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Market Wrap

Treasury Hosts Bear-B-Cue

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Equities spent most of the session drifting within yesterday's range on light volume as various intraday cycles turned lower. That changed at 2:30, when the Treasury released its semiannual currency report. In it, the administration reiterated its threats against China should the ongoing currency peg not be released in the future, but avoided any immediate or formal sanction.

The markets cheered the news, with treasury bonds managing to hold their earlier gains and equities rocketing upward out of their range, breaking to new highs for the move. Volume breadth had been negative for most of the day but recovered, finishing positive on both exchanges, 2.49 advancing NYSE shares for each declining, 1.29 advancing Nasdaqs for each declining. 

Daily Dow Chart

The Dow, on fresh daily cycle sell signals coming out of last week, added 79 points to close at 10331, 5 points off the high. The daily cycle downphase stuttered but did not abort. In last night's Market Wrap, I noted that the Macd confirmation had yet to print, and that remains the case tonight, with the signal line bouncing. Pricewise, the 10320 resistance was broken, but until the May high has been violated, the possibility remains that we're merely seeing a retest of the daily cycle high. Above 10400, the downphase will reverse early, while a break below today's low at 10213 will set up a test of 10150, below which downphase should confirm.

Daily S&P 500 Chart

The SPX hit a high of 1174.35, closing just below it at 1173.80 for a 8.11 point gain. The daily cycle downphase stalled but did not reverse. A closing break above 1176-77 resistance should be enough to do it however, and bears need to see a break of 1160 very soon to avoid an upside whipsaw in the daily cycle stochastic. While the downtrend from March remains mostly intact, one more day like today could be enough to change it.

Daily Nasdaq Chart

The Nasdaq closed higher by 9.72 on its session high of 2004.15. It was a small gain, but it crossed important resistance at 1996-2000 and extended the daily cycle upphase deeper into overbought territory. Next resistance is at 2020-2025, but with price hugging upper Bollinger resistance and overbought, the extended upphase will have to begin a trending move to reach or surpass it. More bullishly, however, the downtrend from the January high is in jeopardy, and the past week has shown us a steady pattern of higher highs and higher lows. Bears need a break back below 1996, with a close below 1975 to generate the first bearish kiss on the daily cycle stochastic.

Daily TNX Chart

The Treasury auctioned $12 billion worth of 4-week bills today. The auction drew a bid-to-cover ratio of 2.36 with a high rate of 2.55%. Foreign central banks took a modest $2.4 billion of the total. Just like yesterday with the 13- and 26-week auctions, today's 2.36 bid-to-cover ratio was the lowest since the beginning of April and below the average for each year since 2002, demonstrating weak demand.

All eyes were on the Treasury at 2:30, when it released its current report. It was widely expected that the report would cite China as a currency manipulator in view of its ongoing Yuan peg to the US Dollar. Instead, the report stated that the US will be prepared to find China guilty of manipulating its currency if it fails to alter its current policies, calling the peg a threat to global growth.

Treasuries remained firm throughout the session, ticking lower following the 2:30 release but closing in the green after touching a new 3 month high. The ten year note yield closed lower by 0.8 bps at 4.117%.

Chart of Crude oil

OPEC released its monthly report this morning, which suggested that daily world demand would decline by 80,000 barrels per day to 83.94 billion barrels on high prices and weakening economic growth. However, the report also stated that OPEC would have to pump at its highest rate ever to meet demand during Q3 and Q4, because of a steep decline in output from non-OPEC oil producers, notably Mexico and Russia. OPEC expects demand to reach 28.9 million barrels per day in Q3 and 30.5 million bpd in Q4.

Tomorrow will see the weekly inventory data, with expectations for a 900,000 barrel increase in crude oil inventories, a 620,000 barrel increase in gasoline supplies and 1 million barrel increase in distillates.

