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Market Wrap

End of Month/Quarter Buying

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As had been expected for the week we've seen a concerted effort to hold the market up. For much of the week it appeared as though it was going to tip over to a new low and a new spurt of buying would kick in only to be repeated a few times like that. We were stuck in a sideways trading range for much of the week until today when a strong bout of buying hit later in the morning and it was a stair stepping higher day from there. The fund managers work very hard to show their books at the end of this quarter in the best light possible. The rallies took us right up to some important resistance levels so we'll find out tomorrow if they hold or if instead we've got a new rally leg starting.

Today started out quietly with no real surprises in the economic numbers that were released this morning. Initial unemployment claims fell by 79K to 356K (consensus 420K) which shows the Katrina-induced levels of claims that had been expected have yet to materialize or are going to be less than feared. It is estimated that about 60K of the 79K reported were Katrina related so without them the underlying 296K reflects a strong national job market. Continuing jobless claims rose to 2.8M. The Help-Wanted ad index was 35 in August versus 39 in July and 37 a year ago so pretty steady numbers there.


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GDP numbers were also tame coming in at +3.3% as expected for Q2. The Core PCE Index was +1.7% versus +1.6% previously. The accompanying chain deflator, which is a key measure to check inflation, was higher than expected at +2.6% (consensus +2.4%).

Corporate profits for Q2 were revised to +4.6% versus +6.1% by the previous estimate and I suspect we'll start seeing these numbers ratcheted down as we head into the 4th quarter. A couple of positive company announcements came out before the open but like the economic news it didn't have much of an impact on initial market direction. A positive earnings report from Pepsi (PEP 56.50 +1.44), where the company beat EPS expectations by $0.05 and provided upside guidance for FY05, was accompanied by Red Hat's (RHAT 21.44 +4.93) reporting of earnings $0.02 ahead of consensus and it raised its guidance, and then E*Trade's (ET 17.22 +0.89) $1.6B acquisition of JP Morgan's (JPM 33.50 +0.43) Brown Co. was considered an upbeat corporate development. By the end of day they had all done well with the rallying market in general. Certainly RHAT's performance makes me wish I had bought some calls on that one!

General Electric Co. (GE 33.65 +0.16) will pay $1.2B to acquire IDX Systems Corp. (IDXC 43.25 +8.08), a healthcare technology vendor.
The purchase price will be $44 a share in cash for IDX's 31.2 million shares, a premium of about 25% to IDX's closing price Wednesday of $35.17. The deal is expected to close in early 2006 and will create a vendor for data handling for hospitals, clinics and doctor's offices, GE said. IDX specializes in IT in areas such as computerized physician order entry and medication barcode charting.

A report came out this morning that showed natural gas inventory rose a less than expected 53 bcf to 2885 bcf versus analysts' estimated 68 bcf rise. Following the all-time high $14.20/M BTUs that NG hit yesterday (October contract), the report further "fueled" (sorry) energy supply fears and NG rallied up to a high of $14.60 today before settling back at $14.19 by the end of the day. Unleaded gasoline and home heating oil dropped from yesterday's high and settled slightly lower on the day. Crude closed up about $0.50 on the day at $66.75 (October).

A rise in technology and financial stocks were drivers behind today's advance, both of which helped the Nasdaq to outperform the broader markets. Among the tech stand-outs were Yahoo (YHOO 33.46 +1.11), Apple (APPL 52.34 +1.26), Texas Instruments (TXN 33.18 +0.34), and Intel (INTC 24.48 +0.53), which contributed to nearly every tech sector's positive standing. It looked like, based on many of the smaller tech stocks that were run up today, that fund managers were hoping to pad their portfolios with the sexy stocks that their customers like to see. Watch for a potential reversal in some of these stocks next week.

The broader indices had a good day but found themselves tucked up under resistance at the closing bell. Let's see where they might be headed.

DOW chart, Daily

On its most recent pullback the DOW found support at its uptrend line from April, and at price level support at 10350. It has now bounced up to its 50 and 200-dma's so we might see some profit taking tomorrow. The daily stochastics suggests we might get some upside going here. The next pullback should provide some clues. If a rally continues through immediate resistance tomorrow, watch just above 10,600 for the next resistance level.

SPX chart, Daily

SPX also found support on its recent pullback to trend line support from the July low and the longer term uptrend line from March 2003 through the April low. It closed just above its 50-dma (1226.18) but tomorrow we'll find out if it was a throw-over going into the end of the day or it's a more meaningful break of that potential resistance level. Daily stochastics shows a turn back up but MACD hasn't given us a cross yet, not even on the faster settings that I use. That's a bit of a warning at the moment.

SPX chart, 60-min

A little closer view of price action shows that SPX banged its head against the September downtrend line. At the same level (1228.75) it met a Fibonacci projection for the rally from last week's low where it now has two equal legs up. If this is just an a-b-c upward correction as I have it labeled, we could get a more significant pullback. If it chops sideways/down under the downtrend line it will likely be building up for a rally through that resistance.

