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Market Wrap

Producer Prices jumped 1% in July, Oil prices fall

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Wednesday's cash session found modest gains among the major averages on negative breadth after the government said producer prices jumped 1% in July (4.6% year-over-year), fueled largely by energy prices jumping 4.4%, with gasoline prices surging 11%. However, core prices, which excludes food and energy prices rose a more tepid 0.4% in July (2.8% year-over-year).

Upbeat responses to quarterly earnings from Hewlett Packard (NYSE:HPQ) $26.82 +13.16% (new 52-week high) and chip-equipment maker Applied Materials (NASDAQ:AMAT) $18.22 +6.11% kept some high beta traders busy in the early going, with the highly anticipated week EIA energy inventory data due out at 10:30 AM EDT.


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Boom! A sell program premium was found and the majors dipped to their morning lows as traders focused on another huge draw in unleaded gasoline inventories with the EIA saying stockpiles plunged by 4.96 million barrels!

As I contemplated how much a yellow Labrador retriever with a broken leg and hip might fetch on an eBay "sympathy auction," so that I could afford to fill up the land yacht in coming weeks, a buy program premium came into the equity markets and stocks firmed.

While unleaded gasoline inventories fell for a seventh-straight week, with stockpiles down 6.24%, or 13.2 million barrels in just the past month, the EIA said crude oil inventories rose by a modest 241,000 barrels (third-straight weekly gain), while refiners continued to churn out distillates, adding 1.19 million barrels to the nation's stockpiles.

With bears having a diverse diet and willing to eat just about anything, sellers turned their attention to the energy complex in Wednesday's trade with September Crude Oil futures (cl04u) settling down $2.83, or -4.28% at $63.25. The September Heating Oil (ho05u) settled down $0.08, or -4.3%, while Unleaded Gas futures (hu05u) settled down $0.092, or -4.67% at $1.891, nearly matching last Wednesday's settlement of $1.896.

The energy pits roared with traders showing open palms for the better part of the afternoon. Some traders cited today's sharp sell-off being led by momentum longs liquidating positions as refiners were operating at 93.5% of capacity last week, a slight decline from 95% the week before. If I were to interpret this as a reason to sell, or take profits, it would be that traders think there might be some slack demand, or extra capacity having come back on line.

The EIA did say it still sees relatively strong demand for gasoline. Despite high prices at the pump, motor gasoline demand averaged nearly 9.5 million barrels a day over the past four weeks, 1.5% above year-ago levels.

U.S. Market Watch - 08/17/05 Close

Miners as depicted by the AMEX Gold Bugs Index ($HUI.X) 208.92 -3.15% were today's sector loser, but still hold a modest gain from last Wednesday. In PINK, I've highlighted the OIX, OSX and XNG indices, where losses here provide a drag not only on the NYSE Composite ($NYA.X) 7,461.77 -0.24%, which is home to many a 1,2 and 3-lettered energy stock, but you'll note that the number of new highs on the New York Stock Exchange (NYSE) have also been dropping off in recent weeks. The AMEX Composite (XAX.X) 1,601.86 -1.18%, which set an all-time high of 1,650 earlier this month, is also littered with many energy, biotech and miner names.

In DASHED Pink (SPX/SPY and OEX) there are also some energy names that may have weighed on today's trade. Exxon/Mobil (NYSE:XOM) $58.18 -1.50% still edges out General Electric (NYSE:GE) $34.10 +0.64% as the most heavily weighted component in the OEX. Well down the list and out of the top 33-weighted OEX components you'll find Schlumberger (NYSE:SLB) $81.74 -2.16%, Halliburton (NYSE:HAL) $55.80 -2.20% and Baker Hughes (NYSE:BHI) $55.83 -2.01%.

Each week I try and post the EIA inventory data for crude oil, gasoline and distillates. Sometimes I think it helps investors to look at the raw data instead of getting just a "one week snapshot" in a paragraph of words.

EIA Weekly Crude Oil, Gasoline and Distillates Table

Remember my thoughts from a couple of weeks ago? When I thought refiners would cut back on their distillate builds and turn their focus toward unleaded and have some "relief at the pump?" Oooooeee, did I miss that one! You want another forecast tonight? I didn't think so.

It is crazy isn't it? I do think I can rationalize what a trader is talking about when he gives the "reason" for selling, based on the scenario that the decline in capacity utilization might be construed as being bearish (lower) for unleaded gasoline. And while I'm not from Missouri (the show me state), I guess we could look for a rise in unleaded gasoline stockpiles next week, but a 4.96 million draw this past week would need some monitoring to that scenario.

Hey, if you were, or are long unleaded futures, it is pretty easy to sell and take some profits, then ask some questions next week.

Oh! I wanted to quickly draw your attention to today's hour-by-hour trade in Treasuries. Go back and look at today's 10, 11, 12, 1, 2 and 3 o'clock interval changes.

Let's just discuss the 10-year YIELD ($TNX.X) for simplicity sake. This is the benchmark bond that many traders will "quote."

What's going on at 10:00? Pretty much unchanged. Hmmm... not a "knee-jerk" reaction we might look for, with higher yield signaling an INFLATION response.

