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Market Wrap

Inside Day

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      05-21-2003           High     Low     Volume Advance/Decline
DJIA     8516.43 + 25.07  8523.16  8431.21 1.79 bln   1971/1311
NASDAQ   1489.87 -  1.22  1490.82  1478.15 1.74 bln   1684/1473
S&P 100   465.20 +  1.62   465.58   461.07   Totals   3755/2784
S&P 500   923.42 +  3.69   923.85   914.91 
RUS 2000  410.73 +  1.70   410.29   407.05 
DJ TRANS 2356.39 -  8.89  2364.59  2344.02 
VIX        23.21 -  0.16    24.59    22.87 
VXN        30.88 -  1.34    32.85    30.81 
TRIN       0.74
PUT/CALL   1.00

Inside Day
By Jonathan Levinson
Click here to email Jonathan

It was a narrow range session today compared with what we've seen lately, with tension building as bulls and bears were forced ever closer by tapering chart formations. Today's candles printed lower highs and higher lows than yesterday, setting up the markets for a big move tomorrow. The indices finished almost where they started despite a number of ordinarily market moving events.

Daily Chart of the INDU

Weekly Chart of the INDU

Note that despite the strong shows of bullish conviction yesterday and today, nothing was done to reverse the sell signals generated by Monday's selloff. On the daily charts of both the INDU (above) and the COMPX (below), we have bearish crossovers of the 13 day simple moving average by the 5 day sma. Zooming out to the weekly charts, we see that the uptrend of the past months has yet to be seriously reversed, but this week has so far printed a bearish engulfing candle, which portends lower prices to come.

Daily Chart of the COMPX

Weekly Chart of the COMPX

There were no market-moving economic reports today. The Energy Department reported that crude oil stocks rose 600,000-barrels during the week ended May 16, vs. expectations for a 1M barrel rise. Total inventories are now 285.1M barrels, which is 12.4% below last year's equivalent level. Gasoline inventories fell by 200,000 barrels to 208.4M, bringing total supplies to levels 4.3% lower than at this time last year. July crude closed at $29.03 a barrel, up 62 cents.

Fed Chairman Alan Greenspan addressed Congress today commencing at 9:30 EST. The US Dollar Index spiked to its low of the day in very volatile trading just after he began speaking and recovered weakly for the remainder of the session.

Chart of the US Dollar Index

As always, there was much to ponder in his prepared remarks and moreso in his responses during the Q&A session that followed. Most notably for short term traders, the fed chairman added a dose of uncertainty for those who felt that a rate cut by the fed at the June 25 meeting was a foregone conclusion. As Greenspan put it, "We do not yet have sufficient information on economic activity following the end of [Iraq] hostilities to make a firm judgment about the current underlying strength of the real economy. Incoming data on labor markets and production have been disappointing. Payrolls fell further in April, and industrial production declined as well. Because of the normal lags in scheduling production and in making employment decisions, these movements likely reflect business decisions that, for the most part, were made prior to the start of the war, and many more weeks of data will be needed to confidently discern the underlying trends in these areas." If anything, I would expect this statement to redirect the market's attention to the upcoming economic data scheduled between now and the end of June. Given the market's almost perfect disregard for the uniformly bleak picture painted by the data of recent months, Greenspan's comments will perhaps call the markets back to reality.

There were other interesting comments, and I strongly suggest a read of his prepared comments at http://www.federalreserve.gov/boarddocs/testimony/2003/20030521/default.htm.. I'll emphasize only that the fed chairman once again displayed an inability to pronounce the word "deflation" even once, but highlighted that risk throughout his remarks and in his subsequent responses to questions from the Joint Committee. As he put it, "Indeed, we have reached a point at which, in the judgment of the Federal Open Market Committee, the probability of an unwelcome substantial fall in inflation over the next few quarters, though minor, exceeds that of a pickup in inflation." The fact that the US Dollar Index actually found support today is interesting, and likely proves that Mr. Greenspan's counterpart in Japan was adding dollars to the BOJ's portfolio. (As of this writing, USD:JPY was up .48%, some of the only green on my forex screen and the biggest loser against the USD in today's session.) With Greenspan discussing the purchase of long bonds in the event that the federal funds rate "goes to zero" and highlighting the risk of a "substantial fall in inflation", while being too frightened to even utter the word "deflation", no clearer signal to sell dollars could be made. The fed continues to make a strong case for the ownership of precious metals. Gold, incidentally, was up 6.10 to 372.60 for the June contract as of this writing.

