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The Session That Almost Wasn't

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The Session That Almost Wasn't

If volume was any indication, market participants just stayed in bed today, putting in one of the lightest days of the year. Combined exchange volume was less than 2.8 billion shares, and QQQQ barely edged past the 50 million share mark. Breadth was mixed during the session but finished negative, with 2.07 declining shares for each advancing on the NYSE and 1.83 in the red on the Nasdaq for each advancing.

Light volume and thin markets can facilitate sudden moves, as any penny stock trader can attest, but the index ranges remained narrow as the markets drifted through another day of summer doldrums. Crude oil rose strongly, building on Friday's gains, while treasury bonds declined following an abysmal Treasury bill auction announced at 1PM.

Index volatility remained in the cellar, despite minor bounces as the indices plumbed the session lows. Characteristic of this July's rally, new highs were reached by some indices while others languished. The SPX was today's beneficiary, touching levels not seen since July 2001 before reversing this morning. The CBOE total put to call ratio opened at very low levels, as it has done several times in recent weeks, with today's first half-hour's reading a mere .55. The daily cycle indicators for the Dow, Nasdaq and SPX are trembling on the brink of a new downphase from overbought. Oil has been relentlessly bullish, as have treasury bond yields, and today's Treasury auction was poorly received (see below). Overall, these factors mandate caution for bulls and suggest impending bearish opportunity. But the price refuses to break down, as it has all month.

Daily Dow Chart

The Dow ran to a session high at 10686 in the morning before reversing in a decline that filled the remainder of the session, touching a low of 10591 and closing -55 at 10596. While price has been sliding sideways between 10570 and 10680 for the past week, the daily cycle indicators have begun to roll over from the top of their July range. As discussed in the Market Monitor, longer cycles tend to take longer to turn, and in this case it appears that the week-long sideways range would be the daily cycle making its turn. As well, the weekly cycle (not shown) is also in a top zone. If this interpretation is correct, then last week's highs should not be exceeded by much, if at all, and not on a daily closing basis. A break of 10560-70 support on a closing basis would confirm a new daily cycle downphase.

I have highlighted bear wedges on the daily chart, but am not very confident in the July wedge. A bounce from 10560 could turn the pattern into a bear flag. Unlike in June, when the wedge break was followed by an immediate, sharp drop, the current support break has been followed by more light-volumed, sideways chop.

Daily S&P 500 Chart

The SPX tagged a 4 year high today at 1238.36 before reversing to an afternoon low of 1228.15. The SPX was the strongest of its peers today, finishing lower by a mere 4.65 points at 1229.03. Like the Dow, the SPX is on a preliminary daily cycle sell signal, awaiting a support line break to generate the Macd confirmation. What was for the Dow last week a sideways range was a pattern of higher lows for the SPX. Today's break to new highs was quickly sold in a gravestone doji, not a bullish print. But the light volume and higher low are not the stuff of which daily cycle sell signals are made, and as with the Dow, SPX bears will need to see some downside price action below 1225 to confirm a new rollover.

Daily Nasdaq Chart

The Nasdaq peeked its head above 2180 but didn't like what it saw, reversing from a high of 2186.46 to hit a low of 2165.93, closing -13 at 2166.74. The daily cycle is in the first stages of a possible rollover, also awaiting Macd confirmation on a close below the recent range- in this case, 2160 is key support. Again, if this bearish interpretation is valid, then last week's high should not be exceeded.

Daily TNX Chart

The Treasury auctioned $19 billion of 13-week bills and $17 billion of 26-week bills. The 13-week auction generated a high-rate of 3.345% and a bid-to-cover ratio of 1.94. This was the highest high-rate and the weakest demand in several years, below the averages going back to 2000. The 26-week auction generated a high-rate of 3.54% and a bid-to-cover of 1.93, again the highest yield and weakest demand in years. Foreign central banks took a respectable $9.1 billion of the $36 billion total.

The weak demand at the 13- and 26-week auctions was matched by higher yields for ten year notes as well, with the TNX rising 2.4 bps to close at 4.247%. On the daily chart, the TNX retraced Friday's decline but fell short of the Thursday high. With the daily cycle indicators looking for an imminent top, bond bears/yield bulls will want to see the TNX hold above 4.2%, targeting last week's highs in the 4.3% area.

Daily Chart of Crude oil

Crude oil gapped higher from Friday's close and declined as China reported weaker than expected demand growth for the month of June. Tropical depression Gert made landfall, with no major disruptions, but this remains the most aggressive start to the annual Atlantic hurricane season on record, having shut in over 6 million barrels of Gulf of Mexico output so far.

September crude oil futures pulled back quickly, filling the opening gap to a low of 57.70, following which they ran higher to close above Friday's high and one tick below the day high of 59.025, +.35 from its gap up open at 59. So far, the daily cycle downphase has been getting very poor price traction, with Friday-Monday's one-two punch stalling the 10-day stochastic well above overbought territory. A clean break above the 22 day EMA targets confluence to 60.75, and would abort the daily cycle downphase early in its run.

Today's lone economic report was Existing Home Sales, released at 10AM. The National Association of Realtors reported that sales of previously-owned homes rose 2.7% to a record annual rate of 7.33 million units. Last month's 7.13 million units were adjusted 7.14 million. Expectations for this month's figure were for 7.15 million. However, inventories rose as well, with the number of unsold homes on the market increasing 3.8% to 2.653 million units, or a 4.3 month supply at current rates. The middle sales price is up 14.7% from June 2004 to a record $219,000.

