Are you getting tired of hearing about the Dow's new record intraday and closing highs? Today saw a number of new records reached, with the Dow reaching yet-another intraday and closing high, the SPX reaching yet-another six-year high, the Russell 2000 reaching another all-time high, the Nasdaq at its highest level in more than five years, and some airline stocks breaking above their 9/11 levels for the first time since that tragic day.
If you're in bullish positions or depending on stock-market gains to push your mutual fund higher, you're not tired of those new records. If you're in bearish positions, you're weary beyond bearing. Those sentiments were expressed mathematically in the VIX's drop to an intraday low of 10.13, one hundredth below yesterday's 10.14 low. Complacency reined this morning, signaling concern to contrarians. That concern has been misplaced of late, but contrarians were to be rewarded over the short-term at least after the release of the FOMC's October minutes stalled the rally.
I, Linda Piazza, would like to shorten my Wraps, but, unfortunately, those setting the dates for economic releases, company developments and FOMC meetings, statements and minutes failed to consult me. I'm doing the next-best thing. I'm dividing my Wrap into sections as follows: Introduction, Charts, Today's Developments, Tomorrow's Economic and Earnings Releases, and What about Tomorrow? If you're interested only in charts and what I have to say about tomorrow's likely pattern, do a search for those headlines.
Equities had been charging higher all day, with the SPX having just broken to the upside out of a rising wedge, once upon a time known as a "bearish" rising wedge. When the minutes were released, equities were knocked back. The ensuing counter-bounce brought the SPX up to a new daily high before it fell back more precipitously and then proceeded to chop around the rest of the day. That bounce had been a bit hard to understand, given the stern tenor of those FOMC minutes.
Bond yields had bounced along with equities and were treading water near their highs of the day previous to the release of the minutes. They gave credence to the stern tenor found in the FOMC minutes. Keene Little has been mentioning in his Wraps lately that the bond traders seem to have as little insight as the rest of us lately, however.
The minutes emphasized that ALL members were concerned about inflation risks, mentioning many upside risks, including the tight labor market. Members agreed that the emphasis in the statement released in concurrence with the October meeting should convince its readers that additional tightening could occur. The Committee's dominant concern was the inflation risk. Current rates of core inflation remained too high for comfort, the minutes emphasized. Targets for inflation were discussed, but a decision was postponed. The Committee thought that "substantial uncertainty continued to attend [their] outlook" that "the economy would expand close to or a little below its potential growth rate and that inflation would ebb gradually from its elevated levels."
The minutes pointed to the upcoming release of significant amounts of data before the next meeting on December 12. That data will provide the Committee with the information that might be needed to assess "whether any additional firming was needed to address" inflation risks.
Although the FOMC believes that the "contraction in home construction remained a significant drag on economic activity," it does not yet see any spillover from the weak housing market. The rise in nonresidential building offset the losses in residential building. September's decline in industrial production was mentioned, with the notation that "economic growth had probably slowed more sharply in the third quarter than had been expected at the time of the September meeting," although the Committee believes that the third-quarter's slowdown was due to temporary factors.
Those who want to read the entire statement for themselves can follow this link: http://www.federalreserve.gov/FOMC/MINUTES/20061025.htm
Looking at charts will give some perspective on the day's events.
Annotated Daily Chart of the SPX:
The SPX's type of short-term bearish candle has often been followed by sideways consolidation rather than an actual downturn. That sideways consolidation sometimes creates a slightly higher high. In the event of an actual downturn, however, watch for potential support at the 10-sma unless the SPX blows through it. Support at the 30-sma and converging trendlines seen on the chart might be appropriate for a short-term buy-the-support bounce attempt for those who are so inclined. Be careful with any such play, preparing to jump right back out if this is the time that the SPX isn't going to bounce. Watch internals, too, because the further these bounces take the SPX and other indices, the more weak hands have been jumping on. They'll be quick to bail.
