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Market Wrap

Checking off the Items on the To-Do List

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The trading day began with a number of to-do lists, at least two in the hands of bulls and another in the hands of the FOMC. One of the bulls' tasks was to send the Dow back up to retest its all-time high. The Dow could not run those final few points ahead of the FOMC statement. Bulls tried again during the volatile period just after the FOMC statement was released, but selling took the Dow back down again, producing a long-legged doji for the day and a close only a few points above yesterday's. On the NYSE, AMEX and Nasdaq, decliners led advancers. Tomorrow, bulls will either smooth out that slightly wrinkled and sweat-stained to-do list or else toss it away.

Last night, Greg Robb of MarketWatch spoke for many market watchers, lining out the three items that the FOMC should have on its to-do list. Those items included raising rates by 25 basis points, suggesting a pause while data is examined and taking a tough stance on inflation. Others suggested that the FOMC's stance on inflation needed to be toughened from previous releases to balance out the expected language hinting at a pause at the next meeting. The expected effect was to be a bid under bonds, a cooling of bond yields and either a bounce or a ho-hum reaction in equities, depending on the commentator or economist being queried.

As the statement's release and FOMC decision approached, bond yields began moving higher again, signaling a little trouble with that scenario. Trouble was ahead, and the trouble was this: Did the FOMC complete its to-do list? Whether it did or not depended on the investor, economist or commentator being asked. "Ambiguous," one commentator termed the results, and I wouldn't disagree.

Ultimately, the FVX, the five-year treasury note yield, was to close higher; the ten-year, flat; and the 30-year bond, lower. Yields on the five-year note ended at 5.02 percent; on the ten-year at 5.13 percent and on the thirty-year at 5.19 percent. The Fed funds futures for July predicted a 40 percent chance of a rate hike at the June meeting, up from the 34 percent before the statement was released.

The Federal Open Market Committee ticked off one of those items on its list--the 25-basis-point raise--but it's not as clear whether the members completed the other two tasks. The Fed kept the wording that stated that some further policy firming may yet be needed, and some had expected that wording to go away, replaced by that firm stance on inflation and the suggestion of a pause at the next meeting. The committee did emphasize that the extent and timing of further hikes would be dependent on data, with the "extent and timing of any such firming" wording an addition to their previous statements. If I were compiling that list, I would have put a question mark beside that item on the to-do list.


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I also would have placed a question mark beside the item that required the committee to take a stronger stance on inflation. In the current statement, the FOMC members remained "concerned about pace of growth and possible negative impact on inflation," with that language newly introduced. The other inflation language was similar to that of the last FOMC statement, with the third paragraph of the statement addressing the impact of the run-up in commodity prices. That run-up had only modestly affected core inflation, the statement opined, with productivity gains dampening the growth of unit labor costs, keeping inflation expectations contained. "Still," the statement read, "possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures." That wording was identical to the wording found in the March 28 statement, so it's ambiguous as to whether the FOMC successfully accomplished that stronger stance on inflation. Perhaps the stronger stance wasn't needed since the "further policy firming" language was retained.

The pause certainly wasn't suggested as strongly as some might have desired. Within minutes of the release, articles were touting the possibility of another rate hike at the June meeting while others applauded the possible open door the Fed had left to a pause in June. A Dow Jones article said that the committee "paved the way somewhat for an eventual pause." Not exactly decisive commentary, is it, but I can't do any better. Once again, the FOMC statement left market participants guessing, and some advised that the Fed just didn't know what's going to happen next. The use of the word "evolution" in the statement about the economic outlook surprised some market watchers and led some to comment that the FOMC might be seeing something change from their former outlook on the economy.

