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Market Wrap

It Is Different This Time

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At least it is according to the new Fed chief's testimony before the House Financial Services Committee. During Dr. Bernanke's much-anticipated testimony today, he assured questioners that the inversion of the yield curve might be different this time. Although such an inversion has historically signaled a potential economic slowdown, Dr. Bernanke reminded questioners that the relationship had been weakening over the last 15 years and that those other inversions had occurred at times when the yields were already high, causing a drag on the economy. This time is different, he said, in that yields are low. He doesn't believe that the recent inversions have been signaling a recession.

Perhaps it's a good thing that Bernanke offered those reassurances, as yields for the two-year treasury note closed the day at 4.70 percent, the 10-year note at 4.60, and the 30-year bonds at 4.57, all according to CNBC, showing an inversion of the two-year note over both of its longer-term counterparts.

Other reassurances included Bernanke's intention to direct the FOMC in continuity with practices under Alan Greenspan and Bernanke's belief that the economy had rebounded from its lull in the last quarter. He said that although further firming may be needed, much progress has been made in moving toward a neutral stance, and that the deficit should come down slowly over a matter of time. Committee members weren't always willing to accept Bernanke's reassurances, particularly when it came to the record deficit levels, but at the end of the day's testimony, most who had watched the hearing concluded that little new information had been relayed about Bernanke.

To varying degrees, indices wandered around before, during and after Bernanke's testimony, with a post-hearing afternoon bounce maintained by some and not by others. Ahead of AMAT's after-the-close earnings, the SOX was one index that did not hold onto the post-Bernanke bounce. Reaching another record new high, the TRAN did.

Annotated Daily Chart of the SPX:

The SPX might be caught in a narrowing triangle, but the Dow trades within a broadening formation. If anything, such formations are even more difficult to trade.

Annotated Daily Chart of the Dow:

In an old-style broadening formation that would ultimately break to the downside, the top red line would not be touched again, but there appears to be a drive to push the Dow up toward 11,117-11,156, so that won't-touch-the-top-again theory is not one that I trust yet. There is some suspicion appending to the Dow's pattern when neither the SPX nor the Wilshire 5000 are came close to challenging their January highs, much less exceeding them, but as long as the TRAN is driving higher, the Dow may make the attempt, too. As Jim noted last night, this looks like a rotation into big caps, more indicative of caution than of anything else. That caution was visible on the narrowing triangle on the SPX and in a similar one on the Nasdaq's chart.

Annotated Daily Chart of the Nasdaq:

Ahead of AMAT's earnings this afternoon, the SOX posted a gain, but its gain is not yet convincing proof of strength.

Annotated Daily Chart of the SOX:

Although few noticed, Bernanke's testimony was not the only economic event today. Jim Brown commented on the housing market in his Wrap last night, and the Mortgage Bankers Association released mortgage applications for the week ending February 10 at 7:00 EST. The report continued the recent downward trend, with the component measuring mortgage loan application volume falling a seasonally adjusted 7.3 percent. Other components fell, too, with the Purchase Index dropping 7.9 percent; the Refinance Index, 6.5 percent; the Conventional Index, 7.0 percent; and the Government Index, 11.2 percent. Four-week moving averages dropped 1.6 percent, 29.9 percent and 0.1 percent, respectively, for the Market Index, Purchase Index and Refinance Index. The average contract interest rate for 30-year fixed-rate mortgages remained the same at 6.25 percent, but points increased.

Although it closed well off its post-Bernanke high, the DJUSHB, the Dow Jones U.S. Home Construction Index, did manage a bounce today. That bounce had taken the index above the 10-sma, but it closed back at the average, not able to maintain values above it.

The NY Empire State Manufacturing Index, reported at 8:30, beat expectations of an 18.0-18.1 showing by turning in a 20.3 number for February, up from January's 20.1. Underneath the headline number, matters did not appear quite so cheery, as the employment index plunged to 4.7 from January's 11.7, the prices paid component rose to 52.8 from January's 46.6, new orders and shipments eased, and unfilled orders inched higher. Most responding to the survey felt that business conditions would improve over the next six months, but optimism did ease. As market participants awaited Bernanke's testimony and his take on economic growth as well as inflation, the higher prices-paid component and slight easing of optimism may have contributed to the wait-and-see attitude that seemed prevalent during early trading.


