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Market Wrap

A New Season

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The new earnings cycle has begun. However, the rumble of Harley Davidson's (HDI) mufflers Wednesday morning wasn't enough to deflect attention away from global worries early in the pre-market session. Deflecting those worries, even if only temporarily, required the release of the narrowed trade deficit. That release pushed the dollar higher, raised ten-year yields, and buoyed futures. The Nasdaq futures dallied a little longer than the Dow and SPX futures, but did eventually move higher into the cash open. If bulls felt encouraged, boredom and worry were soon to set in, however.

Worries included this week's rise in crude and metals, decline in global bourses, and increase in rhetoric from Iran. Secretary of State Rice commented Wednesday on Iran's announcement about uranium enrichment by saying that the UN Security Council must take strong steps. The Nikkei had continued a slide that dropped the index 400 points off Friday's high, echoing our Dow Jones Transportation Index, also dropping steeply off Friday's high.

In addition, the International Energy Agency cut its estimate for global demand for crude, but only slightly, and the agency also stated that crude's rise in price was beginning to be felt across the globe. The action of two airlines emphasized that impact, with those airlines raising fares this week. Those concerns focused attention on the crude inventories to be released mid-morning.


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The spring earnings cycle might have begun, but futures weren't springing anywhere during the pre-market session until the release of the trade deficit. Economists had expected a narrowing, but a narrowing to $67.50 billion, not the reported $65.47 billion.

Bulls couldn't follow through on the boost provided by that number, however. Beginning about 10:00, many indices trended sideways to sideways down, with the TRAN, RLX and RUT modest exceptions. The TRAN had been diving since Friday's early morning new record intraday high, but after the crude inventories, the TRAN began rising. The RUT and RLX rose, too, but then chopped around in a tight range. Bulls staring at their monitors, hoping for a V-shaped recovery, might have done better to have gone out and enjoyed the beautiful spring weather in many parts of the country. Bears might as well have done the same, however.

The SPX formed a potential inverse H&S on its 15-minute chart Tuesday and Wednesday, but about midday, it became apparent that the right shoulder was beginning to stretch too far out in time. That signals dangers for bulls. Despite the short-term bullishness indicated by the formation, they don't have enough strength to drive prices higher and confirm it. Bulls who heeded the sign and exited with whatever profits they had were rewarded by an afternoon when they at least did not have to share their cohorts' boredom.

Annotated Daily Chart of the SPX

The Dow also formed a potential inverse H&S, but the right shoulder also stretched out too far. Still, the Dow's gain on the daily chart looks more impressive than the SPX's. There's a reason for that. The narrower Dow is often the recipient of buying when the intention is to make mom-and-pop investor believe that the markets are doing well.

Annotated Daily Chart of the Dow

Like the SPX, the short-term charts show that the Dow is trapped between near-term support and near-term resistance. That resistance appears be a little tougher than the support on the DOW, but all afternoon, resistance currently at 11,139.53 held on 15-minute closes while support currently at 11,129,42 held on 15-minute closes, so saying that resistance is tougher may be a judgment call. As the day ended, the Dow appeared ready to challenge that resistance again, so look to see whether that 11,139.53 resistance holds again on 15-minute closes.

The Dow obviously needs to break out of that tight consolidation pattern established most of the day before bulls or bears can profit, but if it breaks to the upside, watch that 10-sma and 11,160 for possible next upside resistance. If the Dow rolls over, strong support exists at 11,081 and then again at 11,028.

Like the Dow and the SPX, the Nasdaq formed a potential inverse H&S over Tuesday and Wednesday's trading, and, like the others, it also failed to push high enough to confirm that inverse H&S. The Nasdaq, however, perhaps has not yet invalidated its formation. The daily chart left some questions to be answered, too.

AAnnotated Daily Chart of the Nasdaq

The Nasdaq's chart is not bullish, as the former resistance should have held as support on the pullback. The pullback should have been choppier and not that straight-down fall. Denser support did hold, at least temporarily, and the 30-minute Keltner chart looks more hopeful than it does on some other indices. The 2323-2326 resistance should be watched closely for rollover potential if the Nasdaq should bounce above the 2318 level that kept showing up as resistance today. I'm not yet convinced that a test of the 50-sma and possibly the 72-ema is not still needed.br>
Positive developments in SOX components KLA-Tencor (KLAC) and Micron Technology (MU) helped that index during the early part of the session, before it, too, succumbed to that sideways/sideways-down pattern ahead of this afternoon's AMD report. RBC Capital Markets' Stuart Muter upgraded KLAC to a sector-perform rating from its previous under-perform one. An analyst reportedly had good things to say about MU's prospects, although that could not be verified by an independent source and the report found on Muter's comments did not include MU. Muter's comments about KLAC included his notation that some of the big-cap equipment names might be beginning to look attractive for long-term investors, but he rated Novellus Systems (NVLS) and Applied Materials (AMAT) below KLAC. He noted the low expectations that investors have for companies such as Taiwan Semiconductor Manufacturing Company (TSM), and said that if orders turned out to have been back-ended, that company's stock could rebound.

