Market Wrap, Monday, 04/11/2005
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Pop and Drop
The indices gapped up at the open, held the highs for a few minutes, and proceeded to plunge to the lows of the day. From that morning low followed a weak bounce that settled into an uneasy range beneath Friday's lows.
Breadth was lightly negative, with declining volume leading advancing volume 1.3:1 on the NYSE and 1.6:1 on the Nasdaq. Volatility rose for the QQQQ, with the QQV rising .77 to 16.61 and the VXO higher by .49 to 12.59. Volume was lighter than average across the indices, with QQQQ trading just 69.1 million shares, roughly 27 million shares below its average daily volume.
Daily Dow Chart
The Dow traded a narrow range, bouncing from a low of 10438 and failing at the low end of Friday's range from a high of 10482. So far, the daily cycle upphase that kicked off at the end of last month has been very weak, with the decline since Friday reducing what should have been a 2-3 week bounce to a net sideways drift. This would be consistent with a distribution range at the bottom of the decline from the March high- or, in other words, a bear flag. A break the lower rectangle support, confirmed with a violation of the April low in the 10340 area, should signal the next stage of the decline. However, a break of Friday's high above 10560 would give the upphase legs and set up a potential retest of 10620 resistance.
Daily S&P 500 Chart
By comparison, the upphase for the daily SPX has been much stronger. However, today's doji decline, narrow-ranged as it was and reversed at the final tick to close positive by 1 cent, violated the rising trendline, printing a range solidly below Friday's. This caused the slightest hesitation in the Macd oscillator, but it will take more downside tomorrow to edge the indicators closer to a daily cycle sell signal. Today's 1178.69 low confirmed the 1179 support, below which 1172 and 1162 come into view. A break above 1192 will invalidate this bearish interpretation.
Daily Nasdaq Chart
The Nasdaq got hit the hardest of its peers, declining .36% to finish at 1992.1. Like the Dow, its daily cycle upphase has been a sideways drift only, with the decline since Friday's high reversing half of the past 2 week's upphase in 2 days. Beneath today's 1991 low, 1965-70 is critical support, while the top of the range is at 2020-25. Bulls need to see that upper end broken in order to refute the corrective/bear flag interpretation of the current daily cycle upphase.
Analyst Abhijit Chakrabortti of JP million raised the firm's 2005 earnings outlook for the S&P 500 today from $72 to $74.5, saying that it sees concerns surrounding higher oil prices, interest rates and unit labor costs as "exaggerated." The first sees the possibility for an upside surprise both for the S&P and for its 5% growth target for the Eurozone. In its opinion, Japan has the greatest growth potential off all regions currently, and sees its 10% growth projection as being easily attainable.
There was some discussion over the weekend concerning Fed Governor Ben Bernanke, who was recently appointed by President Bush to head the White House Council of Economic Advisors. Bernanke, who is best known for his controversial "printing press" comments with reference to the ability of a "determined" central bank to create inflation at will, is currently favored as the most likely successor to Greenspan's chairmanship when the current Fed chief's term ends next year. A number of procedural and political hurdles remain, but for the moment, Bernanke is being viewed as the most likely candidate. In light of his previous comments, my interpretation of his appointment would be inflationary- that is, bullish for US asset prices and bearish for the US Dollar.
Daily TNX Chart
The Treasury auctioned $32 billion of treasury bills today, with $17 billion of 3 month bills and $15 billion of 6 month bills. The 3-month bills generated a strong bid-to-cover ratio of 2.77 at a high rate of 2.71%, with indirect bidders (foreign central banks) taking $2.2 billion of the total. The 6-month bills generated 2.25 bids for each bid accepted, with a high rate of 3.065% and indirect bidders taking $4.2 billion of the total. It's worth noting that while the 2.71% high rate on the 3-month bill auction is well above average for this and last year, the bid-to-cover was also higher than the averages for the past 3 years and indicated strong demand. Longer-dated treasuries firmed immediately following the completion of the auction and publication of the results on the Treasury Department's website. It was a good day for ten year bonds, with the ten year treasury note yield finishing the day lower by 4.6 bps at 4.445%.
On the daily chart above, we see Friday's gap up above the descending trendline that coincided with the daily cycle downphase. That gap was filled and the gains reversed today, with the descending trendline tested from above. Given that Friday's move occurred before the daily cycle stochastic reached oversold territory, a retest and even nominal new low for the TNX would not violate my interpretation last week that the daily cycle is aiming to turn higher. A sideways grind along the current range will give the cycles time to turn before the next multi-week leg up. A break below 4.35% would set up the current range as a bear flag and invalidate my thesis.
Chart of Crude oil
The week opened with crude oil prices lower following Friday's close near the lows of the week. OPEC was reportedly considering another 500,000 barrel per day production limit increase, which, on the heels of two 500,000 bps increases in the past few months, would bring the limit to 28 million bpd. With most recent estimates of current production at 29.83 million bpd, this move would be more of a technicality than anything else, because maximum production capacity remains a constant unaffected by such quota decisions.
