Option Investor
Market Wrap

The Good the Bad and the Low Carb Diet

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      09-22-2004           High     Low     Volume   Adv/Dcl
DJIA    10109.18 -135.75 10244.05 10097.37 1.68 bln  759/2058
NASDAQ   1885.71 - 35.47  1910.23  1884.85 1.58 bln  755/2232
S&P 100   536.84 -  7.90   544.74   536.20   Totals 1514/4290
S&P 500  1113.56 - 15.74  1129.30  1112.67
SOX       391.74 - 12.01   403.75   391.08
RUS 2000  565.89 - 11.03   576.92   565.53
DJ TRANS 3194.66 - 76.56  3270.33  3191.45
VIX        14.74 +  1.80    15.30    13.95
VXO (VIX-O)14.63 +  1.77    14.96    13.80
VXN        21.06 +  0.76    21.19    20.66
Total Volume 3,264M
Total UpVol    615M
Total DnVol  2,649M
Total Adv  4290
Total Dcl  1514
52wk Highs  189 
52wk Lows    60
TRIN       1.81
PUT/CALL   1.10

The Low Carb Diet

I tell you at some point the Low Carb diet will be blamed for the high price of oil. The latest to use this diet as a scagegoat is the makers of Twinkies and Wonder Bread Interstate Bakeries (IBC) when they filed for Chapter 11 bankruptcy reorganization. Although many factors were sited for the company's woes including declining sales, a high fixed- cost structure, excess industry capacity, rising employee benefits costs, higher costs for ingredients and energy, they had to jump on the bandwagon and include the low-carb diet. I have always contented that anyone who ate Twinkies or Krispy Kreme doughnuts didn't worry about dieting and didn't cut back on these luxuries because of a diet. But anything that flows your boat. IBC ended the day at 2.05

This is one bearish chart.

The Bad

Morgan Stanley (MWD) had positioned itself for a rise in interest rates that did not pan out because of the unexpectedly low unemployment data (or so they say) and due to this bond miscalculation, earnings came in at 0.76/share instead of the expected 0.95/share, a huge miss, and quarterly earnings dropped by 34%. MWD has also agreed to settle several disputes with the NYSE to the tune of $19 million. MWD ended the day at 48.72 down -3.66.

After an eight-month investigation by its main regulator that found evidence of earnings manipulation, the SEC has opened an informal inquiry into Fannie Mae's (FNM) accounting practices. The Office of Federal Housing Enterprise Oversight launched its probe of FNM after widespread problems surfaced last year and today presented its report to the company's board detailing accounting deficiencies and violations of generally accepted accounting principles. The OFHEO stated FNM has "maintained a culture that emphasized stable earnings at the expense of accurate financial disclosures." FNM closed the day at 70.69 down - 4.96.

The Good

Today FedEx (FDX) reported strong gains in shipment volume across almost all its levels of business and a fiscal first quarter profit that more than doubled.

Although FDX's average load of 5.5 million packages/day was up 6.4% from a year earlier, the company noted air shipments in the U.S. continue to be hurt by the shift toward cheaper ground deliveries. This phenomenon seems to be restricted to the US however, because deliveries outside the U.S. climbed 13%, including a 52% surge in export shipments from China. FDX ended the day at 85.21 down -3.48. Looks like they wanted to sell today and no matter how pretty the books looked you got sold.

30-year mortgage rates eased to their lowest level since early April spurring a rise in mortgage refinancings last week and new applications for U.S. home loans. The Mortgage Bankers Association said its seasonally adjusted market index, a measure of mortgage activity, rose for the week ending Sept 17 by 1.8 percent to 690.7 from the previous week's 678.2.

The Department of Energy reported commercial crude inventories fell 9.1 million barrels to the lowest level in seven months, caused by the disruption of imports when Hurricane Ivan hit the East coast. The greater than expected drop for the week ended Sept. 17, left commercial crude inventories well below the lower end of the average range for this time of year. Once the ships are able to dock again, there should be a substantial increase in imports next week that will build up inventories.

On to the charts.

The last time I did a market wrap I was quite bearish except for the NYA. Well things have definitely changed since then. But before we get to the charts I would like to say that I am going to use a more conventional MACD setting (12, 26, 9), which coincides with the other OI analysts.

