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Market Wrap

Timber!

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The mighty fell last night. In the overnight markets, gold and the Nikkei 225 both tumbled from lofty levels, gold continuing a slide that had begun earlier in the week.

Some attributed gold's plunge at least in part to a change in margin requirements on the Tokyo exchange this week, leading to a liquidation of some positions. A disappointing Tankan quarterly survey supposedly led to the Nikkei's more-than-400-point tumble off its day's high.

Whatever the causes, by the dawn here in the U.S., the lumberjacks were roaming through our markets, looking for other mighty trees to fell. What they found were the trees that had been hiding the bears, forcing bears to take cover and send the SPX to a fresh 52-week high.

The Nasdaq was a reluctant participant in gains for a time in the afternoon, spending much of the day in negative territory and closing there, too. The Bank of America and Bear Stearns downgraded Apple (AAPL) to neutral and peer perform ratings, respectively, contributing to the Nasdaq's relative weakness. Jim Brown has mentioned the possible pressure on the Nasdaq this week due to the reweighting. So far, that pressure has worked only to dampen gains, not to send the Nasdaq below support.

Annotated Daily Chart of the Nasdaq:


That tactic of buying support may no longer work because of the Nasdaq's reweighting. Longs may not be a good idea at all this week on the Nasdaq.

Annotated Daily Chart of the SOX:


Annotated Daily Chart of the Russell 2000:


While the tech-heavy Nasdaq, SOX and Russell 2000 languished, blue chips helped the SPX and Dow to display much more strength. The SPX achieved new 52-week intraday and closing highs despite the retreat off its 1275.80 high of the day.

Annotated Daily Chart of the SPX:


Annotated Daily Chart of the Dow:


The day saw a number of economic releases. The Mortgage Bankers Association released mortgage applications for the week ending December 9 at 7:00 EST. The headline noted the continuing decrease of refinance applications, but mortgage loan application volume was also down 5.7 percent on an adjusted basis and 8.1 percent on an unadjusted basis. The purchase index, refinance index, conventional index and government index all fell. The four-week moving averages for the market and refinance indices fell while that for the purchase index remained unchanged. The average contract interest rate for a 30-year fixed-rate mortgage fell to 6.28 percent from the previous week's 6.32 percent, and points decreased. Despite the fall in some figures from the MBAA, the DJUSHB, the Dow Jones U.S. Home Construction Index, produced strong gains ahead of tomorrow's earnings announcements from a couple of homebuilders.

An AP article hit the wires this morning, speculating that the Pentagon will ask for $80-100 billion more for the effort in Afghanistan and Iraq. This number is in addition to the $50 billion that Congress may approve before adjourning, pushing the war costs up to a possible half-trillion dollars. No final proposal has been written and the ultimate request could differ from the figure now being bandied about, the article concedes, but critics have long accused President Bush of delaying requests as long as possible to keep budget deficit projections less dire than they would otherwise be, and a request anywhere near that amount will plead their case for them.

That press release and its implications for the trade deficit were to lend special significance to the 8:30 release showing that the trade deficit unexpectedly widened by 4.4 percent in October, to a new record $68.9 billion. For the year-to-date, the trade gap now stands at $598.3 billion, with the year now set to break last year's record $617.6 billion annual deficit. The deficit had been expected to narrow to $62.9 billion according to one report. Trade deficits with China, Canada, Mexico, the EU, and OPEC-member nations all reached new records. Exports rose during October by the largest amount in seven months, but that export number was driven by aircraft sales and not enough to overcome rise in import prices.

Bonds reacted, with the ten-year yield gapping lower and dropping, but the immediate reaction in equities was muted. That was to come later, when the markets pulled back from the early highs after the crude inventories release. Even that pullback was not to last, however.

Perhaps a separate release by the Labor Department showing that November's import prices dropped 1.7 percent, far more than the expected 0.7 percent, helped reassure investors, with the drop in crude prices mostly responsible for that decline. During the period covered, petroleum prices declined the most they had in almost a year.

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Treasury Secretary John Snow spoke reassuringly of the trade deficit in an interview on CNBC this morning, claiming that the way to undo that deficit was to continue efforts to grow the economy. He asserted that continuing tax cuts in the face of a record deficit would be a good idea because of the stimulus on the economy. He also noted that energy costs were not filtering through to core costs.

