Geopolitical events in Iraq and India sent global markets notably lower in Monday's trade, which had U.S. equity markets extending last week's losses with the S&P 500 Index (SPX.X) 1,084.10 -1.05% falling 11.6 points and setting a bearish tone to start the week.
Treasuries, which witnessed an intra-day reversal to buying on Friday, saw what I consider defensive buying in today's session as investors sought some safety at higher yields.
The loan U.S. economic report showed manufacturing activity in the northeast slowing in May. The New York Empire State Index fell to 30.2 in May from a revised 34.0 reading the previous month.
Readings above zero indicate expansion, with readings above 30 indicating a high level of economic expansion.
The drop in the index was larger than expected, which may have brought some buyers back toward treasuries, as the prices paid index edged down to 56.7 from a record 57.0 in April. Still, no manufactures reported declining prices, just some abating of recent price gains.
The New York Fed said its order index rose to 36.6 in May from 30.6 in April, while shipments rose to a record 42.3 from 39.5. Unfilled orders jumped to 15.7, its highest level in more than a year.
Two headlines came out of Iraq today, where oil jumped to a record high of $41.85 before retreating back near $41.55 per barrel as the head of the Iraq governing council, Abdel-Zahraa Othman, was killed by a car bomb. Othman was the second member of the U.S.-appointed council to be assassinated since September, and led to uncertainty over the handover of sovereignty on June 30.
President Bush said the strike only added to U.S. resolve for turning over the Iraqi government to Iraqi's by the June 30 deadline.
Later in the day, the U.S. military said an improvised bomb armed with sarin gas exploded in Iraq when a convoy passed, releasing a small amount of the nerve agent. Details regarding where the sarin gas bomb event took place were not disclosed, should there be others in the proximity.
The discovery of the sarin nerve agent was the first such find of weapons of mass destruction, since the war in Iraq began.
While nobody would admit that the U.S.'s discovery of sarin gas in Iraq could be viewed as "positive" news, geopolitical analysts did say it could solidify the reasoning behind coalition forces involvement in Iraq.
Exacerbating today's early session weakness was India's benchmark stock exchange plummeting as much as 16% in intraday trading, which wreaked havoc on overseas markets, as investors became increasingly concerned over whether the new Congress Party government, led by Sonia Gandhi, might slow the privatization of state-run companies after defeating the National Democratic Alliance in elections last week.
India's Bombay Stock Exchange ($BSE) Chart - Daily Intervals
The sharp 11% decline for India's Bombay Stock Exchange was reported as the largest single-day loss in its 129-year history.
Both the Networking Index (NWX.X) 223.88 -2.82% and Combined Telecom Index (IXTCX) 166.01 -2.31%, which were today's sector losers, fell sharply after both Goldman Sachs and CIBC made note that India's openness to privatization has been a great catalyst for technology shares.
Both Goldman Sachs and CIBC said the telecom landscape may see some negative impact from geopolitical uncertainty in India, depending on which policies Ms. Gandhi embarks on, as elections held last week would have increased influence from the communist/left parties in the newly formed coalition government.
Telecom infrastructure companies with exposure to India had LM Ericsson (NSADAQ:ERICY) $24.87 -3.26%, UTStarcom (NASDAQ:UTSI) $26.36 -2.04% and Nokia (NYSE:NOK) $13.08 -0.83% under selling pressure, with Nokia (NOK) recording a 52-week low in today's trade.
Qualcomm (NASDAQ:QCOM) $62.56 -1.71% was pressured as India has been one of the fastest growing markets for the company's CDMA technology.
Goldman and CIBC said eventual decisions regarding continued privatization, or the possibility of reverting back to de- privatization could have consequences for OEM (original equipment manufacturers) like handset makers Kyocer (NYSE:KYO) $71.29 -1.46%, Nokia (NYSE:NOK) $13.08 -0.83% and Motorola (NYSE:MOT) $18.65 -1.27%. If so, handset chipmakers with exposure to India could bring uncertainty toward RF Micro Devices (NASDAQ:RFMD) $7.13 -1.65%, TriQuint Semiconductor (NASDAQ:TQNT) $5.18 -4.05%, Skyworks Solutions (NASDAQ:SWKS) $8.58 -1.15% and Anadigics (NASDAQ:ANAD) $4.30.
Sector gainers in today's session were limited, with Treasuries finding a strong round of buying with the benchmark 10-year bond getting a pop at the open and finish at its session, with yield ($TNX.X) falling 8.9 basis points, and roughly 20 basis points from Friday's intra-day high, to close at 4.699%.
10-year Treasury YIELD ($TNX.X) - Daily Intervals
While today's New York Empire State Index was well below consensus estimates of 34.0, today's gains for Treasuries would have to be viewed as being largely driven by defensive buying, with perhaps some bears locking in recent gains as the 10-year YIELD slips below the 4.750% yield level.
I say this as the Continuous CRB Index ($CRB.X) 268.36 -0.3%, while below the 269 level I thought might bring some renewed buying toward Treasuries, if not broader bond market, fell just 0.83 points by the close.
