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Market Wrap

Recipe for a Rally

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      10-27-2004           High     Low     Volume   Adv/Dcl
DJIA    10002.03 +113.55 10018.55  9841.95 2.15 bln 1941/ 854
NASDAQ   1969.99 + 41.20  1971.28  1926.25 2.06 bln 2092/ 906
S&P 100   537.78 +  6.09   538.41   529.30   Totals 4033/1760
S&P 500  1125.40 + 14.31  1126.29  1107.43
SOX       410.90 + 14.13   411.49   397.01
RUS 2000  587.18 +  9.57   587.18   577.53
DJ TRANS 3475.20 + 39.59  3475.78  3406.64
VIX        15.72 -  0.67    16.53    15.66
VXO (VIX-O)16.13 -  0.35    17.39    15.97
VXN        21.52 -  0.95    22.65    21.21
Total Volume 4,215M
Total UpVol  3,253M
Total DnVol    915M
Total Adv  4033
Total Dcl  1760
52wk Highs  312 
52wk Lows    47
TRIN       0.56
PUT/CALL   0.70

The U.S. petroleum inventories morning report was the fuel needed for a huge drop in oil prices and a massive climb in the stock market. The DOW closed above 10000 at 10002.30 for a daily rally of 113.80 points. But the fuel based climb was not just restricted to the DOW, the broader market ignited also. The SPX was up 14.31, or 1.3%, to 1125.40 and the Nasdaq gained 41.20, or 2.1%, to 1969.99. On the other hand, the bond market got crushed, as were oil prices, which plunged $2.71 to about $52.46 a barrel -- a 4% plunge.

Even though oil may have retreated today it has been on a meteoric rise for the last few months and one would think the economy would be suffering for it but economists will be the first to say this is just not so, oil prices haven't held back the economy so far. However, that may be about to change. According to 54 economists who participated in a Wall Street Journal survey, a sustained move above $50/bbl will be the point when higher oil prices begin to take a greater toll on growth. A move into the $50 to $59-a-barrel range that is sustained for a complete quarter, would force them to shave their gross domestic product forecasts by one-half point.

But so far, the move to $50-plus oil hasn't lasted long enough to cause economists to pare back their forecasts. As a matter of fact the economists lifted their estimates for third quarter growth to a 4.0% inflation-adjusted annual rate, from the 3.6% average forecast they made in September.

Economic Reports:

Durable Goods:

Although economists had predicted Durable-goods orders would gain 0.6%, the Commerce Department report for September durable goods, products meant to last three years or more, increased only 0.2% to $195.7 billion after a revised 0.6% decline in August. The barometer of business spending, orders for non-defense capital goods excluding aircraft, rose 2.6% after a 0.3% increase in August. The durable-goods data are some of the most volatile reported by the government so forecasters are wary of using monthly fluctuations to get a read on the overall state of the economy.

New Homes Sales:

Augmented by lower mortgage rates, new home sales in September unexpectedly rose to the third highest total on record suggesting housing is helping spur the economy. The Commerce Department said single-family home sales rose 3.5 percent to a 1.206 million annual pace last month from a revised 1.165 million rate in August. Sales rose in the every region except the West. The median selling price dropped 8.4 percent in September to $197,700 from August's $215,900. According to the latest forecast by the National Association of Home Builders, sales of new homes this year will reach 1.164 million, surpassing last year's record 1.089 million.

Department of Energy crude, distillate, and gasoline inventories:

In the biggest decline since Sept. 10, crude oil futures fell from a daily high of 55.65/bbl after an Energy Department report showed that U.S. stockpiles rose more than expected. In the week ended Oct. 22, supplies climbed 3.9 million barrels to 283.4 million when an increase of 1 million barrels was expected. Inventories were 2.9 percent lower than a year earlier. Stockpiles of distillate fuel, which includes heating oil and diesel, declined more than expected last week.

Fed Beige Book:

The Fed Beige book is a monthly snapshot of business conditions compiled from reports submitted by the Fed's 12 regional banks. This survey, released at 2:00EDT, showed the U.S. economy continued to grow in September and early October despite being hit by rising energy costs and increased uncertainty surrounding the election. It gave a picture of an economy that is moving ahead and even the hard-hit manufacturing sector is showing signs of regaining its foothold. The report found that the pace of activity had quickened in the Richmond and Dallas districts and the other five districts, Boston, Philadelphia, Chicago, Minneapolis and Kansas City, reported steady expansions.

Central bank policy-makers use this report when they next meet to decide whether to raise interest rates or not. Most economists believe that they will continue to raise rates to make sure that economy does not get overheated and cause inflation.

Earnings Reports:

In its fiscal first quarter, Procter & Gamble's (PG) net profit rose 14% on volume growth and a net gain from selling its juice business. The company also maintained its fiscal 2005 guidance although costs have been increasing. PG posted a net income of $2 billion, or 73 cents a share, up from $1.76 billion, or 63 cents a share, in last year's first quarter. PG ended the day at $51.78 down 1.73.

