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Market Wrap

Lower Highs

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      05-07-2003           High     Low     Volume Advance/Decline
DJIA     8569.56 - 27.80  8635.06  8529.04 1.91 bln   1533/1719
NASDAQ   1506.77 - 16.94  1523.91  1503.06 1.87 bln   1372/1767
S&P 100   470.31 -  2.40   474.57   468.91   Totals   2905/3486
S&P 500   929.62 -  4.62   937.13   926.41 
RUS 2000  410.23 -  2.52   412.75   409.95 
DJ TRANS 2457.26 - 30.47  2488.80  2456.91 
VIX        23.76 +  0.50    24.60    23.14 
VXN        32.03 -  0.10    33.36    31.73 
TRIN       1.32
PUT/CALL   0.92

Lower Highs
By Jonathan Levinson
Click here to email Jonathan

The indices opened lower, drifted and then pushed to their highs of the day, coming close but not touching the highs set yesterday, before sliding throughout the afternoon to their lows of the day and then drifting slightly higher into the close. Volume was lighter across the indices, with the highest spikes at the open and the close.

Daily Chart of the INDU

The daily chart of the INDU shows the failure at upper resistance today, but with price still respecting the boundaries delimited by the wedge trendlines. I left out the descending trendline from the weekly trend depicted below. Today's candle illustrates the confusion between bulls and bears, with a spinning top, the bulk of the trade between the upper and lower blowoff extremes with a neutral close. Both the stochastic and MacD oscillators are overbought and trying to turn down.

Weekly Chart of the INDU

The weekly chart shows the two most recent bear wedges and their breakdown zone at the upper descending trendline. Note the toppiness of the 10 week stochastic here.

Daily Chart of the COMPX

The COMPX printed a bearish shooting star today, closing relatively lower than the INDU and signaling more decisiveness to the downside. The stochastic gave a bearish cross from deep in overbought, though today finished on lower volume.

Weekly Chart of the COMPX

The weekly view is setting up a potential bullish triangle formation, and illustrates the prime source of concern for bears at current levels. Another wave higher from here would alter the longer term picture considerably.

It was a quiet news day. The Commerce Department reported that March wholesale sales rose 1%, outpacing the .5% rise in inventories. The inventory-to-sales ratio fell to a record low 1.21. This low ratio means that a proportionately higher number of retail sales will be reflected as higher factory orders as the buffer of inventories is diminished. Sales of durable goods were up 2.1%, its highest reading in 4 years on motor vehicle sales, as consumers continued to take advantage of unprecedented financing incentives. Sales of non-durable goods increased 0.1%. Inventories of durable goods rose 0.3%, again led by a 1.2% rise in auto inventories.

The Energy Department reported that crude oil reserves fell by 800,000 barrels for the week ended May 2, surprising analysts to the downside. Total inventories are now a reported 287.2 million barrels, down 11.6% for the comparable period last year. Gasoline inventories rose by 2.2 million to 207.8 million barrels, bringing total supplies up to a decrease of 4.2% for the comparable period last year. The June crude contract closed at $26.23 per barrel, up 51 cents +2% on the NYMEX. June heating oil closed at 68.93 cents per gallon and June unleaded gasoline closed at 77.96.

The Fed reported that consumer credit increased in March by the smallest degree in 4 months, by $930 million or 0.6% to $1.74T. This reading came well below expectations of 3.1B. Revolving credit rose by $2.3B for a 3.9% gain. Non-revolving credit - including car loans and other borrowing -- fell 1.7% or $1.4 billion.

Treasury bonds rallied, with yields diving. The five year yield finished near its low of the day, down 12.4 basis points to 2.55%, the ten year down 11.5 bps to 3.693%, and the thirty down 7.2 bps to 4.691%. It was reported that Al Green was likely buying treasuries in the open market "to boost reserves in the banking system in order to combat deflation pressures," per Tony Crescenzi, analyst with Miller Tabak. "This rumor, which has circulated in the markets over the past few weeks, was reinforced by the Fed's policy statement wherein the Fed indicated a concern over the potential for a further decline in the inflation rate," he said. Ben Bernanke's published statements earlier this year about the fed having "a printing press" and being ready to employ unconventional measures such as outright purchases of thirty year treasuries might also have tipped off Mr. Crescenzi. An article on CNNfn observed that, "More abstractly, some traders might worry [that] the Fed's warning [in yesterday's release] of deflation -- despite interest rates at 41-year lows, which should be inflationary -- makes the United States look less like ancient Rome or Queen Victoria's Britain and more like 1990s-era Japan."

