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Market Wrap

Quake Shakes Markets Last Night

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Last night, Japan noted seismic activity that suggested, at first, that North Korea might have detonated another nuclear device. The Nikkei had been positive, but dove after that report. The index eventually closed almost 200 points off the high of the day and 76.68 points in the negative.

Our futures were hit, too. Although news sources were later to attribute the seismic activity to a quake rather than another nuclear test, the damage appeared to have been done. Futures were shown to be vulnerable to a shakeout, at least over the short term. Whether the damage was due to the specter of more nuclear tests by North Korea or that of earnings disappointments here in the U.S., our futures had begun a trending-lower process that was to continue and even escalate after European markets opened. Although the level of futures weren't alarmingly low, their numbers were far below their fair values, hinting at significant downside at the open.

There had been much speculation that North Korea's nuclear test had resulted in a smaller-than-expected explosion, either as a result of a partial failure or an intentional hoarding of resources by North Korea, producing a relatively small explosion. The official Korean Central News agency today called the test a success. Taking its usual stance, the government declared itself ready for either confrontation or dialogue, saying the U.S. had compelled the test while North Korea itself remained committed to the negotiation process and denuclearization of the Korean Peninsula. Logic was further stretched as the report declared the test part of an implementation of a September 2005 agreement to stop its nuclear program in exchange for guarantees regarding aid and security. The country also threatened that it would use physical means to fight any continuing U.S. pressure, although it did not specify what those means would be.

Other small quakes hit the markets this morning in the form of an official output cut announced by OPEC and further corporate shakeups as a result of options backdating activity. Jim's Wrap last night went over the realities of any announced rate cut. OPEC's announcement sent crude prices higher during the pre-market session, even if the bounce wasn't going to endure long. The announced cut was by 1 million barrels a day, with one news source reporting that OPEC last cut its output almost two years ago. This was at the top of the 700,000-1 million cut that Kuwait's energy minister had proposed on Monday.

The expected significant downside occurred at the open, but traders stood up, assessed the damage, and decided there wasn't much. Equities climbed right into the release of the FOMC meetings, when the next-to-last aftershock hit. Although those minutes reiterated the Fed's stance that the weakness in the housing sector did not appear to have spilled over into other sectors of the economy, their assertion was less assured than traders wanted to hear. This was especially true with the Fed staff trimming the forecast for the economy's growth potential. The minutes revealed that the FOMC could not yet rule out a more severe slowdown than has so far been anticipated.


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The Fed's stance on inflation proved even less reassuring, with FOMC members believing that core inflation will moderate but not sounding quite sure enough. The actual terminology was that members "continued to see a substantial risk that inflation would not decline as anticipated." Members voiced concern that their credibility could be questioned if inflation held too long above their perceived comfort level, resurrecting the specter of a FOMC that might go a step too far in holding down inflation. Traders couldn't help but remember the stronger-than-expected CPI of a couple of weeks ago. Bond traders certainly weren't forgetting: bond yields shot higher. Eventually, they were to close at 4.78 percent, jammed underneath the 200-ema and their highest closing level since mid-September.

A potentially weaker economy than expected and a potentially stronger inflation rate than anticipated was a combination that traders didn't want to see. Several commentators also mentioned the Fed staff's note that only a small gap in resource utilization existed, so that the Fed must be especially vigilant against inflation since they just do not have as much leeway. Although the committee expressed the view that pausing in September had been an easier decision than pausing in August, Richmond Fed Jeffrey Lacker dissented from the September decision and wanted a rate hike.

Indices had already dropped when the last quake hit: a small plane or helicopter had reportedly hit a building in New York. As this report is prepared, eye witness accounts differ as to whether it was a small fixed-wing plane or a helicopter, but all authorities have rushed to reassure the nation that there is no evidence that this is related to terrorists' activities. As I type, the latest news is that this was a small plane and that a member of the Yankee organization was on the plane, his passport found on the street after the crash.

With all those quakes hitting the markets today, and with President Bush's press conference, several other economic releases and company-specific news to relate, this Wrap will be long. It's organized in the usual Wednesday-night arrangement, however, making it easy for you to decide what to read. The charts will be next, economic and company-related news after that, and the what-to-expect-tomorrow section at the end. If you don't want to read about those other developments, study the charts and skip to the end.