The impact of crude costs on trade deficit and the deficit's impact on the economy put special emphasis on the crude inventories on this day of many economic releases. Crude inventories rose 0.9 million barrels; motor gasoline, 1.8 million barrels; and distillates remained flat. Expectations had been that crude inventories would drop 1.5 million barrels; gasoline, climb 1.0 million barrels; and distillates, rise 800,000 barrels. While crude and gasoline builds proved better than expected, the distillate number was a disappointment, with distillates the most important component this time of year.

Considering the average range for this time of year, crude was above the upper end of the range, gasoline in the lower half, and distillates in the middle. A couple of minutes before the release, crude had traded at $61.45 a barrel, but quickly dropped to a low of $60.80 before beginning a rebound that took it to a new high for the day. When crude again reversed from that new high, at about 11:00, equities began a climb that was at first labored, but then gained steam as crude dropped to a new low for the day.

Sectors that performed well from early in the day included retailers, utilities and industrials, with blue chips in general performing well. An afternoon push carried financials higher, too.

Many specific-stock related developments probably contributed to the trading pattern today, too, but in the interest of keeping this already-too-long Wrap as short as possible, they will be covered briefly. If these impact your positions, check your preferred news source for more information. AAPL's two downgrades, already mentioned, were due to valuation concerns after recent gains. Electronic Arts (ERTS), ConocoPhillips (COP), PPG Industries (PPG) and Best Buy (BBY) also received downgrades. Safeway (SWY) provided disappointing guidance.

Big caps General Electric (GE), Boeing (BA), Honeywell (HON), Pfizer (PFE) and Wal-Mart (WMT) offered good news, helping to stabilize the big-cap heavy OEX. GE CEO Immelt gave an encouraging state-of-the-company speech to investors. Australia's Quantas Airways chose BA over Airbus for new orders. BA has reached a record number of new orders for the year. HON reaffirmed guidance for fiscal 2005 and 2006, with its fiscal 2006 EPS growth now expected to be 20-30 percent. Yesterday, PFE announced a dividend boost, and today the CEO said that the lifting of the dividend was only the first of a series of developments the company planned to increase shareholder return. WMT bought Sonae, a Brazilian retailer. In other news, General Dynamics (GD) will buy Anteon International (ANT), with the price tag at about $2.2 billion. Citigroup upgraded Nike (NKE).

Near the close, Amgen (AMGN) announced that it would acquire Abgenix (ABGX) for a significant premium to the $14.65 closing price, at $22.50. ABGX understandably shot up during after hours trading. JNJ also announced that its Paliperidone drug had been shown effective in schizophrenia studies. Symantec (SYMC) was granted a new antivirus technology patent.

The failure of the usual market leaders to lead today questions the sustainability of the rallies on other indices, but none of those usual leaders led to the downside, either. There was an obvious preference for the safety of blue chips, so those blue chips better continue to lead the way if the rally is to be sustained. GE has been in a possible bearish right triangle on its daily chart, with a flat supporting line at about $35.25, so bulls want to see GE stay above that level. BA was a market leader today, but saw a close well off its high of the day on strong volume, a sign that big-money people were selling into the rally. Some were expressing concern that BA could not keep up its record orders into next year. BA was approaching the top of a rising regression channel in place since January 2003, a long time for a climb within such a channel, and it was testing the previous swing high at $70.93 back in December 2000. It traded above that today after testing it yesterday. It has the possibility of rising a little further before it hits the top of the rising regression channel, but no guarantee that it will.

Tomorrow is a busy day for economic releases again. At 8:30 are the usual initial claims, but also CPI for November and the NY Empire State Index for December. CPI and employment figures will prove important for market direction. A strong labor number (fewer claims than expected) might worry markets, as the Fed is known to be watching for upward pressure from wages. A core CPI that shows that inflationary tendencies are being passed on to the consumer might, too. At 9:15, capacity utilization and industrial production for November will be released. At 10:30 come the natural gas inventories, with those currently probably more important than the crude inventories. Noon sees the Philly Fed number for December.

Earnings include those from ADBE, APOL, BSC, FCEL, GS, KBH, LEN, ORCL, PIR, and RAD, among others, with a number of financials and homebuilders among that group. That could prove important given the importance of the homebuilders and financials in today's rally

LLumberjacks weren't able to fell many stocks or indices on our markets today, as was obvious by the new 52-week high on the SPX, but the bifurcation in the tech-related indices and the others cautions bulls to keep close stops. The Nikkei's steep decline last night shows what happens when weak bulls are shaken out, but a number of recent sharp 300+ point gains on the Nikkei have shown what can happen when you try to catch a top, too. Watch the levels indicated on the charts above, but remember the tendency for technical analysis to become less useful beginning mid-morning on opex Thursdays.
 

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