As of the close, the SPX's 15-minute Keltner chart revealed that the SPX was finding resistance at the same Keltner line that had previously provided support. That resistance was gathering from about 1397.15-1397.60 on 15-minute closes. It looked as if the SPX might be pressured toward next Keltner support. As of the close, light support lay at 1395.12, with next and stronger support at 1393.80. Strongest support lay at 1388-1388.50, with that support line still rising sharply.
Unless there's a hard push down due to an unfavorable CPI number or other development tomorrow, a bounce should be expected near 1393.80-1394.00, with the result of that bounce, if any, telling traders whether some or all of the bullish exuberance has been evaporated. A brief bounce followed by a rollover may predict that the stronger support near 1388 will be tested. Remember that Keltner lines are dynamic and will change somewhat when the SPX moves, and that any 15-minute indicators can easily be overcome by an event as important as tomorrow's CPI or Philly Fed.
The Dow's small-bodied candle with a small upper candle might also be considered short-term bearish, although "bearish" still translates to sideways or sideways-up consolidation in this market. Be watchful in case it translates into something more bearish than that, however.
Annotated Daily Chart of the Dow:
If the Dow should reach for another new high tomorrow, watch for resistance at the midline of this channel. Bottom-of-the-channel support now lines up with the 10-sma, so bulls don't want to see that support broken. Confirm any such break with a close below the 30-sma, however, and remain aware that support is closely layered beneath the channel. Unless the Dow is shoved down hard, it's going to be difficult for the bears to gain much traction and a bounce might prove likely at the bottom-of-the-channel support, if it's tested.
At the end of the day, the Dow's 15-minute Keltner chart also revealed that former support through much of the day was beginning to serve as resistance. That support was at 12,255-12,257 on 15-minute closes. First light support was at 12,237, with further support at 12,220. A brief bounce at support, followed by a rollover, may suggest that stronger support may need to be tested. As of the close, that lay at 12,165-12,172, but was it still rising sharply.
The Nasdaq's small-bodied candle that pulled back from the day's high, when coupled with its RSI level, urge that short-term bulls exercise caution, although long-term bulls can be satisfied that the Nasdaq's chart remains bullish for now. Follow the Nasdaq or any tech-related stock higher with your stops, however, if you're sitting on big gains from a long-term position.
Annotated Daily Chart of the Nasdaq:
That small-bodied candle with the upper shadow would be more significant if it had occurred at the top of the channel, but the RSI level does urge caution for short-term bulls. Note that the Nasdaq's RSI doesn't tend to stay at its current level long. The top-of-the-channel level may prove irresistible, however, a price magnet of sorts. Whether a short-term or long-term bull, I'd be ratcheting up my stops, however.
As of the close, the Nasdaq's 15-minute Keltner chart did not show the same setup as did the Dow's and the SPX's. It's true that a Keltner line now at 2445 was formerly providing support and, at the end of the day, served as resistance. However, the Nasdaq remained on breakout status on the 15-minute chart. It would first have to break through support at about 2440 and then at 2430.63, as of the close, before it erased that breakout status, with either of those support levels likely to prompt at least a short-term bounce attempt, if not more. A hard shove down tomorrow morning could do push the Nasdaq through that support, but without that hard shove lower, look for support at one of those two levels. Remember that the lines are dynamic and that they're important on 15-minute closes, not on intra-period moves.
I've been pointing out that there was something wrong with the SOX's bearish picture for weeks now. The SOX had been traveling higher through a rising price channel, just as had the other indices. After breaking down, it rose to retest the former support, falling back from that former support in a classic "kiss goodbye" setup. However, the SOX should have then fallen precipitously. Instead, it trended sideways, showing that bears didn't have the strength to push it lower. Sooner or later, bulls were going to gain courage to buy the SOX components if the bears couldn't break the consolidation. This week, bulls gained that courage. The SOX was driven above its 200-sma again and above long-term resistance.
However, the candle it created today while driving above that resistance was anything but bullish.
Annotated Daily Chart of the SOX:
Since that descending trendline that the SOX leaped above this morning is a long-term one, the possibility exists that I've merely gotten the angle the slightest bit off kilter. If that's true, the candle pierced the resistance but closed at or above it, rather than remained sitting on it. In any case, the daily candle was a bearish one when it comes at the top of a rise, and the RSI confirms that possibility. Remember that overbought conditions can be relieved by a sideways/sideways-up movement in time in addition to a pullback.
