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Market Wrap

Bulls Push Back

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      01-10-2005           High     Low     Volume   Adv/Dcl
DJIA    10621.03 + 17.07 10663.74 10582.38 1.83 bln 1779/1059
NASDAQ   2097.04 +  8.43  2111.43  2086.66 2.09 bln 1658/1362
S&P 100   568.27 +  1.89   570.22   565.57   Totals 3437/2421
S&P 500  1190.25 +  4.06  1194.78  1184.80
SOX       406.25 -  1.31   411.55   404.80
RUS 2000  617.74 +  4.53   623.30   613.21
DJ TRANS 3663.23 + 26.45  3683.05  3628.28 
VIX        13.23 -  0.26    13.93    12.94
VXO (VIX-O)13.17 -  0.68    14.22    12.99
VXN        19.61 +  0.46    19.84    19.23
Total Volume 3,935M
Total UpVol  2,013M
Total DnVol  1,801M
Total Adv  3437
Total Dcl  2421
52wk Highs  142 
52wk Lows    42
TRIN       0.95
PUT/CALL   0.82

Bulls picked up the ball from faltering bears and ran the indices higher. The intraday bounce broke the upper end of the sideways range from last week on the SPX, while for the Dow and Nasdaq the range highs held. The SPX gave back the bulk of its gains by session's end, closing back within its range. Volume was lighter than we saw last week and aside from a small number of buy and sell programs, there was very little about which to get excited.

Daily Dow Chart

The Dow advanced 17 points to close at 10621, failing from a high of 10664 and bouncing from a low of 10582 on relatively light volume. The move printed a slightly higher high and higher low, but the 100 point range between 10570 and 10670 continues to contain the action, as it has since mid-last week. A strong break above the range high will target next light resistance at 10720, on the way to the stronger line at 10800.

Daily S&P 500 Chart

The SPX managed to break the high of the past 3 sessions on its spike to 1195, but it closed back within the range at 1190, +4.06 for the day. The low was 1185, at the 78.6% Fibonacci line off the August low. Above 1195, next light resistance is at 1200, followed by 1205. A close above 1205 should be enough to begin generating buy signals on the daily cycle oscillators, while a break below 1180 should get the ball rolling for a test of 1170 support.

Daily Nasdaq Chart

Today's 2111 high tested Wednesday's high after Friday's spike low to the 2075 level. This defines the high and low end of the range, with key overhead resistance above at 2125-30. A close above that level will spell trouble for the daily cycle downphase, as will a failure to break the 2070-75 level this week. For the day, the Nasdaq closed higher by 8.4 at 2097.

Weekly TNX Chart

The treasury auctioned 16B worth of 6 month bills generating a 2.48 bid-to-cover ratio, and 9B worth of 3 month bills generating a bid-to-cover of 2.15. Ten year treasury notes were steady within a very narrow range, closing in lightly positive territory with the yield (TNX) down .7 bps to close at 4.278%. The move respected a narrow range that had emerged last week between 4.26% and 4.295%. Like the daily cycle oscillators discussed in the Futures Wraps, the weekly cycle upphase has been faltering on the so far weak/corrective upphase that emerged off the October lows beneath 4%. A break below 4.14% support should be sufficient to begin generating sell signals for the TNX, while a move above 4.295% will target key 4.4%-4.44% resistance.

Weekly chart of Crude oil

Oil was catching a bid this morning, breaking 47 as Iraqi officials announced that sabotage ahead of the January 30 elections had halted oil operations in the North and brought exports to a standstill. Oil flows through Iraq's northern pipeline have been on hold since an attack on December 18, and repair operations have been continually impeded by ongoing acts of sabotage. In addition to these stories, the financial press began discussing a "cold snap" in the U.S. Northeast, after several consecutive weeks' discussion of the mild winter to justify the downward correction in oil prices. As well, there was mention of the storm in the North Sea disrupting Norwegian production. Nevertheless, a selloff in the afternoon reversed the morning gains, with crude oil closing fractionally lower for the day.

