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Greenspan puts thoughts of deflation to bed

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Traders sold just about everything except the dollar when Fed Chairman Alan Greenspan testified before the Senate Banking Committee late this afternoon, where the Fed Chairman laid to rest past worries that deflation posed a threat to the economy.

Greenspan expressed no concern that inflation was too strong, but put to rest past worries that deflationary pressures were a threat. Regarding deflation, Mr. Greenspan commented that deflationary pressures, "which were a significant concern last year, by all indications are no longer an issue for us" as "pricing power is gradually being restored."

"Inflationary pressures will be reasonably well contained so long as productivity is moving at a reasonably good clip, and unit labor cots, as best we can judge, are still going down," he said.

Greenspan made the comments in response to questions at the Senate Banking Committee during testimony on bank regulation. He made no comments on the economy in his prepared testimony.

Greenspan's comments once again had traders struggling with the thought that higher interest rates are their way.

Market Snapshot / Internals - 04/20/04 Close

I can't explain today's last two-hour reaction to Fed Chairman Alan Greenspan's comments. I thought investors and traders had some inkling that the Fed might eventually tighten rates, but just after Greenspan began talking, the mere thought of any Fed tightening had buyers vanishing with the major indices closing at their lows of the session.

Treasuries, which had found early morning selling to then trade relatively unchanged just as Greenspan began speaking saw a surge of selling into their close, with the benchmark 10-year yield ($TNX.X) jumping 4.3 basis points to finish out with a 4.415% yield.

Stock futures did edge up in after-hours trade when handset chipmaker Motorola (NYSE:MOT) $16.22 -2.87% reported quarterly earnings that blew away Wall Street's estimates. Last tick on Motorola had the stock jumping 20% to $19.51 over the New York ECNs.

After-hours earnings -

After-hours earnings look to be generally inline or higher than analysts average estimates.

Pivot Analysis Matrix

It wasn't until 02:35 PM EDT that the major indices (INDU, SPX, OEX, NDX/QQQ) saw firm breaks below their WEEKLY Pivots. Once the mid-session lows were violated, it was almost as if today was the first time market participants really thought the Fed might eventually raise rates.

Tomorrow, Greenspan is scheduled to testify in front of the Joint Economic Committee, giving in-depth comments on the economy.

AMEX Gold Bugs ($HUI.X) - Daily Intervals

The dollar continued its torrid climb from the 03:00 PM EDT hour and traded its MONTHLY R2 the dollar strengthened further on Mr. Greenspan's comments. Precious metals along with many industrial metals witnessed sharp declines in today's trade, where the once coveted AMEX Gold Bugs Index ($HUI.X) continues to break down, with today's trade seeing a break of the 200-day SMA.

June Copper futures (hg04m) $1.311 -3.39% dropped more than 4.5 cents on Greenspan's comments, while rumors that China, which had been a big buyer of copper the past year was starting to sell the industrial metal, weighed on the metal.

Semiconductor Index (SOX.X) - Daily Intervals

Earlier this morning I posted the SOX.X chart in the Market Monitor and noted that some resistance at the WEEKLY Pivot seemed to be keeping gains in the QQQ to a minimum.

Traders in the Market Monitor may have used that observation to trade a day trade bearish in the QQQ from $36.72, where I had a downside target to QQQ $36.40 (just above DAILY Pivot of $36.39). Believe me when I say it was like pulling teeth to get the QQQ to trade $36.40 when buyers stood firm at $36.41. It wasn't until Greenspan's testimony that the Q's finally gave up their WEEKLY Pivot of $36.41.

Note resistance correlations around QQQ $36.41 in tomorrow's pivot matrix.

NASDAQ-100 Tracker (QQQ) - Daily Intervals

I can only shake my head and wonder how the QQQ can trade tighter range of $36.78-$35.41 for the bulk of the session, then suddenly, bids disappear from the WEEKLY Pivot and Q's close out at their MONTHLY Pivot of $35.68.

I've marked tomorrow's DAILY R1 and DAILY S2, where in a rather continued and unpredictable QQQ spat of volatility, who knows how the market will interpret tomorrow's comments from Greenspan.

The QQQ's last tick in after-hours was $35.88.

S&P 500 Index Chart - Daily Intervals

Just as bids (buyers) seemingly disappeared when the QQQ broke below its WEEKLY Pivot, it wasn't until the SPX broke its 12:00 PM EDT low of 1,133 that a sell program premium was generated (first one since very early in the morning) where the SPX cut lose to close at its lows of the session.

While today's 8% jump in the VIX.X may seem like a lot, and it is, either bulls are showing some complacency, or institutions, which will be buyers of puts to hedge bullish positions don't see the threat of rising rates being a negative for the broader equity markets.

For those still holding puts from the 1,125 level, I'd error on the side of caution and should the SPX trade back near its WEEKLY S2 tomorrow, look to take profits.

Dow Industrials (INDU) Chart - Daily Interval

The INDU looks vulnerable to the 10,200 level and even the "blue chips" saw bids suddenly disappear. Even the more defensive drug components like MRK -1.55%, JNJ -1.46% and PFE -2.34% fell to their close. I've yet to fully grasp how higher rates might impact the drug sector.

Jeff Bailey

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