The dip that occurred after the plane or helicopter crashed into a New York building brought the SPX right to its 10-sma. I'd already partially annotated my charts and had marked that as next potential support, support that was proven by today's action.

Annotated Daily Chart of the SPX:

Normally, such a spring off an obvious support level would suggest at least some upside follow-through the next morning, but that dip and spring was entirely news-related, with the rest of the day's action contained within the consolidation zone that has been building for so long. What felt at times like a big decline was really nothing more than more consolidation, with the outcome as yet unknown.

At the close, the SPX was tangled in converging Keltner lines, so that it becomes impossible to predict from these usually reliable tools the next short-term direction. A drop back to 1346-1347 looked about as likely as a climb to 1352. Without a strong move either direction, the most likely short-term result looks to be some chopping around near its close until it firms up support or resistance.

I note that the SPX has tended lately to pause in 10-point increments, so if the SPX breaks above the top of this week's consolidation zone, at about 1354, do be careful near 1360, but next real resistance is probably that Fib zone marked on the chart, just below 1368. If the SPX drops tomorrow, watch the support levels marked.

The Dow also punched down to its 10-sma.

Annotated Daily Chart of the Dow:

Did today's punch down to obvious support provide enough evidence for Dow bulls of support that they'll risk driving the Dow higher, past this obvious resistance? The late-day punch lower and bounce scrambled the Keltner channels and they don't give their usual reliable clues. The Dow looked as if it might have pulled free of short-term Keltner resistance, but it's easier to drive the narrower Dow up past that resistance. A glance at the daily chart shows that, like the SPX, the Dow spent the day in the recent consolidation zone other than that post-crash punch lower and rise.

What is obvious is that the Dow has to break through this resistance soon, or else bulls will see the Dow pull back to reestablish support before charging higher again. The resistance and support levels are marked on the chart, so watch those. I don't like the Dow's inability to push substantially above the midline of this latest price channel and, on that basis alone, would suggest that it's more likely to pull back than to be able to punch through, but today's news-related punch lower may have been enough of a test of support for bulls giddy with recent success after buying dips.

The Nasdaq has moved into the upper half of its rising price channel, and it didn't need to punch all the way to its 10-sma, although it came close. It needed to punch only to the midline of its rising regression channel to find support.

Annotated Daily Chart of the Nasdaq:

The doji on the daily chart shows indecision, but the Nasdaq's nested Keltner channels shows a stronger likelihood that the Nasdaq will drop toward 2299-2303 than that it will close above to 2316 on the first 15-minute push. That likelihood will be undone if the Nasdaq jumps above about 2310.55 tomorrow morning and charges higher from there.

Wherever the Nasdaq goes, it's likely going to need the help of the SOX. Many have pointed out the SOX's recent gains, but the SOX's daily chart does not yet present a strong picture. The SOX violated the descending channel in which it had been rising off the summer low. The current rise constitutes nothing more than a rise to retest its former support, with the outcome as yet uncertain. If the SOX breaks back inside that channel, the breakdown may have been a trap for bears, but be careful of making that assumption too soon, especially with the 50-percent retracement level shown on the chart waiting as next resistance on daily closes, and the 200-sma waiting just above that. This chart suggests the possibility that the SOX could climb the underside of that former channel until it hits that resistance, too, but the SOX is literally tangled in moving averages that have served as support and resistance.

Annotated Daily Chart of the SOX:

If the SOX turns down tomorrow, this could look like a clean and valid retest of former support, with that former support now holding as resistance. This possibility is reinforced by the fact that the SOX punched through its 200-ema and closed back at that ema, showing that it, too, may be serving as resistance. A close tomorrow below the 72-ema and particularly below the pink 50-sma would suggest that the SOX, at least, was destined to plumb deeper before it finds support. The similarity of the SOX's climb off the summer low in a rising price channel to the same price-channel rises in many indices would then suggest the possibility that they, too, could break down. Watch the SOX.

As of the close, Keltner resistance near 461.85 looked relatively strong and had been tested. Several support levels were gathering beneath the SOX, too, particularly at about 456.70 and 454, so that the SOX would need a strong impetus to push through either resistance or support. That's what the daily chart suggests, too.

At the close, the RUT was curling into a tight triangle after having bounced off its low of the day, enmeshed in Keltner lines and not giving many clues about next short-term direction. This is to be expected after the quick afternoon move scrambled the Keltner lines, but also after a week of testing the same resistance, mired in the same consolidation zone. It's time for the bulls to push the RUT through resistance or risk bears pushing it back to support, both shown on the chart below.

