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Market Wrap

Regional Manufacturing Readings Ignite Small Caps

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A stronger than expected reading from the regional New York Fed manufacturing index had the small caps of Russell 2000 Index (RUT.X) 769.48 +0.89% jumping higher on Monday, while energy stocks also found gains with November Crude Oil futures (cl06x) touching $60 a barrel ahead of this week's special meeting among OPEC members in Qatar.

Natural Gas was today's hot commodity with the November futures contract (ng06x) settling up $0.785, or 13.87% at $6.444/mmBtu.

Traders cited several reasons for today's natural gas price action. Among the reasons were the stronger than expected New York Fed's data (see below), cooler temperatures as well as comments from the head of the North American Electric Reliability Council, or NERC, for today's rise in natural gas prices.

NERC President and CEO Rick Sergel said that Texas and New England are the two U.S. regions most likely to face severe power grid problems and possible blackouts in the next few years.

The NERC's concerns about those two areas painted a dismal picture of the ability of electricity resources to keep pace with demand throughout many regions of the U.S. where I (Jeff Bailey) think traders turned to the natural gas complex as the "alternative fuel" to electricity.

Stocks opened mixed-to-higher with the New York Fed saying its October Manufacturing Index jumped to 22.9 from 13.8 in September. The 22.9 reading was well above economists' forecast, which was looking for a decline to 11.2. Readings above zero signal most manufacturers reported business is getting better.

The New York Fed's manufacturing gauge of new orders declined to 11.8 from 14 in September, while the shipments index rose to 22.5 from 20.6. Inventories rose to 2.5 from September's -4 reading.


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Additional measures showed manufacturing costs declined as the index of prices paid for raw materials decreased to 30.8 from 41 in September, while the measure of prices received by factories rose to 19.4 from 12.5.

Employment data at the manufacturing level in the region also showed a rebound with the index of manufacturing employment rising to 19.4 from September's 12.5.

Volumes were light at both the NYSE and NASDAQ with a plethora of economic reports being released tomorrow.

Prior to tomorrow's opening bell (08:30 AM EDT), traders and investors will get a look at the producer price index for September. Economists are forecasting prices to fall 0.7% month-over-month after a 0.1% rise in August, while the core rate (excluding food and energy) is expected to rise 0.2% after a 0.4 decline.

At 09:00 AM EDT the Treasury International Capital (TIC) Report, which measures foreign demand for U.S. debt and assets will be released. The U.S. Dollar Index (dx00y) 86.97 has been on the rise since late August, depicting some renewed demand for the greenback, if not U.S. assets. Economists are looking for inflows to have risen by $56 billion after $32.9 billion in July.

Then at 09:15 AM EDT September industrial production is forecasted at unchanged versus a 0.1% decline in August, while capacity utilization (a key measure the Fed keeps an eye on for inflation) is forecasted to have eased to 82.2% vs. 82.4% in August.

Later in the afternoon, at 01:00 PM EDT, the National Association of Homebuilders (NAHB) will release its Housing Market Index figures for October. Economist are forecasting the index to remain unchanged from September's reading of 30.00.

U.S. Market Watch - 10/16/06 Close

While there was a lot of green on the screen again today, there was some pockets of weakness among financials.

Wachovia Corp. (NYSE:WB) $55.25 -2.16% closed off its session lows of $54.63, but traded weak after the bank reported net income of $1.88 billion, or $1.17 a share, which included a $0.02/share charge in merger-related costs. The bank said revenues increased 5% to $7.04 billion. The results were shy of analysts' estimates for earnings of $1.19/share on revenue of $7.28 billion. Wachovia officials cited the current interest rate environment pressuring results.

I think traders and investors understand that Fed funds are currently 5.25%, while the benchmark 10-year Treasury note is yielding 4.788% after having recently fallen to just below 4.6% in late September. While I believe the recent RISE in Treasury YIELDs have been a relief for margins between what a bank borrows at and can lend at, margins are narrow.

Wachovia is the first of the nations major banks to report earnings. Wells Fargo (NYSE:WFC) $36.20 -0.25% is scheduled to release earnings tomorrow (consensus $0.63/share), while JPMorgan Chase (NYSE:JPM) $47.73 -0.89%, Bank of America (NYSE:BAC) $53.71 -1.25% and Citigroup (NYSE:C) $50.15 -0.45% are scheduled to report quarterly earnings on Thursday.

JPMorgan (JPM) and Citigroup (C) are Dow Industrials components as we near Dow 12,000 and once again, I think "bulls will be betting on the banks," if not monitoring them closely in coming sessions. "Financials" also carry the heaviest industry weighting for the broader S&P 500 Index (SPX.X).

KBW Bank Sector Index (BKX.X) - Daily Intervals

There is NOTHING at this point that I see as BEARISH for the BKX.X, but those that have followed my commentary over the years know how I tend to keep a very close eye on the banks and various financial sectors/indexes.

Wachovia's earnings were not terrible, but the company's executives state the obvious as it relates to lending margins.

Both the Dow Industrials and S&P 500 Index (SPX.X) achieved prior multi-year highs on, or very close to May 8th, and with several large banks reporting earnings this week, both the BKX.X and BIX.X may be "key sectors" that determine near-term market direction.

Today's S&P Banks Index (BIX.X) 397.44 -0.56% doesn't look overly concerning on the surface, but I will note that this group of super regional banks and regional banks did trade their WEEKLY S1 (396.36) briefly, and show some DIVERGENCE to the S&P 500 Index (SPX.X) as it nears its MONTHLY R2 (1,371.70) and did not trade its WEEKLY Pivot, which this week moves HIGHER to 1,363.50 from last week's 1,343.49 (see last Monday's Market Wrap).

Here is the SAME chart shown in Monday's Market Wrap of the SPX.X, but with WEEKLY Pivot Retracement (blue) updated.

S&P 500 Index (SPX.X) - Daily Intervals

There are SIMILARITIES between the BKX.X/BIX.X charts and the S&P 500 Index (SPX.X). Just as the BKX.X fell quickly from a May 8th relative high to June 14th low, the SPX did the same. But the last few sessions, both the BKX.X and BIX.X have not really "confirmed" the SPX.X strength.

I wouldn't say, or believe that they HAVE to, but this is where the Pivot levels can come in useful.

Various sectors, or industries have different beta, and a 1% gain/loss in the banks is a much bigger move than a 1% gain/loss in the SPX, which would be a MARKET that the banks would be measured against.

A sign of CAUTION is that the S&P Banks Index (BIX.X) does see lower trade at its WEEKLY S1 (buyers held firm at that level of 396.36), while the SPX continued to move higher, not even touching its WEEKLY Pivot of 1,363.50.

Bottom line is that we have some earnings coming from some BIG banks this week, where a DECLINE in Treasury YIELDS vs. current Fed Funds has lending margins being squeezed. Add to that some data tomorrow that addresses INFLATION, or perhaps lack thereof on the producer level, which could influence FOMC policy.

If there is a group of stocks that may be "priced to perfection" at this point in time, I think it may well be the banks, and their price action based on upcoming PAST earnings and FORWARD outlooks from the likes of WFC, JPM and C will be KEY.

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