The SOX's Keltner picture was not particularly clear since the SOX began consolidating in a potentially bullish right triangle after its initial burst higher today, and since it remained in breakout status on the 15-minute Keltner chart. It is, like other indices, finding resistance on a line that earlier served as support, but it needs to drop below 479.90 or so on a 15-minute close to erase its breakout status. There's every possibility that it might rise first, since the Keltner chart was so scrambled by that consolidation. If it does rise first, watch for first potential resistance at 485 to just under 486, with that important on 15-minute closes.
The Russell 2000 also jumped above resistance and also fell back off the day's high, but only slightly. Its daily candle is not particularly bearish, although the chart does show some similarities to the SOX's, particularly when considering the RUT's RSI level. The RUT tends to consolidate sideways or pull back soon after reaching its current level, as is apparent on the chart. I must note, however, that 800 is a nice round number that may present an irresistible price magnet.
Annotated Daily Chart of the RUT:
First daily support for the RUT would obviously be offered at the rising red trendline, with October's high and then the converging 10- and 30-sma's also offering potential support. If in bullish positions, keep ratcheting those stops higher. Although the daily chart was not as bearish as the SOX's, the RSI suggests a short-term overbought condition.
Like the SOX, however, the RUT had not violated its breakout signal on the 15-minute Keltner chart as of today's close. It was finding resistance on a Keltner line that had previously provided support, with that line at the RUT's closing level and with further light Keltner resistance near 793.24. The RUT would need to fall below Keltner lines currently at 788.47 and then at 782.09 before it erases that breakout signal. As of the close the support near 782 looked strong, backed up by further Keltner support.
Several economic releases appeared before this afternoon's FOMC minutes. As is usual for a Wednesday morning, the first release of the day was the Mortgage Bankers Association's (MBAA) weekly mortgage application volume survey, this for the week ending November 10. With the rate for thirty-year, fixed-rate mortgages dropping to 6.15 from its previous 6.24 percent and with points decreasing, too, the application volumes increased 4.3 percent. The unadjusted year-over-year comparison fell 0.1 percent. All components rose, too, with the Refinance Index reaching its highest level in more than a year.
At 8:30 EST, the influential Empire State index measuring manufacturing activity in the New York area was released. That index climbed to 26.7 from last month's 22.9, a surprise since economists had been expecting a decline. Other surveys of manufacturing activity, including the ISM, had shown some weakness. Today's result reached a five-month high. Components measuring new orders, shipments, unfilled orders and employees all improved. The index measuring future business conditions leaped to 37.8 from the previous 30.2.
Perhaps a bit more troubling to those on inflation watch was the strong jump in the employee and prices-paid components, however. The employee index jumped to 24.5 from the previous 19.4, bringing it to the highest level in more than a year. The prices paid index jumped to 34.9 from the previous 30.8. While prices paid were increasing, prices received were easing, to 17.0 from 17.5. That, of course, is not a good combination. Bonds did drop and yields did rise after the release, but whether that was related to the index or was just part of the choppiness we've seen lately in the bonds remains unclear.
Several developments this week could and did impact crude prices. As many may have heard, yesterday think tank Cambridge Energy Research Associates dismissed the "peak oil" theory, saying that the world has about 3.74 trillion barrels of oil remaining, with that estimate triple the previous one. The peak in oil production would not occur before 2030, the think tank's director of oil industry activity proposed.
It's too bad that Jim is out of town this week because his research could have given us a better perspective on how much of this supposed supply would be available for production and how difficult it would be to bring it into production. I suspect he might dispute the think tank's estimate that we have 122 years of supply at current consumption rates. As many of you know, Jim has spent the last year attending energy conferences around the country, speaking with industry officials, so he has gained a strong perspective and knowledge base of what's occurring in the energy sector. Whether Jim would agree with this release or not, the release and perhaps other factors pushed crude lower yesterday, but the modest loss surely wasn't a strong endorsement of the think tank's prophecy.
