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Market Wrap

Juxtaposition

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As Tuesday dawned, bright Dow futures and positive overnight action in Asian markets were juxtaposed against negative Nasdaq futures, mixed European bourses and dour talk about the impact of rising crude and metals prices. As of 7:00 EST, geopolitical pressures concerning Iran and Nigeria had already driven crude futures to a new record high and metals contracts were climbing, too. It was into that climate that the PPI and housing starts were reported.

Traders didn't want to see any inflationary pressures from those reports, and they didn't find them. With that worry eased, investors blithely ignored the new record high on crude prices and soaring metals prices, and sent indices higher. The usual leading indices--the Russell 2000, SOX and TRAN, along with the BKX, XOI and OIX--charged higher. Some of those and other indices had tested recent highs or key resistance levels before the release of the FOMC minutes from the March 28 meeting. For example, the Dow had already soared more than 125 points to challenge 11,200 again. Indices were primed to press through resistance or roll down under it, depending on what was reported in those minutes.

The FOMC minutes spiked equities higher again, into what was termed their best performance in many months. The action sent the dollar and bond yields lower, with ten-year yields plunging to a low of 4.95 percent before bouncing to close at 4.97 percent. Interest-rate-sensitive sector indices such as the DJUSHB, the Dow Jones U.S. Home Construction Index, saw an immediate boost. By the end of the day, the SPX was well above 1300, the Dow had posted a 194-point gain, and the RUT had produced a new record closing high, all on strong volume.

According to the FOMC minutes, many, and maybe most, FOMC members believed that their job raising rates was nearly done. Probably most comforting of all to equity investors was discussion about the dangers of too much tightening, reassuring investors that the FOMC feared that possibility right along with investors. On further inspection of the statement, the FOMC did not rule out more rate hikes than one, reiterating the committee's belief that such decisions were data dependent. If the economy was to continue to perform well, inflationary pressures had to be kept in check. So far, the FOMC concluded, companies were reporting enough of a profit margin to provide them with buffers if unit labor costs rose enough to create inflationary pressures, something labor costs had not yet done.

Charts on most indices showed strong white candles. The Wilshire 5000's actions produced one of those candles.

Annotated Daily Chart of the Wilshire 5000

The SPX's daily chart also sports a strong white candle.

Annotated Daily Chart of the SPX

Days that see such strong gains are often followed by small-range days, although that's not always true, and particularly when there's been such an upward bias. Strong white candles on January 3 and March 14 were followed by smaller-range days, but days that produced gains nonetheless. Still, traders should be prepared for the possibility of choppy and difficult-to-predict action tomorrow as the gains are digested or perhaps partially reversed.

The SPX's 30-minute nested Keltner chart shows a possibility of a rise to 1313-1315 before next resistance is hit, a level that would take the SPX back to April's intraday high and the top of the rising red trendline on the daily chart, so that historical resistance and Keltner resistance coincide there. If the SPX bounces, watch for possible strong resistance as the SPX approaches that level and then at the top of the rising regression channel indicated on the chart. If the CPI is bad, as in showing a hotter number than predicted, the SPX could turn around immediately. If the CPI is in line with expectations and particularly if crude cooperates by stalling its advance, then a bounce might be anticipated, but I still wouldn't be surprised to see advances stall at one of those two resistance levels as recent gains are consolidated. Protect bullish positions.

The Dow's action broke it above a recent bull flag formation, but many tend to discount the recent action on the Dow, with its narrower base and its susceptibility to being pushed around.

Annotated Daily Chart of the Dow

RSI on the Dow's 30-minute nested Keltner chart suggested that the Dow's advance was overdone at the end of the day, with that RSI measuring 80.50. The 15-minute Keltner channels suggested that the Dow perhaps needed a pullback, too, but as long as the Dow is finding support on 30-minute closes above a line currently at 11,219 and still rising, it's maintaining the upward trajectory that it was building today. Based on the evidence of the Keltner charts, I wouldn't be surprised to see the Dow pull back to 11,246 at least, no matter what the CPI number produces, but further pullbacks would be dependent on the reaction to the CPI, and, later in the day, to the crude inventories.

The Nasdaq also produced a strong gain and a large-range white candle.

