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Market Wrap

Sideways Slide

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The indices continued last week's sideways slide, failing on each small attempt to break upward out of Friday's sideways range and eventually breaking to nominal new lows. Volume breadth was mixed, slightly bullish on the NYSE and slightly bearish on the Nasdaq. It was a quiet, uneventful session, and it seemed like the heavy-hitters were playing hooky for the post-Super bowl session.

Prudential's Ed Keon was on the wire today, reducing his recommended equity weighting to 55% from 100%, raising bonds to 35% and adding 10% to cash. In support of his defensive shift, he cited lower productivity, wage gains and high energy prices, as well as negative fund flows, geopolitical risk due to weekend developments with Iran (see below). He said that he is overweight energy, utilities and telecom, underweight consumer discretionary, industrials and financials.

BAC's Thomas McManus estimated that investors withdrew $12 billion from money markets and invested $16 billion in foreign-stock funds, $2.2 billion in U.S.-equity portfolios and $4 billion in bond funds during the month of January. In his research note, McManus wrote that "One feature of this year's money flow derby appears similar to that seen in prior years: investors typically chase the best fund themes and categories of the year just ended."

The indices finished spitting distance from where they closed on Friday, the Dow and SPX eking out small gains.

Daily Dow Chart

The Dow closed higher by 4 points at 10797, bouncing off an afternoon low of 10771 nominally below Friday's low. The Dow has yet to test rising support off the October low, and the daily cycle downphase in progress has yet to do any real damage. Fibonacci support at 10735 is a key level that yet to be touched, above which the decline off 11000 can be seen to be corrective. Below that level, trendline support comes at 10650.

Daily S&P 500 Chart

The SPX gained .96 to close at 1264.99, holding at the low end of Friday's range below rising trendline support. The lower high came at 1267, the higher low at 1261. As with the Dow, the daily cycle downphase has so far failed to do any real damage, except that the October trendline support has failed. Below 1257-60, next confluence support is at 1245.

Daily Nasdaq Chart

Unlike the SPX, the Nasdaq did not print an inside day, instead hitting a lower low of 2249.75. For the day, the Nasdaq lost 3.78 to close at 2258.80. October trendline support has failed, but the previous low at 2240 was not tested by today's low.

If the broken October trendline is bear wedge support, then the implied target could be as low as 2025 Fibonacci support back at the October low. First sign of trouble for bears will be a break back above that trendline at 2270-75.

On the liquidity-front, the Fed was generous today, the open market desk announcing a $7 billion overnight repurchase agreement to replace Friday's maturing $1.75 billion, adding $5.25 billion net for the day. However, that net add was more than offset by the Treasury's new borrowing.

At 11AM, the Treasury announced the size of tomorrow's 4-week bill auction at $14 billion. There are $8 billion in 4-week bills maturing, and so this auction will raise $6 billion of new cash. Last week, today's 13- and 26-week bill auction sizes were announced- in total, $37 billion of the bills were auctioned this afternoon, refunding $34.458 billion and raising new cash of $2.542 billion.

That auction saw indirect bidders (foreign central banks) purchase $7.57 billion of the $37 billion total, a 20.4% participation rate. The high-rate on the 13-week bills was 4.375% yielding 4.485%, the bid to cover ratio a respectable 2.57. On the 26-week bills, the high-rate was 4.5%, yielding 4.669% at a bid to cover ratio of 2.24.

Tomorrow, the Treasury will auction the 4-week bills as well as 3-year notes, then ten year notes on Wednesday. But the big news will be Thursday's $14 billion 30-year bond auction.

Daily TNX Chart

Ten year treasuries opened weakly but recovered early in the session, spending several hours drifting sideways near unchanged before pulling back at the cash close. Ten year note yields finished higher by 1.2 bps at 4.545% despite the 4.541% print. The spring off the 4.3% daily cycle low is testing confluence to 4.56%, above which the November highs come into view.

The UN's 35-nation International Atomic Energy Agency (IAEA) voted to report Iran to the UN Security Counsel on Saturday, citing its concern that Iran's nuclear program might not be "exclusively for peaceful purposes." Russia and China voted in favor of the referral, but on the condition that no action be taken by the Security Council before March. The only member nations to vote against the resolution were Cuba, Syria and Venezuela, and 5 other nations, Algeria, Belarus, Indonesia, Libya and South Africa, abstained. The resolution noted Iran's violation of the nuclear nonproliferation treaty and the inability to determine that Iran is not producing or attempting to produce nuclear weapons.

