The relationship among costs, the dollar's behavior, and equities' performance composes a complicated dance. That's particularly apparent when the costs being considered are fuel costs, paid for in dollars.
A record jump in the PPI on Tuesday and an overnight plummet in the dollar against the euro and yen focused particular attention on Wednesday's CPI and crude inventories numbers. Against a background of a weakening dollar and the specter of increasing costs, equity investors needed to see satisfactory crude inventories.
At least, that's what the dance program suggested. The day didn't turn out that way. The combination of a higher-than- expected rise in CPI; disappointing crude, gasoline, and distillate inventories; and continuing weakness in the dollar should have pressured equities. That dance program was ignored, although the strengthening bonds suggested that it should not be, until later in the session. Crude finally bounced, pressuring equities.
Annotated Daily Chart of Crude Futures for December Delivery:
It was the TRAN that first demonstrated the effect of the rising crude prices. The TRAN often serves as an indicator index, being particularly sensitive to both crude and economic developments. Watch the TRAN for clues as to how the S&P's and Dow might react, as the TRAN sometimes leads these other indices.
Annotated Daily Chart for the TRAN:
Visible on the TRAN's 60-minute chart is a potential triple-top formation. The TRAN, however, did not break down out of its recently established consolidation pattern, and so has not yet confirmed that triple top. A break higher remains possible, with such a break starting a new leg higher.
The charts of the two S&P's and the Dow show similar characteristics.
Annotated Daily Chart for the Dow:
Annotated Daily Chart for the SPX:
Like the TRAN, both the Dow and the SPX ended the day within the recently built consolidation zones. Unlike the TRAN, both had attempted breakouts above that zone, only to be hit by selling.
The tech-related indices present somewhat different pictures. The SOX's successful move above the 200-ema predicted a test of the 200-sma. That test occurred today, ahead of AMAT's after- hours earnings release.
Annotated Daily Chart for the SOX:
Note the breakout above the long-term descending red trendline. This chart suggests the danger in acting on a warning, such as the confirmed CCI H&S, rather than letting price be the ultimate guide. Bulls in semi-related stocks do not want to see the SOX retreat back beneath the 200-ema and that red trendline tomorrow, however, as quick reversals after a breakout suggest danger to long positions.
Annotated Daily Chart for the Nasdaq:
In general, the day's trading produced several attempts to break out, met with strong selling when the dollar collapsed again and crude rose again. Tech-related indices kept climbing, but may be vulnerable to sell-the-news effects after AMAT's earnings, as strong as that earnings report appeared to be. With new orders beating expectations, AMAT reported earnings of $0.27/share against expectations of $0.26/share and compared with $0.01/share a year ago. The company reported that it had gained market share. Net sales rose from last year's $1.22 billion to this year's $2.20 billion. The report was mostly in-line with expectations, although some had worried that orders would decrease. The chief executive did note some cautiousness among customers due to increasing chip inventories.
However, some evidence of excessive bullishness exists in AMAT's trading. As noted by Marc Eckelberry of OIN's Futures Monitor, short interest declined to 8 percent over the last month, with put/call rations declining, too. That sell-the-rumor effect may already be reflected in after-hours behavior, with AMAT last at $16.77 as this report was prepared, down from the cash close of $17.34.
We can't always trust after-hours behavior, however, and there's more to consider in that complicated dance among equities, the dollar's behavior and costs. This morning's CPI added one step to that dance.
Last month, CPI had risen 0.2 percent, with the ex-food-and- energy component rising 0.3 percent. October produced a 0.6 percent rise against expectations of a gain of 0.4 percent, with over half that rise coming from energy costs. The core CPI rose 0.2 percent, in line with expectations. The number emphasized the importance of energy costs and the need for crude to continue its recent pullback if inflation is not to rear its head.
