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Market Wrap

A Whole Lot of Talking Going On

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While this week might not have produced many economic numbers, FOMC members were out in force, and they mostly stood shoulder to shoulder in a hawkish stance. Bernanke, Poole and Bies all commented on inflation risks earlier in the week with Hoenig being the only one who took a even a slight step back from their united hawkish posture. Hoenig agrees with the others that inflation has moved to the upper end of the comfort range, but he noted that it was too early to worry about whether the FOMC's policy has fallen behind the curve with respect to inflation.

Across the globe, equities reacted negatively this week, especially to Bernanke's comments. However, here in the U.S., yesterday many indices had bounced from their day's lows by the close. While some interpret all down days on strong volume as being signs of selling, this writer believes that depends on how the day ends. The strong volume indicates that institutions were involved since we retail traders can't produce that kind of volume on our own. So, what were institutions doing? If that strong volume is coupled with a bounce from the lows, that may mean institutions were accumulating rather than selling, using the dip created when retail traders wanted out in order to buy cheaply. The problem for us retail traders is that institutions can afford to begin accumulating as momentum continues to carry prices lower. They can begin accumulating ahead of a bottom, testing for that bottom. We usually can't, especially when institutions aren't always right, either.

To make matters worse when markets are already jittery, a whole bunch of talking was scheduled for today, too. Atlanta Fed bank president Jack Guynn, former Fed chairman Alan Greenspan, and Fed governor Mark Olson were all scheduled to speak today. Iran and other global powers were doing some talking, too, much of it behind the scenes as the full details of a proposal to Iran were matters for speculation.

The markets appeared set up for at least a short-term bounce, but would it appear? Futures closed above fair value just before the cash open, but traders had seen overnight gains erased after the open often enough that they didn't trust those higher values. That was especially true since a number of stocks and the chemicals sector had received downgrades, balanced by the Semiconductor Industry Association's raising of its forecast for chip sales for 2006. Some reassurance might have come from knowing that futures had held onto gains through the Nikkei 225's rout in overnight trading, but that reassurance didn't last long, especially with the SOX soon dropping below yesterday's low rather than rising.


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Markets chopped up and down as either bulls or bears momentarily gained the ascendancy, but the bears were to win the day. A swift afternoon drop was blamed on a report that the House of Commons in the U.K. had been temporarily shut down due to reports of anthrax, but Fed speak, results of a survey of 116 CEO's, and just plain jittery markets could have been equally valid causes for the ups and downs of the choppy day. The advdec line, VIX, and TRIN's movements were often not in accordance in a way that allowed any confidence in even the shortest-term direction. The SOX kept sliding lower all day as other leading-indicator-type indices such as the BIX, TRAN, RUT and RLX climbed or at least tried to climb before rolling over again. Although the other three of those indices closed lower, the BIX was to close higher by 0.60 percent. At least part of the day, advancers remained above decliners while down volume moved ahead of up volume and indices declined, although that relationship was erased by the end of the day.

After all of that, the Wilshire 5000 and some other indices closed at support at the bottom of recent consolidation zones.

Annotated Daily Chart of the Wilshire 5000:

The Wilshire 5000's long upper shadow can be seen as a positive when it occurs at the bottom of a decline, but gains a less bullish look when it's at the bottom of a consolidation zone. Note the behavior on May 23 when the Wilshire 5000 produced a similar candle, but dipped the next day before springing up and climbing through that consolidation zone. Unfortunately, this chart gives investors few answers.

Like the Wilshire 5000, the SPX nearly duplicated its candle from May 23. The SPX did not manage a close on the 200-sma, as did the Wilshire 5000, but instead closed below it as it had on May 23. In fact, the SPX's 1256.15 close was only cents below the 1256.58 close on May 23.

Annotated Daily Chart of the SPX:

If the SPX duplicated its May 23 daily candlestick, the Dow did not. Some could spot a possible head-and-shoulder confirmation in this week's action, while others might point to the Dow's stop on an important Fib support level.

