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Last week's Nasdaq rally extended to this morning, as the futures held at and slightly above Friday's closing highs. The Dow and SPX were weaker but also held Friday's closing levels until the opening bell. The music stopped at the open, however, and a grind to the low end of the premarket range quick dissolved into a flush below Friday's lows. Thursday's range was partially retraced on the Nasdaq and SPX, and entirely reversed on the Dow prior to a closing bounce.

Volume was strong on the indices while weaker on the ETFs, and volume breadth was solidly negative on the Nasdaq, less so on the NYSE. Volume breadth finished with 1.4 declining shares for each advancing on the NYSE, 2 declining shares for each advancing on the Nasdaq. Today's print constituted a key reversal and bearish engulfing print for the day.

At 10AM, the Institute for Supply Management released its ISM Services index. The ISM index showed an increase in activity from purchasing managers in November that was less than expected at 58.5%, down from 60% in October. Economists had been expecting a reading of 59.2%. Readings above 50% indicate growth in this diffusion index. The Price-paid component fell from 78% to 74.2%, a persistently high level. Marketwatch quoted the ISM as saying that "There is still significant concern about the relatively high level of energy prices and its impact on freight costs and on the prices of other materials and services."

Daily Dow Chart

The Dow was looking a lot more bearish at 2PM than it did at the close, with a sideways bounce retracing part of the previous drop. What would have been a complete reversal of Thursday's gains was corrected by that bounce, but below 10855-875, 10800 looms large as next support. The Dow was the weakest link last week, with Friday's action clearly negative where the Nasdaq was positive. Bulls need to see a violation of the bearish triangle, on a break above 10875, while bears will look for a break of 10800 to target 10700-710 confluence. For the day, the Dow closed lower by 42.5 at 10835.01.

Daily S&P 500 Chart

The SPX lost 2.99 to close at 1262.09, breaking Friday's range but failing to retrace even half of Thursday's tall candle. The descending trendline connecting the rally highs has resulted in a slow roll in the 10-day stochastic, technically a downphase but more of a trending move that remains overbought. Descending resistance is at today's 1265 high. It's very early to consider this as a descending triangle, though it might be. A break below 1257 will target potential triangle support at 1249-50.

Daily Nasdaq Chart

The Nasdaq lost 15.73 to close at 2257.64, declining from an opening high of 2269.48. Steeply rising trendline support was tested but not broken. The daily cycle oscillators continue their slow roll, printing what still appears to be a bearish divergence against the higher price highs. Note that there's no possibility of a declining triangle interpretation here at the highs, because the highs have been rising. Rising trendline support is at 2250.

Daily TNX Chart

The Treasury announced the size of the upcoming 4-week bill, 5- and 10-year note auctions this morning, giving us some indication of the liquidity picture for the remainder of the month. The next 4-week bill auction will be in the amount of $16 billion, refunding $22 billion in maturing bills for a net paydown of $6 billion- adding to liquidity available to the market. However, the 5- and 10-year note auctions in the amount of $13 billion and $8 billion respectively will raise new cash of $21 billion, for a net drain of $15 billion. However, with the cash management bills auctioned on December 1st and 2nd maturing December 15th, $38 billion will be paid down, resulting in a net paydown of $23 billion. Overall, the Treasury should become a net contributor to the market, which would support a positive seasonal bias for mid-December. Of course, the Treasury isn't the only player affecting liquidity flows, but we should see it exert a supportive influence on the market.

Also, note that the paydown/adds will be from short-dated cash management and 4-week bills, while the new cash/drains will be from longer-dated 5- and 10-year notes. This combination exploits the flattened yield curve, by adding liquidity via paydowns of short-dated debt and raising cash via longer dated notes. It should encourage short rates to decline and longer rates to rise, all things being equal.

Today, 13- and 26 week T-bills were auctioned, $34 billion in total to refund $31.9 billion maturing for a net paydown of $2.09 billion. Indirect bidders purchased $8.4 billion of the total for a respectable 25% participation. The 13-week bills sold for 3.93% yielding 4.025% and generating 2.34 bids for each awarded. The 26-week bills sold for 4.185% yielding 4.335%, setting a 2.5 bid to cover ratio.

Bonds were weak throughout the session, with ten year note yields gapping up at the open and finishing strong, +4.8 bps at 4.567%. The daily cycle indicators are showing preliminary buy signals on the bounce from 4.4% support, and a break back above 4.6% would suggest a move to the top of the rising linear channel at 4.7%.

