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Market Wrap

Nasdaq Gaps & Goes

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The Nasdaq gapped higher at the open and led the way up this morning in what proved to be a "flagpole" rally. Stocks launched their way up a steep "flagpole" only to stall at the highs in a narrow, sideways range. That range broke to the downside in the final minutes of the cash session, but the pullback was too shallow to make much of a dent in the Nasdaq's gain for the day.

Although the Nasdaq led, the SPX was a lot closer to the year's high, and ran to new highs not seen since 2001. Bearish housing data and big issuances of new debt from the Treasury were ignored by equities, and while bonds got hit, resistance on the ten year note yield held at 4.6% (see below). Volume breadth on the indices was strong throughout the session, holding positive into the close despite the final pullback.

Daily Dow Chart

The Dow held above Friday's range, but failed to clear this month's resistance to 11200. Below that level, the current gains above 11000 remain vulnerable to a possible bear wedge, while bulls see the break above 11000 as a bullish triangle break currently retesting (and holding above) horizontal support. For the day, the Dow closed higher by 36 at 11098.

Daily S&P 500 Chart

The SPX gained 4.7 to close at 1294.13, failing from its afternoon high at 1297.57. The break to new highs was short-lived, but so was the pullback that followed. The chart is certainly more bullish than bearish at the highs at the highs, a pattern of higher lows and higher highs on the daily chart. Today's break didn't run far enough to rule out a double-top interpretation, but until we see a break of 1280 support, 1288 at minimum, the benefit of the doubt will have to go to the bulls.

Daily Nasdaq Chart

The Nasdaq blew through last week's high, adding 20.14 to close at 2307.18. The move returned to but failed to break above rising resistance at the broken trendline from the beginning of this month. Resistance to 2315 from late January is in play at current levels, today's high 2313, above which the year high should come quickly into view. If today's breakaway gap up open was a bull flag break on the daily chart, then the bulls could be treated to a new leg up to new highs.

On the liquidity front, the Fed's open market desk had no repos maturing this morning, but added a $2 billion overnight repo for a net add in that amount. This was followed up by another coupon purchase in the amount of $1.2 billion, which is effectively a permanent repo that never gets paid back from the dealers to the Fed, bringing the day's total to a $3.2 billion net add.

At 11AM, the Treasury announced the size of tomorrow's 4-week bill auction, which will be in the amount of $20 billion to refund $18 billion maturing. The net effect is to raise new cash in the amount of $2 billion, which drains available liquidity.

Today's auction was for 13- and 26-week bills, the Treasury offering $40 billion of new debt to refund $32.231 billion in maturing notes, raising new cash and effectively draining $7.769 billion. Foreign central banks purchased $10 billion of the $40 billion auctioned, the 13-week bills setting a high-rate of 4.51% with a 4.625% yield and generating 2.02 bids for each accepted. The 26 week bills set a high-rate of 4.58%, the yield 4.754% and a bid-to-cover ratio of 2.13.

Daily TNX Chart

The wave of treasury issuance has caused the ten year note yield (TNX) to rally from a higher low above 4.285%. On the daily chart, 4.6% resistance has been in play for a week, above which the previous 4.65%-4.7% confluence is in play. For the day, TNX closed higher by 2.3 bps at 4.590%.

There was no shortage of bad news from the Middle East over the weekend. However, Traders opened their screens to a drop in crude oil prices as Saudi spokesman Major-General Mansour al-Turki announced that two raids were carried out last night, resulting in the death of five suspects and a single arrest. All six were believed to be involved in last week's al-Quaeda attack. As well, AP reported that Iran and Russia had reached an agreement in principle to set up a joint uranium enrichment venture. The talks that led to the agreement had US support, and helped to ease concerns about Tehran's possible agenda to manufacture nuclear weapons. As well, this weekend's agreement reduces the likelihood that the UN Security Counsel will be forced to initial sanctions or take other actions against Iran. Those concerns remain, however, as many details remain unsettled, including the West's demand that Iran cease domestic uranium enrichment activities.

