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ISM Disappointment Collapses ADP Balloon

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During the pre-market session today, a strong ADP number suggested that Friday's nonfarm payrolls number might be better than had been feared. Buoyed by that hope as well as by merger-and-acquisition activity and easing crude costs, futures jumped.

So did equities during the first few minutes of trading. October's ISM arrived a mere thirty minutes later, however, collapsing all that enthusiasm. Instead of climbing by the anticipated amount, the ISM manufacturing number slipped closer to the expansion versus contraction benchmark level. After that, any attempt to bounce was met with selling, and the day turned sour for equity bulls.

The selling was evident on the SPX's chart.

Annotated Daily Chart of the SPX:

That potential support on which the SPX ended the day was mentioned last week, too. Although it might be difficult to spot on this chart, the SPX did show a small end-of-day bounce after piercing or testing the long-term rising trendline shown here. The bounce was minimal, but did at least show that some were attempting to buy the support: some brave souls, that is, after a long day of selling. Although not shown on this chart, the 1367-1368 level is also an important Fibonacci level taken off the SPX's bear market decline off the 2000 high.

On a short-term and intraday basis, the SPX ended the day bouncing off potential intraday support near 1366-1367. The potential for a bounce exists, but until and unless the SPX closes a 15-minute period above a Keltner line currently at 1368, it's in a downtrend on the intraday chart and it also hasn't broken free of the potential long-term support/resistance at 1367-1368. If it can't break free and climb off this level, a decline to the bottom of the rising price channel off the July low and the 30-sma appear more likely.

Annotated Daily Chart of the Dow:

The Dow close below the 10-sma suggests that a trip to the bottom of its rising channel is next, but Dow 12,000 may likely be staunchly defended, at least ahead of Friday's nonfarm payrolls.

On an intraday Keltner basis, the Dow did not weaken as much as did the SPX, but that's easy to explain given the narrower breadth of the Dow and the psychological power of the 12,000 level. If the Dow should continue its small end-of-day bounce, watch for potential resistance at the 10-sma.

During the pre-market session, Bear Stearns and Kaufman Brothers both lowered ratings on Plantronics Inc. (PLT), citing valuations and concern about market potential for the next year. Although not a Nasdaq component, of course, this downgrade helped depress the tech sector. PLT was to end lower by 9.14 percent. Fortunately for bulls, the Nasdaq's drop wasn't that steep, but the Nasdaq did drop 1.37 percent.

Annotated Daily Chart of the Nasdaq:

The Nasdaq looks as if it might dip a little further, but do expect at least an attempt at a bounce if the bottom of the channel is approached, and be prepared for the possibility that it could occur a little ahead of the bottom of the channel, perhaps at about 2324-2325. Don't be too convinced that the bounce attempt will get too far this time, however. This drop through the channel has been harder and faster than a leisurely corrective pullback should be, and some bulls might be weakened.

The Nasdaq has broken down below short-term Keltner intraday support. This suggests that the short-term move has been overdone, but that the downside momentum is strong. Eventually, the Nasdaq will rise to retest that breakdown level, now at about 2338.50-2339.60 (but dynamic), but the timing of that rise or the result of the retest isn't predicted. The resistance could keep repelling prices, pushing them lower again. The rise could occur early in the day or not until trading is well underway.

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If in short-term bearish positions, be aware of the possibility of a bounce attempt if the bottom-of-the-channel support should be more closely approached. Because it's possible that a bounce attempt wouldn't get very far ahead of Friday's nonfarm payrolls, be cautious about buying that dip, however. It's possible that shorts could cover in any bounce, propelling it higher than I anticipate, of course, but I think I'd take the chance of missing a move and stand aside from buying a bounce attempt tomorrow.

The SOX dropped, too, closing again below the 72- and 200-ema's and the 200-sma, but it didn't break down out of the weeks-long consolidation pattern. It needs to close beneath about 443.81 to do that.

