Woods, or traders expended all their energy last week ahead of this Friday's Triple Witch expiration as volumes were notably less than last week's 4.49 billion share average daily volume at the big board and 2.14 billion share average churn the NASDAQ.

For those of you that taped today's sudden death round of the U.S. Open, don't worry, I will not reveal today's winner in tonight's Market Wrap.

Oil prices jolted higher ahead of this morning's cash open and helped set a broader negative tone for stocks in early session trade as July crude oil futures (cl08n) jumped to a session high $139.89 just prior to 09:00 AM EDT, but then retreated as traders and investors mulled the effects of an overnight fire at a StatoilHydro (NYSE:STO) $38.46 +3.08% drilling rig in the North Sea, which could affect as much as 150,000 barrels of daily oil production, and this weekend's announcement out of Saudi Arabia that it would boost oil output by 200,000 barrels a day from June to July.

By session's end, July crude oil futures at the Nymex settled down $0.25, or -0.19% at $134.61, with this contract expiring on Friday.

After breaking below what I have been viewing as a key level of support (1.5392) on Friday, the euro did strengthen back some today, settling at 1.5476 +0.64% versus the dollar.

It has been my thoughts that the weakness in the dollar versus the euro has been partially responsible for the remarkable gains in oil prices. With some "softening" in the euro, I don't see how market participants can continue to blame any further strength in oil on monetary policy, should weakness in the euro versus the dollar continue.

U.S. Market Watch -

Financials were once again in focus with Lehman Brothers (NYSE:LEH) $27.20 +5.38% reporting a previously forecasted loss. The broker reported its first-ever quarterly loss of $2.8 billion, or $-5.14 per share. Revenue (total revenue less interest expense) for the recently completed Q2 was negative at $-700 million. Some analysts took solace in the firm's 20% reduced exposure to residential mortgages, commercial mortgages and real estate investments during the quarter.

The Financial SPDRs (XLF) $23.60 +0.94% edged higher by $0.22 and were the third-most heavily traded security, turning just more than 124 million shares.

U.S. homebuilder's confidence was about as robust as Lehman's in June.

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The National Association of Home Builders said its index for sales of new, single-family homes fell to just 18 in June, matching a record low set in December 2007. The index, which was 19 in May, gauges builder's perceptions of current home sales as well as sales expectations for the next six months. Readings above 50.00 indicate that more builders view sales conditions as good, while measures below 50 suggest builders see poor sales conditions persisting.

While the NAHB's survey of home builders was very negative, last week's rebound in the seasonally adjusted purchases index from the Mortgage Banker's Association (MBA) will be in the spotlight Wednesday morning.

MBA's Weekly Survey of Purchases - Week Ended 06/06/08

While sentiment among new homebuilders is negative, I would at least want to note that last Wednesday's release of the Mortgage Bankers Association (MBA) purchases index rebounded, with the MBA saying there were some signs that depressed prices may have started to find some speculators re-entering the market.

Having plunged to 333.6 for the week ended 05/30/08, the seasonally adjusted purchase index edged up 8.4% last week.

In the above table, and over to the far right, I've been calculating the 4-week SMA (simple moving average) and 12-week SMA (roughly 1 quarter).

Economic data released today showed manufacturing activity in New York State remained weak. The Empire State Manufacturing Survey fell 5 points to a negative 8.7 in June, which was weaker than economists' forecast of -2.0 and May's -3.2 measure. Readings above 0.00 suggest growth, while measurements below 0.00 suggest slowing.

Of the 200 manufacturing executives polled, roughly 30% of responding businesses reported conditions had deteriorated since May, while 21% said conditions had improved.

This weekend I had been asked by subscribers to post some of the major index/tracker "Max Pain Theory" levels. At tonight's close, the current tabulations when all June call and put open interest is combined would equate to the following.