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Later in the session, Saudi Oil Minister Ali al-Naimi reassured investors that global oil demand would not exceed reserves, and that Saudi Arabia possessed the capacity to meet high sustained demand should such be required. Following his statements, the price of front-month crude oil futures rose back to positive territory. The CEO of Saudi Aramco, Abdallah Jum'ah, reiterated the statement for those who might not have been persuaded by the state oil minister, stating that his job is maintain between 1.5 and 2 million barrels' worth of excess capacity at all times. Marketwatch reported his statement as, "By God we do have the resources." Crude oil fell back to unchanged in the minutes following his statement, declining further as the session wore on.

Crude oil finished higher by .25 at 48.85.

The Labor Department reported the Producer Price Index rose 0.6% in April, exceeding forecasts for a 0.4% rise. Net of food and energy, the Core PPI rose 0.3%, again exceeding the expected 0.2% increase. The PPI has risen 4.8% from April 2004, and the Core PPI is up 2.6% y-o-y.

Also at 8:30, the Commerce Department reported that Housing Starts rose 11% to 2.038 million units (annualized), exceeding expectations for 1.96 million units. Building Permits rose to a 2.13 million unit annualized rate, the largest gain since December 2002.

At 9:15, the Federal Reserve reported that US Industrial Production declined 0.2% in April, missing estimates for a 0.2% increase. Capacity Utilization fell from 79.4% in the previous month to 79.2% in April, missing expectations for unchanged at 79.4%.

Home Depot (HD) reported earnings that rose 13.6% from $1.1 billion or 49 cents per share to $1.25 billion or 57 cents in the current quarter on sales of $18.97 billion. Gross margins reached a record 33.5%, with the price of the average item up to $58.25. Expectations were for 55 cents and sales of $19.26 billion. The company announced that it plans on closing 15 of its upscale Expo Design Center stores, and to convert another 5 to Home Depot stores. The remaining 34 profitable Expo stores will continue to operate. HD gained 3.99% to close at 38.86.

BJ's Wholesale reported net earnings that rose from $16.1 million or 23 cents in Q1 2004 to $18.6 million or 27 cents, beating estimates by 3 cents. Revenue rose from $1.65 billion to $1.81 billion, beating estimates by $100,000. BJ closed higher by 4.56% at 29.59.

Staples (SPLS) reported net income for Q1 of $159 million or 21 cents on revenue of $3.9 billion, up from $125 million or 17 cents in the year-ago quarter. These results beat by a penny, the company citing an increase in North American sales for the gains. SPLS rose 4.97% to close at 21.56.

After the bell, HPQ announced Q2 earnings that rose from $884 million or 29 cents in 2004's Q2 to $966 million or 33 cents on revenue of $21.57 billion. Excluding items, earnings were 37 cents. Analysts were expecting earnings of 36 cents on revenue of $21.4 billion. The stock was higher by .85 as of this writing, trading 22.40. 

AMAT reported an 18% decline in net earnings, at $305 million or 18 cents for the quarter, down from $373 million or 22 cents in Q2 2004. Revenue declined to $1.86 billion, an 8% drop. Nevertheless, these results beat estimates by a penny and $600,000 on revenue. The stock dropped 23 cents afterhours, trading 15.81 as of this writing.

Tomorrow, the Consumer Price Index and the Core CPI are scheduled for release at 8:30AM. The markets showed substantial strength today despite the less than stellar volume. The question that remains is whether the Nasdaq was seeing a terminal move in the toppy daily cycle upphase, or whether it's the start of a trending move and, for the Dow and SPX, an upside whipsaw and bear trap. The influence of op-ex week adds a further layer of confusion. Equities had been weak ahead of the 2:30 Treasury release, but obviously not weak enough.

With so many conflicting factors, the simplest approach will be to follow price and watch the nearby support and resistance levels. Upside should be more tenuous than downside due to the toppiness in the daily cycle oscillators. Further gains tomorrow have the potential to ignite covering from whatever shorts remained after this afternoon's sharp rise. Whether such a move will be able to attract bulls from the sidelines will be the issue.

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