December op-ex week tormented traders with an extended sideways range that broke definitively today. What started in the morning as a very light volume range kicked off into a decline to multiday lows in the case of the Dow and multiweek lows in the case of the Nasdaq.
The drop started just after the 1PM Treasury auction results were released, though those results weren't notably disappointing (see below). Volume picked up on the decline as intraday support failed. Combined exchange volume broke 3.3 billion shares, and breadth was strongly negative by the close, 2.27 declining shares for each advancing on the NYSE and 4.12 declining shares for each advancing on the Nasdaq.
Daily Dow Chart
The Dow, buoyed by MRK and PFE, closed with a minor 39.06 point loss at 10836.53. The lower low and lower high, and upper doji shadow are all bearish. The new low bodes ill for the tentative stall in the daily cycle indicators, but price came to rest on rising trendline support. Below the 10825 low, next support is clustered at 10725-750.
Daily S&P 500 Chart
Unlike the Dow, the SPX broke rising trendline support off the October low on the move below 1267, reaching a low of 1259.28 before closing -7.4 at 1259.92. Parallel trendline support is at 1255, below which the 1244-46 confluence comes into view. 1267-70 is new resistance- the high of the day was 1270.51.
Daily Nasdaq Chart
The Nasdaq got croaked for a 29.74 loss to close at 2222.74. The morning high was 2256.03, the low 2221.79 and right on 2220 support. This level would coincide with 1246 on the SPX chart. The Nasdaq has clearly been the weakest link here, with the range since mid-November looking like a flat head and shoulders top, no upward drift equivalent to that on the SPX and Dow. Below 2220, next support is at 2200. 2230-35 is now resistance.
Daily TNX Chart
The Treasury announced that tomorrow's 4-week bill auction to refund $24 billion in maturing debt will be for $11 billion, resulting in a net paydown of $13 billion. This reduction in debt will free up liquidity to the markets, and both equities and Treasuries bounced slightly following the 11AM announcement, though the strength was short-lived. This followed action from the Fed's open market desk at 10AM, adding an overnight repo of $7.5 billion with no expiries, for a net add for the day in that amount. Despite this substantial amount of new liquidity being added to the markets, price action remained listless and weak both for equities and treasuries.
Partially offsetting these positive liquidity developments were the 13- and 26-week bill auctions announced last week and conducted today. The Treasury auctioned $34 billion of these bulls to refund $30.67 billion maturing, raising new cash of $3.3 billion. Foreign central banks purchased $11.3 billion of the total. The 13 week bills sold for a high rate of 3.895% and median rate of 3.87% yielding 3.98%, with 2.19 bids tendered for each accepted. The 26 week bills sold for a high rate of 4.22%, a new high for the year, and median rate of 4.195% yielding 4.372%, the bid-to-cover ratio 2.17.
Ten year note yields (TNX) fell 1.3 bps to close at 4.442%, right on support from the August highs and above confluence support since mid-October. The TNX flattened against 13-week rates (IRX), closing just over 8 bps above the 3.86% IRX. The yield on today's 26 week bills was just 4.372%. Greenspan has said that a flat or inverted yield curve doesn't necessarily indicate economic weakness, which is a fair statement. It may indicate many things. The one thing it certainly indicates is that the cost of short term money is rising and, in some cases exceeding the cost of longer term money. Is it because demand for money "now!" is growing in the same way as "backwardated" options will see the front-month contract price exceed the back-month contracts? Or is it because mortgage and other long term demand has peaked? It's debatable and fascinating question.
Daily Chart of Crude oil
The Minerals Management Service updated its production shut-in statistics today. The MMS calculates that 27.63% of daily oil production is shut in, while 20.14% of daily natural gas production remains shut in. The MMS noted that improvements have been slow, and estimates that this recovery will "continue with incremental movement over the next several months."
Crude oil opened at the bottom of Friday's range and bled its way lower. The 57.80 low coincided with the upper descending trendline on the broken bearish channel, and the bounce left a doji shadow to confirm the support. However, the daily cycle indicators are early in a new and so-far powerful downphase, and that low will be important support. Below that comes the November low in the 56.70 area. Bulls need a break back above 59.50, followed by a gap fill to 61 to whipsaw the daily cycle indicators back up. For the day, crude oil finished lower by 1.05 at 58, it's lowest close since November 30th.
