Option Investor
Market Wrap

On the Inside

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Do you know what Murphys Law is? Basically it is expecting one thing and getting the opposite. Last week I noted that it seemed as though the market always declines on the days I write the Market Wrap. Its a good thing I didnt trade that coincidence because the while the S&P 500, Russell 2000 and NASDAQ all moved up decent the Dow Jones Industrials barely scraped out 5 points. It was a busy news day so I will get right to the content of what I think made the markets move up today and what we might see tomorrow.

The internal review of the New York Stock Exchange begins with todays volume (1698 million) advancing above the 50 day average volume (1598 million shares). The increase in the volume over yesterday and above the 50 day average along with the increase in the NYSE (Symbol: $NYA) marks today as an accumulation day. Advancing Issues (2199) outpaced the Declining Issues (977) at a 2:1 ratio. The $TRIN or Arms Index at 0.99 was non-indicative of any direction. As for the NASDAQ internals, the Composite advanced 32.98 or 1.39% while my preferred NASDAQ Index, the NASDAQ 100 (NDX) moved up 30.12 or 1.58%. Strangely, there werent that many more Advancing Issues (1851) than Declining Issues (1051). The ratio isnt even 2:1. As for the Volume readings today posted 2133 million shares on the Composite which is barely above the 50 day moving average at 2078 million. Todays volume came in less than yesterdays and right in line with the average. Therefore it isnt enough to classify today as an accumulation day.

Market Movers

The 5 minute chart of the S&P Futures

The quick recap of today is that the market (S&P 500) started up and remained up until the last hour. The ES gapped up 4 points and ran to a peak of 1337.75 or up 22 at 3:00 PM and then proceeded to give most of the gains back by the close. If you hadnt heard the Federal Reserve met yesterday and today to discuss the current and future outlook of the Economy. As you probably know the Fed is concerned with inflation and has very little arsenal to curb the current causes. Those causes are namely energy and food related. The announcement had little downside affect and actually helped spur the advancement to the highs. This amount of volatility is normal on Fed days.

The Fed said overall economic activity continues to expand, partially due to "firming" in household spending. However, the Fed noted that labor markets have softened and financial markets remain under stress. The Fed expects economic growth will face the burdens of tight credit conditions, housing contraction and the rise in energy prices.


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The statement says that uncertainty over the inflation outlook remains high, although it expects inflation to "moderate later this year and next year." The FOMC feels that downside economic risks have somewhat diminished, while inflation risks have increased.

The Fed is likely to keep rates steady for quite a while, as economic growth will remain moderate at best for at least a few more meetings. Credit market conditions are also likely to remain fragile. These factors will inhibit any rate hikes. Addressing any increase in inflation will not come immediately, particularly as the Fed expects inflation to moderate next year.

Dallas Fed President Fisher was the only dissenting vote and preferring a rate increase of 25 basis points. Fisher dissented against previous rate cuts, citing inflation concerns. The Fed believes that they will eventually need to raise the Fed Funds rate from 2% in order to reduce the upside risks of inflation. Their conundrum comes from a tough jobs market and remaining risks in the financial sectors. The difficult part is that rates need to increase to help the fledgling dollar which would also help with the costs of commodities.

Other notable news came from Boeing (Symbol: BA) being added to the Conviction Sell list at Goldman Sachs. The sell rating is being attributed to a weakening economy and record fuel prices. BA closed down 5.39 or 7.21% at $69.64.

Other notable news is out on MasterCard (Symbol: MA) citing that they will be paying American Express (AXP) $1.8 billion after settling an antitrust suit claiming that MA had illegally blocked AXP from the U.S. bank-issued card business. MasterCard announced it has reached an agreement to settle its outstanding litigation with AXP. The form of the agreement calls for 12 quarterly payments by MA, beginning in the third quarter of 2008, of $150 million, contingent upon the performance of AXP's U.S. Global Network Services business. On a tax-affected net present value basis, the settlement payments are estimated to be, in the aggregate, approximately $1 billion. MA will take a charge for the settlement in the current quarter. The maximum nominal amount of the settlement is $1.8 billion. The stock closed up $7.72 at $289.79.