Annotated Weekly Chart of the SPX:

Here is a weekly chart of the SPX and as you can see it is up against that red downward trendline, which seems to be well-fit trendline. You can also see SPX is trading above the 50 and 200EMA. Support should come in at the August 12 low where you also find the 200EMA.

Annotated Daily Chart of the SPX:

Here is the same time frame but on the daily chart and you see how important that red downward trendline has become as resistance. Now for support I have talked a lot about the swing high made on August 2nd as an important level for the bulls to break from below (which they did) and it is now an important level for the bulls to defend from above. I have marked the August 2nd swing high with a blue arrow. This arrow also coincides with the 50 EMA at 1109 confirming it as support. I also see an ominous MACD cross but those can be negated easily enough with a push upward and a positive MACD divergence that cannot be ignored.

Annotated Weekly Chart of the DOW:

Here is the weekly DOW and the same well fit red downward trendline in place. The DOW is also trading above 50 and 200EMA.

Annotated Daily Chart of the DOW:

The daily DOW chart has already traded past the August 2nd swing high and below the 50 and 200 EMAs on the daily chart so the DOW is more bearish than the SPX. Also the positive MACD divergence is not quite as prevalent in this market.

Annotated Weekly Chart of the Nasdaq:

The weekly chart of the NAZ shows that it didn't even make it all the way to the red downward trendline and is trading right at the 50 and 200EMAs. This market is still the most bearish of the three above charts.

Annotated Daily Chart of the Nasdaq:

The daily chart of the NAZ shows that it has not printed above the 200EMA but is above the 50EMA and also right at the August 2nd swing high. Support and resistance is very clear in this market and may help to determine where the rest of the market may go. If the NAZ closes below the 50EMA take a look at the other markets to see if they are closing below their support levels also for bearish confirmation. If you see all three closing below support a revisit of August 12th lows is possible. On the other hand if you see the NAZ close above the 200EMA look to see if the SPX and DOW have broken above their red downward trendlines for a confirmation of bullishness.

Annotated Weekly Chart of the Russell 2000:

Here we have the same red downward trendline but note where the 50 and 200EMAs are.

Annotated Daily Chart of the Russell 2000:

This chart looks more like the SPX than the DOW or NAZ. Support is where the blue arrow and the 200EMA converge. It also has a positive MACD divergence. MACD has not yet crossed.

Annotated Weekly Chart of the NYA:

This is the most bullish of all charts because the red downward trendline has been broken but NYA was stopped at the June swing high (blue line) making a double top, which is bearish if confirmed. That confirmation is a trade below the double bottom formed at August 12th. As a matter of fact we have a double bottom and a double top giving us very clear support and resistance. If so inclined, one could trade this range and have a very clear idea of where to put stops.

Annotated Daily Chart of the NYA:

On the daily chart NYA should find support at the red downward trendline that converges with the 50EMA.

Tomorrows Economic Reports and Earnings

Thursday's economic releases will begin with the usual weekly 8:30EDT release of initial claims. Last week's number was a lighter-than- expected 333 thousand claims, with this week's expectations at 335,000- 338,000. Of course, we could expect some disruption due to Hurricane Ivan's swath through the U.S. and a much-lower-than-expected claims number might be discounted resulting in little market reaction. For the week ending September 18th the consensus is +8K.

At 10:00EDT, the Conference Board releases the Leading Indicators number; one whose title would seem to make it an attention-grabber, but the truth is that many components are already known before this number is released. Consensus is +0.2%

Also at 10:00EDT is the Chicago Fed National Activity Index and the DJ/BTM Business Barometer along with the Fed's Gramlich speaking on monetary supply. Gramlich detoured from recent Fedspeak in his talk last week on oil supply, so stay tuned on what he has to say about monetary supply, too. Natural gas inventories follow about thirty minutes later. Perhaps drawing more attention will be the FOMC Minutes from the August 10th meeting, to be released at 2:00.

HAL, CAG and WSTL will hold investor or shareholder meetings, while many of Wednesday's conferences continue, with WR Hambrecht joining in with a Display Technology Conference.

Among the companies reporting tomorrow are AGE, RAD, SCS, CMGI and RAZF.

Remember trade your plan and plan your trade.


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