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Index Wrap

Vrrrt, squeak, rivet, crank, tweak....

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If you've ever been to commercial garage to get the tires rotated, transmission checked, or get your car tuned up, you're probably familiar with various sounds in this weekend's wrap.

Listen.... can you hear it?

That's the sound coming out of most economist's offices this weekend as they try and fine tune their economic models to adjust for Friday's blockbuster release of nonfarm payroll data, where the Labor Department said the economy generated 308,000 jobs in March, which was well above economists' forecast of 123,000.

Before we say "those economist's have their heads in the sand, and wouldn't be able to forecast a rainstorm if it were already raining," the Labor Department added that prior months data was revised higher!

How could even the smartest of economists make an accurate prediction when the base numbers, dating back to January, are being revised?

Nonfarm Payroll Table - March 2004 thru September 2003.

While March's jobs growth was much higher than economists' had forecast, even the Labor Department said it previously released figures from 03/05/04 (February report) and 02/06/04 (January report) were incorrect, and the economy added 87,000 more jobs than was reported in the prior two periods.

It's a tough job to try and forecast something, when you base data is constantly being changed.

In the larger scope of things, and upward revision of 87,000 jobs in the prior two months is rather insignificant, but it makes an economists, and stock/bond investors rather uncertain as to what they are dealing with.

For an economist, they go back to the drawing board, plug in the latest bit of data, rerun their economic models and see if it spits out a relatively close ballpark figure to what was just reported.

Investors have to do the same thing, and there was a lot of refiguring, or adjustments being made to some financial models in today's trade, where volumes at both the NYSE and NASDAQ were heavy.

Market Snapshot / Internals - 04/02/04 Close

The major indices jolted higher at the open, but for the most part, traded what I would consider to be a narrow range from that point forward. While there were some intra-day gyrations, they were rather gradual after the initial bullish response.

I never really noticed, until preparing the final Market Snapshot Internals, that while the NYSE Composite showed a growing number of new highs from yesterday's final tally (308), Friday's 27 new lows, in a rather bullish index trade found today's number of new lows somewhat high to yesterday's count of 27.

Responses found among interest rate-sensitive sectors had banks and homebuilders trading lower with the S&P Banks Index (BIX.X) 344.51 -1.32% and Dow Jones Home Construction Index (DJUSHB) 644.47 -4.26% diverging from broader equity gains. Treasuries found sharp selling as market participants began wondering if the strong payroll data will have the Fed less patient with its easy monetary policy of low fed funds.

10-year Treasury Bond YIELD ($TNX.X) - 5-minute intervals

Treasury bond prices were crushed just after the official release of the nonfarm payroll data. There was suspicious selling just just prior to 08:30 AM EST, where bond traders suspect that somebody may have leaked the nonfarm figures before illegally.

Did you know that the Bureau of Labor Statistics doesn't allow the trash collector in its offices for a full week before the release of the nonfarm payroll report? That's how secretive and market moving this data can be. (I didn't know this until today)

To put today's Treasury bond action in perspective, the Lehman 7- 10 year iShares (AMEX:IEF) $85.47 -1.84% dropped rather sharply. While not an exact correlation, imagine that an investor BOUGHT a 10-year Treasury bond yesterday with the thought that a 3.9% annual YIELD was a bargain. They'll most likely collect that 3.9% per year, but suffered a -1.84% account loss on Friday. If nothing changes for the next 5-months, then the bond investor that bought yesterday, will be back to break-even in about 5- months after collecting their interest check.

S&P Depository Receipts (AMEX:SPY) - 5-minute intervals

While Treasuries found selling at the open, then traded rather sideways, the SPY, which tracks the S&P 500 Index (SPX.X) 1,141.81 +0.84% jumped at the open, then traded a range from roughly $114-$114.60 the remainder of the session.

We can't tell anything from just one session, but bond and stock market reaction, and remainder of day's trade suggests a MARKET thought that economy is strong (stocks) and that the Fed may now be starting to consider raising its fed funds rate. (DAILY and WEEKLY levels were shown so traders utilizing the Pivot Matrix would have some price/level reference).

10-year YIELD ($TNX.X) Chart - Weekly Intervals

It is time to really start monitoring Treasury YIELDS, as rising YIELD could have potential near-term negative impact for equities. At the same time, the selling of Treasuries could have incredibly bullish implications for stocks!

First, I would want to be alert to a 10-year YIELD that move above trend. Anytime a longer-term trend is broken (up or down) it signals some type of shift in MARKET thought.

Near-term negative implications: Why did Treasuries see a rather sharp round of selling today, and this week? Let's say it was because the economy really looks to be adding jobs and that the MARKET now sees a greater chance of the Fed raising its fed funds rate sooner than some (even the Fed) has been suggesting.

The negative implication that I could foresee on a near-term basis, is that Treasury bulls really begin stepping up their selling, and YIELD breaks above longer-term trend, and even the 45.00, or 4.5% level. How much CONFIDENCE do YOU have in the Labor Department's statistics on what type of jobs the economy is really generating? How much CONFIDENCE do YOU have in economists' forecasts, which can be used by market participants when considering what stocks to be buying or selling?

