Nasdaq-100 Cash (NDX)

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Tim Ord

Today the Nasdaq 100 (NDX) rallied strongly into our targeted area near 1810 range. We have been targeted the 1810 for the last couple of weeks in that a significant high volume gap form their on 2/27. Most large high volume gaps are tested. High volume Gaps are also like magnets, drawing the market towards them. Once the market gets to the gap the gap turns into resistance. Today’s test is just a bit short getting into the gap level but tomorrow most likely the gap will be tested. If the gap at the 1810 range is tested on 10% or greater lighter volume, and then close below the gap level, a sell signal will be triggered. We have an intermediate term sell signal in force now and the gap test will be a shorter term sell signals.

On chart is of the Nasdaq 100 in the Ord-Volume format. The Ord-Volume format takes the average daily volume in each leg and display that result on the graph with a line chart. The average daily volume in a leg measures the energy that leg has. By comparing the up leg and down leg energy you can see which way the market is pushing. Referring to the Ord-Volume chart, a big expansion of energy came in on the February decline which increased 26% from the previous up leg and shows the trend has turned from up to down. The current rally leg has 21% less energy then the previous down leg and shows the down leg is still dominant and in force. The gap is being tested so far on 30% less volume and implies the gap will hold as resistance. If volume does not pick up to 318m shares tomorrow a sell signal will be triggered.


Today’s is Spring Equinox and can mark significant turns in the market. We are expecting the market to be down most of this year. We have an intermediate term downside target to the 1400 on the NDX which is a 22% decline from current levels.

Heard on the CME Floor

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From our Virtual Trading Room Transcript
March 21, 2007
about 1214 PDT

Brad_Sullivan> hearing that LOTS of buystops
Brad_Sullivan> were triggered
Brad_Sullivan> throughout this move
Brad_Sullivan> on the institutional side
Brad_Sullivan> worth remembering
Brad_Sullivan> most RATE CUTS
Brad_Sullivan> are net bearish for the index markets
Brad_Sullivan> 6 months out
Brad_Sullivan> keep a close eye on 810.50 in ER2 M7
Brad_Sullivan> and 1440.50 in SP M7
Brad_Sullivan> if we keep drifting lower

Dollar Weighted Put/Call Ratios for Commodities

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Clyde Harrison, President and Director of Brookshire™ Raw Materials Group, Inc., a former principal and operator of Beeland Management Company, L.L.C., the manager and commodity pool operator for the Rogers International Raw Materials Fund L.L.P. said: "the dollar weighted put/call ratio for commodities is a great sentiment indicator as it helps to identify reversal points. It is a breakthrough technology with vast potential for improving a trader's timing."

Here is a sample report: www.hamzeianalytics.com/pcr_comm.htm

From our Press Release (courtesy of PRWeb)

Inflation Update

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Sally Limantour

The Chinese rate hike over the weekend initially scared traders as last night the market opened lower. Initially, the dollar fell and the metals came in unchanged to a bit higher.

The Shanghai index proceeded to gain 3% which defied the typical stock market reaction to a rate hike. Are we out of the woods? Are the sub prime woes behind us? Two things that disturb me are that unlike the sell off in May/June ‘06 the break from the recent highs has been lead by the financials. One has only to look at the chart of the bank index to see the weakness.

The other issue is inflation. With US core CPI now at 2.7% y/y (well over the Fed’s 2% cap) it is hard to imagine the Fed cutting rates. I think this is what is meant when people say the Fed is between a rock and a hard place. There still seems to be a predominant belief that the Greenspan put will be adopted by Bernanke and the Fed will, once again, save the day. I think we have to look at the reality of inflation and realize the importance of food prices in particular.

