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Market Wrap

Intel Does It Again

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I've lost count how many times Intel has pleased the market with its earnings/guidance which is then followed the next day by a market that tanks. You can almost take that play to the bank--after Intel gets the futures market excited the evening it makes its announcement, the following morning sees a bit of a rally and then the big guns step in to sell into the rally. Why they do this I do not know but it's happening too many times to ignore. Today was a classic post-Intel kind of day with a -175 point reversal in the DOW from its morning high.

The morning started with a market-spooking jump in the CPI numbers that were released at 8:30 am. The U.S. consumer prices jumped a seasonally adjusted +0.6% in March while core prices jumped +0.4% which was higher than the expected +0.5% and +0.3%, respectively. The reason this spooked the market (the pre-market futures) is because the higher inflation rate sparked concerns about the Fed's need to increase rates at a faster clip. It has been assumed they'll continue to slowly raise rates by only 0.25% and maybe not many more before they stop. Today's CPI numbers sparked fears about a 0.50% increase on May 3rd and the fear is the Fed will choke off economic growth. The Fed is stuck between a rock and a hard place on rates since they'll need to fight inflation (or worries about it anyway) but they know if they raise rates they'll hurt economic growth (credit will become more expensive for expanding companies and for consumers' insatiable appetite to consume). The housing market will be especially vulnerable to rising rates which will then further affect the economy in a negative way. Equity futures got slammed to the downside during pre-market, as did the bonds, but then as if by magic they v-bottomed and shot back up to their pre-CPI levels. At the same time bonds barely moved from their spike lower. It smelled of manipulation to me. After the cash market opened it got a little volatile while continuing to chug higher from yesterday's close, which lasted for about an hour. But then the selling started and it never really stopped for the rest of the day, closing very near its lows for the day.


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Inside the CPI numbers, increases were seen in energy (I'm shocked!), clothing and hotel prices which were offset somewhat by falling prices for new cars and prescription drugs. The gain in core CPI was the largest since August 2002 and the overall CPI increase was the largest since last October. March saw energy prices increase 4%, the highest since last October, and gasoline prices increased 7.9%. Food rose 0.2% lead by increases in beef, poultry and vegetables while pork and fruit prices declined. Housing prices rose 0.5% which was the biggest increase since January 2001. The largest component of this though was hotel fares which climbed a record 3.9%. Residential rents increased a more modest 0.2% and home ownership costs increased by 0.3%. Apparel costs increased a large 0.8% but this was attributed to seasonal factors and is expected to ease once a flood of imports from China makes it into the country. Unless of course Congress gets its way and slaps a 27.5% tariff on Chinese goods. Then watch what happens to our CPI! The Trannies should be doing better than they are (see chart later) considering the fact that transportation prices increased by 1.9% and airline fares rose 2.7% but obviously this hasn't been enough to offset higher fuel costs. This increase in airline fares was the most since June 2001. One look at the Transport Index (below) does not inspire bullishness.

Let's review some of today's charts, starting with the DOW:

DOW chart, Daily

After losing support at January's low, the DOW went into freefall and paused at the bottom of a parallel up-channel. But after only two days to allow the bears a drink of water, they renewed their selling today. The first potential support, from a Fibonacci standpoint, is where we would have two equal legs down from the March 7th high. That would be at 9920. The next price level support is not until the August/October lows in the 9700-9800 range. The rally from October was steep and fast and consequently doesn't offer much in the way of price level support between the January low and the October low.

SPX chart, Daily

SPX looks bearish here because it dropped below its 200-dma's, came back up for a test for two days and then dropped hard today. This makes it look like a kiss good-bye on this important moving average. A 62% retracement of the August 2004 to March 2005 rally is at 1126 and I would expect some support to be found there. If that doesn't hold, the bottom of the longer term up-channel sits near 1110 and then of course below that we have price level support at 1090 and 1060, the October and August 2004 lows, respectively.

Nasdaq chart, Daily

The NAZ actually looks like it has the best bullish potential, at least as measured by both Fib and price level support. It's been floundering around its 62% retracement level at 1920 and the previous price lows found in October. If it doesn't hold here, and it won't if the broader market sinks lower, next price level support is near 1850 and then the August low near 1750.

