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Market Wrap

Markets Measure Response to FOMC

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The markets gapped up and held a narrow, quiet range ahead of the FOMC announcement, following which a run higher and dip lower were both reversed. Equities held their opening gains into the close, but finished off their post-FOMC spike highs.

Volume breadth was strong all day, with advancing volume doubling declining volume to finish +2.26:1 on the NYSE and +1.92:1 on the Nasdaq. Volatility fell, but volume was light even in the wake of the post-FOMC surge.

The Dow gapped up at the open and rose to break the previous 2 sessions' highs, spiking to 10639 in the minutes following the FOMC announcement this afternoon. That spike blew off, with price returning to the 10600 area where it had spent most of the day. The higher high and higher low were enough to stall the daily cycle downphase, however, and tomorrow is set to be a key test of today's intraday cycle bullishness against the daily cycle. Bears need to see a closing break of today's 10537 low, while bulls will be content with another higher high and higher low for tomorrow.

Daily S&P 500 Chart

The SPX put in a weaker showing than the Dow, not clearing Friday's high and not stalling the daily cycle downphase (though it came close). The 8.25 point gain closed the SPX at 1231.38, off an afternoon high of 1234 and a low of 1223 at the open. This is the key range for tomorrow, below which bears will defend 1218, 1211 and 1205 support if tested.

Daily Nasdaq Chart

The Nasdaq held entirely within yesterday's range, printing an inside day after opening at a low of 2168 and failing at a high of 2181. 2155-60 is immediate key support, below which is mostly low-volume air to the 2100 level. Bulls need to clear today's high on a closing basis to stall the ongoing daily cycle downphase.

Daily TNX Chart

The Treasury followed yesterday's $52 billion of auctions with a $14 billion 4-week bill auction today. The bills, which mature September 8th, generated a strong bid-to-cover ratio of 3.2 at a high-rate of 3.33%, a new high for the year. But foreign central banks, following the theme of "diversification," lightened up again, with very weak participation- of the $14 billion auctioned, indirect bidders took only $2.3 billion of the total. Equities took a small dip following the announcement, but recovered in the hour leading up to the FOMC announcement.

Ten year notes traded both sides of unchanged but flipped positive following the 2:15PM announcement (see below). Ten year note yields had tested the 4.44% resistance line on a spike, but backed away on the post-FOMC buying. 4.4%-4.44% remains the operative range, below which is support at 4.38% and 4.35%. Regardless of the short-term FOMC reactions, I believe that foreign central bank policy will wind up exerting a stronger influence on the Treasury markets than the Fed's cautious policy decisions. For the day, the TNX closed lower by 2.5 bps at 4.394%.

Daily Chart of Crude oil

Crude oil extended yesterday's rise to tag a new record high at 64.275, but spend the day retreating within yesterday's breakout range. Rising triangle support at 62.50-63.00 was not tested, and today's action felt more like a consolidation than anything else. However, bulls will want to exercise caution as the 10-day stochastic has entered overbought territory, with the Macd still rising but showing a potential bearish divergence should crude oil decline from here. There was little in the way of oil-specific news, aside from a survey by McGraw-Hill's Platts energy service, which concluded that oil production rose 150,000 bpd in July to an average of 30.25 mbpd for the month.

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For the day, September crude oil futures finished lower by .85 at 63.10, a dime off the lows.

In economic news, the Labor Department announced its preliminary Q2 productivity figures, reporting that non-farm productivity slowed to a 2.2% rate during the quarter, beating expectations of a 2% figure. The Q1 nonfarm productivity result was revised up from 2.9% to 3.2%. Unit labor costs rose 1.3%, following the 3.6% gain in Q1. Year-over-year, unit labor costs have risen 4.3%, the widest jump since Q3 2000.

Following the report, Marketwatch reported a statement from the Center for Housing Policy to the effect that increases in average home prices are far outpacing wage inflation, putting homes out of reach for many workers. The Center's director, Barbara Lippman, was quoted as saying that "Across the nation we are seeing a growing disparity between the skyrocketing home prices of recent years and the minimal increase, if not flattening, in wages for our nation's community workers. Additionally, the disturbing trend of retail salespersons and janitors, and those in similar wage groups, paying in excess of what is considered affordable in order to rent a one- or two-bedroom apartment continues in metropolitan areas throughout the country."

Later in the session, the National Association of Realtors connected the dots a step further, stating that expects some kind of a pullback in real estate prices for the remainder of the year despite record new- and existing home sales being set. Longs in FNM and the homebuilders didn't exactly panic in the face of this pronouncement, FNM finishing the day +1.16% at 54.83 and the HGX up 1% to close at 542.48.