The fed added $6.25B in repurchase agreements, for a net addition of $1B in liquidity against the expiring $5.25B 2 day repo expiring today.

The US Dollar Index had another rough night last, bottoming near 95.10 and meandering as high as 95.80 before pulling back. It was reported that the US Dollar reached at 10 month low against the Yen today. The Canadian dollar had slipped .32% against the USD, and the Euro gained .48% against the USD at the time of this writing.

Daily Chart of the US Dollar Index

In corporate news, Newmont Mining (NEM) surprised to the upside, reporting Q1 net income of $117.3 million, or 29 cents a share, versus a loss of 3 cents a share in the year-earlier period. Sales for the period jumped 74 percent to $864. 6 million. Expectations had been for 18 cents per share and revenue of $696.6 million. NEM attributed the results to a 59$ per ounce, or 20 percent, higher gold price, coupled with its mostly unhedged gold position. Imagine, increasing profits based on an increase in pricing power of the product a company sells! This has become an almost revolutionary concept in the wake of the tech bust over the past few years.

INTC was weak after reporting to the SEC an anticipated gross margin percentage of 50 percent for Q2, below Q1's 52%. The company attributed this decline to higher startup costs and a Q1 benefit from the sale of previously reserved inventory. It went on to state that an uncertain global economy makes it difficult to predict demand. Q2 revenue is expected to decline to $6.4 billion to $7 billion, from Q1 revenues of $6.75 billion. Capex spending is expected to decline to $3.5 billion to $3.9 billion in 2003 from $4.7 billion in 2002. The stock closed at $19.16 per share, down 1.94%.

Moody's Investors Services placed AMD on ratings watch for a possible downgrade, citing concerns that its cash burn rate may place AMD in the unenviable position of having to raise another round of capital in the short to intermediate term. AMD's shares traded lower to 7.49, also down 1.96%. Investors were no doubt connecting the dots, taking MSFT down 1.46%. If consumers are not buying CPU's, they're probably not buying operating systems either. MSFT was hurt by news out of the EU setting a fall deadline to resolve an ongoing tax dispute with the US concerning incentives for US corporations, and threatening sanctions in the neighbourhood of $4B.

Reports circulated in the morning that a new Saddam audio tape had surfaced, exhorting the Iraqi people to reject the "invaders" and assuring them that "victory is near". The tape could not be authenticated, however, and its impact on the markets were barely discernable.

CNN reported that the National Weather Service has issued new tornado warnings in areas still trying to recover from heavy storms in the lower Midwest, Mississippi Valley and Southeast earlier this week. Possible funnel clouds in northeast Louisiana and northwest Mississippi were reported, with Tennessee's Cannon, western DeKalb, southeastern Wilson, northern Marshall, eastern Williamson, northwestern Bedford and Rutherford counties under tornado warnings. Severe storm warnings were issued for these regions as well.

It appears that the markets are begin to turn their attention back to economic and corporate data after blissfully ignoring a steady torrent of bad results over the past months. This sets up a potentially dangerous environment for traders, because as the wholesale sales and inventories data showed today, the news isn't necessarily all bad. Whether those data resulted from an ongoing and unsustainable overindulgence in consumer credit spurred by very low interest rates is a matter of speculation. As the charts illustrate, equities are having trouble pushing above their upper trendlines, and it will take a strong round of buying to propel them to the next level. Whether this will come from positive economic or corporate data over the coming sessions remains to be seen, but until a clear resolution of the bearish chart patterns depicted above, traders should be seeking to exercise caution, particularly on the long side. For tomorrow, we await publication of the FOMC minutes for March, and initial jobless claims (prior 448K, expected 440K for the week).


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