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Bear Aware

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Bulls took a powder today as the indices opened on a breakaway gap lower. Those bears who hadn't already given up on stocks in favor of real estate were still shaking their heads in amazement as prices broke and held below yesterday's lows. After a weak bounce attempt after 10AM, prices fell decisively lower, testing Tuesday's lows and returning to Monday's range.

Volume was light, as it's been with rare exception for the past month, but it was heavier than yesterday's figures. Volatility lurched higher, well off its recent decade-plus lows, while volume breadth held decisively negative all day, finishing with more than 2.6 declining shares for each advancing on both the NYSE and Nasdaq. Although I watch those figures all day in real time, I can't recall the last time that volume breadth held levels this negative for the entire day. The TRINQ broke briefly above 2.0.

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The daily charts represent the most concise summary of the various cycles I track, and so they are the featured timeframe for this discussion. As noted today in the Market Monitor, the weekly cycles (not shown) are at or very close to levels at which they should top out, with the 10-week stochastics on bearish kisses. This is noteworthy not just to contextualize the daily timeframe nested within it, but also to understand this week's daily action. Absent a strong upside breakout from here, the weekly cycle is due for a decline. For this reason, the net sideways action of the past 1-2 weeks (depending on the index) looks more bearish than bullish to me.

Daily Dow Chart

The Dow lost 89 points to close at 10609, 3 points above its session low and failing from its opening high of 10697. Today's drop plunged the price back to the range that has held since mid-July, frazzling the nerves of bulls and bears alike. The daily cycle downphase that has been stalling on and off for the past 3 weeks was revived again with today's drop, but the range still hasn't broken. Bears need a break of 10600, with a close below 10560 to confirm the range as a distribution top and set the stage for a move to 10440 support. Bulls need a break of the wedge apex at 10740 to reverse the daily cycle downphase.

Daily S&P 500 Chart

The SPX lost 9.19 to close at 1235.85, sliding from its high of 1245.04 and setting a low of 1235.15. The move retraced all of Tuesday's gains and returned the price to the top of last week's range. It also represented the first session's print below the rising wedge apex, though the light volume doesn't do much to support the bear wedge break interpretation. Bears need a close below 1233-35 to target the 1220 level and turn the daily cycle indicators decisively lower. To the upside, today's high is the goal for bulls, with a close above 1245-46 necessary to turn up the daily cycle indicators.

Daily Nasdaq Chart

The Nasdaq fell 25.5 points to close at 2191.3, one point above the lows. Of its peers, this is the clearest picture of a bear wedge, and today the first clear break below it. The daily cycle has been trending mostly sideways-lower in what appears to be a bearish divergence against this week's higher highs, and a break below 2180 should be enough to seal the deal. Next support is at 2160-65, while bulls need to gun the price back up above 2220. However, based on the bulls' inability to bounce the price off this afternoon's oversold intraday readings, my guess is that there will be more of them eager to escape at or above today's highs than there will be bears looking for cover. Above 1220, the bulls should be back in business, while below it, the bears should continue to press.

Daily TNX Chart

The Treasury announced its quarterly funding requirements this week, and will be stepping up borrowing by over $25 billion. It will also begin selling thirty-year debt again. Both announcements mean more debt to be absorbed by the market. Ten year note yields spent this morning in suspended animation at the 4.3% level before pulling back up to finish the session 1.9 bps at 4.319%. The launch higher during the past week qualifies as a trending move following the daily cycle rollover, and this week set a new high at 4.35%. Bond bears need to see 4.3% hold, with the rising trendline off June support 3 bps below it at 4.27%. A break above 4.35% would target the 4.4% and 4.44% confluence levels.

Daily Chart of Crude oil

September crude oil futures bounced today after touching yesterday's record high and dropping to 60.625 in the wake of the Wednesday weekly inventory data. The financial press had little to say beyond attributing the move to supply concerns. Reuters quoted one analyst as saying that despite higher prices, the oil system is running "close to sustainable limits" with very little or no excess capacity.

Following the daily coverage of the oil market by the mainstream press, I'm continually struck by the confusion of timeframes. The bearish case for oil, rarely supported but oft-repeated, attributes the pullbacks to various developments that are inconsequential to the longer-term bullish case for oil. Similarly, advances in price tend to get attributed to short term or non-recurring events. Reuters' coverage today gets closer to the truth, in my view- this is a non-renewable resource being consumed at an accelerating rate with no (or dubious) prospective alternatives. Whether short term price has outpaced the true value of a barrel of oil can be debated, but it seems to me that the fundamental long-term bullish case for oil cannot.

On the daily chart above, yesterday's high tested double top resistance from a higher low, in a possible bullish rising triangle. Bulls remain in the secondary uptrend above 59, with primary rising support at the 53 level. For the day, September crude oil closed up .60 at 61.45, off a high of 62.075.

The European Central Bank announced its decision to maintain its overnight rate unchanged at 2% for the 12 nation eurozone. This rate has not changed since June 2003. Also as expected, the Bank of England reduced rates by 25 basis points to 4.5%, citing "subdued" output growth and slowing household spending and business investment.