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Warm weather contributed to an easing of January's industrial production, reported this morning. Production at utilities dropped 10.1 percent, a record number, sending the headline number down 0.2 percent. Analysts had expected a rise of 0.2 percent, but it's unlikely that many were concerned about the weaker-than-expected showing due to its cause. Manufacturing output actually rose 0.7 percent. Capacity utilization was reported at the same time, up 80.9 percent against an expected 80.8-percent rise.

That unexpectedly warm weather contributed to a decline in crude prices, and conversely, to a climb in the Dow Jones Transportation Index, the TRAN. Tuesday, the TRAN reached a new record high of 4418.09, but at Monday's open, the index plunged below 4400 again, to a 4369.78 day's low reached during the first 15 minutes of trading, prior to the release of the inventories number. The TRAN eventually climbed to a new record high of 4444.32, with a new closing high of 4442.64. The TRAN verges on breaking out of resistance that it has not broken on a weekly closing basis since mid-1997, but the converse of that is that it could be verging on falling back through the envelope again.

Annotated Weekly Chart of the TRAN:

Crude inventories had been expected to build, and they did, but much more than expected. Crude inventories rose 4.9 million barrels; distillates, 900,000 barrels; and gasoline inventories, 2.2 million barrels. All remain above their average ranges for this time of year, and crude inventories are now pegged at their highest since the week that ended June 24, 2005. The TRAN promptly bounced to a new record high, abetted not only by the encouraging inventories numbers but also by Bernanke's expectation that the Fed's economic predictions were realistic and that the last quarter's lull was temporary. The TRAN was to show some volatility, dropping again before it soared to that new record high.

At the Nymex close, crude futures for March delivery closed at $57.60 per barrel. That close on the crude contract was to leave the maximum number of market watchers guessing, with the November low, hit twice on the daily chart, at $57.50. Is crude going to find support and bounce, even if perhaps into another lower high, or will it plunge through support that has held twice? As this report was prepared, it was bouncing, at $57.97.

Once Bernanke began to speak and until he finished, however, all attention focused on his comments. Widely anticipated by many to be hawkish on inflation, Bernanke seemed to confirm that impression when he commented that unless the FOMC was proactive, the economy could "overshoot" targets. Inflationary pressures could build. However, while he was still speaking, one online article was already terming him a "gentle hawk."

Committee member Paul Kajorski [(D)Pennsylvania] questioned Bernanke about the deficit, commenting that it was growing faster than productivity was growing. Under his questioning, Dr. Bernanke confessed to his own concerns about what the deficit does to personal savings and how demographics might factor into the deficit's impact on the economy.

Representative Ron Paul [(R) Texas] was to grill Bernanke on inflation, too, commenting that price increases were only a result of inflation, not the cause, which was an increase in money supply, among other factors. He asked Bernanke about the Fed's decision not to publish M3 money supply figures any longer. Bernanke answered that their research committee had concluded that M3 was not being used by either the academic community or the FOMC itself, and that it was a burden on the financial community to produce those figures. Representative Ron Paul commented that many considered the information important and that the appearance was that the information was being hidden.

All during his testimony, Bernanke tried to deflect any questions that would require him to intrude on territory that he thought properly belonged to Congress. When asked by Representative Christopher Shays [(R) Connecticut] whether the Federal budget had "a revenue problem or a spending problem," he asserted that Congress needed to make a decision on the proper size of the government, for example. When asked by two representatives to advise President Bush against the inadvisability of retaining all tax cuts, he commented that he did not want to inject himself into decisions that were the domain of others.

During the course of the testimony and the day's releases, the Fed raised the outlook for the economy from its previous 3.25-3.75 percent increase to a 3.25-4.00 percent increase, but at the conclusion of Bernanke's testimony, most felt that little new ground had been covered. The economy was still on track, the housing market was softening, the Fed had now begun a period of watching economic indicators, and an anticipated March rate hike might not be the last one.

Due to the focus on Bernanke's testimony, little attention was paid to an announcement by Merrill Lynch (MER) and BlackRock (BLK) confirming their anticipated merger into an asset management firm that will be one of the largest in the world, with that merger expected to be accomplished by the third quarter. MER closed higher by 0.18 percent, and BLK by a heftier 3.62 percent.

