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Market Wrap

The Market That Could

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The Market That Could

Equity bulls maintained Friday's rise, reaching new highs for the move and closing at the session highs after a corrective intraday dip. Despite extremely overbought intraday cycles and extremely low put-to-call readings in the morning, the markets moved higher and maintained a persistent underlying bid throughout the session.

Volume breadth was strong throughout the session, never even approaching neutral on the intraday dip and finishing at 3.36:1 for NYSE advancing volume and 4.97:1 on the Nasdaq. Volume was respectable, with a combined 3.16B shares traded on the NYSE and Nasdaq, and QQQQ volume 96.5M shares for the day.

Daily Dow Chart

The Dow finished 15 points off its 10534 high, rising from its opening low at 10449. 10440-450 had resistance since late June, and today's tall bullish candle built on the strong gains from the London bombing's doji low below 10160. This setup has been sufficient to turn the daily cycle indicators sharply higher, reversing the bulk of June's gains in a mere 3 sessions. There was more strength after the cash close, casting doubt on the intraday downphases discussed in the Market Monitor. While today's high remains below the June and March highs, the strong volume on the launch off last Thursday's doji bottom and the uncompromising move higher from there is causing bears to second-guess their assumptions, if the decline in volatility and the low put to call readings this morning were any indication.

Daily S&P 500 Chart

The picture is more bullish on the SPX, as the June highs were exceeded at today's 1220.03 high. The SPX closed at 1219.44, a bullish finish to conclude the afternoon's corrective dip. The return to the earlier intraday high after bouncing from a higher low suggests further strength tomorrow on a possible intraday rising triangle break above 1220. The March high at 1127-1230 will be next confluence resistance if the bulls can do it.
While the weekly cycle upphase is nearing the top of its range, suggesting that upside could be limited from here, there's still plenty of room in the daily cycle upphase for a run lasting 1-2 weeks should bears fail to regain the 1212 and 1206 levels.

Daily Nasdaq Chart

The Nasdaq also cleared major resistance today, in this case the 6 month old horizontal resistance at 2100-2110, with the Nasdaq closing 22.55 at 2135.43. QQQQ finished at its session high. I've read a great deal of speculation as to whether the 2100-2110 line was a reverse head and shoulders neckline, in which case the implied target would be as much as 200 points higher.

I'm not persuaded by that interpretation, not because of the potentially high target, but because on a cycle basis, reverse head and shoulder formations are only valid at the bottom of a longer cycle decline. J.M. Hurst discusses the pattern as resulting from the interplay of shorter cycles trending within longer ones- in this case, a reverse head and shoulders would result from a daily cycle upturn taking shape within a weekly cycle bottom. In this case, however, the weekly cycle indicators are just entering overbought, and if anything, a failure below 2160 would set up a broad and sloppy head and shoulders (not reverse) above 1750ish. In any event, the price will tell us. Next resistance is at 2140-45 at the former bear wedge apex, while bears need a break below 2100-2110, confirmed by a move below 2075 to stall the daily cycle upphase.

Daily TNX Chart

The Treasury auctioned $17 billion in 13-week bills and $15 billion in 26-week bills today. Foreign central banks were awarded $8.7 billion of the total. The 13-week bills received 2.53 bids for each awarded, the highest bid-to-cover ratio since the April 25th auction. However, the high-rate was 3.204%, the highest since 2001. The 26-week bills generated a bid-to-cover ratio of 2.34, the highest June 6th, and another 4-year high high-rate of 3.4%.

Despite another net add from the Fed's open market desk, ten year note yields (TNX) were buoyant again, breaking 4.14% resistance for the first time in a month and spending the day in positive territory until the final minutes of the cash session. The mostly steady march higher for the TNX has been puzzling since the Fed's massive net $14.5 billion repo add one week ago. With these repos being fed to the Fed's primary dealers at stop out rates below the 3.25% target rate, the lack of demand for treasury bonds has been strange. In any event, the daily cycle upphase for the TNX continues, with TNX now testing the key 4.14%-4.16% confluence zone that has held back the yield since breaking below it in May. For the day, TNX closed -0.7 bps at 4.102% on an end-of-session dip.

Daily Chart of Crude oil

Crude oil futures held below 60 today as Hurricane Dennis was downgraded to "tropical storm" status and a number of oil producers announced that their facilities would be coming back online today. Risk Management Solutions estimated the value of insured losses caused by the storm between $1 billion and $5 billion. Last year, Hurricane Ivan caused more than $7 billion of insured losses. The US Minerals Management Service reported that Dennis caused 445 rigs and platforms to be evacuated, halting over 96% of daily oil and 62.4% of daily natural gas production in the Gulf of Mexico.

On the daily chart of front-month August crude oil, we see that today's unfilled gap down was sufficient to print sell signals in the daily cycle indicators. Those sell signals printed from bearish divergences at the highs, signaling a potential strong downphase from here. Bulls need to hold the rising support line at 58, while bears will be gunning for a break to confirm the overdue daily cycle downphase. August crude oil finished lower by .75 at 58.875, off a session low of 58.05. Meanwhile, Marketwatch reported that the average retail price of regular unleaded gasoline printed a new record high of $2.291 per gallon, breaking the April 11 record of $2.276.

