Market Wrap, Saturday, 06/18/2005
HAVING TROUBLE PRINTING?
Primed to Rise
Oil fueled overnight
market action Friday and set up the action for U.S.
markets. Gains in Asian and European commodity-related issues drove those
bourses higher. Steel-makers, miners and oil majors saw overnight gains, while
equities seemed to ignore the impact of rising crude costs and joined right
along. The FTSE 100 hit a new three-year high. Morning online newsletter
editions predicted a likely bump higher in U.S. equities, too. Equities were
primed to rise.
Still, with crude over
$57.00 a barrel as most U.S. investors woke opex Friday
morning, some nervously eyed charts of U.S. indices and pondered the estimates
for a widening deficit, wondering if an upside pop would hold. After the SPX
settlement and the final economic release were out of the way Friday morning,
would equities be free to decline?
They weren't going to decline pre-market, no matter what, it seemed. When the
current account data at 8:30 EST showed an unexpected widening to $189.4
billion, only the dollar and bonds seemed to react, despite the economic risks
from the burgeoning deficit. Equity futures
stayed positive, barely moving.
Shortly after the open, equities received a further boost from the Michigan
sentiment number. A higher than expected June number of 94.8, well above May's
86.9 and the expected 88.8, buoyed equities that were already climbing. Bad news
was good, and good news was even better.
Not far into the day, CNBC commentators and print articles began touting the
fact that the S&P 500 was positive for the year. Some might have missed a
important gauge of market strength, the Wilshire 5000's rise to
test the year's high and the brief pop above that level. As well, the important
DJUSHB, the Dow Jones Home Construction Index, zoomed to a new high above 1000,
and the Nasdaq raced up to test the neckline of a well-defined inverse H&S on
its daily chart.
Annotated Daily Chart of the Wilshire 5000:
While the Wilshire closed at a new high, that close was less than three points
higher than February's closing high, so it's essentially an equal high so far.
The Wilshire 5000 still faces resistance from Friday's high up to just above
12,200. While 12,000 has some historical significance as resistance and probable
major psychological significance, the upside breakout did not quite happen on
this index that is the broadest of all our indices.
SPX did manage that positive close for the year.
Annotated Daily Chart for the SPX:
The RUT broke above a descending trendline off last year's high, but couldn't
quite confirm the breakout by closing above the early March high.
Annotated Daily Chart of the Russell 5000:
The Nasdaq also tested important resistance and could not close above it,
although the Nasdaq's formation is potentially bullish.
Annotated Daily Chart of the Nasdaq:
The Dow has already confirmed one version of an inverse H&S on its daily chart,
candles have all shown some indecision since breaking over that
neckline. It will soon face a neckline for an inverse H&S on the weekly chart,
at the lower bold red line.
Annotated Daily Chart of the Dow:
Recent gains have caught some market participants by surprise. Potential new
breakouts over important resistance levels loom,
but formations such as inverse
H&S's can be rejected at the necklines, too. Some speculate that early gains
Friday were opex related, a theory that will be tested early next week, after
opex settlement is out of the way. Chart formations look easy to read and
breakouts or rollovers easy to determined, but now is no time to get married to
positions. A breakout may be a fake-out move, destined to be quickly reversed as
markets finally pull back to next likely support.
ready to jump out if indices reverse course. With indices looking so
overbought by many measures, including RSI, buying at these levels looks risky
to this writer, but one helpful exercise may be watching the relationship of the
indices with respect to tests of the 5- and 60-minute 100/130-ema's. Many
fast-moving indices have been bounding off the five-minute versions, and then,
if those fail, off the 60-minute versions on deeper pullbacks. The Russell 2000
is one of those indices.
60-Minute Chart of the Russell 2000:
Use the action surrounding these averages, combined with the resistance levels
identified above, to help guide your decisions. If the Russell 2000 were to open
at or below Friday's close, for example, bringing up the possibility of an
evening-star formation, watch first to see if it bounces
again from the
five-minute 100/130-ema's at 643.28 and 642.52, respectively. If not, there's a
possibility of a drop down to the 60-minute versions, particularly if the RUT
rolls over from retests of the five-minute versions. A decline down to the
60-minute versions would be enough to complete that evening-star formation,
although the 60-minute averages should keep rising for a while as the RUT drops.
A completion of an evening-star formation coupled with a change in trend,
by these averages being converted to resistance, might signal that
over the short-term at least, it's time to start selling rallies. A bounce over
resistance coupled with continued bounces from these averages maintains the
buy-the-dips mentality. In any trending market, identify a time frame in which
the security being watched is bouncing from the 100/130-ema's and watch for a
change in trend.
