Option Investor
Market Wrap

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     06-17-2004            High     Low     Volume Advance/Decline
DJIA    10377.52 -  2.06 10390.01 10338.13 1.57 bln   1670/1108
NASDAQ   1983.67 - 14.56  1993.93  1976.25 1.46 bln   1199/1811
S&P 100   552.60 -  0.83   553.63   550.62   Totals   2869/2919
S&P 500  1132.60 -  1.51  1133.56  1126.88 
RUS 2000  569.57 -  0.50   571.16   565.21
DJ TRANS 3059.99 +  0.75  3062.53  6032.32
VIX        15.15 +  0.36    15.58    15.00
VXO        15.06 +  0.40    15.97    14.87
VXN        21.33 +  0.94    21.75    20.77
Total Volume 3,321M
Total UpVol  1,345M
Total DnVol  1,908M
52wk Highs     214
52wk Lows      131
TRIN          1.38
PUT/CALL      0.79

One day remains in this option-expiration week. Only one more day of boredom remains before markets break out of their recently established consolidation patterns. At least, that's the hope many market watchers express.

Muted reactions to economic numbers characterized Thursday's trading, with markets drifting down or up according to the latest release in a day punctuated by scattered releases. Only on the Nasdaq and some other tech-heavy indices did the drifts take the indices far from the flat-line levels. The Dow closed lower by 2.06 points or 0.02 percent, the Nasdaq by 14.56 points or 0.73 percent, the Russell 2000 by 0.50 points or 0.09 percent, and the S&P 500 by 1.53 points or 0.13 percent.

Some hints of another boring day on the markets occurred pre- market. Futures showed little reaction to overnight news that might have been market moving only a week or two earlier. The day dawned with news of a car bombing in Iraq, with that bomb killing dozens and wounding more than 100. As the June 30 hand- off date approaches, violence escalates as had been anticipated, but the level of Thursday's carnage proved particularly disturbing. In addition, recent explosions have stopped oil exports from Iraq, requiring repairs of blasted pipelines in both the north and south of Iraq. Crude oil prices rose pre-market, with European and U.K. oil majors rising and crude-sensitive sectors such as airlines sinking.

June 30 looms important for another reason, too, of course, with a two-day FOMC meeting concluding that day. Exacerbating the worries of market watchers during the pre-opening hours was a Swiss central bank decision to hike rates and further warnings by central bank members in England and other countries. In the U.K., May's retail sales rose a higher-than-expected 0.8 percent, increasing expectations for yet-another rate hike by the Bank of England. Economic numbers released in the U.S. before the market open fanned worries about the pace of rate hikes in the U.S.

Our economic calendar included the release of initial claims and PPI at 8:30, May's leading indicators at 10:00, natural gas inventories at 10:30, and June's Philadelphia Fed number at noon, but it was PPI that garnered the most attention early in the day. PPI came in at a hotter-than-expected 0.8 percent higher due to soaring food and energy costs. Core PPI, excluding those costs, rose more than expected, too, to 0.3 percent against an expectation of a 0.2 percent rise. Crude goods rose 2.8 percent, with core crude goods falling 3.8 percent. May's wholesale prices climbed 5 percent, indicating that producers have been able to increase prices to offset costs. Intermediate goods prices climbed 1.1 percent and 0.9 percent, excluding food and energy. Gasoline prices contributed to the higher PPI. While one article trumpeted the news that "Wholesale Inflation Leaps on Higher Producer Prices," raising the specter of Greenspan and company ratcheting up rates at a faster-than-wanted pace, other commentators calmly noted that PPI tends to be more volatile than CPI.

Markets also had to deal with the pre-market release of the jobless claims number, balancing that stronger-than-expected PPI against good news in the employment sector. With last week's claims number rising to a seven-week high and the prior week's revised upward, attention focused on that claims number. The expectation for the four-week average ranged from 330K-346K, depending on the source. The actual number fell somewhere near the middle of that range, at 336,000. Articles mentioned that increased demand encouraged U.S. companies to hold on to workers. First-time claims fell 15,000 from a revised-lower 351,000 (revised from 352,000). The four-week average dropped to 343,250, easing away from that 350,000 level that many consider the benchmark. Some point to the federal holiday last week for President Reagan's funeral as a major reason for the decrease in claims, the second week in a row that has contained a federal holiday. Next week, much attention should focus on the claims number.