Go back and review the nonfarm payroll table to see how much CONFIDENCE anyone can have at this point. To have CONFIDENCE, it usually takes several observations to build a more predictable trend.

Right now, I'd have to say the month-to-month nonfarm payroll data is somewhat unpredictable. The economy is generating jobs, and just as President Bush, Fed Chairman Alan Greenspan and Treasury Secretary John Snow predicted (for months) the economy does look to be ramping up some job growth, but I'm not sure how much CONFIDENCE there can be at this point.

What it usually takes to overcome higher interest rates, especially in the early stages of economic recovery is CONFIDENCE in many of the various economic trends, where job growth is usually the last indicator to show improvement.

Friday's reaction from both the stock and bond markets would appear to show some sign of optimism about jobs growth, which the Fed has said might have it changing its views on the current accommodative monetary policy.

Positive implications: The positive implications of rising Treasury YIELDS, which is only brought on by selling in the underlying Treasury, is that the REWARD of owning these bonds isn't worth the RISK, and should there be CONFIDENCE that job growth is in an early ramp up stage, where jobs equals more money available for consumer spending to further grow the economy, then a rising Treasury YIELD, which will raise the borrowing costs for YOU and I, can be absorbed actually offsets each other.

June Crude Oil Futures (cl04m) - Daily Intervals

I showed the above chart of June Crude Oil Futures (cl04m) in the 03/18/04 Index Trader Wrap after the recent Producer Price Index figures were released, where concern regarding inflation was thought to be responsible for stock's declining. This week, OPEC announced they would cut their daily production quota by 1 million barrels per day. Oil ministers say that prices in the futures market were not accurately depicting the current supply/demand dynamics in the market and that if they didn't cut their oil output, prices were going to fall sharply.

It may be hard to believe, but there has been talk for months that Oil and oil futures have been bought to hedge currencies. Despite OPEC announcing production cuts, oil prices in the futures markets actually fell this week.

Now get this....

In Friday's Market Monitor, fellow analyst Jonathan Levinson, who is always on the lookout for inflation noted that Georgia Pacific (NYSE:GP) $34.15 +0.44% was raising Dixie Cup, plate and cutlery prices 4% to 6%, and would raise paper towel, tissue and napkin prices 6% to 9%.

We can begin to understand that this is inflationary at the consumer level, and most likely, GP is raising prices to offset the rise in fuel prices, which GP relies on to make its products.

I thought to myself, and posted a reply to Jonathan's comment that this might be GOOD NEWS! Actually, I was playing devils advocate, when I made the comment that it was good news that GP actually felt they could raise prices for their goods. Hasn't that been a NEGATIVE often mentioned? That company's have no pricing leverage?

I also wondered how long GP has been waiting to make this announcement? It might well be coincidence, but what better time to announce a price increase, when the economy shows robust jobs growth, while Oil prices are falling.

Could the scenario of raising the price for your product be a positive for a company like GP, or other companies, if the economy begins ramping up job growth, and oil prices fall?

OK... so maybe we need to keep tabs on oil prices and jobs data. Think about not only the NEGATIVE implications, but also the POSITIVE implications. Jobs and oil/fuel prices were perhaps this weeks top economic news events, where both can have implications for what the Fed is thinking in regards to interest rates, which could draw a reaction from the bond market, which could then impact consumer borrowing costs, where selling in Treasuries could have positive, or negative implications for equities.

Pivot Analysis Matrix -

A quick note I want to make for the S&P Banks Index (BIX.X) is that Friday's range of trade, was also the week's range of trade. For such a move to take place, I would have to think the nonfarm payroll data from Friday was a surprise, and most likely had some banking bulls re-thinking some scenarios as it relates to interest rates (where a sharp rise can become a negative) versus the positives that jobs growth (still uncertain as to what type of sustainability or stability of growth) could have on banks.

Up in the DAILY Pivots, to the far left, I quickly review Friday's percentage changes for the S&P 500 Index (SPX.X) +0.85%, the NASDAQ-100 Index (NDX.X) +2.55% and the S&P Banks Index (BIX.X) -1.32%.

Those that have looked at a chart of the NDX.X or QQQ in recent weeks or months will certainly understand that this tech-heavy index had seen steeper percentage declines, where in just the past 7 sessions, 62% of the mid-January to late-March decline has quickly been erased.

One thing I do think traders/investors do need to come to grips with is that we could well be seeing bullish rotation back to a more "oversold" group of stocks.

With that said, I also want traders/investors in the SPX and OEX to remember that roughly 25% of the SPX/OEX is comprised of financial stocks. This isn't just banks, but brokerage stocks as depicted by the Broker/Dealer Index (XBD.X) 709.54 -0.10% and insurance stocks, or the S&P Insurance Index ($IUX.X) 331.27 +1.04%.