Food prices are reaching high levels, particularly the category of ‘food away from home’, such as restaurants, take away food and so on. This component alone has reached its highest annual rate since April 1991. In addition food at home prices are also picking up. After reaching a low of 0.8% in May 2006 prices have now accelerated to almost 3% annual inflation. Corn prices alone have doubled and this has caused problems ranging from run away tortilla prices in Mexico to beer producers raising their prices. No longer are producers able to contain prices and have to now pass it onto the consumer.

Another aspect of the inflation picture is that whereas last years sub component prices were dominated by oil prices we now see a broader participation by other areas. Shelter remains at elevated levels, medical care inflation is back at its higher levels and apparel inflation is unusually inflationary at the current time.

In addition money supply growth is accelerating and the high level of asset prices around the world is now a problem for central bankers. Going forward
it appears we will be finding out where liquidity begins and leverage ends.

Tomorrow the FOMC begins a two day meeting and housing starts will be reported. Last January’s housing starts fell more than 14% due to the bad weather, so all eyes will be on February’s number. For today, next resistance is 1415 with strong R at 1418.75. Breaking the 1399-1401 level will clearly put the market on the defensive while rallies that hold above 1415 area should attract buying.

Equity Index Update

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Brad Sullivan

The index market continues to mirror its recent behavior of Yen/Dollar watching and is called to open higher by nearly 0.5% this morning in the SPM contract at 1406.50. The Yen/Dollar has fallen by about -0.7% relieving fears of the carry trade unwind – at least for the time being. This week is highlighted by the FOMC 2-day meeting that begins tomorrow and concludes with Wednesday afternoon’s statement. Typically, the indices have rallied into and through these meetings over the past several instances…however, with a peculiar batch of economic data it appears difficult for the market to get a clean gauge on Dr. Bernanke’s next play.

On the Monday merger mania front…Barclays Bank and ABN Amro are in discussions to merge and become a $160 billion behemoth. Even the once “given up for dead” Service Master was able to find a buyer in Private Equity Land for nearly $5 billion. If one adds the Blackstone IPO to this picture, it is hard to be overtly bearish looking down the road. I certainly do not want that statement to be misconstrued as the Sub-Prime blowout may have ramifications that we do not see on the horizon…however, I always try and construct my ideas around the money…Follow the money, is a message I try and repeat to myself when I think the markets are at a crossroads. Simply put, the liquidity driven marketplace remains intact and that is being seen in the appetite for deals. Let’s not forget that somehow LEND was able to find a buyer for some of its debt leading to rally in the entire Sub-prime sector. In my opinion, the short term picture remains shaky, but, it is worth reminding ourselves how resilient this equity market has been during this bull move. The fact remains that this is a liquidity driven bull market. Fears are rampant about the Carry trade being unwound and if something triggers a mass covering it would be awfully ugly for the indices. However, if the unwinding is gentle one has to wonder if the worst of this move is behind us.

As for short term trading, the best indicators for market direction remain GS, GOOG and the YEN/Dollar. Odds appear to favor a short term bracketing in the trade as we move from one end to the other in a range around 1.5% in the SPX.

HOTS Weekly Options Commentary

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Peter Stolcers

Last week I did not see the activity on Tuesday's sell off or on Wednesday's rally back to tell me that the lows are in. A "V" bottom will be formed when there is fear and volume on the way down and confidence and volume on the way up. The bears want each market rally to find resistance a little sooner than the time before. Eventually, the market will drift lower and test support. When it fails to bounce after a decline and we get 2-3 consecutive days of selling, fear will set in. We have not seen that yet and bullish speculators have not been scared out - yet. The bid to the market continues to surprise me. Thursday we saw the market rally after a "hot" PPI number. Friday morning we woke up to global market weakness and it looked like we might open lower. The CPI came in "hot" and it exceeded estimates by .1%. Then, consumer confidence fell to its lowest level in 2 years. The market dismissed both economic indicators and staged an early quad-witch rally.

During the week, Norway and Switzerland were added to the list of countries that have recently raised interest rates. If our interest rates remain unchanged (as opposed to going higher), this puts downward pressure on the dollar. Recently, the market has been declining when the dollar falls.

