Traders perturbed by the whippy price action were comforted by the extremely light volume today, with QQQQ barely managing to trade half of Friday's volume. Despite the relatively tight price range and light volume, however, volatility rose sharply (QQV +10.09%)for the QQQQ while declining slightly (VXO -.7%) for the OEX.
Daily Dow Chart
Dow bulls must have missed the memo this morning, as the Industrials hung stubbornly in the red as the Nasdaq and SPX spent much of the session in the green. The bounce in oil might have been a contributing factor, but as the one year daily chart above indicates, Dow bears have about 130 points left to go before the current bullish daily cycle picture can be invalidated. The October-November flagpole rally has resolved itself into the "flag" portion of the pattern, and the current 200 point range will either prove to be consolidation or distribution. The direction of the break above 10650 or below 10430 should be determinative. Above 10640, the daily cycle uptick will confirm itself into a genuine upphase from a much higher price and oscillator low, while below 10430, bears will have a chance at retracing at least part of last month's rally. For the day, the Dow lost 45.15 to close at 10547.06.
Daily S&P 500 Chart
The SPX traded both sides of unchanged today as the Dow held lightly negative. As with the Dow, the SPX is tracing a pullback from last week's highs within the flag atop the October-November rally. The range here has risen to 1174-1200, with next support below at 1160 and 1140-45. The light volume and doji prints today suggest that traders aren't willing to take a stand as to which way this deadlock will resolve. A bounce from here will need to take out 1200 in order for the rally to reignite, while anything less suggest a renewed test of rising support at 1174. In my view, the bulls have a greater challenger than the bears, but that view is mitigated by the fact that price has been rising for the past 2 months and the trend is, as they say, your friend. Aside from aggressive traders and gunslingers, following a high volume range break should be the safer approach. The SPX closed lower by .92 at 1190.25.
Daily Nasdaq Chart
The less oil-sensitive Nasdaq eked out a 3.3 point gain to close at 2151.3. The daily cycle upturn apparent on the charts of its peers is also apparent here, but the angle of incline is so sharp that the consolidation looks more like a rising wedge than a rising flag. In any case, 10125-30 is support, 2180-85 resistance. Below the 2050 wedge implied target, next support is at 2035, but the daily cycle oscillators should reverse on a break of 2100, if it occurs.
Weekly TNX Chart
Bonds rose today, with the ten year note yield (TNX) managing to break slightly below 4.26% support, losing 3 bps to close at 4.24%. The headlines this morning attributed the move to the shootout at the US embassy in Saudi Arabia (discussed below), but I suspect that that particular event was a tempest in a teapot for the bond market today. The weekly cycle upphase continues higher, and last week's strong whipsaw saw a test of 4.44% resistance followed by a strong decline in the TNX following Friday's disappointing employment report. A move below current levels should target 4.14%-4.16% support, but until the weekly cycle turns down, these pullbacks should remain corrective for the upphasing TNX.
The Chicago Fed's senior economist, William Strauss, told Reuters that he expects slower growth in 2005 of 3.3% (Real GDP), down from the 4.4% projected this year. The estimate, derived from the Fed's experts as well as attendees of the Chicago Fed's economic symposium, is based on the anticipated slowdown caused by higher interest rates and high crude oil prices. The only component of GDP expected to grow was exports, based on the decline in the US Dollar's rendering exports more attractive to holders of rallying foreign currencies. Participants expect the unemployment rate to decline in 2005, and for inflation to decline from its current 2.9% level this quarter to an average estimate of 2.4% in 2005.
Weekly chart of Crude oil
Iran's oil minister Bijan Zanganeh indicated that the OPEC ministers will be focusing more on quota compliance than on the removal of production ceilings at the upcoming meeting in Cairo later this week. Zanganeh noted that price is very unstable currently, but suggested that current oversupply be dealt with not by raising the production ceiling but rather by compliance with existing production quotas. Zanganeh had nothing to say about the suggestion from other OPEC members that the oil price band target be raised from $22-$28 per barrel to a minimum of $30 per barrel. When pressed on what he felt to be a fair price, Zanganeh replied that the market price is, by definition, fair.