Annotated Daily Chart of the SOX:

The SOX ended at intraday Keltner support at about 448. It was rising into potential resistance at 450.25-450.91. Until and unless the SOX closes a 15-minute period above that resistance, it remains in a short-term downtrend. If you don't have Keltner channels, substitute the 15-minute 10-ema.

The Russell 2000 did break through consolidation-pattern support.

Annotated Daily Chart of the RUT:

The Russell 2000 not only tested a former resistance line: it fell through it. The RUT sometimes overruns targets, so it may be that happened in this case, too, but it definitely fell out of its consolidation-pattern support and below the Fib level at 757.31, shown above. That suggests that, in the event of a bounce attempt, that Fib level may be now be resistance. Further resistance should be expected just above 760 and then at the 10-sma, where market participants should watch for a rollover if that level is tested.

The RUT also broke through Keltner support on the intraday chart, dropping through its channels. Until and unless the RUT closes a 15-minute period above a Keltner line now at 754.82, it's still in a short-term downtrend, and until it breaks above about 757.60-758.25, it's still in a breakdown status on a short-term basis.

If the RUT does continue dropping, expect a bounce attempt at 745-746, if not earlier. Stronger support will be found near the converging (pink) 50-sma and 72-ema's. If the 30-sma support does not hold on daily closes, that test of the 50-sma may be in the works.

A number of economic releases and stock-related developments contributed to the market's weakness. After reporting a rise in mortgage applications last week, the latest weekly survey by the Mortgage Bankers Association revealed another decline. The survey's reported 1.8-percent week-over-week decline brings mortgage applications down by 11.2 percent year-over-year and to the lowest level in almost three years. Components of the number also fell, including applications to refinance a current loan. Those applications dropped a hefty 4.5 percent despite a drop in the rate for 30-year, fixed rate loans to 6.24 percent from the previous week's 6.36 percent. Marketwatch.com reports that refinancing loan volumes have dropped 42 percent from their highs just last year. The spread between a fixed-rate loan and a one-year ARM narrowed, which gives home buyers little incentive to choose a riskier ARM.

September's pending home sales were also reported at 13.6 percent below their year-ago level, falling 1.1 percent in September. Residential construction spending dropped for the sixth month in a row, falling by 1.1 percent. These numbers proved far from cheering for the homebuilders in particular or the markets in general.

Another early morning release gave futures a boost in the pre-market session, however, although it wasn't destined to last long. The Automatic Data Processing Inc. (ADP) employment number provides market watchers with a preview of what the jobs data will show, since the ADP's survey is taken during the same period as that jobs data and reputedly employs methods that echo those used in calculating the jobs data, other than that the ADP data does not include government jobs. The ADP report showed a higher-than-expected 128,000 private-sector jobs added in October. With an estimate of the government jobs added to the ADP's number, that predicts a nonfarm payrolls number of about 140,000 on Friday, above the until-then expected 121,000-135,000 jobs and above the recent average of about 95,000 jobs. That calmed fears of a serious disappointment on Friday, although the ADP was spectacularly wrong about five months ago. In June, the ADP seriously overestimated the jobs number.

The October ISM and crude inventories were still to come, however, and the ISM was to change the character of the trading day. The ISM had been expected to rise to 53.0-54.0 from the previous 52.9, although OIN's Jim Brown didn't expect it to rise. He posed the possibility this weekend and last night that recent economic releases indicated that the ISM could weaken. It most certainly did. The ISM weakened to 51.2, sinking dangerously close to the expansion versus contraction benchmark at 50.0.

Not all the news was bad, depending on your outlook. Components showed that the prices index dropped to 47.0 from September's 61.0 and the employment index inched to 50.8 from September's 49.4. However, the new orders component dropped to 52.1 from September's 54.2, the production index dropped to 51.9 from September's 56.1 and inventories climbed to 49.4 from September's 46.4. As Jim mentioned last night in his Wrap, growing inventories in a weakening economy is not a good combination. While the decline in prices was good news for those most concerned about inflation, no one would consider slowing manufacturing growth of this magnitude to be good news. This was the worst decline in more than three years.