Annotated Daily Chart of the Nasdaq

Like the Dow, the Nasdaq's 30-minute nested Keltner chart revealed an RSI level indicating overbought conditions. The current upside target predicted by those channels is 2367-2368, in line with next resistance shown by historical charting methods, but upper shadows on the 30-minute candles may indicate the need to consolidate first, even if that potential target is hit. Next support gathers on that chart at 2343-2346, and as long as the Nasdaq is closing 30-minute periods above that support, the possibility of another charge up toward that target is maintained. The Nasdaq sometimes bounces back hard from that particular resistance line now at 2367-2368 on the 30-minute chart--doing so on the first 30-minute candle on April 7, for example--so this is a time for bulls to concentrate on protecting profits.

YHOO's, IBM's and MOT's after-the-bell earnings reports could impact tech-related indices tomorrow. YHOO's Q1 profit declined in line with expectations to $160 million or $0.11 a share. This report included options expenses. Sales were also in line with expectations, up 34 percent, but revenue increased. I hesitate to report after-hours trading patterns, as those can change so rapidly and then reverse before the cash open the next day, but as this report was prepared, QCharts showed $32.92 for YHOO, up from the $31.31 close. IBM's revenue eased to $20.7 billion from the year-ago level of $22.9 billion, but that revenue would have been steady if the company's sale of its PC unit was stripped out from the year-ago level. Sales met expectations, and earnings of $1.08 a share beat expectations of $1.05 a share. The gross profit margin rose to 39.1 percent. MOT shipped a record number of handsets and revenue jumped 23 percent, but earnings were a cent lower than the expected $0.29 earnings. MOT was trading lower in after-hours, dipping as low as $22.90 at one point.

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As this report was prepared, TXN was just releasing earnings, with the final market assessment of those earnings not yet complete, and untrustworthy anyway, as already mentioned. MarketWatch reports earnings of $0.36 a share, including $43 million in income from discontinued operations, while CNBC reports $0.33, with expectations at $0.32 a share. Revenue at $3.3 billion appeared to be slightly above the $3.287 billion expected. Sales rose 23 percent, and headlines trumpeted the company's ability to avoid a seasonal slowdown, with phone chips increasing those sales. As the report was prepared, time and sales on QCharts showed prices jumping in a range from $33.97-$35.12, up from the $34.00 close.

This morning, J.P. Morgan had upgraded Micron Technology (MU), prompting an early bounce in the SOX, but anticipation of Texas Instruments' (TXN) after-the-bell earnings may have prompted some short covering, too.

Annotated Daily Chart of the SOX

By the close, the SOX had charged above one level of resistance on the 30-minute Keltner chart, but the charge above that resistance wasn't particularly convincing, with the 30-minute candles leaving upper shadows behind. If the breakout is real, the next target on the 30-minute Keltner's is 526, but with today's stop at the 50-sma and the look of those candles, I hesitate to suggest that the next target will be hit and think instead that the next 60-minute resistance currently near 519.20 on 60-minute closes may bear watching. If reactions to TXN's report continue to be as positive overnight as they are now, that resistance should be challenged rather quickly tomorrow morning if the SOX doesn't do its gappy thing and gap right above it.

Economic reports impacted trading today, with the markets avidly focusing on anything but the rising crude costs. Crude closed at $71.35 a barrel, reminding readers of a recent prediction that crude could quickly reach the $75.00 a barrel mark.

Economists predicted that the March producer price index would rise 0.4 percent after falling 1.4 percent the previous month. Economists predicted a rise of 0.01-0.2 percent in the core PPI. The actual PPI headline number rose 0.5 percent. While one article proclaimed that gas prices had driven wholesale inflation higher, others interpreted the data differently. Market watchers appeared reassured with the inline 0.1 percent rise in the core number. Last night's Dallas television news included anecdotal evidence of businesses forced to raise prices due to the impact of rising energy costs. Such anecdotal evidence in Dallas and elsewhere hasn't yet been corroborated by that core PPI, but the data today did not reflect the recent push high in crude and other commodity prices. Instead, the March number reflected a 4.5 percent drop in energy prices at the crude goods level and a 0.9 percent drop at the intermediate processing level, although it did show a 1.8 percent gain at the finished goods level. One component that the Fed often watches is the core intermediate goods prices, and that component eased back to a 4.4 percent rise for the past 12 months, down from the previous month's 4.8 percent. Tomorrow's CPI will give another view of whether inflationary pressures are being seen in the prices consumers pay.

