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Market Wrap

Dow 11K Partiers Reticent

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The Dow tagged and broke The Number, but the fanfare was subdued, with price trading a quiet range in the afternoon, just another notch in last week's rally. Volume was lighter than on Friday, and volume breadth, while positive, was nowhere near as strong as we saw in Friday's meltup and ensuing range. The Nasdaq and SPX pulled unexcitedly to new multiyear highs.

The Dow was aided by Goldman's upgrade of GM from "underperform" to "inline" based on valuation and what analyst Robert Barry characterized the "unlikeliness" of a bankruptcy filing in the nearterm for the troubled automaker. GM closed higher by 7.74% at 22.41.

Daily Dow Chart

The Dow gained 52.69 to close at 11019.90 after touching a high of 11020.15, the highest close in 4 and a half years. While my dad will doubtless want to discuss 11K in detail with me tonight, the round number close did little to alter the setup for the past few sessions, notching a nominal new high on lighter volume in what has been a powerful, almost vertical rally since the beginning of the year. Most of the intraday cycles topped last Thursday and have been trending ever since as the daily cycle in the chart above continues its upward march. As discussed in the Market Monitor in recent weeks, the weekly cycle has been overbought and looking for a downphase, and the current new highs still qualify as a retest within that broader cycle's top. But above 10900-920 support, the range break has to be respected as price works its way higher.

Daily S&P 500 Chart

The SPX gained 4.7 to close at 1290.15, printing its first full candle above rising parallel trendline support at 1280. The cycle setup is identical to that on the Dow, with a dominant daily cycle upphase overpowering the intraday cycles in this so-far correction-free rally. Bears need to see a break below range support in the mid-1270s before assuming that a correction is anything more within this daily cycle upphase.

Daily Nasdaq Chart

The Nasdaq gained 13.07 to close at 2318.69, despite the erroneous print on my daily chart. The candle is correct, however, in that the price finished less than 4 points off the 2322 intraday high. Despite the stronger break of the previous highs compared with the Dow and SPX, the Nasdaq has not yet violated its rising parallel trendline resistance. While Edwards & McGee trendline analysis is subject to interpretation, it's an interesting divergence from what we see on the SPX chart. 2275 is the level for bulls to defend, at the bottom of last week's unfilled gap.

Daily TNX Chart

Ten year notes traded both sides of unchanged in a narrow range day to close flat at 4.379%. Daily cycle indicators are oversold and are looking for an upturn, but a move above 4.44%-4.45% resistance is needed to generate the first preliminary buy signals.

The Treasury announced the size of a number of upcoming auctions today. The 4-week bill auction will total $8 billion to refund $14 billion of bills maturing, resulting in a paydown of $6 billion. However, that amount was more than offset by a $13 billion auction of 5-year notes also announced, raising all new cash in that amount. As well, the upcoming 10-year TIPS (treasury inflation-protected securities) auction will raise $9 billion of new cash, for a total net of $16 billion in new cash being raised net via longer-dated 5- and 10-year paper against the paydown in 4-week bills.

The Treasury auctioned 13-week and 26-week bills in the amount of $34 billion to refund $32.88 billion in maturing bills, raising another $1.12 billion in new cash. All this new cash being raised drains liquidity otherwise available to the markets, and this might have been why the Fed's open market desk was generous today, giving its dealers a $7 billion overnight repo against $5.75 billion maturing from Friday, for a net $1.25 billion add.

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The 13- and 26-week auctions were well-received, with foreign central banks stepping up for just under $9.5 billion of the $34 billion auctioned. The 13-week bills sold for a high-rate of 4.15% yielding 4.252%, with 2.25 bids received for each accepted. The 26-week bills sold for a high-rate of 4.25% yielding 4.404%, with a bid to cover ratio of 2.5.

The Atlanta Fed President Jack Guynn delivered a speech to the Atlanta Rotary Club, in which he estimated that the economy should grow this year in a 3%-4% range. He didn't give any hints about upcoming rate hikes, but did say that the economy looks "quite favorable" for this year, while allowing that the federal deficit is "very worrisome." Inflation expectations are "anchored", and estimates job growth of approximately 175,0000 per month for the year. The economy is, according to Guynn, "stronger than most people think." The Kansas City Fed President Thomas M. Hoenig followed up with a speech in which he said that job growth should remain slow, while the main economic risk would remain inflation spurred by rapid growth. However, he expects "core" inflation to remain stable and low, that the Fed Funds rate is currently at the low end of a neutral range.