But wait a minute. Even if the pause had been suggested more strongly, a pause is just a pause and not necessarily a full stop, as Fed Chairman Bernanke clarified last week. Bernanke didn't want the equity markets running away with a false impression. Such pauses in the rate-hike cycle sometimes are followed by further rate hikes, several times since 1989. In another report, however, Tom Dwyer of FTN Midwest Securities mentioned last night that he had researched the FOMC's statement accompanying its last rate hike in 1995. He claims that, based on that statement, there was "no chance you would have thought they were going to stop raising rates." Tuesday night, Dwyer posed a possibility that probably prompted last week's zoom: some had been anticipating, rightly or wrongly, that "pause" might mean "end." Their disappointment was immediately apparent in the first market reaction, with equities dropping, bonds dropping, and yields bouncing.

The committee asserted that the economy was strong, but that the "gradual cooling" of the housing market, increases in energy prices, and "lagged effects of increases in interest rates" would likely moderate economic growth to a pace that would prove more sustainable. Those possible factors in the moderation marked new additions to the statement and worried some who were sorting through the statement, word by word.

The Wilshire 5000, the broadest of our markets, dipped today, but the dip proved as inconclusive as the FOMC statement. The sideways consolidation at the recent high could be considered bullish, but borrowing language from the FOMC statement, we have to see how the evolution of further information impacts the markets. A deeper pullback than today's isn't precluded.

Annotated Daily Chart of the Wilshire 5000:

The SPX also consolidates at the top of a rising regression channel. Today's dip brought the SPX down to test the top of a former resistance line, and the bounce came from that level.

Annotated Daily Chart of the SPX

The post-FOMC volatility scrambled intraday charts and indicators, so that they provide little insight into next direction. One tactic that sometimes works in this situation is to wait until prices settle into a recognizable pattern and wait for the break from that pattern for a trade entry. That settling hasn't happened yet.

The post-FOMC action also scrambled the intraday indicators for the Dow, and the day's candle illuminated the indecision produced by the day's action.

Annotated Daily Chart of the Dow

The possibility of a tall red candle to confirm the possible reversal signal at the top of the Dow's climb can't be ignored, but that scrambling of intraday signals just doesn't allow any weighting to be given to that possibility.

Dell's and CSCO's declines contributed to a more negative day on the Nasdaq. Dell produced an inside-day candle. CSCO approached but didn't quite reach potential support near $20.57, where CSCO and Nasdaq bulls want to see a bounce. A 60-minute nested Keltner channel suggested that the Nasdaq was ready to attempt a bounce, but that 2327-2331 was likely to be significant resistance on that bounce.

Annotated Daily Chart of the Nasdaq

The RUT and SOX should be watched for guidance when deciding whether that next resistance will hold, if the Nasdaq should bounce.

Annotated Daily Chart of the SOX

The SOX's 60-minute Keltner channel chart shows that the SOX move to the downside is becoming extended, but that resistance courses down to a level just above the current SOX level, too. Such intraday indicators may be of little use with the SOX churning around within a triangle that's taken four months to set up. Watch the test of SOX support at the triangle and the converging 200-sma's and -ema's. Nasdaq bulls need to see that support hold.

Discussions of the conclusion of the FOMC meeting, the accompanying statement, the resultant stock-market action and the ramifications have necessarily lengthened this Wrap, but some other economic developments related to the housing industry and crude inventories occurred, too. Those subscribers who don't want to wade through those developments could skip now to the end of the article, where tomorrow's economic developments and outlook are developed.

The Dow Jones U.S. Home Construction Index erased yesterday's losses while remaining within a recent consolidation pattern. The bounce took place at the open and before the FOMC statement, however, with that pre-supposed cooling in yields likely contributing to the bounce. The index plunged to a new low of the day after the release, but managed a bounce back above 800 by the close. For about a week, the DJUSHB has been consolidating between the April 2005 low of 781.17 and the March 2006 low of 821.19, with that chop perhaps not surprising as markets awaited the important FOMC statement. However, several other pieces of data related to the home construction industry were released today, too, and their impact perhaps should not be ignored.

