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Nasdaq 'Bot Battle

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A gap up open ran face-first into a 10AM high, following which a steep selloff ensued. On the Dow and SPX, that selloff filled the gap and broke to Friday's lows, while the Nasdaq never filled its gap, trading sideways-up in a narrow, low-volume range that held for hours. The range was even narrower and flatter on the PHLX Semiconductor Index (SOX). It looked and felt like an op-ex Thursday for the tech indices.

Friday had left off with a closing spike up, and that spike carried through this morning, buoyed by news from the Semiconductor Industry Association that worldwide sales of semis rose 3.2% in August to $18.6 billion. Annual sales are up to $144.4 billion, a 5.8% y-o-y increase. The SIA attributed the gain to a pickup in PC sales, as well as higher demand for flash memory on booming celphone and mp3 player sales.

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Some of the bloom came off the rose by the cash open, however, as Vitesse Semi (VTSS) warned, lowering its Q4 view from $52-$53 million to $48 million, with revenue expected lower by $1 million at $53 million. VTSS got smoked for 10.16% loss to close at 1.68.

At 10AM, the Commerce Department reported that Construction Spending rose 0.4% in August, and revised the July number from unchanged to .3%. The August results missed expectations for a .8% increase, but still represented the largest increase in 3 months. Private sector construction spending rose .4%, up from a .1% gain in July, while public sector spending rose .5%, down from July's .6% increase.

The greater anticipation was for the ISM Manufacturing data, released a minute or two later past 10AM. The Institute for Supply Management reported that manufacturing activity rose, the index up from 53.6% in August to 59.4% in September, blowing out estimates for a drop to 52.1%. The New orders component rose to 63.8%, employment rose to 53.1% and the price index spiked up to 78% from 62.5%. Stock indices were toppy on an intraday basis before the report's release, but I believe it was the huge surge in prices that caused the subsequent reversal down, as the market digested the fact that the price inflation that the Fed so vigorously denies was reflected in this widely-watched report. Treasuries had been weak ahead of the report, and dropped further after 10AM.

Volume was strong for the day at 3.357 billion combined Nasdaq and Dow shares, with volume breadth positive +1.13:1 for the NYSE and +1.41:1 for the Nasdaq.

Daily Dow Chart

The Dow lost 32.74 to close at 10535.64, having found support at 10523. It was the weakest of its peers, and its daily cycle upphase has so far failed to strike terror into the hears of bears. While the price one strong rally day away from its July-August highs, the bounce from the September low has yet to regain the broken support from the May lows, and continues to look like a bear flag on the daily chart. Bulls will need to see an authoritative close above 10620 to suggest that this move is the real deal, while a break below 10500 could see downside acceleration. It's difficult to see on this daily chart, but today's morning high tested and failed at that broken long-term support/resistance line, leaving an upper doji shadow. 10600-10620 remains strong overhead resistance until broken.

Daily S&P 500 Chart

The SPX lost 2.11 to close at 1226.70, doji-ing back from a test of 1233 resistance while finding support at former 1225 resistance. Like the Dow, it's attempted daily cycle turn has been less than convincing, and bulls will want a strong break above today's high confirmed by a close above 1239 to confirm. 1245-46 remains key resistance at the year high, and the weekly cycle indicators (not shown) continue to point lower.

Daily Nasdaq Chart

The Nasdaq rose 3.74 to close at 2155 after hitting its head on the 2162.79 high. That descending trendline is resistance off the year high, and was defended twice intraday by the bears. A violation of that level would doubtless cause a wave of short covering and present the possibility that this decline from the August high is actually a bull flag on the daily chart. 2140 is key support, followed by 2115-2120.

Daily TNX Chart

The Fed's open market desk had gone into the weekend with $6.75 billion in repurchase agreements, and replaced that expiry this morning with a $7 billion overnight repo. The $250 million net add was a positive for the liquidity picture, if smaller than usual, but demand for the money rose sharply. As reported in the Market Monitor just before 10AM, the stop out rate rose 3.3 basis points from Friday's 3.4 to 3.73 on treasury collateral, indicating that the Fed's dealers were willing to pay much more for the repo money than they were on Friday.

Ten year notes had been weak in the morning, but following that open market operation announcement, the ISM report at 10AM dealt them a strong blow. Ten year notes plunged as the financial press reported that the "strong" economic data would likely keep the Fed in tightening mode. My guess is that the big upward spike in the "Prices" component of the report indicated the type of inflationary evidence that the Fed has been recently attempting to talk down.

In any event, for the day, ten year note yields gained 5.8 bps to close at 4.386%, testing declining trendline resistance on the daily chart from the June high. 4.4%-4.44% has been heavy and important confluence resistance, and a break above it would qualify as a breakout for the TNX. The daily cycle points down from here, and a close above that level would cause it to whipsaw to the upside.

