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Market Wrap

You Can Bank on a Rally

HAVING TROUBLE PRINTING?
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Or can you? Through much of February, financials lent strength to the indices. The BKX, the KBW Bank Index, and the BIX, the S&P Banks Index, charged higher over the last three weeks and showed particular strength last week. Some market watchers questioned that leadership, given the recent uncertainty about the current rate-hike cycle and the continued yield-curve inversion. Some of those uncertainties played out in yesterday's strong profit taking among the financials. Today, the BIX and BKX appeared to lag other indices' gains, but the SOX and TRAN ran forward, assuming leadership roles. Most tech-related indices gained.

Annotated Weekly Chart of the BKX:

Despite today's SPX gains and hopes that by this time this week, we'd see more conclusive evidence of next direction on the SPX, this Wednesday sees that index just about where it was last Wednesday, both in price and in relationship to its rising wedge.

Annotated Weekly Chart of the SPX:

Despite today's strong gain, the Dow could not press above the 10-sma. Unlike the SPX, it remains below last Wednesday's 11,137.17 close. Like the SPX, it also has not clearly revealed next direction, despite hopes that it might have done so by today.

Annotated Weekly Chart of the Dow:

Those already long the Dow or Dow stocks should protect longs with hopes that the Dow will move back to the top of that broadening formation or even break through the top, but this in-between spot, in a broadening formation, does not appear a good spot for new positions.

During the pre-market period today, some market watchers pointed to former favorite CSCO's behavior as indicating renewed Nasdaq strength. Ahead of a Merrill Lynch conference this afternoon, this former tech darling closed yesterday at $20.24, its highest close since September, 2004. By mid-afternoon, the stock's price had shot above $21.00 and article titles gave CSCO credit as leading tech shares higher. Market watchers want to hear good news out of CSCO at that conference, and especially want to hear that the company is increasing its spending. Watch your stops if you're long this stock as some volume patterns indicate that some are selling into the rallies. If that supply dries up or is absorbed, CSCO could shoot higher, but if CSCO or Merrill Lynch says something disappointing and supply overwhelms demand, it could go down as fast as it rose. CSCO closed at $21.06, up $0.82 or 4.05 percent.

Annotated Daily Chart of the Nasdaq:

If the SOX has managed to break out of its bull flag and back above its last gap, then Nasdaq dips to and bounces from the 10-sma might be considered tentative buying opportunities, but with smaller positions than usual and with full awareness of the resistance soon to be faced. Many reasons exist to peg the recent climbs as suspicious, and the SOX's gappy climb remains one of those reasons.

CSCO wasn't alone in creating enthusiasm for tech-related stocks. Many SOX components played their part. ALTR gapped higher this morning and then ran up above $21.00, after closing yesterday at $20.04, but it wasn't the only SOX component to bounce. NSM also gapped higher, NVLS shoved past a gap on its daily chart, TXN saw an early and strong gain, and many other components bounced from their recent drubbings. INTC was more of a follower than a leader among the chip stocks, however, showing tepid gains as it also touched $21.00, but not able to hold onto its highs into the close. INTC closed at $20.80, up $0.20 or 0.97 percent. During the pre-market period, J.P. Morgan downgraded the company's 2006 earnings estimates and Stifel Nicolaus cut its price target for the company.

Annotated Daily Chart of the SOX:

The day's economic release calendar was full. The Mortgage Bankers Association released mortgage applications for the week ending February 24 at 7:00 EST. That report might have gained more interest after this week's disappointing numbers for new and existing home sales if market watchers hadn't been so focused on later data. The MBAA figures showed that the Market Composite Index decreased 1.2 percent from the previous week's figure on a seasonally adjusted basis and was 18.9 percent lower than the year-ago level. The Purchase Index decreased 1.9 percent, the Refinance Index climbed 0.1 percent, the Conventional Index decreased 1.4 percent, and the Government Index increased 1.5 percent. Four-week moving averages were down more than two percent for the Market, Purchase and Refinance Indices. Refinancings decreased as a percentage of total applications. The average interest rate for a 30-year fixed-rate mortgage fell to 6.18 percent and points decreased, too. A spot on CNBC later in the afternoon used the narrowing of the gap between rates for one-year ARMS and 30-year fixed-rate mortgages as an example of how real-life decision-making processes are affected by the inversion we're seeing lately.

Other early morning reports included January's Personal Income figures. Personal incomes rose 0.7 percent, but headlines warned that inflation cut into those gains in incomes. With consumer inflation increasing 0.5 percent and core inflation gaining 0.2 percent, real disposable incomes gained only 0.1 percent. Real consumer spending gained only 0.4 percent. Both gains proved the weakest in many months, although the headline number for consumer spending, a 0.9 percent gain, was the strongest since last summer. That resulted in a decline in savings.

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Print and television commentators were soon pondering the quandary facing the FOMC with this divergence in headline and core numbers and personal incomes and consumer spending. The FOMC typically relies on core numbers as representing the true state of inflationary pressures, but committee members can not forever ignore the probable eventual effect of continued high non-core trends. Those of us in the real world know that higher energy costs already factor into our day-to-day experiences. Jim touched on this subject in his Wrap last night, so I won't belabor the subject.

