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Mixed Finish on Light Volume

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Mixed Finish on Light Volume

Stock indices traded an excruciatingly narrow range today, and did so on light volume across the board. The Nasdaq-100 tracking stock, QQQQ, barely eked out half of Friday's volume, and just over half of its average daily volume.

With no major economic reports released today and a plethora of data scheduled during the remainder of the week, including 2 days' worth of Greenspan testimony, it's unsurprising that the heavy hitters stuck to the sidelines. It was a light news day, and with the indices stuck at the top of a 2 week long daily cycle upphase, the markets had little impetus to drive them in either direction.

Daily Dow Chart

The Dow traded a high of 10802, just 29 points above its session low, closing lower by 4.88 points at 10791.13. Today's high came within 95 points of the 52 week high printed on December 26. As appears from the daily chart, the daily cycle oscillators are in overbought territory, with the 10 day stochastic at levels that often coincide with multiweek tops to within a few days. Exceptionally, the indicator will become buried in overbought territory as a bullish trending move asserts itself. With all the news due for the rest of the week, it was clear that no one was going to bet heavily that dilemma in either direction. The Dow remains bullish above 10770, while a close below 10640 should be sufficient to roll the daily cycle over and kick off the next downphase. Below 10710, the upphase should stall.

Daily S&P 500 Chart

The SPX fared fractionally better than the Dow, adding .84 of a point to close at 1206.14, failing at a high of 1207 and bouncing from 1204. The 52 week high is at 1218, and like the Dow, the daily cycle upphase could well have enough gas in the tank for one last hurrah. 1205 and 1195 are immediate support, with stronger support at 1189 and the previous daily cycle low at 1160-62. A break below 1189 should stall the upphase, while I would expect a close below 1179 to kick off the next downphase.

Daily Nasdaq Chart

The Nasdaq rose .3% or 6.25 points to close at 2083. Despite the relatively stronger showing, the Nasdaq remains the farthest from its 52 week high. The bounce of the past 2 sessions has avoided what appeared to be an imminent and early failure in the weak upphase of the past 2 weeks. A close below 2070 should be enough to bring the daily cycle back to the do-or-die point, and below 2050 I'd expect to see a new downphase in place. Today's low printed at 2075, the high 2085.

Weekly TNX Chart

Banc of America reduced its recommended allocation of bonds from 10% to zero, with its weighting of cash rising from 25% to 35% on the firm's expectation of higher yields in the coming months. Citing broadly bullish sentiment for bonds, the bank's analyst Thomas McManus expressed a contrarian position, noting further that he sees the Fed already beginning to "sop up" excess liquidity. This matches recent observations of the Fed's daily open market operations in the Market Monitor since the Fed's most recent rate announcement. The Fed's open market desk has been displaying a notably tighter bias since the announcement, with a higher number of successive daily net drains overall.

The treasury auctioned 37B worth of 3 month and 6 month notes today, of which indirect bidders (foreign central banks) took 7.2B or 19.5% of the total. The bid-to-cover ratio was a respectable 2.19 for the 3 month notes and 2.3 for the 6 month notes.

Ten year treasuries began rising today from unchanged shortly before the auction results were released at 1PM and finished the day in positive territory. The ten year note yield (TNX) closed lower by 2.2 bps at 4.073%. On the daily TNX chart, we see that the daily cycle downphase is in the process of turning up from oversold territory toward first resistance of 4.12% below the key 4.16% resistance level. A break above 4.16% will target minor next resistance at 4.18%, but would also represent a potential upside bull wedge break. The upside implied target on that wedge could be as high as the 4.4% level. Support is immediately below at 4.03% and 3.98%.

Weekly chart of Crude oil

There was little news on the oil front today, with March crude oil futures trading both sides of unchanged in a whippy session. For the day, crude oil finished higher by 30 cents per barrel or .64% at 47.45. On the daily chart, this worked out to a bullish engulfing doji hammer, with Friday's low and high exceeded and a close above Friday's range. The market is coiling into a pennant here, between 45.5 and 49. A daily cycle upphase is kicking off from a higher price and oscillator low, and the outlook is bullish above 45.00-45.50 confluence.

There were no major US economic reports released today, and with earnings season winding down it was a relatively quiet session. The bigger news was in the currency markets following the release of Japanese economic data relating to that country's current account surplus. As analyst Linda Piazza reported in the Market Monitor, Japan's December current-account surplus rose 28%, representing a 35.1% increase from December 2003's figure and blowing away estimates in the 6% range. That caused a rally in the yen and a sharp drop in the US Dollar Index back below the key 84 support level as gold, silver and crude oil rallied.