Now, what takes place from 11:00 to the 03:00 close? A slight move higher in YIELD right?

OK ... now I don't track crude, unleaded gas, or heating oil in the intra-day market internals, but look at the Commodities Research Bureau Index (CRB.X). What takes place after 11:00? Remember, the EIA data was released at 10:30 AM EDT.

Hmmm... are you thinking "that looks slightly re-factionary?" As if lower energy prices might be less taxing, or stimulative?

Oh those regional banks and the BIX.X. Buggers showed some bullish life on Tuesday when they traded a WEEKLY R1 in their pivot matrix, the first trade of a weekly R1 since last doing so the week of 07/11-07/15. Since the week of 07/11-07/15, the BIX.X has NOT traded a WEEKLY R1 (resistance 1) and has shown the ability to trade WEEKLY S1's (support 1) and lower WEEKLY S2's.

YOU don't need to be a Pivot Matrix expert to grasp what may be taking place here. All you need to do is think like a computer would think.

Here, let me take a sledge hammer and I'm going to hit your knee with it. Let's say your knee is a WEEKLY S1. What is your reaction? (Next time you try that Jeff, I'm going to move my knee).

OK.... now you see me getting ready to swing the sledge hammer again. What are you going to do (no, you can't punch me in the nose)? Move your knee right? Bam! I got your foot this time (WEEKLY S2) and a lower target. See what is going on here, but to the downside.

Now.... I'm not going to try and hit your "belt" with the sledge hammer. This would be a WEEKLY Pivot. The middle part of your body. No.... things are pretty content around the PIVOT. Just a tummy rub.

Hmmmm, how about a tickle with a feather under your arm? At a WEEKLY R1? What's your reaction to that? On the first tickle, you might jump away and grin and say... "Ooo that tickles."

OK, I digress, but I want traders to get a "feel" for what may be taking place within the BIX.X and their weekly Pivot levels. Next week, you might say, hey, tickle my knee (WEEKLY S1) or tickle my tummy (WEEKLY Pivot). Just don't hit me with that sledge hammer again.

Should things get carried away with the tickling, then its your chin, or just behind the ears and WEEKLY R2 (resistance 2).

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

What I like about using Pivot Levels, is that we can imagine that we are a computer and without emotion, manage a inventory of banking stocks. If our lower support levels keep getting pounded with stock from sellers, the computer sets itself up to then sell rallies at resistance. Eventually, buying and selling reaches some type of equilibrium, and things turn. Suddenly support levels are being hit (S2, or S1) and buyers start "tickling" resistance levels (R1, R2) on a more frequent basis.

Now MARKET bulls shouldn't be getting overly euphoric at this point. Those of you that have followed my analysis over the years know that I like to go back in time and set up some tests.

See the "History in WEEKLY Pivots:" where I point to some bars that would represent time from 03/28-04/01. During that time, the BIX.X has been under selling pressure, but that week, we did witness the BIX.X trading UP to a WEEKLY R1. See how it wasn't until 04/21/05 that the BIX.X made a climactic bottom?

Just put that in your mind right now. Bears can do the same thing. The question right now is... will history repeat, and are we currently experiencing a trade similar to 03/28-04/01, or are we currently making a bottom like that found on 04/21?

I wish I could tell you for CERTAIN, but I can't. However, with some "softening" in energy sectors, which have undoubtedly HELPED the SPX/SPY and perhaps the OEX, the BIX.X will remain a focal point of mine. And hopefully yours. Banks carry a MUCH GREATER WEIGHTING in the SPX/SPY and OEX than do energy stocks. Some bear bloggers were out in force today reminding bulls that the main reason the SPX was able to hit 4-year highs earlier this month was because of energy stocks.

S&P 500 Index (SPX.X) - Daily Intervals

I want to show the SPX with its current WEEKLY and MONTHLY Pivot retracement. Remember, these levels are simply derived by a mathematical formula (something a computer can understand). If we compare what the BIX.X is doing within its WEEKLY Pivot retracement (trades R1 Tuesday, but SPX nowhere close) and what the BIX.X is doing within its MONTHLY Pivot retracement (has traded MONTHLY S1, but SPX nowhere close to 1,159) we get a very different impression.

Impression: Good gravy! The SPX.X has downside risk to 1,159!

Analysis: Great! Now you (bull bear) understand the pending importance of the BIX.X!!!!

Now look where the SPX hit a low back in April (04/20) and put that in perspective of what the BIX.X did when it made a 04/21 low. You see, the BIX.X didn't need to trade 10% higher in order for the SPX to trade 10% higher. Why? Because there are so many darned banks in the SPX!

NASDAQ-100 Tracker (QQQQ) - Daily Intervals

Watching the QQQQ trade intra-day, it sure seems to want to gravitate either side of $39.00. My source for "Max Pain" theory levels remains out of commission and I haven't had the time to try and study QQQQ/NDX options chains to try and derive a possible August expiration "Max Pain" theory level. Still, I think there might be some "old bears" looking to cover some shorts as the QQQQ eases back into the neckline. If the QQQQ were to break back above that $39.60 level, which just happens to be this week's WEEKLY R1, then bears could be in trouble ... again.

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