Despite the conjectures of one television commentator, Barton Biggs' assertion that the markets were primed for a big bounce, only moments before that late-day bounce occurred, did not prompt the gains. Here's what more reasoned thinkers believe happened.
Annotated Daily Chart of the SPX:
After a day in which the SPX had at one point lost more than 19 points; the Dow, more than 167; the Nasdaq, more than 52; and the Russell 2000, more than 14, the bounce proved impressive, whatever produced it.
The early losses proved just as impressive. U.S. investors woke to the news that June crude oil had traded above the benchmark $40.00 level on the New York Mercantile Exchange, to its highest level since 1988. Although Asian markets had moved higher in the overnight session, with the Nikkei gaining an impressive 2.26 percent after bouncing from its own 200-dma, European markets had headed down.
To make matters worse, the International Energy Agency, the IEA, released a report estimating that global use of fuels would rise more than expected, at the same time saying that inventories of crude and fuels held by the thirty member nations of the Organization for Economic Cooperation and Development, the OECD, fell in the first quarter. The IEA also trimmed its estimate of oil supply from countries outside OPEC. Saudi Arabia has been urging OPEC members to increase production, with OPEX ministers to meet informally beginning March 22. Some question whether production can keep up with surging demand, however. China's growth has bumped it up to the number two oil consumer, ahead of Japan, with the IEA concluding that China's recent measures to cool its economy would not significantly cut its oil consumption.
Although some deemed the number less inflationary than expected, the U.S. doesn't look ready to cut consumption, either. The 8:30 EST release of the U.S. trade deficit revealed a 9.1 percent widening of that deficit with imports rising faster than exports. March sales of U.S. goods and services to other countries hit a record $94.70 billion, growing 2.6 percent, with that figure deemed good news for manufacturers. What was not good news was that all-time high in the U.S. trade deficit, rising to $45.96 billion in March against estimates of $42-43 billion, up from the revised-higher $42.12 billion in February. That was far less than the 4.6 percent increase in imports to a record $140.66 billion.
Although more attention usually focuses on exports than imports because the imports component of this number lags other measures of domestic demand, the surging consumer goods component of the imports growth did not go unnoticed. That represented $2.6 billion of the increase, as Jim reported in the Market Monitor. Also worrisome was another reason for the widening gap, the increase in the country's petroleum deficit to $12.50 billion.
Against that background, Chicago Federal Reserve President Michael Moskow spoke on CNBC Wednesday morning. Responding to a question about inflationary pressures, he termed those pressures "transitory." When asked about the downturn in manufacturing, Moskow thought that downturn had been cyclical rather than secular, although he added that the downturn had still been painful, especially in the Midwest where manufacturing assumed exaggerated importance.
Other market watchers might have quibbled with Moskow's market- calming words, with one analyst quoted in a Marketwatch report suggesting that any deficit was inflationary, whether from a budget or a trade deficit. Joel Naroff, an independent economic consultant, was quoted in a separate Marketwatch report as saying, "Dear Mr. Greenspan: The whites of inflation's eyes are now coming into view."
Roy Blumberg, analyst with Sterne, Agree & Leach, attributed the early weakness to interest-rate concerns rather than those related to the oil prices. Blumberg commented that concerns about interest rates, Iraq, and oil costs alternate from day to day to pressure the markets. He felt that the interest-rate concerns factored highly in Wednesday's weakness, but were overdone, and that it would take a two percent increase before rates would dampen growth. The effect is psychological, he theorized, but many would argue that the markets instead are discounting the effect of interest rates many months in the future.
Ten-year bond yields had been dropping prior to the U.S. trade deficit data, but steadied afterward and ended the day higher. An auction of five-year notes showed foreign demand lower than it had been for the last several auctions, sending bond prices lower and yields higher.
Annotated Weekly Chart for Ten-Year Yields:
As Jim also reported in the Market Monitor Wednesday morning, mortgage applications dropped to 742.2 from 780.0. Homebuilders have been reeling, with the DJUSHB, the Dow Jones US Home Construction Index, depicting how the specter of higher interest rates has affected the homebuilding industry. While the SPX and other indices hit support levels today, the DJUSHB was hitting one of its own.
Annotated Weekly Chart of the DJUSHB:
As the DJUSHB's chart depicts, Wednesday's bounce was not unalloyed good news, and won't be until the index moves above a possible right-shoulder level near 628. Until then, the index remains in danger of rounding over into a right shoulder and then confirming that H&S. As the chart depicts, oscillators have already broken through their own H&S formation, perhaps predicting weakness ahead for this index and for stocks related to the sector. As always, price action will be the final guide, while we let this oscillator action serve as a warning of what could happen.