That price came down significantly last week, the largest move in either direction in over 3 years. Support came at 42, and 40-42 remains strong confluence support. The weekly cycle downphase, so far very strong, suggests that selling might not be over, and unless we see a clear move back above the 50 level, that selling might in fact be just getting started. While the long term fundamentals for oil remain very bullish, the shape of the weekly oscillators suggest that the correction may well have further to go. For the day, crude oil closed higher by 1.08% at 43 on the Nymex.
The morning opened on a bleak note as Associated Press reported that a number of Americans were injured in an attack on the US consulate in Jiddah, Saudi Arabia. The attackers apparently used grenades to make it past the Saudi security personnel to the interior of the compound where a gunbattle ensued. The initial reports stated that 7 people were killed in the 3 hour crisis, among which 3 attackers, but later reports stated that "several Americans were slightly injured" and none were killed. 2 attackers were captured, and an American spokesperson said that the attackers were suspected al Qaeda militants. Later reports upped the body count to 7 and then 14, but security sources reported that all were Arabs and Asians, many of whom staff who were alleged used as human shields by the attackers during the battle.
Spain was rocked by at least 7 explosions following a series of telephone warnings from callers claiming to represent the Basque separatist group ETA. The explosions occurred in Leon, Santillana del Mar, Avila, Valladolid and Ciudad Real, Alicante, and Malaga. Initial reports indicated that only minor injuries were caused, with subsequent reports quantifying the inured at 18.
In corporate news, Circuit City (CC) reported a 4.3% decline in same-store sales for fiscal Q3 from 2003's Q3 levels. Total sales were higher by 3.8% to 2.5B, missing estimates of 2.6B for the quarter. The company blamed the shortfall on its decision to reduce its promotions of music, movies and software, and a change in its DSS and wireless phone business models. The stock was downgraded as well by SunTrust Robinson Humphrey to "neutral," and the combination saw the stock get hit for a 7.46% decline to close at 15.
Canadian miner GG reported that it intends to purchase WHT for 2.09B in stock in a friendly offer following its failed hostile bid to take over CDE. The Sunday announcement claimed that this latest consolidation in the mining industry will render GG the eighth largest gold producer worldwide with proven reserves of 10.5M ounces and an expected production of 1.1M ounces in 2005. GG closed lower by .56% at 14.26, while CDE got clipped for 4.73% to close at 14.03 and WHT rose 7.84% to close at 3.44.
Kimberly-Clark (KMB) announced its plan to increase its quarterly dividend by 12.5% to 45 cents per share and to buy back "at least" 1B of its own stock in 2005. KMB expects Q4 earnings in the 89-91 cent range. KMB rose .56% to close at 64.34.
Navistar (NAV) announced that it expects Q4 earnings to be no less than $1.88 per share compared with $1 for Q4 2003 and 8 cents above current consensus estimates. The company attributes the rise in guidance to strong engine shipments and improved cost structure. NAV lost 5.88% to close at 38.73.
3Com Corp. (COMS) warned that it expects to lose 12-14 cents per share on revenue of 149M-153M for Q2, solidly below consensus estimates of 7 cents per share on revenue of 174M. COMS lost 3.94% to close at 4.39.
CMGI announced a loss of $600,000 for fiscal Q1, breaking even on a per-share basis after earning 6 cents per share on income of 29.9M in Q1 2003. Net revenue rose 171% to 257.1M, while total operating income rose 134% to 2.4M. CMGI blasted higher, adding 32.45% as of this writing to 2.49.
The White House gave a lift to the price of gold in the afternoon, when spokesman Scott McClellan stated that the federal government would be required to borrow in order to support the "upfront transition" costs associated with the reform of what he characterized as the currently "unsustainable" Social Security system. Part of this transition includes the addition of personal retirement accounts to Social Security.
While there were no economic reports today, tomorrow will see the release of revised Q3 productivity, estimated at 2%, and later in the day, consumer credit for October, estimated at +6.0B. While today's lack of decline certainly suggests bullishness, that bullishness was severely tempered in my view by the lack of volume that came in for the rise, particularly on QQQQ. As noted in the Market Monitor, the cycle setup this morning suggested a stronger decline than we got, but the intraday rise came in on dramatically lighter volume overall. Perhaps the big boys hadn't closed out enough longs or gotten sufficiently short to permit a deep downside move this morning. If so, the intraday gains should prove to be merely distribution, and should get no further than the afternoon highs tomorrow. If so, the sellers who were so notably absent today should push back tomorrow. If they don't, we can expect yet another powerful display of strength from the bulls when volume returns.