Trading Observations

A friend (A) at a major trading house is a young but astute market oberver.

He notes some details of today’s action:

1. Volume is tracking for 11.7 billion shares, which if accomplished would be the largest volume day since June 26th. On that particular day, personal income and spending data for May revealed a sharp rise in the savings rate to 6.9% (which was revised down yesterday to 6.2%). Breadth is negative for both the NYSE and the Nasdaq, but the Arms Index (the ratio of NYSE advancers to NYSE decliners divided by the ratio of NYSE up volume to NYSE down volume) is ridiculously low at 0.37, indicating an outsized amount of volume in advancing stocks relative to the number of stocks which are advancing. Thank Jim Cramer: his call on Mad Money last night to buy Bank of America (its price is high enough now that institutions will feel comfortable buying it…the logic of which I think speaks for itself) has galvanized the bank stocks amidst an otherwise negative tape. JPMorgan’s tender offer for $3.4 billion of its preferred notes for roughly 60 cents on the dollar is also helping sentiment, as is what I’m guessing is a short covering exercise in Citigroup shares ahead of its preferred-to-common conversion tonight. Bank of America is up by about +5%, as is Citigroup, with those two stocks accounting for 1.2 billion shares so far today (at 1:15 p.m.). That puts the better than usual volume in perspective too.

2. Tech is dragging us lower today, both in price and breadth. An “MGIP” chart on Bloomberg reveals that the separation between the two occurred at 10:00 a.m. when the June Factory data (better than the Street’s expectation for -0.8% m/m at +0.4% m/m, with the inventory/shipments ratio declining to 1.42 from 1.45 which indicates that the inventory bulge is moving through the supply chain) and weaker-than-expected ISM non-manufacturing data came out. We saw an immediate separation between the two indices at 10:00 a.m. of about 20 basis points, and that has since widened out to about 50 basis points. Breadth for the two indices also diverged, with NYSE breadth improving after a 10:30 a.m. bottom (-1124 on the A/D line) while Nasdaq breadth rolled over and made a new intraday low just after 1 p.m. (-1144 on its A/D line).

Source for all data is Bloomberg.


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