Hit by tough conditions in Europe and Asia, Unilever (UN) said its business suffered in the third quarter but has maintained its forecast for low earnings-per-share growth for the full year. The maker of brands such as Dove soap and Lipton tea, reported its net increased 4.2% to $1.13 billion. UN stated conditions in Europe continue to be difficult because of weak consumer confidence and the growth of discount retailers. They also sited poor weather as the cause for lower sales of ice cream and ready- to-drink tea in the region. UN closed the day at 57.92 down 0.13.

The Philadelphia cable-television and Internet provider Comcast's (CMCSA) net income fell sharply from the previous year's third quarter because the previous year's quarter's results included a $3.29 billion gain from the sale of the company's interest in home-shopping network QVC. CMCSA reported its net income dropped 93% to $220 million, or 10 cents a share, from $3.18 billion, or $1.41 a share, a year earlier. Revenue jumped 12% to $5.1 billion from $4.55 billion a year earlier. CMCSA ended the day at 29.47 up 0.55.

Blockbuster (BBI), who earlier this month split off from its former corporate parent Viacom, is suffering from a continued decline in its video-rental business and reported a sizeable loss in the third quarter. The company reported a net loss of $1.42 billion, or $7.82 a share, compared with net income of $63.7 million, or 35 cents a share, a year earlier. Revenue rose 1.8% to $1.41 billion from $1.38 billion a year earlier. BBI ended the day at 6.81 down 0.28.

ConocoPhillips (COP) reported a net income gain in the third quarter as record high oil prices overcame declining production and higher exploration costs. Although some large oil companies like COP are faced with fewer and fewer ways to reinvest their windfall profits into projects that will grow production in future years, COP is using its cash to invest in the Russian oil industry. COP has announced a $2.4 billion strategic alliance with Russian oil giant OAO Lukoil, under which COP can purchase a 7.6% stake of the company and develop joint exploration projects. COP ended the day at 84.92 down 1.01.

The world's largest aerospace company, Boeing's (BA), attributed its third-quarter 78% surge in net income to double-digit growth in its military unit more than offsetting the losses in its commercial-aviation unit. In absolute dollars net income was $456 million, or 56 cents a share, up from $256 million, or 32 cents a share, a year earlier. Revenue increased 7.9% to $13.15 billion from $12.18 billion during last year's third quarter. BA finished the day at 50.10 up 0.12.

After hours we will be getting earnings from many companies but the most noteworthy are ASKJ, BIIB, JDSU, SWKS and THQI.

Annotated Weekly Chart of the DOW:

Here is a weekly chart of the DOW, which I think shows why we may see a more upward pressure in the next few days.

I am not a huge fan of MAs - they seem just a little too esoteric for for me but there is one I use because a lot of other analysts use it also - it is the 200 MA. However, I have a problem because there are two 200 MAs, the simple and the exponential and as you can see from the chart above they can be quite divergent. To solve this problem I have put both on the chart and lo and behold they are merging so I don't have to decide between them. But the really cool thing is that they are merging right at the bottom of the DOW's weekly regression channel.

Then you have the positive divergence in the MACD and stochastics, the election next week and the end of October and you have a recipe for a rally.

Annotated Weekly Chart of the SPX:

As you can see from this chart the weekly SPX is much more bullish than the weekly chart of the DOW. First of all the regression channel is almost sideways while the DOW weekly chart points downward. Also both 200 MAs - the simple and exponential, are above the bottom channel. And then there is the bullish reverse H&S forming with the neckline at the top channel line. More ingredients in our rally recipe.

Annotated Weekly Chart of the NASDAQ:

The weekly chart of the Nasdaq is much harder to read than the DOW and the SPX. The regression channel did not completely contain price like it did in the other two weekly charts. The two 200 MAs are much more divergent here but I looks like the exponential is the best one to use. It also looks like this index is ready to retreat and visit the bottom of the channel exactly opposite of what we are seeing in the DOW's chart. Of course you have to take into consideration the fact that the Nasdaq has been much more bullish than the DOW in the last few weeks. However you want to explain it, markets "work" much better when you have all the pieces in sync and that is not the case now.

Annotated Daily Chart of the DWC - Wilshire 5000:

Instead of showing a chart of the Russell 2000 I decided to show you a chart of the Wilshire 5000, which is the total market. Surprisingly the two are very similar.

I think what is most noteworthy here is the bullish reverse H&S forming with the head right at where the two 200 MAs converge. The only problem (isn't there always a problem?) is that reverse H&S are most relevant when a market is making a bottom and although I guess you could call this a falling market but on the weekly chart it is hard case to make.

The Market Tomorrow

Thursday's economic releases begin with the usual 8:30 release of jobless claims, with those claims last week showing a decrease beneath the benchmark 350 thousand to 329 thousand. At 10:00, the Help-Wanted Index will be released, with natural gas inventories next, near 10:30. The Money Supply number will be seen after Thursday's market close, at 4:30.

The most noteworthy earnings tomorrow will come from CCMP, COLM, DCX, XOM, GTW, GSK, IMCL, JBLU, LTR, MSO, MLNM, PNRA, RTN, G, VZ, VIA.

Have a great evening.



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