State television in Iran reported immediately that Iranian President Mahmoud Ahmadinejad addressed a letter to Vice President Gholamreza Aghazadeh following the adoption of the resolution, ordering the resumption of uranium enrichment and the end of snap inspections of its facilities.

Crude oil gapped higher overnight but spent the day drifting lower, dropping back to Friday's range in the final minutes of the day session to close lower by .275 at 65.10. The session high in the morning was 66.675.

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In corporate news, Toshiba Corp. announced that it has agreed to purchase a controlling stake of more than 51% in Westinghouse for $5.4 billion, outbidding GE and Japan's Mitsubishi. Westinghouse supplies nuclear power plant technology, the US arm of British Nuclear Fuels. The agreement is notable because expectations were for a deal around $1.8 billion. Some analysts believe nuclear power to be the most important alternative to fossil fuels in a future defined by scarcity of those fuels.

Canadian steelmaker Ipsco (IPS) reported Q4 earnings that fell from $199.1 million or $3.91 per share to $170.2 million or $3.52 per share in the current quarter. Sales rose from $801.1 million to $852.2 million. The results blew out estimates, however, with analysts looking for EPS of $2.84 on sales of $780 million. Shipments rose 12% to 953 tonnes, a new record, but on margins that shrunk from 35.5% to 30.3%. The company cited higher input costs of allows, energy and consumables over the past year. IPS gained 2.32% to close at 94.

Toymaker Hasbro (HAS) reported Q4 earnings that rose from $81.9 million or 44 cents on revenue of $1.06 billion in the year-ago quarter to 48 cents or $94.3 million on revenue of $1.07 billion. Excluding repatriation of capital charges, HAS earned 61 cents, beating expectations by 3 cents but missing on revenue by $40 million. The company cited strength in its Star Wars segment and weakness in its games segment. HAS closed lower by .29% at 20.69.

After the bell, Activision reported Q3 profits that declined 30% from a profit of 35 cents or $97.3 million to 23 cents or $67.9 million, missing by 13 cents. Revenue declined rose from $816.2 million from $680.1 million in the year ago quarter. Estimates were for $707 million. ATVI gained 1.99% to close at 14.36.

There were no economic reports released today, but there was economic news. The President delivered requested from Congress a $2.77 trillion budget for fiscal 2007, seeking increases for defense and the permanent extension of his first-term tax cuts alongside cuts to domestic programs from community policing to Medicare. The White House anticipates an increase in the federal deficit to a record $423 billion, or 3.2% of GDP, up from -$318 billion or 2.6% of GDP last year. The administration expects the deficit to narrow to 1.4% of GDP or $208 billion by fiscal 2009.

Later in the day, Defense Secretary Rumsfeld stated in a webcast that the Pentagon's budget request of $439 billion is historically low relative to GDP, at 3.7%-3.8% of GDP. The $439 billion remains the largest discretionary component in the proposed 2007 budget.

Chairman Ben S. Bernanke was sworn in today to replace departing Fed Chairman Greenspan this morning. Bernanke thanked the President as well as former chairmen Paul Volker and Alan Greenspan who attended the ceremony. In his brief remarks, Bernanke quoted FDR as follows:

"In his remarks in this building in 1937, President Roosevelt described as our purpose 'to gain for all of our people the greatest attainable measure of economic well-being, the largest degree of economic security and stability.'"

Bernanke's term of office will be 4 years, subject to renewal. President Bush added that he enjoys Bernanke's "sly sense of humor" and opined that "he will be a superb chairman."

This will be a very quiet week for economic data. Tomorrow's lone report is Consumer Credit in the afternoon. On Wednesday, we'll get the weekly Mortgage Bankers data and the EIA Petroleum report. On Thursday, it's the weekly Initial Claims, and Wholesale Inventories, and on Friday, the Trade Balance and the Treasury Budget.

For tomorrow, the question will be whether the current decline is going to reverse or grow teeth. So far, the light volume and sideways drifts have combined to feel like a reversal waiting to happen, right up until the next quick drop or gap down. With the Treasury continuing to borrow aggressively, diminishing liquidity available to market, the downside in stocks and bonds is not surprising- but the hesitant, slow, light volume with which it's been occurring continue to feel unconvincing. We'll be following all of it live in the Futures and Market Monitors- see you there tomorrow!
 

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