Option Investor
Market Wrap

The Numbers

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The Dow Jones Industrial Average rose 45.89 points to close at 10851.51. The S&P 500 index gained 2.24 to close at 1209.25 and the Nasdaq Composite lost 1.57 points and closed the day at 2059.72. NYSE traded 1.5 billion shares where 1,345 stocks rose and 1,977 fell. On the Nasdaq Stock Market 1.7 billion shares changed hands, 1,253 issues rose and 1,814 declined.

The dollar finished mixed after a turbulent session. Comments out of Japan that they may diversify out of dollar denominated issues set a negative tone early on. Although these comments were rebutted by the Ministry of Finance it sent shockwaves through the Forex markets and traders remain concerned over diversification agendas. Odd isn't it how today's events played out almost identically to those last month when Korea made similar remarks and then later repudiated them. USD/JPY managed a small gain to finish out at 104.088. The euro pushed higher ahead of the Treasury budget number but fell back late in the afternoon, settling near EUR/USD 1.3425.


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The News

After registering a $5.2 billion loss in 2004, Delta Inc. said it expected to rack up a "substantial" loss again this year giving Delta the dubious honor of having the worst year ever for a U.S. airline. Delta has already cut thousands of jobs and has wrung millions of dollars in pay and benefit cuts from its employees included executives giving up their bonuses (heaven forbid!). But they have admitted that even more painful belt-tightening is needed. This belt must be getting pretty tight because they are now down to charging more for drinks and getting rid of pillows on many flights. Meanwhile, high fuel prices that caused most of Delta woes last year haven't gone away and will not in the near future. Delta closed the day at 4.33 down 12.07%

Fifty Six private economists were surveyed by the Wall Street Journal as to why long-term interest rates have remained low despite the Federal Reserve's campaign to raise rates on the short end. Low inflation came out as the #1 reason by a wide margin.

Some of the other reasons sited were the huge amount of U.S. Treasury debt being bought by foreign central banks and others sited that investors have piled into bonds because of uneasiness about the economy. Both could work to keep long-term rates low.

Unfortunately though the "conundrum" (as Mr. Greenspan has called it) is showing signs of unwinding and many economists are beginning to think that long-term rates will climb until there's no more "conundrum" left to discuss. The yield on the 10-year Treasury note crept higher hitting a high of 4.55 the highest high since July. On average, the yield on the 10-year note is expected to be 4.65% by June, higher than the 4.57% forecast in the last survey, and 4.99% in December, up slightly from forecasted 4.97%.

The economists also see the Fed becoming more aggressive in the near term in increasing the federal-funds target rate. The market is currently pricing in a 25 basis point hike following the March 22 FOMC meeting and further down the road, the May and July Fed Funds contracts are fully pricing in 50 basis points of additional tightening, which would bring the Fed's target rate to 3.25% by the start of the third quarter.

Most of the economists interviewed in the WSJ survey agreed there is only about a 22% probability that a drop in the U.S. dollar will be so sudden and so sharp as to have a significant effect on the stock and bond markets.

After the bell, Intel released its mid-quarter update of its financial condition saying it expected revenues for the period at between $9.2 billion and $9.4 billion, compared to a previous range of $8.8 billion to $9.4 billion. It also boosted its forecast for gross margins to 57% from a previous forecast of 55%. Shares of the world's biggest chip maker jumped to $25.50 in after-hours trading.

Today's Economic Reports

New claims for U.S. government unemployment benefits rose by 17,000 to 327,000 for the week ending March 5th, more than 2,000 above the consensus. Because this weekly number can be very volatile it is smoothed with a four-week moving average of claims, which irons out weekly fluctuations. The 4-week MA rose from last week's four-year low to 312,500.

At 2:00EST the Department of Treasury released its Treasury Budget and there were a few surprises. Firstly, through the first five months of fiscal year 2005 the federal government ran a deficit of $223.4 billion, 2% smaller than the $228.5 billion deficit at the same point in fiscal year 2004. Secondly, during the first five months of fiscal year 2005, total federal revenues were up 9% from the same period in FY2004. Thirdly, corporation income tax payments were up 50% compared to the same period in fiscal year 2004. Next, payroll taxes were up 6% from the same period in FY2004, while personal income tax receipts were up 10%, due to the strengthening labor market and an end to legislated tax cuts.

However, the long-term budget picture remains poor. Tax cuts have reduced personal income tax receipts and the retirement of the baby boomers will result in greater outlays on Social Security and Medicare. Although the budget picture will improve over the next few years as the economy strengthens, the United States is expected to run large federal deficits over the long run.

At 10:00EST the Wholesale trade numbers were released and although this release is not a market mover it is watched by the financial community. Wholesale inventories increased 1.1% for the month of January, following an increase of 0.4% in December where most of the inventory growth occurred in durable goods, with auto inventories posting a 2.2% increase over the month, following a decline in December.

The Inventory/Sales ratio continues to remain low at 1.15 in January, after dipping to 1.14 in December. The low I/S ratio and the increase in inventories suggest an increase in stockpiling and could translate into a manufacturing slowdown. 

The Charts

In the Market Wrap yesterday I showed some charts and built a bearish case around them. Today it would like to show some charts that I did not have the time to show yesterday. But first of all I would like to revisit the granddaddy the SPX and take a look at some things that I did not address yesterday.


When you see an index reach a new yearly high like the SPX did on March 7th you would like to see the indicators support it by making a higher high themselves. But that is not what is happening here. When the SPX made this higher high the MACD made an equal high and the stochastic made a lower high. These are called negative divergences and should be telling you this index is running out of steam. Now I do have to make a caveat here that these divergences are not as blatant as I have seen and some may say I am grabbing at straws (whatever that means) but it emphasis the fact that this index is not as bullish as some on CNBC will lead you to believe.

The next chart I would like to look at is the Transportation Index.


Although this index is building the same wedge as the SPX (the wedge I described in Wednesday's Market Wrap) it does not have the bearish MACD and stochastic divergences so it is a lot stronger than the SPX in that respect.

The next chart I would like to take a look at is the S&P Banking Index, $BIX.X.


In an environment of rising interest rates one would believe the banking industry should start to feel the heat. Well it looks like that is exactly what is happening. Notice how the MACD and stochastic make a lower high with each lower high on the price chart? This tells you that there is no underlying strength in this market and that the decline will probably continue. I wish it were that easy but these MACD and stochastic divergences can be your first clue into underlying strength building or continuing weakness.

Tomorrows Economic Reports

Tomorrow at 8:30EST the Bureau of the Census and the Bureau of Economic Analysis of the Department of Commerce will release its report on International Trade. This is without a doubt the most important release of the week amid concerns about the size of the deficit and its implications for current account deficit funding. This one could be a market mover but yet everyone is watching and expecting the worst so perhaps the worst case scenario is already priced into the market. Consensus is for the deficit to grow to -$56.8 Billion from its current reading at -56.4 Billion.

The balance of trade is the difference between what the country exports and what it imports in goods and services. The financial community will be looking not only at the total difference but changes in trade balances with particular countries like China and Japan.

This is rather shortened Market Wrap for that I apologize but I think it covered most of what made up the day.

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