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Market Wrap

Bidders Strike

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Today's session was a snoozer as bulls and bears reflected on yesterday's vertiginous drop. Volume was extremely light, range was narrow, and only the tension left over from yesterday's sharp move help traders' attention. The action (or lack thereof) was suggestive of a bear flag, but positive breadth and a lack of volume on the intraday dips complicated an otherwise bearish picture.

Volume breadth opened strongly green, with roughly 3 advancing shares for each declining on the Nasdaq and 2:1 on the NYSE. By the close, that had deteriorated to 1.2:1 on the Nasdaq and 1.5:1 on the NYSE, but it refused go negative, declining volume never taking the lead. Pricewise, it coincided with a mostly flat/sideways drift on the indices. Bonds rose, while oil persisted in its gains despite a bit of an improvement in Tropical Storm Katrina's flight path (see below). Natural gas pulled back after breaking the $10 level, but remains at multiyear highs.


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Overall volume was very light for the indices, with combined exchange volume failing well below 2.5 billion shares.

Daily Dow Chart

The Dow chopped its way along the bottom of a rising channel in pay since the April lows, finding support at a low of 10428 but barely twitching off the canvas following yesterday's drop. The high was only 10428, well below the bulk of yesterday's volume. It appeared that yesterday's sellers were covering or averaging down, but every bounce attempt was steadily sold back down. There were few spikes in either direction, and the volume was very low. For these reasons, I believe that today was just a pause in yesterday's impulsive decline, a bear flag or what Linda Piazza refers to as a "b" distribution pattern, but if that's the case, the sellers will need to step up tomorrow, and not much higher than today's highs. 10500 is now resistance, 10440 immediate confluence. For the day, the Dow gained 16 to close at 10450.63.

Daily S&P 500 Chart

The SPX did a little better than the Dow, closing higher by 2.76 at 1212.35, a relatively higher percentage gain that retraced more of Wednesday afternoon's destruction. As with the Dow, the daily cycle indicators have gotten down to levels that have coincided with bounces in the past, but today's performance was anything but bullish. A close back above 1218 would be the first sign of trouble for daily cycle bears, while to the downside, next support is at 1204-05.

Daily Nasdaq Chart

The Nasdaq gained 5.46 points to close at 2134.37, hanging just above yesterday's lows for the entire session. The high was 2138, forming a nervous 9 point range for the entire session. Unlike its peers, the Nasdaq is seriously oversold on a daily cycle basis, the 10-day stochastic trending in oversold for over a week now. Bears need to defend 2150 resistance, a close above which should be enough to generate the first daily cycle buy signal. Below the current lows, there's little in the way of support until 2100-05.

Daily TNX Chart

Yesterday afternoon's sharp decline coincided with an announcement reported by Bloomberg that the New York Fed "invited 14 of the 'major participants' in the credit- derivatives market to a meeting next month amid concern the $8.4 trillion industry is rife with unconfirmed trades." This meeting is scheduled for September 15th. This is not the first we've seen of the issue, as the Counterparty Risk Management Policy Group issued a report on July 27, stating that "urgent" efforts are required to address an accumulation of trade confirmations and recommending that banks reduce their trading until alleged deals can be properly confirmed. For the September 15th meeting requested by the Fed, each invitee was suggested to bring "a senior business representative and a senior risk management person."

The FDIC announced today that earnings at insured banks and thrifts declined 3.3% or $1.1 billion from their record Q2 results to $33.1 billion in the current quarter. The report cited lower non-interest income and higher expenses for the drop, while noting that loan demand rose, particularly for residential mortgages, commercial and industrial loans. The decline is unsurprising, given the rise in short term rates and the overall flattening of the yield curve.

Ten year treasury notes chopped their way higher today, holding within yesterday's range. Ten year note yields (TNX) declined 1.9 bps to close at 4.16%, but have yet to break the 4.14% confluence and Fibonacci support. The daily cycle downphase has entered oversold territory and a bounce will be due in that timeframe. A break above the 4.2% confluence would confirm what should prove a bull wedge breakout targeting the 4.44% August highs. First resistance is at 4.18%.

Daily Chart of Crude oil

Last night, Tesoro Petroleum (TSO) reported a fire in one of the fluid catalytic cracking units at its Golden Eagle refinery in Pacheco, CA. The refinery produces 168,000 bpd, and the unit that caught fire is responsible for 70,000 bpd. The company said that it's too early to assess the damage, but expects that other units at the refinery can compensate for the outage.

More significant were the latest updates on Tropical Storm Katrina, which was veering away from the Gulf of Mexico's oil and gas rigs. Front-month October crude oil made to a high of 67.95 on the Nymex in overnight trading, which set a new high since US crude futures began to trade in 1983. Adjusted for inflation, these levels bring into view the prices set in 1979-80. The rally in natural gas has further compounded the issue. More impressively, perhaps, is that interest rates are as low as they are- particularly when compared to the levels they reached when oil was hitting those 1980 highs.

IMF president Rato noted in a teleconference that he does not to see a return to 2004's prices, as demand is strong and persistent. Indeed, the inelasticity of demand only underlines the vulnerability of supplies of this finite resource, particularly in light of the burgeoning industrialization of economies such as China and India. China reported that it imported 11.1 million metric tons (or 12.24 US tons) of crude oil in July, an average of 2.62 million bpd. China's crude oil imports were up 5.4% in the first 7 months of 2005. Japan reported that crude imports rose only .8 percent y-o-y in July, but cost almost 50% more.

