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Market Wrap

High Anxiety

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      12-13-2004           High     Low     Volume   Adv/Dcl
DJIA    10638.32 + 95.10 10642.53 10543.21 1.79 bln 1930/ 882
NASDAQ   2148.50 + 20.43  2148.50  2132.19 2.06 bln 1886/1150
S&P 100   570.41 +  4.91   570.55   565.50   Totals 3816/2032
S&P 500  1198.68 + 10.68  1198.77  1188.00
SOX       425.10 +  2.35   427.59   423.10
RUS 2000  638.03 +  5.79   638.08   631.65
DJ TRANS 3724.96 + 38.93  3724.96  3685.27
VIX        12.54 -  0.22    12.61    12.13
VXO (VIX-O)13.55 +  0.35    13.77    12.80
VXN        18.78 -  0.79    19.64    18.71
Total Volume 3,863M
Total UpVol  2,791M
Total DnVol    971M
Total Adv  3816
Total Dcl  2032
52wk Highs  375 
52wk Lows    28
TRIN       0.72
PUT/CALL   0.72

The equity indices probed the highs today, with SPX setting a nominal new high as the Dow and Nasdaq rose below theirs. Volatility as measured by the VXO and QQV rose along with price as tensions mounted ahead of tomorrow's FOMC meeting.

Breadth was solidly positive and volume solid despite very light QQQQ volume, with the number of advancing shares traded nearly tripling declining volume on both the NYSE and Nasdaq.

Daily Dow Chart

The Dow revisited the rally high today, finishing 4 points below the high of the day at 10642.53. Just as we saw several times last week, bearish intraday cycle setups went net nowhere, with sellers displaying a perfect absence of strength. The daily chart itself is an example of this, with the daily cycle oscillators aborting a pathetic 2 week downphase and today printing early an early buy signal, the first step of a new upphase. This oscillator action lines up with the interpretation of the past month's range as a bullish continuation pattern.

On the flip side of that coin, the current chart pattern resembles that seen in June and in September, when the flag atop a flagpole rally degenerated into a complex top as the price simply collapsed. In June, that occurred from a similar pattern of higher flag highs. There's no telling whether this will repeat again, and it's worth repeating that the bears have been a no-show on most of their intraday downphases as well as on the current daily cycle downphase. Food for thought.

Daily S&P 500 Chart

The SPX gained 10.68 points to close at 1198.68, one tenth of a point off its high of the day and 52-week high. The same bullish uptick in the daily cycle oscillators is evident here as on the Dow above, and with upper expanding wedge resistance in play at current levels, tomorrow will be do or doo-doo time for the bears. Support is below at 1180, and unless the bears can drill the price down to at least that area tomorrow, the daily cycle upphase will begin catching up to the price, starting from a much higher price and oscillator low than the previous one did- a very bullish scenario.

Daily Nasdaq Chart

Whereas the Dow and SPX have been either topping or consolidating at the highs for the past month, the Nasdaq has just been rising. Despite this, the daily cycle downphase is more persistent than it is on the SPX and Dow. That's either an important bearish divergence, or a very bullish consolidation- a downphase in which the price continues to rise. In either case, the bears need to get the price below the 2100 level for starters. The Nasdaq feel 16 points short of its year high today, another potentially bearish divergence when compared with the SPX. With the price persisting at these levels, the daily cycle downphase is on borrowed time and should abort if the price doesn't pull back tomorrow. Either way, it will be helpful to get the indicators back in line with the price.

Weekly TNX Chart

Bonds were firm last week and kicked off this week on a positive note as ten year note yields (TNX) declined, finishing lower by .5 bps at 4.151%. Last week's decline was sufficient to stall the weekly cycle upphase, with the 10-week stochastic currently on a bearish kiss. With rising bear wedge support just below in the 4.0%-4.02% area, bond bulls are now eyeing what could be a large price with a wedge target in the low 3% area. TNX bears will want to see the previous low in the 3.9% support area taken out to target 3.55%-3.6% support. For TNX bulls, a move above 4.4%-4.44% should be sufficient to reignite the stalled weekly cycle upphase.

Weekly chart of Crude oil

Forecasts of colder than average temperatures for the next 5 days in the northeast and sabotage in Iraq contributed to a strong open for crude oil this morning following OPEC's weekend statements to cut back 1M bpd of "excess" output. OPEC, which produces 1/3 of the world's oil, resolved that Saudi Arabia, Kuwait, the United Arab Emirates, Nigeria, Libya, Algeria and Qatar will each reduce output by 5%, and that the cuts will impact not just the lower grade "Arab heavy" but also higher grades, though few details were given.

Over the weekend, delivery of oil through Iraq's northern export pipeline to Ceyhan was stopped on Sunday, following a 12-day halt caused by an explosion at the November. Despite this, the OPEC announcement and the colder weather, prices were steady, with January crude trading a narrow range on both sides of unchanged for much of the daytime session and closing at 41. On the weekly chart, the 30 minute cycle downphase continues, with price confluence support in the 40-42 range currently being tested. As 40 was a major resistance area on the way up, we can expect support to assert itself here. Added to that is the news from the CFTC as reported by Reuters to the effect that crude oil specs had moved to a net short position of 17440 contracts for the week ended December 3rd from a 5815 net long position the previous week. On a contrarian basis, this would be bullish for oil prices.

