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Market Wrap

Pressure cooker gonn'a go pop!

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Pressure cooker gonn'a go pop!

It's barely summer and already its BEAR season!

A surge in oil prices ahead of tomorrow's weekly inventory data may have been the saving grace for broader equity market bears with July Crude Oil futures (cl05n) settling up $2.63, or 5.06% at $54.60 on the NYMEX. Energy inventory data, which is usually released Wednesday each Wednesday morning, will be reported tomorrow morning due to the Memorial Day Holiday.

Despite the surge in oil prices, stocks finished markedly higher with the S&P 500 Index (SPX.X) 1,202.22 +0.89% finishing off its best levels of 1,205.64, with traders booking some gains in the final hour of trade.

Today's time-line shows a flat-to-lower open, but buyers came to the table in force at the 10:00 AM EDT hour with a flurry of buy program premiums catapulting the major indices higher. At 10:00 AM, the Institute for Supply Management said its manufacturing sector continued to expand, albeit at a slower pace, with a May reading of 51.5 vs. April's 53.3 reading. Figures above 50.00 signal expansion, while readings below 50.00 are considered to show contraction.

I do think continued dollar strength, which had the euro falling to its lowest level against the dollar in eight months, combined with a strong bout of Treasury buying at this morning's open is in part reflecting a "flight to quality" as voters in the Netherlands joined France in rejecting the EU constitution, and putting economic reforms on hold. I also think there's some bears on the wrong side of this trade, fueled in part by April's Treasury budget surplus.

However, a further surge in buying among the major Treasury maturities was found when the May ISM figures were released as investors contemplated that the Fed may be nearing its final stage of rate hikes. The benchmark 10-year yield ($TNX.X) plunged 9.9 basis points to close at 3.907%, a staggering move below the psychological 4.0% level. Today's 10-year yield close was the lowest since April 1, 2004!

Further fueling the hunger for Treasuries was comments from Federal Reserve Bank of Dallas president Richard Fisher, who suggested the current rate tightening cycle is drawing to a close.

The FOMC will meet later this month and Fed Fund futures continue to suggest a 100% probability of another 25-basis point rate hike to 3.25%. After that, the FOMC doesn't meet until August 9. A quick look at September Fed Funds (ff05u) 96.54 +0.03%, which has been creeping higher since late March now suggests an 85% probability of Fed Funds rising 50 basis points, to 3.50%. In March, this contract was predicting an 85% probability that Fed Funds could read 3.75%.

If you bought a house, or refinanced a mortgage in the past year, let alone in late March, you should call your mortgage lender and look into a refinance. In late March of this year, the 10-year yield ($TNX.X) stood at 4.6%. This would equate to a decline of 70 basis points in just two months. Here too, some bears look to be caught on the wrong side of the trade, which I think could have the 10-year yield ($TNX.X) falling to 3.77%!

Speaking of houses. The Dow Jones Home Construction Index (DJUSHB) 935.67 +1.91% traded an all-time high intra day.

Market breadth was positive at both exchanges, where bullish leadership prevails. The 220 new highs at the big board was the largest number since March 7 of this year, when daily NH/NL readings were 427:16. The NASDAQ's NH/NL reading today compares favorably to a May 13 reading of 131:151 and here too getting close to a March 7 reading of 171:47.

U.S. Market Watch - 06/01/05 Close

Broad gains were found across the sectors. Even the AMEX Gold Bugs Index ($HUI.X) 190.65 +2.62% found gains despite dollar strength! Not just today, but over the past week (5-day Net %).

This action may begin to suggest that dollar softening could soon take place. Remember how gold stocks weakened several month ago despite dollar softness?

Still... in a raging bull trend like the equity markets are in, the rising tide will lift all boats as bears get sideways. When that happens, they can start buying back what profits remain in even the weakest of sectors, for fear gains could quickly become losses as bullishness feeds on itself.

So what happened to "dollar strength = broader equity weakness?" We haven't heard too much from those bearish bloggers of late have we?

Once again the lesson of an equity market, or say an economy, or participants view of the economy is much more complex that what the dollar is doing (up or down). One could say the same about oil's price movement and broader equity prices. I'll throw in Treasury yield as another KEY INGREDIENT, as YIELD will have major impact on consumer borrowing costs.

The REASON you don't hear about dollar strength being bad for equities from the bearish blogger is that it NO LONGER HOLDS TRUE! We've seen it before, we'll see it again.

The equation may look something like this ....

Treasury YIELD + Dollar + Oil = Equity prices/economy

The trader/investor that FOCUSES on just one part of the equation may find short-term success, but when the trade turns, like the dollar has, and equity prices have (they're now moving in unison), the pain can be great for the broader equity bear that focuses on just one dynamic (the dollar for instance).

What's changed? Oil is still high, however Treasury YIELDs have fallen sharply, thus the "reflation" for equities.

Now... I have learned through confidential sources, that a bearish pool of bloggers are forming with the thought that a sharp rise in Treasury YIELD will then become the doom and gloom for the broader equity markets!

