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Market Wrap

Op-ex Week Kickoff

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Op-ex Week Kickoff

This month's option expiration week began with a whimper, with light volume and, save for one hour this morning, quiet rangebound trading. The markets opened within Friday's range, chopped sideways-lower, then launched at 10AM, peaking just past 11AM, following which a slow grind lower ensued.

As is so often the case during op-ex week, most of the moves today seemed to be false and in the end, the net change for the day was minimal. The big story was the in the currency markets as the US Dollar hit nine month highs against the Euro and Yen. The US Dollar Index surged as European Central Bank chief Otmar Issing told a reporter that soft growth in Europe could prompt the ECB to cut European rates. This effect was compounded by comments from Philadelphia Fed President Anthony Santomero in a speech on Saturday to the effect that US rates may continue rising at a measured pace, and Greenspan's similar comments last week.


In equities, the internals started negative-to-mixed and spent most of the day in positive territory, with volume breadth finishing 2.1:1 in favor of advancing NYSE volume and 1.45:1 in favor of advancing Nasdaq volume. Overall, however, volume was light, as it has been for most of the past month. The combined NYSE and Nasdaq total fell way short of 3 billion shares at 2.74 billion. QQQQ came in 10 million shares below its average daily volume of 92.5 million.

Daily Dow Chart


The Dow rose as high as 10589 on the morning blast, only to settle back to a gain of 10 points at 10522. The 10474 low came just after the cash open. Today's tall doji star resulted in yet another confirmation of the 150 point range that has prevailed for the past month, with price continuing to hug the 10500 level. Op-ex week is usually a bad time to expect a significant range break, as option writers attempt to steer the price toward whichever strike will allow their short contracts to expire worthless. Unfortunately for bears, the current range has so far coincided with the ongoing daily cycle downphase, which appears to be entirely corrective. If this sideways range is the extent of the daily cycle's downward force, then the next upphase could pack a wallop. 


Daily S&P 500 Chart


The SPX fared better today, adding 2.71 points to close at 1200.82. The opening dip bounced from 1194.51, failing at a high of 1206.03. 1194 has held for a number of tests this month, with 1192 the current range bottom. As with the Dow, the downside has been minimal despite the daily cycle sell signal that printed at the beginning of the month. I would expect a break of either end of the range to be directional if confirmed by a surge in volume- so far, volume has been in very short supply since last month.

Daily Nasdaq Chart


Nasdaq bears are faced with an even narrower range, with 20 points separating today's high and low. Today's candle mostly overlapped all of last week's range. If indeed the Nasdaq will be held in this area for Friday's op-ex print, we can only hope that there will be more range within which to work before then. So far, the past week has been a fine example of "tractor-beam" trading, except that it appears to have commenced a week early. Beyond the 2060-80 range, upside resistance is at 2095-2100, support at 2040 and 2025.

Chart of QQQQ with $QQV overlay


In last week's Market Wrap, I correlated the ratio of QQQQ to the QQQQ volatility index (QQQQ:$QQV) with recent tops and bottoms for QQQQ. I've tried a different format and came up with a different but similar relationship, with the QQV (NDX volatility index) overlaid in blue on a daily chart of the QQQQ, with trendlines applied to the QQV's range. Note how the trendline touches corresponded with recent tops and bottoms for QQQQ. This relationship is not perfect, as we saw with the signal in December. But during the past year, the two upper trendline touches for the QQV have coincided with relative lows for the QQQQ, the lower trendline touches with relative highs. Obviously, it remains to be seen whether such will prove to be the case with the beginning-of-June QQQQ high. 

Daily TNX Chart


The Treasury auctioned $32 billion today comprised of $17 billion in 13-week bills and $15 billion in 26-week bills. The 13-week bills had a high yield of 2.975%, and a bid to cover ratio (the ratio of bids tendered to bids accepted) of 2.16. The 26 week bills generated a high rate of 3.12, with a bid to cover ratio of 2.16. Foreign central banks took $4.78 billion of the 13-week bills and $3.88 billion of the 26 week bills, or $8.6 billion of the $32 billion auctioned today. This was back into a normal range after the weak 10% participation seen in last week's ten-year note auction.

