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Market Wrap

Lights On but Nobody Home

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Lights On but Nobody Home

Bulls and bears returned to their screens on Monday full of anticipation. The first real decline in several weeks closed on Friday with the indices actually oversold on an intraday basis with prices just beginning to tick up. All were on the alert for an expected bounce. The Fed added $9 billion in overnight repurchase agreements, which yielded a net gain of $6.5 billion available to the market. With no economic reports, many were expecting a sizeable bounce.

The markets chopped sideways in the morning and eventually slid to new lows, but began to recover after 11AM. The bigger surprise, however, was a thorough lack of participation in either direction across the markets. QQQQ barely made it past half its average daily volume, and combined volume for the NYSE and Nasdaq struggled to surpass 2.6 billion shares. Throughout the day, volume breadth hovered around or just south of neutral, but the action was very slow overall, more appropriate to an afterhours session than the day after a big drop. What does it mean?

On a technical basis, a weak reaction to a strong move is generally thought to be corrective. That is, the true move on Friday was down, and the light volume, slow, hesitant bounce was merely a correction to it- a dead-cat bounce. If so, a break through today's lows tomorrow should be strong, sharper and on higher volume. "Forensically," it felt like the markets were waiting for something- possibly Greenspan's scheduled appearance in Beijing tonight (see below). In any event, it felt like a throwaway day, with short term traders getting stopped in both directions and the net change for the day insignificant to longer term traders.

Daily Dow Chart

The Dow traded as low as 10430 before bouncing to a high of 10481, at the lower end of Friday's broad range for a gain of 6 points. This gain was insufficient to impact the sell signal on the daily cycle stochastic, though we await a confirming cross from the Macd. 10440 is significant support, a break below which would trap all the buyers of the past 2 weeks and get the daily cycle downphase in gear. Bulls need a break above 10560 to reverse the bearish view. Note the potential for a reverse head and shoulders on a strong break above that level as a neckline. A move below 10380 would invalidate the pattern.

Daily S&P 500 Chart

The SPX added 1.49 to close at 1197.51, bouncing from a low of 1192.75 and failing at 1198.78. On the daily chart, the rise of the past two weeks has taken the shape of a rising expanding wedge or "bulloney bullhorn," a difficult pattern to read that generally breaks to the downside. That did not occur Friday or today as the lower support line was tested. While the oscillators are on the verge of their long awaited downphase, it's important to note that the pattern is still a rising pattern- that is, until it breaks, it's going up, not down. A break of today's low should be accompanied with stronger volume, and would set the stage for a daily cycle downphase. A bounce that clears today's high could run to the top of the wedge in the 1210 area, but again, these tend to be bearish patterns.

Daily Nasdaq Chart

The Nasdaq took out Friday's low and reached 2066 before its bounce to 2078, finishing at 2075 for a 4.33 point gain. Volume was impressively light, as it has been through much of the rally during the past few weeks. A failure below 2060 should have little support until the 2025-2035 area, which equates roughly to 10380 on the Dow. Above 2100, the bulls would reassert control. Again, it's worth noting that despite the bearish indicators, including the sky-high QQQQ:QQV ratio (see below), the low volume the toppy daily indicators and today's weak bounce, this is still a chart that has been rising for over a month. A close below 2060 would be the minimum price confirmation to suggest a rollover, with confirmation below 2040.

Chart of QQQQ and QQQQ:$QQV

Daily TNX Chart

The Treasury auctioned $34 billion of debt today via t-bills and cash management bills. The $12 billion in cash management bills generated 2.75 bids tendered for each accepted, at a high rate of 2.94%. The 13-week bill auction generated a bid to cover ratio of 2.06 at a high rate of 2.965%, while the $15 billion of 26-week bills fetched 2.5 bids for each accepted at a high rate of 3.06%. Foreign central banks took $9.4 billion of the total $32 billion in 13-week and 26-week t-bills.

Ten year treasury yields (TNX) held a relatively narrow range at the top of Friday's monstrous bullish doji hammer. That hammer launched from a morning low of 3.8% to nearly fill the gap left on the break below 4%. Today's range finished the job, touching 4% before falling back to Friday's highs. On the daily chart, an upphase is overdue with a bullish divergence on the 10-day stochastic. Ten year treasury bears/ TNX bulls will want to see a move above 4.05% to kick off that upphase. For the day, TNX finished lower by 1.7 bps at 3.962%.

Chart of Crude oil

Oil was weaker today as OPEC President Sheikh Ahmad al-Fahd al-Sabah of Kuwait told the press that current prices are too high and may warrant another increase in the production limit. However, with OPEC currently pumping at rates above the current production ceiling, a quota hike would have little effect. Reuters quoted Alegerian Oil Minister Chakib Khelil as saying, "Why should we change our policy? OPEC is producing at full capacity. We cannot produce more." The current quota is 27.5 million barrels per day, with Reuters surveying May's production for the OPEC nations at 27.94 million bpd. The next policy meeting is scheduled for June 15 in Vienna.