US Initial claims for week ended July 29th were announced by the Labor Department at 8:30AM. Initial claims for unemployment assistance declined by 1000 applications to 312,000 (seasonally adjusted), pulling the 4-week moving average lower by 2,250 to 316,750. Continuing jobless claims fell 18,000 to 2.58 million. Analysts were expecting weekly claims to rise to 315,000. Tomorrow's data will complete the picture, with the monthly employment report due at 8:30, with Nonfarm payrolls for July expected at 180,000 and the Unemployment rate at 5%.

Equities has been trading lower ahead of the Initial Claims data, and pressed to new lows following its release, while bonds held flat-to-negative as the report was released.

In corporate news, Gillette (G) beat the street with earnings of 49 cents on revenue of $2.77 billion, up from 42 cents in the year-ago period. Estimates were for EPS of 46 cents on revenue of $2.7 billion. The company reported gains across all businesses and in all regions, with Reuters noting a boost in sales from new products such as its "Venus Vibrance pulsating razor for women." G is to be acquired by PG this fall, in a $53.5 billion deal. For the day, G lost 1.23% to close at 52.30.

WMT got a lift in the morning, reporting July same-store sales which rose 4.4%, with Wal-Mart sales up 4.2% and Sam's Club up 5.1% for the month. Total sales rose 10.7% to $22.81 billion for the month, compared with $20.61 billion for July 2004. WMT estimates a 3%-5% gain for August, and was among the stronger of the retail same-store results. However, results overall, including the Gap (GPS), Nordstrom (JWN), the Limited (LTD), Sharper Image (SHRP) and Target (TGT) disappointed, with the S&P Retail Index (RLX) getting clipped for 2.21% to finish at 472.12. The implication is of stressed consumers, beset by persistently rising energy prices and rising borrowing rates. Recall that the Commerce Department reported earlier this week that the savings rate of US consumers has reached zero, at the lowest levels since the Great Depression, according to CNN. This is offset by appreciation in real estate values, and no doubt most homeowners are "saving" via rising property values instead of spending less than their income. But retailers were hurting today as they reported weak same-store sales for the month. WMT closed lower by .83% at 49.27,

Warner Music Group (WMG) managed to beat the street, losing $179 million or $1.41 per share, compared with a loss of $91 million or 85 cents in the year-ago period, on IPO-related charges. Excluding those one time charges, the company lost 27 cents or $35 million, compared with estimates of a 49 cent loss. Revenue was higher by 2% at $742 million, compared with estimates of $721.3 million. WMG gained 6.68% or 1.05 to close at 16.78.

Clorox (CLX) announced Q4 earnings which rose from 86 cents in the year-ago quarter to $1.00 in the current quarter, with net earnings declining from $185 million to $156 million. Revenue rose from $1.19 billion to $1.25 billion. The jump in EPS was attributed to a reduction in the float. Consensus estimates were for 94 cents per share. CLX finished the day 1.54% at 56.74.

Sara Lee (SLE) reported a net loss on revenue that declined 5% to $4.8 billion, earning $148 million or 19 cents, down from $354 million or 44 cents per share in the year-ago quarter. Net of one-time charges, SLE earned 36 cents, beating expectations by a nickel. The company also announced a share repurchase program of $2 billion, reduction of at least $1.5 billion in debt during the next 2 years and reaffirmed its 79 cent dividend for 2006. Later in the day, Fitch downgraded SLE's senior debt to "BBB " from "A", citing the share buyback and other capital initiatives. The stock opened lower, dropped to a low at 10AM, and rose from there to finish the day 2.26% at 20.81.

Today's action was ominous, coming as it did in the context of the weekly cycle picture and the extended, extreme low volatility readings. One analyst noted that mutual fund cash-to-asset ratios are back to record lows at levels seen only once before, in March 2000. That's not to say that an immediate and vertiginous plunge is imminent. But it does indicate that, at the very least, it is late in the bullish party, and the balance of probabilities favors the downside from here. Price is the only primary indicator, and it remains in an uptrend even counting today's drop. But increasingly, the secondary indicators are flashing warnings, and bulls should not hesitate to protect their profits if the price trend begins to reverse.

After the bell, Viacom reported Q2 earnings that rose 6% from 41 cents or $717 million in Q2 2004 to $726 million or 47 cents in the current quarter, beating the street by a penny. Revenue rose from $5.4 billion to $5.9 billion, beating expectations by $500 million. VIA.B was up 2 cents in afterhours as of this writing.

Aside from the monthly Nonfarm Payroll report, tomorrow is set to be a critical day for purely technical reasons. Today's decline wiped out nearly all of the equity indices' gains since Monday. With the weekly cycle topped out and on a bearish stochastic kiss, a close at or below Monday's lows would result in a gravestone doji candle for the week- a potential bearish reversal print. With bond yields trading in an upside trending move, crude oil, natural gas and gasoline prices firm and volatility coming off recent lows, equities are at levels that bulls will need to see defended. While weekly tops are usually not quick affairs, the argument can be made that we've been watching the process unfold in recent weeks. That doesn't rule out more tests or even new highs, but it does imply that the vast bulk of the upside has been seen for this run.
 

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