Daily Chart of Crude oil

Crude oil gapped higher overnight and held above the descending linear regression channel off the Katrina high at the end of August. The intraday high was 60.825, but even the end of session pullback held above gap. Oil bulls need to see the 59 area hold if retested, and a break above 61.30 to confirm a new uptrend off the 56 lows. For the day, February crude oil closed higher by .625 at 59.95.

Traders returned to their screens this morning to find an early morning report from Ford (F) to the effect that the automaker intends to close 8 North American assembly and parts plants. Like GM, which is eliminating 30,000 jobs and closing 12 North American facilities, F cited "soaring" raw material and health-care costs as well declining North American market share. Reuters reported that F has lost more than $1.4 billion from its North American unit. It's worth noting that the Fed has been iterating and reiterating its view that inflation is "well-contained," and, along with government, has been a supporter of the elimination of global barriers to employment. It is my own view that reality can be seen in announcements such as this: every consumer sees the price of pretty much everything other than consumer electronics rising, and increased competition from international, particularly Asian labour is pressuring wages. With North American wages not growing as quickly as the price of commodities, consumers here have relatively less money to spend, and it's pressuring North American manufacturers who must pay more for inputs and cannot charge correspondingly more for their finished products. F closed lower by 1.1% at 8.06, while GM gained .14% to close at 22.13.


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JPM announced that it intends increase its staff in India by 4,500 during the next two years. Marketwatch reported that these new graduates will be hired instead of "replacing staff somewhere else." INTC announced that it will invest more than $1 billion over the next 5 years in India and, more particularly, Indian tech companies. Craig Barrett said that this includes a $250 million venture capital fund to exploit the rapid growth in Indian information technology. Currently, INTC employs 3,000 engineers and professionals in its Bangalore-based design center.

In other news, NTL (NTLI) announced that it would offer $1.4 billion to purchase Virgin Mobile. NTLI gained 1.16% to close at 60.80. Later in the morning, Boston Scientific (BSX) announced its $25 billion bid for Guidant (GDT). The bid equates to $72 per share in cash and BSX stock for all of the outstanding GDT stock, and exceeded JNJ's previous $22 billion or $63.43 per share bid by roughly 14%. Both Fitch and S&P placed BSX on credit watch negative, citing their expectation that the unsolicited offer would result in BSX's incurring excessive debt leverage to finance the deal. BSX lost 3.59% to close at 26.35, while GDT gained 9.96% to close at 67.98.

Calpine traded huge volume today as the NYSE announced its intention to suspend trading in and seeking delisiting of CPN shares tomorrow due to its "abnormally low selling price" and the possibility that the company could be pushed into bankruptcy. This follows a Delaware court ruling requiring CPN to repay $313 million in mis-spent proceeds from the sale of its natural gas supplies. The company characterized the sum as "ruinous" and requested a suspension of the order, which motion was dismissed on Friday. The company now has until January 22 to comply with the ruling. CPN lost 14.29% to close at .24.

Britain's Chancellor of the Exchequer, Gordon Brown, lowered his forecast for UK GDP growth from 3%-3.5% to 1.75% in 2005. Brown expects 2006's GDP to grow 2% - 2.25%. He cited "tough" economic conditions exacerbated by the oil rally and the downturn in the housing market. British pound futures were trading higher by .5% at 1.7423 as of this writing.

The President addressed what the Associated Press characterized as a "friendly" crowd at the Deere-Hitachi Construction Machinery Corp. in North Carolina, calling on companies to fund their pension obligations and on Congress to clarify applicable rules to ensure that US workers get paid their pensions as promised by their companies, and not by taxpayers via federal pension insurance. Bush, whose approval rating on the economy was at a low of 37% in the latest AP-Ipsos poll, cited last week's job numbers and reiterated that the economy is strong, with brighter days ahead. That poll and others have shown that a majority of Americans are pessimistic about the economy, however. The President also called upon Congress to extend the tax cuts due to expire, and to implement the Administration's pending health and energy plans.

This is scheduled to be a lighter week for economic data. Tomorrow will see the releases of Q3 Productivity and Factory Orders, followed by Wednesday's weekly mortgage and petroleum data, as well as Consumer Credit in the afternoon. On Thursday, it's the weekly Initial Claims report and on Friday, Michigan Sentiment and Wholesale Inventories.

For tomorrow, traders will be watching this morning's highs carefully. With the daily cycle indicators in various stages of their slow-motion rollovers, a failure to regain yesterday's high will put today's lows in peril, opening the door to daily cycle downphases lasting potentially for weeks. On the other hand, positive seasonality, a friendlier Treasury, and a so-far unbroken rising price trend suggests that it's still early for bulls to be worrying. Barring a break of today's lows, the rising trend remains intact. We'll be following and analyzing the action tick-by-tick in the Market and Futures Monitors- see you there!

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