On the daily chart, we see a sharp daily cycle upphase testing last Thursday's high, with today's session high 55.55. The low was reached in the early afternoon at 53.90, with an end of session bounce closing the July contract -.55 or 1.00% at 54.475. There's confluence support at 53.70-.90, below which 52.25 support comes into view.

It was a quiet news day, with no major economic reports released and a thin set of reports slated for the week. Tomorrow's Consumer Credit will be the first, scheduled for 3PM, followed by Wholesale Inventories on Wednesday morning, then Initial Claims on Thursday. Friday will be the heaviest day this week, with Import Prices and Export Prices, the Trade Balance and in the afternoon, the May Treasury Budget.

S&P reported that company stock buybacks rose 91% in Q1 of this year, from $43 billion to $82 billion. The report emphasized the benefit to shareholders in having all those extra bids for their shares, as well as the antidilutive effect of reduced floats and the corresponding boost to EPS. The subtext to this trend is that companies may see fewer users for their money, such as investment in their core businesses and operations, other than buying back their own shares. Nevertheless, in the short term stock buybacks are bullish for stock prices, and S&P anticipates that 2005 will easily surpass 2004's level of repurchases by public companies.

In corporate news, Washington Mutual (WM) announced that it will purchase Providian (PVN) for $6.45 billion. The purchase price will be paid 89% in stock and 11% in cash. Providian shareholders will receive .45 WM shares for each PVN. The deal values PVN at $18.71 per share, just over a 4% premium to Friday's closing price. WM said that intends to retain PVN's management and infrastructure, and that the company will remain in San Francisco. WM expects the deal to close in Q4 2005, and to add to profits by next year on a cash and GAAP basis. Following the announcement, S&P placed PVN on credit watch "positive," highlighting the transaction as well as PVN's decision to move from the "deep" subprime market to the middle-to-prime market. WM finished the day lower by 2.48% at 40.54, while PVN lost 1.84% to close at 17.63.

Homebuilder HOV announced that the net value of its new contracts, being new contracts minus cancellations, rose 34% in May. The number of net contracts rose 16.9%. Despite the increase, both the net value and number of new contracts in California declined, but the company attributed the slump to its "conscious effort" to restrict sales too far ahead of its expected delivery dates in certain communities, as well as regulatory delays. HOV gained 1.42% to close at 61.46.

There was more on the AAPL-INTC move today as Steve Jobs addressed the annual Apple software developers conference in San Francisco, announcing that AAPL will drop IBM and switch to INTC chips for its PCs. AAPL has just under a 2% share of the global PC market, and the shift would constitute a win for INTC and a snub for Big Blue. There seems to be a consensus that the move would result in AAPL machines running with smaller, cheaper, faster and more efficient chips, but that the transition would nevertheless involve a great deal of risk and re-engineering costs. Analysts also highlighted the expected exodus of AAPL users following another architectural transition and the redeployment of software that such would entail. AAPL closed lower by .92% at 37.89, INTC lost .59% to close at 27.17, and IBM lost 1.04% to close at 75.

Computer graphic processor maker ATI (ATYT) warned that Q3 and Q4's projected revenue would come in light at $530 million, roughly 5% below its previous minimum expectations, with consensus estimates $574.5 million. The company said that while volume overall is up, demand has shifted toward the lower end of the PC and notebook market. ATYT got smoked for a 10.35% loss, closing at 13.68 on nearly 9 times its average daily volume.

The US-China textile dispute was highlighted again today by a senior Chinese official, Vice Premier Wu Yi, who stated that the issue could "serious harm the process of economic cooperation" if not resolved. Wu, who had worked as Trade Minister on the negotiations that saw China enter the WTO, told US Commerce Secretary Carlos Gutierrez, "You believe that trade must be fair, but you impose restrictions on textile imports from China." Beijing has recently removed export tariffs on its booming textile trade and criticized the EU and US for its imposition of import controls.

Tonight, Chairman Greenspan), ECB President Jean-Claude Trichet, Bank of Japan Deputy Governor Toshiro Muto and People's Bank of China Governor Zhou Xiaochuan are slated to address the International Monetary Conference in Beijing.

For tomorrow, the question will be whether today's low volume, high-anxiety bounce was a mere correction to Friday's decline, or a stealth accumulation ahead of a retest of the rally highs. Bears need to break today's low to build their case for the former, while bulls need to match or top Friday's high to stall the decline building in the daily cycle. Today was a lower-low, lower-high session, and bulls will want to see today's high taken out as a first sign of potential trouble for the bears.


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