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Market Wrap

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As World Cup fever heats up, bears put another one in the back of the bull's net early in the week on a light volume rush.

A mixed trade in Asia and weakness among European bourses had stocks here in the U.S. opening mixed to modestly lower.

Japan's government said the country's gross domestic product rose 0.8% quarter-over-quarter (+0.5% prior quarter), which was ahead of the 0.5% forecast. However, the Corporate Goods Price Index jumped 0.7% month-over-month (+0.5% prior month), which was much stronger than the 0.2% forecast.

The United Kingdom said producer price inputs fell 0.5% month-to-month (+2.5% prior), which was less than the +0.2% forecast. Meanwhile, producer price outputs rose 0.3% (+0.4% prior), which was slightly above the +0.2% forecast.

These data set the table for tomorrow morning's U.S. PPI (forecast +0.4% vs. prior +0.9%), with the core rate, which excludes the volatile food and energy components forecasted at +0.2%, compared with a 0.1% rise in April.

Other economic data slated for release here in the U.S. has economists looking for no change in May retail sales following a 0.5% increase in April. Ex-autos, economists look for a 0.5% increase after a +0.7% gain in April.

U.S. Market Watch - 06/12/06 Close

A strong Q2 earnings report from Lehman Brothers (LEH) $62.01 -5.48% set a modestly bullish tone prior to the cash open, but came up limping just after kickoff. The broker said net revenue jumped 35% to $4.41 billion, but fell 1% shy from the record level in Q1. Earnings came in at a healthy $1 billion, or $1.69/share, easily topping Wall Street's expectations of $1.61/share.

When listening to a somewhat muted stadium of onlookers, I did not hear any jeers calling for a windfall profit tax on the brokers.

Fed officials were talkative again today with the overriding theme of "inflation above my comfort level," still present.

As markets pulled and tugged either side of unchanged in mid-morning trade, buyers were seemingly dealt a "red card" late in the afternoon after the Treasury said the U.S. posted a $42.38 billion deficit in May. Spending rose 25% while revenue jumped 26%. The budget gap is more than the $39 billion deficit the Congressional Budget Office expected. The year-to-date deficit remains narrower than a year earlier

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There was plenty of merger-related news today.

Hedge fund Jana Partners said it proposed to acquire Houston Exploration (THX) $57.97 +6.07% for $62 a share. The hedge fund said it currently holds a beneficial stake of 12.3% of THX's outstanding stock.

I (Jeff Bailey) already see shareholders holding up a "yellow card" in the form of a shareholder lawsuit if THX's board approves the merger, which may explain the stock's lackluster trade in today's session. Shares of THX trade well off last-year's hurricane highs of $71.00. However, the way things or going in the energy complex, $60.00 might look good in a couple of months.

The reason I say there might be a shareholder lawsuit in the making is that Kinder Morgan (KMI) $99.51 -0.32% was slapped with a shareholder lawsuit recently. The stock surged back to last year's "hurricane highs" of $102/share from May's lows of $84 after The Carlyle Group and Riverstone Holdings LLC, submitted a proposal to acquire all of the outstanding common stock of KMI at a price of $100/share.

While Jana Partners seems willing to embrace THX for $60/share, Plains All American Pipeline (PAA) $44.65 -3.14% agreed to buy Pacific Energy Partners (PPX) $32.99 +2.80% for $2.4 billion, including the assumption of debt and estimated transaction costs. The deal calls for PPX unitholders to receive 0.77 of a newly issued PAA share. Plains All American said it expects the combined companies to generate near-term growth and savings of $30 million a year, growing to $55 million annually over the next few years.

Other merger-related news had electricity producer Mirant (MIR) $24.38 -0.28% blowing the whistle on its unsolicited takeover bid of NRG Energy (NRG) $46.92 -7.72% a week after NRG alleged Goldman Sachs improperly gave Mirant confidential information about NRG during months of merger negotiations.

The Networking Index (NWX.X) 227.07 -4.67% fell sharply with Comverse Technology (CMVT) $20.48 -13.10% shareholders playing things defensively after the communications-technology firm didn't file its quarterly report by Friday's deadline because of its ongoing stock-option review. The delay in filing quarterly financials could result in the stock's delisting from Nasdaq.

Online job poster Monster Worldwide (MNST) $38.60 -8.07% continued its horrific decline after The Wall Street Journal reported the company frequently granted options to top executives ahead of sharp share-price run-ups. Monster said it has received federal subpoena regarding its stock-option grants.

Energy commodities gave back the bulk of Friday's gains as Tropical Storm Alberto, the first named storm of the 2006 Atlantic hurricane season missed many Gulf of Mexico platforms. Shell USA's CEO said the company saw no oil, or natural gas production disruption from the storm.

