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Market Wrap

Waiting for the Fed

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     05-03-2004            High     Low     Volume Advance/Decline
DJIA    10314.00 + 88.43 10329.05 10227.13 1.94 bln   1722/1118
NASDAQ   1938.72 + 18.57  1954.62  1926.09 1.99 bln   1367/1389
S&P 100   545.85 +  4.97   546.95   540.88   Totals   3089/2507
S&P 500  1117.49 + 10.19  1118.72  1107.30 
RUS 2000  565.48 +  5.68   568.38   559.80
DJ TRANS 2923.48 + 36.66  2923.21  2885.60
VIX        16.62 -  0.57    17.72    16.61
VXO        16.63 -  0.93    17.69    16.61
VXN        25.72 -  0.01    26.24    25.35
Total Volume 4,284M
Total UpVol  2,671M
Total DnVol  1,558M
52wk Highs      88
52wk Lows      232
TRIN          0.74
PUT/CALL      0.81

Monday kicked off on a positive note after Friday afternoon's deep selloff in the futures. The Semiconductor Industry Association (SIA) announced that March chip sales had risen to $16.8B, up 4.4% from April's level on increased demand for computers and communications devices. Optimistic projections were included in the release, with the SIA saying that 25% growth for the year is looking "more and more likely." The SOX was leading the markets to the upside (though it later gave back all its gains and closed in the red), the indices were recovering from their deeply oversold condition from Friday afternoon, and all looked rosy for a relief rally, or at least a tradeable bounce.

There was more good news for the markets at 10AM, with March construction spending increasing by 1.5% (estimates were for 0.5%) to a record $944.1 billion seasonally adjusted annual rate. February's reading was revised upward to a 0.4% gain from a 0.1% decline. Spending rose 7.9 percent in the past 12 months. While the jump was in large part attributable to public sector (read: non-productive) spending, that fact was not part of the headlines, which bullhorned the high overall reading. Private, nonresidential projects dropped by 0.2%, and residential spending came in above unchanged.

Also at 10AM was the release of the Institute for Supply Management's Factory activity report for April, which registered 62.4, missing estimates by 3 pennies and down a hair from the 62.5 reading for March. This makes it sixth consecutive months during which the index has held above 60.

The combined effect of the 10AM reports was a fleeting spike, followed by a drop that stopped at a higher low 20 minutes later as the indices followed through on the anticipated technical bounce generated by the oversold 30 and 60 minute cycle oscillators from Friday's steep decline.

Daily INDU candles

The Dow closed higher by 88.43 points or .86% at 10314. As noted in the Market and Futures Monitors, the bounce was anticipated based on the deeply oversold 30 and 60 minute cycles, but the daily cycle downphase was not interrupted by today's gains. Bollinger support has crept lower to 10220, which is also price confluence above the more significant trendline support at 10150. As is so often the case ahead of a major event such as tomorrow's Fed announcement, the price is stuck beneath resistance and above support, with the oscillators assuming an ambiguous configuration. This jibes well with the pennant that has developed, which tends to be a continuation pattern but can break in either direction. The daily cycle oscillators favor further downside, but a move above 10365 on a closing basis would abort the downphase. Resistance above is at 10330, followed by 10365 and 10460.

Daily COMPX candles

The Nasdaq rose 18.5 points or .96% to close at 1938.7. It is set up more ambiguously than the Dow, having printed an inside day following Friday's wide-ranging selloff. This harami pattern is often bullish, and the unfilled opening gap higher from the open is a very encouraging pattern for bulls. However, the long upper doji shadow above the candle body is a rejection of higher prices, and the futures dipped following the 4PM cash close. Once, again the stage is set for Greenspan to break the deadlock. As with the Dow, the cycle configuration suggests lower prices, but support is in play and a directional move will lead the oscillators whichever way traders choose to take it following the 2:15 announcement. Support is at 1933, followed by 1920 and 1900, while resistance is at 1940, 1965, followed by 1982 and 1995.

In corporate news, JPM and ONE named the board of directors to lead the company upon completion of their $60 billion merger. Shareholders from the two banks will vote on May 25. James Dimon, CEO of ONE and JPM's William Harrison will serve on the board, Harrison as Chairman.

Google Inc. filed its "love-in" letter from the founders with the SEC last week, in which lofty proclamations and promises reminiscent of the New-Economy dotcom bubble from the late-'90s were offset by a tip-of- the-hat to Warren Buffett. The founders received praise from the Oracle himself over the weekend. Buffett did not go so far as to recommend the IPO, but was reportedly flattered by the attention from Google's founders. There was further news this morning to the effect that Google had canned Goldman Sachs for talking to Kleiner Perkins, one of Google's large investors. The theme here continues to be one of the rejection of "old ideas" and "old banking relationships" in Google's quest for innovation, based on the assumption that old is bad and new is good. While I prefer Google to all other search engines and have for years, respecting both the product and the obvious talent that created it, I had thought that the Dotbomb collapse that helped tank the Naz in 2000 had also refuted the "we are the world" tech-bubble mentality that embraces innovation for its own sake. I strongly urge traders to recall history. Be it tulips in Holland, electronics in the 1960's, routers or websites in the 1990's, the old rules of human emotion married to market supply and demand always apply. A new world is not being heralded by the Google IPO, though another bubblemania milestone may well be.

