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Market Wrap

Coming and Going

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     07-07-2004            High     Low     Volume Advance/Decline
DJIA    10240.29 + 20.95 10266.61 10199.29 1.61 bln   1704/1086
NASDAQ   1966.08 +  2.65  1976.92  1960.78 1.75 bln   1394/1596
S&P 100   544.25 +  0.92   546.23   542.46   Totals   3098/2682
S&P 500  1118.33 +  2.12  1122.37  1114.92 
RUS 2000  572.03 -  0.38   575.84   571.49
DJ TRANS 3150.08 + 33.59  3151.55  3116.45
VIX        15.81 -  0.44    16.47    15.59
VXO        15.75 -  0.42    16.37    14.50
VXN        22.26 +  0.15    22.39    21.89
Total Volume 3,655M
Total UpVol  1,975M
Total DnVol  1,552M
52wk Highs     153
52wk Lows      156
TRIN          0.92
PUT/CALL      0.99

It was a laborious session that ended with light gains for the Nasdaq, Dow and S&P, but at least the indices didn't break to new lows. Key support levels were tested and held, but the daily picture does not look encouraging for bulls in the short term.

The action of the past month has succeeded in whipping both bulls and bears in both directions. Abby Joseph Cohen's bullish call on the markets last week, preceding a precipitous drop by mere hours, was countered today by Morgan Stanley's Rick Bensignor who said that he sees the "most significant selloff" yet to come for the year, based on the technicals. We don't need to take anyone's word for it, however- here are the charts:

Weekly Dow Chart

The weekly Dow candles are at the root of the ambiguity, with the action off the year high printing either a bull wedge, a neutral pennant or a complex top. That's beyond useless, but it's also the most accurate description of what I see on a pattern basis. On a sentiment basis, we've seen record lows in Nasdaq and Nasdaq-100 volatility, nearly 10-year lows in OEX volatility, and very strong bullish optimism. However, we've also seen very high sustained put-to-call readings. To compound the uncertainty, I defy anyone to give me a definitive read on the weekly oscillators here- are they in downphase or upphase? Once again, the picture is ambiguous. We've seen in recent months that when in doubt, particularly within a range, smart traders don't force trades. Unless you're strongly persuaded against one side of the this market or the other, it's safer to wait for a high volume break of either 10500 to the upside or 9900 to the down, or to play for reversals at those levels with stops just beyond. The rising support line at 10200 narrows that range considerably, providing a higher support level to play.

Daily Dow Chart

The Dow's daily range managed to touch the upper and lower pennant trendlines at 10266 and 10199. Above that level is stiff resistance from 10320-10350, and given the shape of the daily cycle oscillators in their current bear roll, it's unlikely that we'll see a serious challenge to that upper range without more downside first. Below 10200, next support is at 10100, followed by 10060-80.

Weekly Nasdaq Chart

The same ambiguity is present on the weekly Nasdaq- bull flag, neutral pennant or complex top- but with the pullback of the past two weeks retesting the pennant apex in what is now a commonplace false pennant breakout. The oscillators are equally uncertain here, and the working range is 1900-2025.

Daily Nasdaq Chart

The Nasdaq found support today at 1960, failing below the descending daily trendline at a high of 1977. The low came right on what appears to be support on a descending triangle, and any print below 1960 should see a move to the 1935 level. I've highlighted a bearish divergence between the higher price high since early June and the lower 10-day stochastic peak, which portends that a break of that 1960 support could do some downside damage.

Putting it all together, we see more weakness in the shorter daily timeframes than in the weekly, and for that reason we can expect uncertain chop as the shorter timeframes seek longer term direction. The first extended move should be determinative, and the move from last week's highs qualifies. I'm not bullish here, but the lack of clarity on the weekly charts is telling me to keep an open mind either way.

The Mortgage Bankers Association reported that the Market Index of mortgage loan applications 19.5% to 687 on a seasonally adjusted basis from 575 the previous week. On an unadjusted basis, the index was higher by 19.2 but lower by 34.1% year-over- year. The Refi Index, with refinancings accounting for over 1/3 of all mortgage activity, rose 27.6% from the previous week, while the government index rose 9.7%. The average interest rate for a 30-yr fixed-rate mortgages was down to 5.96% from 6.21% in the previous week.

I've attached a weekly chart of 10-yr note yields (TNX). The downtick in rates over the past month should correlate with continuing increases in the level of mortgage activity. If this cycle continues to dominate, mortgage bankers can look forward to several more weeks of increased business.

Weekly TNX Chart

The International Council of Shopping Centers reported that chain-store sales for the most recent week rose 0.9%, correcting part of the previous week's 1.2% loss. This level is up 4.4% y-o- y, but the ICSC warned that this y-o-y gain has been deteriorating since earlier in June. Caution seems to be the ongoing theme in the retail sector, with WMT warning last week, and continued concerns about the amount of consumer exposure to debt and wage deflation.