Single digit earnings growth is expected this quarter and the market lacks a catalyst to drive stock prices higher. I feel that the price action is getting heavy and that the market has shouldered all of the bad news it can take. If you look at the chart you can see the SPY 141 resistance level. The longer the market stays below that level, the more significant that resistance becomes. Also note the blue dotted lines in the chart. You can see that the market made a lower low on the second wave of selling and the bounce was weaker. Sellers were more aggressive this time around and they started hitting bids before the market could make another assault on SPY 141. The message is pretty clear to me.

The housing market is weak and with inflation on the rise, the Fed will not be in a position to help out by lowering rates. The slump will have to cycle through the economy on its own. If you're wondering how important housing is to the economy, here is an interesting statistic. From 2001 - 2006, 50% of US job growth came from this industry. That includes lending, sales and construction. Sub-prime may be a small part of the total picture, but there is a ripple affect. There are many more marginal homeowners with adjustable rate mortgages that will convert from a low 3-year fixed rate to an ARM in the next year. This is certain to affect consumption. The economic releases are very light next week and they are highlighted by more housing data.

Equity Index Update

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Brad Sullivan

BEWARE THE IDES OF MARCH…so warned Mr. Shakespeare long, long ago. Maybe he should have written beware selling new lows for the move in the index markets the day before the ides of March. The tide turned awfully fast across the board for those trading indices yesterday in the late morning. After undercutting the previous lows made from our downdraft in the last two weeks buyers came rushing in and fresh shorts were forced to pay up in order to cover. When the dust settled it was a fabulous show of strength from the Hedgies ahead of this critical expiration…and to that end I say touché.

This morning the index markets, which had been trading higher earlier, are called to open lower on the heels of our PPI reading this morning. The reading came in at +1.3 on the headline and +0.4 on the core…well above expectations on both counts. However, this reading is notoriously volatile and fickle – my assumption is that the markets will wait until we get tomorrow’s CPI before making any rush to judgment about inflation. Accordingly, I would take this open with a grain of salt and assume that the path of least resistance will be towards the upside.

March Madness begins today, I would anticipate a lightening of the volume by mid-morning ahead of this annual gambling extravaganza. Beware…

Wednesday of Options X -- The Low we put in Today, was that the Bottom you were looking for?

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Fari Hamzei

Not exactly !!

I was asked that question a number of times earlier today, both by professional and institutional traders.

IMHO, the market is following the Script we put out two Sundays ago on this blog (see http://hamzeianalytics.blogspot.com/2007/03/market-timing.html).

Our Script calls for a volalitity retest in the +4 to +5 sigma region. That should translate to a test of our last May 2006 high (~1326 on SPX), now acting as a critical Support. If that support level does not hold, the next logical stop is 1280 on SPX (July 2006 highs).

Here are two Volatility Indices that we follow very closely. (I am in the Prof. Robert Whaely's camp (the orginal VIX inventor), now called VXO -- and yes, I don't like the new VIX, as it has to do with its construct).


During this vol retest, we should see the VXO between the high 20s to low 30s, and

We should see VXN in the mid 30s before the dust settles. As far as its timing, with this week's quad-witching March Expiry as a backdrop, market should sell thru Friday and Monday ahead of Tuesday which happens to be Vernal Equinox (First Day of the Spring or "Norouz" in Persian).

