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Market Wrap

Bionic Bulls

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      11-15-2004           High     Low     Volume   Adv/Dcl
DJIA    10550.24 + 11.23 10563.02 10517.13 1.84 bln 1498/1321
NASDAQ   2094.09 +  8.75  2094.13  2078.84 1.87 bln 1705/1350
S&P 100   566.09 -  0.13   566.64   564.40   Totals 3203/2671
S&P 500  1183.81 -  0.36  1184.48  1179.85
SOX       429.57 +  5.76   432.63   420.53
RUS 2000  623.86 +  1.88   623.86   618.97
DJ TRANS 3611.51 - 16.69  3626.99  3594.12
VIX        13.38 +  0.05    14.06    13.25
VXO (VIX-O)14.21 +  0.16    14.80    14.00
VXN        18.50 -  0.32    19.73    18.42
Total Volume 3,717M
Total UpVol  2,359M
Total DnVol  1,317M
Total Adv  3203
Total Dcl  2671
52wk Highs  419 
52wk Lows    16
TRIN       0.69
PUT/CALL   0.56

Bulls and bears alike were on the alert for an overdue pullback in the indices as option expiration week kicked off. A premarket dip was bought, however, as was every other dip that followed for the rest of the day as the indices held their gains, closing mixed to positive by session's end.

Daily Dow Chart

The daily Dow chart contains one year's worth of daily data to provide some longer range perspective at the expense of short term detail. Today's 46 point range broke Friday's high in the morning and managed to trade both sides of unchanged for the rest of the day. Once again, there was no pullback, which has been the case for nearly all of the move off the October lows. This move is comparable to the December 2003 rally, only it has been generally steeper, more like an upside crash than a rally. The move for the past two weeks has resulted in a trending daily cycle upphase, with the 10 day stochastic currently buried in overbought territory. This would be the logical spot for at least a corrective downphase to kick off, but the bids have been relentless. Bears will want to see a move below 10480-10500 before thinking about trying to catch the rising knife. Resistance going back to February-March 2004 is from 10560-10600.

Daily S&P 500 Chart

Unlike the Dow, the SPX has reached new highs for the year on this rally, not because it traveled further but because it launched from a much higher relative low of 1089. It too has maxxed out its daily cycle and is due for some downside. It was a slow day, however, with the SPX respecting a less than 5 point range. Today's CBOE total put to call ratio never made it above .54, with a low of .44. While the CBOE put to call ratio is a secondary indicator only, due to the multitude of bearish and bullish strategies using puts or calls or both, extreme lows in put volume over call volume tend to coincide with market tops. Today's intraday p/c ratio readings are in that neighbourhood, reiterating the message of the trending 10-day stochastics, but without cooperation from the price, bearish traders will be left holding a great set of arguments and a great big loss. Better to let a new trend at least suggest itself before trying to anticipate a decline, however likely. In this case, we'd want to see a close below 1170 at minimum, better yet below 1162 support, which should produce preliminary sell signals in the daily cycle oscillators. Until then, the trend will remain clearly up, regardless of what the indicators may be cautioning.

Daily Nasdaq Chart

The Nasdaq traversed all of 16 points for the session, finishing 8.75 in the green despite intraday bearish divergences galore. Volume was moderate and the price held up. Like the Dow, the COMPQ has failed to touch, let alone exceed the year highs, but the descending channel breakout is full of bullish promise if the price can be driven above 2160. A quick look at a 3 year weekly chart holds up the possibility that this year's decline was in fact a corrective bull flag within the rally from the 2002 lows. In that case, there's the potential for a move of a similar magnitude of the 2003 rally having just commenced on the breakout above 1950. On the other hand, a failure at or below 2160 would set up a bearish double top. Given the overbought readings on the daily cycle oscillators, I'm more inclined toward at least a correction from here. But until such commences (which it clearly has not), the powerful rise from October has to be respected. Bears need to see a close below 2045, confirmed with a break below 2035-2025 support, to suggest that a new daily cycle downphase (and not just a whipsaw) is underway.

Weekly TNX Chart

Bonds traded a narrow range today around unchanged, finishing slightly higher, with ten year note yields (TNX) losing 1 bp to finish at 4.19%. The weekly cycle upphase that launched on the successful test of lower rising wedge support confirmed with a bullish Macd cross last week. On this basis, the 3.96%-4.0% support level should not be broken on any pullback from here, and above 4.26%, 4.38%-4.4% is next resistance for the TNX.