Charts show many bullish characteristics with some hesitation, while Friday's
current account information questions all this bullishness. Looking at the
numbers might be helpful. As had been anticipated, the revised deficit widened,
but it widened even more than some had expected, to $195.1 billion, a 3.6
percent increase. The deficit now comprises 6.4 percent of the GDP. The
component measuring the trade of goods created much of that deficit, with that
component's deficit rising to $186.3 billion. The goods and services deficit
increased more than it had
in the fourth quarter.
Foreign-owned assets increased by $226.1 billion. Unilateral current saw net
outflows of $27.1 billion, higher than had been seen in the fourth quarter.
Foreign official assets in the U.S. rose $24.7 billion, a number far less than
the fourth quarter's $94.5 billion gain. Foreign direct investment in the U.S.
and U.S. direct investment abroad both moderated. U.S.-owned assets abroad
increased by a more modest $60.7 billion than it had in the previous
Foreign purchases of U.S. equities moderated to $28.9 billion from the previous
quarter's $45.7 billion, and foreign purchases of corporate bonds also moderated
to $58.6 billion from the former $69.3 billion. Agency bond purchases fell to
only $800 million from the previous $43.2 billion. Net foreign purchases of U.S.
Treasuries climbed to $75.5 billion, however.
For those whose eyes are crossing as they sort through the various components, a
Street Journal interpretation of the data was that Americans had increased
purchases of foreign overseas goods, creating a deficit in goods. In part,
higher crude costs led to the higher amounts U.S. consumers spent on foreign
goods, but demand appeared to be higher, too. Net outflows for unilateral
current transfers also contributed to the deficit, but the WSJ thought income
and services surpluses helped offset those deficits.
Another article's writer felt more concerned.
That writer summed up the release
by noting that the current account deficit continues to rise steadily as a
percentage of the GDP. In the fourth quarter the current account made up 6.3
percent of the GDP. A year ago, it was only 5.1 percent. Also just this week,
Federal Reserve Governor Donald Kohn said that the current-account deficit
contributes to the greater-than-usual risks to the economy.
U.S. Treasury Secretary John Snow put a positive spin on the deficit. He
that it emphasizes the strength of the U.S. economy, showing that it's growing
faster than economies in Europe and Japan. The U.S. is importing more goods and
paying a higher price, since crude and dollar developments both contributed to
those higher prices in the first quarter. Recent data has corroborated Snow's
impression that the U.S. economy is growing faster than many others across the
globe, as they've shown recent signs of weakening. However, an economy that is
faster in comparison to weakening economies may not be a stellar
endorsement of the U.S. economy. This week, some television guests have again
begun to mention the "R" word with regard to the U.S. economy.
Developments in crude prices didn't offer consolation to those worried about the
impact of rising crude costs. It did cheer those heavily invested in
commodity-related issues, as those issues were seeing gains across the globe
Friday. Both the U.S. and U.K.
closed down consulates in Lagos, Nigeria, after
security threats in that country. Nigeria produces a better grade oil than OPEC
would if it geared up to replace any lost supplies from Nigeria. As Jim Brown
has been warning for some time and reiterated this week, it's not just a supply
problem that's heating up crude costs, but a problem in obtaining the right type
of crude. Next week, OPEC ministers are to consult again about a second increase
in production, with that consultation to
be held if the organization's price
index remains above $50 a barrel for seven days, a target already met. However,
the ability to produce light sweet crude and the refining capacity to turn that
into needed products remains questionable, no matter what reassurances OPEC
ministers make. Friday, the OIX, the oil index, rose to an all-time high,
closing at an all-time closing high of 504.27, just off the high of the day.
Also impacting the sector was news that Valero Energy
raised guidance, resulting
in a 4.25 percent gain. While VLO is not an OIX component, UCL is. CNOOC,
China's largest offshore oil producer, might make a counteroffer for Unocal
(UCL), some speculated, leading to a 3.62 percent pop in UCL.
At times during the day Friday, Nasdaq and S&P behavior and volume patterns
appeared bifurcated, with that bifurcation stalling the indices for a while. The
differences in behavior were attributed at least in part due to Adobe Systems'
(ADBE) issuance of in-line guidance for the third quarter after beating
analysts' expectations for the second quarter by a penny. ADBE also revealed
that it will face a lawsuit concerning its proposed acquisition of Macromedia
(MACR). ADBE closed lower by 3.30 percent as some disappointed investors
abandoned the stock.
While ADBE's in-line guidance punished tech stocks, KB Home's (KBH) strong
earnings report for the second quarter helped. KBH was to close higher by
percent, but it wasn't the only homebuilder gaining, although many closed off
their highs of the day. Smith Barney upgraded KBH, HOV, PHM and RYL to buy
ratings, with some of these also being components of the S&P 500.