Even before the Barton-Biggs-inspired or SPX-inspired bounce, hints had surfaced that a market bounce could be coming. You've read those hints on these pages, as writers warn of building oversold pressure. More specific evidence surfaced. Early in the trading day, I noted that the BIX, the S&P Banks Index, was not following other indices to their tests of yesterday's lows. Although trading minimally lower, it hovered near the top of the previous day's range, finally breaking above Tuesday's high and then the 200-dma. The BIX shares some big-cap names with indices such as the OEX, so that OEX bears were warned to watch the BIX's behavior. That bounce will soon bring the BIX up to a test of a violated regression channel, however, with that test occurring at about 334-355, and with the BIX closing at 332.50.
That bounce coupled with approaching resistance describes a problem for many who might be examining charts after Wednesday's close. Many indices now head straight into presumably strong resistance. The SPX bounce moved it into the midpoint of the range between the supporting 200-dma and the presumed resistance from a broken support line at about 1112. Two questions arise. Will there be follow through on the late-day bounce? Have markets seen their lows? Possibly, and I don't know.
Examining market breath for clues reveals that, despite the late- day bounce, market breadth was mixed. On the NYSE, advancing issues beat declining issues by a moderate 17:16 ratio. Up and down volume was matched equally, but new lows trumped new highs with new lows at 208 and new highs at 8. On the Nasdaq, advancing issues numbered fewer than declining ones, with the adv/dec ratio at 14:17. Down volume proved stronger, too, on that exchange, at 1.7 times up volume. New lows measured 100 and new highs, 21. That picture does nothing to clarify the forecast for tomorrow or the next few days.
Neither does the behavior of the SOX, often a leading indicator for the tech-related indices. Although the SOX bounced strongly with other indices, it did not manage a positive close. Despite the loss in the SOX, the Nasdaq closed higher, bouncing from near 1880, but it heads into resistance of its own and may be forming a congestion zone between the 1880 support and the 200-dma.
Annotated Daily Chart of the Nasdaq:
The Dow's bounce sent it back above its 200-dma, but the bounce stopped at nearest resistance, and the Dow will face resistance again at 10,200.
Annotated Daily Chart of the Dow:
Finally, to add more fuel to the mix (pun intended), as was mentioned in the Futures Monitor on the OIN site, the $40 price for crude oil has served to stop every advance in crude oil prices for more than thirty years. Intraday crude futures reached a high of $40.92, and closed at a 13-year high, at $40.77, depicting crude oil prices as being at a key level.
Crude oil prices and ten-year bond yields have reached strong resistance, zones from which they will either break out or roll down. Most indices bounced strongly, but remain below key resistance, and the potential reversal signals require confirmation from tomorrow's action. The Dow, SPX, and COMPX all have room to run before crashing into that next strong resistance, allowing room for a day or several-day run higher before they do so. We won't know whether today's bounce was anything more than an oversold or technical bounce, as some were already labeling it this afternoon, until that follow through results and then those overhead resistance levels are breached.
The Russell 2000 may provide the first peek at how that overhead resistance will be handled, as it appears close to testing important resistance.
Annotated Chart of the Russell 2000:
Market watchers would do well to watch crude prices, ten-year yields, and the Russell as first indicators of market action tomorrow. A downturn in crude prices and ten-year yields may allow for an equity bounce to retest resistance and relieve oversold pressure. Since the SPX's touch of the 200-dma proved so important in today's action, that level should be watched, too.
After-hours trading saw the NDX pull back from gains made in the late-day push. In other after-hours news, Disney (DIS) traded higher after its Q2 report. Thursday's earnings reports include tech bellwether Dell as well as BEA Systems.
Economic reports due Thursday include April's include PPI and Core PPI, 4-week jobless claims for the week ending May 8, April's retail sales and ex-auto retail sales, all to be released at 8:30 EST. Although the market typically pays more attention to the Core PPI, the prices paid component that excludes food and energy, the inclusive PPI figure might draw some attention this week, too, as concerns about crude oil prices have factored so strongly in recent market declines. Market expectations for PPI range from a 0.3-0.5 percent gain, against March's 0.4% gain, while estimates for Core PPI mostly center on a 0.2 percent climb, up from March's 0.1 percent gain. Estimates for the initial claims number are at 325 thousand, with the previous number at 315 thousand.