The Bears Flex Their Muscles...
5/21/2014 9:02:02 AM
Canaries react but...
Recommendation: Take no action.
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Long SDRL at $33.90 on June 15, 2012 (Shares were put to us when options expired.
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Long SDRL at $33.50 on March 21, 2014 (Shares were put to us when options expired. We were paid $1.50 per share when we sold those options and bought the shares for $35.00 each.
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Equities saw a gap down open followed by immediate selling action. That selling was strong and lasted for a half hour followed by buying for an hour which was not able to reach the level of the open before selling began anew. That selling would take things down to lows that were higher than seen on Monday for the NASDAQ-100 but both the Dow and S&P-500 broke below Monday's lows. With a bit more than two hours remaining, the bulls began buying. The buying was interrupted in the final half hour with all three major indexes logging fractional losses. It is worth noting that the NASDAQ-100 closed above its 20-, 50-, and 200-Day Moving Averages (DMAs) while the S&P-500 closed below its 20-DMA and the Dow closed below its 20- and 50-DMAs. Clearly the NASDAQ-100 has shown greater relative strength of late. That story is repeated across the other leading indexes with the Dow Jones Transports (IYT 140.34 -1.35) and the Semiconductor Index (SOX 578.57 -3.48) both closing above their respective 20-, 50-, and 200-DMAs. Of course, the Russell-2000 (IWM 109.06 -1.69) is one of our canaries that we have followed to gauge the markets overall direction. Although it was slammed lower and closed below its 20-, 50-, and 200-DMAs, it did not shift from its trading state to a downtrend state. It maintains a BEARISH BIAS. The Bank Index (KBE 31.26 -0.19) and the Regional Bank Index (KRE 37.51 -0.39) both remain below their respective 20-, 50-, and 200-DMAs but maintained trading states and maintain a BEARISH BIAS. The Finance Sector ETF (XLF 21.73 -0.13) continues to hover below its 20- and 50-DMAs but above its 200-DMA. Longer Term Bonds (TLT 112.95 +0.25) was little changed and we believe it has topped, which we suggested three sessions ago. It saw a modest gap down open with modest buying following. It maintains a trading state. It sits above its 20-, 50-, and 200-DMAs. Trading volume remained light with 648M shares traded on the NYSE. Trading volume on the NASDAQ was also light with 1.756B shares traded.
There were no economic reports of interest released and none are schedule until Wednesday.
We are watching gold for a potential reversal in the Gold Miners Index (GDX 23.39 -0.02) was essentially unchanged as was the price of Gold (GLD 124.69 +0.09). Both closed below their 20-, 50-, and 200-DMAs.
Apple (AAPL 604.71 +0.12) was essentially unchanged. AAPL constitutes about 20 percent of the NASDAQ-100 and nearly five percent of the S&P-500.
Seadrill Limited (SDRL 35.68 +0.15) added a fractional gain. It remains above the support of its 20- and 50-DMAs with the 20-DMA crossing up through the 50-DMA last Thursday. We sold March 2014 $35.00 put contracts for $150 at the open on Feb 18th and bought shares at $35.43. The stock is now trading ex-dividend for $0.98. The shares were put to us at $35.00 less the $1.50 per share we were paid for the puts, so we have an effective price of $33.50.
The U.S. dollar rose a twentieth of one percent while the Euro moved the same amount in the opposite direction.
The yield for the 10-year treasuries fell four basis points to close at 2.51. The price of a barrel of crude oil fell twenty-eight cents to close at $102.33.
The implied volatility for the S&P-500 (VIX 12.96 +0.54) rose four percent remaining well below its 200-DMA. The implied volatility for the NASDAQ-100 (VXN 15.34 +0.24) rose most of two percent but remains below its 200-DMA.
Market internals were bearish with decliners leading advancers 2:1 on the NYSE and by 3:1 on the NASDAQ. Down volume led up volume 4:1 on the NYSE and by 3:1 on the NASDAQ. The index put/call ratio fell -0.15 to close at 1.00. The equity put/call ratio rose +0.12 to close at 0.66.
Tuesday saw the bears flex their muscles but they came up short of really dominating the bulls. All three canaries (IWM, KBE, KRE) moved lower but none of them retested their recent lows but IWM was able to break below Monday's low briefly. One thing of note is all three canaries maintained their trading states. That means the bears have not regained the downside momentum they had and we are likely to see bounces off of support and resistance. As we stated, we were not confident of a bullish day on Tuesday, and we certainly didn't get one. With that said, we believe the bulls will push their case on Wednesday with the 200-DMAs still looming above as the biggest obstacle for the canaries to overcome. We will maintain our long positions for now.
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