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Market Wrap

Op-ex Monday

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The October expiration week kicked off with a downward grind that climaxed in a brief drop around noon, followed by a bounce that extended to the final minutes of the session before pulling back. It was a difficult, frustrating session in which the usual time and price cycles were distorted and ineffective- a perfect start to op-ex week.

Volume was well below the levels seen last week, and there was no conviction to any direction other than sideways. Traders didn't believe either the dips or the bounces. Volume breadth remained positive on the NYSE for the entire session, while on the Nasdaq it flipped positive and negative several times. At the close, advancing volume outpaced declining volume 1.85:1 on the NYSE and 1.41:1 on the Nasdaq.

Daily Dow Chart

The Dow took a good bounce off the 10269 low to close +60 at 10348. The high at 10350 was obvious enough, and for the moment the daily cycle downphase continues. But the indicators are oversold, and anything less than a complete reversal of today's gain should see the first bullish kiss or even cross on the next daily cycle upphase. With strong resistance at 10350, however, it's not obvious which will prevail. A gap up open could solve the problem, but with the intraday indicators overbought and due for at least a correction, there would be good reason to be wary of an apparently bullish move at the open tomorrow.

Daily S&P 500 Chart

The SPX ground out a 3.51 gain, bouncing from a low of 1184.48 to close at 1190.08. As with the Dow, the current bounce is stopped at first resistance, but that resistance is weaker than the Dow's 10350. The equivalent would be overhead at 1204-05. For the moment, the current bounce is a mere "return to the scene of the crime" at the 1190 breakdown area, but a close above it could line up with the first bullish signals from the daily indicators.

Daily Nasdaq Chart

The Nasdaq gained 5.47 for the day to close at 2070.30, bouncing at midday from a 2054 low. The high confirms resistance to 2080, while the low lines up with the range bottom from June-July. As noted above, the intraday cycles are overbought and due for downside that never materialized today and was overdue as of the close. If the bulls can keep them pinned to the ceiling tomorrow, there will be reason to expect a strong daily cycle upphase to follow. But the daily cycle downphase hasn't relented yet, and with strong resistance overhead, the more likely move will be to the downside tomorrow. The strength or weakness of that move will give us more clues as to the likely shape of the daily cycle upphase to follow.

Daily TNX Chart

The lone economic report this morning was the October Empire State Manufacturing Index, which fell to 12.1, missing expectations in the 20-22 range. September's result was revised down from 17 to 15.6. While new orders rose after their sharp decline last month, the prices-paid component rose again this month to 57.3, close to a record high, and the employment component fell from 11.7 last month to 9.3. Gold jumped on the news, and bonds rose slightly.


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Following this report was a statement from the Conference Board to the effect that while the hurricanes (and the other impediments for the economy) haven't touched off a recession, they could slow the economy enough "to make it feel like one." Higher energy costs could "put holiday retail sales at risk." The Conference Board finished off by noting that if the Fed doesn't raise rates beyond 4% and energy prices don't "spike" higher, stronger growth should return next year. I disagree with any characterization of the rise in energy prices since 1998-1999 as a spike, and I'm sure that the lines of filers comprising the latest record highs in bankruptcy filings this past weekend ahead of the legislative amendments would disagree with the Conference Board as well.

The Fed, possibly responding to tremors from the Refco situation, released a $6.25 billion overnight repo against no expiries this morning, bringing tomorrow's expirations to a respectable $13.75 billion. The stop out rate on treasury collateral rose to 3.74, however, 8 basis points above Friday's rate and one bp below the target rate, indicating an escalating demand for liquidity on the part of the Fed's dealers.

The Treasury auctioned $18 billion in 13-week bills and $16 billion in 26-week bills. Foreign central banks took $8.6 billion of the total, with the 13-week bills generating 2.05 bids for each awarded, at a high-rate of 3.785% yielding 3.875%. The bid-to-cover ratio on the 26-week bills was 2.08, with a high-rate of 4.015% yielding 4.155%.

For the day, ten year note yields (see chart above) finished fractionally lower by .2 bps at 4.489% after another test of 4.5% resistance. What was looking like a routine bear flag for the TNX has extended into an upside trending move to challenge key resistance at 4.5%. Above that level, 4.64% comes into view for a possible test of the year highs for the ten year note yield. 4.4% is key confluence and rising wedge support.

Daily Chart of Crude oil

Weekend news was grim, as the death toll in Pakistan broke 54,000 with over 2 million people now homeless. Romania and Turkey reported cases of the H5N1 bird flu, and a strain resistant to the current Tamiflu treatment was discovered in a Vietnamese girl who had been infected by her brother. The World Health Organization has maintained its pandemic alert level at "3" to indicate a new influenza subtype capable of infecting humans. The WHO stated that it will only change the alert level should it observe that the virus has become more infectious. US Health Secretary Mike Leavitt was in Jakarta today, where he stated that in his view, no nation is adequately prepared a pandemic avian flu. Later in the day, it was reported that Greece has confirmed its first bird flue case as well.

Tropical Storm Wilma was gathering strength in the Carribean Sea today, and the National Hurricane Center said that it could be in the Gulf of Mexico by the end of this week. Oil and natural gas prices were up strongly this morning as traders contemplated the 21st named storm of the hurricane season, the most since 1933. Reuters reported that as of Friday, 67% of US Gulf production is still shut in, and 6 refiners representing 10% of US refining capacity are still offline.