Stock-market investors agreed. They sent equities lower and bonds higher. This was the best of both worlds for bonds, with the drastically lower prices component removing immediate fears of inflation and raised rates, driving yields lower, and with bonds being considered a safer investment if the economy is going to contract more than the gentle softening that's wanted. Soon after the ISM release, the February fed funds futures had predicted a 20 percent chance of a rate cut in late January, up from last week's 12-percent chance.

The equities that reacted negatively to the ISM included those stocks that make up the Dow Jones Transportation Index, the TRAN, but they were soon to be momentarily rescued by another release, the crude inventories. According to the Department of Energy, crude inventories rose 2.0 million barrels, gasoline inventories dropped 2.8 million barrels, and distillates dropped 2.7 million barrels. Inventory was added to the SPR. The American Petroleum Institute (API) figures showed crude supplies rising 3.5 million barrels, gasoline inventories dropping 3.2 million barrels and distillate inventories falling 745,000 barrels.

Although the draw downs in gasoline and distillate inventories were larger than anticipated, utilization of refinery operable capacity climbed, and the report was ultimately considered bearish for crude costs. They dropped, allowing the TRAN, sensitive both to both any economic softening and any rise in crude costs, to attempt a post-ISM bounce. That bounce wasn't to last long, however, as perhaps might be expected when we saw the TRAN climbing as crude costs did but while economic prospects were also increasing. The TRAN might react intraday to crude costs but this index is probably more sensitive to economic health. In addition, the drop in crude prices wasn't to last. The TRAN ultimately dropped below 4700, finding end-of-day support at near the 61.8 percent retracement of the decline off the May high into the August low, with that Fib level at about 4675, and with the TRAN ending the day at 4674.75.

Our FOMC Chairman Bernanke also spoke today, but his talk was not considered market moving. He did warn that consumers should be vigilant when weighing various options related to mortgage and investment products. He cited research that shows that "awareness could be improved," especially among those with low incomes or educational levels.

Some earnings reports did impact specific stocks and sometimes sectors. For example, better-than-expected earnings reports from Newmont Mining (NEM) and Marsh & McLennan (MMC) were credited by some with supporting their respective sectors. NEM was to end the day well off its high of the day, but did close positive.

Others did not provide support. McKesson (MCK) reported earnings this morning, beating expectations. The company also raised its EPS guidance for the full-year 2007. While this report was initially greeted by investors buying the MCK's stock, prices soon reversed into negative territory and the stock closed below $50.00, at $48.99.

In the same sector, merger talk interested some market participants this morning and helped boost enthusiasm for equities in the pre-market and early cash market periods, but may have taken some of the wind out of MCK's sails. Drugstore chain CVS confirmed that it was in talks to merge with Caremark Rx. Caremark manages pharmacy benefits, selling drugs through networks of pharmacies to direct mail to benefit-plan participants. This may be a move to counteract the negative impact of Wal-Mart Stores (WMT) to sell generic drugs for $4.00. After the close, CVS reported earnings of $0.33 a share, up from the previous year's $0.30, on sales of $11.21 billion. Analysts had anticipated $0.32 a share and sales of $11.24 billion. Same-store sales rose 9.1 percent for the three months ending September 30, with total pharmacy sales comprising 70.3 percent of the revenue.

Cigna (CI) also beat expectations and raised its EPS forecast for the full year.

Time Warner Inc.'s (TWX) earnings resulted in some investors losing interest in the company's stock during the pre-market session as its adjusted earnings missed expectations. The stock was to close well above its low of the day, but still in negative territory, below its 10-sma.

The company reported net income of $0.57 a share, up from the year-ago Q3 earnings of $0.18. Continuing operations produced earnings of $0.34 a share. On an adjusted basis, however, earnings from continuing operations were $0.19 a share, with revenue of $10.91 billion. Analysts reportedly expected $0.20 a share on revenue of $11.07 billion. The company projected that it would see a growth rate in the low double-digits for operating income before depreciation and amortization on an adjusted basis for 2006 and would convert 35-45 percent of that income for 2006 into free cash flow. Time Warner Cable created revenue growth of 44 percent while AOL's revenue fell three percent.