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

The Semiconductor Industry Association said that chip sales for 2006 should grow 9.8 percent, with this projection an increase from its previous forecast of 7.9-percent growth. Higher demand for consumer electronics prompted the increase. INTC's continued slide dragged the index lower, however. The company has announced its intention to sell its communication-chips assets to private investors or other chip firms, but investors weren't interested in holding the company's stock when it's losing market share to AMD. I thought I heard about a downgrade and lowered price target for INTC early this morning, but a search all day has not turned up confirmation of that downgrade. Whatever the cause of INTC's decline and the SOX's, the day's action was ugly. A weekly chart might be the best for seeing what's happening.

Annotated Weekly of the SOX:

The SOX needs to pull up between today's close and 440, or it risks falling to the stronger and longer-term support of the weekly 200-sma at 423.40.

Fed speak had far more to do with the market action than most of the day's economic releases, but those releases began early. At 7:00, the Mortgage Bankers Association released its weekly mortgage application volume survey for the week ending June 2. The headline number measuring total mortgage loan application volume fell 1.4 percent on a seasonally adjusted basis and plummeted 28.0 percent below the year-ago level on an unadjusted basis. The refinance component has fallen to April 2002 levels, levels it also hit briefly last December. Components measuring conventional and government loan applications also decreased. A number of weeks of declining volume has sent the four-week moving averages for all components lower by more than one percent. The average contract interest rate for fixed-rate 30-year mortgages fell to 6.60 percent from the previous 6.66 percent and points increased.

The day's economic releases resulted in lower crude prices, but decline didn't help equities. Instead, it dragged the OIX and XOI lower, denying markets the upside leadership of the energy sector stocks. Rather, they led to the downside.

Jim Brown commented last night on the EIA's raising of its crude demand estimates for 2006 and 2007, and that action's impact on crude prices. If there was a whole lot of talking going on with respect to our FOMC members, former and current, talk also flies back and forth between Iran and other global powers. Early this morning, the Wall Street Journal reported that world powers had toned down their demand for Iran to stop enriching uranium before talks could commence, asking for a suspension rather than a long-term moratorium. Iran could also continue the precursor step to enrichment if it agrees to the terms reportedly presented by six countries as conditions before multinational talks. Other sources have speculated that Iran will be provided access to the WTO and a new facility to stockpile nuclear fuel, and will be eventually allowed to resume nuclear enrichment. Some speculate that Russia will provide Iran's nuclear fuel. Iran has continued to "play the crude card," as Jim noted last night, however, so few have a firm grasp of whether Iran will likely accept the deal or not.

Violence continues in Nigeria, but crude prices had dropped overnight as tensions eased over the Iran situation and on expectations of a build in inventories. Industry analysts differed in their expectations. Most expected gasoline inventories to rise, but the estimates varied from a 500,000 build to a 1.50-million build. Distillates were expected to rise from 850,000-1.5 million, according to the particular source making the prediction. One group estimated that crude inventories would decline by 500,000 barrels and another that they would climb by 1.3 million barrels. Some called the build in inventories "unexpected." However, with such widely varying estimates, it's difficult to decide whether the Department of Energy's report of a build of 1.05 million, 1.76 million and 1.14 million, respectively, in unleaded gasoline, distillate and crude inventories met or exceeded expectations.

Crude traders reacted as if the surprise build had been bearish for crude prices. Crude dropped further after the release, closing at $70.82. Operable Capacity rose 54,000 barrels, while Percent Utilization fell to 90.97 percent, down from the previous report's 91.44 percent.

Crude dropped back to the bottom of a rising regression channel that was established after the May 22 low. It holds that support, as well as holding far above the 100-sma at $68.86 and a long-term rising trendline now at about $67.07. The choppy back and forth nature of its climb since May 22 questions whether the rise could be a bear-flag rise, but so far, the support holds.