Nasdaq chart, Daily

That neckline at 2100 is going to be a tough bugger to break through. That level has provided support and resistance for over a year and it's not surprising to see it act as support on its first test. The COMP has resistance just above at its 50-dma at 2156 and then the top of a potential bull flag just above that at 2170. In the meantime we have a new uptrend line from the April low to watch for potential support on any future pullbacks.

SOX index, Daily chart

If the techs will rally so will the SOX (or maybe it's the other way around). The 50-dma is just above at 469.73 and this moving average has been useful in past rallies and declines so keep an eye on that level. The oscillators are presenting the same picture as the broader indexes.

The banks are usually a good proxy for the market and lately they've been painting a fairly bearish picture. They got a good bounce today so it will be important for the broader market to see the banks participating. Some news that could be considered tough on the banks, although that wasn't apparent today, was yesterday's information released by the American Bankers Association which reported that the percentage of credit card accounts 30 or more days past due climbed to an all-time high of 4.81% in the April-to-June period which experts believe could grow in the months ahead. The previous high of 4.76% came in the first three months of this year so the trend shows a generally steady rise over the past several years. The association's Chief Economist, James Chessen, and other analysts blamed high prices for gasoline and other energy products for the increase in payment delinquencies, but said that low savings and higher borrowing costs also played a role. "The rise in gas prices is really stretching budgets to the breaking point for some people," Chessen said. "Gas prices are taking huge chunks out of wallets, leaving some individuals with little left to meet their financial obligations." This will of course only be compounded when winter heating bills start kicking in and higher electric bills once the electric companies get rate increase approvals due to the high cost of natural gas.

The Federal Reserve has been tightening credit since June 2004 and this has caused commercial banks' prime lending rate to rise to 6.75%, the highest in four years. These rates are used for many short-term consumer loans, including credit cards and home equity lines of credit, so the continued raising of rates continues to squeeze the average consumer and small business. But interestingly enough, while late payments may be bad news for consumers, credit card companies do not necessarily mind them because late fees are a source of revenue. "Credit card companies are increasingly addicted to their fees," said Daniel Ray, editor in chief at Bankrate.com, an online financial service. "Six years ago, all fees, including late fees, contributed only a minor portion to overall revenue. Today it accounts for more than 30 percent." That's an amazing statistic and now with bankruptcy less of an option for consumers, the late fees will only compound the problem for people who have put themselves in a credit bind. So in a perverted way, trouble for the consumer could be good for banks.

BKX banking index, Daily chart

As I had mentioned above, the banks have been painting a negative picture for the broader market since the July high. It's pretty much in space at the moment without clear support or resistance. The uptrend line through the August low may act as resistance on a retest so watch for that. Otherwise the first support level is back at the April low.

Oil chart, August contract, Daily

After dropping fairly hard from its $70+ high in August oil has been consolidating between $63 and $67. It's a tough call as to which direction this will head next. I'm leaning towards seeing lower prices based on the fast drop and now a consolidation. That would suggest we'll see another $10 drop from it consolidation high. That would currently give us a downside target near $57. But before that is the longer term uptrend line now just above $60. If another rally kicks into gear, we should easily see a climb up towards $75.

Oil Index chart, Daily

The oil index suggests oil prices will continue to climb since the oil companies continue to climb. But looking under the hood says the current rally may not be too healthy. The negative divergences as this index presses higher says pull your stops up nice and tight to maximize your profits. It would take a break below 560 to say at least a short term high is in. There are several factors that point to a potential end to a blow-off top here so be cautious.

Last week (September 22nd Wrap) I discussed some significant sell signals being given off by the market, some which are rare and need to be heeded. I showed some charts that warned us of potential trouble ahead based on a large drop in the Consumer Sentiment index (a break of the H&S in this index back in 2000 preceded a major drop in the market and we just had another break of a H&S pattern so it's the first sell signal in 5 years by this comparison). I showed an analog (comparison) of price patterns leading up to the 1987 crash and how eerily similar the pattern in 2005 is to 1987's. I discussed the Hindenburg Omen signal and how it rarely calls out a major sell signal but in the past week we've now had 5 days where the parameters for the sell signal have been met. Here's an update to the 1987 versus 2005 comparison chart. We'll watch this comparison until it's broken or follows through, either of which should be soon (within the next month).

DOW comparison between 1987 and today

There's another interesting correlation to 1987 that was pointed out by an analyst I follow, Jeff Cooper, and it has to do with cycles and eclipses of the sun and moon. For anyone who has followed people like Archie Crawford, you know the market seems to be affected by the magnetic disturbances, gravitational changes and who knows what else that is going on in our solar system. It seems to affect our moods and of course our collective mood greatly affects the market. I have no clue how to interpret these "outside" influences but what I do take note of is how past market patterns around these external events have been repeated over time. I don't have to believe in it but I should sure take notice of it. So that being said, we have an eclipse schedule setting up that is the same as was seen in October 1987.