AAnnotated Daily Chart of the SOX

As of Wednesday's close, an intraday chart gave no more guidance than the daily one as to short-term direction. The SOX looked about equally likely to rise toward 509.25-510.99 as it was to drop toward 503.30, with lighter support and resistance between those levels. Fifteen-minute RSI squiggled near the neutral level. The formation had at one time looked like a possible inverse H&S, like the ones forming on other indices. Like the ones on those other indices, bulls couldn't manage a confirmation.br>
Advanced Micro Devices (AMD) reported in-line sales and earnings that appeared to beat expectations, at least as first reported. Earnings were $185 million or $0.38 a share, up from the year-ago level of $17 million or a loss of $0.04 a share. The company predicted that the second-quarter's sales would be slightly below the first quarter's. As this report was prepared, AMD was still halted.

The DJUSHB, the Dow Jones U.S. Home Construction Index. dropped heavily, with this rate-sensitive sector likely hit by a persistent climb in yields throughout the day. The Mortgage Bankers Association released mortgage applications for the week ending April 7 at 7:00 EST. The component measuring mortgage loan application volume dropped 5.5 percent on a seasonally adjusted basis from the previous week's number, and decreased 14.7 percent on an unadjusted basis from the year-ago level. All components fell, including conventional, government, refinance and purchase components. Four-week moving averages were mixed. The rate for thirty-year fixed-rate mortgages inched higher, to 6.50 percent from the previous week's 6.49 percent, but points increased, too.

As already noted, February's trade deficit narrowed more than expected, providing an early, if fleeting, boost to markets. That narrowing produced a 4.1 percent decline from January's record deficit, but it should be noted that January's number was revised slightly higher, to $68.6 from the previous $68.5 billion. The petroleum deficit increased. Exports declined 1.2 percent, but imports fell more, by 2.3 percent, with all major components of the imports number declining. The trade deficit with China was its lowest in eleven months.

While the surprise in this number could produce a slight upward revision in the GDP, economists do not expect the downtick to last. One footnote to the trade deficit--a statement by China that its March trade surplus with the U.S. widened--emphasizes the possible fleeting nature of this narrowing of the trade deficit. In addition, today three think tanks in Europe--the IFO, INSEE and ISAE--expressed concern about domestic demand weakness in the Eurozone amid their generally upbeat forecasts for the zone. This perhaps questions how much demand there will be in the Eurozone for U.S. goods.

The reaction to this economic release, initially positive, might have produced a slight "good news is bad news" effect. Market watchers worried about continued rate hikes don't want to see the GDP heat up too much, but the need to consolidate a several-day decline shouldn't be discounted as a factor in behavior of the markets.

The impact of rising crude prices shouldn't be discounted, either. Although crude prices declined after the inventories number and eventually closed at $70.05, well off its $71.05/barrel day's high, the specter of $75.00 crude doesn't seem far off now.

Analysts had expected a rise of 1.2-1.3 million barrels in crude inventories and a drop of 2.0-2.3 and 1.4-1.6 million barrels, respectively, in gasoline and distillate inventories. The range in expectations resulted from differing forecasts by various analysts. As happened other times recently, crude inventories rose more than expected, but gasoline and distillate inventories fell more than expected.

A drop of 3.9 million barrels in gasoline inventories puts supplies 1.9 percent below year-ago levels, the Energy Department reported. Distillate inventories declined 4.2 million barrels, but remain 12.3 percent above the year-ago level. Crude inventories rose 3.2 million barrels and are 7.8 percent above year-ago levels.

Especially during the pre-market session, but also during the day, many focused on company-specific news, too. Last night, Genentech (DNA) handily beat analysts' expectations, although the new options-accounting rules caused some confusion. By early this morning, Morgan Stanley had trimmed DNA's price target to $84.00, and some were citing disappointing outlooks for Rituxin as a reason for a post-report decline. Although DNA was down in pre-market, it soon bounced and exceeded Tuesday's close, but it couldn't hold onto that value. The stock was volatile as it probed for support and resistance and it ultimately closed lower, by 1.21 percent.