During the course of his remarks, Chairman Greenspan mentioned the boom in home equity borrowing. The Mortgage Bankers Association reported that 30-year loan rates hit 5.17%, below the record set in the May 9 week of 5.27%. These low rates sent the refinance index up 15.2% to 8,351.1. The MBA's market index of overall demand was up 10.2% to 1,562.8 and the purchase index slipped 4.7% to 395.8.

Weekly chart of the thirty year yield

While this is not an original thought, as the above figures from the Mortgage Bankers Association shows, it remains an excellent time to refinance your home mortgage- the best in decades.

Corporate news was slim today. NSM announced before the bell that it's pursuing its 'profit-improvement' initiative launched in February. The company said it's still actively pursuing a sale of its Information Appliance unit, and it is closing its cellular base-band business unit, which will result in a workforce reduction of 340 jobs. NSM said that it would record a charge of between $25 million and $30 million in Q4 from these moves. The company continues to expect sequential growth of 4% to 7%.

Big Mo's parent, Altria (NYSE:MO) was up strongly today after Florida's Court of Appeal overturned a jury award of $145B in punitive damages rendered in the court of first instance. This had been the largest such award in US history, and in rendering its decision, the Court criticized the plaintiffs' counsel, stating "it is obvious that the 'runaway' jury award was largely the result of numerous improper comments by plaintiffs' counsel directing the jury to disregard limitations on punitive damages. The trial was book-ended with prejudicial misconduct which incited the jury to disregard the law because the defendants are tobacco companies." The court overturned the Engel decision and held that in prosecuting tobacco claims, individual plaintiffs may exercise their rights individually, but not in a class action. The decision buoyed shares of tobacco companies, and MO was lifted 10% on the news.

A bill was been introduced to extend the SEC's powers in the prosecution of securities fraud cases. The bill would widen SEC powers to the detriment of state jurisdiction in moving against protected assets of alleged violators. In addition to extending the SEC's authority to impose civil penalties and fines, the legislation would require redirect moneys recovered by states in securities violation cases to the SEC for redistribution to investors.

Salomon Smith Barney, the brokerage arm of Citigroup, lost a $600,000 arbitration for putting unsuitable investments in a customer's IRA. The arbitration board ruled that SSB failed to diversify her investments, did not properly evaluate asset allocations and failed to exercise risk management to protect the account. This is one of the first cases to go to arbitration, and if it starts a trend, as we opined it would last year when this issue first came to the fore, brokers will have some additional liabilities to add to their balance sheets.

INTC's shareholders voted against a proposal to expense stock options, narrowly defeating the resolution. According to the company, treating stock options as a standard business expense would have cut its first-quarter net by one-third.

Japan's farm ministry announced that it had suspended imports of cattle, beef and beef-related products from Canada following the announcement on Tuesday that the first Canadian cow in 10 years had tested positive for Mad Cow disease. Canadian beef imports accounted for about 3% of total beef imports in Japan in 2002. This news scared US invertors, as the disease had previously been confined to Europe and Japan. The US beef industry is worth an estimated $60 billion, and relies on similar protections and procedures as those employed in Canada. The consensus appeared to be that this was an isolated case, as MCD and WEN shares stabilized today after yesterday's selloff. After the close, it was announced that some beef from the quarantined herd had made it into the food chain, contrary to what had been believed yesterday.

Al-Jazeera aired what was purportedly a new Bin Laden tape which urged Muslim's to "take a lesson" from the 9/11 attacks and "light a fire under the feet" of the United States, Britain, Australia and Norway by attacking embassies and corporations. At 11AM, it was announced that an Israeli official made an unannounced visit to White House. The Defense Intelligence Agency (DIA) raised the military terror threat level from "significant" to "high," its top level, and it was widely reported that the nation is anticipating a possible terrorist attack.

Despite fresh testimony from Greeenspan, terrorist news and heightened nervousness ahead of the long weekend, the markets coiled tighter to give us an "inside" day. Inside days tend to precede breakout moves as the markets uncoil from their compressed ranges. With terrorist fears and the markets still near their multiweek highs, there's a good chance that traders will try to lighten up their positions tomorrow. If they do, then we could see selling to challenge today's lows. As well, in light of Greenspan's comments today, the initial claims report due tomorrow before the bell (briefing forecase 435,000, expected 420,000, prior reading 417,000) could have a larger impact than usual as investors squint to find clues as to whether the fed will seek to cut rates or not in June. See you at the bell!


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