With Treasuries being the "least risky" bond investment under times of geopolitical uncertainty, I would still analyze today's bond market trade as being more defensive, when I note that the iShares Goldman Sachs InvestTop Corporate Bond (AMEX:LQD) $106.49 +0.61%, which is in general terms higher RATED corporate bonds, found gains, while at the RISKIEST end of the bond spectrum, the Pacholder High Yield (AMEX:PHF) $8.19 -2.03% gave back all of Friday's gains, as if bond traders were risk averse due to geopolitical events.
Market Snapshot / Internals - 04/17/04 Close
Spot Gold finished up $2.80, or 0.74% as the U.S. Dollar Index (dx00y) 90.96 -0.75% recoups some of today's losses, but still trades below Friday's close where the U.S. Dollar Index (dx00y) found its overnight lows this morning at 03:55-04:00 AM EDT at 90.51, where after equities opened at 09:30 AM EDT, the U.S. Dollar Index (dx00y) matched the overnight low of 90.51 and as the dollar lifted from those levels, Spot Gold eased from its morning highs. Currency traders said the dollar's early declines came from overnight hedging on expected weakness for stocks and strength for Treasuries. A complex trade and most likely related to complex hedge activities.
The AMEX Gold Bugs Index ($HUI.X) 180.08 +1.52% was the only equity-based sector in my U.S. Market Watch screen to gain more than 1%. The Oil Service Index ($OSX.X) 98.89 +0.39% was the only other equity sector/index to manage a gain.
Despite a drop in Treasury yield, the interest sensitive S&P Banks Index (BIX.X) 332.18 -0.88% and Dow Jones Home Construction Index (DJUSHB) 549.04 -1.52% traded lower.
Pivot Analysis Matrix -
Friday's close found the INDU, DIA, SPX, SPY and OEX all closing above this week's pivot, but geopolitical events found gap lower opens, where today's intra-day highs did not see trades back at the WEEKLY Pivots. As such, the UNEXPECTED (at least concerning Iraq events) would have the WEEKLY Pivots as a near-term resistance level, where correlative MONTHLY S2 and WEEKLY Pivot in the Dow Industrials (INDU) 9,906.91 -1.05% looks more formidable.
The S&P 100 Index (OEX.X) 530.40 -0.94% was the only major index within the WEEKLY Pivot matrix to not see trade at its WEEKLY Pivot.
In recent Market Monitor posts, I've been tracking some historical trade within the WEEKLY Pivot level for the NASDAQ-100 Index (NDX.X) 1,379.90 -1.42% and Semiconductor Index (SOX.X) 444.94 -1.34% where I thought a move above their WEEKLY Pivots could find strength building for the next week-and-a-half. Needless to say, there was little shot for that to happen at the open.
Due to width of a SOX/NDX chart work I began back on Sunday May 9th, I can't display the chart comparisons of the NDX/SOX and what I was looking at, but if you click this http://www.OptionInvestor.com/charts/510200473228AM_72.asp last week's trade looked to be similar to that found for the week of 03/22-03/26, where after the SOX.X showed some strength within its weekly pivot RELATIVE to the NDX, unison breaks above the WEEKLY Pivot saw strength build to the remainder of the week and following two weeks.
Last week (for 05/10 to 05/14) the SOX.X showed some relative strength in its weekly pivot to traded at its WEEKLY S1 while the NDX.X was weaker at its WEEKLY S2. It was this week (for 05/17 to 05/21) that both the NDX/SOX showed similar setup for strength ABOVE their WEEKLY Pivots.
Considering today's action, I would have to think WEAKNESS below these pivots.
I used the NDX/SOX as both open and close at 09:30 AM EDT and 04:00 PM EDT, where the QQQ closes at 04:15 PM EDT and often times, the last 15-minutes of trade will create some disconnect for SOX/QQQ correlations.
NASDAQ-100 Tracker (QQQ) - Daily Intervals
Late Friday I thought there was good shot for a gap ABOVE the QQQ/NDX WEEKLY Pivots for a rally to WEEKLY R2 of $36.00, which is this month's option expiration "Max Pain" level. The QQQ failed that scenario as I did not forecast some of today's geopolitical events. As such, must view the WEEKLY Pivot as resistance. A break below $34.09 could well see some long liquidations in the QQQ from the noted 186.6 million shares traded on Wednesday of last week between $34.27 and $34.28 as trader/investors begin contemplating new levels of support on a break of the March lows ($34.01).
Dow Industrials (INDU) Chart - Daily Intervals
The Dow Industrials (INDU) 9,906.91 -1.05% had been holding closes near its rising longer-term 200-day SMA, but today's close is the lowest since December 5, 2003, and hints that bulls are perhaps losing their appetite. Two overlapping resistance levels at the 9,980 and 10,100 levels.
Late today, I thought it best to have some bearish exposure to the indices and profiled a PARTIAL 1/2 position in the Dow Diamonds (AMEX:DIA) $99.56 -0.88% and the JULY $100 Puts (DIASV) for $3.30, no stop and target of $92.00, which would be equivalent to INDU 9,200. This type of target, in my opinion, would only come under more extreme geopolitical events.