The management of Taser International (TASR), the stock has killed countless bears and bulls alike, was talking up its shares this morning in response to a Barron's article that questioned its valuation. The company, assuming the role of investment bankers, stated that it believes that it merits a forward p/e ratio of "more than 50", with such a multiple being appropriate for such a "rapidly growing" company. It cited taser programs initiated by 25% of law enforcement agencies, while reportedly only 6.2% of officers actually have taser guns. I personally didn't see the article, but I suspect that Taser, whose ordinary course of business is NOT the valuation and pricing of securities, didn't include a discussion of rising bond yields or other such factors that might otherwise impact the markets or even its stock. TASR was lower by 1.10 at 31.24 as of this writing.

Warren Buffett was also on the wire announcing that he had increased his purchases of foreign currencies in recent months, based on concerns about the US current account deficit. In March, he had announced that his fund had invested $12B in foreign currencies, seeing little in the way of bargains among US assets. These comments from the world's second richest investor contrasted with John Snow's bullish comments on the US economy early this afternoon, in which he cited encouraging economic trends and predicted a "long period of good above potential growth."

Just prior to the 4PM close SEBL announced that founder and CEO Tom Siebel would be passing the torch to J. Michael Lawrie, former group executive for worldwide sales and distribution at IBM. Siebel will stay on as non-executive chairman. Shares rose sharply on the news, the stock trading 10.60 as of this writing.]

Tomorrow will be a quiet day for economic data, as we await Factory Orders for March scheduled for release at 10AM, estimated at 2.4%, which is significantly higher than the previous .3% in February. However, all eyes will be on the Federal Reserve's Open Market Committee announcement at 2:15PM. Observers appear divided on what the Fed will or will not do, citing signs of economic strength and more particularly the uptick in employment. On the other hand, capacity utilization has been holding stubbornly nearly the 75% mark, with the April 16th reading coming in at 76.4, and this is a number to which the Fed has paid close attention in the past.

I'm not eager to guess at what the Fed will or will not do next, but I would be surprised to see anything substantial announced in either direction. We have spent a few years now watching the Bank of Japan jawbone the markets and then fail to deliver as traders frontrunning the promised action do the Central Bank's work for it. I'm thinking that the Fed will be following that example tomorrow. The US consumer remains saddled with historic levels of debt, and interest rates remain at multidecade lows. Despite the uptick in the employment numbers, there's anything but wage inflation in the US, and higher interest rates continue to pose a serious threat to debt-saddled consumers. The fear of the Fed (and the market's acknowledgement of the asset inflation that Bernanke and Greenspan have so vigorously denied) has already led to a very substantial correction in the bond market, with the TNX up nearly 100 bps in the past month.

Whether the Fed hikes the overnight rate by 25 bps tomorrow is a minor question, and I believe the markets will be listening more closely to the bias statement. Will the Fed continue to be generous with its open market operations? Will it pick up the slack left by the deceleration of Asian central bank purchases of US debt? Will it act to reign in the inflation it's been denying, evident in the multidecade highs in the CRB, the bond and real estate markets, and even the prices paid component of the ISM which reached a high not seen since 1979? I believe that we've seen a fear of a tighter Fed bias getting baked into the markets for the past month, and it will take strong words from the Fed to substantially spook bonds or even equities tomorrow. My guess is for gentler words, perhaps the abandonment of the "patient for a substantial period" language, and some sort of relief rally- and with that said, the stage is now set for a major dislocation to prove me wrong.

The markets are poised for a decisive move in either direction here. The COMPX broke a 5 day losing streak today but is still locked within a steep shorter-term downtrend. The Dow hasn't sustained nearly the same degree of damage as the Nasdaq, but both are near rising support on the daily and are not particularly oversold on their key daily cycles. There is thus ample evidence on both sides of the trade, and the Fed is in the unenviable position of having to talk up the economy while justifying the low rates on which it has been maintained. We have seen weak economic data result in bond and equity rallies due to the expectation of further Fed stimulation. On a trading basis, I expect this confusion to result in the usual whipsaws and headfakes immediately preceding and then following the 2:15 announcement. Even the most nimble traders will want to keep a safe distance until the froth has been shaken out. My preference here is for countertrend longs at rising pennant support, with active stops/short entries just below. Just as a bounce from support could be ferocious, so could the plunge if it fails.


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