Option Investor
Market Wrap

Are the Wheels coming off?

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      01-05-2005           High     Low     Volume   Adv/Dcl
DJIA    10597.83 - 32.95 10684.43 10597.75 2.12 bln  708/2138
NASDAQ   2091.24 - 16.62  2116.75  2091.24 2.37 bln  877/2193
S&P 100   565.21 -  1.56   569.75   565.20   Totals 1585/4331
S&P 500  1183.74 -  4.31  1192.75  1183.72
SOX       404.25 -  6.11   412.86   402.59
RUS 2000  617.48 - 11.06   628.66   617.48
DJ TRANS 3653.29 - 25.04  3679.45  3649.72 
VIX        14.09 +  0.01    14.09    13.26
VXO (VIX-O)13.97 -  0.16    14.37    13.49
VXN        20.18 +  0.12    20.19    19.52
Total Volume 4,492M
Total UpVol  1,184M
Total DnVol  3,261M
Total Adv  1585
Total Dcl  4331
52wk Highs   70 
52wk Lows    29
TRIN       1.15
PUT/CALL   0.95

This morning stocks opened bearishly near yesterday's lows but appeared to grab a bid and started to rise. All the bulls gave a sigh of relief, "the selling was over for now." Unfortunately that sigh turned into a gasp of disbelief when yesterday's lows were breached. But alas, there was another sigh of relief when it was realized that the breach was hardly anything to worry about and stocks were headed back up again. Then those lows were breached again and this time there was no responding sigh of relief from the bulls because there was no heading back up again. Stocks closed at their daily lows. Not looking good so far. You know the saying "If Santa Claus should fail to call - the bears will come to Broad and Wall." Well here they are and the bulls may fall!

The DOW closed at 10597 for a -32.95 point loss. The DOW has lost 1.7%, or 185.18 points, in the last three days and has now declined for six straight sessions -- the longest losing streak since July 2002. The Standard & Poor's 500-stock index fell 4.32 to 1183.73 and the Nasdaq Composite Index slid 16.62 to 2091.24. On the Big Board, 1.7 billion shares traded, 930 stocks rose and 2,411 fell. On the Nasdaq Stock Market, 2.4 billion shares changed hands, 910 issues advanced and 2,250 declined.

It is still early in the month so this may be a little premature but heck who knows when I will get another chance to let you in on these little gems. One is called the Stock Market's Almanac Incredible January Barometer devised by Yale Hirsch in 1972. It states that however the S&P goes in January the rest of the year follows suit and has a 90.7% accuracy rate. Since 1950 this barometer has failed only five times. Now that's incredible.

The other gem I would like to share with you is that if the DOW's December lows are breached in the first quarter of the New Year then you will have a bearish year. Of the 26 years (since 1952) when the DOW breached its December lows in the first quarter of the New Year, 13 times the DOW closed lower. Now I don't think this is such a great record but then of those 13 years if you have a negative First Five Days in January also 12 of those 13 years have closed lower. Now that is a record I think is great.

Larry Williams took this on step further and says if the November lows are breached in the first quarter there is an 80% chance that we will have a bearish year. Something to put in your hat and remember come March 31st.

The economic reports started this morning at 7:00EST with the MBA's release of its refinancing Index and although many market watchers ignore this early-morning release, this morning's merited attention. A 10.6 % decrease in mortgage applications was tagged as the largest decrease in more than a year, and that occurred despite a drop in mortgage rates. Refinancing activity dropped 5.7 %. Addition information reveals that this year may be the first since the recession when the number of house purchases does not set a new record. Housing prices have been rising throughout the year, with that rise in cost being cited as a reason for the slowing of demand in the housing market.

Next on the docket of economic reports was the 10:00EST Institute for Supply Management's (ISM) December's index of non- manufacturing companies. The number rose to 63.1 from 61.3 in November, the fastest pace in five months. Readings above 50 means growth. The average of 62.5 for 2004 is the highest since the survey began in 1997. According to the survey of purchasing executives in industries including retail trade, banking and insurance, orders accelerated and more companies said they were adding to inventories. Economists were cited as saying the post- Christmas surge in sales suggests consumers have the incomes and confidence to keep driving economic growth.