The International Council of Shopping Centers and UBS announced that US retail chain store sales fell 0.8% last week, pulling the year-on-year increase down from 4.9% last week to 4% in the current week. The ICSC cited "seasonally hot weather" for the decline in demand. Window-shopping was also to blame, as shopper traffic increased while spending declined.

The Commerce Department reported June Wholesale Inventories at 10AM, with inventories growing 0.7% in June on a 3.1% jump in automobile inventories. Wholesale sales rose 0.6% on rising petroleum sales, with the inventory-to-sales ratio holding at 1.19. Estimates had been for an increase of 0.3% in Wholesale Inventories.

In corporate news, MCI (MCIP) reported Q2 net earnings that rose from a net loss of $71 million or 22 cents in Q2 2004 to $64 million or 19 cents, blowing away estimates by 20 cents. Revenue declined 10% to $4.7 billion in the current quarter but beating estimates by $70 million. Later in the session, MCI disclosed the terms of its acquisition of Totality Corp., announced last week. The company will pay approximately $70 million in cash to acquire Totality, a private company that provides services including remote managed systems, problem management and asset management to the retail, financial, health and travel sectors. MCIP closed +.28% at 25.38.

Echostar (DISH) announced Q2 earnings of $856 million or $1.89 per share, up from $85 million or 18 cents in Q2 2004. These earnings were boosted by a one-time tax benefit of $593 million or $1.31 per share, net of which earnings would have been 58 cents. Estimates were for earnings of 44 cents (net of one time items). On revenue, DISH met expectations with an 18% rise to $2.1 billion in the current quarter. DISH gained 5.48% to close at 31.

America's leading movie-rental chain, Blockbuster (BBI) reported Q2 earnings which fell from +$48.6 million or 27 cents per share in the year-ago quarter to a loss of $57.2 million or 31 cents, or 22 cents and $40.2 million net of one-time items. Estimates were for a loss of 10 cents per share. Revenue fell 2% to $1.4 billion, with rental revenue dropping 5% to $1.02 billion due to the elimination of late fees. BBI has withdrawn guidance for 2005 and sees "uncertainty and continued decline in the rental industry." BBI gapped lower at the open and slid for the day, finishing lower by 11.49% at 7.09.

After the bell, CSCO announced Q4 EPS which rose from 20 cents in the year-ago quarter to 24 cents (GAAP basis), on revenue of $6.58 billion, up from $5.93 billion. Pro-forma EPS was 25 cents, meeting consensus expectations. Revenue exceeded expectations by $10 million. CEO John Chambers was characteristically upbeat: "The close of Cisco's fourth quarter and 2005 fiscal year marks not only a period of strong operating performance for the company, including record net income and earnings per share, but also further demonstrates that our architectural strategy is working." CSCO had closed up 1.87% at 19.61, but was trading down 6 cents at 19.55 as of this writing.

At 2:15, the Fed's Open Market Committee raised the its overnight target rate 25 bps to 3.5%, in a widely anticipated move. This was the 10th consecutive rate hike from the Fed. As noted in the financial press, the policy statement was virtually identical to its June 30th statement, with the FOMC seeing the current 3.5% overnight rate as "accommodative" and stimulative. The committee noted that spending and labor markets have been improving gradually despite high oil prices, with "low core inflation" and "longer term inflation expectations remain[ing] well-contained." That seems to be what they meant, but since first reading it at 2:20PM, I've been struggling to either de- or induce the logos from this sentence in the 2nd paragraph of the Fed statement:

"Core inflation has been relatively low in recent months and longer-term inflation expectations remain well contained, but pressures on inflation have stayed elevated."

Syntactical conundrums aside, the Fed retained the "measured pace" language, saying that it expects to continue to raise rates at a pace "that is likely to be measured."

Treasuries firmed on the benign statement and equities broke their previous session highs. Greenspan has already said that he is not concerned with narrow spreads and a flat yield curve, and today's release indicated that status quo will remain the policy of choice. Presumably, the Fed will continue to stimulate via its open market operations, and allow market forces to deal with the rallies in real estate, crude oil and other assets.

Tomorrow the markets will receive the weekly mortgage data, the EIA weekly petroleum report, a 5-year Treasury note auction and, at 2PM, the July Treasury Budget. Today's bounces in equities and treasuries came on the heels of extended intraday trending moves within the longer cycles. Those bounces should get put to the test tomorrow, as the strongly oversold intraday cycle readings that generated them are now at or close to overbought readings. The opposition of these key cycles could generate sudden reversals and chop, or even worse, an extended flat, low-volume range. Traders in all but the shortest timeframes will want to exercise patience to see which way the deadlock wants to break. Today's session highs and lows should serve well as the key levels by which to measure which side has the edge.
 

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