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Market Wrap

Wounded bear calls on oil

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Stocks surged higher in early morning trade despite a negative reaction to networking equipment giant Cisco Systems' (CSCO) $18.25 -6.93% tepid outlook into next quarter.

Early morning reports from the Division of Wildlife showed a record number of bears being harvested, but by late morning with advancers outnumbering decliners by a hefty 4-to-1 margin at the big board, and 2-to-1 margin at the NASDAQ, there was one report of a hunter found crawling on hands and knees near a remote oil well pad in the high mountains of Montana.

In an unsubstantiated report, the bear hunter was evidently trying to set a Guinness Book of World Records by shooting a grizzly bear with a slingshot.

Hmmm... hunting Grizzly with a slingshot and a pocket full of marbles.

Buy program premiums were found after the EIA said crude oil inventories jumped by 2.79 million barrels in the recent week after showing a fractional 196,000 barrel build in the prior week. And while the report was initially described as "very bearish" for oil traders, it may have been forgotten that crude oil inventories for the week ended July 1 and July 8 had both shown draws of over 3.6 million. EIA data from July 22 showed a hefty draw of 2.2 million barrels.

No, I wasn't smart, or dumb enough to try and short the highs based on the headline crude oil numbers, but I hadn't lost all my marbles either. I've been tracking the weekly EIA data and while today's report does suggest that supply and demand may be leveling out a bit, the psychology of higher oil prices may well have saved many a broader equity bear in today's trade.

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Other data released by the EIA showed continued draws in gasoline, with inventories falling by 2.08 million barrels. Refiners continue to crank out distillates, with inventories adding another 2.6 million barrels.

Over the past month, crude oil inventories are down just 0.05%, or 152,000 barrels, down 2.5%, or 8.1 million barrels for the past two months, but down 4.0%, or 13.2 million barrels from 3-months ago.

Yes... when you start to look where inventories are vs. 3-months ago, the latest week's crude oil build is a bit like shooting a Grizzly with a slingshot.

Hey, if there's a silver lining in the "oil cloud," it might be that crude oil inventories have built by 26.5 million barrels versus this time last year. That's a 9.0% gain from last year.

If there's one area of the markets that bears are at the top of the food chain, it remains the energy complex. September Crude Oil futures (cl05u) settled up $1.83, or 2.90% at $64.90 and hit another contract high. September Unleaded Gas futures (hu05u) settled up $0.0739, or 4.06% at $1.8963, while September Heating Oil futures (ho05u) finished up $0.0622, or 3.5% at $1.8388.

Miners, oil, oil service, natural gas and health insurers were atop today's sector winner's list, while networking, Internet, and combined telecom, all of which Cisco Systems (CSCO) is a component, paced declines from mid-session to the close.

Insurance giant American Intl. Group (AIG) $62.24 +1.33% traded as high as $63.73 after reporting Q2 net income of $3.99 billion, or $1.53 a share. The Dow component cited strong results in overseas operations and surging capital gains offsetting lower business volume in some of its U.S. units. The company's CEO said the firm is cooperating as much as possible with accounting probes.

On the topic of accounting, chartered mortgage company Fannie Mae (FNM) $52.64 -3.99% said it was pushing back 2004 results. The company now expects to release 2004 results in second half of 2006 and may curtail disclosures while it completes restatement. Executives refused to provide details on riskier assets it had acquired recently.

Both AIG and FNM's news came prior to the opening bell.

U.S. Market Watch - 08/10/05 Close

News out of the Federal Government had the U.S. budget deficit falling in July to a deficit of $52.79 billion, which was narrower than the Congressional Budget Office's projection of $58 billion and last year's deficit of $69.16 billion. Fiscal year-to-date budget deficit stands at $302.59 billion, compared with year-earlier deficit of $396.22 billion.

Unocal (UCL) $66.10 +0.83% voted to sell the company to Chevron (CVX) $62.48 +2.05% for about $18 billion. A large majority elected to receive all cash for their shares. Chevron expects to gain oil and natural gas reserves in Asia and North America as part of the takeover.

In other merger-related news, Yahoo (YHOO) $34.20 +0.38% said it is set to pay $1 billion and hand China operations over to Alibaba.com in return for a 35% stake in Chinese e-commerce operator. If consummated, Alibaba would maintain Yahoo brands for its search engine, but would gain access to users and advertisers.

Tonight's extended session was rather quiet with media-giant News Corp. (NWS) $17.44 +1.45% edging up 58 cents to $18.02 after saying Q4 net income rose 67% vs. a year ago.

CV Therapeutics (CVTX) $25.83 -2.34% fell 62 cents during the regular session, but jumped to $27.55 in late trading after the company said its first of two Phase III studies Regadenoson, which helps detect coronary artery disease, met primary endpoint.

I want to quickly review the S&P Banks Index (BIX.X) 354.33 -0.52%, which is down another 2.24% since our visit last Wednesday.

Several weeks ago I mentioned that sources deep within the "bear camp" would eventually start pointing to "higher yields" among the major Treasury maturities as being doom and gloom for stocks. You didn't hear much of that this morning, but I still think (those of you that have followed my commentary over the YEARS) that while the Fed methodically raises rates from historically low levels, we need some SELLING in the longer-dated maturities to widen the spread.

The daily bar chart of the BIX.X isn't the best chart to show intra-day action, but we can see how the BIX.X did show some life this morning. Go back up to our intra-day breadth table and we can see some "relief" from the 5-year to 30-year Treasury yield spread on an intra-day basis. The banks were bidding.

But you'll have to take my word that when oil prices broke to a new record high, just about EVERY EQUITY GROUP reversed gains at that very minute!

I say "oil is psychological." Yes, it is also a fundamental "tax" on the economy, but at times, you can really see how a higher trade in oil becomes the "psychological trigger" for selling of equities.

I don't mean to laugh, but when oil broke to a new high, it was like equity trader's eyes popped open wide. Yeah... kind of like shooting a Grizzly bear in the fanny, then realizing what you've just done. Some say you're supposed to just "play dead" and take your chances, cause if you run, that bear is going to run you down and eat you up.

S&P Banks Index (BIX.X) - Daily Interval

Again, the BIX.X is just a portion of the financials, and while the banks struggled the past 5-days, brokers held their own, insurance was soft, but the U.S. Market Watch shows both the BIX.X and BKX.X a point of contention, and still NO HELP for bulls to fully exterminate the bearish population.

Don't just "forget" or write the banks off and predict doom. Understand why they will trade weak, or strong, based on loan generation, but also their LENDING SPREADS.

S&P 500 Index Chart - Daily Intervals

Here is a chart of the S&P 500 Index (SPX.X) with WEEKLY (blue) and MONTHLY (red) pivot analysis retracement. The levels, or "zones" I see as being important support/resistance are colored in yellow.

Do you see how today's bar looks a little similar to the BIX.X bar? A nice pop, but then the reversal.

My point here is that the SPX.X challenges the highs again, without ANY real help from the BIX.X since its relative high "top" on July 15.

With bears starting to grumble that it is "higher yield" that is doom and gloom for equities, traders/investors need to follow the BIX.X as an important sector/index.

The BIX.X does suggest broader equity cautiousness at this point, but it has been my observation, that just when the BEARS count them out, that's when they rally strongest. It's not a "finite" 10-year yield, or a "finite" price of oil either that triggers buying or selling in the group.
 

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