Then at 10:30EST we got the Energy Department's weekly report of Crude Oil/Gasoline/Distillate inventories that showed heating oil and diesel inventories rose by two million barrels to 121.1 million barrels. The build was higher than expected and moves distillates (heating oil and diesel) within their historic inventory range for this time of year. Crude oil inventories fell by 3.3 million barrels whereas analysts were expecting a 1.2 million barrel decline. Gasoline inventories rose by 2.0 million versus analyst's forecast of a 1.0 million.

In December, U.S. car and light-truck sales rose 8% from a year earlier, for a seasonally adjusted annual sales pace of 18.4 million vehicles, a record for the month. Although industry analysts agreed that the numbers were due largely to the heavily advertised end-of-the-year sales promotions, some think stock- market wealth and improvements in personal income and consumer confidence will sustain demand and that 2005 sales will match last year's strong performance of about 17 million light vehicles sold.

The Airline index (XAL) was down -3.41 today amid announcements from Delta Air Lines (DAL) that they were slashing fares for domestic travel by as much as 50% and dropping restrictions such as Saturday night stays to win back customers from low-fare competitors. The whole index took a hit because of concerns that revenue may fall if all carriers adopt Delta's stance. One analyst said airlines may lose as much as $3 billion a year and cut forecasts on Delta, AMR Corp., Northwest Airlines Corp. and AirTran Holdings Inc. The hardest hit was the holding company for American airlines (AMR) falling 13%. Delta and Northwest Airlines (NWAC) were close behind, nose-diving 12% and 11%, respectively.

On to the charts.

SPX Daily Chart

This is not a healthy looking chart. The fact that since November 15th SPX has continued to climb in the face of a falling MACD had to resolve itself at some point. I think that point has finally come. Why do I think that? First of all SPX has broken out of the regression channel when most would have thought (liked) SPX to have bounced back to the top of the channel. Next, for two days running now SPX has closed below its 20 EMA. The last time the SPX closed below its 20 EMA was October 26th. Then you have the MACD probing the 0 line albeit not under it yet. The last time the MACD was under the 0 line was October 28th.

DOW Daily chart.

The DOW has not been as strong as SPX during our little bull rally and it did close below the 20 EMA back on December 8th but it has not closed two days running under this MA since back in late October when the bull rally was just getting started.

I have marked the December lows in red and the November lows in magenta. If you have a charting platform you may want to put these trendlines on your DOW chart as a reminder of the December low indicator (or November low if you decide to use that one instead) I mentioned earlier.

COMPX Daily Chart.

This chart is very similar to the SPX chart but does not have the clear regression channel. However, it does have the very clear MACD divergence and two days running of closes under the 20 EMA something that not has happened since October 26th.

RUT daily Chart.

The one thing that bothers me the most about the decline we have seen since the beginning of the year is that it is lead by the RUT, one of our strongest markets and it looks like the wheels are about to come off this steam roller. It has the negative MACD divergence just like the other markets and the closes under the 20 EMA but look at where the MACD ended up today. The fast MACD line has hit a level today that it has not seen since last August. Yikes!

Now the market never goes straight up or straight down so tomorrow "should" bring a little relief to the bulls but unfortunately it may just be temporary. We have had some major damage done here and the bulls will need to call in some heavy hitters to fix the damage. Heavy hitters like the RUT and the Compq.

Same-store sales figures began appearing after the close with AEOS and SBUX being among the stores reporting this afternoon. AEOS raised guidance and SBUX reported same store sales up 8%. Tomorrow morning sees other stores reporting, including ANN, ANF, DDS, FD, KSS, PIR and WMT, among others.

Thursday's economic releases begin with the usual 8:30 release of jobless claims and also includes the 10:30 release of natural gas inventories and the 4:30 report on the money supply. At 1:00 EST, the Fed's Hoenig gives an outlook on the economic, speaking in Kansas City.

Until next time - keep your wheels on your wagon.

Jane Fox


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