At first, retailers reacted negatively to Abercrombie & Fitch's toned-down outlook for the year, reported late Tuesday in a conference call with analysts. Some interpreted the remark as an attempt to force analysts to temper expectations that might have been unrealistic, that ANF could continue to deliver indefinitely same-store sales in the 20-30 percent range, as it had been doing over the last year. Many retailers were to see a strong bounce post-Bernanke, pushing the RLX, the retail index, into a 1.07 percent gain. ANF bounced off its low, too, but still closed lower by 2.10 percent. TGT, reporting tomorrow, gained 0.84 percent.

In other news, Delta Air Lines Inc. reported a fourth-quarter loss that narrowed from the previous quarter's loss. Fuel costs flamed 26 percent higher than they had in same quarter the previous year. The company also narrowed its loss for the year. The company operates under bankruptcy protection. The airlines were to gain 1.65 percent today.

After-hours developments included earnings reports from AMAT, HPQ, NTAP, SNPS and EXPE, and most gained in after-hours trading. AMAT reported that profit declined 51 percent, but sales and orders climbed. Excluding charges of 10 cents a share, the company's earnings were $0.17, beating expectations for $0.16. As this report was prepared, AMAT last traded at $20.79, up from its $20.46 close. HPQ reported earnings, excluding one-time items, of $0.42 a share, beating expectations of $0.44. The company's stock last traded at $32.88, up from its $31.67 close. NTAP last traded at $34.00, up from its $31.16 close, with one source noting earnings per share lower than expected, but revenue higher. SNPS traded at $22.90, above its $22.22 close. EXPE, however, traded at $21.39, down from its $24.25 close.

Traders will be busy fielding economic reports at 8:30 tomorrow morning, too, when January's building permits, export and import prices and housing starts will be released. Initial claims for the week of February 11 will be released at the same time. Natural gas inventories will be released at 10:30. Fed Chairman Bernanke will continue his testimony tomorrow. At noon, the February Philly Fed number will be released. Tomorrow evening, the important semi book-to-bill number will be released.

Companies reporting earnings include Administaff (ASF), Baker Hughes Incorporated (GHI), Bio-Rad Laboratories (BIO), Brocade Communications (BRCD), Cabot Oil & Gas Corporation (COG), DaimlerChrysler (DCX), Dell (DELL), Goodyear Tire & Rubber (GT), Guess (GES), ING Group (ING), JCPenney (JCP), NETGEAR (NTGR), NVIDIA Corporation (NVDA), Priceline.com (PCLN), Reliance Steel (RS), Sapient (SAPE), Target Corporation (TGT), Watson Pharmaceuticals (WPI), among others.

Almost every chart examined in tonight's Wrap indicates indecision and reveals chart formations that are known to be difficult to trade and less amenable than usual to technical analysis. A strong bias about the market might produce a winning trade--there's at least a 50 percent chance of that happening--and with these kinds of formations, a 50 percent chance of being right is about the tops that can be expected. These charts show us that ultimate direction is not yet decided, that even those who govern where markets can go are still battling the accumulation versus distribution decisions. Complicating these patterns will be another day of Bernanke testimony and option expiration. Beginning tomorrow at midday, the normal attempt to lock prices into certain levels will begin, whether or not that process is ultimately successful.

Watch the TRAN. It's unlikely that the DOW, OEX or SPX are going to fall too far as long as the TRAN charges higher. By many measures propounded by different types of technical analysts, the TRAN should be topping, but it tends to lead those three indices, and as long as it's charging higher, they might go higher, too. Watch the SOX, reacting to AMAT's earnings tomorrow and the book-to-bill Friday. The SOX also has exhibited many behaviors indicative of a topping out process, but it has not yet fallen out of the rising regression channel in place since October.

The boundaries on those chart formations are clear. Conservative traders should wait until there's a breakout and then a successful retest, and stay away from the chop inside those formations. Aggressive traders can either buy support and sell resistance (with most indices closer to resistance than to support) or buy or sell breakouts, but watch position size and be ready to reverse, if you're attempting either type of trade.

I wouldn't be surprised to see an attempt to push higher tomorrow. I wouldn't be surprised to see a runaway gain powered by a short-covering and I'm-late-to-the-party type environment, and I wouldn't be any more surprised to see an attempted push higher followed by a sharp reversal. These types of consolidation patterns just don't give any clues, and anything can happen. Trade with care. Watch the Futures and Market Monitors for minute-by-minute updates on what's going on, as these experienced commentators watch the action. I'll be reading their commentary right along with the rest of you.

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