Weekly chart of Crude oil

Crude oil fell below 46 to a 9 week low of 45.30 on the Nymex as the financial press reported that rising US reserves had eased fears of a Winter supply squeeze. There was also talk of the absence of any weekend supply disruptions that helped move the market lower. The Nigerian labor dispute has yet to be resolved, though the government offered to reduce pump prices by 10% which the Nigeria Labor Congress was considering today. Other potentially bullish factors cited in support of the price of oil were ongoing supply uncertainties, the risk of a colder than usual winter, and the threat of sabotage arising from the conflict in Iraq. Crude oil futures recovered part of their losses to close -1.16% at 46.775.

Whatever the external factors attributed to the decline, the weekly chart's bearish stochastic divergence was sounding the alarm from the time of the initial move to 46. The sharp break from the record highs fits well with that divergence, and with a downphase now in progress, traders should be looking for a pattern of lower highs and lower lows until the next weekly cycle upphase gets underway. 45-46 is confluence support on this chart, but given the ongoing downphase, we should see that level broken and a retest of stronger support at 42. A bounce at or above that level would be clearly bullish for the price of oil, given the strong rally of the past 3 years.

In corporate news, meat processor TSN reported a drop of 66M or 19 cents per share from Q3 to Q4 on rising sales of 7.1B from 6.6B. Estimates were for 19 cents per share. The company projects 2005 earnings to come in between $1.15 - $1.45 per share. Analysts are expecting the company to $1.30 per share in 2005. TSN closed higher by 1.18% at 17.08.

Insurer/asset manager AIG is reportedly close to reaching a settlement with the SEC in the PNC affair, in which AIG has been under investigation for allegedly helping PNC to commit accounting fraud. Sources claim that the settlement will cost AIG more than 10M, but would help it avoid prosecution by the Department of Justice. AIG added 2.97% to close at 62.84.

GLBC reported a wider loss for Q3 2004 of 102M, up from 80M in Q3 2003 on revenue of 617M, down from 696M one year ago. The company attributed the declines to its ongoing financing and business tweaks, and noted that its gross margins are improving. The stock closed lower by 3.05% at 14.60.

Home improvement supplier LOW beat estimates by a penny, reporting earnings of 66 cents per share or 522M. Q3 2003's earnings were 452M or 56 cents per share. Sales were higher by 16.2% at 9.1B for the quarter, with same-store sales up 5.2%. The company estimates Q4 earnings of 58-60 cents. Analysts are estimating 60 cents for the next quarter. LOW dropped 1.66% to close at 59.25.

Gold miner KGC announced the revision of its previously reported Q3 earnings of 9.4M to a loss of 133.6M on the basis of a 143M reduction in goodwill attributed to its Paracatu mine in Brazil. The company noted that its cashflow of 62.5M was unaffected by the revision. KGC got clocked for 5.26% to close at 7.93.

Foodmaker KFT announced that it is in an agreement to sell is candy business, including Life Savers, Altoids, Creme Savers, Trolli and Sugus, to WWY in a deal worth approximately 1.48B. KFT closed lower by .57% at 34.68, while WWY gained 1.07% to close at 68.08.

DJ announced that it is in a deal to purchase MKTW for 519M or 18 per fully diluted share, which, including MKTW's 56M cash on hand amounts to a net price of 4563M. According to MKTW, the price represents a 46.5% premium on the average trading price over the past 60 days. DJ, which owns the Wall Street Journal, expects that the deal will extend its reach and deliver a larger and broader audience for online financial news. After the bell, ratings agency Standard & Poors placed DJ on credit watch, with the negative implications that such carries, pending a review of the company's financial strategies. S&P stated that any downgrade would likely be limited to "one notch". DJ rose .2% to close at 45.10, while MKTW gained 7.92% to close at 18.12.