News from the housing sector wasn't as reassuring, although the eventual post-FOMC jump in the DJUSHB, the Dow Jones Home Construction Index, looked as if all data today had been wonderful. Sector experts expected March housing starts to decline 4 percent, to 2.04 million, down from February's 2.12 million. Instead, construction of new houses fell 7.8 percent to a seasonally adjusted 1.96 million units, the lowest level in a year. Building permits fell 5.5 percent, the steepest decline in six and a half years. All regions were impacted, although the West and Midwest were hit the hardest by declines in new construction. Still, some said that the number still fell into the category of an expected softening that shouldn't prove alarming. Some economists and analysts speaking out Monday felt that the anticipated further softening of the housing market would not likely undermine the economy. Some also pointed to the errors sometimes seen in this number and to the 6.9 percent rise year over year.

Monday, the sector had received more bad news, as reported by Keene Little in last night's Wrap. Both industry spokespersons and Chicago Fed President Michael Moskow had termed Monday's result consistent with the view of an orderly and expected decline in the housing market, and not cause for great alarm as yet. By the end of the day, the index had posted a 4.38 percent gain, but that gain brought it right up to important resistance in the 898-903.6 region, where it was stopped.

Moskow and industry speakers might attempt to reassure that a softening of the housing market won't undermine the economy and as some might have greeted the tame core PPI as definitive evidence that rising crude costs are not impacting prices, but WALL STREET JOURNAL writers are not quite so sure. An article today pointed to those geopolitical concerns mentioned earlier and the "persistent upward creep in oil," saying that those factors could coalesce into investor concern.

Bond yields eased. That easing had begun after the PPI report and the housing starts number, but yields on the ten-year sank most of the day. The Think Tank, based in New York, believes that the Fed will raise rates once more, to 5 percent, with this expert opinion joining that of other well-known Fed watchers. The dollar also eased.

Other economic reports received less attention. Redbook U.S. retail sales rose 4.1 percent in the first two weeks of April. This rise was when compared to the March number. Another report noted that the number of black-owned businesses increased 45 percent from 1997 to 2002, four times the national rate. The Census Bureau reported this information. Revenue from black-owned businesses increased 25 percent.

Before-the-bell earnings reports may also have impacted trading, at least in some indices, and those reports certainly have impacted the length of this Wrap. Coupled with economic reports and other developments, including information on a number of reporting companies increased the length more than is optimal.

Before the bell, Merrill Lynch (MER) reported that it had taken a charge for stock-based compensation that drove its first-quarter earnings lower. The company reported earnings of $432 million or $0.44 a share, down from the year-ago level of $1.21 billion or $1.21 a share. Still, the company beat expectations of $0.32 a share, helped by revenue from investment activity. Revenue was expected to be $7.33 billion, but was $7.96 billion. The stock closed higher by 1.17 percent.

Reports from Johnson & Johnson (JNJ) and UnitedHealth (UNH) were deemed mixed and positive, respectively, when unveiled, but investors weren't so sure about UNH's report when trading began. JNJ chopped around and UNH dropped. JNJ's revenue disappointed, but UNH's Q1 profit increased 21 percent, and the company raised its forecast for the year. Some investors may have been concerned by a lack of clarity in the company's options grant process, one analyst opined, while also noting a recent rotation in the health-insurance sector that has pulled money out of UNH's shares. JNJ ultimately gained 0.83 percent, and UNH dropped 3.87 percent.

Also in the healthcare sector, Eli Lilly (LLY) received an analyst upgrade after yesterday's reports that its Evista was as effective as tamoxifen in preventing cancer in post-menopausal women with a lower incidence of some side effects. The stock gained 2.81 percent.

Companies reporting earnings in the morning also included Cleveland's National City (NCC). The bank's 5 percent decline was narrower than expected. Toymaker Mattel Corporation (MAT) received a tax benefit that helped earnings, with the company reporting Q1 earnings of $0.08 a share, up from last year's $0.02 a share for the same period. However, the company reported an operating loss of $32 million, compared to its profit of $5.5 million a year ago. High materials costs contributed to the loss. NCC gained 3.39 percent and MAT dropped 0.18 percent.