Although less attention was paid to other economic releases, this Wednesday's economic calendar was almost as full as last Wednesday's, beginning with the MBA Refinancing Index at 7:00, and continuing with that CPI and Housing Starts and Building Permits at 8:30. Despite the holiday-shortened preceding week, the Composite Index of mortgage loan applications rose 4.3 percent, week-over-week, on a seasonally adjusted basis. Not adjusted for seasonality, applications decreased. Refinancing activity increased 10.6 percent, with the refinance share rising to 48.6 percent of all applications. The seasonally adjusted Purchase Index decreased 0.6 percent.
Finance activity revealed some worrisome tendencies, and housing starts and building permits provided a mixed impression. Housing starts zoomed up 6.4 percent, but building permits dropped 0.7 percent. Some seasonality issues might have produced the decrease in permits.
At 9:30, October's Industrial Production and Capacity Utilization followed, leading into the 10:30 release of crude, gasoline, and distillate inventories. October's industrial production rose a much greater-than-expected 0.7 percent, with capacity utilization increasing a greater-than-expected 77.7 percent. The Federal Reserve noted that September's number had been affected by hurricanes in the Southeast, and termed Monday's number a possible bounce back from that hurricane-slowed production.
The American Petroleum Institute scooped the Department of Energy, releasing figures showing crude imports up 4.5 percent from the year-ago level. The API reported a rise of 3 million barrels in crude inventories, but a drop of 1.5 million barrels in distillates and a rise of 126,000 million barrels in gasoline inventories. With winter months approaching, attention has focused on distillate stocks, with expectations among analysts for a rise instead of the actual decline. Distillate supplies include heating oil. While weather forecasts are for a mild winter, some worry that a hard cold snap would deplete supplies and drive up prices.
The Department of Energy's later release revealed crude inventories higher by 800,000 barrels, but distillate and gasoline inventories down 1 million and 400,000 barrels, respectively. These numbers fell below expectations for a rise of 2.3 million barrels.
Economic releases tapered off, but the pre-market shakeup created by the Kmart (KMRT) and Sears (S) merger announcement continued. Both had bounced in pre-market trade, with KMRT closing higher by 7.69 percent and S, by 17.23 percent. Competitors Wal-Mart (WMT), Home Depot (HD) and Lowes (LOW) didn't fare so well, with WMT closing lower by 0.65 percent; HD, 1.67 percent and LOW, 0.41 percent. The net effect on the retail index, the RLX, was to close it higher by 0.37 percent.
The merged company will be named Sears Holdings Corporation, and will be the third-largest retailer in the U.S., although both companies will keep their original brand names. The structuring of the deal gives Sears' shareholders a 10.6 percent premium over Tuesday's closing price. The companies expect the merger to be finalized by March 2005. Cost savings and an increase in incremental gross margin will benefit the companies, executives believe.
Reviewing the moves of that complicated dance show that crude bounced and the dollar declined, with that combination proving somewhat difficult for equities to negotiate. Yet if equities face resistance just ahead, so does crude, and it's not yet clear which will take the lead in this complicated dance. Equities pause, but might glide through either resistance or support, not yet having clearly broken through in either direction. CCI flutters into H&S formations, hinting that the indices might be tiring and might need at least minimal retracements, but that probably depends on both crude costs and the SOX's reaction to AMAT's earnings release. Watch the recently established consolidation zones, the SOX's 200-ema and Nasdaq 2100 for clues.
Thursday's economic releases begin with the usual 8:30 release of jobless claims, but tomorrow's economic calendar rivals today's in number, if not in importance. At 10:00, October's Leading Indicators will be released, followed by Natural Gas Inventories at 10:30, and November's Philly Fed Index at noon. The Leading Indicators number is generally not considered market-moving, but I've seen it do just that. The Money Supply number will be released at 4:30. One report suggests that the Semi Book-to-Bill number also appears tomorrow, but the official site at wps2a.semi.org (formerly semi.org) lists November 22 as the release date. Be ready for the next big move, but be willing to be wrong, too, reversing course if necessary.