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Market Wrap

Volume returns

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      01-03-2005           High     Low     Volume   Adv/Dcl
DJIA    10729.43 - 53.58 10867.39 10710.07 1.89 bln  646/2170
NASDAQ   2152.15 - 23.29  2191.60  2148.72 2.19 bln  931/2175
S&P 100   572.33 -  2.96   579.11   571.48   Totals 1577/4345
S&P 500  1202.08 -  9.84  1217.90  1200.30
SOX       424.26 -  9.05   437.54   423.60
RUS 2000  640.44 - 11.13   654.30   639.43
DJ TRANS 3760.37 - 37.68  3817.40  3755.65 
VIX        14.08 +  0.79    14.23    13.25
VXO (VIX-O)14.20 +  0.62    14.29    13.46
VXN        19.50 +  0.92    19.78    18.80
Total Volume 4,091M
Total UpVol  1,034M
Total DnVol  2,937M
Total Adv  1577
Total Dcl  4345
52wk Highs  134 
52wk Lows    22
TRIN       1.34
PUT/CALL   0.78

The big guns returned to the market today after last week's siesta, with the Nasdaq trading 2.076B shares and the NYSE 1.5B shares. With increased volume came increased selling, and the indices closed just above their session lows.

Daily Dow Chart

The Dow got hit for a 54 point loss, declining just .5% to close at 10729. The relatively mild damage looks worse on the daily chart, however, where a gravestone doji printed below the lower rising bear wedge trendline. The session low was 10710, but a quick bounce to the 10729 close confirmed 10720 support above the 10640 line. The Dow fared far better than its peers, but even so, today's action resulted in bearish divergent daily cycle sell signals. If bulls fail to regain at least the 10800 level tomorrow, these sell signals should strengthen. The implied target of the broken bear wedge is as low as 10425.

Daily S&P 500 Chart

The SPX got hit harder than the Dow on a percentage basis, losing .81% or 9.84 points to close at 1202. The bear wedge break that occurred on the Dow also printed here and did so on higher volume, potentially targeting the December lows. The bearish divergence on the daily cycle oscillators is present here as well, and suggests a potentially steep decline from here if 1210- 1215 resistance holds. While it's easy to overlook the "higher volume" component of today's action, it's an important point: last week's gains took place on significantly lighter, mostly retail volume. The heavy hitters returned today, and sold the indices below rising trendline support in place for most of last month. Unless they decide to turn the ship around very soon, the bias, which is confirmed by the bearish chart pattern and the bearish oscillator divergences, will shift to the downside.

Daily Nasdaq Chart

The Nasdaq took the hardest lumps of its peers, losing 1.07% to close at 2152.1. The bear wedge break is the least pronounced here however, but the fact remains that the Nasdaq closed 3 points off its low of the day, below the lower bear wedge support line. Next support is at 2125, followed by the December lows. Note that the daily cycle oscillators are ambiguous here within their bearish divergences, and a break back above even the 2160 line would go a long way to restoring last month's uptrend. In other words, the bears are not out of the woods just yet.

Weekly TNX Chart

Bonds reacted positively to the big miss in November construction spending and the slightly better-than-expected ISM data released at 10AM (see details below). Bonds rose from their session lows at and continued the advance for most of the day, with ten year note yields closing higher by 0.7 bps at 4.219% after reaching an earlier high of 4.261%. 4.26% remains key resistance, 4.14%- 4.16% support. On the three-year weekly chart, with the most recent candle based entirely on today's activity, a weekly cycle upphase continues to play out correctively. A failure to exceed 4.44% resistance this month would likely spell the end of the current upphase from a lower price and oscillator high. Such an outcome would give us a high likelihood of a break below 4.02% support, which could set the stage for a bear wedge break to target last year's lows. While my gut is expecting higher, rather than lower yields, the chart pattern here appears more much more bearish than bullish for the TNX below 4.44%.