Annotated Daily Chart of the RUT:

Short-term support can be found at the Fib level at about 740.30 and the next at the 10-sma and then at the 30-sma (in blue and black on the chart above). Resistance is obvious at the top of the rising regression channel. If the RUT breaks higher and isn't immediately reversed, the Fib level just below 760 may be the next resistance.

Before sunrise this morning, a CNBC commentator noted that there had been both good and bad news in recent weekly survey results produced by the MBA, the Mortgage Bankers Association. The survey results had been showing that those who had obtained somewhat exotic mortgages, as he termed them, had been able to refinance and were doing so in increasing numbers. That was the good news. However, he characterized survey results as showing that the numbers of those applying for mortgages to buy new homes were still trending down. That was the bad news.

At 7:00, less than an hour after he spoke, the Mortgage Bankers Association released its weekly mortgage application volume survey for the week ending October 6. The headline number fell both week-over-week and year-over-year, on a seasonally adjusted and unadjusted basis. Week-over-week, it fell 5.5 percent on a seasonally adjusted basis and 5.3 on an unadjusted basis. When compared to the year-ago level, it fell 13.3 percent.

After several weeks of improvement, the refinance component dropped, too, by 5.8 percent, from the previous week's number. Other components dropped similar percentages. Four-week moving averages were mixed, with the refinance component rising 3.7 percent, still under the influence of recent action mentioned by that CNBC commentator. The average contract interest rate for a fixed-rate, thirty-year mortgage rose to 6.27 percent, up from the previous week's 6.24 percent. Points increased, too.

In addition to the MBA's release, Countrywide Financial (CFC) released September's mortgage loan fundings results, saying that those had fallen $11 billion when compared to the year-ago level. The third quarter's fundings were $114 billion, compared to $146 billion for the same quarter last year. The CEO called CFC's September mortgage loan fundings "solid," but a Bloomberg News survey's interpretation of the outlook for housing seemed less certain of the solidity of the industry.

That survey resulted in a lowering of the median forecast for the economy's growth for this quarter and the last quarter to an annual rate of 2.5 percent. The Commerce Department had previously reported 2.6 percent growth for the second quarter. The Bloomberg News survey attributes its lowering of expectations for the economy to the weakening of the housing sector, with an economist saying that the homebuilding sector probably fell at a twenty percent annual rate this quarter. Bloomberg surveyed 82 economists from October 2-10 to obtain the results.

All this information came a day after some homebuilders reported troubling results, but some analysts upgraded sector components, as noted in last night's Wrap. Those economists from the Bloomberg survey are not predicting a recession, but a CNBC guest this morning avowed that he was not averse to using the "R" word, and the European Commission is at least somewhat concerned. Today, the EU said that its twelve nations may not see their economies expand at all in the first quarter of 2007 due to expected slowing in the U.S.

More attention was paid to the figures on the federal deficit, released at 10:00, than to those early morning housing-related numbers and statements. Equities appeared to gather strength from the deficit figures. Those figures showed the deficit narrowing to $248 billion for fiscal 2006, the Treasury Department reported. This was below expectations of $250 billion by the market and a projected $296 billion by the administration. A revenue spike of 11.8 percent, sharper than the spending spike of 7.4 percent, was responsible for the narrowing, CNBC reported. Higher revenues came in part from a sharp increase in tax receipts.

The discussion of the deficit has become politicized, and I don't want to jump into the fray and be labeled as pro one side or the other, but do know that some experts more experienced in the economy than I am remain concerned by the size of the deficit. Some argue that President Bush's claim that he's significantly reduced the originally projected deficit, and done it three years early, was a claim that many have expected since that projection was first uttered. Some point out that President Bush hasn't almost halved the actual deficit, but rather the deficit projection. When that original deficit projection was set, some claimed President Bush's administration wasn't playing fair, deliberately setting an artificially high projection so that this very claim of a significant reduction could ultimately be made. You've heard that projection made on these very pages, in fact, although by other writers.

Because I don't want this Wrap to be considered partisan, the comments from President Bush's press conference this morning will come directly from his words without any analysis of those comments. The main topics included the economy, which began President Bush's address and which he often returned to after questioned about other concerns facing the U.S. He believes that the "elections will be decided by economy and security," he asserted, not by concerns over Foley's actions or other concerns. He commented on the 6.6 million new jobs his administration says have been created since 2003 as pointing to the strength of the economy. He reaffirmed his desire to make his tax cuts permanent.

