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Market Wrap

Volatility Crunch

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     05-27-2004            High     Low     Volume Advance/Decline
DJIA    10205.20 + 95.31 10222.24 10109.89 1.75 bln   1914/ 915
NASDAQ   1984.50 +  8.35  1991.87  1969.04 1.60 bln   1645/1382
S&P 100   546.32 +  3.72   547.17   542.60   Totals   3559/2297
S&P 500  1121.28 +  6.34   1123.95 1114.86
RUS 2000  568.56 +  0.79   571.87   564.35
DJ TRANS 2951.89 + 86.53  2974.62  2933.38
VIX        15.28 -  0.69    15.86    15.19
VXO        15.53 -  0.70    16.39    15.37
VXN        21.50 -  0.13    22.19    21.33
Total Volume 3,394M
Total UpVol  2,311M
Total DnVol    948M
52wk Highs     181
52wk Lows       56
TRIN          0.63
PUT/CALL      0.94

Equities added to the week's gains, with the Dow closing higher by .94% at 10205, the Nasdaq +.42% to 1984.5 and the SPX adding .57% to close at 1121.28. Options volatility as measured by the VXO, VIX, QQV and VXN fell further still, despite a widespread consensus that the volatility crash this week had come too far, too fast. The QQV is below 20 again, back to levels from which previous price highs have blown off. But equity futures were looking firm afterhours as of this writing.

The market's bounce has aligned itself with an upturn in the daily chart oscillators from oversold territory. However, key trendline tests lie dead ahead, and there's been remarkably little backing or filling this week. With a holiday weekend approaching, there is an apparent lack of concern for terrorist threats, Iraq trouble or even a technical correction in price as option premiums continue their plunge. However, key trendline tests are imminent, and the mettle of this rally should be put more fully to the test at those levels.

Daily Dow Chart

The Dow's 95 point gain today brought it nose-to-nose with resistance at the 50 day EMA (pink line). The daily cycle upphase is in its early stages, launching from a wide base in the 9900 area. I expect some chop as the current gains get digested, but so long as the daily cycle upphase continues, we should see a test of trendline resistance in the 10360 area. A failure at that level below 10400 would maintain the daily downtrend off the year highs, which would suggest that the longer cycles within which the daily cycle oscillates have turned down as well.

Monthly Dow Chart

Looking at those longer cycles, the monthly is in the first stages of a downphase. The continued bounce in today's trading was sufficient to convert what was shaping up to be a 3rd bearish candle into a doji star, turning this month from red to green. The 10 year monthly chart reveals a lower high to complete the rally of 2003, but the decline off the year high is still young enough to constitute a monthly bull flag if the descending upper trendline in the 10600 area can be broken to the upside. However, the 10 month stochastic is on a sell signal, the first suggestion of a monthly cycle downphase lined up with the failure beneath that upper descending trendline. A move back below the 9800 support level would confirm this downphase and likely produce the beginnings of a bearish cross on the monthly Macd, while a break above 10600 would reverse the weakness and confirm the bull flag interpretation.

Daily Nasdaq Chart

The one year daily Nasdaq chart resembles that of the Dow, except that the broad base on the Dow is narrower on the Nasdaq, with the current daily cycle bounce sharper and consequently more extended than that on the Dow. The broken rising trendline test is closer at hand as well, fittingly at round number resistance at 2000. The descending upper trendline from the year high at 2160 lines up just below 2040, by which level I would expect the daily cycle to be overbought and extended. If the cycle turns back down at or below that level, we'll again have confirmation of a new downphase in the longer cycles. Those longer cycles are currently ambiguous, as we've just seen with respect to the Dow, which sets up that 2040 level as a key resistance to watch.

Monthly Nasdaq Chart

I still find the monthly Nasdaq candles fascinating. Looking at the full 10 year sweep of it, it's tempting to assume a head and shoulders pattern, although the downside projection on a neckline break would obviously be many thousands of points below zero, of theoretical interest only. That said, rising support lines up with monthly Bollinger support at 1200. The 10 month stochastic is in the first steps of a downphase, with the Macd not yet but much closer to a sell signal than that on the Dow monthly above. The same bull flag / bearish rollover dilemma is apparent here, and it will take a break above 2100 or below 1800 to clarify the picture for the coming months.