Equity Index Update

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Brad Sullivan

Was it the other shoe…or did we just untie it? That is the question, and the only question that really matters facing the domestic and global index markets over the next several weeks. Yesterday’s severe decline was the 2nd such implosion over the last 11 sessions and laid to rest the silly notion that the massive selling from two weeks ago was due to a computer glitch revolving around the DJIA pricing. Given the complete lack of volume on any of the higher sessions during this bounce phase, yesterday’s action does not come as a total surprise. Sooner or later something would trigger another round of selling and the fact that it happened during expiration only exaggerates the move. More importantly, this downdraft may continue to spiral lower due to the expiration of options and futures this week. I have continued to point out that the favorite fund game on the board over the last 3 trading years has been to sell naked puts…when the jig is up on expiration week the moves, potentially speaking, can become quite severe. Yesterday morning I commented that this market had about 5% of downside risk by Friday. After yesterday, we are only 3% away. While I felt the odds of such a trade were remote, they have increased dramatically after yesterday’s action and those that are speculatively short --- particularly those that have watched out of the money puts become in the money --- are faced with the decision as to take in some of the position, all of the position or none of the position. Personally I took in enough yesterday to give me a free roll + profits no matter what plays out from here.

Subprime...I am wondering if it will become a verb in the next few years, like “Homer” in the classic Simpson’s episode where Homer’s constant idiocy becomes a cult classic of “ oop’s I did a Homer” when making a mistake. Only time will tell. But, there is no question that this fiasco lit the fuse yesterday. Accredited Home Lenders (LEND) got the ball rolling saying it was in financial trouble and in need of waivers on outstanding debt. New Century (NEW) was delisted from the NYSE and closed at .85 on the pink sheets. Bear Stearns is the supposed target of subpoena’s on bullish research in this zone. Essentially, we are watching a implosion of a financial product that created affordable homes and thousands of jobs – Savings and Loan scandal anyone? This will end when there is no longer a purely subprime lender left in the building, and at the rate of descent, that may happen sooner than one can imagine. The only question that matters within this arena is will this meltdown trickle through the broader economy? If it does, as many of the bears are forecasting, the result will be recessionary in nature. After a choppy overnight session, the indices have caught a bid from their respective lows and are called to open around UNCH. The Yen/Dollar is trading around UNCH as well after having been well bid earlier in the evening session. Keep a close eye on all product classes today as yesterday’s equity market action drove prices lower in grains, gold, crude and higher in treasuries. Funds are forced to push out positions in one market as their other positions lose value…sell beans, sell SPM7 for example. I don’t expect that to change anytime soon.

Equity Index Update

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Brad Sullivan

The index markets are called to open at or near their respective low trading zones over the past 3 trading sessions. A combination of the sub-prime lending blowup, a weak retail sales report and – most importantly – whispers of INFLATION out of the BOJ last night has produced another big leg of unwinding in the YEN carry trade. On the flip side, GS produced blow out numbers on its quarterly earnings report released this morning…keep a close eye on this stock as it has been our proxy over the last several months.

One of the concerns behind yesterday’s small move higher was the complete lack of volume. It seemed as though it was a holiday trade yesterday as players were on the sidelines…this morning it appears players have awoken from their collective slumber and appear ready to monitor their collective portfolio risk. One key aspect of the trade that few have discussed is the expiration week that we are currently 1/5th of the way through.

Since our massive selling 2 weeks ago today, the indices have been able to hold at higher, but rather uninspired levels. There is little question that this move has been propped by large demand amongst the funds as they try and protect their favorite trade of selling options. If there were to be an unwinding this week of the YEN/DOLLAR it would have dramatic ramifications on the index market. Players are holding their breadth that this does not turn out to be the case, but, if they must let their positioning go due to the risk department LOOK OUT. Certainly the odds of such an event are outlier by definition. However, when looking at such events in a historical context there is always a trigger. The index markets are faced with a POTENTIAL trigger of a YEN carry unwinding that forces index positions out of portfolios creating a vacuum of selling. If this scenario plays out – I would suspect the SPX would fall roughly -4% by Friday’s close from current levels. Keep in mind that the probability of such a happening is small – perhaps as little as 5% to 10% so any plays on this theory should be done with ample speculative cash.

Finally, keep a close eye on GS…a reversal below 200 would put the overall market in jeopardy.