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Market Wrap

Champagne or Maalox?

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The Dow finally hit a new all time high today at 11758.95 and a new record close of 11727.34 but traders were not sure if they should celebrate or breakout the Maalox for the days to come. The Dow high came on weak volume for such a hyped event and the broader indexes failed to confirm the Dow gains. The Russell ended with a loss and the Nasdaq failed to break resistance at 2250 closing with only a +6 point gain. The S&P also failed to regain last week's prior resistance at 1340. Even an implosion in oil prices with a -$2.52 drop to $58.50 was unable to power the broader indexes.

Dow Chart - Daily

Nasdaq Chart - 90 min

Today's economic reports were led by the Challenger Employment numbers showing layoffs spiked to 100,315 for the month of September and well above the 65,280 in August and 37,180 in July. That is two consecutive months of better than a +50% increase in layoffs. This was the most layoffs since January. As you can see in the chart below the seven month decline in layoffs has been erased and we are very near to a new monthly high. The auto industry contributed to the spike with -33,745 announced layoffs followed by the computer sector at -10,059, consumer products -9,031 and industrial goods at -5,973. On the flip side there were announced plans to hire 27,801 workers, which was the highest number for the year. The transportation sector was a large portion of those prospective hires with Union Pacific alone adding 1,750 by year-end.

Challenger Chart

Auto sales for September were also announced with the annualized rate rising to 16.6 million from 16.0 million in August. On a seasonally adjusted basis all the automakers posted gains but Toyota was the big winner with its market share rising to 16.4%. Another increase in incentives helped GM and Ford sell more vehicles with the average incentive rising to $5,973 per vehicle. On a non-adjusted basis GM (-3.1%) and Chrysler (-3.8%) both posted negative numbers for the month but that was not immediately recognizable with the headline numbers reported on an annualized basis. Car sales at Chrysler fell -26.6% while Ford's car sales jumped +26.2%.

Economic reports due out on Wednesday include the Factory Orders, ISM non-Mfg and oil and gas inventories. The Factory Orders are expected to decline by -0.2% and the ISM non-Mfg is also expected to decline to 56.2 from 57.0 in August. Neither report is expected to be a market mover. The Oil and Gas Inventories will also be cussed and discussed. Crude is expected to show a decline of -900,000 bbls, gasoline a gain of +1.2 mb and distillates a gain of +1.3 mb. With gasoline levels already at 9% higher than 2005 and distillates at +15% higher at a seven year high, an inline report would add to the bearishness in the sector. Oil prices imploded on Tuesday losing -$2.43 to $58.60 in regular trading and continued to decline in the after hours market. This came despite more comments from OPEC members that prices were too low and after announced cuts from Nigeria and Venezuela. Analysts claim this is a test of OPEC and their willingness and ability to support prices and at what price that support will appear. The after hours low of $58.43 is the lowest price for this contract since July of 2005. The $60 support level did not just break it evaporated. All eyes will be on the inventory report tomorrow but more importantly on overnight comments from OPEC. They will also be focused on the natural gas inventory report on Thursday with levels of gas in storage already at highs not seen since 1974. Gas prices are ticking higher in anticipation of winter but that is surprising after the announcement from the hurricane forecasters today. They said the early arrival of El-Nino would prevent the formation of any major hurricanes in this season and limit expectations to the formation of only one more storm. Last year was a record year with 28 storms but this year has yet to see any hit anywhere close to the oil patch. That takes one more support plank, however weak, from the price of oil and natural gas. The fall in the price of oil will help the economy not only in the US but worldwide. Lower gasoline prices will promote a resumption of strong consumer demand. It is just one more cycle for the energy sector.

November Crude Oil Chart - Daily

In the US a $1 increase in the price of oil is an undeclared tax of $7 billion per year on the consumer. With the drop from $78.40 to $58.40 that is a reduction of -$140 billion in potential cash drain from consumer wallets. It was announced yesterday that oil demand in China rose +9.5% in August and Moody's claims China's GDP rose +10.9% in the first half of 2006. Demand will continue to grow despite what the bears are currently claiming. America currently has 230 million vehicles and we saw today in the September auto sales that number is going to grow by +16.6 million in 2006 minus a few headed for the crusher. China is expected to surpass us in vehicles by 2020 and China has 3.7 million square miles of real estate for those cars to travel. China is also seeing 18 million new consumers born each year, 34 per minute. Globally there are over TWO billion vehicles and that number is increasing by 60 million per year. Anybody expecting gasoline demand to decrease simply does not understand the problem. Assuming an average of 20 gal of consumption per week the 60 million new vehicles each year adds 1.5 billion gallons of gasoline demand every year.

