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Oil and bonds gain, while stocks decline

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For stocks, it was a down day on Wall Street where September Crude Oil futures (cl04u) $44.41 +3.75% had oil rising more than $1.50 per barrel and settling at new highs, but doing little to boost stock investor's sentiment.

Investors turned to Treasuries, and bonds in general with the benchmark 10-year Treasury yield ($TNX.X) falling 2.9 basis points.

Higher grade corporate bonds found buying as the InvesTop Corporate Bond Fund iShares (AMEX:LQD) $108.94 +0.03%, which we track in the "Beetle's Benchmark Fund" edging up 4 cents, while our "junk bond" Pacholder High Yield (AMEX:PFH) $9.14 +0.88% tries to reclaim its 200-day SMA ($9.15) with an 8-cent gain.

Upbeat inventory data from homebuilder Toll Brothers (NYSE:TOL) $41.00 +0.07% for its recently completed July quarter, impressed traders early on as Toll's shares traded a session high of $42.99, helping lead the Dow Jones Homebuilders Index ($DJUSHB) 573.23 -0.44% to a session high of 589.82. At one point during the session I thought certain I could lose stock to a an August $40 covered call written on the underlying shares I hold in Toll Brothers, but as oil prices continued higher during the session and sentiment soured, that certainty turns a bit doubtful.

U.S. Market Watch - 08/05/04 Close

Not even the Oil Index (OIX.X) 358.87 -0.92%, or Oil Service Index (OSX.X) 106.89 -1.61% could weather today's storm of negative sentiment.

Market Snapshot / Internals - 08/05/04 Close

As the hours passed, bearish just continued to build. Today was a "classic" bearish reading from the TRIN where unlike yesterday's jump higher at the open (more bearish) the TRIN gapped lower, THEN move higher while stocks held relatively steady for the first 90-minutes of trade.

Traders that have been observing 5-day and 10-day NH/NL ratios also noted deterioration in the ratios, especially at the NYSE where at 11:00 AM the NYSE's 5-day NH/NL ratio started out at 56.3%, but slowly deteriorated during the session. Not a good sign when the much stronger NYSE under-performs the NASDAQ for bullish leadership.

With gold pinned below $400 per ounce and the CRB Index ($cr00y) or $CRB at www.stockcharts.com hovering around 270.00, I'd have to think "inflation" still not an overriding concern for the Fed at Tuesday's meeting.

Tomorrow's nonfarm payroll data will get multiple views on just what the numbers are saying. Economists currently forecast the economy to have generated 243 new jobs in July.

With sentiment still looking very negative (see XBD.X and SPX.X) keep an eye on the U.S. Dollar Index (dx00y) 89.64 -0.04%. I would think one way the market might tip its hand as to what the Fed is going to do on Tuesday (raise a quarter, or keep rates unchanged) is dollar action.

The dollar has had a nice move higher the past two weeks, where this action is DIVERGENCE to the "short dollar and buy oil" trade that had been discussed months ago, where traders believed the dollar's weakness or strength came on oil strength or weakness.

With the U.S. Dollar Index below its May relative highs of 92.00, yet oil well off its May relative lows of $36.00, it has to be my analysis, based on observation, that the dollar/oil trade hasn't been in play.

It would also be my analysis, based on observation, that after some analysts suddenly felt the dollar's strength in May was a signal of inflation and that the markets would dictate Fed action and have the Fed aggressively tightening interest rates, that current trade in the dollar does not signal hyper inflation, nor aggressive Fed tightening on the way.

So, I think the recent dollar strength has been from market participants anticipating a Fed tightening, where tomorrow's nonfarm payroll figures could draw some insightful action.

I don't trade currencies. I'd be willing to bet that probably 80% of market participants don't trade currencies. Therefore, we might get a more "natural" response in the dollar, than perhaps a more emotional trade from equities.

A level of trade for dollar weakness to perhaps sign "no move" from the Fed might be found in the Pivot Matrix.

Pivot Analysis Matrix -

MONTHLY Pivot and WEEKLY S1 correlations in the U.S. Dollar Index (dx00y) 89.64 -0.04% have been noted and with tomorrow's July nonfarm payroll figures a rather key economic report, I think we should at least be alert to dollar action, where the dollar might filter out some "sentiment" trade.

Observations from today's (Thursday) trade was that oil set the negative tone early and while the weakest NASDAQ-100 Index (NDX.X) 1,353.44 -1.86% was the only index to show some near-term correlative resistance at its DAILY R1 (1,387.40) not even the weaker Semiconductor Index (SOX.X) 402.39 -1.06% could turn tech sentiment bullish as it did trade its DAILY R1 (411.81).

Jeff Bailey

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