Despite the opening drop and a narrow range that followed for most of the day, May crude futures ticked up and ran from their 52.25 low to finish 35 cents in the green at 53.675, one tick below the 53.70 high of the day. On the daily chart, we see today's bullish hammer having set a new low at a price not seen since October 2003- a fact which was briefly trumpeted in the financial press. However, the doji reversal is not a bearish formation, and nor is the flatline in the 10-day stochastic at what should be the midpoint of a more extended decline. A bounce from here would represent a bullish early reversal to the daily cycle downphase, well above the 50 level.
It was a quiet day data-wise, with no major economic reports released today. In corporate news, Circuit City (CC) reported a decline in fiscal Q4 earnings, with net income declining to $84.5 million from $89.6 million in the year-ago period and earnings from continuing operations down from $94.7 million or 46 cents per share one year ago to $82.5 million or 43 cents per share. However, these results included a number of one-time items, such as $30 million in lease termination costs and $4.2 million in accounting change expenses, as well as asset write-offs and the closure of a distribution center. Excluding these $38.6 million in charges, the nation's 2nd-largest electronics retailer behind Best Buy earned 60 cents, missing expectations for 62 cents earnings per share. Revenues increased from last year by 5.3% to $3.47B, meeting estimates, and gross profit margin rose to 24.4% from 23.8% in last year's Q4, boosted by the inclusion of international sales. Domestic profit margins declined due to slimming margins and competitive promotions on certain products. The company expects a 3%-6% revenue increase in 2006. CC gained 3.44% to close at 15.94.
InFocus (INFS) issued a profit warning this morning, expecting a 30-35 cent loss for the quarter, or 19-24 cents excluding restructuring charges. Analyst expectations had been for a 4 cent per share profit. Revenue is expected between $136 million and $138M, compared with prior expectations of $150 million to $160M, with gross margins estimated at 7-8% compared with prior estimates of 16-18%. INFS got smoked for 14.05%, gapping down at the open and staying there, closing at 4.71.
Shortly thereafter, Ingram Micro (IM) announced that it will outsource 550 associate jobs as part of an optimization plan, which it expects to save approximately $10 million this year. The company is expecting charges of $26 million to result from the plan. IM lost 1.24% to close at 15.87.
MSFT announced the settlement of its antitrust issues with GTW, in consideration for which it will pay $150 million to GTW over the next 4 years. GTW announced that it would use the payments for advertising, training, and r&d for new MSFT-compatible products. MSFT will take a $550 million charge for settlement reserves for antitrust claims, $123 million of which will be earmarked for the GTW settlement and $51 million for its dispute with Burst.com. MSFT gained .16% to close at 24.98, while GTW added 1.96% to close at 4.16.
NCR guided higher this morning, announcing its target for Q1 EPS at 16 cents per share, compared with its previously forecast 2-5 cents. Revenue is expected to come in at $1.34 billion for the quarter, and EPS for the full year is seen between $1.35 and $1.40. NCR added 1.88% to close at 35.31.
PG announced a 12% dividend hike, from 25 cents per share to 28 cents per share, to be paid on May 16 to shareholders of record on April 22. PG rose 1.47% to close at 55.30.
Ford's afterhours warning on Friday impacted the tape today, with F now expecting its automotive operations to be breakeven at best and placing its 2005 profit expectation at least 14% lower than previously anticipated. Citing higher raw material, gasoline prices and healthcare costs, F lowered its 2006 profit goal as well. Fitch lowered its rating outlook for F, Ford Credit, Hertz and numerous associated entities from "stable" to "negative." The downgrade cited production cutbacks, competition, consumer buying patterns shifting away from SUVs and other such pressures. The agency said that its future rating decisions will be based upon F's ability to restore market share, retain pricing power and reduce costs. F lost 5.08% to close at 10.47, GM lost 1.08% to close at 29.18, and DCX rose .05% to close at 42.15.
While the Fed tends to focus on the CPI and PCE data while talking down the impact or existence of bubbles, some of today's more negative news can be viewed as an "H-O" scale representation of a broader problem. F cites higher input material costs and waning demand, particularly in its less fuel-efficient mid- and full-sized SUVs. On the one hand, the Fed Chairman was unable to comment on the impact of higher oil prices on the economy. F can and did, however, with Friday's profit warning. Industrial and commodity-sensitive businesses are not alone in their woes, as the multiple hits from INFS, Ingram and CC demonstrate, with retailer CC indicating waning domestic demand for less oil-sensitive electronic gear and wholesaler Ingram seeking to "optimize" by downsizing and outsourcing.
Despite these ominous signs, however, the indices held together for the day. With options expirations distortions to be expected for the remainder of the week, however, it would be overly ambitious to read too much into the price action or lack thereof.
Complicating matters further, there's a full slate of economic data scheduled. Tomorrow we get the February Trade Balance, FOMC minutes and Treasury Budget for March, as well as the continuation of pre-earning announcements. As option writers attempt to steer the underlying securities toward their optimal strike prices to minimize the value of expiring options in-the-money, sudden whipsaws and reversals, as well as long, aimless narrow ranges, are more common and less predictable than usual. With all of these rocks being dropped in the point, Jim's maxim is most appropriate: "Enter Passively, Exit Aggressively."