Before the release of the 8:30 numbers, S&P futures had been holding steady and slightly higher than at Wednesday's close, from about 1132.75 to 1134, but they dipped lower to support near 1132 after the release. The dip wasn't extreme, and it was predictive of the market open, also a dip that wasn't extreme, although the Nasdaq did open almost five points lower. Indices opening near Wednesday's close didn't maintain those near flat- line levels long, however, with markets slipping lower into the 10:00 release of May's leading indicators. Market pundits characterize the leading indicators index as a closely watched number, and it appeared to cheer market watchers, with the SPX, Dow, Russell, and Nasdaq all steadying immediately after the release of that number and then climbing off their lows. After our markets opened, European markets had followed our markets lower after PPI and had steadied immediately after the release of the leading indicators and then drifted up into the European close, following the same pattern the U.S. markets this morning. The FTSE 100 and CAC 40 closed near flat-line levels, up 0.05 percent and 0.10 percent, respectively, but the DAX fell harder after PPI than did the other two, and it closed lower by 0.44 percent.

Expectations for May's leading indicators ranged from a rise of 0.3-0.4 percent, with the prior month's release seeing a rise of 0.1 percent. Leading indicators actually rose a higher-than- predicted 0.5 percent, with one headline noting that eight of the ten U.S. leading indicators rose. Consumer confidence and stock prices were the two leading indicators that dropped. An increase in factory hours and a rise in money supply prompted some of the gains.

Then began the next set of economic releases. Natural gas inventories rose 94 BCF, according to the Department of Energy, but that number appeared to produce no reaction at all. Expectations for June's Philadelphia Fed Index had ranged from 25.3-28.00, with the market consensus being 26.4, according to one article. The number was actually a higher-than-expected 28.9, rising above May's 23.8. The prices-paid component dropped to 51.9 against May's 59.6. As Jonathan Levinson noted at the time on the Monitor, markets showed little reaction at first to the Philadelphia Fed Index, perhaps still ruminating over the previous releases and their implications. Most markets then drifted slightly lower, wafted along on a gentle, languorous current.

They tried to climb again, too, but late-day trading was characterized by a dampening of any moves higher or lower, with most indices finding a preferred level and sticking to that level into the close. Breadth proved mixed, with adv/dec ratios at 19:14 for the NYSE and 12:19 for the Nasdaq. Up volume outnumbered down volume by a healthy margin on the NYSE, too, with down volume more than double up volume on the Nasdaq.

Weakness in semi stocks and a Jabil-induced weakness in electronic manufacturers pressured the tech-laden Nasdaq all day. Flextronics (FLEX) and Celestica (CLS) fell along with JBL, although Solectron (SLR) managed a nearly flat close ahead of its after-hours earnings report. Across the markets, other weak sectors included biotechs, networkers, securities broker/dealers, and computer storage companies, but a surprising number of sectors closed in the green. Many stocks closing higher were in the oil-service, utility, and natural-gas sectors, but gainers also included the homebuilders and healthcare stocks. Studying a list of sector decliners and gainers, some might consider the trading to have been mostly defensive.

Stocks in the news included Jabil (JBL), of course, closing lower by 3.56 points or 12.69 percent after the warning about Q4. CSCO traded lower by 0.52 points or 2.18 percent after announcing that it would buy the intellectual property, most of the engineering teams and certain assets from Procket Networks, a privately owned company. JDA Software (JDAS) announced its own acquisition, of QRS Corp. (QRSI), a retail-industry software maker. Although JDAS opened lower and traded lower after the opening, it rebounded and closed higher by 0.32 points or 2.61 percent.