It was a quiet day for economic data, with the first economic reports of the week scheduled for Wednesday with Export and Import Prices as well as the Trade Balance. Later that day we'll get the Treasury Budget for June, followed by Retail Sales, the CPI and Initial Claims on Thursday. On Friday, it's the Empire State Index, Business Inventories, the PPI, Industrial Production and Capacity Utilization, and Michigan Sentiment.

In corporate news, pharmaceutical, medical-surgical and information solution provider McKesson (MCK) announced its intention to buy D&K Healthcare Resources (DKHR) at a 71% cash premium to DKHR's closing price of $8.50 on Friday, as well as an assumption of DKHR's outstanding debt. MCK expects the acquisition to close during Q3 2005, and to be accretive to earnings by 2007. MCK gained 1.48% to close at 45.21, while DKHR rocketed up 68.24% to close at 14.30.

Overnight, LG Philips (LPL) announced Q2 earnings which fell from $678 million from this quarter last year to $40 million in the first quarter. This precipitous decline was tempered by the fact that Q1 saw a net loss of $76 million. Sales were up from Q1 as well, rising 12% to $2.23 billion, which was nevertheless lower by 1% from Q2 2004. The company attributed the jump from Q1 to more accessible pricing in LCD TVs, and expects more of the same as lower prices attract demand in the second half of this year. LPL gained 4.94% to close at 22.75.

DreamWorks Animation (DWA) warned today that it sees a Q2 loss of $.07 to $.09 per share, down from its previous guidance of breakeven. For the full year, DWA expects to see EPS of $.80-$.90, down from earlier projections of $1.00-$1.25. DWA also announced that it will withdraw its $500 million common stock offering. The company cited an increase in return reserves for its 2004 titles for the profit warning and valuation concerns for the decision to cancel the stock issuance. Later in the session, the company disclosed that it has received an information request from the SEC regarding its May 10th financial report and trading in DWA securities. The request for information was characterized by the SEC as "informal." DWA got whacked for a 13.20 loss to close at 23.27.

Also warning was semiconductor equipment maker Brooks Automation (BRKS), which sees fiscal Q3 revenue coming in between $111-$113 million, down from its previous $115-$120 million target. The company cited delays in some customer projects. BRKS lost 1.8% to close at 15.31.

Industrial chemical maker Celanese (CE) announced that Q2 earnings would be strong, based on "strong fundamentals," with EPS projected at $.39-$.44. The previous outlook was for a range between $.36-$.41 per share. CE's full-year is expected at $1.64-$1.69 per share. CE added 4.37% to close at 16.94.

Sprint (FON) announced its intention acquire its wireless affiliate US Unwired (UNWR) for $1.3 billion, pursuant to which FON will pay $6.25 for each UNWR share and assume $266 million of UNWR debt. The acquisition will also terminate a lawsuit that UNWR had brought against FON. FON rose .07 to close at 25.45, while UNWR gained 4 cents to close at 6.20.

After the bell, Genentech (DNA) announced Q2 results of 27 cents or $296.2 million, up from $170.8 million or 16 cents in the year-ago period on revenue that rose from $1.13 billion to $1.53 billion in the current quarter. Net of litigation and other charges, EPS was 30 cents, beating consensus estimates by 4 cents. DNA rose 25 cents to 83.75 afterhours, building on today's .40% gain to 83.50.

In other news, Marketwatch reported that Reserve Funds, which manages more than $25 billion and launched the world's first money-market fund, reported that client cash in sweep accounts is up more than 30% this year to $1.3 billion. This is potentially compelling anecdotal evidence of a buildup of cash "on the sidelines," and while $1.3 billion is certainly real money, it's difficult to get excited about it from a macro perspective in light of the huge amounts that the Fed's open market desk routinely throws around ($2.25 billion of net new money was added today alone via a $7 billion overnight repo, and last Tuesday, it was a $14.5 billion net add).

For tomorrow, the market will again reflect on the price of oil and treasury yields as we await Wednesday's economic data, the first of the week. Equity bulls will be seeking to defend today's range against the intraday corrective pullback that failed to gain traction today. A break of the lows would suggest potentially more than just corrective weakness, but with the futures firm afterhours as of this writing, the bears should have their work cut out for them. A break of today's highs could send them running for cover, extending the trending move off Thursday's lows further still.

While traders might not believe the firm, nearly pullback-free move, that disbelief has so far acted as a wall of worry to be climbed. Today's opening sub-.50 total put to call ratio looked like a brick wall for the bulls, but they disregarded it easily. In such cases, as always, price is the primary indicator- don't let yourself stare in disbelief as the price runs away. Similarly, if you're holding bullish profits, don't let a break of today's lows go unnoticed, as it could spell trouble for the daily cycle upphase that has brought us the gains from last week's low. In either direction, let the stops do their work.


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