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Market Wrap

The Return of Op-Ex

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Traders doubled-checked their calendars to be sure that January's third Friday had passed as the equity indices traced a tight, flat range. The range felt ready to break at any time, but each attempt was reversed quickly.

Volume was moderate, and volume breadth held in positive throughout the session, finishing with 1.8 advancing shares for each declining on the NYSE and 1.5:1 on the Nasdaq. Despite that, however, bulls weren't able to break upward out of what bears saw as flags at the bottom of last week's steep decline.

Daily Dow Chart

The Dow gained 23 points to close at 10712. The afternoon high was 10750. Unlike that of the Nasdaq, the Dow's high failed to exceed yesterday's high, resulting in a higher low and lower high for the day. This price compression suggests a potentially explosive move out of the narrowing range. The current range is just below the November-December range that broke on last week's drop below 10730-750, and the overhang will be a major obstacle for bulls seeking another shot at the highs. If the current bounce is a bear flag/dead-cat bounce, then a violation of 10630-650 could be enough to kick off the next leg of the decline.

Daily S&P 500 Chart

The SPX eked out a 3.04 gain close at 1266.86. As with the Dow, these prints have managed to retrace only a small part of last week's decline. On the other hand, the November-December confluence has not yet failed, and while the oscillators point down, the broader bullish trend has yet to be seriously violated. 1260 is first support below, 1272 immediate resistance just above the 1271.47 high of the day.

Daily Nasdaq Chart

The Nasdaq gained 16.78 to close at 2265.25, bouncing from rising linear support at a low of 2256. 2270 is first resistance a point above today's high, followed by 2290-2300. As noted in the Market Monitor, this week's flaggy bounce has yet to impact the oscillators on the daily or weekly charts, which remain in downphases. Only the intraday cycles are bouncing, and that bounce appears to be corrective. A strong move back above 2300 could change that, however.

Daily TNX Chart

The Treasury auctioned $12 billion of 4-week bills today to refund $10 billion maturing and raising $2 billion of new cash. Foreign central banks purchased $900.2 million of $12 billion total, a weak showing, and the bid to cover ratio was 2.02. The bills sold for a high-rate of 4.145% yielding 4.216%.

The Treasury also auctioned $10 billion of 20-year Treasury Inflation-Protected Securities (TIPS), raising all new cash. Foreign central banks took a big $5.56 billion of the total, but the bid to cover ratio was just 1.48. The high-yield was 2.039%, the median yield 1.955% (at which rate half of the bonds were auctioned) and the interest rate 2%.

In addition to this effective $12 billion in drains on the market, the Fed loaned its dealers $7 billion via overnight repo, refunding the $10 billion expiring today for a net drain of $3 billion. That drain was mitigated by the outright coupon purchase announced yesterday and delivered today, in the amount of $947 million. Given that nearly $15 billion in liquidity was drained today by the Treasury and the Fed, it wasn't surprising that the treasury markets were weaker, but equities nevertheless held their slim gains.

Ten year note yields (see chart above) closed higher by 3.3 bps at 4.39%, back within the rising linear channel. The daily cycle continues its difficult downphase, and a break back above the 4.44% level could be enough to generate the first upturn in this timeframe.

There were no major economic data released today, but the earnings were fast and furious. 3N (MMM) reported Q4 earnings that rose from $720 million or 91 cents per share to $761 million or 99 cents in the current quarter, 4 pennies short of consensus estimates. Sales rose from $5.09 billion to $5.33 billion, a 4.5 gain but missing expectations of $5.4 billion. Net of one-time accounting charges, the company said it earned $1.04 per share. For Q1, MMM expects EPS of $1.1-$1.14, compared with First Call estimates of $1.15. The company will restate 2005 earnings to include a 14-cent per share charge related to expensing of stock options. MMM closed lower by 1.98% at 74.20.