Other scheduled economic releases included the money supply figure. Recently, some economists and other market watchers have been scrutinizing the money supply figures, expressing the opinion that money supply has been expanding at an abnormally fast pace. Many concluded that the Fed had taken an unusually accommodative stance. However, you'll notice that you don't find the figures for money supply in this article. That's because I've recently come across articles by Mark Hulbert, with those articles expounding on some of the reasons why we might not be able to trust the money supply numbers. Those reasons include the Fed's tendency to seasonally adjust those numbers even many years after their first release. Recently, the Fed revised the seasonally adjusted data for 1998, for example. Hulbert also mentioned a couple of ways that the errors could affect the money supply number, including the as-yet-unproved possibility, proposed by Madeline Schnapp of TrimTabs, that banks could be erroneously entering figures for risky items into one measure of money supply that has displayed that abnormally high pace of expansion. I don't know about you, but I don't have the experience to sort through data sets that may be in error when first released and then adjusted for the next six years and come to any sound conclusion, so you won't find an erudite discussion on money supply in an article I've written.

Another economic release scheduled for after hours was the semi book-to-bill number. Late last week and early this week saw several analysts recommend that clients lighten up on their semi related stocks, with Deutsche Bank and UBS being two of those analysts. Clients have apparently taken that advice to heart, along with a number of their investing friends, because the SOX headed south all week, rolling back down into the descending regression channel that has contained its prices this year. Stochastics rolled down into a full bear roll, and the SOX confirmed a double-top formation, setting up a downside target near 437. Not benefiting Thursday's trading was memory-chip maker SimpleTech's (STEC) lowering of revenue estimates on Wednesday. Semi.org had not yet released the semi book-to-bill number as this article was submitted, so I was not able to include that number in this article, but semi-related stocks throughout the globe could certainly use some help tonight, with our SOX perching on important support.

Annotated Daily Chart of the SOX:

As James Brown pointed out on the Market Monitor today, MACD created a new sell signal. The histogram is now negative, but that sell signal was created from above the signal line, and the MACD has not completely rolled down through that line. I find this an iffy time when watching MACD, because as it's on the verge of rolling down through that signal line, it sometimes turns right back up again. This might be a particularly important point since the SOX ended the day on possible mid- channel support, just above the March low. A positive or even a buy-the-(negative)-news reaction to the book-to-bill number could see beaten-down semiconductor stocks attempt to rise. If so, the 30-dma has proven particularly important to watch over the last month, with that average now marking the approximate confirmation level of the double-top formation. With that confirmed double top formation, complete with bearish divergence as the second top was formed, the expectation would be that the SOX will again find resistance, perhaps near either the 30- or the 50-dma's. Expectations or not, in-place trend or not, price action should always be the guide. A move above the 200-dma would signal that the SOX might be ready to break out of that descending regression channel.

A negative reaction to the book-to-bill number could be followed by a further drop, confirmed by a move below 452.75-453.00. The expectation then would be that the SOX would fall down through its regression channel toward that 437-438 downside target predicted by the double-top formation. Traders should note intervening support before that target could be reached, however.

A SOX decline would create more pressure on the Nasdaq, of course. With tomorrow being opex Friday, I would caution against placing large bets on any position, however, as the day could produce false moves that are not particularly amenable to technical analysis.

The Nasdaq's chart displays some troubling signs, too.

Annotated Daily Chart of the Nasdaq:

That potential head-and-shoulders formation just under resistance pinpoints possible weakness, especially when coupled with the rolling-down RSI. Bullish traders prefer to see a measured pullback in the form of a flag formed from a tight pattern of lower highs and lower lows, a bull flag. However, neither stochastics nor MACD has fully committed to the downside, and the Nasdaq has stubbornly maintained levels above the 200-dma, so we can't assume that H&S formation will ever be confirmed. Watch that 200-dma for signs that the Nasdaq might be confirming that H&S, rolling down toward the 1930 support again. A move up through 2000 and then above last week's high would be a sign that the Nasdaq is unexpectedly breaking to the upside out of its bearish right triangle. These formations typically break to the downside, but "typically" is not synonymous with "always."

The Russell 2000 chart displays its own possible H&S, with the Russell 2000 not yet ready to roll over into that right shoulder and perhaps never ready to do so. That possible right shoulder forms at the 50 percent retracement of the decline from the April 5 high to the May 17 low, and has a descending neckline that roughly conforms to the 30-dma.

