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Market Wrap

Dennis the Menace

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Dennis the Menace

Energy prices surged higher on Wednesday with August Crude Oil futures (cl05q) settling up $1.69, or 2.84% at $61.28 as traders await the arrival of Tropical Storm Dennis. The latest measures from the U.S. National Hurricane Center in Miami have Dennis nearing the "hurricane" category, with current direction and speed reaching landfall near the Alabama-Florida border this weekend.

Energy companies operating in the Gulf of Mexico made announcements that non-essential personnel were being evacuated from operations in the eastern-Gulf of Mexico, while workers in the mid and western-Gulf were returning after Tropical Storm Cindy reached landfall yesterday.

Natural gas prices were also sharply higher with the August contract (ng05q) jumping more than 21 cents, or 2.85% to $7.688/mmBtu.

For August oil, the previous contract high of $60.95 was no match and thus far oil is up roughly 75% year-over-year and about 45%in 2005 alone. An active storm season should have traders looking more closely to tomorrow's Department of Energy report.

Volumes were brisk at both the NYSE and NASDAQ exchanges, and underpinning bids were hard to find especially with Challenger Gray & Christmas reporting layoffs at a 17-month high. The outplacement firm said corporate announcements of job reductions increased by 35% from May's 82,282 and 73% from June 2004's 64,343. The automotive sector announced 45,378 job cuts in June, while the retail sector cut 24,065 jobs.

In a separate report issued Wednesday, the Institute for Supply Management reported an unexpected jump in the nonmanufacturing sentiment index in June, indicating strong growth. 

The ISM index rose to 62.2% in June from 58.5% in May. June's reading was well ahead of expectations that had been anticipating a decline to 58.4%.

While energy prices rose sharply, it was energy-related sectors that suffered the wrath of sellers. 

After trading 52-week highs the past few sessions, the Utility Sector Index ($UTY.X) 419.81 -1.77% was today's sector loser, while the Natural Gas Index Index (XNG.X) 363.65 -1.42% finished down 5.27 points after hitting an intra-session all-time high earlier this morning.

U.S. Market Watch - 07/06/05 Close

The Morgan Stanley Healthcare Index (HMO.X) 1,598.08 +1.62% surged mid-session to trade an all-time high. The gains were sparked on news that UnitedHealth (UNH) $53.19 -0.07% would buy PacifiCare (PHS) $77.10 +6.08% in a cash/stock deal that values PHS at roughly $77 per share.

Already we're hearing that regulators are looking over the deal as the number of health insurers become fewer. The move would give Minnesota-based UnitedHealth a stronger presence in the growing Medicare market. It hasn't been as aggressive as other players in marketing that coverage. Further, the deal would combine two formidable individual and group-health entities, PacifiCare's AMZ and UnitedHealth's Golden Rule.

The Dow Industrials (INDU) closed near its lows of the session, its first triple digit loss since June 24 (the Dow lost 99.51 points on June 30). Of the blue chip barometer's 30 components, 28 contributed to today's losses. 

Dow Industrials (INDU) - 50-point box

Of the 5-most heavily PRICE weighted components, only IBM $75.81 +1.36% managed to post gains today. After giving a triple top buy signal at the 10,300 level on May 3, the INDU has shown a tendency to "stretch its wings" higher, then retrace those gains, and work itself to another relative high.

While 10,000 is also "psychologically round" support, it is also important technical support. 

I would note that the Dow Diamonds (AMEX:DIA) $102.67 -0.92% currently has a bullish vertical count of $133 associated with its point and figure chart, where a trade at $99.00 (9,900 INDU equivalent) would generate a reversing lower point and figure sell signal.

The very narrow DJIA Bullish % ($BPINDU) from www.stockcharts.com currently reads "bear correction" status at 66.66%, is in a column of X and would need to achieve a higher reading of 74% to reach "bull confirmed" status. It would take a reversing lower measure of 60% for this bullish % to turn back lower to "bear confirmed" status. In late April (red 4), this very narrow (measures just 30 point and figure charts) reversed up from 50%.

