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Market Wrap

It Was a Setup

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      11-10-2004           High     Low     Volume   Adv/Dcl
DJIA    10385.48 -  0.89 10439.40 10378.59 1.88 bln 1621/1204
NASDAQ   2034.56 -  8.77  2047.25  2032.37 1.84 bln 1614/1394
S&P 100   555.54 -  1.36   558.85   555.51   Totals 3235/2598
S&P 500  1162.91 -  1.17  1169.35  1162.51
SOX       405.76 - 10.04   415.80   404.90
RUS 2000  609.61 +  2.97   611.93   605.46
DJ TRANS 3574.36 - 13.35  3594.87  3568.18
VIX        13.80 -  0.53    13.51    12.79
VXO (VIX-O)13.63 -  0.01    14.08    13.18
VXN        19.41 +  0.22    19.91    19.16
Total Volume 3,729M
Total UpVol  1,685M
Total DnVol  1,966M
Total Adv  3235
Total Dcl  2598
52wk Highs  407 
52wk Lows    42
TRIN       1.47
PUT/CALL   0.70

Dictionary.com defines "setup" as "a contest prearranged to result in an easy or faked victory," among other definitions. Both bulls and bears fear that the day's events set them up for someone else's victory. A study of daily charts shows how close many indices are to breakdowns or breakouts.

Annotated Daily Chart for the SPX:

Annotated Daily Chart for the Dow:

Annotated Daily Chart for the Nasdaq:

Annotated Daily Chart for the GHA:

Annotated Daily Chart for the SOX:

Annotated Daily Chart for the Russell 2000:

Cisco (CSCO) set techs up for a decline, but the company had help from tech bulls. Tuesday, Marc Eckelberry of the OptionInvestor Futures Monitor had pointed out that CSCO's November 20 strike had a put/call ratio of .11, indicating irrational optimism about CSCO's earnings report. The stock was set up for a decline on any disappointment, and there was a disappointment. CSCO closed Wednesday at $18.44, down $1.31 or 6.63 percent.

Despite disappointment over CSCO's Q1 results, network-related stocks had performed well in Europe, but the NWX, the Networking Index, gapped lower at the U.S. open and headed down throughout the day. The NWX closed down 1.14 percent.

Early Wednesday, analysts had begun cutting ratings on tech- related stocks or sectors. UBS cut HPQ's rating to neutral, citing valuation and its preference for IBM or Dell. However, the company also cut Dell's rating to neutral. UBS was busy in the tech sector, raising its price target for Lucent Technologies (LU) in one bright spot for techs. Morgan Stanley lowered its outlook on the semiconductor capital equipment sector to a cautious one from its previous in-line view. The firm noted that they were seeing a downturn rather than a mere correction in capital spending. The firm also lowered price targets for AMAT, NVLS, CYMI, KLAC, and LRCX.

More setups were to come, setups that might have helped the FOMC formulate a decision and the accompanying statement later in the day. Because Thursday is Veteran's Day, government offices will be closed, shaking up this week's usual schedule of government releases. In addition to the usual batch of economic releases Wednesday morning, Initial Jobless Claims, October's Import Price Index, and September's Trade Balance were all slotted into the 8:30 time period.

Those numbers appeared to set markets up for an early-morning rally, but futures dropped off their highs instead, perhaps on worry over the Fed's interpretation of the numbers or perhaps after a look at the underpinnings of some of those numbers.

Unemployment claims numbered slightly fewer than expected, up only 2,000, with the four-week average down 5,500 to 336,000. That was touted as the lowest level since July, and sure to have been factored into the Fed's decision.

September's Trade Balance had been expected to remain flat at $54 billion. Instead, the number surprised by falling to $51.6 billion. Import prices rose 1.5 percent, but fell 0.2 percent ex oil. The average price of a barrel of oil increased to $37.62, a record high.

Market pundits noted that hurricanes and other factors disrupted shipments of imported oil in September. That capped import prices, they concluded. Otherwise, those prices might have risen more. With this in mind, some theorized that the deficit will widen again in October as a result of resumed shipments, and this month's deficit was no lightweight, still the third largest. Exports rose 0.8 percent to their highest-ever levels, but imports from China also rose to a record high.

