Option Investor
Market Wrap

Lower Highs, Lower Lows

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      09-27-2004           High     Low     Volume   Adv/Dcl
DJIA     9988.54 - 58.70 10046.65  9985.37 1.54 bln  902/1918
NASDAQ   1859.88 - 19.60  1871.94  1858.88 1.31 bln  833/2177
S&P 100   531.02 -  3.35   534.37   530.84   Totals 1735/4095
S&P 500  1103.52 -  6.59  1110.11  1103.24
SOX       376.96 -  5.59   383.47   375.67
RUS 2000  558.36 -  7.61   565.97   558.36
DJ TRANS 3177.35 - 24.76  3201.29  3166.94
VIX        14.62 +  0.34    15.06    14.55
VXO (VIX-O)14.30 +  0.16    14.76    14.07
VXN        21.92 +  0.82    22.34    21.73
Total Volume 2,864M
Total UpVol    637M
Total DnVol  2,203M
Total Adv  1735
Total Dcl  4095
52wk Highs  107 
52wk Lows    95
TRIN       1.68
PUT/CALL   0.99

The indices gapped lower today and failed at or just below Friday's lows. A narrow range emerged following the gap open, but an afternoon breakdown drove the indices below the intraday range to finish at the lows.

Breadth was negative and volume was light, with declining volume exceeding advancing volume 2.98:1 on the NYSE and 3.92:1 on the Nasdaq. Volatility rose, with the OEX Volatility Index (VXO) adding 6.72% to close at 14.30 and the QQQ Volatility Index (QQV) +6.16% to close at 19.99.

Daily Dow Chart

The daily chart of the Dow shows today's break below 10000 completing Friday's bearish consolidation at the lows. Price is walking down the lower daily Bollinger band in what is so far a strong daily cycle downphase. 9950-60 is next support, below which bears will be targeting the August lows.

Daily S&P 500 Chart

The SPX is in the earlier stages of its daily cycle downphase, still working on support from 1096-1102. Below this level, the downphase will strengthen, with next support in the low 1080s. 1112-1115 is new resistance.

Daily Nasdaq Chart

The Nasdaq is showing a bearish unfilled breakaway gap this morning, with the daily cycle downphase just getting started. Support below is at 1850-55, below which 1825-30 comes into view. Note the pattern of lower highs and lower lows from the daily cycle over the past 6 months.

It was a light day for economic news, with New Home Sales as the only major release. The Commerce Department reported that new home sales in the US rose 9.4% to an annual rate of 1.184M homes (seasonally adjusted). This was the largest jump in 4 years, with 404,000 new homes up for sale, which represents an inventory of 4.4 months at August's sales rate and the highest level in 25 years. The median price of a new home fell from $214,400 to $208,900, still a 9.7% year-on-year increase but the lowest median price in 8 months.

Standard & Poor's announced its estimate for Q3 SPX operating earnings at $16.42, which represents a 13.9% increase from Q3 2003. It's estimate for Q4 is for a 15.5% rise over 2004's levels.

Weekly TNX Chart

Ten year treasury bonds pulled back briefly on the New Home Sales news, but the decline proved to be a mere pause in the morning's gains. Ten year note yields (TNX) continued lower through 4% and failed on a bounce attempt back to that level to close lower by 3.4 bps at 3.997%. The weekly chart of TNX shows descending trendline support in play at current levels, while the rising support line connecting the lows of the past 18 months is just below in the 3.85% area. A break below that lower line would suggest a bear wedge breakout targeting 3.55% on the way to a downside objective of 3.05%.

Weekly chart of Crude oil

Investor awoke to crude oil trading north of $49 per barrel today, with crude futures reaching a new record high of 49.75 on the Nymex this morning. This time it was concerns over Nigeria, the number five OPEC producer, where rebels pushing for political reforms said that they would seek to extend the current uprising to the countries entire southern delta oil region. Royal Dutch/Shell closed down their 30,000 bpd output as a precaution. Nigeria had already been forced to cut back from its peak capacity of 2.55 mbpd due to aging facilities, and the current disruptions compound existing factors in Nigeria in a climate of global supply concerns and strong demand.

The weekly chart of Nymex crude, whose most recent green candle is comprised only of today's data, points an unequivocally bullish picture. Current support is at 48, followed by 46.50. For the day, Nymex crude close higher by 80 cents or 1.64% at 49.675, a new record close.

Nigeria wasn't the only fly in the ointment. Insurgent forces in Iraq attacked the oil ministry building Saturday, causing no injuries and minor damage. Iraq's export levels remain at relative highs for the year despite the various attacks on production facilities. OPEC continues to produce oil at 25 year high levels, but traders and analysts cite an absence of excess capacity with which to cushion external shocks such as the recent Nigerian developments. Again referring to the weekly chart, this year's rally has merely steepened an already bullish trend, and I'm personally not persuaded by arguments attributing the rally in oil to terrorism or other such purely external factors.