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In corporate news, FPL Group (FPL) announced its $11 billion acquisition of Constellation Energy (CEG). The Wall Street Journal cited "a person with knowledge of the matter" in reporting that the deal would be for stock only, valuing each CEG share between $61-$62. The combined power companies will provide operations along the entire East Coast, generating more than 30,000 megawatts of power. Reuters reported that it's also the first merger in the wake of the new energy bill, repealing the Public Utilities Holding Companies Act that limited such mergers. Moody's subsequently affirmed the debt ratings of the two companies while revising its outlook on CEG from "stable" to "positive" and on FPL from "stable" to "negative." The changes came what Moody's perceived to b a lower business risk profile to CEG, and a higher risk to FPL based on CEG's unregulated generation and risk management businesses, larger operations and higher percentage of cashflow generated from unregulated businesses.
CEG closed lower by 4.22% at 59.01, while FPL lost .37% to close at 42.79 after trading a high of 44.00 in the morning.
Pepsi Bottling (PBG) warned that 2006 EPS will fall from this year's projected $1.83-$1.87 range to $1.76-$1.84, due to a $.18 per share charge from the expensing of its employee stock options. On a pro forma basis, 2006 EPS is expected to be $1.94-$2.02 compared with consensus estimates of $2 per share. PBG closed higher by .04 at 29.50.
Shopping this past weekend was "healthy" but not spectacular, according to market researchers at NPD Group, who reported that merchants are hoping for a surge in last-minute shopping. Because Christmas Eve will be on a Saturday this year for the first time in 11 years and Chanukah will be later, Michael P. Niemira, chief economist at the International Council of Shopping Centers expects last minute shopping to surge this year. NPD Group reported that discount and electronic retailers have been the strongest this season, while mall-based apparels have been mixed. WalMart reported that December sales should come in higher by 2%-4%, but food has been outselling general merchandise. Because margins are thinner on food, that trend could have a deleterious impact on profits. WMT lost .33 to close at 48.94.
Circuit City, one of those electronic retailers, reported that Q3 earnings from continuing operations rose from a Q3 2004 loss of $5.9 million or -$.03 to a gain of $10.1 million or 6 cents per share in the current quarter. Sales roles from $2.53 billion to $2.91 billion in the period, and same-store sales rose 13.1%. These results beat estimates by 2 pennies. The 2006 full-year sales growth projection was raised from 5%-8% to 10%. The company also announced that Chairman and CEO Allan McCollough will retire as CEO on February 28th, 2006, and as Chairman in June. Philip Shoonover was nominated to the board and will be come CEO on McCollough's exit.
Clorox (CLX) guided higher this morning, saying that Q2 earnings from continuing operations should rise from 41-47 cents to 44-49 cents per share. Consensus estimates were 45 cents prior to the update. Q3 earnings are expected at 66-73 cents and Q4 at $1.04-$1.14, compared with consensus estimates of 74 cents for Q3 and $1.06 for Q4. The full-year estimate for 2006 remained at $2.91-$3.06 per share, compared with a consensus of $2.95. CC gained 6.4% to close at 22.62.
In other news, the National Association of Home Builders reported that its sentiment index declined from 61 in November to 57 in this month, the lowest level since April 2003. This is a diffusion index, with readings above 50 indicating expansion. The NAHB cited rising interest rates and higher energy costs for the decline. The PHLX Housing Sector Index (HGX) lost 1.65% to close at 520.68, off a low of 519.86.
There were no major economic reports released today, but it's scheduled to be a moderately busy week. Tomorrow we'll get Housing Starts and Building Permits, along with the PPI, all before the opening bell. On Wednesday, in addition to the weekly Mortgage Bankers and EIA Petroleum Report, we'll get the GDP and Chain Deflator final numbers for Q3. On Thursday, it's the weekly Initial Claims and Natural Gas inventory reports, along with Personal Income and Personal Spending, and Leading Economic Indicators. On Friday, we'll get Durable Orders, Michigan Sentiment and New Home Sales.
For tomorrow, the big issue will be whether we've seen a genuine change of trend on the indices, or whether it's a buying opportunity. On the SPX and Nasdaq, rising support finally failed, and did so on a sharp decline. On the Dow, that technical damage is absent. The sharp decline left the intraday cycles oversold and in some timeframes, trending. A bounce is due on those cycles for tomorrow. If it is weak, or absent, or fails within today's range (ie at a lower high), then the weakness reflected on the daily charts will be confirmed. A break of today's high would be the first big step toward repairing the damage on the Nasdaq and SPX, confirmed by a return back above the broken trendline. Join us in the Market and Futures Monitors tomorrow, where we'll be following and reporting on the action throughout the day.