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Market Wrap

Sellers' Siesta

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Sellers' Siesta

Equities rose today, reversing all of Friday's losses on light volume. The indices followed through on Friday's end-of-session bounce with a steady rise that closed at their session highs, above Friday's highs.

The volume just wasn't there, however, with QQQQ trading just over half of Friday's volume, and combined NYSE and Nasdaq volume failing to reach 2.9 billion shares. Breadth was positive, with 2.7 advancing NYSE shares for each declining and 2.48 advancing Nasdaq shares for each declining.

Daily Dow Chart

The Dow rose from a low of 10138 to close 3 points off the high at 10252. Friday's decline was engulfed by today's higher high and higher low. On a daily cycle basis, however, we see the indicators starting a new downphase as of last week. On that basis, any upside should be corrective, and today's light volume fits the profile. Provided that the current bounce fails at or below the 320 area, any upside would be a retest of the young downphase. A break of 10080 support will confirm it. The Macd is a source of caution on the bear side, however, because it has so-far failed to confirm last week's stochastic sell signal. Any weakness tomorrow should be enough to do it.

Daily S&P 500 Chart

The SPX gained 11.64 to close at 1165.69, .07 off the 1165.75 high. The rollover on the daily cycle indicators is at the same stage as that of the Dow, with a sell signal on the 10-day stochastic awaiting Macd confirmation. The 10320 Dow resistance level equates to 1170 on the SPX, and daily cycle bears will be looking for a failure at or below that level confirmed by a break of 1146. 

Daily Nasdaq Chart

The Nasdaq refused to break on Friday, holding in the green as the Dow and SPX sold off. It gained again today while underperforming its peers slightly, gaining 17.65 to close at 1994.43, .04 of a point off the high. While today's percentage gain was less than that of the Dow or SPX, the daily cycle has yet to roll over. The indicators remain on buy signals, though the 10-day stochastic is overbought and due for a downphase. 1996-2000 resistance is in play, above which the 2020-25 level comes into view. However, bulls need to be close on their stops with the combination of today's light volume, toppy daily cycle and, of course, op-ex week kickoff. A break below 1975 will target 1960, below which we should see the first daily cycle sell signals.

Daily TNX Chart

The Treasury auctioned $30 billion of 13- and 16-week bills today. The 13-week auction generated a modest 1.95 bids tendered for each accepted, with a high rate of 2.8%. The 1.95 bid-to-cover ratio was the lowest since the beginning of April and below the last 5 years' average. Foreign central banks took $2.997 billion of the total. The 26-week t-bills had a bid-to-cover ratio of 1.95 as well, a high rate 3.07%, and foreign central bank participation of $3.497 billion of the total. As with the 13-week auction, the bid-to-cover ratio on the 26-week bills was the weakest in over a month and below this year's average, indicating weak demand for US treasuries today.

Ten year treasuries held onto light gains for most of the day following the disappointing Empire State Index (see below), but gave them back in the final half hour of the cash session. Those light gains had been impressive following as they did on the heels of last week's bond rally. Ten year treasury note yields (TNX)(TNX) tested last week's low at 4.1%, on a fresh and very early daily cycle sell signal. A break below 4.1% has next support in the 4.07% area below which the February lows come into view. For the day, TNX closed higher by 0.4 bps at 4.125%.

Chart of Crude oil

Crude oil declined again today, doing its best to frustrate bulls and bears alike. It dropped as low as 47.575 before rebounding to 48.60 at the close for a .075 loss. On the daily chart, 48 continues to serve as support on a closing basis, with each push below it printing an intraday doji reversal. However, bulls need a break back above the 49.50-.75 resistance level to generate some upticks in the downtrending daily cycle indicators.

The lone economic report today was the New York Fed's Empire State Index for May, which was released at 8:30. The Manufacturing Index dropped from April's 2.0 reading to -11.1 in the current month, well below expectations of +11. This was the weakest reading since April 2003. The negative reading in this diffusion index reflects economic contraction. The Employment Index fell to 0.2 from last month's 8.5 reading.