A couple of hours later, at 12:30 EST, Atlanta Fed bank president Jack Guynn discussed the economic outlook and the housing sector, but former Fed chairman Alan Greenspan spoke first. When speaking before the Senate Foreign Relations Committee, at that committee's request, Greenspan addressed rising energy costs. Although the economy had so far been able to absorb those costs, he said, the prices were beginning to curb economic growth and flatten demand. He did not believe that the damage could yet be termed a "serious erosion," according to an Associated Press release, but he called the increase a "huge implicit tax" on consumers. He believes that continued high prices will eventually cut back on our dependence on petroleum. He does not believe that the world's refining capacity can widen the margin with world demand, a comment that will not prove new or surprising to those who have been reading Jim Brown's commentary for the last couple of years.

When Guynn spoke, his comments appeared mixed with regard to his hawkish stature. He called inflation readings worrisome, comments he'd previously made. He called rate policy "close to where it should be" since productivity gains and global forces could ease inflation in the future. In his opinion, the decline in the housing sector could still be called orderly and the rest of the economy is moderating in line with Fed forecasts. He said that he didn't want to let the genie out of the bottle, in terms of letting inflation get out of control, and that he wasn't sure the inflation readings were transitory. The initial focus appeared to be on his worries about the bothersome inflation readings and his intention not to let it get out of control, and not the rest of his comments, as equities rolled down with the SOX reaching a new day's low, one of many it was to eventually reach as it stair-stepped lower all day.

Fed Governor Olson worried that investors may have sought out riskier investments as the flat yield curve offered them less opportunity for gain.

The International Monetary Fund did its part to weigh down U.S. markets today, too, again warning U.S. officials of the dangers of the growing deficit, calling the previous support of the deficit and the dollar "possibly temporary," according to one report. The IMF still believes that the U.S. economy drives growth across the globe, with that engine continuing despite various challenges, including hurricane damage, a rising-interest-rate environment, and rising energy prices. Investors did not need a reminder of the dangers of the deficit, however, and that perhaps contributed to the grim outlook on the markets.

CEO's proved less optimistic on the economy than they had been previously, according to a second-quarter Business Roundtable survey. The Outlook Index fell to 98.6 from 102.2, but remained above the year-ago level of 94.3. Only 41 percent of CEO's expect to increase staff, down from the first-quarter's 43 percent, but still above the 35 percent level from a year ago. Those expecting to increase capital expenditures decreased to 48 percent, down from the previous 50 percent reading and flat with the year-ago level. Those anticipating higher sales for the second quarter fell to 83 percent, down from the last quarter's 85 percent and also below the 85 percent reading from a year ago.

At 3:00 EST, April's consumer credit report was released. Economists predicted that consumer credit rose by $3.9 billion, a big leap higher from March's $2.5 billion. If that rise had been steep, the actual reported $10.6 billion seemed astronomical. That news appeared to hasten the rollover that had already begun. Non-revolving credit climbed by $7.6 billion while revolving credit rose $3.0 billion.

In stock-specific news today, a number of upgrades and downgrades were issued. Banc of America Securities downgraded Northrop Grumman to a neutral rating from its previous buy rating and set its target price at $70.00, and Robert W. Baird downgraded Johnson Controls (JCI) and BorgWarner Inc. (BWA) to neutral ratings. NOC dropped 0.87 percent; JCI rose 1.59 percent; and BWA dropped 2.11 percent. Deutsche Bank went after a number of chemical companies, including Dow Chemical (DOW) and DuPont (DD). DOW dropped 1.26 percent, and DD, 2.56 percent. The firm said that its GDP forecast was below consensus and that a slowing economy would impact these companies and the sector. Banc of America Securities upgraded Boeing Co. (BA) to a buy rating and set its target price at $93.00. BA rose 1.00 percent. C.H. Robinson Worldwide (CHRW) also received an upgrade, with this transport stock rising as a result. CHRW is a component of the TRAN, the Dow Jones Transportation Index. CHRW rose 1.57 percent.

