Crude oil, bonds, yield, the dollar and the gold are all been blamed for today's bearishness in the stock market. Crude oil rose, bonds fell, yields rose, the dollar fell against foreign currencies and gold rose. However, I think the market was due for a short-term pullback and we are just in a mini correction for now and that we will see a higher high later on - but more on that later. However, anyway you look at it today was not a good day for the bulls. Bonds and index futures took an unexplained fall during the overnight session and never seemed to gain their footing once the cash markets opened at 9:30EST. Rising crude oil prices and a 10-year yield making new yearly highs certainly didn't help anything. The Dow Industrials lost 107 points (-0.98%) closing at 10805.62, giving the bulls a pretty big scare. The Nasdaq Composite Index slipped 12.26 to close at 2061.29. The S&P 500 index declined 12.42, almost as much as the Nasdaq, to close out at 1207.01. On the NYSE 1.7 billion shares traded and 683 stocks rose and 2,699 fell. On the Nasdaq Stock Market, where 1.9 billion shares changed hands, 1,047 issues rose and 2,059 declined.
Investors may be coming to grips with our huge deficit and debilitating trade gap and decided to just sell everything - stock and bonds. Of course a more immediate factor weighing on bonds and giving yields a significant boost could have been the sale of $24 billion in new five- and 10-year notes by the Treasury Department on Wednesday and Thursday. Here is a daily chart of the 10-Year yield hitting new yearly highs.
The 5-year yield hit a high not seen since last July.
A $2.57 trillion budget was proposed by House Republicans that would help cut $69 billion in spending. The committee said its plan would cut the federal budget deficit to $229 billion by the year 2009, compared with about $412 billion last year. The House plan includes the cost of increased military spending in Iraq and Afghanistan but does not include the cost of changing Social Security.
The plan also looks to delete $69 billion from benefit programs over the next five years and accrue savings from Medicaid, student loans, farm programs, veterans and perhaps welfare and unemployment insurance. The proposed plan would allow benefit programs to continue accommodating for inflation but at a slower rate. Programs such as national parks and food safety protection will be cut by 8%. Final decisions on exactly where the cuts will fall will be made in later bills.
Federal prosecutors arrested two friends of former chief executive of ImClone Systems, Samuel Waksal. Zvi Fuks, chairman of the department of radiation oncology at New York's Memorial Sloan Kettering Hospital, and Sabina Ben-Yehuda, who worked at an investment vehicle set up by Mr. Waksal, are accused of selling their ImClone stock in December 2001 after learning the Food and Drug Administration would not be approving the company's cancer treatment.
Today's Economic Reports
The first report out this morning at 8:30EST was the MBA's Mortgage Applications. This report is not usually a market mover but a very interesting one to watch. It is a leading indicator of home sales and consequently gives the financial markets an indication of where the housing market is heading. It is also used for gauging refinancing activity, which has a direct correlation to consumer spending.
The report for the week ending March 4, 2005 showed the MBA index decreased by 0.7% to 704.8. The composite index is 4% below its four-week-ago reading, and 21% below its year-ago reading as the demand for mortgages declined driven by the decline in refi applications. The refi index declined by 4.6% to 2,176.8 and is now 39% below its one-year-ago reading however, the purchase applications index increased by 2.7% to 451.7. Last week's decline in the 30-year fixed mortgage rate may account for some of the rebound in the purchase index but the most likely factor is just plain noise or weekly gyrations.
The next report was the Oil and Gas inventories out at 10:30EST. This report put out by the American Petroleum Institute (API) and the Energy Information Administration (EIA) has taken on a new importance since the price of oil has been mentioned almost every time you hear the words 'stock market.' But in particular this report is scrutinized by the Crude Oil market for unexpected changes in crude oil and gasoline inventories indicate changing market conditions and can provide insight into crude oil prices in the future.
Both the EIA and API reported a sizable build in crude oil stocks for the week ending March 4. The API report showed crude oil inventories increased by 6.247 million barrels to 304.295 million barrels. The EIA reported a build of 3.2 million barrels to 302.6 million barrels. The API reported an increase of 239,000 barrels of distillate stocks to 114.518 million, while the EIA reported a draw of 800,000 barrels to 109.2 million barrels.