OPEC revised its 2005 and 2006 demand forecasts for crude oil by 200,000 bpd in 2005 and 400,000 bpd in 2006. OPEC does not expect any "dramatic drop in consumption," and cited market sensitivity to refinery outages.

Crude oil opened strongly, pulled back within positive territory, and launched to close 10 cents off its 64.425 high, +1.7 or 2.71% for the day. Natural gas gained .65 or 4.92% to close at 13.87. On the daily chart, the current bullish-divergent bounce is testing 50 day EMA resistance, above which the descending channel top just below 65 comes into view.

In corporate news, Citigroup (C) reported a 35% rise in Q3 profits, which rose from $5.31 billion or $1.02 per share in the year-ago quarter to $7.14 billion or $1.38 per share. Revenues rose 15% to $21.5 billion in the period. Estimates were for EPS of 98 cents on revenue of $21.2 billion. Earnings from continuing operations were 97 cents per share, down a penny from last year's Q3 and missing First Call estimates by a penny. The company attributed its gains to record revenues from corporate and investment banking, compensating "sluggish" revenues in consumer banking, which fell 13% to $2.72 billion. Some noted that the company's per-share earnings were boosted by stock repurchases. The stock popped in the morning, but had reversed to negative territory by noon. C closed lower by .51% at 44.81.

Saks (SKS) reported Q2 earnings that rose from a year-ago loss of $25.3 million or 18 cents per share to a profit of $8.2 billion or 6 cents, but $57 million or 40 cents were contributed by one-time items The company sees "flat to low single digit" growth. SKS gained 1.99% to close at 16.93.

GM reported a Q3 loss exceeding $1.6 billion or $2.89 per share. Excluding special items, the loss was $1.92, blowing out estimates for a loss of 81 cents. The beleaguered automaker cited rising costs in raw materials, healthcare, and of course gasoline prices, the net result of which is a huge squeeze both on the input side and the sale side. Quarterly revenue rose, however, by 5% to $42.7 billion, presumably on the deep discounts and sales incentives of this summer. News reports didn't cite management's own questionable vision in adhering to a strict design agenda of muscle- and SUV gas-guzzlers, even in the face of steadily escalating fuel prices over the past several years. Is it any wonder that demand is falling, even amid aggressive marketing and sales-incentive campaigns?

GM also announced a tentative deal with the United Auto Workers union to cut annual healthcare expenses by approximately $3 billion per year and healthcare costs for retirees by $15 billion while establishing a fund to help mitigate the effect thereof. The company will reduce its payroll by approximately 25,000, and will close more plants. The stock rallied more than 10% in the premarket on this news, breaking back above the 31 level. GM finished +7.04% at 29.95.

The toymakers announced as well, with Mattel (MAT) reporting disappointing results on waning Barbie sales, while Hasbro (HAS) cited strong Star Wars sales but missed estimates by 4 cents. MAT lost 4.51% to close at 15.23, while HAS gained .37% to close at 18.79.

Krispy Kreme (KKD) got slammed as its majority-owned franchisee partner Freedom Rings LLC unit filed for Chapter 11 protection. This news follows an official "No Comment" statement just 5 days ago when KKD stock dropped 22% in a single day following an 8% drop the day before. KKD will fund Freedom Rings through its restructuring process. Later in the session, KKD disclosed that it had acquired the remainder of the company, an additional 30% of the equity, and by doing so eliminated the $24.1 million that Freedom Rings owed to it. According to the company, that eliminates substantially all of the indebtedness at issue, leaving the outcome or even the necessity of a Chapter 11 filing in question. KKD closed -5.35% at 4.60.

After the bell, IBM reported Q3 earnings that rose from 92 cents in the year-ago quarter to 94 cents. Revenue declined from $23.35 billion to $21.52 billion. Earnings from continuing operations was 94 cents per share, declining from $1.55 billion to $1.52 billion. Excluding items, EPS was $1.26 per share. Estimates were for EPS of $1.13 on revenue of $21.7 billion IBM was up .98% at 83.16 after the report.

RMBS reported earnings which rose from 10 cents or $10.4 million in the year-ago quarter to 14cents or $14.5 million on revenue that fell from $38.8 million to $36 million. RMBS was up 4.63% at 12.20 following the release.

NVLS reported a 64% decline in profits, from 45 cents or $64.7 million in Q3 2004 to 17 cents or $23.4 million. Estimates were for 21 cents. Gross profit fell from 48.4% to 43.4% in the current quarter. NVLS was down .68% at 24.67 as of this writing.

Earnings will continue to outpace economic data, as a light week is scheduled. The inflation picture will be completed by the PPI tomorrow, followed by Housing Starts and Building Permits, the weekly petroleum report and the Fed Beige Book on Wednesday. On Thursday, we'll get Initial Claims, Leading Economic Indicators and the Philadelphia Fed.

For tomorrow, the big question is whether the bulls can follow through on today's advance, or whether the intraday cycles will get a chance to assert themselves. With the daily cycle downphases not yet reversed, the ordinary expectation would be for a correction, possibly deep, to exhaust the last of the daily cycle sellers. With the weekly cycle indicators still declining, that would be my ideal outcome. However, this being op-ex week, and with significant October short put positions to be defended by their writers, there's a much better than usual chance that the ideal cycle picture will not come to pass. By the same token, I am skeptical of the chances of a sustainable rally from here. If today is any indication, the intraday swings will be most likely to net out close to where they started.

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