Annotated Daily Chart of the Russell 2000:

Oscillators do not yet commit to a direction. It's possible to micro-analyze every nuance of each of the oscillators and discover bearish price/RSI divergence as the possible head was formed, but all we can say with certainty is that the Russell 2000 remains trapped between its 200-dma and 100-dma. It's positioned about midway between support and resistance and displays a potentially bearish formation that has yet to be confirmed. A break much above 572 negates the potential H&S, while a break below the 200-dma confirms it. Until either of those events occurs, we can't determine much else.

The Dow's chart displays indecision, too, with the daily candle a doji at resistance for the second day in a row.

Annotated Daily Chart of the Dow:

Although I haven't included the channel on this chart, it's also possible to characterize the Dow as trading lower since February within a descending regression channel, with the top of that channel described by the top red trendline on the chart above. As other writers have noted, the Dow clings to that upper trendline, not able to move above it and not willing to fall below it. Oscillators show inconclusive evidence. Stochastics and RSI poise on the verge of tipping over into bearish rolls or else trending while the Dow begins a directional move higher. Nothing on this chart signals that the Dow will head one direction more strongly than the other, with the obvious exception of an expectation that an index trading in a well- formed descending regression channel might continue to trade lower within that channel. Since the weekly view shows oscillators still trending up but showing the slightest tendency to hook over, the possibility remains that this big regression channel has been nothing more serious than a bull flag on the weekly chart.

The SPX can also be characterized as trading lower within a descending regression channel, although its channel formed beginning in early March.

Annotated Daily Chart of the SPX:

As is also true of the OEX, the SPX's pullback on the daily chart since early June could be variously characterized as a bull flag (if you're a bull) or a broadening formation (if you're not so bullish). This week, that formerly broadening formation has narrowed into a tighter range, however, with a top at about 1136.50 and a bottom at about the board-flat 100-dma, with further support below at the 50-dma. RSI begins to look more bearish here, but stochastics kicked back up again, giving a mixed outlook that goes perfectly with the flattening MACD. Weekly oscillators look similar to the Dow's: RSI and stochastics headed higher, but showing a slight tendency to hook down.

After-hours earnings did little to clarify the situation. They included reports by Adobe (ADBE), Red Hat (RHAT) and Solectron (SLR), with ADBE and RHAT both trading lower, and SLR headed higher. RHAT's revenue missed expectations, and the stock had headed lower by 9 percent as this report was prepared. ADBE had dropped more than 2 percent.

Economic reports due Friday include only the 8:30 release of the Q1 current account figure, with the previous number at -$127.5 billion, and with expectations firming up for a deficit of -$140.0 billion, but ranging from $139.5-141.3 billion. If markets are going to move, they'll probably be prodded by something other than economic numbers.

The often-seen tendency for an option expiration Friday is for markets to clamp down late in the morning and attempt to maintain equilibrium until the market close, a tendency that may be exacerbated by the upcoming FOMC meeting and transfer of power in Iraq, with both events now two weeks away. While I would not be surprised to see that trend continued tomorrow, be watchful of the crude prices. While lowered gasoline prices this week and building inventories over the last couple of weeks might have reassured markets, crude futures flamed up toward the $39.00/barrel level Thursday. That, coupled with the higher- than-expected PPI, could start a fire that eats through some support levels. The Dow Jones Transportation Index, often a leading indicator for the Dow, created a doji at the top of a rise in Thursday's trading, and Dow bulls don't want to see it turn down Friday, pressured by rising crude prices.

However, some possibilities for at least a modest rise exist. Tech traders should watch the SOX's reaction to the semi book-to- bill number. Although several chart attributes suggest that the SOX has room to fall, it's deeply oversold on a 30-minute basis, and it may just see an oversold bounce unless the number disappoints in a big way. If a directional move gets underway, market watchers want to see the various indices make a concerted effort to move the same direction, rather than have the tech- related indices moving in opposition to the others, for example. If markets could all head the right direction, perhaps market watchers won't even have one more day of boring trade but will find something to excite them tomorrow.

I'm not counting on that to happen, but just open to the possibility. Be careful, keeping the trend of many opex weeks in mind as you make decisions about entering positions. After the opening volatility, moves that appear to be promising may get damped down almost as soon as they get started, especially if there's no volume behind the move.


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