These reports and concerns about the performance of individual stocks such as Google (GOOG) and Pfizer Inc. (PFE) merely provided the background against which the ISM was to appear at 10:00. A study claiming that PFE's Celebrex painkiller almost doubles the risk of heart attacks pressured that stock in pre-market trading. It dropped in early trading, but bounced from the day's low and managed a close near the flat-line level, up $0.07 or 0.27 percent. GOOG printed a small-bodied candle, with a close only a few points above yesterday's, up $2.18 or 0.60 percent.

The ISM number came in higher than expected. The number had been forecast to rise to 55.6-55.8 percent from January's 54.8 percent. However, ISM was reported at 56.7 percent for February. New orders jumped to 61.9 percent, up from 58.0 percent the previous month, and employment climbed to 55.0 percent, up from 51.3 percent. The price index fell to 62.5 percent, down from 65 percent.

Construction spending was also reported at 10:00, and that number disappointed. Spending had been expected to increase 1.0-1.3 percent gain but instead showed an increase of only 0.2 percent. That was the smallest increase since June, the Commerce Department reported.

Equities had risen into the ISM and construction spending numbers, but dropped afterwards, climbing again into and beyond the release of crude inventories. American Petroleum Institute (API) figures showed crude inventories rising 2.5 million barrels while the Energy Department reported a rise of 1.6 million. The API claimed gasoline inventories rose 213,000 barrels, while the government announced a build of 300,000 barrels. The API's figure for distillates was a drop of 1.4 million barrels while the energy department reported a drop of 1.5 barrels. A drop in distillates had been expected after last week's chilly weather, and as refineries begin gearing up to produce motor gasoline in anticipation of increased demand in the summer months.

Crude costs proved somewhat volatile before and after the announcement. Although the drawdown in distillates was expected and the increase in crude inventories was higher than expected, some focused on demand and geopolitical developments ahead of next week's OPEC meeting. For a number of fifteen-minute periods before and after the announcements, candles showed long tails either direction with small candle bodies forming near $62.00, but crude eventually dipped to a low of $61.48 before bouncing to a new day's high and then retreating off that high again. At the Nymex close, the front-month crude contract was trading at $61.97, up from yesterday's close at $61.41. As this report was prepared, it was last at $62.20.

Car manufacturers released reports on last month's sales from late morning until early afternoon. Ford (F) announced that February's U.S. car and truck sales were down when compared to last year's sales, by 1.4 and 5.4 percent, respectively. Total U.S. sales declined 4 percent versus the year-ago levels. Land Rover sales increased 27.8 percent, but sales of other models fell.

DaimlerChrysler (DCX) sales increased 4 percent. Mercedes-Benz sales pulled the group higher, but Chrysler sales also increased. General Motors (GM) reported that sales declined 2.5 percent in February, a disappointment when market watchers had expected a 1.3 percent increase. DCX climbed, but both F and GM inched lower.

Tomorrow's economic reports include the 6:00 EST Monster Employment Index, the 7:30 EST Challenger Report, the 8:30 Jobless Claims and the 10:30 Natural Gas Storage numbers. During the day, we'll be seeing chain store sales and the semiconductor billings number will also be released, usually after the market close.

Companies reporting earnings include CATS, CAV, CIEN, CWEI, COST, CMOS, DLM, DT, MDS, NXST, NOVL, PBY, TLB, UVN, and RMIX, among others.

I can only repeat the mantra that I've been repeating for a while. The SPX, OEX and Dow are not going to fall too far as long as the TRAN is moving higher. The TRAN should have reached strong resistance week before last, but it continues to move higher, having broken out of a weekly envelope that had previously always held it since mid-1997. With an inverted yield curve, crude prices that should be causing problems and increasing geopolitical tensions, I remain skeptical of that breakout, but not skeptical enough to bet against it myself or advise others to do so. With the SOX having produced numerous gaps on the way to its January high, I'm suspicious of that index's climb, too, especially ahead of this week's book-to-bill number, but the SOX recently completed a successful test of its 50-sma, and it's attempting an upside breakout of a possible bull flag. The SOX was stopped at the top of its last big gap. Gap resistance held, a suspicious event, but the SOX still climbs.

Remain skeptical enough that you keep raising stops as appropriate if long, but don't assume that bearish positions are right until the markets give you proof. First steps toward that proof would consist of sharp pullbacks in the TRAN and the SOX. Instead, both attempt upside breakouts. Add the BKX and BIX to your radar screen, as it's possible that their strength is flagging, but there's been a phenomenon that Keene Little likens to bathtub sloshing in the markets lately. One index leads until it breaks through some significant level or formation. Then its strength flags, and then all the momentum seems to flow to another index or sector, and the same occurs. When each has broken above levels that some would consider significant, it is left alone to fend for itself for a while, while efforts are made to support another. It seems a juggling act of sorts, and perhaps it can continue perpetually, but be careful if the master juggler drops too many indices at once.
 

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