McDonald's Q4 earnings rose from 31 cents or $397.9 million in the year-ago quarter to $.48 or $608.5 million on revenue that rose 19% to $3.55 billion, meeting consensus estimates of 48 cents. MCD gained .14 to close at 35.85. JNJ's earnings Q4 earnings rose from $1.2 billion or 41 cents to $2.2 billion or 73 cents, but sales fell 1.1% to $12.6 billion on a 4.2% drop in domestic sales. Estimates were for EPS of 73 cents on $13.2 billion revenue. JNJ got hit for a 2.99% loss to close at 59.36.

Dupont (DD) reported Q4 earnings that fell from $278 million or 28 cents to $153 million or 16 cents per share, 3 cents of which was a one-time benefit in the form of lower than expected tax costs resulting from its repatriation of foreign earnings. Sales dropped 3% to $5.83 billion. Estimates were for EPS of 10 cents on revenue of $5.92 billion. The company also warned that Q1 earnings are expected at 70 cents per share, 29 cents lower than the current consensus view. The company cited declines in its agriculture and nutrition businesses on lower demand for crop protection chemicals and other factors. As well, last year's hurricanes were blamed for an expected decrease in performance materials, coatings and color technologies. Full year earnings for 2006 are expected around $2.60 per share, compared with a $2.83 consensus. DD lost .73% to close at 39.26.

Upside earnings surprises included LXK and SMG, though Lexmark's earnings nevertheless fell 47% and the company announced a planned job cuts of 825 positions and outsourcing of another 525 positions. LXK rose 11.29% to close at 51.08. EMC reported a record quarter and full-year, with Q4 net income rising 27% from $321 million or 13 cents per share to $409 million or 17 cents on revenue that rose 15% to $2.71 billion. Estimates were for EPS of 17 cents on $2.693 billion revenue. EMC gained 2.94% to close at 13.65.

After the bell, SUNW reported Q2 earnings that fell from a $4 million profit in the year-ago quarter to a loss of $233 million or 7 cents per share. Revenues rose, however, to $3.38 billion from $2.84 billion. Excluding one-time entries, EPS was a loss of 3 cents, missing expectations by 2 pennies. Sun got hit for a 2.29% loss afterhours to 4.27 as of this writing.

Disney (DIS) confirmed its agreement to purchase Pixar (PIXR) for $7.4 billion, comprised of $6.3 billion in stock and $1.1 billion in cash, pursuant to which PIXR CEO Steve Jobs will join Disney's board and become its largest shareholder. DIS closed the day +1.84% at 25.99, and PIXR closed lower by 1.2% at 57.57, up .03 to 57.60 as of this writing.


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In other news, Canadians elected a new Tory minority federal government yesterday. The Conservative party won 124 seats in Canada's House of Commons, the Liberals 103, the Bloq Quebecois 51 and the NDP 29. Quebeckers gave the BQ 51 out of 75 ridings, while the Conservatives gained 10 new ridings, 8 of which were former BQ ridings. This is a smaller minority than the Liberals won in the 2004 election, suggesting that the Conservatives will have their work cut out for them in Parliament. Canadian dollar futures traded both sides of .87 on Globex, and then dropped hard to the mid-.86s as the Bank of Canada announced another 25 bp overnight rate hike to 3.5%.

The Bank of Canada's rate decision was inline with expectations, and its policy decision maintained that "some modest further increase in the policy interest rate would be required to keep aggregate supply and demand in balance and inflation on target over the medium term..."

This is a relatively light week for economic data, with the greater emphasis to remain on corporate earnings. There were no major economic reports released today, and tomorrow we'll get the weekly EIA Petroleum report, the weekly Mortgage Bankers Association data, and Existing Home Sales. On Thursday, it's Durable Orders, Initial Claims and the Help Wanted Index, as well as the EIA Natural Gas inventory report. On Friday, we'll get the GDP and New Home Sales.

For tomorrow, the big question will be whether the bulls can break out of this bear flag off the lows. A sideways drift would only add another day to the "accumulation/distribution" dilemma. While the pattern and the cycles in the daily and weekly timeframes support more downside from here, the market has had a habit of blasting strongly higher from such consolidations. Best is to watch the support and resistance levels posted above and keep an open mind- a break on heavy volume should be the real deal. We'll be following all the action as it happens in the Market Monitor and Futures Monitor. See you there!

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