Some experts believe that the dollar, already weakening to record levels over the last week, may be weakened further by the widening gap in the current account. Many central banks, most notably those in Asia, have been making efforts to shore up the dollar against their currencies. A weak dollar helps U.S. exporters, but hurts Asian and European exporters, as well as U.S. domestic companies paying for imported products, particularly fuel. Currency traders weren't fooled by the lower deficit this month, looking forward to expectations for October. The dollar plummeted through the open, but then sprang up afterwards, forming a neutral triangle at the top of the day's range.

The Department of Energy's usual Wednesday release of crude, distillate, and gasoline inventories followed. DOE figures showed crude inventories up 1.8 million barrels, slightly lower than the expected 2.0 million increase. Distillate and gasoline inventories both fell, by 100,000 and 400,000 barrels, respectively. Estimates had been for a rise in distillate inventories of 400,000 barrels, but the American Petroleum Institute's figures disputed the DOE's. The API stated that distillate inventories rose by 2.21 million barrels.

Distillates include heating oil, increasingly a focus as winter approaches. Some energy experts worry about heating oil supplies this winter, but the International Energy Agency attempted to calm those worries, lowering its estimate of global oil demand through the end of this year by 100,000 barrels a day. The high energy costs proved a major factor in that decreased demand, producing a global economic slowdown according to the IEA. That slowdown was also certainly be factored into the Fed's decision.

Crude prices initially rose after the release of the inventories number, then dropped to a new recent low before rising again. Although many have been cheered by crude's fall from its plus- $55.00 per barrel cost, it may be trying to bounce again from support at its last swing high. Like some indices and stocks, it's set up for a bounce or a tumble through support.

Annotated Daily Chart for Crude:

At 2:00, October's Monthly Budget Statement was released, with the FOMC Rate Decision following closely afterward at 2:15. The budget deficit was in-line with expectations, at $57.3 billion, and the Fed's decision to raise rates a quarter point was also in line with expectations.

The accompanying statement to the FOMC decision mentioned the improving labor market and asserted that output was still growing despite those higher energy prices. That statement read much as the previous meeting's had, with the Fed feeling that risks to price stability and sustainable growth were balanced. The statement also asserted that inflation remained muted, an assertion that some economists dispute, but that energy costs and uneven global growth must be watched.

Whether or not inflationary pressure are muted, the reaction to the FOMC decision was muted, too. CNBC's cameras focused on pit traders after the announcement, faces upturned as they looked up at the boards. While Ron Insana quoted from the Fed's statement, they stood silent, still scanning the boards. A few hands raised, palms out, to sell; a few hands raised, palms up, to buy. Most stood as if paralyzed. The markets appeared to be, too, and that's where they ended the day, ready to rumble or ready to tumble. Another Dictionary.com definition for "setup" is "a play or pass that creates a scoring opportunity." Many markets are set up for just that opportunity, but with the direction yet to be determined.

Be cautious with all entries. Some measurements, including bullish sentiment, 9-period daily RSI, daily CCI, and others reveal worrisome overbought levels on some indices. The climb on some has been meteoric, but as the following chart displays, prices can continue climbing long after indicators signal overbought conditions, when indices or stocks seem to be defying gravity. Those who follow my posts in OptionInvestor's Market Monitor have seen this chart already. Due to space requirements, it wasn't possible to capture the beginning the rally in mid- December.

Annotated Daily Chart For the OEX:

This chart warns that it's as risky to catch soaring knives as it is to reach for falling ones, even when all the signs are in place for a retreat. Watch the benchmarks listed on the charts above, place cautious bets, and be willing to be wrong and change sides if markets react differently than you expect.

Thursday, bond markets will close along with government offices. Some economic calendars still include the release of information on natural gas inventories at 10:30, but that may be a mistake as others listed it for today. Other than that, markets will have little to distract them from sorting through bullish and bearish factors and deciding on a direction.

A day ahead of time, my thanks and those of the OIN staff to all veterans who have served to protect us all.



 
 



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