The Catalyst for the Next Significant Rally

From 1990 to 1997, Kevin Haggerty served as Senior Vice President for Equity Trading at Fidelity Capital Markets, Boston, a division of Fidelity Investments. He was responsible for all U.S. institutional Listed, OTC and Option trading in addition to all major Exchange Floor Executions. For a free trial to Kevin’s Daily Trading Report, please click here.

The option expiration, and more negative news on the financial sector Friday was too much for the market, as the $SPX declined -1.9, and was -3.2 for the week. The $BKX was -1.2, but -6.1 on the week, while the leaders were the $HUI +4.2, and OIH +1.8 The $SPX closed the week at 1317.93 after taking out the 1327 key price level, and closed flat yesterday at 1318 despite the $BKX at -3.0, and $XBD -2.4, as Goldman Sachs reversed their previous May upgrade to "underweight" in the financials which is just chasing the obvious. The energy sector led yesterday with the OIH +4.8, and XLE +4.0, as crude oil advanced +1.4%, despite the +0.5% gain for the $US dollar ($DXY).

NYSE volume fell to 1.09 billion shares yesterday versus the 2.03 billion shares on expiration Friday, while the Volume Ratio was 36, and breadth -1117, which leaves the 4-day MA's ST-O/S again just as they were before the $SPX reversed from the 1331.29 low (6/12) and rallied to 1366.59. The next price symmetry is 1311-1310, followed by 1296-1292, and the $SPX futures are -9.0 points as I complete this at 7:30 a.m. EST, so they will be in play this morning if the futures don't reverse.

The FOMC meeting today and tomorrow is the primary media and market focus, but the expectation is that the Fed will not raise rates, as their jawboning has already done that. The economy is in a recession, and probably has been since Jan 2008, and the equity market to this point is still only pricing in a very mild downturn, and looking for the second half recovery. I think the surprise will be that the downturn is more severe, and the $SPX will eventually take out the 1257 low before the bear market is over, regardless of any decent rally prior to the election, which could be fueled by the record positive cash balances in both margin and cash accounts. The hedge funds can't afford to miss a move because of their dismal performance YTD, so they will act as a "herd", so as not to miss it.

Because of the ST-O/S condition, and the fact that there are five trading days left in the Quarter, I still think that the $SPX will close above that 1327 level.

The next commentary is Thursday 6/26/08.

Have a good trading day!

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