Why Banks Could Be Important Here

• August 4, 2003
• Chris Curran

The September S&P 500
futures (SPU and ESU) finished lower for the week largely due to
escalating worries over the sharp declines in the bond market. 
The Banking sector was a big
factor in the futures weakness, mainly due to speculation that some large
institutions may have been on the wrong side of the bond sell-off.  Also, the
sell-off in bonds has sent mortgage rates soaring, which has renewed worries
that the party may be over for the refinancing boom and the strong housing
market.  There were a number of upbeat economic reports released during the
week, which contributed to some wide intraday swings, but overall, the equities
and futures markets were unable to respond very well to the data.  While the
overall damage was minimal, it should throw up a red flag that equities continue
to struggle in the face of improved economic news. 

The September S&P 500 futures closed Friday’s
session with a loss of -9.75 points, and finished the week with a loss of -21.25
points. Volume in the September ES was estimated at 620,000 contracts, which was
off from Thursday’s pace but still average.  It should also be noted that open
interest increased on Thursday’s wide intraday swing that erased most of the
day’s gains.  On a daily basis, the contract confirmed Thursday’s gravestone
reversal and broke its 50-day MA at 983.50.  The VIX, which has been discounted
by the “talking heads” because it has been so low for so long, began to move
back up last week.  Although it can’t predict how far the market may slide, it
should give a defensive pause to the horn-tooting longs. 

Looking
ahead this week, with earnings season winding down and only a handful of
economic reports scheduled, the equities market may likely focus on how bonds
continue to perform.  More rumors surrounding the Banking sector will also
probably surface.  At this point, they are simply just rumors, but I would not
be surprised to see some truth behind these rumors start to develop.  And even
if many of the rumors are untrue, it’s important to remember that higher rates
really cut into the already thin margins of banking institutions. 

Currently,
the S&P 500 remains trapped in the same range it’s been in for 8 weeks now.  The
index has tested resistance several times, and has been unsuccessful in making
new highs (see chart).  In addition, each time resistance has been tested since
the June high, the tests have come with less momentum (e.g. weaker breadth and
fewer new highs).  This sort of action is very typical of distribution tops,
which can take months to form.  At this point, it’s still not too late for the
index to regain momentum and take another stab at clearing resistance.  However,
if overall breadth continues to deteriorate, the chances of the next big move
being to the downside increase significantly. 
And, on a trivial and historical note, the
traditional summer rally normally runs out of steam in July, leading to lower
prices the rest of the quarter.

                               

Daily Pivots for 8-4-03

Symbol	Pivot	      R1	R2	R3	S1	S2	S3
COMP	1720.92	1727.84	1740.05	1746.97	1708.71	1701.79	1689.58
INDU	9175.49	9212.70	9271.42	9308.63	9116.77	9079.56	9020.84
NDX	1267.14	1274.19	1284.04	1291.09	1257.29	1250.24	1240.39
SPX	982.97	987.08	994.01	998.12	976.04	971.93	965.00
ESU	983.08	989.17	998.83	1004.92	973.42	967.33	957.67
SPU	981.37	985.73	991.87	996.23	975.23	970.87	964.73
NDU	1268.83	1277.67	1287.83	1296.67	1258.67	1249.83	1239.67
NQU	1270.67	1281.33	1295.17	1305.83	1256.83	1246.17	1232.33
BKX	875.39	882.17	895.30	902.08	862.26	855.48	842.35
SOX	391.14	396.88	400.05	405.79	387.97	382.23	379.06
QQQ	31.52	31.73	32.01	32.22	31.24	31.03	30.75
SPY	98.76	99.28	100.05	100.57	97.99	97.47	96.70
SMH	32.54	32.99	33.22	33.67	32.31	31.86	31.63

 

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Please feel free to email me with any questions
you might have, and good luck with your trading on Monday!

Chris
Curran

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