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:
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.
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.
Deere & Co. - DE - close: 79.00 change: -2.66 stop: 82.55
Why We Like It:
BUY PUT JUL 80.00 DE-SP open interest=1501 current ask $4.30
Picked on June xx at $ xx.xx <-- see TRIGGER
Monsanto - MON - close: 133.40 change: -2.94 stop: 140.55
Why We Like It:
FYI: The $125.00 level should be short-term support and we might use a bounce there as an entry point for new bullish positions.
BUY PUT JUN 125.00 MFP-RE open interest=7351 current ask $1.30
BUY PUT JUL 125.00 MFP-SE open interest=2963 current ask $5.00
Picked on June 11 at $133.40
Peabody Energy - BTU - close: 78.69 change: -0.08 stop: 74.90*new*
It appears that oil stocks were the only "safe" place to be on Wednesday but some of the coal producers fared well. BTU displayed some relative strength with only a minor loss. Rivals JRCC and MEE both surged to another new high. The intraday trading action in BTU is bearish and we would expect a dip toward the $76-75 zone. We are raising our stop loss to $74.90. We're not suggesting new bullish positions at this time. BTU has exceeded our first target near $80 multiple times. Our second target is the $84.00-85.00 zone.
Picked on June 01 at $ 73.92 /1st target exceeded 79.75
Emerging Markets 50 ADR - ADRE - cls: 51.47 chg: -0.82 stop: 55.51*new*
The ADRE continues to slide. It lost 1.6% and is now testing its exponential 200-dma after breaking below its 100 and 200-dma. This ETF does look short-term oversold so readers may want to start taking profits now. The intraday low was $51.40 and our target is the $51.00-50.00 zone. We're adjusting our stop loss to $55.51.
Picked on June 03 at $ 54.69
Caterpillar - CAT - close: 78.93 change: -1.17 stop: 83.05 *new*
Widespread market weakness finally pushed CAT over the edge. Shares hit our one of our triggers to buy puts at $79.45. The play is now open. We are adjusting the stop loss to $83.01. More conservative traders may want to use a tighter stop loss. Our target is the $75.25 mark. The stock "should" see some technical support at its 200-dma near $75.00. FYI: In the news today CAT announced it was raising its quarterly dividend 17% to 42-cents.
Picked on June 11 at $ 79.45 *triggered
DaVita Inc. - DVA - close: 49.59 chg: -0.10 stop: 53.01
In spite of all the market fireworks today we don't see any changes from our comments on DVA. More aggressive traders may want to open positions now. We are going to stick to our plan and wait for a bounce. Our suggested entry point to buy puts is the $51.00-52.00 zone. If triggered we have two targets. Our first target is 47.75-47.50. Our second target is the $45.15-45.00 zone. The P&F chart is bearish with a $45 target. FYI: Last month DVA announced a $250 million stock buy back program. At $50 a share that's about 5 million shares. DVA has about 104 million shares outstanding.
Picked on June xx at $ xx.xx <-- see TRIGGER
Electronic Arts - ERTS - close: 46.07 chg: -0.09 stop: 49.05*new*
ERTS hit another relative low today at $45.60. The intraday action on ERTS continues to look bearish. However, the stock's daily chart has produced a "doji" candlestick, which suggests indecision. ERTS only lost 9 cents with the market down sharply. I suspect the stock may be ready for an oversold bounce. Readers can watch for a failed rally near $48.00 as a new bearish entry point. We're adjusting the stop loss to $49.05. Our target is the February lows near $44.50-44.00.
Picked on June 06 at $ 47.75 *triggered
3M Co. - MMM - close: 75.27 chg: -0.73 stop: 77.65
As expected the bounce in MMM is rolling over. However, the stock is still trading above support near $75.00. Readers can wait for a new relative low under $74.85 as a new entry point. We have two targets. Our first target is the $70.25-70.00 zone. Our secondary target is the $67.00-65.00 range. The P&F chart is bearish with a $69 target. FYI: If you are aiming for the $67 target then you might want to consider the October puts.
Picked on June 06 at $ 74.95 *triggered
(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)
Amgen Inc. - AMGN - close: 42.95 chg: -0.87 stop: n/a
The pull back in AMGN has put our June strangle in serious jeopardy. We have less than two weeks left for June strikes before they expire and the erosion is going to pick up speed. We are not suggesting new positions at this time. We have suggested a July strangle and a more aggressive June strangle. The options in the July strangle are the July $45 calls (AMQ-GI) and the July $40 puts (AMQ-SH). Our estimated cost for the July strangle was $1.65. We want to sell if either option hits $3.50. The options in the June strangle are the June $45.00 calls (AMQ-FI) and the June $40.00 puts (AMQ-RH). Our estimated cost on the June strangle was $0.56. We want to sell if either option hits $1.10 or more.
Picked on May 22 at $ 42.77
McDonald's - MCD - close: 58.75 chg: -1.02 stop: n/a
MCD reversed 1.7% amidst the market turmoil. Right now our June strangle isn't looking so great. Now that the time premium has eroded we're going to need to see MCD under $56.50 or above $63.50 if we are going to have a chance at seeing a profit on this play. We've got less than two weeks left before June options expire. We are not suggesting new positions. The options we suggested were the June $62.50 calls (MCD-FZ) and the June $57.50 puts (MCD-RY). Our estimated cost was $1.10. We want to sell if either option hits $1.65 or higher.