While US consumption still far outpaces that of other countries, with China coming in 2nd, the sheer size of the Asian markets suggests a potential tectonic shift in global demand patterns should Asian demand continue to rise. To quote Jimmy Rogers' example, imagine what will happen when the average Chinese or Indian begins to shift from riding a bicycle to riding a small moped, consuming 1 gallon of gasoline per person per week.

These are intermediate to longer-term forces. In the meantime, the crude oil rally may well be due for a correction. But with the price of fuel having tripled in the past 3 years, this is not a rally to be ignored or dismissed.

Today, crude dipped within yesterday's bullish range as analysts discussed the likelihood that Katrina would miss the Gulf of Mexico's energy installations. But price was generally firm, and so far the daily cycle downphase has been generating very poor traction. 20-day rising Bollinger resistance is at 68.74, though a close above 68 should see that level move higher as the daily cycle downphase reverses. For the day, October crude oil finished higher by 17.5 cents at 67.50, off a low of 66.475. Natural gas futures finished lower by .205 at 9.815, off an intraday high if 10.20.

At 8:30 this morning, the Labor Department reported that applications for first-time unemployment benefits declined 4,000 to 315,000 in the week ended August 13th (seasonally adjusted). These results met expectations. Despite the decline, the 4-week moving average of initial claims rose 1,250 to 315,000, the highest level since July 30th. The Labor Department also reported that continuing jobless claims declined 9,000 to 2.58 million.

At 10AM, the Conference Board announced that the Help Wanted Index rose from 38 to 39, matching July 2004's level. This index tracks the volume of help-wanted ads in US newspapers. Because it ignores other media, such as internet job postings and such, it's viewed as a secondary indicator. The Conference Board reported that online postings declined from 1.39 ads per 100 workers to 1.33 in July. Nonetheless, the most recent report posted increases of help-wanted ads in 5 out of 9 economic regions in the US, with East South Central and the Pacific regions leading the advance.

Homebuilder Toll Brothers (TOL) reported Q3 earnings that doubled from $106.2 million or 66 cents per share in Q3 2004 to $215.5 million or $1.27 cents on revenue of $1.56 billion, up from $1.01 billion. Expectations were for earnings of $1.19 on revenue of $1.53 billion. The company closed on 2310 homes in Q3, a 55% increase, and expects to deliver 10200-10600 in fiscal 2006. The stock popped in premarket trading, opened strong and blew out yesterday's highs, rising to 51.72. But the breakout wasn't to be, and the stock reversed hard off the high to return to yesterday's morning range. For the day, TOL closed lower by 1.91 at 48.09.

In other corporate news, Reuters reported that the State of California has added as many as 3 dozen pharmaceutical companies to a preexisting lawsuit for allegedly inflating prices to bilk Medicaid. Those companies will be joining those already accused in the 2003 lawsuit, which includes AMGN, GSK, ABT and WYE. Associated Press reported that other states are bringing similar suits as well. The Biotech Index ($BTK) rose .52% to close at 609.84.

Johnson Controls (JCI) announced that it will purchase York International (YRK) in a $2.4 billion all-cash deal that includes the assumption of roughly $800 million of YRK debt. YRK shareholders will see $56.50 cash per share, roughly a 35% premium to its $41.75 close. The deal is to be financed via debt issuance by JCI, and represents an attempt on the part of the autoparts maker, recently hurt by its exposure to GM's woes, to diversify into heating, air conditioning and ventilation. JCI expects YRK's annual $5 billion in sales to be accretive to earnings by 2006, and is hoped to save roughly $275 million from tax and operating costs by 2008. JCI rose 4.99% to close at 59.60, while YRK gained 35.52% to close at 56.58.

After the bell, NOVL announced earnings that declined from $23.4 million in Q3 2004 to $2.1 million in the current quarter, with revenue declining 4.7%. Excluding one-time items, the company broke even at 3 cents per share. The stock closed lower by .11 at 6.17. HP approved an addition $4 billion to supplement its $3 billion buyback approved in September 2004. Of that 1st program, $800 million allegedly remains.

Tomorrow is set to be an even lighter day for economic data, with Michigan Sentiment scheduled for release at 9:45AM. Also, however, Chairman Greenspan will present a speech to the annual Kansas City Fed Economic Symposium in Jackson Hole, Wyoming at 10AM entitled "Reflections on Central Banking." There will be no question & answer period, presumably to avoid an anticipated avalanche of eager inquiries.

This has been a very light week for economic data, but that will change next week with more than 15 reports, including the FOMC minutes from the last meeting, preliminary Q2 GDP, and the monthly nonfarm payrolls report. For tomorrow, today's lows will be in play as bulls and bears battle for a resolution to the bear flag printed today. Below those lows, there's the possibility of a drop equal to the decline off the Wednesday high, with today's light volume range the midpoint of the move. Above today's high, the daily cycle downphases noted above will need to be watched for signs of a possible reversal. We'll be following the action in realtime in the Market Monitor. See you there.

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