July Crude Oil futures (cl06n) settled down $1.27, or -1.77% at $70.36, while July Nat. Gas futures (ng06n) finished up $0.052, or +0.84% at $6.224. July Unleaded (hu06n) settled down $0.0285, or -1.32% at $2.1243.

Over there... Over there...

The weakness is coming, the weakness is coming, the weakness is coming from over there.

In Thursday evening's Market Monitor, I was clicking through some supply/demand charts, also known as Point and Figure charts and was noting the "domino effect" that was taking place.

In this weekend's Market Wrap, Jim Brown noted some of the staggering declines that have taken place in various markets around the globe. Some of the sharpest have come in what I might consider "developing" markets like Brazil, South Africa, India, and one could argue Mexico and Hong Kong still in a development stage.

Depending on your age, you might remember the Sesame Street show. One of their educational attempts was surely targeted at future market technicians like myself. The game was called "Which one of these things is not like the other? Which one of these things are just the same?"

Something like that anyway. See if you can pick up on the pattern and what I've deemed "An aversion to risk."

Japan's Nikkei-225 ($NIKK) - 50-point box

One of the overriding concerns we tend to hear out of Japan is the impact of the weaker U.S. dollar potentially having on demand for the goods being imported into the U.S.. Since giving a triple bottom "sell signal" in May at 16,750, the $NIKK has yet to give a "buy signal." If there's any positive news coming from the above chart, it is that the $NIKK has achieved, and slightly exceeded its bearish vertical count of 14,500.

Please remember, the point and figure methodology of bullish and bearish vertical counts is based on the science of ballistics and is used by market technicians as a way to observe and understand POTENTIAL risk. Point and figure chartists will NOT encourage NEW BULLS to load the wagon when a bearish vertical count is neared, achieved, or exceeded, but a BEAR will likely look to lock in gains at an objective.

Now, let's come further west and check out Hong Kong's Hang Seng Index.

Hong Kong's Hang Seng ($HSI.X) - 50-point box

In late May, early June, the HSI.X looked to be consolidating a notable retreat. A double top "buy signal" at 15,950 was quickly retraced back to the May lows earlier this month (June) and the more recent trade at 16,050 did begin to signal some demand returning. However, the recent break of support and trade at 15,600 with further decline into this spring's base is a bit troubling and suggests further downside yet to come.

A great test for strength out of China can be "stock specific."

In my 05/22/06 Market Wrap, I mentioned that I was more eager to "sell option premiums" and had profiled the selling of the Petrochina (PTR) $95.04 -2.95% June $95 Put (PTR-RS) for $1.10, when the stock was trading at roughly $104.00/share.

With one eye on PTR and another on the above chart of the HSI.X, I decided we should have an "aversion to risk" as the HSI.X continued to exhibit weakness, where that MARKET risk might well exhibit itself in an "oil stock" of all places. While traders could have closed the trade for a small gain ($+0.65/contract, or 59.09%), it was indeed some MARKET RISK that recently found PTR plunging further lower to $93.70 on Thursday and challenging that low again today.

Petrochina (PTR) - $1 & $2 box scale

The main reason I revisit the past and current trades that I've profiled in PTR is this. "Common sense" would say that of all sectors and perhaps stocks getting drilled to the downside, oil would be less likely. However, MARKET, SECTOR and then STOCK specific risk currently play out to the DOWNSIDE. The tide will/can turn to BEARS having the risk, but looking at many stocks really shows how weakness is the overriding theme. Even in Asia.

Let's travel further west. Here's Germany's DAX Composite ($DAX).

German DAX ($DAX) - 50-point box

As we start to "click through" some of the major global indices, they begin to look VERY SIMILAR. Germany's DAX actually looks as if it is getting pulled lower by what has taken place in Asian indices.

France's CAC-40 Index ($CAC) has given two consecutive double bottom sell signals. You can visit stockcharts.com and view a FREE PnF chart using the symbol $CAC.

If there's an index that is showing some technical strength, it would be London's FTSE ($FTSE).

London Financial Times Index ($FTSE) - 50-point box

I'd argue that the FTSE "needs to give a sell signal!" It hasn't given a sell signal since it broke above downward trend at 3,900 way back in April, 2003!

I'd keep an eye on the STRONGER FTSE. If it should drop sharply, or at a fast rate of speed in coming sessions, then that could suggest that sellers are still quick to cut and run, even in other markets when the recent lows are broken.

Now let's bring it home to the S&P 500 Index ($SPX).

S&P 500 Index ($SPX) - 10-point box

As weak as the SPX has been, the above chart looks like a "little pullback" compared to some other supply/demand charts we've just reviewed.

I've been noting some of the foreign market action in the Market Monitor at night, or early the next morning in order to get a feel for how the U.S. markets might trade during the day.

Last week it was really the Asian markets that seemed to get hit hardest on the U.S. consumer credit figures. That might make some sense, as the U.S. is a BIG importer from those economies.
 

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