Picked on May 18 at $ 60.53
Tyco Intl. - TYC - close: 42.91 change: -0.63 stop: n/a
So far so good. TYC lost another 1.4% but hasn't quite let go of the technical support at the 100-dma yet. We are not suggesting new strangle positions in TYC at this time. The options we suggested were the July $47.50 calls (TYC-GW) and the July $42.50 puts (TYC-SV). Our estimated cost was $1.30. We want to sell if either option hits $1.95 (50% gain).
Picked on June 03 at $ 44.89
Terex Corp. - TEX - close: 63.11 change: -2.93 stop: 72.05
We were correct on picking the decline in TEX but we missed the entry point. Instead of buying the immediate breakdown we wanted to try and buy a bounce instead. Our plan was to buy puts on a bounce at $69.00. Our first target was $65.25 and our second target was $61.50. We are dropping TEX as a bearish candidate at this time. We would keep an eye on it for a failed rally under support in the next month.
Picked on June xx at $ xx.xx <-- see TRIGGER
The equity markets have been quite trying ever since the peak on 5/19/08. It is interesting that the 10 day moving average of the CBOE Equity Put/Call ratio also dipped to its low on the same day. What the moving average signaled was that on an average over ten days 6 puts traded for every 10 calls. Contrarian mentality looks at highs and lows in investor sentiment. A high level of call trading represents that option investors are bullish. Extremes in call volume generally suggest that the vast majority of option speculators and portfolio managers have made their respective upside bet or stock replacement strategy. The contrarian looks at the extreme level and assumes if everyone that is going to buy has already bought who else is left to buy.
We made the move to a Negative bias last week (5/28 was the confirmation from the 10/20 day Moving Average crossover). So far there has been little action in the Put/Call ratio to change that signal. There was a blip, however, last Thursday which almost changed the signal back to Neutral. After the market popped up on Thursday, many of you probably thought the signal was wrong. The 10 day Moving Average (pink line) closed up at 0.719 and the 20 day Moving Average (blue line) closed at 0.684. The signal will remain Negative until the 10 day Moving Average peaks near 0.80 or it declines toward the 20 day Moving Average. Should the 10 day MA cross below the 20 day MA, the signal will become Positive again.
The Signal: We are still on a Negative (Sell/Short) Bias. All the bias suggests is that the indicator generated a signal to change the portfolio bias to a more bearish stance. The indicator read that the trend in option trading shifted from bullish call buying to protective put buying. The signal is not a recommendation to sell short the market but a bias suggestion. To lean the portfolio more negatively, I like to sell calls and/or lightening up short puts. In summary, you can trade the initial changes in direction or tests of peak levels but this and the other indicators are best used to adjust overall portfolio directional exposure. SIGNAL: NEGATIVE BIAS
The CBOE Volatility Index ($VIX)
As the S&P 500 market is dipping down to lows not seen in a couple of months, the CBOE Volatility Index is reaching to relatively high levels. I refer to the 23.18 close as relative because the moving averaged were indicating levels in the 27 to 28 range in March. While there are short term trading opportunities to go long on these relatively extreme highs the 10 and 20 day Moving Averages continue to reflect the uptrend in volatility. The trend represents that S&P 500 option traders are increasingly becoming more nervous about the market and are therefore more willing to pay higher risk premium for portfolio protection.
The signal: The 10 DMA moved up 0.35 to 20.44 while the 20 day moving average closed up 0.25 at 19.16. We are still on a Negative (sell/short) signal.
Spikes in the $VIX to around 30 can be long signals. Lows near 18 to 19 can be short term sell signals. However, confirmation is important to not trying to catch a falling knife or short a bull run. A spike up or down is hard to trade. Sometimes it is best to wait for the direction to reverse and therefore avoid the temptation to attempt to trade the absolute high or low SIGNAL: NEGATIVE BIAS
The Investors Intelligence Polls
About the Indicator: The peak in Bullish Investor Sentiment usually tops 60% while the peak Bearish Investor Sentiment tops at about 45%. We normally look for bearish triggers when the Bullish % peaks and bullish triggers when the Bearish % peaks. I like to see confirmation after the peaks. But there is usually a lag because this poll comes out once a week. The Investors Intelligence polls do not actually poll individual investors. It polls investment newsletter writers all vying for individual investors subscription dollars. Therefore, there is a bias integrated into their writings set to attract subscribers. Since more people flock to the newsletters that make them feel good about their long portfolios (obviously I am not here to make anyone feel good) there is a bias toward bullish investors in each weeks readings. That should explain why the peak reading for a bearish signal (55% for bulls) is greater than that of the bullish signal (45% bears).
The report from Investors Intelligence shows a reversal in sentiment from last week. Or another way to look at it is that those polled reverted back to a more bearish trend. The number of bullish newsletter writers/advisors polled decreased to 43% from 44.8%. The percent of bearish newsletter writers/advisor polled increased a little to 32.6%. The spread declined 3.3% to 10.4%. As the chart below shows the spread between bullish and bearish advisors peaked on 5/21 and fell aggressively a week later. While the best negative (bearish) signals occur when the Bullish % reaches above 50 the contraction in the spread last month and again this week confirms the Negative bias. SIGNAL: NEGATIVE BIAS
Robert J. Ogilvie
Today's Newsletter Notes: Market Wrap and The Contrarian by Robert Ogilvie, and all other plays and content by the Option Investor staff.
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