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Market Wrap

Oil and economics provide choppy trade

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Oil and economics provide choppy trade

The major equity averages finished green in what would best be described as a choppy trade with advancers edging out decliners at both major exchanges by a 3:2 margin.

Oil's trade kept equity traders on the edge of their seat early with July Crude Oil futures (cl05n) jumping as high as $56.75 intra-day to finish up 57 cents, or 1.04% at $55.57. 

The intra-day time line of our internals will drive home just how much impact oil prices can have on an equity trader's psyche. 

Stocks found a bid early in the session after the government said consumer prices declined 0.1% in May, a reversal of unexpectedly large increases the prior four months. The decline came in part as energy prices fell 2.0% in May. Core prices, which remove the volatile food and energy components rose 0.1%, which was shy of economists' 0.2% forecast. The core rate of consumer prices has risen 2.2% year-on-year, while consumer prices are up 2.8% year-on-year.

"Older" economic data had April business inventories rising and expected 0.3%, with sales up a healthy 1.2% that month. The inventory-to-sales ratio fell to 1.30 months from March's 1.31 reading, and down from a February reading of 1.32. 

Additional economic data showed production at the nation's factories, mines and utilities rose by 0.4%, double the gain analysts had expected. It reversed a 0.3% drop in industrial production in April and reflected a surge of 0.6% in output at American factories.

Equity bulls scratched their heads early as stocks began giving back gains. 

At 10:30 AM EDT, the EIA reported a 1.8 million barrel draw in crude oil inventories, while gasoline inventories fell by 900,000 barrels for the week ended June 10. Distillate inventories rose by 2.5 million barrels (see last Wednesday's wrap), but remain in the lower half of the average range for this time of year. 

Upon release of the EIA's report, July Crude Oil futures (cl05n) spiked to an intra-day floor trade high of $56.85, but settled up a still respectable 57 cents, or 1.04% at $55.57. With capitalism alive and well July Heating Oil futures (ho05n) settled down 1.8 cents, or -1.07% at $1.6211, while July Unleaded Gas futures (hu05n) settled up 2.16 cents, or 1.4% at $1.5625.

News that OPEC agreed to bring its output ceiling in line with actual production from July 1, a move that equates to a 1.8% hike, or 500,000 barrels a day found little response from traders. OPEC itself admits that production isn't the main problem of solving higher oil prices, but capacity constraints at the refining end continue to create the bottleneck.

Once heating oil, then crude prices abated, stocks firmed as there was still another serving of economic data yet to be release.

At 02:00 PM EDT, buyers stepped in after the Fed's latest Beige Book report, which is anecdotal, showed economic activity continued to grow from mid-April through May in all 12 Fed regions, while price pressures were generally moderate.

Treasuries found a choppy trade with shorter-dated maturities finding the bulk of the selling as the 5-year yield ($FVX.X) backed up 1.6 basis points to close at 3.890%, while the belly of the curve had the 10-year yield ($TNX.X) falling 1.2 basis points to 4.115%. The longer-dated 30-year yield ($TYX.X) edged down 0.7 bp to finish at 4.422%.

On a Wednesday-to-Wednesday timeframe, we've seen the 5-year yield ($FVX.X) rise 44.5 bp, the 10-year yield ($TNX.X) rise 44.4 bp, while the 30-year yield ($TYX.X) has risen 46.6 bp. A very fractional re-steepening of the curve.

U.S. Market Watch - 06/15/05

Homebuilders as depicted by the Dow Jones Home Construction Index (DJUSHB) 968.87 +2.10% traded an all-time high and took today's top spot among sector winners. Broker A.G. Edwards lifted its targets on several names in the group, a shocking move that comes from one of Wall Street's "value" shops. The firm cited recent new home sales as reason for further price appreciation.

Commercial airliners were pressured on oil's rise and were today's sector loser.

On a Wednesday-to-Wednesday basis, Oil Service (OSX.X), Gold Miners ($XAU.X) and Oil producers (OIX.X) have been top performers, while the Transports (TRAN) have yet to get back into a bullish gear.

Look at those "small caps!" with the Russell 2000 Growth (RUT.X) up 2.69% on the week. Even Jim Brown was surprised at how strong they were. 

Late last week, as if Bear Stearns' downgrade of truckers wasn't enough to rattle sector bulls, Morgan Stanley downgraded shares of United Parcel Service (NYSE:UPS) $69.86 -0.27% from the $72.34 level on concern that pricing pressures from a highly competitive market could weigh on earnings growth.

Dow Transports (TRAN) - Daily Interval

The market seems to be listening to what Bear Stearns had to say last week. That's fine, and I'll establish a "BEAR Stearns" trend. Still, the market hasn't totally given up on this economically sensitive group. 

The bullish side of me (Jeff Bailey) hasn't given up entirely on the TRAN. We "knew" 3,490 was important, and now it gets the ultimate test. Who has the conviction? Buyers (demand) or sellers (supply)?

Dow Transports (TRAN) - 10-point box

At some point a trend takes hold and becomes formidable longer-term. As of tonight's close, Dorsey/Wright and Associates' Transport / Non Air Bullish % (BPTRAN) was still "bear correction" status at 51.16% and was up 1.16% today. In early May (red 5) this sector bullish % had just reversed back up to 40% from a recent relative low reading of 34%. Earlier this month (red 6) it was reading 50% bullish. 

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

Tick, tock, tick, tock. It's triple-witch expiration and I've been doing a lot of work in the Market Monitor regarding option chains. It is tedious work, but hopefully traders have gotten a feel as to how option open interest is having some influence on trade. 

No new comments here. Marginal week-to-week gain in the SPX Bullish % ($BPSPX), but internals do confirm price action.

Let's face it! The TRAN isn't at 3,750. That's a fact. Energy stocks have undoubtedly helped the broader SPX and I think SPY "Max Pain" theory of $119 (SPX 1,190 equivalent) has too. Keep an eye on the TRAN!

Speaking of bullish % readings. On Thursday of last week, Dorsey's very broad NASDAQ Composite Bullish % (BPOTC) reversed up to "bear correction" status at 44%. Today, StockCharts.com's very broad NASDAQ Composite Bullish % ($BPCOMPQ) reversed up to "bear correction status" at 44%.

Last Wednesday we looked at a WEEKLY interval bar chart of the NASDAQ Composite (COMPX) 2,074.92 +0.28% and I thought it might take price action above 2,110 to see the $BPCOMPQ to reverse up. Nope.... and bulls should be ready to leg further into positions as internals continue to improve!

Here's the same chart viewed last week, but now with daily intervals.

NASDAQ Composite (COMPX) - Daily Intervals

The PINK retracement from January highs to recent lows would certainly suggest that the 61.8% retracement is "in play" as resistance. Yesterday (Tuesday), fell analyst Marc Eckelberry thought he felt a "bid" in the NASDAQ and wondered if this week's option expiration was propping up the NASDAQ. I also wondered if expiration keeps things in a tight range. It is possible that expiration could be holding it down too!

But with the very broad NASDAQ Composite Bullish % (BPCOMPQ) reversing up (all major equity market bullish % now in column of X), I thought it worth a trade in the QQQQ. Have you been following the QQQQ PnF chart using the 1% box size. I showed this PnF technique back in the May 25th Market Wrap.

QQQQ - 1% box size

Never got the 3-box reversal back to $36.74, but did get a 3-box reversal to $37.48. As my dad used to tell me when I was being potty trained. Either "do something" or get off the pot!

The bullish % measures are all reversed back up into a column of X. Whatcha gonn'a do? 


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