Mere weeks after the AT&T-SBC deal, Verizon (VZ) has announced plans to acquire MCI for $6.763 billion, lowballing Qwest's rival bid by roughly $500M. The purchase price is to be paid with 5.3B in VZ stock and the remainder in cash via dividends from VZ. MCI's investors reportedly preferred to be paid in VZ shares than in Q's stock, given Q's own accounting issues and higher debtload, and VZ's status as a top cellular provider and top local provider in the Northeast. Under the deal, VZ will also assume MCI's debt of approximately 4B, and the company estimates that the acquisition will yield roughly 7B in new revenue and savings. The deal values MCI at $20.75 per share, matching Friday's closing price. Fitch Ratings placed VZ's A+ debt rating on Rating Watch Negative and MCIC's B rating on Rating Watch Positive following the announcement. VZ lost .33% to close at 36.19, while MCIC rose .85% to close at 59.31. Q closed lower by 4.1% at 3.98.

Herbalife (HLF) announced that it has pulled one of its products from shelves in Israel after that country's health ministry launched a probe due to customer complaints of liver problems. HLF is cooperating with authorities, and maintains that the unidentified product has not been proven to cause liver disorder. HLF lost 3.52% to close at 15.90.

European oil refiner TOT announced strong Q4 results, with sales rising 34.8B euros from Q4 2003's 27.5B level. The company attributed the rise to higher oil prices. For the year, sales rose 17% to 122.7B euros. TOT closed higher by .61% at 111.38.

AIG announced that it has received subpoenas from NY-AG Eliot Spitzer and the SEC in connection with investigations of its non-traditional insurance products and certain of its reinsurance transactions, and its accounting for same. The company said that it will cooperate in responding to these subpoenas, and will separate "traditional" from "non-traditional" earnings. However, CEO Greenberg refused to answer questions in a morning conference call, sticking to a prepared statement. In particular, he would not comment as to whether the 53M settlement already paid by the company for its nontraditional insurance deals was related to the round of subpoenas announced today. Spitzer and the SEC are investigating, among other things, whether these insurance products have or could be used to help companies hide losses or earnings weakness. A 10-K filing is expected from AIG within the next 3 weeks. For the day, AIG lost 2.23% to close at 71.49.

Discovery Labs (DSCO rocketed in the premarket on news that the FDA has issued an approval letter for its Surfaxin drug, which will be used to prevent respiratory distress in infants. Rising over 20% to clear the $7 level before the bell, DSCO closed higher by 10.88% at 6.42.

Office equipment retailer OMX announced the resignation of its president and CEO Christopher Milliken, and the firing of 2 employees in connection with its ongoing accounting investigation. The company also announced that it overstated its operating income for Q1 of fiscal 2004 in the amount of 5M-10M due to unrecorded rebates. However, this error also resulted in the understatement of income in Q2 and Q3. Today's news followed the resignation of OMX's CFO last month as the company delayed the release of its Q4 earnings report due to accounting problems. The 2 employees terminated in today's release allegedly fabricated documents to justify approximately 3.3M in claims billed to a supplier. The company expects to conclude its investigations by the end of this month. However, S&P announced that it is reviewing OMX's current BB credit rating in light of these developments, with a view to a possible downgrade. OMX closed lower by 5.45% today at 30.02.

After the bell, Agilent (A) reported Q1 earnings of 21 cents per share or 103M, which, excl;uding restructuring charges and tax benefits came to 20 cents per share or 100M. Revenue rose from 1.64B last year to 1.66B. The stock closed higher by 1.26% at 24.02.

Following Ameritrade's news last week of a slowdown in retail trading activity, SCH reported similar findings today. Schwab's January client daily average revenue trades came in at 186,000, which was down 14% from January 2004 levels and 1% lower than December 2004. NITE reported a 20% drop from January 2004's levels and a 6% drop from December's. As noted in the weekend Market Wrap, if not for program and mutual fund trades, the markets would be very quiet. Retail traders are indeed leaning back toward an "investor" posture.

For tomorrow, we can look forward to a more active newsday, with the Empire State Index for February, Retail Sales for January and December Business Inventories all scheduled to be released in the morning, followed by the $19B 4-week treasury bill auction at 1PM. With important reports scheduled for the remainder of the week, not to mention Greenspan's Wednesday and Friday testimony, the markets will have to run a veritable gauntlet of data from here. On the one hand, prices have been firm for the past two weeks, following the daily cycle upphase in the stock indices. On the other, that upphase is rapidly running out of racetrack, particularly for the Dow and SPX, and in this key timeframe the balance of risks is shifting in the bears' favor. Until clear sell signals appear, generated by a break of the support levels discussed above, the trend will remain up. However, bulls will want to snug up their stops as the daily cycle upphase begins to wane.


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