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Market Wrap

Pulmonary Edema

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     10-15-2003            High     Low     Volume Advance/Decline
DJIA     9803.05 -  9.93  9850.01  9764.46 1.81 bln   1094/1717
NASDAQ   1939.10 -  4.09  1966.87  1933.03 2.00 bln   1254/1803
S&P 100   522.14 -  1.16   525.90   520.16   Totals   2348/3520
S&P 500  1046.76 -  2.72  1053.79  1043.15
RUS 2000  527.35 -  4.49   534.25   526.48
DJ TRANS 2863.64 - 18.02  2891.43  2853.65
VIX        17.69 +  0.32    17.96    16.98
VXN        26.77 +  0.28    27.44    26.66
Total Volume 4,184M
Total UpVol  1,663M
Total DnVol  2,412M
52wk Highs     993
52wk Lows       14
TRIN          1.10
PUT/CALL      0.67

Pulmonary Edema
By Jonathan Levinson

The markets found the air a little rare this morning, with the Dow reaching a 16 month high at 9850, the Nasdaq a 21 month high at 1954 and the S&P 500 a 16 month high at 1054 shortly after the open. The indices failed from there, closing the day slightly in the red on larger than average volume at 1.47B NYSE shares and 2.04B Nasdaq shares.

1 year daily COMPX

The one year daily chart of the COMPX reveals a rising wedge off the March lows, with the daily oscillators growing toppy but still well within their upphases. Today's opening high felt like a weak blowoff top. The end of a cycle phase often results in one last burst in the cycle's direction before the reversal, a last gasp of sorts. The opening move might or might not have been the terminal move on the 10 day stochastic. It didn't feel as cataclysmic as one might have expected, but in any event we won't know until the oscillator turns, followed by the laggier Macd for confirmation.

The bear wedge has plenty of support below, with a potential target of 1260.

20 day 30 minute COMPX

The 30 minute chart of the COMPX shows this morning's spike high and the failed breakout above what is another potential wedge. As you can imagine, I'm beginning to see wedges everywhere, and I'm not particularly confident in this one. Nevertheless, 1940 was an important juncture, and it failed just after 2PM. The oscillators on this shorter timeframe are on sell signals, aiming for 1925 support, followed by heavier support in the 1905 area.

1 year daily INDU

The INDU broke above its daily wedge resistance line, closing just above 9803 despite a 1.50% loss from GE. The strength in the Dow compared with the weakness in GE over the past week has been astounding, and today was another example of it. That said, the INDU has support at 9800, and bears should sleep with one eye open until 9350 has been taken out. Until then, it remains in a confirmed uptrend, despite the bearish chart patterns and topping oscillators.

20 day 30 minute INDU

The 30 minute INDU reveals far less technical damage than that on the COMPX chart. Lower trendline support held, and the oscillator downphase is far less pronounced than on the COMPX. That said, support is close below at 9775, and GE was tripping over itself all through the session. Tomorrow will be a critical day, with further downside suggested by the ongoing-but-uncertain 30 minute oscillator downphase.

The closing bounce was not strong enough to turn the indices positive, but it did improve breadth considerably. The VXO, the OEX volatility index, actually closed negative at 19.26. In addition to the toppy daily oscillators and potentially bearish chart patterns above, the VIX has been in historically low territory. Rather than describe it, I've attached a chart of the VIX with the corresponding SPX chart above it to provide a clearer picture of the relationship between these two indices:

5 year monthly chart of the SPX and VIX

Before you run out and short everything with a symbol, recall that the VIX symbol was reassigned this month, what was formerly the VIX is now known as the VXO. The VXO has not touched the 17 level this year, and has yet to dip below 19. Nevertheless, there remains clear evidence of a bear market in fear, with the SPX at a lower high.

In economic news today, the Mortgage Bankers Association (MBA) announced this morning that seasonally-adjusted demand for mortgage refinancings, the MBA refi index, dropped 22.1% for the past week, despite mortgage rates holding steady with a 0.2 bp increase to 5.81% for a thirty fixed. Demand for loans with which to buy homes, the Purchase index, fell 18.6% to its lowest level since the week ended April 25. The Application index dropped 20.5% for the week.

The New York Fed released New York's Empire State Manufacturing Index for October was released at 8:30AM, showing substantial improvement over September's results. The Empire State Index rose to a record 33.7 from 18.4 in September, blowing out forecasts for a decline. New orders rose from September's 13 to 34.8 in October. Shipments rose to 25.3 from 17.0. Employment readings were also stronger, with the number of employees up to its highest reading in over one year at 10.78, compared with -.92 in September. The Index also reflected increased optimism going forward, rising to 66.72 from 58.79. The release of this report caused the euphoric bull frenzy / terrified bear panic, along with an initial selloff treasuries.