On the economic front, there were a number of announcements before the bell. The Commerce Department revised the 1st quarter GDP upward from 4.2% to an annualized 4.4% rate of growth, falling just shy of the anticipated 4.5% level. The GDP's strength was attributed primarily to inventory rebuilding and software and equipment investments on the part of businesses, high spending on the part of consumers, and defense spending. After-tax profits rose 36.7% from the previous year's period, which marks a 23 year high, while the Personal Consumption Expenditure Price Index rose less than the 3.2% expected, coming in at a 3% annualized rate.

The Labor Department reported that initial jobless claims declined for the week ending May 22 by 3,000 applicants to 344,000, while the 4 week moving average of initial claims rose by 1,500 to 335,500 applicants from a 3 and half year low. The number for the week exceeded estimates by 9,000 applicants.

The dollar and treasuries had been weak ahead of the data, and while the bond strengthened from 8:30AM, the dollar fell further against British pounds, Swiss francs, CDN dollars and euros. Gold, silver, US bonds and equities all rose on the dollar weakness. The move in the dollar and bonds was attributed in part by the media to the discovery of explosives in the Slovak capital of Bratislava, near this weekend's planned meeting place for 300 NATO officials.

At 10AM, the Help Wanted Advertising Index for April was released, falling by 1 point from the March reading of 39 to 38, still up 1 point year-over-year. Ad lineage increased in most US regions during the past quarter, with an estimated 708,000 new jobs created.

While the market clearly expressed disappointment in the data, with the US Dollar Index getting croaked on the news and bonds rallying, the employment news clearly represents an improvement over the 400K+weekly initial claims we recall from last year. The deeper issue is the quality of the jobs being created, with the outsourcing of tech and manufacturing jobs still a crucial and troubling story.

Crude oil broke back below the 40 level in the morning and remained weak throughout the session, falling 3.44% to close at 39.30. Natural gas stocks rose 89 billion cubic feet for the latest week, exceeding analyst expectations for an 88 bcf rise. Natural gas, heating oil, crude oil, cotton and soybeans were the weakest components of the CRB Index for the day.

It was a quiet day for corporate news, with mostly up- and downgrades making the headlines. It was reported that the Federal Reserve fined Citigroup (C) $70M million "to pay restitution to certain subprime personal and home mortgage borrowers" for requiring borrowers to obtain co-signatories for loans, even where they qualified independently for the loan.

Costco Wholesale (COST) reported Q3 net income of .42 per share or $198.7M, up from .33 per share year-over-year and beating estimates of .38 per share. Sales were up 14% to $10.67B, also beating estimates of $10.64B. COST rose 1.66% to close at 38.08.

Electronic Data Systems (EDS) completed the $2.05B sale of its UGS PLM Solutions software unit to a group of three private equity firms. This appears to be a bullish transaction for the company, which it claims should render it debt-free and flush for $5B by the end of the year, as well resulting in a large cash gain for Q2 to be reported in July. EDS closed higher by 2.01% at 16.25.

The Fed was relatively quiet today, with New York Fed President Timothy Geithner addressing the Economic Club of New York today. Mr. Geithner told the Club that the financial system appears to be sound, but admitted that the increasing complexity of the financial system makes risk assessment and banking oversight difficult tasks. He noted that participants appear to be adjusting themselves in preparation for a higher interest rate environment, but stressed the difficulty in evaluating risk within the system and the need to devote resources to allow regulators to properly monitor those risks.

With the weather heating up and a long weekend approaching, I'm expecting volume to drop considerably for tomorrow. As we know, that can either result in a comatose flatlined range, or hair- raising volatility on a thin tape. In either case, barring a strong directional move to the downside, this week is clearly set up for a bullish victory. As discussed in tonight's Futures Wrap, an intraday pullback is to be expected, but for the time being, the daily cycle upphase, still in its early stages, is delivering strong upside price traction. If feeling bearish on the action, my suggestion is to either use patience, disciplined entries, tight stops and quick exits, or preferably all of the above.

Tomorrow morning, we'll have personal income and personal spending data for April to be released at 9:30, followed by Michigan Sentiment at 9:45 and the Chicago PMI for May at 10AM. With holiday volume expected, there's a good chance that we'll see some fast action in the morning. We'll be covering it tick- by-tick in the Market Monitor and Futures Monitor. See you there.



 
 



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