Homebuilder D.R. Horton (DHI) reported earnings that rose 20 percent above the year-ago levels, with Q2 net income of $1.11 a share against year-ago levels of $0.92 a share. The earnings met EPS expectations. The company pegged full-year earnings expectations at $5.25-5.35 a share, below the $5.38 a share once source said was expected. The stock gained 2.24 percent.

Boston Scientific Corporation (BSX) reported rising sales, but said that new accounting rules and write downs were responsible for the company's report of EPS of $0.40, compared to $0.42 for the year-ago level. Sales numbered at $1.62 billion, against expectations of $1.596 billion and last year's $1.615 billion. BSX gained 1.21 percent. FLIR Systems (FLIR), manufacturer of thermal imaging and stabilized camera systems, announced that a higher-than-anticipated tax rate would mean that first-quarter revenue would be lower than previous expectations, but the company held to full-year guidance. The stock dropped 11.29 percent anyway. Fifth Third Bancorp (FITB) reported Q1 net income that declined 10 percent year over year, with earnings at $0.65 a share, a cent higher than expected. The stock gained 4.17 percent. Unisys Corp. (UIS) reported a loss of $0.08 a share, but analysts had predicted a loss of only $0.05 a share. Although services growth was solid, demand for enterprise servers was weak, driving down technology revenue and margins. The stock dropped 2.30 percent.

In other company-specific news, Target Corp. (TGT) said that Easter sales should prompt a 10 percent rise in same-store sales for April, in the middle of its previous 9-11 percent guidance. The stock gained 0.87 percent. Warren Buffett's Berkshire Hathaway (BRKA) has made an agreement to buy Russell Corp. (RML). RML jumped $5.04 or $37.89. An advisory board in the U.K. counseled the country's health service not to purchase Pfizer's (PFE) Exubera, an inhaled insulin drug, but PFE still gained 2.00 percent.

Tomorrow's economic reports include March's CPI, as mentioned earlier, reported at 8:30 EST. Previous to that will be the Mortgage Bankers Association weekly report on mortgage applications. At 10:30 come the crude inventories. March's CPI is expected to rise 0.2 percent after the prior 0.01 percent rise, with the core CPI expected to rise 0.3-0.4 percent after the prior 0.1 percent gain. A higher core CPI number could well spook markets.

Earnings reports will garner attention, too, especially J.P. Morgan Chase's (JPM) before-the-open report and Intel's (INTC) and Apple's (AAPL) after-the-close reports. Other companies' reports could impact markets, too, with ABT, ASD, AMR, ASML, EBAY, GD, GENZ, HON, JPM, JNPR, KFT, KO, LRW, LUFK, PFE, PJC, QCOM, SHR and STLD among the more than 100 reporting companies.

After such a strong day, my usual expectation is to see some follow-through the next day, but on a smaller range and with trading perhaps less amenable to technical trading than usual. Tomorrow's CPI, crude inventories and location in the middle of opex week will likely throw a wrench into that expectation, but that's what I normally would have expected after this day.

If trading the Dow, SPX or OEX, keep a close watch on the RLX, BKX and BIX, and the TRAN. The BIX hit strong resistance on the daily chart at 375 and possible Keltner resistance as the markets closed, but it was analogous to resistance that the BKX had already pushed through. The TRAN, too, was hitting likely strong resistance at 4701-4702, with next resistance near 4737. If it's climbing ahead of the crude inventories number tomorrow, it's likely going to propel the SPX, OEX and Dow higher, too, into their next resistance levels, but protect profits if that happens because indices could stall. Begin watching for possible strong TRAN resistance on 60-minute closes at 4698-4700 and then again at the April high if the TRAN should burst through that first resistance. If CPI is too hot, indices could start down immediately instead of bouncing, but the TRAN needs to drop below a line currently at 4670 on 30-minute closes before it's done anything to change the upward tenor it developed again yesterday. Could happen, though.

If interested in tech-related indices, the SOX stop at its 50-sma also bears watching, especially with the RUT again approaching its record intraday high of 771.54, with the RUT closing at 769.81. Those stops short of or at next resistance are natural before important earnings announcements, but these again are two indices primed either to burst through resistance or roll over beneath it. Watch them closely. If you're long a tech stock or index, you want to see them both climbing. If you're looking for a rollover or if one starts after tomorrow's early-morning releases, you want to see both headed down.
 

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