Also released at 8:30 was the Commerce Department's September Retail Sales report. U.S. seasonally adjusted retail sales fell 0.2 percent in September, the first decrease since April. Auto sales posted their biggest decline since February, falling 1.6 percent. Retail sales ex autos rose 0.3 percent, the lowest reading since May 2003. Notwithstanding the weak retail sales numbers, the August retail sales figure was revised upward to a 1.2 percent rise from the 0.6 percent originally reported. It appear that this revision dominated traders' attention, at least until the 9:30 bell.

Wednesday is the day we usually receive the weekly inventory reports for oil products from the Energy Department and the American Petroleum Institute, but these releases were delayed until tomorrow because of Columbus Day. Analysts expect inventories for crude to increase by 1.6M barrels, gasoline to decline by 1.1M barrels, and distillate to decline by 1M barrels.

Marketwatch reported that Treasury Secretary John Snow told interviewers that California Governor-elect Arnold Schwarzenegger should not expect Federal assistance in addressing the state's budget crisis. Schwarzenegger is slated to speak with the President tomorrow. "I'm sure we'll listen to him, but you know California's problems are basically California's own problems. I think California is going to have to solve its own problems rather than turn to the Treasury of the United States." California constitutes the world's fifth largest economy.

In that same interview, Mr. Snow predicted growth in GDP for Q3 of "4% plus", and for Q4 "around 4%".

The Fed Beige Book was released at 2PM, with the Fed reporting economic expansion in 10 out of 12 economic districts. Boston and Cleveland reported "mixed but steady levels of economic activity. " In the Fed's inimitable words, "Overall, both wages and prices of finished goods and services remained relatively stable, though there were scattered reports of business input cost pressures." Sounds like cost-push inflation to me.

The report indicated strength in consumer spending but weakness in auto sales, this latter confirmed by the various earnings reports and the retail sales report released today. The report noted that labor markets "remain generally slack", but noted some signs of pickup in select districts. Overall, the markets greeted the report with a yawn, and the afternoon selloff commenced a few minutes thereafter.

GM reported 3Q income of $425 million or 79 cents per share on $44B in sales. This compares with a net loss of $804 million or $1.42 per share for Q3 2002. CEO Rick Wagoner made upbeat comments, citing the "accelerating" US economy and "enthusiastic response to GM's new products", although one might wonder whether he was referring to its automotive or financial products. It was widely reported that GMAC's operations carried GM through this earnings report.

SNDK reported Q3 revenues higher by 99% at $281.4 million and net income of $50.6 million, up from $11.3 million in Q3 2002. The company raised its 2003 revenue forecast from a projected $950 million to "exceed $1 billion." Earnings were 60 cents per share, blowing out expectations of 15 cents. GENZ beat estimates by 3 cents on revenue of $437 million, stating that it expects to beat full-year earnings and revenue guidance as well. SEBL met expectations with a net loss of 12 cents per share, or 3 cents excluding charges.

After the bell, AAPL announced ESP of 12 cents, beating estimates of .07. QLGC matched estimates of .35, as did IBM at 1.02 per share. NFLX came in at 19 cents vs. estimates of .10. IBM got hammered for more than 2% following the release of its report after the bell, despite its stating that it intends to hire 10,000 next year. Revenue was 350M below the consensus estimate of $21.85B. As of this writing, the conference call was ongoing, with no guidance given as of yet.

We have the following economic data due tomorrow:

               Report                   Briefing  Market    Prior
                                        Expects   Expects
Oct 16 8:30 AM Business Inventories Aug - 0.0%    -0.1%     -0.1%
Oct 16 8:30 AM Core CPI Sep -             0.1%     0.1%      0.1%
Oct 16 8:30 AM CPI Sep -                  0.2%     0.2%      0.3%
Oct 16 8:30 AM Initial Claims 10/11 -     390K     385K      382K
Oct 16 9:15 AM Capacity Utilization Sep - 74.8%   74.8%     74.6%
Oct 16 9:15 AM Industrial Production Sep - 0.4%    0.4%      0.1%
Oct 16 12:00 PM Philadelphia Fed Oct -     17.0    15.6      14.6
While the indices remain in an uptrend, the bulls had a clear shot at a breakaway gap. That failure encouraged bears, but the indices remain far from a breakdown. With opex Friday approaching, there's the chance that prices will begin to gravitate toward the nearest strike prices and hold there. Caution is urged in both directions as the markets reach ever closer toward the apex of their respective wedges. If a break doesn't come this week, I expect Monday of next week to be very exciting indeed.


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