Monsanto (Symbol: MON) reported its earning pre open with Reports of 3rd Quarter earnings of $1.45 per share, $0.11 better than the First Call consensus of $1.34. The revenues rose 26.2% year/year to $3.59 billion versus the $3.71 billion consensus. MON raised its guidance for FY08 and estimates EPS of $3.40 vs. $3.39 consensus; which is up from $3.15-3.25. Monsanto now expects that its free cash flow for fiscal year 2008 will be $550 million. The co expects net cash provided by operating activities to be in the range of $2.6 billion. MON closed down $3.50 at $131.52 after hitting an intra day low of $126.31. The interesting thing about the dip today is that the stock opened at $131.75 or about the close. The stock also went down on volume three times the average and touched the 50 day exponential and simple moving averages. Obviously the upside momentum is faltering in the agricultural space. If the agricultural and energy stocks begin to turn over what sectors will benefit from the rotation?

In other headlines, Best Buy announced today that it is increasing its dividend 8% to $0.14 per share. Also, Countrywide stockholders approve transaction with Bank of America; merger is expected to close on July 1, 2008.

After the close Oracle (Symbol: ORCL) reported 4th quarter earnings of $0.47 per share, excluding non-recurring items. That is $0.03 better than the First Call consensus of $0.44. Revenues rose 23.8% year/year to $7.28 billion versus the $6.85 billion consensus. "Non-GAAP operating margins were up 200 basis points in FY08 to a record 43.0%. Non-GAAP earnings per share were up 29% for the year and non-GAAP EPS has tripled over the last five years. Oracle has delivered solid results year-after-year." "Oracle's application new software license revenues grew 38% in FY08, while SAP's new software license revenues grew only 13% in their most recent fiscal year. This is the third consecutive year we've taken applications market share from SAP." "Four years ago we publicly announced a five year plan to deliver non-GAAP earnings per share at a compound annual growth rate of 20%. During the past four years we exceeded our plan and delivered a non-GAAP EPS CAGR of over 26%." ORCL is down in after hours trading.

Research in Motion (Symbol: RIMM) 1st Quarter earnings of $0.84 per share were $0.01 worse than the First Call consensus of $0.85. Also revenues rose 19.1% year/year to $2.24 billion versus the $2.27 billion consensus. RIMM issued mixed guidance for the 2nd Quarter with EPS estimates of $0.84-0.89 versus $0.90 consensus and Revenues of $2.55-2.65 billion versus $2.44 billion consensus. RIMM Q1 (May) net Blackberry subscriber additions 2.3 mln vs. guidance of 2.20 mln. The revenue breakdown for the quarter was approximately 82% for devices, 13% for service, 3% for software and 2% for other revenue. "We are pleased to report another record quarter with revenue increasing 107% as the popularity of the BlackBerry platform continued to spread in business, government and consumer segments. Our comprehensive technology and business strategies continue to reap strong results in the market and RIMM is well positioned to build on its momentum throughout the remainder of fiscal 2009... As we prepare this summer to ship our 40 millionth BlackBerry smartphone, we continue to steadily scale our business and partnerships to support the opportunities ahead in this thriving sector." RIMM is down $9.50 in after hours trading at $131.


Crude oil dipped down significantly after the weekly inventory reports surprised the market with an increase of 880,000 barrels versus an expected shortfall of 1.2 million barrels. At one point oil was down over five points and touched the 21 day EMA (green line). I may be wrong, but oil looks like it is running out of gas. Thats funny, right? A break of 131 will put the commodity down to 126 or the 50 day moving average. After that the June low of 121 will come into play. I have my fingers crossed.