While oil prices have generally been heading higher, we've seen a significant pullback from the level reached about two weeks ago. Today's inventory report showed crude oil inventories fell 1.8M barrels, versus an expected 1.4M barrels, while gasoline inventories fell 1.5M barrels versus only a 275K expected decline. Do you suppose that will translate into cheaper gas prices at the pump? Me neither. But increasing inventories and decreasing demand (if the economy is slowing down) should continue to depress the price of oil.

Oil chart, May contract, Daily

From oil's high of $58.21 on April 4th, it dropped briefly below $50 on the 14th and 18th before rebounding slightly, closing at $52.50 today. But as shown on the chart, after oil fell out of its steeper up-channel it now appears to be headed to the bottom of its longer term up-channel which is currently near $46.50. At the same time its 200-dma's are rising and may arrive at its uptrend line about the same time it tests that level. I would expect we'll see strong support in the upper $40's should it pull back to that area.

Oil Index chart, Daily

The oil index shows a very similar picture to oil's chart. After breaking its steeper up-channel and then dancing at the top of its longer term up-channel, it looks like it should head lower. As with oil, it looks like the 200-dma's will coincide with its uptrend line, the bottom of the up-channel, and would likely provide strong support. If you're looking to buy any stocks in this index, you should be hoping to see a further pullback to provide a long term buying opportunity. Looking at this chart I'd say it's a little early to be doing your shopping.

Transportation Index chart, TRAN, Daily

As mentioned above, the Trannies don't look so good here. The index dropped straight through its 200-dma's, bounced slightly to give it a kiss and then fell away today. This is not bullish price action. If it can't hold near its 50% retracement of the rally from May 2004, the next potential Fib support is at 3181 which coincides closely with the July 2004 high near 3200.

U.S. Home Construction Index chart, DJUSHB, Daily

The last chart shows what's happening in the home construction market. After falling out of its steeper up-channel it dropped back inside its longer term up-channel. It banged around at the top of this longer term up-channel and then fell sharply away. Are you beginning to see a pattern in all these charts? The sell-off we've witnessed over the past month or so has been broad based and this makes it that much more bearish. It may be too early to call it but this has the makings of the start of the 2nd leg down in the long term bear market that started in 2000. Watch the decline in this index to see if it finds support at its 200-dma's. If not then the bottom of the longer term up-channel may provide support. A break of that uptrend line would be very serious and would tell us unequivocally that we're likely into a bear market. Rising interest rates will not only choke off economic growth but it will also kill the housing market. This index may be telling us it's already happening. Yesterday's significant drop in new housing starts is also telling us that. Keep a close eye on this index.

Sector action today saw mostly red, no surprise considering the triple-digit loss in the DOW. The only green sector on my watch list was the internet index (thank you Yahoo). The leading losers were the broker index, the SOX, airlines, finance related, retail, and energy. The Fed Beige Book was released this afternoon and in summary showed choppy expansion in the U.S. economy with some of the districts reporting uneven growth. Some of the districts show poor retail sales (notice retail was a leader in the loss column today) but interestingly said that the retail sector is demonstrating increased ability to raise prices. So they can increase their prices but they must be selling less. Hmm, somebody needs to teach them the supply vs. demand marketing model. The factory sector continued to show solid growth. As part of what we saw in the CPI numbers, the Beige Book reported upward price pressure lead by energy prices.

We're in the middle of earnings season and generally speaking it's a mixed bag. But it seems not to matter. What matters is investor mood and it's currently bearish. Investor mood is what swings the market (and the economy) and the earnings of companies will then reflect that, not the other way around as most believe. Intel's good earnings numbers last night tanked the market. Huh? Don't ask why since it doesn't make any sense. Go with your charts and sell when you see sell signals and buy when you see buy signals. Simple, no? If only. The market is clearly oversold and we only got a small relief bounce this week. It seems like we should be close to some good support levels but don't fight the tape or sell signals on your charts. If you only like to be long the market, take a breather here and stay flat. Wait for some buy signals to emerge. If you like to short the market, we're in a downtrend so it's your game right now. But don't press your luck since a bottom could be the v-bottom variety. Follow your trades down with your stops and don't give a bunch back. It's better to reinitiate your short position instead of giving it all back. Look for more selling tomorrow, at least early, but start thinking about probing for a bottom if you're a short term trader. Longer term traders can follow their stops down or if you're looking to buy, wait for a better buy signal. Catching falling knives is cutting up a lot of bulls right now. Good luck tomorrow in your trading.

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