Crude oil closed the day lower by 1.975 at 60.925, 10 cents off its session low. Natural gas closed -.53 at 6.785, 8.5 cents off its low.

At 10AM, the day's lone economic report was released. The Commerce Department reported that sales of new homes declined 5% to an annual rate of 1.233 million homes in January (seasonally adjusted). That reading marks a two year low. Inventory rose 2.5% to a new record of 528,000 units, and at the lower annual rate, the record number of homes for sale represents a 5.2 month supply, the largest in 9 years. The median sale price of a new home rose 6.7% from the year-ago reading to $238,100. December's new home sales figure was revised from 1.269 million to a 1.298 annualized rate.

This will be a busy week for economic data. Tomorrow, we will be treated to the Preliminary Q4 GDP and Chain Deflator, Chicago PMI, Consumer Confidence and Existing Home Sales. On Wednesday, in addition to the weekly Mortgage Bankers and EIA Petroleum reports, we'll get Auto & Truck Sales, Personal Income and Personal Spending, Construction Spending and the ISM Index. On Thursday, it's the weekly Initial Claims and EIA Natural Gas Storage Reports, followed by ISM Services and Michigan Sentiment on Friday.


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In corporate news, there was good news from Lowe's (LOW), who reported Q4 earnings that rose from $508 million or 64 cents per share on sales of $8.55 billion to $695 million or 87 cents on sales of $10.81 billion. Consensus estimates were for EPS of 80 cents on $10.44 billion sales. LOW forecasts Q1 EPS of 92-94 cents and $4.03-$4.13 for the full year ending January 2007, compared with current consensus of 88 cents for Q1 and $3.95 for the year. LOWE closed higher by 5.63% at 69.22.

GE reported that it will divest itself of its remaining 71 million Class A and 15 million Class B shares in Genworth Financial (GNW). GE added .18 to close at 33.33, GNW losing .23 to close at 32.41.

The world's largest gold producer, Newmont Mining (NEM) reported Q4 earnings that fell from $190 million or 42 cents per share in the year-ago quarter to $62 million or 14 cents. The company cited legal settlements and asset write-downs for the decline. Earnings from continuing operations fell from 34 cents to 16 cents per share, while revenues rose from $1.2 billion to $1.31 billion. Estimates were for earnings from continuing operations of 36 cents on $1.4 billion revenue. Tne company sold 2.4 million ounces of gold during the quarter at an average realized price of $472 per ounce. NEM got smoked for a 5.88% loss at 54.69.

Barrons released an article this weekend speculating that AAPL could bid for DIS, noting that AAPL CEO Steve Jobs is also PIXR's CEO, and is on Disney's board as its largest individual shareholder. Neither DIS nor AAPL released any news to confirm or deny the rumor, but AAPL traded lower today against the broader market, while DIS was up. AAPL lost .66% to close at 70.99, while DIS gained 1.47% to close at 28.39. PIXR closed higher by 1.96% at 65.06.

For tomorrow, traders will be watching for a continuation of today's equity festivities. So far, the Treasury's heavy supply of debt has been sparing equities, with bonds getting hit as stocks rally. Liquidity analysis would suggest that a reduction in the supply of money should ultimately hurt all markets, while today's action felt more like asset allocation from bonds into stocks. As always, the chart you're trading is the only one that counts, and so while the weakness in bonds is ominous, equity bulls continue to benefit from a rising tape.

Tomorrow will also be my last day posting in the Market Monitor. It was not an easy decision to take, and I'm going to miss you as well as my colleagues enormously. You're in the best of hands here, with a team comprised of analysts who really care and give it their best, every day. May all of your longs rally, your shorts tank, and your option writes expire worthless. A friend and trading mentor wrote something a few years ago that I've had stuck to my second monitor ever since, and I can think of no better a parting quote:

"I'd just like to remind you, that no matter how important trading the market may be in your life, NEVER let it interfere with that which is most important, your loved ones. Now, go give your spouses and kids a hug, and if your Mom and Dad are still around, give them a call to let them know you are thinking of them. Then go see them this weekend and give them a hug too."

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