The Fed reported November's Consumer Credit report at 3PM, with outstanding credit falling at an annual rate of .4%, or -$649 million to $2.156 trillion. October's figure was revised to from a 7.2 billion decline to an $8.4 billion decline (or a 4.7% annualized rate), making the November reading reported today the first 2 consecutive month decline in Consumer Credit in 13 years. Consensus estimates were for a $5 billion increase.

Daily Chart of Crude oil

Crude oil was up again this morning as China's CNOOC announced a $2.3 billion cash deal to purchase a 45% share of a Nigerian deep-water oil field in the Niger Delta - the first acquisition since its attempted takeover of Unocal last year. The deal is still pending approval by Nigeria's and China's governments. India's largest oil company, Oil & Natural gas Corp., had previously submitted a winning $2 billion bid, but it was subsequently blocked by the Indian cabinet as not being commercially viable. The site's recoverable reserves are estimated at 620 million barrels of oil and 2.5 trillion cubic feet of natural gas.

Currently, China imports more than 40% of its estimated consumption of 6 million bpd of oil, and with yearly growth estimates hovering around 10%, China's appetite for fuel is expected to increase commensurately.

The gain in crude oil was short-lived however, and reversed later in the session as OPEC Secretary-General Mohammed Barkindo announced that the cartel will probably not decide whether to cut production in its January 31 meeting. With the financial press touting the 12.5% y-o-y in crude oil inventories, the prevailing mood was bearish for black gold, which finished the day session -.65 at 63.55, off a low of 62.90. The session high was 64.625, a 3 month high.

Speaking of gold, gold futures broke to new highs today, with the front-month e-mini reaching 552.90, an 11.80 gain. Marketwatch reported that the 550.50 closing was its highest close since January 1981.

In corporate news, Boston Scientific (BSX) announced that it expects to show a 12% rise in sales for 2005, and estimates net sales to be $6.28 billion, up from $5.62 billion in 2004 but missing consensus estimates of $6.32 billion. Q4 net sales are estimated to come in at $1.54 billion, compared with consensus estimates of $1.57 billion. BSX is in a bidding war with JNJ to take over Guidant (GDT), and announced yesterday a $25 billion cash and stock bid to buy the company- Marketwatch reported that this matches its earlier $72 per share bid, and tops JNJ's $63 per share bid. BSX stated that it would share the rights to GDTs' drug-coated stent technology with Abbott Labs (ABT). Following BSX's announcement yesterday, JPM upgraded ABT from "neutral" to "overweight." BSX lost 1.37% to close at 25.88, while JNJ gained .62% to close at 62.99. ABT rose 3.72% to close at 42.51, and GDT gained 2.45% to close at 69.

Reuters reported that Tyco (TYC) is again revisiting former CEO Kozlowski's plan to break up the company and divest itself of its electronic and health-care businesses. The board intends to meet this week to discuss the plan, which would see TYC reduced to its security, fire-prevention, and pump and valve operations, all to be run by current CEO Edward Breen. TYC closed +3.54% at 31.04.

Marvel (MVL) announced that it has ended its licensing agreement with Toy Biz Worldwide, and executed a $205 million license pursuant to which Hasbro (HAS) will produce toys based on its comic book and movie characters. MVL estimates a Q4 charge of $13 million - $16 million related to the termination of its deal with Toy Biz, but has been guaranteed $205 million of royalties under the new 5 year contract. The one-time charge was not reflected in MVL's 2005 estimate of November 9, 2005. MVL rose 1.02% to close at 16.86 and HAS gained 1% to close at 20.19.

After the bell, Alcoa (AA) announced Q4 net earnings that declined from 30 cents per share on revenue of $5.98 billion to 26 cents on revenue of $6.67 billion. Estimates were for EPS of 37 cents on revenue of $6.69 billion. AA traded -3.34% afterhours at 29.55.

Tomorrow's economic reports will be restricted to Wholesale Inventories at 10AM. On Wednesday, apart from the weekly Mortgage Bankers Association data and the EIA petroleum inventory report, there are no data scheduled. On Thursday, we'll get Import Prices ex-oil and Export Prices ex-ag, Initial Claims, the Treasury Budget, and the EIA natural gas figures. On Friday, it's Retail Sales, Business Inventories and the PPI.

For tomorrow, traders will be scrutinizing the intraday charts for a violation of today's lows to signal the start of the overdue intraday cycle correction. The strength on the daily charts tells us to expect that intraday decline to be corrective, but if it breaks back below range support identified above, we could see that correction spread to the daily cycle as well. With today's advance listless despite the bulls' close above The Number, the upside looks less likely without a correction first. See you in the Market Monitor!
 

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