Equity Index Update
Thursday August10, 2006
It seemed so good in the morning, the buyers were back in charge on the CSCO earnings report, the NDX was up over 1% on the session and the SP had traded back to the initial high after the FED announcement. Then it reversed. Once again, buyers would not sustain the bid levels at the top end of our trading range and the index markets suffered through a brutal afternoon of selling. When the bell rang to announce the close of trading, an outside reversal day was registered in the SPU6 contract...while the Russell 2000 and Midcap 400 continue to bear the brunt of long liquidation in the face of a slowing global economy.
Speaking of the Russell 2000, don't look now, but the index is within striking distance of its YTD lows around the 668 level. Keep in mind that these intra day trading lows in the index represent a decline in the YTD return of the index of a mere -0.4%. In other words...if this index begins to get comfortable in the red for the year, I would expect more to come. The same analogy applies to the Midcap index as well. In addition, this working theory can be seen in the NDX's performance in 2006. After breaking solidly below the UNCH level in mid-May, the index has made a series of lower highs and lower lows...WITHOUT moving back above the Mendoza line. Currently, the NDX stands at nearly -10% YTD. Food for thought.
Russell 2000 chart
This morning the index markets are called to open lower on the foiling of a terror plot in the UK and a continuation in yesterday's trading reversal...KEEP IN MIND THAT THE LAST 3 MONTHS HAVE PRODUCED SIGNIFICANT % DECLINES IN THE WEEK PRIOR TO AND DURING OPTION EXPIRATION...at 12:00cst we will get the results of the 30 yr. bond auction and at 1:00cst the Treasury Budget will be released...expect some volatility during the first 45 minutes as players push around the indices following the downside gap and the external terror news...the true direction of the session will most likely take place later in the day. Finally, keep a very close eye on the final 90 minutes of trading. During this probing of the higher levels of our recent range, the final hour produced consistent trading rallies. Yesterday, that was not the case...if this market is in danger of heading significantly lower, it will be on the thrust of heavy institutional selling in the afternoon.
As for all the talk discussing the terror plot, one thing that everyone seems to be forgetting is that this plot was FOILED...nothing happened. The comparison charts were are being inundated with on CNBC about market performance AFTER terrorist activity make no logical sense. While you cannot dismiss the psychological impact of this event, I don't think it will be the main driver if we move lower today. Finally, has anyone seen the DJ Transportation, homebuilders and mortgage lenders...to steal a line from the cult movie Valley Girls... Oh my God.
Good trading to all,
Brad Sullivan