June "Max Pain Theory" Tabulations - at 06/16/08 Close

The Dow Diamonds (DIA) $122.66 -0.35% and the Financial SPDRs (XLF) $23.60 +0.94% currently reside BELOW their June'08 Max Pain theory levels. The SPY $136.23 +0.05%, IWM $73.78 +0.62% and USO $108.99 -0.19% currently reside ABOVE their June'08 Max Pain theory levels. Give or take several cents, the QQQQ $48.80 +0.88% and SMH $32.00 +0.72% currently trade near, or at their June Max Pain theory levels.

While traders should NOT rely on securities "gravitating," or "elevating" towards the Max Pain theory levels, this is a QUARTERLY expiration and levels can me more influential and create greater gyrations as institutional traders, especially options market makers attempt to push things around and keep as much of the premiums they've sold as possible.

While today's U.S. Open sudden death round was exciting, last week's heavy volume certainly suggests institutions were active in their pre option expiration activity and if you thought Tiger's birdie on the 18th hole Sunday was unbelievable, which forced today's playoff, traders should always be aware that similar excitement and turning of events can take place into Friday's expiration.

U.S. Oil Fund (USO) - $0.50 box chart

Oil prices as depicted by the U.S. Oil Fund (USO) could be a major driver into Friday's expiration. Not only do USO options expire this week, but July crude oil futures (cl08n) also expire at Friday's close.

A break ABOVE $113.00 in the USO could bring another HUGE wave of buying into oil and weigh on the major indices, while a break below $116.00 in the USO, which happens to be this month's "Max Pain" theory could trigger a substantial decline.

Open interest in the July crude oil futures (cl08n) is heavy at 172,409 contracts and today's volume was brisk at 273,792 contracts!

If there's going to be a pivotal technical event to drive markets this week, I have to think its oil's price.

Like a 4-foot put to win the U.S. Open, great pressure continues to build around oil's price.

Euro CurrencyShares (FXE) - Daily Intervals

On Friday (06/13/08) the euro looked set to break down against the dollar, but the euro rebounded today.

I have NO clue as to "why" oil shorts didn't get their heads handed to them today, other than the euro looking a bit suspect to softening.

It is a tough call here as support looks horizontal at $154.00, but the lower highs despite oil's strength has a near-term bearish look to it.

If sellers come in strong below Friday's low (FXE= $153.40), then some hedge funds that have been long oil and long the euro could relinquish their hold.

The reason I feel pressure here is that I had profiled NAKED calls against the FXE, but on June 5th, I feared the FXE could surge above trend (as it did on June 6th), and should it break much above $158, traders could get caught in another short squeeze similar to that in late February (see 02/26/08 move).

Despite some very hawkish comments out of ECB officials, the euro's strength has been "kept in check."

In my opinion, the yen has weakened enough against the dollar at this point to alleviate fears among Japanese investors that their economy would crater under dollar weakness.

I think greater focus will be placed on the eur/$ and its impact, if any, on oil for the next couple of weeks.

DIA and SPY Montage - Daily Intervals

Little change in the DIA, or SPY from last Monday's market wrap at tonight's close, but buyers defended where they had to in the DIA on Wednesday (06/11/08).

On Tuesday morning as the DIA was trading $123.36, I did think conservative bulls should be looking to trade long the DIA Aug $123 Calls (DAW-HS) at $4.50/contract. As stated in last Monday's market wrap, I'm looking to hold this call option as long as the DIA can hold a CLOSE above $120.75.

IWM and QQQQ Montage - Daily Intervals

Both the very broad small caps of the iShares Russell 2000 (IWM) $73.78 +0.62% and the narrower, but larger cap names at the NASDAQ as depicted by the NASDAQ-100 Tracker (QQQQ) $48.80 +0.88% remain steady.

Shares of QQQQ/NDX component Adobe Systems (ADBE) $42.85 +0.32% slipped to $41.85 in this evening extended session after the software-maker said net income rose to $214.9 million, or $0.40 a share, amid strong sales overseas. Excluding stock-based compensation and acquisition charges, the company said EPS were $0.50. Revenue rose 19% year-over-year to $886.9 million. Analysts were looking for the company to earn $0.46/share on revenue of $880.01 million.
 

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