The S&P 500

The above chart is the Daily chart of the S&P 500 as shown with various moving averages. I use a combination of simple and exponential moving averages to provide a more diversified perspective of multiple technical views. Some people use the simple moving averages and some use the exponential. If there is support or resistance at roughly the same price then there are that many more traders buying or selling, respectively, at those levels. Yesterday the SPX dropped to a low of 1304 before running up. While the market was actually positive yesterday it failed to close up on the day. Today was similar in that it closed down substantially from its lows. The Slow Stochastic oscillator has re emerged from below 20 as well as crossing above its own 3 bar moving average. This is actually a good long signal. Couple the Stochastic buy signal with the bottoming attempt over the last two days and the rest of the week should provide a nice bounce up to the resistance provided at the downtrend line depicted on the graph. If we had a stellar day tomorrow, that level would be as high as 1360. However, the market needs to clear a path above todays high before it attempts any move that aggressive.

Also re emerging the RSI closed today at 35.31, which is slightly above the oversold level of 30. The Fibonacci level (76.4%) at 1300 was the last level of support or else the market pattern would have continued downward. The sell off isnt over until the market can close above the 21 day moving average (green line). Actually, the decline below the 61.8% Fibonacci level is usually very bearish and may cause a lot of technical damage to the over chart pattern. It will take a remarkable event to help the market make it past the resistance of the downtrend line and the 21 day EMA. As the chart shows the markets price has ridden down the lower Bollinger band while the upper Bollinger band has declined very little.

The NASDAQ 100 (NDX)

The grey line on the chart above represents the 89 day simple moving average. While the market didnt actually touch it the relatively close proximity of the price to the line followed by a quick bounce provides some confirmation of support. The NDX was up over 40 points at its high today. As mentioned earlier it closed strong up 30 points. Also note that the Slow Stochastic has re emerged above the oversold 20 level and has also closed above the red line. The red line is the 3 bar moving average of the Stochastic and is helpful in providing confirmation. Over the long term, traders are most successful when patiently waiting for a confirmation of a change in direction. Traders lose money when trying to catch the bottom or top. Consistently getting the juicy middle is better that the ego of buying the absolute bottom and riding it up. Most likely the greed and the ego will cause one to hold the position too long and give up some or all of the profits.

The Bollinger band view of the NDX isnt as convincing that the market may have bottomed yesterday. In fact, a break below yesterdays low would put the 1849 gap into play. I am in the camp that believes that all significant gaps are filled, eventually. However, the RSI is convincing that me that some positive divergence is occurring. For instance, the low of the RSI was higher than the low of the RSI in early June. The market is indicating a down open as I write this. But things change fast overnight and overseas. The NDX ran up to the 21 day EMA and found resistance. This is going to be the first heavy level of resistance should the NDX begin to strengthen.

Open Interest

The Yellow highlighted levels indicate the peak levels above and below the current price that should provide resistance and support, respectively. The light blue level is the peak put open interest at the 1950 strike. Interestingly, the high today on the NDX touched the upper resistance level as indicated by the 1950 Call strike. The Calls have 6118 contracts open and 9916 contracts open at the 1950 strike level. Peaks in high put open interest on the option strikes close to the underlying indexs price represent bullish contrarian signals. The puts peak open interest, 7441 open contracts, is about 100 points lower at 1825.

There is support at 1300 as identified by the peak open interest off 91,531 contracts. There is quite a bit of open interest at 1325 but the $SPX closed just below there at 1321.97. There isnt much resistance until 1350 as indicated by the 82,265 call contracts open. However, the peak open interest is all the way at 1400. The Put/Call ratio is at 1.86 which indicates that there are almost 2 puts for every one call. The SPX is normally traded by institutions because of the leverage and size of the contracts. That means that the high call skew associated with retail investors is not a consideration of the Index Put/Call ratio contrarian signals.

The Economy and Earnings Tomorrow

The market will be looking at Lennar (LEN) for clues to how bad the new home market really is. Christopher & Banks (CBK) and Finish Line (FINL) are consumer discretionary stocks and may provide insight into the consumers shopping tendencies. Palm and Micron (MU) may provide decent news of the stealth expansion in technology related sectors.

Existing home sales along with the LEN news should provide additional transparency on one of the many sectors that are giving the economy trouble. Fridays PCE Core Inflation and Income and Spending reports are probably the most market moving news. Good trading.

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