Weekly chart of Crude oil

Crude oil got cheaper today, gapping down and sinking lower below 42 throughout the day to trade a low of 41.275. The financial press attributed the drop to a milder-than-expected winter, but given the bounce in the US Dollar and the corollary declines in precious metals and commodities across the board, I find that a dubious connection at best. The move brought February crude futures back to yet another retest of the sloping head and shoulders neckline I've been discussing for the past few weeks, and a break of this level would imply a pattern target in the mid 20's for oil. Once again, I find that a difficult price to imagine, but this is one of the clearer head and shoulders tops I've seen. The daily cycle oscillators have rolled over into a new downphase, and if 40.00 support fails, next support comes in the 38 area. For the day, crude oil closed lower by 3.16% at 42.075 on an upside spike in the final minutes of the afternoon session.

There was positive retail news today, as WMT announced that December's food and general merchandise sales exceeded its expectations last week and is forecasting a 3% increase in sales for the month over 2003's levels. This represented an improvement over its previous forecast in the middle of the 1%-3% range. WMT noted a big increase in gift card redemptions in the final week of December over 2003's figures. For the day, WMT rose 1.1% to close at 53.40.

Walgreen (WAG) announced its Q1 results, exceeding estimates by 2 cents at 31 cents EPS for the quarter (excluding a 15M pretax, one time gain from litigation settlements). WAG attributed the good results to strong prescription and general merchandise sales as well as higher gross margins. Q1 earnings were $332.7M or 32 cents per share, up from 254.9M or 25 cents during the previous year, a 30.4% increase. Sales were higher by 13.4% to 9.89B. WAG blasted higher, gaining 5% to close at 40.29.

The last-minute/end-of-December surge in reported sales prompted one analyst, Greenwich Capital Markets' Steve Stanley to conclude that procrastination may be the biggest trend in retail this year. In a separate report, Goldman Sachs, Harris Interactive and Nielsen/Netratings' eSpending Report found that online shopping by US consumers rose from a total value of 18.5B in 2003 to 23.2B in 2004, with clothing, toys, video games and electronics the top categories. The S&P Retail Index, the RLX, closed lower by .41% at 460.09.

Colin Powell and Florida Governor Jeb Bush are leading a delegation to Thailand, Indonesia and possibly Sri Lanka, three of the nations hardest hit by the tsunami in the Indian Ocean. Powell said that the problem now is not money, with 2B in international aid including 350M pledged by the US, but rather its responsible distribution and use. Powell acknowledged that the true extent of the damage was not initially appreciated, and stated that the reconstruction effort could last years. Associated Press reported that aid agencies currently place the death toll around 140,000 and expect it to rise to 150,000.

Despite Powell's comments, the President enlisted the assistance of his father and Bill Clinton to appeal directly to the public for additional relief aid and donations. As well, Reuters reported that the President is referring to the 350M as an "initial commitment," holding out the promise of more to follow.

At 10AM the market received its lone economic reports, November construction spending and the December ISM manufacturing index. Construction spending declined for the first time in 10 months, losing 0.4% on a seasonally-adjusted basis and falling well short of expectations of a 0.5% gain. Private building spending declined .6%, the largest drop since January 2002, while spending on home construction declined .4%, the largest drop in almost 3 years.

The Institute of Supply Management reported that its manufacturing index rose to 58.6% in December from its 57.8% reading in November. Expectations were for 58.5%. The employment component fell to 52.7% from 57.6%, while new orders rose from 61.5% to 67.4%. The employment index fell from 57.6% to 52.7%. Readings above 50% indicate expansion.

In other news the US' largest futures exchange, the Chicago Mercantile Exchange, reported its 5th consecutive record volume year in 2004 above 787M contracts. Average daily volume rose 26% to 3.1+ million contracts.

For tomorrow, we have another light menu of economic reports, with auto sales and truck sales being reported, as well as factory orders for November. Volume was back to normal levels today after last week's light holiday trade, and so far the bias has been to the downside. With last week's strength on mostly light/retail volume, I believe that there's a good chance that the market was tipping its hand today. If so, given the very bullish sentiment readings and extremely low volatility, there's a great deal of potential downside once the upward trend reverses. For that to occur, bears will want to see the resistance levels noted above hold for any retest tomorrow, more support levels broken and more technical damage to rule out the possibility that today was yet another fleeting downside correction in the autumn's ongoing rally. With December's rising support lines broken, however, bears have taken a promising first step.


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