After the bell today Valero (VLO) warned that the sudden drop in oil prices and corresponding squeeze to refining margins over the last month would produce earnings between $2.25-$2.35 and slightly less than analysts had expected at $2.44. It will still be record earnings for Valero but less than previously forecast. Valero said the crack spreads were rebounding now that the gasoline prices were stabilizing at lower levels. The initial shock to the system had worn off and it would be business as usual going forward but just with prices at a lower level. Valero has some of the highest margins in the business due to their ability to refine the cheaper sour crude. Valero also announced it had repurchased 10 million shares in the quarter. They are also going to post an additional $132 million gain in the sale of some pipeline assets.

Saks Fifth Avenue announced a special dividend of $4 per share after the close. The dividend will be paid in part from the sale of its Parisian chain. Tivo fell in after hours after suffering a setback in a patent dispute with EchoStar. A court ruling allowed EchoStar to resume selling DVR recorders that Tivo claimed violated their patent.

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A European Commission review panel is considering bringing antitrust action against Intel. Intel has produced 80% of the processors for the more than one billion PCs on the planet and the EU has been listening to AMD's request to sanction Intel's marketing practices in Europe. Intel claims they have done no wrong and AMD claims unfair advantages due to its size and pricing leverage. The commission said today they felt they had enough evidence to proceed against Intel. Intel did not lose any ground after the announcement.

Berkshire Hathaway (BRK.a) closed at an all time high of $97,480 per share and seemed well on its way to hit $100,000. If somebody tells you they only own 100 shares of stock you might want to ask them which one before forming an opinion about their portfolio. Quite a difference between 100 shares of CMGI and BRK.a.

Kohls (KSS) gained +$2 after saying that same store sales rose a whopping +16.3% in September. All regions of the country experienced double-digit gains according to Kohls. This helped power the retail index to a new four month high.

Marvel (MRVL) lost -2.29 after saying that it expected a -10% decline in sales. Marvel makes chips used in communications systems and storage systems. Shares of AMD fell after one analyst cut his rating on Dell saying the ramp on AMD sales at Dell was going slowly. The Semiconductor Index (SOX) lost -5 points for the day but saw a decent early morning rebound after the Marvel news produced a gap down open for the sector. The SOX has fallen to weak support at 445 with another -10 points possible before decent support is found at 435. This handicapped the Nasdaq and held the tech sector back on fears of more chip warnings ahead.

Gold fell -21 points to support at $580. Gold fell on fears that the sharp drop in oil prices would help cushion the economy and produce a softer landing and this reduced inflation fears removing support for gold. The entire commodity sector was weak on fears of reduced demand.

December Gold Chart - Daily

Despite the various earnings warnings and news items the VIX declined to 12.0 intraday as though there was not a care in the world about future market direction. With Iran stubbornly refusing to budge on its nuclear stance and the US starting to ramp up the push for sanctions as early as next week nobody, especially in the oil sector appeared to care. Even a claim by North Korea that it was going to test a nuclear weapon possibly within the next three weeks was unable to deter the blue chip bulls from pushing the Dow higher.

Dow Transport Chart - Daily

Despite the Dow record and the falling price of oil the transports are still mired in a consolidation range between 4400-4500. Today's +36 point gain, powered by the airlines, closed the index right near the middle of that range at 4469. Until the transports break out of this consolidation they will remain an anchor to the Dow rather than support. The airline sector celebrated the drop in oil prices and rumors of consolidation within the sector. Boeing was the largest gainer on the Dow at +1.81 adding +17 Dow points. This came after Airbus said it was delaying the A380 super jumbo jet for another year. Virgin Atlantic and Emirates hinted that the setback could lead to order cancellations. Emirates said its 45-plane order worth $13 billion could be in doubt given the new delay. Virgin Atlantic said it would meet on Oct 12th to consider "all" options given the seriousness of the delays. Airbus currently has orders for 134 passenger jets and 25 for its freighter version. Airbus said the delay came from slowdowns in installing the 300 miles of wiring required on each plane.