At 8:30AM, the Commerce Department released the November retail sales report which showed a 0.1% increase vs. expectations for no change. The bigger news was the large upward revision in the October report from a 0.2% gain to a 0.8% gain. As expected, automobile sales were weak, declining 1.3%, but that decline was expected. Excluding auto sales, November retail sales were higher by 0.5% for the month and 8.6% for the year.

At 10AM, the Commerce Department reported that business inventories rose 0.2% in October, missing economists' expectations for a 0.5% increase. Retail inventories declined 0.6%, while sales rose 1.2%, the largest increase since March. The inventory-to-sale ratio fell to 1.3 for the month, falling back below September's 1.31 reading to the record low set in May of this year. The inventory-to-sales ratio for the manufacturing sector remained at 1.25, for the wholesale sector 1.15, and for the automobile sector it declined from 1.62 in September to 1.59 for October.

Mastercard reported on Sunday that transaction volume for the prior week was 7.8% higher than it was one year ago, with 67.7M transactions processed during those seven days. This is the third consecutive week of transaction volume growth on a year-on- year basis reported by Mastercard.

Agence France-Press reported that China will impose export duties on textiles and clothing. This news comes to the great relief of global textile producers fearing a flood of Chinese product when China's quota system is lifted next month. The report went to quote spokesman Chong Quan from China's Ministry of Commerce, who explained that the new tariffs will be assessed on volume rather than price, which should bolster the production of high-end fabrics.

In corporate news, TOY was up strongly this morning following a weekend report from the Financial Times to the effect that European firm Permira and US firm Apollo were collaborating on a takeover bid for TOY. The article stated that KKR, Cerberus and Bain Capital were also among the suitors, and that CSFB is conducting the auction with bids due after Christmas. TOY closed higher by 2.81% at 20.47.

PSFT and ORCL have finally reached an agreement to conclude their 18-month takeover saga, announcing PSFT's acceptance of ORCL's $26.50 per share bid in a 10.3B deal. ORCL had previously stated that $24 was its final offer. PSFT, which had closed at $23.95 on Friday, was up to 26.40 in premarket trading and closed higher by 10.31% at 26.42, while ORCL rose as well, closing higher by 10.17% at $14.63. Oracle's Larry Ellison said, "This merger works because we will have more customers, which increases our ability to invest more in applications development and support." ORCL expects that the deal will add 1 cent to its fiscal Q4 EPS, 2 cents per quarter in fiscal 2006, and "a bit more" in 2007.

Cardinal Health (CAH) announced a 3-year restructuring plan that includes a 500M stock buyback and the dismissal of 4200 employees, just over 7% of its workforce in a bid to boost earnings by 500M. The company is forecasting a 15% drop in EPS for 2005, which should bring earnings growth down to the "low single digits" compared with its prior expectation of double- digits. CAH closed lower by 1.76% at 55.76.

Tenet Healthcare (THC) warned as well, citing lower patient volumes and high levels of bad debt from patients. THC's Q3 net loss reported in November totaled 15 cents per share or 70M on revenue of 2.44B, 3.2% lower than Q3 2003. With 3748 fewer admissions in tenet-operated hospitals and an increase in admissions of uninsured patients from 3.5% to 3.8% of the total, THC is expecting to record charges that could exceed 1B in Q4 2004. THC lost 8.06% to close at 11.07.

The Nasdaq 100 Index (NDX) added the following 8 stocks to the index late Friday: XMSR, ADSK, LBTYA, NTLI, MCIP, WYNN, ERICY, SIRI. The following 8 were removed: CEPH, CPWR, FHCC, GNTX, HSIC, NVDA, PTEN, RYAAY. XMSR reached a 4 year high of 39.60 following that news and on the announcement that GM has signed its one millionth XMSR subscriber. These changes become effective on December 20th.

USA Today reported over the weekend on an "avalanche" of IPOs set to commence trading this week, as many as 17. This is the highest number of IPOs in a single week since August 11, 2000, when there 26 in that week. This year's 196 total IPOs also harkens back the dotcom bubble. The article noted that IPOs have been largely successful this year, up an average of 31% from their IPO price, the best such showing since 1999.

Tomorrow is the FOMC meeting and at 2:15 we get the Fed's rate announcement. This is always good for a rollercoaster afternoon, with quiet, low volume in the hours preceding the announcement and then whippy moves in both directions after 2:15PM. On the one hand, rates remain very low at current levels, as conceded in the numerous speeches from the Fed's governors and Chairman. On the other hand, demand for US debt has been firm as evidenced by the recent treasury auctions. This morning's upward revision to the October retail sales report was treated by some mainstream media channels as sealing the deal on a 25 bp rate hike tomorrow. With equities, commodities and foreign currencies still very strong this year against the US Dollar, even following last week's bounce, there are strong arguments to support a rate increase, even despite the Fed's reticence to tighten during the less liquid December period. Time will tell.

Aside from the FOMC announcement, we'll get the 8:30AM announcement of the October trade balance, est. 53B, then at 9:15 Industrial Production and Capacity Utilization, est. +0.2% and 77.8% respectively. With op-ex week and FOMC trading patterns, the potential for headfakes, false breaks, stop runs and whipsaws could scarcely be higher. Tomorrow is a good day during which to be extra careful out there.


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