This morning, speculation that OPEC might be considering another production cut was discussed again, although some are skeptical that such a cut would occur. OPEC's president spoke out, however, removing some of the skepticism when he stated that $58-60.00/barrel oil wasn't good for investments, that more production should have been cut at the last OPEC meeting, and that another cut was probable at December's meeting. Nigeria's production has decreased and reports of another strike at the Nigerian production facilities were circulating this morning ahead of the crude inventories number.
Expectations for crude inventories from Wachovia were for an increase of 1.2 million barrels for crude, while Fimat USA expected a lower increase of 800,000 barrels. The corresponding expectations for distillates were for a decline of 550,000 barrels and 1.1 million barrels. For gasoline, Wachovia forecast a climb of 225,000 barrels, and Fimat predicted a decline of 200,000 barrels.
Gasoline and distillate figures proved much different than expected, with big draw downs in both. The EIA reported a build of 1.3 million barrels in crude, but draw downs of 3.6 million barrels in distillates and 3.7 million barrels in gasoline. The EIA also reported that refineries operated at 87.3 percent last week. Crude climbed above $59.00 today, but was stopped by the 10-sma , with the close today at $59.15 according to my source.
The TRAN had soared ahead of the crude inventories, breaking above October's high, but flattened afterwards. It closed the day at 4830.43, playing catch-up with other indices that had been posting gains. It's still below a long-term descending trendline that crosses at about 4860, however.
Big news surfaced in the transportation sector this morning, with U.S. Airways making an $8 billion cash-and-stock offer for Delta. According to a CNBC reporter, the CEO of U.S. Airways has always believed that if he wanted to grow the company, it would be through mergers and acquisitions. This merger would give U.S. Airways the biggest share of domestic seats. He pointed out the advantages for U.S. Airways to move now. The offer is a 20 percent premium to what Delta's creditors would be able to receive otherwise, and so the deal was likely to receive approval from the courts and creditors. In addition, some have speculated that the Democratic stance on antitrust issue would make them less likely to agree to mergers and acquisitions in the airline industry. It behooves the company to move quickly and have the deal structured before Democrats come into office, even if it's unlikely that the deal can be completed before then. If the deal is in the works, it's unlikely that Democrats will have this first on their list, the expert speculated, although other legacy airlines are likely to object.
Another analyst proposed that this development could create big excitement in the transports, and it certainly did in early trading. We have six big carriers, the expert said, speculating that we needed only two. A third expert noted that the transports had not participated in yesterday's rally, and, in fact, were still far below May's high.
The excitement didn't appear to be strong at Delta, however, with a pre-market banner on Marketwatch claiming that Delta had said that early talks with U.S. Airways had not been productive.
In related news, British Airways announced that it was buying American's 1-percent position in Iberia. Also, Fortress Investment Group will buy Rail America Inc. (RRA), a holding company for two railroad companies, for $16.35 a share cash, with Tuesday's close at $12.38. Also perhaps contributing to some excitement in the transportation sector was Bear Stearns' upgrade of JetBlue (JBLU) and AirTran Holdings (AAI). The Wall Street Journal reported good prospects for Boeing (BA).
Another development in the energy sector was discussed this morning. Some speculation exists that Russia wants to set up an OPEC for natural gas. Russia has over 20 percent of the world's natural gas. Although an expert speaking on CNBC this morning thought an OPEC for natural gas was unlikely because the producers were so disparate and had such different goals, that expert did point out that Russia still had immense control over the world's supply. Nearly 25 percent of all Europe's gas is coming from Russia, he pointed out, speculating that in the next 20-25 years, that percentage could rise to 40 percent.
Warren Buffet's Berkshire Hathaway created some excitement early in the day with a pre-market announcement that it was increasing its stakes in Lowe's Companies (LOW) and Nike (NKE). This helped boost the retail sector ahead of tomorrow's earnings releases that include a number of retailers. In other company-related news, Goldman Sachs upgraded Altria Group (MO) to a buy rating ahead of Thursday's investor meeting.
