Option Investor
Market Wrap

Opex Opiate

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December's option expiration week kicked off true to form, complete with extended drifts, trendline violations, whipsaws, failed chart patterns and reversals... all within stunningly slow, narrow range. Volume was light, and the clearest theme was neither bullish nor bearish, but sideways.

Volume breadth spent some time in negative territory, but the opening readings were very strong and persisted past the first hour. As usual, the downside readings as the market retreated weren't nearly as strong as were the upside readings. Advancing volume outnumbered declining volume 1.35:1 on the NYSE and 1.22:1 on the Nasdaq at the close.

Daily Dow Chart

The Dow closed 10.81 points from where it started and while the range looks wide, the action was slow. Old resistance to 10700 has become support, not yet tested, with today's 10735 low confirming initial support to 10725. So far, this daily cycle downphase has been less steep than the upphase that preceded it, and failing a break below 10700, the pattern off the year high could prove to be a bull flag.

Daily S&P 500 Chart

A doji star for the SPX in its recent range, adding 1.06 to close at 1260.43 after bouncing from a 1255.52 low. The range has been flat enough this month to suggest that op-ex week started 2 weeks early, and unfortunately for bears, this has been during the first third of a daily cycle downphase. If this pattern is a neutral pennant, the doctrine holds that these tend to be continuation patterns, which would imply an upside resolution. Today's high came at trendline resistance of 1263.86.

Daily Nasdaq Chart

The Nasdaq's print looks more bullish than it felt, because the initial gains were made overnight on no volume. The market gapped up, traded sideways, broke down to test Friday's highs, then bounced slowly, sideways-up back to where it started, all of which on low volume. The move was the first step toward stalling the daily cycle downphase, but then, this is op-ex week and an FOMC week to boot. Bulls need a break back above 2270-75, while the bears need a violation of 2225 and 2240 support, either of which could be neckline support on a possible head and shoulders top if today's 2266 high holds. For the day, the Nasdaq gained 4.22 to close at 2260.95.

Daily TNX Chart

At 1PM, the Treasury announced results of the $34 billion 13-week and 26-week bill auction, which refunded $31.76 billion in maturing paper and raised $2.24 billion of new cash. However, that minor drain to the market was more than offset by a big $10 billion paydown in 4-week bills announced this morning- the Treasury will auction $14 billion in 4-week bills tomorrow against $24 billion maturing.

The $34 billion in 13-week and 26-week bills auctioned today were taken up by foreign central banks to the extent of $9.53 billion. The 13-week bills sold for a high-rate of 3.82% and a median rate 3.79%, yielding 3.911%. The bid-to-cover ratio was 2.32. The high rate on the 26 week bills was 4.18%, yielding 4.33%, with a bid-to-cover ratio of 2.11.

The Fed did its part, with the open market desk refunding Friday's expiring $5.5 billion weekend repo with a $10.5 billion overnight repo. That resulted in a $5 billion net add for the day, but interestingly, demand for the money rose to new highs for the year. The repo was awarded at the highest rate submitted, 4.27%. If the Fed raises its overnight rate by 25 bps as expected tomorrow, then today's repo activity sees today's demand rising 2 bps above it. The 13-week bill rate held the low 3.8% range today, and so the overnight rate remains higher than the 13-week bill rate and very close to today's closing 4.547% yield for ten year Treasury notes.

At 2PM, the Treasury reported its November budget, which came in at a deficit of $83.1 billion, exceeding expectations for a deficit of $80 billion. This was a record November deficit, up from last November's $57.9 billion deficit. Receipts rose 3.2% to $138.8 billion for the month, while expenditures rose 15.3% to $138.8 billion. The administration expects the budget deficit to rise from $318.5 billion to $390 billion in 2005.

Ten year note yields (TNX) had opened in negative territory but had reversed by mid-morning, breaking Friday's highs as they rose following the 1PM auction announcement to close +1 bp at 4.547%. The daily cycle upphase continues, not yet overbought, and bond bears/yield bulls will want to see TNX hold above rising trendline support in the 4.47%-4.48% area.

Daily Chart of Crude oil

Crude oil rose last night, and the headlines cited an OPEC decision to leave its 28 million bpd production quota unchanged. Kuwaiti Oil Minister Sheikh Ahmad Fahd al-Sabah and Saudi Arabia's Ali Naimi said that the cartel is considering reducing output at next month's January 31 meeting if demand weakens. Suprisingly little mention was devoted to this weekend's explosion and fire in Hemel-Hempstead, England. Europe's largest post-WWWII oil explosion received little space. Fortunately, only 2 people were reported seriously injured and only 43 were hurt, but the huge toxic cloud and risk of groundwater pollution from efforts to contain the blaze remained. Terrorism was immediately ruled out in the reports I saw this weekend.