Ten year treasuries were weak at the open, with the ten year note yield (TNX) gapping higher and holding the bulk of its gains throughout the session to close +3.9 bps at 4.086%. Above 4.09%-4.1%, next resistance is at 4.14%-41.6%.

Chart of Crude oil


Associated Press reported that OPEC is considering another quota increase of 500,000 barrels per day (bpd) to bring the limit to 28 million barrels per day. However, with current production in the vicinity of 30 million bpd, the move is of limited significance, and intraday prices remained firmly positive following the announcement. Current global demand is estimated by the IEA at 84.3 million bpd. The June OPEC meeting is scheduled for this Wednesday in Vienna.

Crude oil rose throughout the day to peak at a high of 55.775 just before the close, breaking descending upper resistance on what appears to be a pennant at the top of the May rally. Pennants generally being continuation patterns, the upside breakout could presage a bullish trending move for the toppy daily cycle. Above the pennant apex to 53.50, the bias remains to the upside. For the day, July crude oil gained 2.075 to close at 55.625.

There were no economic reports released today, but it's scheduled to be a much heavier week than last week, with Retail Sales and the PPI tomorrow, the CPI, Industrial Production and Capacity Utilization as well as the Fed's Beige Book on Wednesday, Housing Starts and Building Permits, Initial Claims and the Philly Fed on Thursday, and the Q1 Current Account and Michigan Sentiment on Friday.

It was a very quiet day for corporate news as well. The big story was an announcement from Morgan Stanley (MWD) on the departure of current CEO Philip Purcell. Purcell will leave as soon as a successor can be found but in any event no later than the next annual meeting. The stock rallied on the news overnight as rumors of his departure circulated. This news was followed up with a profit warning for fiscal Q2, as the company now expects earnings for the quarter to come in 15%-20% below Q2 2004. The firm cited poor market conditions for the warning. 

Notwithstanding, MWD held its gains throughout the session, despite a soap-opera's worth of stories as to whether Purcell retired or was fired, with Challenger & Gray characterizing his ouster as a "mutiny" to illustrate the exigencies to which CEOs can be subjected. Marketwatch estimates that Purcell can expect to receive as much as $62.3 million for his termination, in addition to equity, stock options and pension benefits totaling just over $60 million. Exigencies indeed. But the fact that this story made headlines throughout the day underscores how thin a news day it actually was.

MWD gapped higher at the open and remained positive to close +2% at 50.88 on nearly 3x its average daily volume.

Warner Music Group (WMG) reported that it became profitable in Q2, reversing last year's Q2 loss of $48 million. The company earned $4 million in the current quarter on revenue that rose 4% to $767 million. The company reported gains bother in recorded music and publishing as well as digital revenue, which rose from $32 million for the full year in 2004 to $35 million in the current quarter. The stock closed lower by 1.77% at 16.65.

Marketwatch reported new research from IDC to the effect that global storage software sales totaled $2.1 billion in Q1 2005, up 14.9% from Q1 2004. The top 6 storage software vendors were EMC, whose sales rose 18% to $625 in the quarter, followed by VRTS, IBM, NTAP and HPQ. EMC rose 1.72% to close at 14.79 on average volume, VRTS +.17% to 23.72, IBM gained .37% to close at 75.05, NTAP +1.56% at 29.89 and HPQ rose 2% to close at 23.89.

For tomorrow, the question will be whether anything will happen at all as SPX hugs the 1200 line, Dow 10500 and Nasdaq 2070. With the currency markets churning and oil breaking out, I'm expecting more action than we saw today. While the daily cycle downphases have been weak so far and the sideways patterns on the daily charts potential bull flags, the extremely low volatility and low volume readings suggest that those downphases could start kicking in. On the other hand, there are precedents for volatility rising along with price, and none of these indicators can be treated as absolutes. Better is to respect the price action. In this case, with the ranges so well defined, a break of support or resistance on high volume stands an excellent chance of being directional. With bulls and bears getting chopped to ribbons inside these ranges, waiting for a trendline break (or patiently buying support and selling resistance with tight stops) is a good alternative.

 
 



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