Target (TGT), Dell (DELL), Northwest Airlines (NWACQ), and Fairchild Semiconductor International (FCS) also made news. TGT said that consolidated gross margin rate and selling, general and administrative expense rates will be slightly higher in fiscal 2006 than in 2005, excluding the influence of a fifty-third week. According to a filing with the SEC, it expects a low double-digit percent increase in full-year earnings before interest and taxes, while the fiscal 2006 earnings per share percent increase should be in the mid teens. Target was also presenting today at a Piper Jaffray conference along with other retailers. TGT rose 2.73 percent. DELL announced that Google (GOOG) would use its servers in the most recent version of GOOG's Search Appliance product. Dell dropped 1.36 percent. NWACQ's flight attendants voted not to accept the airlines contract, intended to cut costs, and the company said it would ask for a preliminary injunction to stop their union from striking. The company has already asked the bankruptcy court to reject their existing labor agreement, and now it will ask the court to make a ruling and then allow the company to impose a new contract. FCS said that gross margins should increase from 0.5 to 1 percentage point but reiterated its guidance for Q2 revenue. The company expects that revenue to be flat to down by three percent. FCS dropped 2.06 percent.

Earnings for tomorrow include those from CATS, CRAI, FCEL, GLBC, LUB, NSM, RENT and TTWO. Few economic numbers have been released this week, and that trend continues until Friday's numbers. Tomorrow includes only the usual initial claims, released at 8:30, April's wholesale inventories, released at 10:00 and natural gas inventories, released at 10:30. Because wholesale inventories don't tell a lot about personal consumption, this number doesn't usually move the markets unless the number moves enough to change the GDP outlook. Expectations are for a rise of 0.5-0.6 percent, up from the prior 0.2 percent. As Jeff Bailey commented yesterday, however, in this hyper-alert market, any number has the capability of moving markets.

With equities across the globe reacting negatively and somewhat in concert to rate-hike suggestions, it might be worth noting that the Bank of England is now engaged in a two-day meeting, and that the last meeting had contained a surprise bidder for a rate hike. Some believe that a rate hike will be the next move by the Bank of England, but probably not tomorrow, at the conclusion of the two-day meeting. The ECB also announces interest rates tomorrow, both just before our cash market opens.

As frustrating as this statement will be, today's action did not decide the next market direction. The Wilshire 5000 and SPX almost repeated their May 23 performances, while both the Dow and the SOX dropped to next strong support. Both the Dow and SOX stopped at or near support, however. Countering the bearishness of that action was the BIX's bounce from support on a day when many would have expected the BIX to decline.

Annotated Daily Chart of the BIX:

I can't find conclusive evidence of whether markets will crater or bounce again within recent consolidation zones. That's the nature and cause of these consolidation zones: bulls and bears are still battling it out.

If the SOX doesn't pull up soon, it has the possibility of falling to 420-423, perhaps dragging the other indices lower with it, but the BIX bounced off support tested today, attempting to lead indices higher. The Wilshire 5000 and SPX nearly duplicated their May 23 performances, and those performances did not result in a breaking of the consolidation patterns, so we can't conclude that today's action will result in a final breaking of those zones, either. They may, and they may not. The RLX and TRAN stayed within recent consolidation patterns.

I'll tell you when a reasonable forecast can be made, but the markets closed on the edges of cliffs, and like the old cliff-hangers of old, the movie ended without any idea whether a hero was going to come to the rescue, or a villain in the form of the head of a central bank somewhere around the globe was going to push them over the edge. Watch futures' reactions to overnight actions, but trust nothing, especially as tomorrow is a Thursday before option expiration week, an often volatile trading day. If futures bounce while other indices do, or hold up while other indices do, a temporary bounce might be attempted. If futures drop when other indices climb, a test of lower lows might be expected. I would advise staying out of the markets until evidence is clearer, but if you're trading, take profits quickly.

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