Earlier in this article, antitrust issues were mentioned in concern with the U.S. Airlines' proposed merger, and that issue has surfaced again with respect to Microsoft (MSFT). The head of the European Commission has given MSFT a Thanksgiving Day deadline to submit requested technical documents or be levied a fine of up to 3 million euros each day. In other company-related news, Clorox (CLX) raised its quarterly dividend by two cents.
After-hours developments included disappointing results from Applied Materials (AMAT) and BEA Systems (BEAS). AMAT was last trading at $18.25, down from its $18.65 close, and BEAS was last trading at $14.34, down from its $15.69 close.
Tomorrow's Economic and Earnings Releases
Tomorrow's economic reports of course begin with the weekly initial claims, but few will notice that release. They'll be focusing instead on October's CPI, to be released at the same time. Expectations are for the headline number to drop 0.2-0.3 percent, following last month's 0.5-percent drop. Any sign of inflation might be considered particularly bad news, given the recent gains in the market. September's Net Foreign Purchases will be released at 9:00, followed by October's Industrial Production and Capacity Utilization at 9:15. Both can and do move the markets. Some market participants might be skittish about this number, given some weaker-than-expected manufacturing numbers in the last several weeks, although today's Empire State index might have reassured them. Expectations are for a gain of 0.2-0.3 percent in industrial production after last month's 0.6-percent drop, and a flat figure for capacity utilization. Expectations are for 81.9-82.0 percent after the previous 81.9 percent. The important November Philly Fed follows at noon, with expectations at a 4.0-5.0 percent jump, up from the previous 0.7-percent drop.
As is apparent, tomorrow will usher in a number of potentially market-moving economic releases. These could fight against that normal pin-them-to-the-numbers effect that typically begins about mid-morning on an opex Thursday.
Also perhaps fighting against that tendency might be the fact that Dell reports tomorrow after the close, and HPQ also reports tomorrow, although the time was not supplied, according to Yahoo. Other companies reporting earnings tomorrow include BKS, BIG, CLE, CPWM, DEBS, GPS, IFX, KLIC, MSCC, SHLD, SBUX, SMRT, BBA, WSM and ZLC. Those reporting companies include many retailers.
What about Tomorrow?
What about tomorrow? By the end of the day today, a little fear-of-the-Fed had asserted itself, particularly ahead of tomorrow's CPI. We know that the FOMC has to proclaim itself a staunch defender against inflation. If you've read my previous Wraps, you even know that the FOMC tends to take that stern stance when it's pausing, even in those times when the next move has been an easing rather than a tightening. However, recent data makes it difficult to dismiss that fear of the Fed entirely, and bond traders certainly weren't dismissing it.
Tomorrow's pre-market release of the CPI assumes strong importance in this climate, and I still haven't received my crystal ball. The shape of today's daily candles and the RSI levels of some indices that do tend to respond quickly to elevated RSI levels suggest that the indices are vulnerable to a downturn, perhaps as soon as tomorrow. If in long-term bullish positions, continue the tack I've advised in other Wraps: ratcheting your stops higher with any gains and getting out if your pre-set get-out points are hit. So far, indices remain long-term bullish, but candles today were short-term bearish on many indices. I've pinpointed levels to watch when discussing each chart.
What about bearish positions? As indices have been climbing inside their rising price channels, I've been pointing out the difficulty of entering bearish trades in a bullish environment. I've been cautioning would-be bears to enter only at their own risk and only if they're adept scalpers. However, if tomorrow weren't opex Thursday, I would be suggesting that this might be a good time to attempt a short-term bearish play, perhaps after a first bounce tomorrow morning. However, tomorrow is opex Thursday. Moreover, it's attended by numerous important economic releases that will be occurring throughout the day, as well as Dell's after-the-close report. Based on that, I think I'd advise again that--other than long-term bulls who are ratcheting up those stops as the markets climb higher--only adept scalpers who don't need my advice anyway should be in the market tomorrow. Today's moves have scrambled technical indicators, and they've been of less use than usual in this climate, anyway.
I have to end by saying that this climate scares me a bit, although the VIX level indicates that it's not scaring many people.