Dow component Alcoa Inc. (AA) $26.00 -0.76% begins the parade of second-quarter earnings announcements for major U.S. companies on Thursday, reporting results after the market closes. Many analysts have cut their forecasts for the aluminum giant, whose stock is a Dow component, in recent weeks as aluminum prices have fallen. The average estimate stands at 45 cents a share on sales of $6.64 billion, according to a survey by Thomson First Call. A year ago, the company posted profits of 46 cents a share. Yesterday, CS First Boston lowered its earnings estimate to 42 cents a share from 54 cents, citing lower than expected aluminum prices and pointing toward "operating challenges" at Alcoa's Russian operations. The company's earnings are "very sensitive" to aluminum ingot prices, which have so far averaged 76.5 cents per pound in July, down from a June average of 78.3 cents. 

When the quarter ended last Thursday, the estimated earnings growth rate for companies in the S&P 500 Index stood at 7.4%, according to consensus data from Thomson Financial. That's the lowest pre-report estimate since the second period of 2003, when S&P 500 firms were expected to report earnings growth of 7%. 

Results have outpaced pre-report estimates in every period since the fourth quarter of 2002, according to Thomson data. For the first quarter, earnings grew at an actual rate of 13.9% -- far ahead of the 7.6% growth rate predicted at the beginning of the period. Looked at another way, though, it's clear that earnings growth is slowing. Last quarter's final growth rate was 29% lower than in the previous period and the lowest since the second quarter of 2003, when S&P 500 earnings grew 9.5%. For the S&P 500 group, more than 60% of the pre-announcements for the second quarter have been negative, according to Thomson data. That makes for a negative-to-positive ratio of 2.6 to 1 -- the highest in eight quarters.

S&P 500 Index (SPX.X) - 5 & 10-point box

It may seem like a 5-point and even a 10-point box scale of the S&P 500 Index (SPX.X) is just "too big" to trade from, but with the SPX gyrating 7 to 10-points on any given trading day, this conventional box scale is filtering out the day-to-day noise. No, 7 to 10-points is just what a futures trader likes to see, but cash traders will see the SPX has been little budged since early June (red 6).

Today's action saw the broader S&P 500 Bullish % ($BPSPX) from www.stockcharts.com remain unchanged at 65.00%. Compared to last Wednesday's reading of 64.4%, we've seen a net gain of 3 stocks generating a reversing higher point and figure buy signal. On June 21, the S&P 500 Bullish % ($BPSPX) reached a near-term high reading of 66.40%.

One technique I'll use from time-to-time is to change up my box scale to a "less conventional" box size in order to get a different perspective of supply (O) and demand (X), and try to uncover where a key level of support/resistance is at. 

Here's a 3-box scale of the SPX. It adds more "noise" to the supply/demand chart, but I think it ties in nicely with last night's Market Wrap and work Jim Brown did for the SPX.

S&P 500 Index (SPX.X) - 3-point box

Now Jim didn't outline the little "head and shoulder top", but strength above 1,209.00 on the above 3-box chart is the likely level where bears would have stops. The neckline of this pattern would be 1,188-ish.

Now, I also show the 1,220 level from Jim's bar chart. That's a much BIGGER head/shoulder top pattern that is still "in play." 

Not everyone reading the evening commentary is able to "get a feel" for market psychology, but those of us that are will likely feel the "squeezing" of life from equities as oil prices rise. 

Today, stocks "felt" like they really wanted to bid, and while there are undoubtedly some shorts getting their heads handed to them in the energy futures markets, the push higher just sucked the life out of the major indices as the session wore on.

Be alert tomorrow. We may have simply seen some profit taking in energy EQUITIES today, but their weakness despite surging energy futures contracts has me suspecting that its the bullish momentum in energy futures that carries the trade there. 

Dow Transports (TRAN) - Daily Intervals

I didn't update the TRAN in last Wednesday's wrap, but the "Bear Stearns Trend" as I'm calling it continues to hold and is the trend I would have to consider as being the overriding trend. There aren't a lot of "profits to protect" as it relates to the way the TRAN is trading, and that may be the only reason it wasn't down more than 0.38% with energy prices rising.

A quick glance at Dorsey/Wright and Assoc. Transportation / Non Air Bullish % (BPTRAN) shows this group of point and figure charts still in "bear correction" status at 51.72% as of Tuesday evening. It would take a reversing lower reading of 44% to turn back lower to "bear confirmed." It would currently take an 80% reading to achieve "bull confirmed" status. 


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