At 1PM, the results for the $32 billion 13- and 26-week Treasury bill auctions were released. Indirect bidders (foreign central banks) took $8.1 billion of the total. The $17 billion in 13-week bills sold for 3.525% at a yield of 3.606%, generating 2.07 bids for each accepted. The 26-week bills sold for 3.87% yielding 4.002%, with a bid-to-cover ratio of 2.01.

Daily Chart of Crude oil

Despite Chairman Greenspan's reassurances last week that risks from Hurricanes Rita and Katrina had peaked, the Minerals Management Service reported that almost 100% of oil and 80% of natural gas production remain shut in. The latest headlines include W&T Offshore's report that 5 of its platforms are damaged, and ConocoPhillips warned that Q3 output will drop due to the storms, but added that margins and prices are higher for the same reason. Reliant Energy reported that it has requested a rate increase for electric bills to Houston-area subscribers due to the rally in natural gas. Marketwatch reported that based on today's price, Reliant would need to increase prices by 25% from 12.88 cents per kilowatt hour to 16.04 cents. Force majeure has been declared for 2 consecutive months for natural gas delivery, but I was unable to find any headlines on Henry Hub, a key delivery point for natural gas. The last photo I saw last week showed most of the installation still submerged under what appeared to be a thick, murky flood.

The administration's Energy Secretary, Samuel Bodman, spoke today and asked consumers Monday to conserve energy and reduce consumption. Bodman said that he's willing to dip into reserves should such be necessitated by demand for crude and heating oil. However, because the petroleum reserves are mostly sour crude, and because US refining capacity has been so severely reduced, that offer may be of limited utility. Today's comments from Mr. Bodman kicked off a joint program between the administration and the consumer group Alliance to Save Energy, intended to mitigate what threatens to be a significantly more expensive winter for most Americans due to the rally in energy prices.

November crude oil traded an intraday low of 64.975, closing -.8 at 65.45. Natural gas rose +10.9 cents to close at 14.03. Unleaded gasoline lost .0368 to close at 2.06, off an intraday low of 2.035. Crude oil continues to trade within its 63-68 range, off its 70.85 record high.

Obvious but nevertheless significant has been the impact of the energy rally on US automakers, whose product line remains fuel-consumptive and muscle-centric. Ford reported a 19% decline in September sales to 228,157 cars and trucks, citing a steep decline of 51% in SUV sales. F also cited the employee pricing marketing blitz over the summer, cannibalizing current sales as consumers presumably took a breather. Toyota (TM) reported a 10.3% rise in sales for the month, let by Toyota cars, which rose 22.9%. The Prius hybrid vehicle saw sales double from last year to 8,193 units.

In other corporate news, GE reaffirmed Q3 and full-year forecasts in light of Hurricane Katrina, expecting EPS of 43-44 cents and 2005 earnings of $1.80-$1.83 per share, with revenue at the high end of its $17-$18 billion target. The company also announced its intention to sell 60 million shares of GNW and 21 million shares of Citigroup Global Markets Inc. Despite this apparently bullish news, the stock declined from its release just past 3:30 PM, finishing the day -.44 at 33.24. I saw no mention of "Hurricane Rita" in any of the releases- the only reference was to Katrina.

In other news, Standard & Poor's reported that the number of dividend increases in the 7,000 reporting issuers it follows matched year-ago levels in Q3. Year-to-date, however, the 1446 dividend hikes represents a 12.4% increase over the first three quarters of 2004.

Today kicked off a moderately busy week for economic data. Tomorrow will bring Factory Orders, followed by ISM Services and the weekly petroleum inventory data on Wednesday. On Thursday, we get Initial Claims and on Friday, the Employment Report and Wholesale Inventories, as well as Consumer Credit. With Rosh Hashanah tomorrow, we can expect volume to be light, or at least those of us who will be missing the action are hoping. All bullish hopes seem to be pinned on the Nasdaq, the only index showing a strong daily cycle upphase. Resistance tested today is key, below which the bulls will have to prove their case. Above that high, however, and the bears will have their work cut out for them below the August highs.

Many readers have been expressing disbelief at the strength in equities. They cite soaring energy prices, negative personal savings, record levels of credit card debt, bankruptcies and defaults, rising interest rates, all the chaos from the hurricanes, and other such bearish arguments. I don't disagree with those arguments, or their bearish conclusions. However, the market's job is not to make sense, and it's easier to trade the charts than to trade those arguments. However, they do suggest that keeping tight stops under long positions is a good idea, and to remain flexible as to your directional bias. As we saw with the reaction to today's ISM data, bad news can be bullish and good news bearish when the Fed's anticipated reaction is factored in. Trade what you see, and try not to let your bias get in the way.
 

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