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News-Driven Markets Likely Ahead of UN Meeting and State-of-the-Union Address

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Weekend news resounded with talk of war and reports of a worm that slowed Internet traffic Friday night and Saturday. Although most institutions and companies resolved problems with the worm and have prepared for possible second-wave attacks, war talk will continue to figure in news this week.

Over the weekend, a U2 spy plane crashed in South Korea, killing three on the ground, but most attention focused on Iraq. Speaking from Davos, Switzerland, Secretary of State Colin Powell warned of a relationship between Hussein and terrorism, and said that the U.S. was prepared to move against Iraq "alone or in a coalition of the willing." While Germany, France, China, and Russia claim that President Bush has not yet convinced the international community of the need for immediate action, aides say he will use his State of the Union Address tomorrow night to present his case to the U.S. public and perhaps to the listening international community, too.

The rhetoric promises to heat up today, ahead of tomorrow's State of the Union address and Wednesday's U.N. debate. Hans Blix, chief U.N. weapons inspector, reports to the Security Council today at 10:30 ET, and is expected to ask for more time for inspections. He likely will report that Iraq did not fully cooperate with inspections, and may cite Iraq's refusal to allow surveillance flights or full questioning of Iraqi scientists. Iraqi Foreign Minister Naji Sabri countered today that Iraq has fully cooperated and that attempts to link Iraq to terrorism are fabrications.

Reacting to fears that the U.S. will attack Iraq even without the cooperation of its allies, and helped along by the release of a report indicating a 37% fall in the Japanese trade surplus, the Nikkei dropped 1.4% today. European markets reacted to war fears by plunging, with the FTSE 100 down 2.81%, the CAC 40 down 3.16%, and the DAX down 2.79% as of this writing.

As evidenced by the reactions of the Asian and European markets, geopolitical events will be market movers this week and must be addressed in any view of market action. However, Bush plans to devote half his address tomorrow to economic policies, and this update should focus some attention on the economy, too. Of particular importance is the dollar's drop against the yen overnight and its fall to three-year lows against the euro. European commentators note that insurers have become net sellers of equities in order to protect their reserves for filling claims, and that might be happening in the U.S., too. Capital flows appear to be going into euro-denominated bonds, some speculate.

This morning will see the release of existing home sales at 10:00 ET. Forecasts are for 5.80M in existing home sales as compared to 5.56 for November. These numbers are not expected to be market moving.

In Europe, consumer non-cyclicals dropped less than other sectors. Today's U.S. earnings releases include consumer non-cyclical companies Tyson Foods (TSN), Sysco Corporation (SYY), Playtex Corp (PYX), and Kimberly Clark (KMB). PYX reports after the bell, with EPS expectations of $0.14. TSN's expectations are for EPS $.16. Sysco met EPS expectations of .28, compared with $0.24 for the same period last year. Kimberly Clark announced EPS of $0.72, with an ex-items EPS of $0.76, beating expectations of .74. Sales stood at $3.3 billion, flat versus a year ago.

Last November, the consumer non-cyclical sector demonstrated new weakness on point-and-figure charts by reversing into a column of O's, and Kimberly Clark demonstrated weakness, too, both in price action and on its P&F chart. Friday's 44.78 close was the lowest since October 1998. Although reaching lower intraday lows in early 1999 and 2000, KMB always bounced on those other occasions, closing several points higher. That didn't happen on Friday.

A glance at the linked chart shows that KMB has been stair-stepping to lower levels, consolidating before dropping sharply. Bulls could argue that it's time for a bounce, while bears might argue that another of those sharp drops may be due. Notice something else interesting in the MACD and RSI indicators. While KMB's prices have been falling within the wedge outlined in green, MACD and RSI have both been consolidating into a pattern of higher lows and lower highs, with their patterns outlined in red.

Daily Chart of Kimberly Clark:
Option Investor

For more confidence in KMB's direction, verify that pattern breaks in these indicators confirm a break in the price pattern.

What direction will the break likely head? Stochastics show oversold conditions, but the ADX (not shown) measures 35.84, indicating that the current downward trend remains strong. In a strong trend, oscillators such as stochastics may not provide reliable signals, so we may not be able to trust the daily stochastics.

KMB's relative strength chart also shows it to be weak in relationship to its sector, a sector that has also been weak of late. With that evidence and KMB's P&F sell signal to boot, care should be exercised when playing upside breakouts. They may be traps or oversold bounces. Breakdowns should face next support at 42, the area that has seen previous bounces, then again at 38 and the 34.50-35.50 area.

Fair value for the S&P 500 today is $0.11. That price will not change during the session. HL Camp & Company set their computers for program buying at $0.19 and for program selling at -$2.86. Fair value for the NDX today is $1.81.

Expect treacherous trading conditions this week. Today, DJIA futures threaten gap-down openings near a key support level of 8020. Two scenarios can unfold: a panic selling this week that quickly brings markets near the targets projected when H&S necklines were broken on some indices or a bounce and retest of resistance before further declines. Market direction might reverse quickly as news hits the airwaves. Conservative traders not willing to face possible whipsaws might consider standing aside as the markets digest the barrage of news likely to hit the airwaves.

Linda Piazza

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