Reuters reported on the "60 minutes" story last night to the effect that MRK had evidence as early as 2000 that Vioxx was unsafe. Two studies, the "Vigor" study of 1999 and the "Topol" study of 1998 demonstrated that users of the drug were respectively 5 and 6 times more likely to suffer serious cardiovascular events than those who did not. As of the end of last month, MRK had been named as a defendant in approximately 375 lawsuits associated with Vioxx. The company disputed the Topol study, but the 2000 "Approve" study established that patients taking Vioxx were exposed to twice the normal risk of heart attacks and strokes. It was on the basis of this study that MRK recalled Vioxx on September 30, 2004. MRK gained 2.42% to close at 27.09.

Software provider MUSE reported Q4 earnings of 7 cents or 5.4M, beating estimates for 1 cent per share. On a GAAP basis, the company's profit was 4.2M or 5 cents, up from a loss of 2 cents per share or 1.8M in Q4 2003, with revenues rising 8% over last year's Q3. MUSE rose 20.87% to close at 5.56.

Cigar and consumer products producer SYBR reduced its loss from 627K or 34 cents per share to 170K or 8 cents per share, with revenue up from 10.3M in Q3 2003 to 13.8M in the current quarter, a 34% y-o-y increase. SYBR added 41.89% to close at 5.25.

In economic news, the lone report for the day was a minor one, the New York Empire State Index for November, which came in a 19.76 compared with estimates of 20.6. The number was up from its October reading of 17.4. The New Orders component was down from 21.2 in October to 18.5 in the current month, while shipments rose from 19.1 to 21.8.

Associated Press reported that John Snow was staying the course, saying that the US supports "the strong dollar" but adding that the international forex markets should determine its value. Snow was in Ireland when he stated, "Our policy on the dollar is well known. We support a strong dollar. A strong dollar is in America's interests... Our basic policy, of course, is to let open, competitive markets set the values. Markets are driven by fundamentals and towards fundamentals." The comments to the 12- nation eurozone members were in response to the expression of concern that the dollar's decline will price European exports out of the US market. The article reported that currency traders have a dim view of the "fundamentals" to which Mr. Snow ostensibly referred, citing the expanding budget and trade deficits under the current administration, the latter of which has risen from 496B to 592B over the past year.

There were 4 resignations announced by the White House, with Secretary of State Colin Powell, Energy Secretary Spencer Abraham, Agriculture Secretary Ann Veneman and Education Secretary Rodney Paige leaving. No replacements had been announced as of this writing. With respect to Powell, who, as Reuters reported, "... was often seen representing more moderate views on foreign policy in the Bush administration," an unnamed State Department official said that Powell would be staying on until his replacement had been named. Later in the day, there were rumors circulated that Condoleezza Rice might succeed him.

In other news, Federal Reserve Governor Mark Olson delivered a speech today in which he said that the Fed should continue to seek a policy stance that is "more appropriate for sustained economic expansion." By this, he was referring to the ongoing rate hikes, which he said need to continue at a measured pace.

For tomorrow, the Producers Price Index and Core PPI will be released at 8:30AM, the first half of the monthly story that gets completed on Wednesday by the Consumer Price Index release. The October PPI is estimated at +.6% after last month's .1% gain, with the core PPI estimated at .1%, down from .3%. After today's slow drift, traders are hoping that the release of this data will spur a clear directional move. With today's action tense but narrow, it's not at all clear what the market has in store for the next 4 days' worth of op-ex week trading. On the one hand, the heaviest front-month option strikes or "maximum pain" strikes are generally far south of current prices. This would generally favor a strong downside move as large option writers push the underlying price to a level of maximum profitability for their expiring short contracts. On the other hand, the strong rally of recent weeks has likely caused many of these participants to hedge by, among other things, buying the underlying securities which they may have been short via naked call writes. In that event, the rally may have been fueled by option-relating hedging in a bullish feedback loop- that would certainly explain the relentless grind higher across the indices.

While "maximum pain" related bearishness lines up well enough with the overbought daily and intraday oscillators across the indices, it's important to note that option writers who are sufficiently margined to move the indices are equally capable of dynamically hedging so as to defy the max-pain objectives. This is the reason we've seen so many op-ex week max-pain misses this year. While many traders and their indicators feel that a corrective (or impulsive) pullback is overdue, the price is the bottom line. Traders will want to see that pullback begin and break some support levels before yielding to their guts- as we've seen over the past weeks, the market is not subject to gravity in the short or even medium terms, and until the price reverses, it's safest to stay with the trend.



 
 



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