This HAS TO BE IT! It isn't the dollar! It's the sharp decline in Treasury yield that has fueled this bull rally! When it reverses, so will equities!

Ooops! That wasn't true as recent history would prove out. In November, the 10-year yield ($TNX.X) backed up from 3.85% to 4.4%. Yet the S&P 500 Index (SPX.X), a good index for broader equity observation, rose from 1,100.00 to 1,180.00.

I want to quickly cover the SEPTEMBER Crude Oil Futures (cl05m) chart, as this is the contract from which we find resistance appearing out of nowhere in the JULY Crude Oil Futures (cl05n) today.

Oil trading is a game of now (July) and then (September).

Do NOT assume that oil's rise is being "ignored" as not having a negative impact on stocks, or the economy! It DOES! But also remember, oil's price is also benchmarked to the U.S. Dollar!!!!

What's the dollar been doing? A SIMPLISTIC look at the 5-day % Net would show the DX00Y up 2.42%. JULY Crude 5-day % Net would show it up 6.64%. Yes, crude oil's rise is TAXING, but not as bad perhaps if the dollar was DOWN 2.42%. Now throw in the DECLINE in Treasury YIELD. There's some "taxing" relief there. Especially at the CONSUMER level.

September Crude Oil Futures (cl05u) - Daily Intervals

Not all that dissimilar to Jim Brown's chart of July Crude in last night's wrap, we do see September Crude (cl05u) breaking boldly above trend. Today's gap above my previously defined near-term "zone of resistance" from $52.73-$52.95 is a SIGNAL that shorts are getting squeezed here too. And they'll be jittery as heck into tomorrow's energy reports.

I (Jeff Bailey) would now have to feel that the NEGATIVE psychology of oils rise is going to have broader equity bulls eager to pull the trigger on gains on a break above $56.75 as overhead supply becomes limited.

What are broader equity market BEARS thinking. I think they've got to be thinking.... "Oil had better press higher for my bearish broader-market scenario, as I'm not getting any help from the dollar and Treasury YIELD."

Oil is in play again as a possible capper to this broad equity rally.

You know where the Dow Transports ($TRAN) are trading. And we should all be up to speed on this index. They couldn't close the deal at 3,650 today and remain pinned pretty much between 3,600 and 3,650. You can feel the pressure continuing to build.

Dow Transports (TRAN) - Components

It certainly looked like the TRAN could make the run for 3,650 and become the "key sector" for confirming strength to this broader-market rally. Give some "market theory" support to the broader averages.

But unless we've had our head in the sand as it relates to fuel prices and the commercial airline sector. I showed a similar table of the TRAN components in today's Market Monitor just after the TRAN had traded its high of the session.

What drives home the thought that oil is still in play as a "rally killer" is the 5-day and 20-day Net% gains the TRAN has gotten from many of the commercial airlines. Today, as oil prices really started to get a move on, this group then "weighted" on any thought of TRAN above 3,650.

If there is EVERY and index at this point that shows a test for STRENGTH, its the TRAN.

I sense, observe GREAT PRESSURE BUILDING here.

Dow Transports (TRAN) - 10-point box

We last looked at this chart on 05/18/05 as the TRAN ramped back higher. I want to show you this chart in hopes you get the observation that PRESSURE is building. Bulls defend above 3,580 wish suspicious bar chart low closes at 3,600 even. Bears defend at previously identified 3,650 and "collision pending."

S&P 500 Index (SPX.X) - Daily Intervals

On Friday, the S&P 500 Bullish % ($BPSPX) reversed back up to "bull confirmed" status with a 58% reading. Today (Wednesday) we saw an additional 1.2% gain, or a net gain of 6 stocks to reversing higher point and figure buy signals. Since Wednesday of last week, we've witnessed a net gain of 3.8%, or 19 stocks to a reversing higher point and figure buy signal.

Tonight I show a bullish resistance trend (upward trend that was broken to downside, that can become resistance when tested from underneath). The anchor point is the January 24th relative low.

NASDAQ-100 Trust (QQQQ) - Daily Intervals

What's happening here? Last week we looked at this chart of the QQQQ. Sure looks as if some bears were doing some low risk shorting at that 61.8% retracement the last three sessions. Not bad with a tight stop just above. Meanwhile, buyers inflict some pain.

I also mark a similar "bullish resistance" trend from the QQQQs Jan. 24 relative low. With QQQQ back on that trend, sellers below $37.52 should be getting eager to cover any pullback, unless oil is at $60?

Last week I also showed a technique for using the point and figure chart, where we set the box size to a 1% box. As of tonight's close, a 3% pullback would equate to $37.89.

Today, the NASDAQ-100 Bullish % ($BPNDX) saw a net gain of 4 stocks to a reversing higher point and figure buy signal and remains in "bull confirmed" status at 51%. Bulls now have advanced the ball to "midfield." It was on May 18 that this narrower indicator (compared to S&P 500 Bull %) reversed up to "bull confirmed" at 40% bullish.


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