Overnight, Chinese Premier Wen Jiabao stated that China will not be swayed by political pressure to revalue its currency or reconsider its exchange rate policy. Jiabao characterized the value of the Yuan as a matter of Chinese sovereignty, and said that China will follow "market principles" but would not be pressured on matters of policy. He added, in a blinding glimpse of the obvious, that the imposition of tariffs or quotas would "not help the healthy development of Sino-US trade."

The Treasury reported that net inflows of foreign capital to US assets fell to $45.7 billion in March, $8.3 billion less than the trade deficit in March and well below estimates of $65 billion - $75 billion. This was the weakest reading since October 2003's $26.5 billion, with foreign central banks net sellers of US Treasuries for the firs time since August of that year. Foreign central banks sold a net $14.5 billion in US securities in March. February's number was revised down from $84.5 billion to $84.1 billion. Net foreign purchases of US securities declined to $60.1 billion in the current month from February's $98.1 billion reading. 

Marketwatch reported that the CSFB Tremont Hedge Fund Index lost 1.04% in April, the worst showing since July 2002 when it declined 1.35%. As a result of that decline, the index is now down 0.11% for the year. Convertible bond arbitrage funds lost an average of 3.13% for the month, and managed futures funds lost 3.45%, bringing their year-to-date results to -8.25%.

It was a quiet day for corporate news as well, with earnings season nearly behind us. LOW reported a profit of $590 million or 74 cents per share for Q1, up from 2004's Q1 earnings or $452 million or 58 cents on sales that rose from $8.68 billion to $9.91 billion. Gross margin rose from 33.06% to 34.45%. Expectations had been for 76 cents EPS and revenue of $9.97 billion, however, and LOW got whacked for over 1% in premarket trading. LOW closed higher by 5.56% at 55.80.

UPS announced its agreement to purchase Overnight Corp. (OVNT) for $43.25 per share or roughly $1.25 billion in a deal expected to close during Q3. The acquisition would expand UPS' ground freight services in North America with a variety of "truckload" and "less-than-truckload" services, bringing it into more direct competition with FDX. The proposed purchase price for OVNT represents a 46% premium to Friday's closing price. Just before the close, S&P placed OVNT's debt ratings on credit watch positive, citing the UPS deal, and affirmed UPS's credit rating as well. UPS closed +1.43% at 73.18, and OVNT closed higher by 43.75% at 42.52 on just under 25x its average daily volume.

Brocade (BRCD) disclosed that it is cooperating with the US DOJ and the SEC as they investigate the company's stock option practices. The company also revealed that it has overstated its 2001-2004 earnings by up to $52 million in connection therewith, and will restate earnings to include up to $3.2 million in option expenses for 2003-2004. This follows January's restatement that had eliminated $41 million of net income for 2003-2004. The company stated that none of the expenses at issue will affect revenue, cash or non-option related expenses. BRCD lost .72% to close at 4.14.

Infospace (INSP) announced a $100 million stock buyback with CEO Jim Voelker stating that the company feels that the market price fails to reflect the company's true value. A quick flip through the company's list of recent insider transaction reveals no purchases and several millions of dollars' worth of sales of the company stock since January 2004, but this could very well be for diversification purposes among the company's management. INSP rose 3.56% to close at 30.26.

After the bell, Agilent (A) announced Q2 earnings tat declined from 2004's Q2 $104 million or 21 cents to $101 million or 20 cents (excluding items) on sales that declined 8% to $1.69 billion. This quarter's decline met analyst expectations however, and A expects to see a "modest rebound" in its semiconductor lines for Q3. A finished lower by 1.96% at 21.56.

The economic calendar heats up tomorrow, with the Producers Price Index, Housing Starts and Building Permits, Industrial Production and Capacity Utilization before the opening bell. Today's light volume gains will be tested, with the Nasdaq running out of racetrack on its daily cycle upphase and its peers trading on preliminary sell signals. Any bounce that fails to break the upper resistance levels for the Dow and SPX should reverse quickly, as such would confirm the preliminary sell signals printed at the end of last week. However, with op-ex week well known for its false breaks, sudden moves and long, senseless ranges, traders will want to exercise more skepticism than usual. 


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