The Dow set a new intraday high at 11758.95 and a new closing high at 11727.34. That was the only news today if you only listened to CNBC. Unfortunately the news was slanted entirely towards the bullish case while the internals and broader indexes painted a much different picture. Decliners beat advancers, new highs were anemic and the Russell, NYSE Composite and the Semiconductor index all closed lower. It was a blue chip rally only with Boeing and the financials leading the charge. All indications suggest there is a better chance of a decline in our future than a further rally even on the Dow. Now that the record has been broken there is nothing for the bulls to aim for and earnings warnings are starting to flow. Initial support on the Dow is 11660 with next support at 11475.

The Nasdaq was hampered by the SOX and the Marvel warning. It failed to break resistance at 2250 and posted its second consecutive day of lower highs. Overhead resistance is fairly strong at 2260-2275 and support at 2225 and 2210 is fairly weak. The SOX will determine the direction for the Nasdaq and the Russell will determine the power. That is not a good sign since the Russell closed negative for the day and just over critical support at 715 and well below resistance at 735. The Russell is simply not participating in the rally and events like the drop in the ISM we saw on Monday penalize small cap chances. If the economy is going to be weak the small caps will suffer the worst. That is exactly why the blue chips have been rising as funds store money in the safety of big caps until the economic outcome is known. The Russell has weak support at 715 and 705 followed by strong support at 675. That is a long way off from today's close at 718.

Russell-2000 Chart - Daily

The SPX also failed to rebound even to its highs of last week and also posted its second day of lower highs while adding only a miniscule gain of +2.79 when the Dow was knocking on the door of a +85 day at 2:30. The S&P has been nearly as strong as the Dow with an 11-week rally of +110 points. Unfortunately that strength is also ebbing along with that of the Nasdaq and Russell. It appears the rebound may have run its course but I am far from predicting a collapse.

SPX Chart - 15 min

We have arrived in October without a significant decline since May. Many claim that the May decline gave funds a reason to exit early for the year and they have already taken positions they would normally have entered on the Sep/Oct decline. I am fine with that concept because it fits the general market scenario. It would suggest that any October decline would be weak and traders will be buying the dip early. Unfortunately it also suggests that the rebound gains over the last 11-weeks were borrowed from the 4th quarter. The normal Q4 rebound comes out of the October bottom and runs into December. If funds acted early on the May crash then there is no buying power left for Q4. Cash reserves are said to be in the 3% range for long only funds. That leaves very little for Q4 rally fuel.

All of this is pure speculation summarized from countless dozens of analyst interviews and articles over the last week. It makes no difference what we think is going to happen. It only matters what we do about it when it does happen. The plan for this week was to remain long from our prior game plan as long as the SPX continued over 1340. We were going to exit and go flat/short on a dip back under 1333. We saw that dip to just below 1333 this week and that should have reversed everyone to flat or short. Today's rebound failed to reach 1340 so you should still be flat or short. Remember each level 1333 and 1340 acts as a stop and a reversal for the opposite position. At this point we are short/flat until resistance at 1340 is broken and it will take a move over 1340 to go long.

The window undressing on Monday was very light and that suggests funds wanted to stay long in hopes that Dow record would attract another wave of buying. That is still possible. Ma and Pa investor could read the headlines on tomorrow's paper and rush back into the market giving those funds one more pop and enough volume to exit gracefully. I don't expect it but like I said above it does not matter what we expect. It only matters how we play it. Stick with the plan and avoid the chatter. Tomorrow we have three Fed heads speaking at lunchtime. Bernanke will be the headliner for the news groupies but he will not likely say anything of importance in a speech on savings. Kohn is the one to watch as his speech is on the current economic outlook. He is more likely to drop a few crumbs that the markets will pick up and run with. At this point I can't imagine anything that would be market negative but that is in the eye of the beholder. Most analysts see the next move as a rate cut rather than another hike so the Fed heads will likely maintain the party line of data dependency, risks are equal, we are remaining vigilant, oil prices offset housing, etc. For me the sound bites from the speeches will be just further useless chatter. Stick to the plan and follow the market not the chatter.
 

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