Iraq, Iran and North Korea figured strongly in both the prepared remarks and the questions during the Q&A session, and since all impact sentiment, the stability of our economy and those of other countries, and perhaps the outcome of the election, which also will impact our economy, the comments may become important. President Bush asserted that he still believes that after the elections, Republicans will hold majorities in the House and Senate. Whether you believe his assertion or not, his voice was sometimes fractious when making his feelings known.

He continually pointed out that he trusts General George Casey, the top commander on the ground in Iraq, and believes the policy in Iraq is flexible enough to contend with changing conditions. He disputed today's report that 655,000 Iraqi's have been killed, saying that he didn't believe that this was a credible report. He would not, however, agree to stand by his administration's previous 30,000 number, a figure that was perhaps an old one. He attacked Democrats and said he will use their votes and their words against them, characterizing their position on Iraq as a "cut and run" one. "It's in our interests," he says "that Iraq succeeds," often times mentioning the "young democracy" established there and our need to protect it. At one point during the Q&A session, he said that "the calling of this country is whether or not we will help" other countries. We "can't tolerate a new terror state in the heart of the Middle East," especially one "with oil reserves to fund" actions taken against the U.S.

When questioned about North Korea, and particularly whether continual warnings to North Korea and Iran in the face of their continued movement toward development and, in North Korea's case, testing of nuclear weapons, make the U.S. appear "feckless" in the world community. He brought each such discussion or question around to the assertion that progress is being made and rather swift progress, in his words, in pulling together a consensus of other countries that will speak with the U.S. against North Korea's actions in particular. When asked in particular if he regretted not taking steps in 2003, when he "had the last moment" available to an American president "to destroy supplies when they were all still in one place," and he said that North Korea's action in "walking away" from the agreement that had been reached had been part of the process of gaining that consensus. He asserted that the "U.S. remains committed to diplomacy" while "reserving all options."

Nothing in he said proved particularly surprising, and indices mostly moved higher while he spoke. Their foundations for the day had been undermined, however, and the candles just hadn't fallen off their shelves yet.

If quakes hit all equities, online brokers were hit particularly hard today by a Bank of America (BAC) announcement. The bank said it will offer free online stock trades to customers with combined deposit balances of at least $25,000. Those customers must be self-directed investors, the bank said. SCHW, AMTD and ET all dropped on the news. Bernstein downgraded BAC as a result of the bank's intention to offer free trades.

Company-specific news included an announcement by McAfee Inc. (MFE) that its chairman and CEO, George Samenuk, had retired, and that its president had been terminated. Dale Fuller was named interim chief executive and president, and Charles Robel was named non-executive chairman. The company has been one of those examining practices relating to stock-option grant practices and related accounting measures.

MFE was only the first the two companies today to announce executive changes related to investigations into stock-optioning practices. CNET announced the resignation of its Chairman and CEO after an investigation discovered that stock options had allegedly been backdated. The company's general counsel and human resources head also resigned.

In other news, Lehman Brothers initiated coverage of GM and Ford (F). The firm gave GM an underweight rating and F an equal-weight rating, citing a possible proxy fight as a reason behind GM's relatively lower rating. The firm rated the auto parts sector with a neutral rating. Another company that was the subject of an analyst's report was Legg Mason (LM), receiving a sell rating from Merrill Lynch after yesterday's earnings report. Also, Morgan Stanley lowered its full-year earnings-per-share estimate for Citigroup (C).

Monsanto (MON) reported a widening loss this morning, with its fourth-quarter loss at 27 cents a share or $144 million, wider than the year-ago period's 23-cents-a-share and $125-million loss. Analysts had expected a narrower loss, of 21 cents a share. MON's guidance for 2007 is $1.50-1.57 a share.

In a move that's become more prevalent and that is drawing debate over its impact on the health of the markets, Jacuzzi Brands (JJZ) is going private, agreeing to be acquired by the private equity firm Apollo Management L.P. JJZ shares closed at $10.35 yesterday, and the acquisition values the shares at $12.50.

That leads this report into tomorrow. The big release for tomorrow is the September's Beige Book, released at 2:00. At the same time, September's treasury budget will also be released, with the previous budget showing a $64.6 billion deficit.

