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How the Cookie Crumbles

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The ultimate chocoholic disaster happened. Kraft foods raised the price of Oreos, blaming higher energy costs. The company sent retailers a memo last week detailing the cookies, crackers, lunch meats and other products that will see higher prices.

As that Oreo cookie crumbles, so crumble other products in an economy that some still don't believe to be inflationary. In a climate in which consumers are being hit below the belt, literally, by the rising price of Oreos and other foodstuffs, the Oil Pricing and Profits hearing began today in Washington. Senators raucously claimed that energy companies were hitting beneath the belt, too, gouging consumers. Last night, Jim Brown discussed the importance of the hearing, so the implications don't need to be repeated.

The windfall profits by energy companies and the resultant hearing have prompted a debate as to whether market forces in a cyclical and low-profit-margin market should be allowed to govern energy companies' profits or whether government policies have a part. CNBC televised much of the hearing, with the energy companies' representatives led off by Lee R. Raymond, chairman and chief executive officer of Exxon Mobil Corp.

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The questions posed by that Senate hearing were unlikely to be resolved by one hearing, and might legitimately occupy many a lecture period in an economics class. Markets spent another morning with their next near-term direction unresolved, too.

Traders bored into near catatonia were stunned midday, however, by a spike that appeared out of nowhere. Market watchers attributed it variously to a SOX move above a key level, a statement by Raymond that suggested that crude prices had peaked and, conversely, a jump in crude prices that brought energy majors higher. With crude climbing over $60.00 just prior to the spike in the equities, the "crude" explanation wins my vote. A study of charts shows that XOM and other energy companies being responsible for much of the gain during that spike.

Ultimately, many indices could not hold those gains and fell back into the formations in which they'd traded before the spike. A series of explosions in Jordan may have contributed to the failure to hold those highs, but the crazy zigzagging action, zooming past carefully drawn trendlines and Fib levels and any other known technical analysis tool rattled traders and scrambled the charts.

Annotated Daily Chart of the SPX:

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

Annotated Daily Chart of the SOX:

The opening of the Senate hearing and the release of wholesale inventories roughly coincided. September's build in inventories was much higher than expected, at 0.6 percent against the expected 0.3 percent. However, markets bounced after it was apparent that the build was pegged on increases in drugs and petroleum, with the important inventory-to-sales figure revealing a tightening in inventories. The nondurable inventory-to-sales figure was a record low. Economists, usually the only people paying attention to this number, suggest that the numbers hint at the need to ramp up production, perhaps even of those more expensive Oreos.

Against that backdrop, the Department of Energy released crude inventories numbers, with an upside surprise in the inventories number spiking equities higher. The build in crude and gasoline inventories proved more than twice what was expected. Distillates fell against an expected build, however. If the inventories number drove crude prices, it was difficult to discern which direction. After the release, crude prices dropped, soared above $60.00 and then dropped again.

Other market developments produced no predictable results in market action. Perhaps it was no surprise that insurance Company American International Group (AIG) will restate financial results again, delaying its 10-Q filing. The company had previously restated earnings and was investigated by regulators earlier in the year. The company noted that the errors resulted in third-quarter results being understated by $500 million. AIG was to zigzag its way 0.78 percent higher by the close.

Some retailers had good news. Retailer Federated (FD) beat expectations, climbing 7.72 percent by the end of the day, and Limited (LTD) was upgraded, posting a 3.39 percent gain by the close.

After yesterday's unwelcome surprise to the housing industry, delivered by Toll Brothers (TOL), some might have been relieved that the headline of the Mortgage Bankers Association's Weekly Mortgage Applications Survey for the week ending November 4 noted an increase in applications over the previous week. However, four-week moving averages continued their decline, and home purchase applications fell 3.6 percent below their year-ago level. The DJUSHB, the Dow Jones U.S. Home Construction Index, closed lower by 0.87 percent.

TOL's announcement yesterday hit other homebuilders and also other companies in their food chain. That included companies such as Home Deport (HD). This morning, Piper Jaffray lent its help by raising HD's rating to an outperform one. The firm sees margin improvement for the company. Linens 'N Things (LIN) also received an upgrade. HD gained 0.24 percent, and LIN, 0.15 percent.

After the close, CSCO reported earnings of $0.25 a share, beating by a penny. In his prepared statement, Chambers noted "increasing momentum in both the U.S. and Asia Pacific." The company planned capital expenditures in India, hiring as many as 4,000. Some looked to its higher gross margins, at 68.5 percent, against expectations for something in the realm of 67 percent, for CSCO's rise in after-hours trading. At the time of this report, CSCO was trading at $18.15, up from the close at $17.75. The conference call had not yet begun.

That conference call could help determine the direction for tomorrow. As of the close, charts had been scrambled, with short-term charts even more so than the longer-term ones. If Chambers says nothing to spook markets and CSCO opens above and maintains values above the 72-ema at $17.86, the company's stock may make a rush toward its 200-sma at $18.26, dragging other indices with it. Note, however, that call open interest and volume were stronger than put OI and volume for CSCO in both the $17.50 and $20.00, perhaps limiting upside gains for that company, and perhaps also limiting its contribution to broader market gains. If CSCO opens below those key levels and rolls down, it could help bring markets lower.

Markets so far remain choppy and difficult to trade, with old relationships broken apart. Midday, a rise in crude saw energy majors soar, too, bringing the SPX, OEX and Dow higher, and when crude costs dropped back, so did the energy majors and those indices. The old "crude higher/equities lower" paradigm clearly did not work, and the TRAN ignored it all, doing its own thing. Movements to the upside are often reversed in the SPX, OEX and Dow, while stellar setups on bearish plays produce no follow-through, either. As soon as a formation sets up on a chart and traders are enticed into the trade, the whole setup crumbles, trapping both bulls and bears and cheating as many as possible out of as many funds as possible.

I see no strong evidence of next direction, and would advise caution to all traders. Play the upside breakouts if bullishly inclined, but maintain close stops, keeping the SPX's reversal this afternoon in mind. This afternoon, selling rollovers from the SPX's and Dow's spikes, to 1226.59 and 10,601.92, respectively, would have been the more profitable plays. That kind of action warns of sellers lurking overhead, and those bearishly inclined might take that sell-the-bounce tactic, but be prepared to take quick profits, if any are offered. The TRAN is taking no bearish survivors, zooming ever higher in a climb that still looks unsustainable and begs for a pullback. Volume in TRAN components is dropping in many cases as the stocks rise, a dangerous sign but not a good market-timing one. The TRAN often helps lead the Dow and to some degree, the SPX and OEX, and so the TRAN's direction should be watched, too.

The best bet appears to be to wait for more clarity, and that's this writer's advice. While we used to see volatility and unpredictable behavior on opex week, we're often now seeing it the Thursday and Friday before opex week, so tomorrow could be even more difficult to manage.

Dell reports tomorrow after the close, but has already warned. Many might have already positioned themselves ahead of that report. Tomorrow morning's releases include the September trade gap, October import/export price indices and weekly jobless claims, all at 8:30, and November's preliminary Michigan consumer sentiment, at 9:47. Natural gas inventories will be released shortly afterward, and the last release of the day will be October's treasury budget, released at 2:00.
 

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