Later in the day, the Energy Department increased its long-term forecast for global crude oil prices by $21 to $57 per barrel. By "long-term," the DOE is referring to 2025 and 2030, with oil prices expected at $54 per barrel in 2025 and $57 per barrel in 2030, (valued in 2005 dollars). A reader sent the following reaction after I posted the DOE's headline in the Market Monitor:

"Im not sure I follow those headlines. Just exactly how does the Energy Dept know what oil will be trading for in 2030? Im not sure we will even have any by then. ...If my math is correct thats 24 years into the future. In 1981 how many people could have envisioned the world we live in today and could have accurately forecast what we would be paying for goods and services? I dare say not many. The DOEs forecast and 7 Bucks might buy you a latte at Starbucks."

On the daily chart, crude oil has re-started the stalling daily cycle upphase, but holds within what could be a bearish rising wedge above 61.00 support. For the day, crude oil rose 1.925 to close at its session high, 61.325, a 3.24% gain. Session low was 59.30. Natural gas gained .525 or 3.67% to close at 14.825, off its 14.93 high.


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In other news, the Organization for Economic Co-operation and Development (OECD) reported that China surpassed the US in laptop, mobile phone and other info-communications technology exports in 2004. China exported $180 billion of these "ICT" goods in 2004, while the US sold $149 billion. In 2003, the US led with $137 billion to China's $123 billion worth of ICT exports. The OECD expects China to maintain or grow this lead in 2005, but expects the data to take months to collect.

Gold rose further this morning to 25 year highs, with wire services citing demand in Japan. While various media have discussed stepped-up jewellery demand and portfolio diversification, the Bank of Japan's near-zero percent overnight rate in place since 2001 could have something to do with it as well, with currency fears contributing to the move. Foreign central banks growing their monetary bases/devaluing their currencies are arguably the principal contributors to the rallies in "hard" assets, and I believe it to be a mistake to view the rally in gold as somehow isolated from the rallies in energy, or other metals, or real estate.

February gold futures printed a high of 544.20 before dropping steeply at 12:30PM EST. Unlike silver, which got clotheslined for a deep decline, gold held positive above 530, but only fractionally so. The break to new highs with a sharp intraday reversal would have been a gravestone doji had gold closed negative, but it was still a close call.

In corporate news, Burlington Resources (BR) took a rocket ride on news that it is in talks be acquired by the nation's third-largest oil company, ConocoPhillips (COP) for more than $30 billion. Reuters reported that both companies declined to comment on the story. COP closed lower by 2.89% at 61.25, while BR gained 8.42% to close at 82.50.

Canadian Pacific Railway (CP) lowered its 2006 EPS projection from CAD $3.70-$3.85 to CAD $3.60-$3.85. The revision was based on Fording Coal's (FDG) Dec. 7 outlook for a reduction in coal output as well as other factors. CP lost 1.78% to close at 41.35.

MRK took a hit this morning and a subsequent downgrade by Hillyard Lyons on news that federal judge declared Fallon a mistrial in a Vioxx case. The mistrial a motion by Plaintiff's counsel based on publication in the New England Journal of Medecine of a report that questioned the legitimacy of MRK's testing methods and protocols for Vioxx. MRK faces over 7000 Vioxx-related lawsuits. MRK lost 2.47% to close at 28.41.

This is scheduled to be a heavy week for economic reports. Tomorrow, we'll get Retail Sales, Business Inventories and the FOMC announcement at 2:15PM. On Wednesday, it's Export Prices ex-ag., Import Prices ex-oil, the Trade Balance, and the weekly Crude Inventories and Mortgage Bankers data. On Thursday, we get the Empire State Index, the CPI, Net Foreign Purchases, Industrial Production and Capacity Utilization, the Philly Fed, and the weekly Initial Claims data. On opex Friday, we'll get the Q3 Current Account.

The markets aren't easy to forecast or even to follow, and option expiration week, affectionately known by some as "scam week," is notorious for its false moves, roundtrips, whipsaws and extended ranges. FOMC announcements are known for miniscule volume followed by wide, unpredictable spikes and reversals. Tomorrow is lined up to be a fine day to take with a large grain of salt, and I will be very hesitant to draw conclusions from the intraday action. Protect your capital and your peace of mind as you follow the action, as there will certainly be easier and clearer sessions ahead. Join us in the Market and Futures Monitors, where we'll be sparing no effort to make sense of it tick-by-tick.

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