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     08-13-2003         High     Low     Volume Advance/Decline
DJIA     9271.76 - 38.30  9322.11  9233.94 1.48 bln    608/ 849
NASDAQ   1686.61 -  0.40  1695.83  1681.31 1.44 bln    738/ 677
S&P 100   495.29 -  4.45   500.95   493.55   Totals   1346/1526
S&P 500   984.03 -  6.32   992.50   980.85
RUS 2000  467.47 +  0.52   468.37   466.01
DJ TRANS 2598.88 -  8.59  2610.04  2592.52
VIX        20.62 +  0.41    21.69    20.17
VXN        30.27 +  0.06    31.24    29.79
Total Volume 3,144M
Total UpVol  1,490M
Total DnVol  1,598M
52wk Highs     367
52wk Lows       59
TRIN          0.12
PUT/CALL      0.78

By Jonathan Levinson
Click here to email Jonathan

The indices flirted with significant upside and downside levels today, finishing the day nearly unchanged, with the Nasdaq losing less than one point and the Dow 38 points.

5 year weekly COMPX

Cyclically, the Dow and Nasdaq both appear to have just completed up-phases from the March lows. Note that on both indices, the March bottom was a higher low on the 10 week stochastic, and the top of the ensuing up-phase occurred at a higher high. While lower prices appear to be in the cards, the onus will be on the bears for the down-phase just commencing.

5 year weekly INDU

6 month daily COMPX

The daily candles paint a picture of bifurcated markets with the Dow vastly outperforming the Nasdaq on the correction off the March rally's high. The Dow is on buy signals, with the Nasdaq on sells.

6 month daily INDU

20 day 30 minute COMPX

On the 30 minute candles, we see both indices in the early stages of downphases within bear flag formations, projecting to lower lows.

20 day 30 minute INDU

What does the foregoing tell us? The bulk of the long-term (weekly timeframe) energy of the Spring rally has been expended, and the cycles are beginning a down-phase. Countertrend to that are the daily candles, which have paused in their ongoing downphases. The short term up-phase which caused that pause has terminated on the 30 minute candles, with the oscillators in that timeframe topped out and pointing south.

While the outlook appears weighted to the downside, note that significant bounces can occur within downphases without disturbing their course, such as we see on the daily candles. For me, the best trades occur when the short cycles max-out countertrend to their longer cycles before resuming their runs in gear with the longer trend.

On the economic front, the Mortgage Bankers Association (MBA) announced this morning that seasonally-adjusted demand for mortgage refinancings, the MBA refi index, declined 16.1% for the past week following the previous week's 2.4% drop. Demand for loans with which to buy homes, the Purchase index, fell 10%. The Application index fell 10.3% for the week. The average interest rate for a 30-year fixed rate mortgage fell to 6% from 6.37%. The drop in mortgage and refi activity for the week is indicating either the beginning of the end of the mortgage and credit bubble, a very significant development, or merely a lag between rates and mortgage/refi demand. While it's entirely possible that demand has been satisfied at and near current rates, I find the latter case the more likely scenario, and we'll see next Wednesday whether demand perks up for this current week.

The Philadelphia Housing Index (HGX) was lower today, while treasuries got sold aggressively throughout the session sending yields sharply higher, the thirty year yield (TYX) finishing higher by 15.3 basis points at 5.441%.

One year daily chart of the HGX

The HGX sold off, dropping 5.44 to 286.14. It seems obvious that higher rates should slam the brakes on the homebuilders, but strong yield rally (see TYX below) has yet to have any serious impact on the index. Nevertheless, today saw the TYX add 15.5 basis points to the HGX' 5.44 point loss. If yields post new year highs, one might expect to see a downward trend in the HGX assert itself.

One year daily chart of the TYX

Equity futures took a jump at 8:30 when The Commerce Department reported that U.S. retail sales increased by 1.4% in July, exceeding estimates of 0.8%, led by purchases of gasoline, autos, electronics and household goods. The June figure was revised up to 0.9% from the 0.5% previously reported. Auto sales were up 3.2% in July. Excluding autos, retail sales were up 0.8% compared with estimates for a 0.5% increase. Retail sales were higher by 5.6% from July 2002, and this month's figures represent the largest increase since March of this year. It was reported that sporting goods stores and non-store retailers were the only retail categories to see a decline in sales for July. The financial press reported that this data is evidence of the sharp economic recovery that some are seeing. This may well be the case, but I find the water excessively muddied by the recent sharp moves in interest rates, the ongoing new highs in consumer credit, and the aggressive inflation of money supply by the Fed. The combination of increased sales with the recent declines in initial claims paints a potentially bullish picture for the economy, but ongoing price inflation, continuing unemployment claims and duration of that unemployment remain worrisome.

On that point, President G.W. Bush, following a meeting with his top economic advisors, told reporters that in his opinion, the current round of tax cuts and incentives should be sufficiently robust to create jobs, and that his administration is upbeat on the employment outlook. In a separate statement, U.S. Treasury Secretary John Snow said that, "When an economy is recovering, it is normal to see interest rates rise some. So I would point to the rising interest rates as an indication that the economy is coming back."

While Mr. Snow is not the only observer to share that opinion, I do not. Unless a significant uptick in employment and domestic corporate spending occurs (ie spending at home, and not foreign direct investment), the rise in yields looks purely negative to me, particularly in light of the alltime record levels of personal indebtedness and bankruptcies already occurring in this year's "as good as it gets" credit environment. The increase in yields will only exacerbate these problems, putting additional pressure on the straining consumer, as well as corporate and government borrowers. As a purely technical aside, a better than 130 basis point jump in yields within a 2 month period looks like more than interest rates merely "rising some", as Secretary Snow puts it, but the matter is open to interpretation.

The Labor Department reported that the price of imported goods rose 0.5% in July following a rise of 0.7% in June, exceeding estimates of a 0.3% increase. Prices for exported goods fell 0.1%. Prices rose in nearly all major sectors, with petroleum import prices rising 3.7% in the month while non-fuel import prices rose 0.1%.

The Energy Department reported a 200,000 barrel increase in crude oil supplies for the week ended August 8, while the American Petroleum Institute reported a 3.2 million barrel increase to 281.3 million barrels. Gasoline supplies fell 1.85 million barrels to 200 million barrels and distillate inventories lost 836,000 barrels to 117 million barrels according to the API. Unsurprisingly, analysts were caught flatfooted again, expecting a drop in crude oil supplies for the week. Crude oil futures led the Commodities Index to the downside, dropping 1.14 or 3.57% to $30.78 per barrel. Notwithstanding today's drop, crude remains above the widely-regarded 30 per barrel level and continues to pressure the economy.

We have the following economic data due tomorrow:

               Report                   Briefing  Market    Prior
                                        Expects   Expects
Aug 14 8:30 AM Core PPI Jul -             0.1%     0.1%     -0.1%
Aug 14 8:30 AM Initial Claims 08/09 -     385K     393K      390K
Aug 14 8:30 AM PPI Jul -                  0.1%     0.1%      0.5%
Aug 14 8:30 AM Trade Balance Jun -      -$42.0B  -$42.0B  -$41.8B
Aug 14 2:00 PM FOMC Minutes 
With bonds selling off aggressively today and gold rallying, the markets should be particularly sensitive to the 8:30 news. The initial claims data is expected to be low, and any upside surprise could be the straw that breaks the camel's back on the bear flags we've been watching. Nevertheless, it is options expiration week, and price has a habit of misbehaving during this period. We'll trade what the markets give us and exercise caution in either direction.


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