Today's trade among the financial sectors was quite mixed. One reason the brokers were fractionally weak may be attributed to Lehman Brothers (NYSE:LEH) $82.67 -1.77%, which has profited greatly from bullish interest among Treasury bulls, and bond bulls in general, where LEH is one of the largest bond brokers/underwriters in the world. It isn't so much the thought that Treasuries fall out of favor that would impact trading revenues (still a transaction to be had for buyer to meet seller), but if Treasuries begin to lose favor among fixed income investors and YIELDS rise, then there becomes thought that new CORPORATE bond offerings, which translate to underwriting fees for LEH, could begin to dry up.

Insurance companies would most likely WELCOME higher Treasury YIELDS. Why? Insurance companies that take in revenue in the form of premiums you and I pay, invest a large portion of those premium in interest bearing securities, which are obligations of the issuer (the government, companies, etc) where the interest paid on those investments can be used to pay claims. Basic thought is that if properly managed, rising bond YIELDS can actually help an insurance company's bottom line.

Here's a twist you may not have thought of. What have your insurance premiums been doing the past couple of years? Going up? What have Treasury YIELDS been doing the past couple of years? Going down? What if Treasury YIELDS rise, insurance company's become more profitable and margins grow? Could it be that a rising YIELD then allows an insurance company to actually LOWER insurance premiums for consumers?

Remember in a free market economy like we have in the U.S., when profits in a certain segment of the economy become too great, there will be new entrants to that business, looking to share in the profits. With new entrants comes competition. With competition comes lower prices.

While a mixed outlook for various financial sectors presents itself should Treasury YIELDs rise, one mindset I think traders should be refreshed on, is the importance of the financial sectors, especially as it relates to the SPX/OEX.

Remember too, that the "real" name of the NDX.X is the NASDAQ-100 Non-Financial Index.

Again... one day's trade and percentage change I showed for Friday's trade isn't necessarily indicative that money is going to rotate out of banks and into technology, but Pivot Matrix traders that are using the levels to help guide their trade, might have to be prepared, or understand that a WEEKLY R1 for the NDX/QQQ may not be directly tied to the BIX.X or SPX/OEX.

Traders of the SPX/OEX might have to begin thinking of these two indices as an 8 cylinder car engine, where with 25% of its weighting being tied to financial sectors, which can be impacted by rising and falling Treasury YIELDS, may run on all 8 cylinders one day, but 6-cylinders the next, as the MARKET tries to sort out the impact of Friday's more robust jobs data.

S&P 500 Index (SPX.X) Chart - Daily Intervals

During today's session I was making note that the small-cap Russell-2000 Index ($RUT.X) was challenging new highs. With the SPX now boosted above its 50-day SMA, I would be keeping an eye on the RUT.X, and should it make a break above current levels, then I would have to think that the SPX's March 5 highs are in play.

Russell-2000 Index ($RUT.X) - Daily Intervals

The RUT.X is back at 603 and after briefly violating a downward trend in early March to just barely trade a new 52-week high, the RUT.X found support at a conventional 80.8% retracement taken from its All-time high to the bear market low.

With the RUT.X right at the upper end of what has been a trading range, focus can be given to Stochastics, where this oscillator is more informative for trading ranges. Still, the longer-term trend, as depicted by the regression channel, also taken from the bear market low has traders observing MACD ramping higher and back above zero, which looks very bullish.

This would be the major index to be monitoring for leadership. I would have to begin thinking renewed weakness only on a reversal back below the starting to round up 21-day SMA of 492.55.

NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals

Friday's nonfarm payroll data saw the QQQ gap higher, and by session's end, heavy volume of 128.2 million shares traded. While the QQQ is also matching a March 5 relative high of $37.15 (the bar that tucks directly under the 50-day SMA, where QQQ closed just above the current WEEKLY Pivot of $36.59) I would tie current level of trade in the QQQ to the RUT.X.

Since the QQQ is more heavily traded buy bulls and bears, where the RUT.X, keep a close eye on the RUT.X in sessions to come.

I would expect more shorting in the QQQ, but should the RUT.X be breaking new ground higher to its all-time high, then QQQ could launch further higher to WEEKLY R1.

Dow Industrials (INDU) Chart - Daily Intervals

Effective at the opening of trade on April 8, 2004, current Dow Components T +1.55%, EK +0.27% and IP +1.16% will be replaced with are going to be replaced AIG +1.33%, PFE +1.15% and VZ +0.92%, which may have the Dow Industrials trading somewhat unnatural until the changes are completed.

In today's trade, I made note that both Intel (INTC) $28.12 +2.70% and IBM (IBM) $94.20 +1.98% showed what looked to be reverse head and shoulder patterns on their charts, which I felt could have bullish implications if played out to their pattern objectives. Both stocks broke above their horizontal necklines in today's trade and both traded above average volume.

INTC's pattern objective is calculated at $30.00 (head $26, neckline $28), while IBM's pattern objective is calculated at $97.25 (head $90.28, neckline 93.80).

INTC is scheduled to announce quarterly earnings on April 13, after the close. Analysts estimates are for the company to earn $0.27 per share compared to year-ago quarter $0.14.

IBM is scheduled to announce quarterly earnings on April 15, after the close. Analysts estimates are for the company to earn $0.94 per share compared to year-ago quarter $0.79.

Jeff Bailey

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