After several weeks in which the mortgage application volume increased week-over-week, the Mortgage Bankers Association's latest figures for the week ending May 5 showed a return to the prior pattern of decreasing volume. On a seasonally adjusted basis, the volume fell 5.8 percent. On an unadjusted basis, volume was 27.1 percent lower than the year-ago level. All components fell, too, including conventional, government, refinance and purchase indices. Four-week moving averages fell, and the refinance share of mortgage activity dropped to 33.8 percent of all applications.

The National Association of Realtors (NAR) also weighed in this morning. NAR expects a cooling in the housing sector, but only to what could be considered a more normal outlook. NAR believes that home re-sales will ease to 6.62 million units this year, while new homes sales will fall to 1.13 million units, down from last year's record 1.28 million units. NAR predicts rising home prices, but the 5.7 percent predicted increase is much slower than last year's 12 percent. According to one source, some other surveys peg the increase for 2006 even lower, at 3-4 percent.

The DJUSHB has set up potential price/RSI bullish divergence on its daily chart. Keltner support lines are attempting to firm just beneath the current consolidation range, but so far, all that's shown is an attempt to firm up support without any more conclusive evidence. RSI rises, but prices need to do more than consolidate while RSI rises. They need to rise, too, or the DJUSHB continues to look weak.

While today was supposedly all about the Fed's decision and statement, it was at least a little about the crude inventories. Yesterday, the TRAN zoomed up to hit a record intraday high of 5001.02, with its closing high of 4998.95 a record, too. This morning, prior to the inventories numbers, the TRAN was already pushing higher again and it hit another record intraday high of 5013.67.

While some Fib and other targets show a possibility of a continued climb, this parabolic climb of late has to make the 5,000-ish level look a bit like the proverbial electric fence, you'd think. It's certainly been resistance on daily closes, with today's close at 4991.24. Since the TRAN is theoretically sensitive to both economic slowdowns and crude prices, the TRAN's zoom has provided insight into which the big-money people think most important of late. On the TRAN components, investors have discounted the negative impact of rising crude prices and focused on bright hopes for the economy, but the Fed's new cautions about the risks to economic growth may cause some concern with this index.

Ahead of the crude inventories, Indonesia's president and its oil minister tried to soothe the troubled waters between Iran and others, with the president reiterating Iran's claim that its nuclear plans are intended for peaceful uses and the oil minister saying that if the geopolitical concerns were removed, oil prices might average $58-60 a barrel. Kuwait's oil minister agreed that geopolitical concerns were inflating oil prices. Iran's President Adhmadinejad weighed in, too, however, with rhetoric that was more likely to churn those waters than calm them.

The Energy Information Administration differs with Indonesia's oil minister, with the EIA yesterday pegging likely average crude prices at $68 a barrel both this year and next. The Department of Energy cut its estimates for U.S. demand. Crude prices had eased and then steadied just ahead of the inventories release. Those futures demonstrated some volatility of their own today, but bounced and measure $72.29 in after-hours trading as this report is prepared.

One source said estimates for the inventories numbers were for a decline of 600,000 barrels in crude inventories, a rise of 1.2 million barrels in gasoline inventories and a drop of 300,000 barrels in distillate inventories. Instead, crude inventories rose only 300,000 barrels, gasoline inventories jumped a higher-than-expected 2.4 million barrels and distillates unexpectedly rose by 200,000 barrels. Motor gasoline inventories remain 3.8 percent below the year-ago levels, but both crude and distillate inventories remain above their year-ago levels.