Tomorrow, we'll get July Consumer Confidence, following which the schedule heats up with Durable Orders, New Home Sales and Fed Beige Book on Wednesday. On Thursday, it's Initial Claims and the Help Wanted Index, and on Friday, the GDP, Chain Deflator, ECI, Michigan Sentiment and Chicago PMI.

Xerox (XRX) reported a rise in earnings and revenue for Q2, reporting earnings of $408 million or 40 cents per share on revenue of $3.92 billion. The company had earned 21 cents or $187 million on revenue of $3.85 billion in Q2 2004. Consensus estimates for the current quarter were 23 cents on revenue of $3.86 billion. Net of a 33 cent per share one-time tax gain and a 13 cent per share restructuring charge, the company earned 20 cents, 3 cents below estimates. Following what has been a recurring theme this earnings season, the company stated that it sees Q3 earnings of only 16-18 cents, well below the previously forecast 22 cents. XRX got smoked on the news despite the mainstream press' emphasis on the 2% increase in revenue, losing over 7% in premarket trading. For the day, XRX closed -6.05% at 13.20.

Wal-Mart (WMT) grabbed early morning headlines, announcing its intention to double its presence in China by the end of 2006 and its expectation of double-digit sales growth in that market. WMT has been building new stores in China at an increasing pace following Beijing's abolition of a requirement that foreign companies have a local partner. While WMT did not offer figures for its sales growth in 2004, Reuters reported that Chinese government data shows a 31% increase in sales to 7.6 billion yuan or $940 million. As of December 2004, WMT had 43 stores in China, and intends to reach 55 stores by the end of 2005 and 90 by December 2006. Worldwide, WMT has approximately 5,000 stores. WMT closed lower by 13 cents at 49.41, off a low of 49.31.

In merger news, Teva Pharmaceuticals (TEVA) announced its agreement to acquire Ivax (IVX) for $7.4 billion, pursuant to which IVX holders will receive $26 per share in cash, a 13/6% premium to IVX's close on Friday, or .8471 American Depositary receipts in TEVA. TEVA expects no more than 50% of IVX shareholders to select the cash option, and the deal is subject to proration. TEVA and IVX are two of the largest generic drug companies, and the deal awaits antitrust clearance in Europe and the US. The deal is expected to generate synergies of $150 million within 2 years, with anticipated combined sales exceeding $7 billion. Following the announcement, S&P placed TEVA and its associated entities on credit watch "negative," stating that it sees challenging conditions ahead for generic drugmakers as well what it perceives as excessive debt levels that would be used to fund the acquisition. TEVA closed +.04 at 31.20, while IVX gained 10.1% to close at 25.19.

BellSouth (BLS) reported Q2 earnings from continuing operations that declined from Q2 2004's $996 million or 54 cents to $795 million or 43 cents. Including its participation in the Cingular/SBC venture, BLS earned $849 million or 46 cents on revenue which rose 27% to $8.52 billion, topping estimates of 43 cents and $8.49 billion. The company added 124,000 high-speed internet accounts in Q2, which Reuters reported was "well-below" forecasts. BLS gained 8 cents to close at 26.80.

American Express (AXP) reported in the early afternoon, announcing Q2 earnings of which rose 14% from last year's Q2 $876 million or 68 cents to $1 billion or 81 cents. Revenue rose from $7.2 billion to $8 billion in the current quarter. These results beat estimates of 78 cents and $7.78 billion on revenue, and the stock closed down a penny at 54.56.

After the bell, Altera reported lower Q2 earnings, declining from 20 cents or $75.3 million to $67.6 million or 18 cents in the current quarter, on revenue that rose from $269 million or $285.5 million. Estimates were for 18 cents on $277 million revenue. The stock was up 2 cents at 22.55 as of this writing, building on its 33 cent gain to 22.53 during the regular session.

Netflix (NFLX) reported a 53% jump in subscribers, with earnings nearly doubling to $5.7 million or 9 cents from last year's Q2's $2.9 million or 4 cents. EPS beat estimates by 8 cents. Revenue jumped 37% to $164.5 million, beating estimates of $163.5 million. NFLX was up 7.37% or 1.25 in afterhours trading at 18.21 as of this writing.

Texas Instruments (TNX) was the much-anticipated report afterhours, beating EPS expectations by 3 cents and coming in at 32 cents (net of tax-related items), with revenue rising 9% to $3.24 billion. Operating profit was $669 million, a record high. The company announced its intention to raise its dividend 20% to 12 cents per share annually, along with q $2 billion stock repurchase. The stock, which had closed -.16 at 30.60, was still halted as of this writing after trading +.20 afterhours at 30.80.

For tomorrow, bulls will continue to watch their stops and bears will continue to angle for those lower lows and lower highs which have so far eluded them. Forgetting the secondary indicators noted above, the cycle picture is becoming less bullish as the price holds its current ranges. The one component eluding bears continues to be the price, which steadfastly refuses to break. With earnings flying fast and furious, and mostly positive, the impetus may be a bunker-buster from one of the biggies this week. If last week's Dow/Nasdaq or today's SPX highs are broken with authority, then the bulls fondest wishes will be on track to come true. But barring that, the benefit of the doubt should begin shifting toward the bears' favor.


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