The DJUSHB, the Dow Jones Home Construction Index, leaped above 1,000, breaking
to a new all-time high. Mid-afternoon, the index slipped, falling quickly below
the mid-point of the day's range and raising the possibility of a key reversal
it actually closed negative, but it recovered to close above that
midpoint. The day's candle left a long upper shadow, however, and this index
bears watching Monday morning.
Financials gained attention due to Bank of America's $3 billion deal to take a 9
percent stake in China Construction Bank. That deal, reported during the
overnight session, will be the largest single foreign investment in China's
banking sector. Other company-related news included speculation that General
Electric (GE) might announce three vice chairman next week, with further
speculation that its current chief executive John Rice and chief executive of
transportation David Calhoun would number two of the three. GE rose 1.08
percent. The Wall Street Journal reported the GE news and also speculated that
Morgan Stanley (MWD) might be reconsidering its planned spin-off of credit-card
operation Discover due to a possible need for a heftier cash infusion than MWD
had expected. MWD
dropped 1.00 percent, but the XBD, the Securities Broker
Dealer Index, did squeak by with a 0.15 percent gain.
Circuit City (CC) also reported Friday, with its loss widening due to rising
costs. A portion of those costs proceeded from the need to rebrand 970 InterTan
Inc. stores that Circuit City bought last year. InterTan lost a judgment,
forcing the stores to stop using the RadioShack name in Canada. The title of one
article, "There's Little to Cheer at Circuit City"
says it all. Same-store sales
for stores open more than a year were flat. Inventory shortfalls of notebook and
desktop computers were significant, the chief officer acknowledged, and that
officer has requested a shakeup in merchandizing. The RLX did post a 0.51
percent gain, however.
Pre-market upgrades and downgrades included a Wachovia Securities downgrade of
Goldman Sachs Group, Inc. (GS) to a market-perform rating. This was due to
earnings' volatility since trading
comprises too big a proportion of GS's
revenue. Goldman Sachs was doing some rating of its own, starting Monster
Worldwide, Inc. (MNST) at an outperform rating, mentioning MNST's expected
increasing recruitment advertising market share. Bear Stearns downgraded The
Cheesecake Factory (CAKE) to a peer-perform rating, speculating that CAKE might
see another earnings miss this year. UBS and J.P. Morgan couldn't agree on the
prospects for Sanofi-Aventis (SNY) with UBS upgrading the
company and J.P.
Morgan downgrading it. UBS saw SNY's loss of a case involving one of its patents
as creating a buying opportunity. J.P. Morgan didn't see it that way,
speculating that sales could be impacted by as much as half by 2009.
Next week's economic releases include Monday's 10:00 release of leading
indicators. The word "leading" can be a bit misleading, pun intended, because
the conference board compounds this number from prior releases of indicators
as new orders, jobless claims, and money supply. Although markets
occasionally react to this number, they also sometimes ignore it. Tuesday's
releases include the ICSC-UBS store sales for the previous week, Redbook's
measure of sales at chain stores, discounters and department stores and the
State Street investor confidence index, with that last release at 10:00. This
last number is not a survey, but a direct measurement of how many risky
investments professional investors are
holding. With the RLX still gaining, but
with the daily chart showing small-bodied candles with upper shadows, those
figures on retail sales may assume importance.
Other than MBA mortgage figures and crude inventories on Wednesday, with crude
inventories certainly closely watched, the next releases don't come until
Thursday, with the usual jobless claims release followed at 10:00 am by May's
existing home sales and then at 4:30 by the money supply figure for the week of
With the DJUSHB reaching new record highs but showing signs of some
selling Friday afternoon, those home sales figures might be particularly
The next day, May's durable goods orders will lead the day's releases at 8:30,
with May's new home sales following at 10:00. Durable orders, with its
importance as a leading indicator of manufacturing activity, should catch market
A few important earnings reports will begin to
appear next week. Homebuilder
Lennar (LEN) reports before the open Tuesday, and Bed Bath & Beyond (BBBY)
reports Wednesday, giving investors another clue into how the
buy-a-home-and-furnish-it sectors are performing. FDX reports Thursday, as do
low-cost retailer Family Dollar (FDO) and A.G. Edwards (AGE).
Next week should be an important week, although early Monday action might be
somewhat volatile and difficult to fit into a pattern as opex settlement
Remember to watch the Russell 2000 for a potential
evening-star formation, and the Wilshire 5000 for a breakout above or rollover
below that important resistance. Watch those 100/130-ema's, tinkering with the
time interval for your preferred index so you can note a change in trend. Logic
says that indices shouldn't be performing as well as they are with the "R" word
beginning to be mentioned here and abroad, but don't argue if indices decide
otherwise. Keep a close watch
on those profits, however.