There are two eclipses in October, a solar eclipse on October 3rd and a partial lunar eclipse on October 17th. In 1987 there was a solar eclipse on September 23rd and a partial lunar eclipse on October 7th which followed a period where the market was rolling over from an August/September top. We again have been rolling over from an August/September top. For those who might be interested in the potential effects of eclipses you can read W.D. Gann's book, "Tunnel Through the Air" in which he discussed the nature of the eclipses and their cause and effect in the markets. It's obviously just speculation as to whether or not these solar events will have any influence on the markets this October. But when I see similar price patterns between 1987 and 2005, when we get the kind of drop we just got in consumer sentiment, when we start getting some rare crash signals popping up, and now with a similar eclipse series as we saw in October 1987, one must wonder about the possibilities here.

But, one thing to note, especially if today's rally continues, is that the DOW had its strongest up day ever as it approached the solar eclipse in September 1987. A similar pattern this year would call for a strong rally before the October 3rd solar eclipse. October 3rd is this coming Monday. This October could also be marked by volatility much higher than we've seen all year so I would say both sides need to be careful.

There is a lot different between today and 1987, that's for sure, so it may not be an accurate comparison. But there are also some cycle studies that point to potential vulnerability in the market mid to late October. Jeff Cooper has identified a 44 to 55-day cycle for turns in the market. 54 is a Fibonacci number and has special meaning in that range. 44 to 55 days from September 9th gives us a potential turn window of October 19th to the 30th which may see some strong selling pressure into that turn window (since September 9th was a high). As I stated last week, it's not smart to bet on a market crash--it's an extremely rare event. I would rather play what's in front of me and that would be the chart patterns, in both directions. But knowing that we have similarities to a time where the market did not treat investors kindly, I am going to be especially cautious anytime I'm in a long position. And in the more immediate time frame, if we were to get one of those monster rallies, be careful if you're in a short position as well.

Transportation Index chart, TRAN, Daily

The Transports based for quite awhile on its uptrend line and 200-ema and has come blasting out of there the past 2 days. It jumped right over its 50-dma today and looks like it's got its sights set on the downtrend line from March. Watch the 50-dma to act as support on any pullbacks over the next couple of days.

U.S. Home Construction Index chart, DJUSHB, Daily

The housing index is trying to lift back up again. After dropping below support at its 50-dam, and then retesting it in September, it has now dropped below its uptrend line from last October and looks like it will attempt to bounce back up for a retest. A failure there will be another good shorting signal.

U.S. Dollar chart, Daily

After a corrective pullback from its July high, the U.S. dollar had been rallying strongly from its September low. Watch for potential resistance at its previously broken uptrend line just above $90. One would have thought that such a strong rally in the dollar would have smashed the price of gold. Not so...

Gold chart, August contract, Daily

Gold has rallied stronger than the U.S. dollar in the past month. The inverse relationship between the two has clearly not held and begs the question why. Very simply it appears investors are worried about inflation, and consequently so is the Fed. Many analysts say if you want to know what Greenspan watches for clues, just watch gold. Greenspan is more interested in fighting inflation even if it means killing the patient (the economy) which he will likely do. Gold looks close to the point where we should see some consolidation (in a 4th wave as I have the pattern labeled). I would expect to see any pullback supported above $460 and believe we'll see $500 before any longer term pullback.

Sector action was unsurprisingly mostly green today. The only red sectors on my watch list were the healthcare index (looks like profit taking there since that was where everyone was going when they were playing defense), the airline index and the networking index. The rest were green and led by the disk drive index, gold and silver indexes, software, brokers, Transports, financials and technology. Matching the Technology also served as an influential leader to the upside and is usually a good indication of speculative fervor. It's also end of month/quarter window dressing and fund managers like to show their customers that they have technology companies in their portfolio. Jumps in semiconductor (+1.4%), disk drives (+1.9%), hardware (0.9%), and software (+1.7%) offset modest consolidation in the networking group (-0.3%). Retailers (+1.2%) also benefited from gasoline's pullback and a recovery in homebuilders (+1.7%), helped by a series of analysts' upgrades, lifted the Consumer Discretionary sector to a +0.8% finish. CSFB helped eBay (EBAY 41.20 +2.27) by increasing its Q3 earnings forecasts. Just in time for their end of month/quarter report also. Not too disingenuous...

Tomorrow's economic reports include the following:

Referencing my update on crash warnings and market vulnerability as we enter October, one might think I was super bearish but actually I'm not. Other than being aware of the higher than normal market risk, which will keep me more vigilant than normal when in long positions, I'm actually leaning towards a higher market as we head into October and beyond. The longer term uptrend lines are holding, we've had some recent bottoming signals that have marked important bottoms in the past two years (high put/call ratio 10-dma, low breadth readings such as advance/decline ratios) and I have a potential EW pattern that calls for a new high going into the end of the year. Therefore I won't be reluctant to keep testing the long side. But I'll be holding the exit door open at all times, ready to bail at a moment's notice.

For tomorrow, we rallied up to some important potential resistance levels. I'm thinking at least a pullback tomorrow but if it pulls back in a lazy choppy fashion, it will be an indication that it will rally higher again. And a higher rally would then identify a potentially much more bullish pattern in play. So I would suggest testing the short side tomorrow (watch for a quick pop higher to catch late-to-the-party bulls) but if we get much more of a rally above today's highs I would switch over to buying the pullbacks. Good luck and I'll see some of you on the Futures Monitor tomorrow.

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