With inventories this strong you would expect the price of crude to fall but Crude-oil futures briefly spiked to $55.65 a barrel on the New York Mercantile Exchange, matching an intraday record, before settling just below $55.
Speaking of oil I would like to interject my own opinion here. Although we hear a lot of rhetoric about oil and the price of crude oil I don't think it had a lot to do with today's market swoon. Crude Oil, adjusted for inflation, is nowhere near as important or expensive as it was in the 1970s. And the price of oil has been high for months now so don't you think this has already been absorbed into prices.
Then last but certainly not least was the U.S. Department of Treasury's Beige Book out at 2:15EST. Economists analyze this report for future monetary policy by the FOMC. In particular economists and market watchers look for comments regarding regional labor markets, retail sales, real estate, banking and energy. The Beige Book can provide some of the timeliest data on the economy at the regional level.
The report revealed that after a record deficit of $413 billion in fiscal year 2004, which ended on September 30, it is possible this fiscal year's deficit will be somewhere near $400 billion, a slight improvement. This is due to personal income tax revenues starting to grow from the stronger economy and an end to legislated tax cuts. Also corporate income tax receipts are up sharply and should see continued gains due to the expansion and the expiration of the accelerated depreciation allowance. The report also revealed strong growth in spending, however, mostly for defense and healthcare based on a new transportation bill, the Medicare prescription drug benefit and Iraq and Afghanistan wars.
On February 14th I posted an article in the OptionInvestor Newsletter called "Tighten that Wedgie." It was a piece on how to spot and then trade a bullish or bearish wedge. Here is what I said about the bearish wedge. The rising wedge is a bearish pattern that begins wide at the bottom and tapers as price moves higher and the trading range narrows. The rising wedge is both a reversal pattern and a continuation pattern as well. As a continuation pattern, the rising wedge will still slope up, but the slope will be against the prevailing downtrend and as a reversal pattern, the rising wedge will slope up but with the prevailing trend. Whichever type you encounter - reversal or continuation - the rising wedge is bearish.
I would now like to take a look at the SPX daily chart and use the criteria from the article to first of all see if the formation I am seeing has the potential for a bearish wedge and if it does then how to trade it. (This chart was created on Tuesday so does not show the bearish day today)
We definitely have the potential for a bearish wedge so I have drawn some red arrows within the green cone to show you where I think SPX will need to trade to complete the formation. Here is where I see the higher high I talked about earlier.
But even if it does complete you will not get a confirmation of this pattern until the lower support line is broken. It is sometimes prudent to wait for a break of the previous swing low because once support is broken there can be a reaction rally to test the newfound resistance level.
Here is a chart of the DOW and as you can see it has a similar pattern.
Do you also see the MACD negative divergence (marked in red) giving us more bearish information. A slight bearish divergence appears on the SPX chart as well (not shown).
Now take a look the charts of the Russell 2000 and the NDX.
Both are in neutral wedges that don't give a lot of hints as to direction but we can use them for trading the SPX and the DOW. Since SPX and the DOW are building bearish wedges I expect these two neutral wedges to break to the downside. But if they don't then it puts a little bit of a crink in the bearish picture I am building and I would not be as ready to open bearish positions on these SPX and the DOW. But on the other hand if they break downward in conjunction with the SPX and DOW bearish wedges breaking downward you have a very good confirmation and all the more confidence in your bearish positions.
Unfortunately trading is never this simple but this does give you a roadmap to follow albeit a bearish roadmap. If you are bullish you probably don't want to follow this roadmap.
Tomorrow's Economic Reports
Tomorrow's economic reports start with the Bureau of Labor Statistics' weekly Jobless Claims 8:30EST report. This report is watched as a secondary indicator of labor market conditions and as an advance indicator of the more widely monitored monthly payroll employment situation report. Consensus 310,000 and previous weeks 310,000.
Next we have the Bureau of Census' 10:00EST report on wholesale trade inventories and the inventories to sales ratio. These are important indicators of current consumption and of future manufacturing activity.
Then we have the 2:00EST Treasury Budget that is not a market mover but watched because longer term trends in the Federal Budget are important to financial markets.
Remember plan your trade and trade your plan.