Wednesday, President Bush asked U.S. Treasury Secretary John Snow to stay on as a member of his cabinet. With few economic releases due Wednesday, focus had shifted early in the morning onto the wild overnight moves in the currency markets and developments in semiconductors, Merck, Wal-Mart, General Electric, IBM and Texas Instruments. Just ahead of the U.S. open, the dollar began a retracement from its overnight highs that lasted until about the time the announcement came out that "Strong Dollar" Snow had been asked to stay.
With those wild currency moves and other developments, market participants had much to consider. One article advised that the U.S. markets would likely get off to a cautious start due to that mix of information, and the article's author was right. The day began cautiously, and choppy trading conditions prevailed all day despite advancers beating decliners most of the day. On the Nasdaq, down volume bested up volume, however, perhaps capping gains. Indices performing strongly included the HMO, the Morgan Stanley Healthcare Index, gaining 2.48 percent; the BTK, the Biotechnology Index, gaining 2.34 percent; the DDX, the Disk Drive Index, gaining 1.65 percent and the RLX, the S&P Retail Index, gaining 1.26 percent. Miners declined, with the XAU falling 1.44 percent and the HUI, 1.61 percent. Other decliners included the SOX, falling 1.32 percent.
The major indices ended the day with gains, but with mixed chart characteristics in some cases.
Annotated Daily Chart of the SPX:
Annotated Daily Chart of the Nasdaq:
Annotated Daily Chart of the Dow:
Annotated Daily Chart of the Russell 2000:
A disappointing Japanese GDP number may have helped prompt the dollar's stunning overnight rise against the yen and euro, but the dollar had been rising against the yen all week, preparing the way for such a bounce. Some termed that bounce a technical bounce, one that was echoed in the dollar's move against the euro. The dollar's steep decline against the yen since mid- September allows for an even steeper climb against the yen before a 38.2 percent retracement is reached. For a time during the overnight session, traders seemed determined to drive the dollar all the way through that 38.2 percent retracement in a single day. The higher dollar impacted metals and basic materials negatively.
News Wednesday included Goldman's downgrade of retailing giant Wal-Mart to an inline rating due to concerns about same-store sales. The firm feels that WMT's decision to concentrate its supercenters close together could dilute same-store sales. Despite that downgrade, WMT ended flat and the RLX, the S&P Retail Index, posted that already-mentioned 1.26 percent gain. WMT, of course, has been pummeled enough lately that one more downgrade might not have made much difference, but the stock's performance might also have been helped because Banc of America disputed Goldman's view to some degree, speaking in favor of the company.
Banc of America had less favorable comments about some semi- related stocks, however. The firm downgraded several chip- related stocks to sell ratings. Actel (ACTL), Altera (ALTR), Analog Devices (ADI), Intersil (ISIL), National Semiconductor (NSM), Semtech (SMTC) and Xilinx (XLNX) garnered those downgrades. By the close, all had posted hefty declines along with the SOX. As Jim Brown noted after-hours in the Futures Monitor, both ALTR and XLNX warned after the bell.
Annotated Daily Chart of the SOX:
When downgrading the named semi-related stocks, Banc of America mentioned valuations as well as concerns about revenues and utilization rates. Texas Instruments (TXN), of course, had updated analysts on Q4 earnings Tuesday afternoon, news already covered in last night's Market Wrap. TXN declined 0.97 points or 3.88 percent in Wednesday's trading.
In addition to the news relating to semiconductors, other stocks gathered attention. Merck (MRK) narrowed its projections for 2005's earnings, with the narrowed $2.42-$2.52 per share range below average predictions of $2.57. The company cited weak sales of key drugs. MRK did reaffirm its Q4 and 2004 guidance, however, and investors appeared to have been reassured, sending the embattled stock $0.80 or 2.87 percent higher.
Countering those developments, not as uniformly bearish as they might have been, was Lehman Brother's upgrade of General Electric (GE) to an overweight rating and confirmation that IBM had sold its PC business to Lenovo. Lehman Brothers thought that GE's possible earnings per share growth was not priced into the stock, and the stock gained $0.40 or 1.13 percent. CSFB upgraded Federal Express (FDX) to an outperform rating, with the firm mentioning likely strong growth in its international business and margins. FDX gained $2.77 or 2.88 percent. In addition, the disk drive index benefited from Seagate Technology's (STX) raising of guidance Tuesday after the close.
Wednesday's economic reports included only the usual Mortgage Bankers Association report on mortgage activity and the mid- morning report on crude inventories, but the inventories number sparked an initial flaring higher of crude prices. Crude inventories increased by 600,000 barrels last week, according the Department of Energy. Distillates rose 1.4 million barrels and gasoline increased 2.4 million barrels. Market watchers expected an increase in crude inventories of 750,000 barrels and distillates of 1.5 million.
Although the reported numbers proved only slightly below expectations, inventories have seen an upward trajectory over the last weeks and that's beginning to be less of a dampening pressure on crude prices than it once was. That increase in inventories leads some to speculate the OPEC ministers might cut production when they meet Friday. Crude futures initially bounced after the numbers, although they could not hold onto all the gains. The bounce may also have been partially attributable to the American Petroleum Institute's competing release of inventories, with the API showing a decrease in distillate inventories.
Annotated Daily Chart of Crude Futures for January Delivery:
The only other economic release today occurred pre-market. Last week, the MBA had blamed the Thanksgiving holiday for the poor showing in mortgage activity, and the week ending December 3 did show a pickup in some measures. On a seasonally adjusted basis, the Composite Index rose 3.4 percent over the previous week's, and the Purchase Index increased 6.6 percent over the previous week's and 22.7 percent from the same week a year ago. The MBA defines the Composite Index as a gauge of mortgage loan application volume. The Refinancing Index decreased 1.1 percent, however, from the previous week's number, and the percentage of refinancings to all mortgage activity fell to 45.6 percent against the previous week's 46.4 percent. Interest rates on thirty-year fixed-rate mortgages fell to 5.09 percent, down from the previous week's 5.17 percent.
When I scan these charts, I see a mixture of bullish and bearish characteristics, and that same mixture is seen when a search is broadened to include other indices. The BIX has come dangerously close to confirming a double top on its daily chart, and for a while today, refused to bounce along with other indices although it eventually cooperated. The ALTR and XLNX warnings may send the SOX down to that 200-ema, with the outcome of this test not known. The broadening patterns seen on the Dow and the OEX are notoriously difficult to trade because each breakout or breakdown is soon reversed. One index's action sometimes is juxtaposed with that of another.
All these various factors will coalesce soon and send the markets one direction or the other, but trading conditions have been particularly difficult recently. Your main goal is to avoid getting whipsawed so many times that you're trading capital is depleted. There will be another trade and perhaps a better one, so preserve that capital. I've listed some potential entry points, both bullish and bearish, but enter with trepidation and only if as many factors are going the direction of the trade as possible.
Jonathan Levinson will be discussing the impact of the dollar's action and its interaction with equities, bonds and commodities in his Futures Wrap. The dollar spent much of the day retracing some of the overnight gains, but it's uncertain as yet how it will behave during tonight's overnight sessions and how that will impact our markets. Thursday's economic releases include only a few more than Wednesday's, with the usual 8:30 release of jobless claims and 10:30 figures on natural gas inventories joined by October's Wholesale Inventories at 10:00 and the Money Supply number at 4:30. None of those should have the impact of Friday's numbers, but fear of those numbers and the OPEC decision, and the resultant impact on crude futures may be important to watch tomorrow.