In other stock- and industry-related developments, Apple Computers announced that it was launching iTunes Latino. This will consist of a zone within the US iTunes Store that focuses on Latin television shows and podcasts, audiobooks, music and music videos.

In the afternoon, auto companies began releasing October sales figures. GM beat expectations, reporting a 17-percent increase in sales for October when compared to year-ago levels, as reported in an AP article. Toyota announced a 9.2-percent increase, and Ford, an 8-percent increase. Ford still sold more cars than Toyota, though, with the comparison at 214,806 vehicles versus Toyota's 189,011. Nissan's October sales increased 3.9 percent. DaimlerChrysler reported sales that dropped 1.6 percent. Although the Mercedes-Benz unit produced sales that rose 12.3 percent, Chrysler's dropped 3.2 percent.

Most auto-related companies saw gains, but GM couldn't hold onto those gains and closed a bit lower. Articles caution that last October saw auto sales plummeting, so that the comparisons proved easy for many companies. Ford announced its efforts to align inventory with expected sales, saying that Ford, Lincoln and Mercury inventories were lower than year-ago and September levels.

Tomorrow ushers in a full schedule of economic releases, although those releases are probably not as important as today's ISM or Friday's nonfarm payrolls. They begin at 6:00 with October's Monster Employment Index and then continue at 7:30 with October's Challenger Report, another employment-related number. Jobless claims for the week of October 28 follow at 8:30, with the third-quarter's Productivity and Costs release at the same time. September's Factory Orders follow at 10:00, with those orders expected to rise 3.7 percent, up from the previous flat number. Natural gas inventories will follow at about 10:30. Chain store sales for October will also be released, as will September's Semiconductor Billings.

Markets will also be anticipating Friday's non-farm payrolls, as well as dealing with a number of earnings releases. Companies releasing earnings include APCC, AMSC, ABC, ATML, AWRE, ABX, BDX, BBI, BWNG, CMX, CEGE, CEPH, CMS, CSTR, CS, EE, ENR, ENZN, FFH, GTW, GMST, IMGN, IFF, IP, ISIS, LF, MDR, OLGC, PPX, PHTN, PDC, PWAV, QCOM, PWR, QSC, GOLD, SONE, SINA, SFY, TLG, TSO, RIG, UN, VPHM, WEBM, WFMI, WMB and others.

What's likely to happen tomorrow? Several indices show that they're approaching short-term oversold conditions, including the tech-related indices. Those indices look as if they might see a little further weakness, but that some oversold pressure might be building, too, so that a bounce attempt might be expected at some point. At this perspective and especially ahead of Friday's nonfarm payrolls, I'm not expecting great strength out of any bounce attempt, however. I could be wrong, as I was last week about some indices with a stronger Thursday last week than I'd anticipated, so let the 15-minute 10-ema's be your guide to short-term strength or weakness. Fifteen-minute closes above those averages suggest that bulls have temporarily gained strength.

I think I'd hold off entering new bullish positions, however, especially ahead of the nonfarm payrolls number on Friday. If you're in bullish positions already, you've long ago determined your get-out levels, and those may have been hit today. If you've entered a bearish position, now is the time to start moving your stops down with the action. Remember that many indices are still just dropping down within months-long rising price channels. The SOX is the only one that has violated such a channel, and it has moved sideways and not down since breaking down out of that channel. There's something wrong with the bearish picture there, so keep on your toes. Until and unless the SOX breaks down again and other indices follow by breaking out of their respective rising price channels, this has just been a long-anticipated and not-yet-too-bearish pullback.

Arguing against that innocuous conclusion is the fact that the RUT attempted an upside breakout and couldn't hold it, a fake-out movement that visibly illustrates that bulls could not make it happen. The RUT's drop today was pronounced.
 

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