The Treasury Department auctioned $15 billion in 5-yr notes on at an average yield of 3.663%, generating a bid-to-cover ratio of 2.33. Bonds were slightly higher for the day, with the ten year note yield declining 0.8 basis points to close at 4.472%.

The morning opened bleakly with a warning from PSFT about Q2's earnings and revenue, which are now expected at 13-15 cents per share from the previous 21 cents. Revenue is expected between 655M - 665M, down from 689.3M. Despite its morning drop PSFT recovered later in the session to close higher by 1.66% at 17.10. EBAY got whacked on a downgrade of the entire internet sector by Prudential to neutral weight from overweight (does that mean hold or sell?). Prudential noted that EBAY's overall auction listing growth has been slowing. The stock closed lower by 3.31% at 86.87. China internets were also lower on a warning from NTES based on weaker than expected sales from its wireless and other fee-based operations. The entire sector was lower today, with the INX lower throughout the day to close at 188.32.

In other news, UAL reported that its load factor reached rose 4% to 86% in June, the highest in its history. Traffic increased almost 17% to 10.6M revenue passenger miles from 9.1 million miles year-over-year.

NITE got smoked for more than 5% after warning that Q2 would fall short of expectations, lowering its range to 6-11 cents per share from 15 cents. The broker dealer blamed the miss on low volatility and volume in equity and options, as well as a 79M charge attributable to the settlement of SEC and NASD investigations. CEO Thomas Joyce said that "The trio of rising rates, higher oil prices and an unstable Middle East worked to keep investors, both retail and institutional, on the sidelines." For the day, the XBD fell to a 9 month low, losing 2.04% to close at 120.19.

The Department of Energy reported that it expects crude oil prices to remain high through 2005, based on low inventory levels and persistent demand. The DOE said: "The chances for even a gradual, sustained decline in crude oil prices through 2005, as previously projected in this outlook, seem to have diminished. Low world oil surplus capacity levels provide an extremely limited cushion in the event of unexpected world oil market disruptions." Despite these comments, crude oil futures were lower throughout the day on confirmation from Ali-al-Naimi, Saudi Arabia's oil minister, that OPEX would honor its stated intention to up its quota by 500,000 barrels. In the grand scheme of things, that's a minor increase, but increased supply and the consistency from OPEC's earlier announcements coincided with short term overbought conditions after this week's strong runup to generate a 1.44% decline in front-month crude oil futures by the end of the day.

Federal Reserve Vice Chairman Roger Ferguson manned the bullhorns in the afternoon, warning investors that the strong gains in US productivity during past two years is unlikely to continue, but that productivity should remain above average as new technologies are deployed. He noted that the economic data indicate a pullback from last year's pace, and that while lower productivity gains could spike employment labor costs and harm profit margins, such threats to inflation are premature.

Gold was sharply higher, rocketing in the morning and holding its gains for the session. Bloomberg attributed the gains to concerns over the banking situation in Russia. While there's uncertainty over the extent of the problem, the Canadian Press reported that Russian Central Bank chairman Sergei Ignatyev was reassuring the country that the sector was sound. The state- owned Vneshtorgbank is in negotiations to buy Guta Bank, which bank suspended operations yesterday as clients arrived to find suspension notices covering the doors of their branches. Word was of a liquidity crisis, affecting this and other smaller banks, and the response today was to slash reserve requirements from 7% to 3.5%. Gold rose above 402, making its largest gain in 13 months.

After the bell, AA reported net earnings of 46 cents per share, missing estimates by a penny, and income of 404M, up 86% from $217 y-o-y. YHOO reported earnings inline with estimates at 8 cents per share for Q2, more than doubling to 113M from the previous 51M. Sales rose to 609M, missing estimates by 1M. YHOO got smoked following the release, spiking down 14.5% to 28.45 as of this writing. AA was lower as well despite its positive report.

DNA reported Q2 revenues of 1.128B, up from 799.7M, earning 19 cents per share and meeting expectations. Net profit was 170M or 16 cents per share, up from 132.3M or 13 cents per share last year. The stock was lower by .29% at 54.50 as of this writing.

We await initial claims for the week ending July 02 tomorrow, estimated at 345K and down from 351K in the prior week, as well as consumer credit for May to be released at 3PM, est. 7.5B. Based on the terrible reception of the earnings reports after the bell, the configuration of the daily indicators and Abby J-C's bullish call from last week, I'm bearish here, but keeping an open mind due to the ambiguity of the weekly indicators. If in doubt, exercise patience, and whatever you do, do it with stops. The markets could well gap below today's support at tomorrow's open, and if so shorts can use today's closing prices as a reference for the placement of stops.



 
 



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