In a report to its private clients released today, Morgan Stanley stated that it believes "crude oil could reach $61 before a meaningful sell-off occurs. The Amex Airline Index ($XAL) fell 4.01% or 1.72 to close at 41.18, with AMR losing 6.69% to close at 6.97, a new 52-week low.

Weekly chart of Amex Airline Index ($XAL)

In other news, UBS reported that its Index of Investor Optimism, maintained in collaboration with Gallup, declined to a 4-month low of 74 in September from 77 in August. 56% of investors polled believe that now is a good time to invest in the financial markets, down from 60% in August, though expected average rates of return rose from 9.3% in August to 10.1% in the current report.

In corporate news, FNM was announced its agreement with its regulator, the Office of Federal Housing Enterprise Oversight, to create a 30% capital surplus within 270 days and review its internal accounting controls. FNM's minimum capital requirement is 2.5% of assets plus 0.45% of off-balance-sheet/derivative obligations, which Reuters reported to be equal to approximately $31B based on most recent data. The company agreed to submit to the OFHEO with 45 days details of strategies to meet these new commitments and their impact on the company.

This comes in the wake of Wednesday's OFHEO charges that FNM has been employing improper "cookie jar" accounting methods to smooth earnings and, on at least one occasion, deferred its reporting of expenses, possibly to reach bonus compensation targets for management. The SEC announced that it is conducting an inquiry into these findings. Morgan Stanley had downgraded FNM earlier in the morning to equal weight from overweight, citing uncertainty from the ongoing OFHEO examination and "a wide range of possible outcomes", and Prudential followed with its own downgrade to "neutral" following the announcement. Later in the day, it was announced that a subcommittee of the House Committee on Financial Services will hold a hearing titled "The OFHEO Report: Allegations of Accounting and Management Failure at Fannie Mae" will be convened on Oct. 6 at 10AM EST. Notwithstanding all of the foregoing, FNM's ticker showed some much needed green following last week's washout, closing higher by 1.51% at 66.50.

Hurricane Jeanne moved out of Florida today, leaving at least 4 people in the State and approximately 5.2M people without power. Reuters reported that the storm dropped up to 10 inches of rain, and a close friend of mine in Florida told me that crews had yet to clean up much of the debris left by Ivan. Sewage and drainage systems were waterlogged before Jeanne swept through, and flooding remains a serious concern. Current damage estimates are between $4B and $8B. The President declared a major disaster for the state, rendering it eligible for federal aid.

While the Orlando/Orange County Convention and Visitors Bureau said that its tourism areas were unaffected, operational and open for business, investors sold shares in DIS, which closed 1.19% lower for the day at 23.18. EMRG announced that it is redirecting customer service operations from its Sebastian FL location to its Fort Worth, TX branch. Tampa Electric, a division of TE, announced that its infrastructure has sustained extensive damage in eastern FL, and that 228,000 of its customers are without power. Insurer ANAT announced that the combination of Charley, Frances and Ivan will cost its subsidiaries $22M in pre-tax earnings, with total gross losses estimated at $37.2M, part of which will be recovered from the Florida Hurricane Catastrophe Fund and part from its reinsurance agreements. Insurer EMCI estimated its losses at $6.9M, which will translate to an earnings hit of $4.5M. Both EMCI and ANAT had not yet tallied the damage resulting from Hurricane Jeanne. BLS reported that 30,000 of its customers in Georgia have experienced service interruptions due to Hurricane Jeanne.

In other news, TOM got smoked for 21.79% or 2.87 to close at 10.30 on news of a federal grand jury subpoena from the US Attorney, examining the commission rates paid by its US subsidiary to its non-US subsidiary since 1990. Pharmaceutical company NSTK rose 69.90% or 5.41 to close at 13.15 on news of a contract with Merck to develop a nasal spray treatment for obesity.

Tomorrow's lone economic report is Consumer Confidence for September to be released at 10AM, estimated at 99.5 and down from August's 98.2. With oil mere pennies away from the $50 mark and getting a lot of attention, with the volatility indices beginning to rise but still in the range of multiyear lows, with S&P announcing optimistic expectations for Q3 earnings, my current bias is aligned with the daily cycle oscillators on the indices. With the previous daily cycle upphase failing from its third lower high in the past 6 months, the trend on this timeframe remains to the downside. The current daily cycle downphase suggests a strategy of shorting overbought bounces on the 30 minute or 60 minute cycles with stops just above resistance. Until it reverses, this cycle should continue to deliver a pattern of lower highs and lower lows on these intraday timeframes.


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