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Market Wrap

Majors indexes creep higher as third quarter draws to an end

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The major indexes shrugged off early morning weakness to finish higher with the narrow S&P 100 Index (OEX.X) 614.56 +0.85% closing at 5-year highs as homebuilders and semiconductor lead Monday's gains.

Tobacco stocks were weak with Dow component Altria (NYSE:MO) $77.06 -6.36% falling $5.25/share after a federal judge ruled earlier this morning that a jury should decide whether tobacco companies must pay tens of millions of smokers up to $200 billion for allegedly duping them into buying light cigarettes over the past three decades.

Altria, the parent of the nation's largest cigarette maker, Philip Morris USA Inc., said the ruling will delay its long-awaited restructuring plan, which includes a divestiture of its controlling stake in Kraft Foods Inc.

As the smoke cleared from ongoing "light cigarette" litigation, the National Association of Realtors (NAR) said sales of existing single-family homes and condominiums fell 0.5% in August to a seasonally adjusted annual rate of 6.30 million units. That was a fifth straight monthly decline and left sales 12.6% below the pace of a year ago.

August's 0.5% decline was less than the -1.6% forecast among economists.

The continued slowdown for existing home sales had the inventory of unsold homes rising to a record 3.92 million units, or 7.5 months backlog.

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The NAR said the median price of a home sold in August fell to $225,000, which was down 2.2% from July and down 1.7% from August 2005. The year-over-year decline in home prices was the first drop in home prices since a 0.1% decline in April 1995.

Sales of condominiums fell 3.5% to an annual rate of 793,000 units, which represented a 14.5% drop from the condo sales pace in August 2005.

By region of the country, sales of single-family homes and condominiums in the South fell by 0.8% in August compared with July and were off 2.3% in the West. Sales actually rose by 1.9% in the Northeast and 0.7% in the Midwest.

Median prices were down in all regions of the country except the West, where the median price rose by 0.3% from a year ago.

The existing home sales figures brought another wave of buying into Treasuries with the 10-year Yield ($TNX.X) plunging as low as 4.530% intra-day. The benchmark bond finished down 4.2 basis points at 4.555%.

Here again I think the bond market is responding to housing data in combination with past Fed commentary and the FOMC's concern that housing prices had become "inflationary."

I (Jeff Bailey) am not in the "bear's camp" that a modest decline in housing prices, from above historic average price gains witnessed the past couple of years, spells doom and gloom for the U.S. economy. I do think the builds in inventory levels and easing of housing prices on a national level should calm some fears on the inflation front.

Since we visited last Monday, the 10-year yield ($TNX.X) has fallen 25.5 basis points and Wednesday's FOMC decision on Fed Funds was unchanged, with the FOMC's target still 5.25%.

U.S. Market Watch - 09/25/06 Close

November crude oil futures (cl06x) rose 90 cents, or +1.49% to settle $61.45 after breaking below the $60.00 level earlier this morning. The November contract moved off its NYMEX floor trade low of $59.65 just when an obscure headline crossed my newswire feed from Dow Jones that "OPEC doesn't plan an emergency meeting."

An "emergency meeting?" I thought to myself. Regarding what? Falling prices?

Not minutes later a relief bid was found with the November contract trading as high as $62.15 intra-day.

OPEC's president did speak to oil ministers from the 11-nation producer group about the recent decline in oil prices but said there were no plans yet for OPEC to hold a formal meeting.

Good news and bad news

In Tuesday afternoon's Market Monitor at OptionInvestor.com I was talking out loud that after writing Monday's rather bullish market wrap and pointing out that the major bullish % charts from StockCharts.com and Dorsey/Wright & Associates had reversed up and were signaling the resumption of internal repair, that it would only be fitting that some type of geopolitical event take place to sour a bull's appetite for stocks on a broader scale.

As Linda Piazza pointed out in Tuesday evening's Market Wrap, a coup attempt on Thailand's government was found on Tuesday and quickly tested a bull's resolve.

My first thought was "semiconductor's are vulnerable" as many fabricators are found in the region.

Throw in a rather "anemic" August 2006 book-to-bill ratio of 1.00 after June's 1.14 and July's 1.06 readings and there hasn't been a lot of good news for the chips since last Monday. Yet they hold tough with Microsoft's pending release of its Vista operating system and new Office products.

Traders and investors should remember that the book-to-bill ratio is really a 3-month average of worldwide bookings. A book-to-bill of 1.00 means that for every $100 in new orders received, $100 worth of orders was shipped.

I still remember chip bull's saying that the upcoming release of new Microsoft products would eventually turn the chip stocks around during their torrid decline from May to July.

Microsoft (NASDAQ:MSFT) $26.95 +1.08% has been trading strong, as has fellow software giant Oracle (NASDAQ:ORCL) $17.97 +2.45% in recent months.

The DEMAND for faster chips/processors are driven in part by new SOFTWARE upgrades, and it has been "software" as depicted by the GSTI Software Index (GSO.X) 180.67 +1.53%, which closes at multi-year highs that may still keep bulls building positions among chip names into year's end.

GSTI Software Index (GSO.X) - Monthly Intervals

While the Semiconductor HOLDRs (SMH) have rebounded from their summer lows, it has been software stocks and the likes of heavyweights Microsoft and Oracle that have been a major driver of technology gains in recent weeks.

Do NOT forget that Standard & Poors has "Information Technology" as being the #2 weighted industry behind "Financials" for the broad S&P 500 Index (SPX.X), which not unlike the narrower S&P 100 Index (OEX.X) is making 5-year highs.

I would always encourage short-term traders to "step back" and look at the big picture from time to time. Whether it be DAILY, WEEKLY, MONTHLY time intervals on a bar chart, or the Point and Figure charts, which tend to filter out some of the intra-day, or day-to-day "noise."

If I could throw on one additional piece of "bad news," with the broader S&P 500 Index (SPX.X) trading at 5-year highs, it would be the latest regional Philadelphia Fed data.

Why is the SPX trading multi-year highs when there's so much "bad news" in the market?

Maybe there's some "good news" just around the corner?

According to The Stock Trader's Almanac, October begins a rather bullish period of seasonality into year's end.

Money Center Banks (BKX.X), Brokers (XBD.X), Computer Technology (XCI.X), Cyclicals (CYC.X), High Tech (MSH.X) and Interactive Internet (IIX.X) along with Transports ($TRAN) are sectors that the Almanac notes as being sectors that tend to "outperform."

If it is "true" that SOFTWARE drives future demand for chips and the computers that use those chips, then SOFTWARE becomes a "key sector" for Q4.
 

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