Harley-Davidson (HDI) arrived early Wednesday morning with its in-line report, but its rumble of mufflers wasn't going to impress investors. HDI gapped lower at the open and closed near its low of the day, down 5.92 percent. Circuit City (CC) also reported, with the retailer noting that strong sales in portable music devices, flat-panel televisions and notebook computers helped it to beat expectations. CC's stock bounced at the open and held onto almost all of its gains, closing higher by 8.28 percent.

Boeing's (BA) stock did more than bounce at the open: it surged. Since breaking over the top of a rising regression channel in place since 2002, BA had been consolidating sideways, but news that it had signed a contract to provide eighty more 737's to China Aviation Supplies Import and Export Group caused the stock to break out of the latest consolidation and soar higher. Morgan Stanley raised the price target to $110 from its previous $80 target and thought the price could go even higher. Although the stock could not hold onto its $84.23 high of the day, the pullback off that high was choppy and looked corrective, indicative of a possible further attempt to rise. BA closed at $83.21, up $2.64 and 3.27 percent.

Financial stock Progressive Corp. (PGR) was another reporting stock, bouncing after its first-quarter report. Unfortunately for PGR investors, prices fell into the upward gap after that initial pop and closed near the low of the day. While that's never a good sign, PGR did not close the gap and ended the day with a 2.22 percent gain.

In other news, JMP Securities downgraded Google Inc. (GOOG) to a market-perform rating from its previous strong buy rating and lowered its price target to $475 from the previous $550. An analyst with the firm also lowered the 2006 earnings forecast to $8.25 a share, down from the previous $9.25 a share. The firm believes that GOOG's Q1 and 2006 revenue growth will disappoint. Search queries fell below expectations, the analyst noted, and monetization of the Google Network and proprietary sites have not met expectations.

GOOG produced a doji within its recent consolidation zone and closed only $0.71 or 0.17 percent off the previous day's close, not giving much indication of next direction. Neither did the indices, but perhaps that will come tomorrow. Economic reports will include the standard initial claims and natural gas inventories. At the same 8:30 slot as initial claims, March export and import prices and retail sales will be released.

Retail sales, reported by the Census Bureau of the Department of Commerce, certainly have the ability to move the markets, if none of the others does. Retail sales are expected to climb 0.5-0.6 percent after the prior 1.4 percent drop. Ex-autos, the sales are expected to climb 0.5-0.7 percent after the previous 0.6 percent drop. The RLX, the S&P Retail Index, has been a good indicator index at times, and that index formed a doji above presumed strong support at 468.18-468.90, eventually closing at 470.64. The index appears ready to bounce or to fall further through that support.

The preliminary April Michigan sentiment will be reported at 9:50. Forecasts are somewhat wide-ranging, from 88.5-89.0, with the previous number at 88.9. Thursday's reporting companies include INFY and PII, but earnings don't really heat up until next week.

The SPX looked as if it might try a bounce early tomorrow morning, but an economic report will intervene and could change that impression. Whether any early bounce will carry it up toward the 30-sma or fail lower, at 1293-1294 or even at 1289, was not yet clear. If the SPX does climb to 1293-1294, bulls should take steps to protect profits and bears could begin looking for rollover opportunities, as long as the TRAN is weak. It must be remembered that although the TRAN declined steeply off Friday's new record intraday high, it did not violate a rising trendline off the January low and it sprang well off the day's low today. It's had a steep pullback, but no enduring technical damage has been done yet.

In addition, the RLX tested strong support and sprang higher. My inclination is to expect a bounce attempt and then to look for potential rollovers if there are bounces in the SPX, OEX or Dow, but watch the RLX and TRAN indices tomorrow, and don't count on steep declines in the SPX, OEX or Dow as long as the RLX and TRAN are still bouncing off yesterday's lows.

The RUT also looks ready to retest yesterday's high and perhaps climb toward 750-751. The SOX gave little indication of next short-term direction, but if both indices should bounce, sentiment might carry the Nasdaq higher, too. I don't like the Nasdaq's behavior for those seeking bullish plays, but I wouldn't be interested in touting a bearish one at resistance if both the RUT and the SOX were climbing, either.

The indices are consolidating big several-day losses. A balancing act is underway, with bulls who wanted to accumulate at the dip squaring off against bears. Not even the Russell 2000 pushed above a 50 percent retracement of the last drop from Tuesday's high, so none of these indices did anything particularly bullish Wednesday, except that they held their own in the face of several pressures. The Thursday before opex week can see crazy behavior, and the TRAN's action today argues that the underlying bid in the markets hasn't yet been completely undone, so be careful.

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