Today, the Treasury released its forex report, and many wanted the Treasury to check something off a to-do list. Many had been calling for China to be named a currency manipulator, but the report failed to check off that item. The report said that no countries met the definition of a manipulator, but did denounce China's slow progress toward a more flexible currency stance and said that the Treasury would closely watch China's progress. The delay has not been justified given China's economic growth, the Treasury said, but it did give credit to the country for committing to a more flexible currency and to encouraging other Asian nations to adopt more flexible stances. Huh? Doesn't that sound a bit ambiguous, too, like shaking China's hand and slapping its cheek at the same time? Treasury Secretary Snow reiterated his "strong dollar" stance ahead of the meeting, with long-time Option Investor readers having some idea of our take on his "strong dollar" stance. An hour after the report was released, the dollar had bounced off the day's low against the yen and euro, however.

Because of the number and importance of the economic announcements today, company-specific news will be kept to a minimum, but that news included an announcement by Whirlpool Corp. (WHR) that the company would close three plants, consolidate corporate offices and trim 4,500 jobs, about 5.6 percent of the current 80,000-employee pool. The company will also add about 1,500 jobs, so the net 3.8-percent loss will be smaller than the headline number. This comes almost six weeks after the company's acquisition of Maytag Corp. In other news, Toyota reported a record profit for its fiscal year. Only General Motors (GM) reports more revenue. GM climbed, with its climb attributed to the company's plans to raise prices for the 2007 vehicles sold to rental-car companies. Boeing (BA) also climbed, benefiting from rumors that Airbus may not produce its A350 aircraft as it gears up to develop a new plane.

In after-hours trading, JDSU was dropping after it sold $375 million in convertible notes. TEVA's quarterly results dropped that stock to $37.52, but that stock was at $37.85 as this report was prepared. NWS bounced after announcing its earnings.

Tomorrow's economic releases will feature the important April retail sales as well as March business inventories and the usual initial claims, all released at 8:30. While business inventories are of course important, most of its components have already been released, so unless something wild happens with retail sales, the only unknown component, business inventories doesn't usually move the markets. Tomorrow, retail sales are expected to rise 0.8-0.9 percent and 0.9-1.1 percent ex-autos, this after March's more tepid numbers. Business inventories are forecast to be 0.5 percent.

Earnings tomorrow include ADPT, AMSC, BGO, BVF, CCOI, DT, DISH, EXPE, ING, JJZ, JCP, KSS, PAL, PSUN, PBY, URBN and VIA. Market watchers might recognize a number of high-profile retailers among those reporting companies, likely heightening the impact of the retail sales number and those sales' influence on the business inventories. Any wild swing is likely to be exaggerated, so watching the RLX appears important. This week, the RLX rose to test its July 2005 all-time high of 489.34, but before today, that retest had been accomplished by a series of small-bodied spinning-top type candles indicative of indecision. Today's action dropped price to 481.80 support, but the RLX bounced off that low by the close. As the close, a drop to 480.40 looked about as likely as a climb to 490.67, but the RLX is beginning to look overextended and ripe for a deeper decline.

Tomorrow is the Thursday before opex week, a day that presents its own difficulties in gauging even without the reaction to an ambiguous FOMC statement. Opex-week volatility has lately often been seen the Thursday and Friday of the week before opex, rather than during opex week itself.

My personal feeling is that the markets were stunned today when those many to-do lists weren't accomplished as expected, and some participants might be staggering around, wondering where to head next. The TRAN has failed two days in a row to complete a to-do list of its own: closing above 5,000.

My advice remains the same as it's been for many weeks: other than on scalps or day trades, don't bet against the SPX, OEX or Dow if the TRAN still climbs or consolidates sideways. If the TRAN remains strong, buying dips to the 10-sma's remains an appropriate tactic, but if the TRAN crashes, then it's time to begin watching for a strong decline on the SPX, OEX and Dow, and then a bounce up to retest for a bearish entry. The TRAN's action certainly looks like a possible blow-off top, but you've heard that before and from my lips, too, so I'm not going to discount the TRAN's ability to climb until the TRAN itself proves that it's ready to fall.

The RUT and SOX should be watched for guides into likely Nasdaq action. Right now, they're giving mixed outlooks, but if both head either up or down, bet that direction on the Nasdaq, too.

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