Before those releases come the morning's slate, beginning with the jobless claims and August's international trade figure. Consensus for those are 312,000 claims, up from the previous 302,000, and a $66.0 billion deficit, up from the previous $68.0 billion deficit. Oil and gas and natural gas inventories all come near 10:30, with the crude inventories being delayed a day because of the holiday. T. Boone Pickens was on CNBC this morning, and says $70 before $50 for crude prices. Although his assertions haven't always been exactly correct--crude didn't quite meet his $80-before-$60 price, missing $80 by a few cents before turning lower and hitting $60--they do rate some attention and consideration.

Important earnings releases for tomorrow include those Jim mentioned in this weekend's Wrap: GENZ, PEP, PII and COST. Others include DPZ, HOG, LUB, SWY and WGO.

What do I think about tomorrow? Usually when indices bounce strongly off the low of the day, I know what to think. I expect that a follow-through reaction to the upside is likely early the next morning, even if it's a small follow-through. The news-related punch lower and immediate bounce somewhat undo that likelihood, however. Just before that news about the plane circulated, my Keltner charts were showing me that a short-term bounce was due at about 3:00, but that it might be a small one, and then we might see what the markets really intended into the close. Then the plane hit and the news circulated. Indices punched lower, only to have equities quickly bought, bringing them right back to the point at which they had been showing that they were due for a small bounce anyway. The time factor was just off by enough minutes that we didn't get to see the final reaction after they had risen from what I had already determined was short-term support. Would they have rolled down, printing taller red candles? Bounced higher, printing the lower shadows, but just not as long as the ones that were produced? We just don't know.

Then I look at the bond reaction, and yields, of course, didn't have time to react to that news of the plane crash. They weren't showing any kind of substantial pullback when they did close, suggesting that fear of the Fed was in full force as the bond market closed. So, if you erase the action brought about by the plane crash and look at what bonds were saying about fear of the Fed, and how equities were reacting to that fear-of-the-Fed reaction in bonds, I'm not so optimistic that the usual follow-through after such a spring will be seen.

If you're long, your task is easy. The important resistance levels are easy to spot, with some indices jammed against those resistance levels for a week now. If indices break out to the upside, follow with your stops, prepared for a quick reversal back inside. If they don't break higher and roll down instead, you've had a week to plan, and you know where your preferred get-out levels are. Get out if they're hit.

If you're itching for a bearish play, you know that all the technical signs can be there, but there's just been no follow-through on any supposed breakdown. You know the score by now and hopefully know how to manage losses and maybe even take quick profits, when offered. Some indices--the SOX and the RUT--look in particular danger of rolling lower, so watch them closely for first clues. If they break to the upside instead, don't fight these sometimes-quick-moving indices. Unless there's a strong punch lower, don't expect big drops and be quick to take profits.

There's a caveat to all this, however. Tomorrow is the Thursday before opex week. If you've been reading my commentary for long, you know that some of the volatility we used to see attached to opex week has migrated forward a week, often to the Thursday before option expiration.

If you're trading the SPX, OEX or Dow, don't forget to put the TRAN on your radar screen. It's been a good barometer lately. If you'd been watching it yesterday, for example, you would have seen its early push higher, and you would have known that the SPX, OEX and Dow's early weakness were just unlikely to see much follow-through. They don't tend to go opposite the TRAN for long. Today, the TRAN showed early weakness, and those other three felt a little more vulnerable to the downside, too, didn't they?

It's my impression that, minus that plane crash and resultant action, we might have had much more bearish-looking candles today and might have actually been expecting some downside follow-through tomorrow. The market felt a little shakier and it certainly proved ready to drop on the least pretext. It's just that the dip this afternoon proved something that might not have been proven otherwise, when bulls were willing to step back in because they dismissed the drop because it was news-related.

Partly this impression is derived from what I was seeing on the short-term Keltner charts, but also in the equity reaction to the bond market action. All, no matter what you're trading, should keep an eye on bond yields tomorrow. They've been climbing for most of a week, and stalling the equity advance while they do so. Today, the ten-year yields (TNX, $TNX, TNX.XO or other, depending on your chart source) closed right at key resistance, their converging 200-ema and -sma's. If equity bulls have a chance tomorrow, it might depend on whether the yields stall at that resistance.

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