On the daily chart of front-month crude oil futures, the head and shoulders neckline support held in the 41 area, and the bounce since the new year has turned the daily cycle oscillators to a new upphase. 46-47 is a significant confluence level, and the break above 47 this morning represents a break of the previous high. Today's 6-week high weakened, but has not yet invalidated, the head and shoulders formation. Above 48, the next significant resistance is back at the 50.50 level. For the day, crude oil closed lower by 12.5 cents at $45.30.

In corporate news, GM announced that it intends to reduce its US workforce by approximately 7%, eliminating 8000 positions over the coming 12 months. This marks the fourth consecutive year of workforce reductions at the world's largest auto manufacturer- in each year since 2002, GM has fired between 2% and 3% of its salaried employees, 5%-6% of its hourly workers and approximately 10% of its contractors. GM closed lower by 1.31% at $38.49.

Executives of the Big Three automakers made comments over the weekend to the effect that inflation in US health costs, particularly for retirees, is severely impacting their ability to compete with foreign automakers. Ford revealed that it has paid 3.2B in healthcare expenses for American employees, of which 2.2B went to retirees. GM spent 4.8B in 2003 to cover 1.1M people, more than it spent on steel for its vehicles and adding an amazing $1,400 to the cost of every vehicle it manufactures in the US. They stressed that this is an issue besetting all domestic manufacturers and not just their industry.

Big news today was News Corp.'s (NWS) agreement to purchase the remaining 18% of Fox Entertainment (FOX) in a stock swap valued at approximately 6B. This acquisition would complete NWS' ownership of FOX. Under the deal, FOX Class A shareholders will receive 1.9 shares of NWS Class A shares, which represented a premium of over 7% above Friday's closing price of $31.22 for FOX. NWS lost 2.08% to close at $17.85, while FOX gained 9.8% to close at $34.28.

Rural wireless provider Alltel Corp. (AT) announced that it will purchase Western Wireless Corp. (WWCA) for 4.4B in a cash and stock deal that values WWCA at $39.27 per share, a 7.5% premium over Friday's closing price. AT will also assume 1.5B of WWCA's debt. WWCA shareholders will receive $9.25 in cash and .53 AT shares for each WWCA share they hold. Word of the deal prompted Standard & Poor's to place AT's long term "A" and short term "A- 1" ratings under review, as S&P believes that the acquisition could pressure AT's creditworthiness. S&P placed WWCA's "B-1" credit rating under review as well, but with positive implications. AT closed lower by 2.44% at $54.75, while WWCA gained 2.33% to close at $37.37.

After the bell, Alcoa announced Q4 earnings of 345M or 39 cents per share (flat against Q4 2003's 342M or 39 cents EPS), missing consensus estimates for 41 cents. Sales rose to 6.04B from 5.42B in Q4 2003. AA finished the day -.72% at 30.47.

In economic news, the lone report for the day was Wholesale Inventories released at 10AM. The Commerce Department announced that inventories at US wholesalers rose 1.1% in November on increases in a wide array of categories, exceeding analyst expectations for a .7% rise. Inventories had risen 1.1% in October. Despite the larger than expected gain in November, however, the inventory-to-sales ratio remained at 1.15- indicating that it would take 1.15 months to deplete current inventories.

Just after noon, Secretary of Labor Elaine Chao announced the administration's proposal for pension plan reform. In particular, the plan seeks new rules for the funding of the Pension Benefit Guarantee Corporation and a likely increase in employer premiums. Also included would be rules requiring more information to be provided to workers and greater flexibility for employers seeking to contribute to pension plans. Those companies with fully funded plans would likely see their current premiums indexed to growth in employees' wages. Those companies whose plans are in the red would see premiums increase.

There are no major economic reports scheduled for release tomorrow, and on Wednesday we'll get the November Trade Balance and the December Treasury Budget. The big question that has dominated equities since last Tuesday's close has been whether this sideways range is a corrective distribution to consolidate Monday's and Tuesday's impulsive drop, or whether it's an accumulative base. While the daily cycle oscillators suggest more downside to come, the surge in bearishness and the now 4-day extension on that sideways range mitigates on the bullish side of the ledger. Based on the daily cycle oscillators, my interpretation is a bearish bias below the nearby resistance levels detailed above. Above those levels, however, the oscillators will likely whipsaw back up, and the indices will be set for a retest of the rally highs.


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