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Market Wrap

A Sigh of Relief Swells into a Yell

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Markets across the globe sighed with relief during the overnight session as selling pressure on the dollar eased. Many multinational companies with significant presences in the U.S. saw their stocks rebound from recent drubbings. That sigh was to swell into an exultant yell after the GDP revision reassured some that perhaps the U.S. economy wasn't softening as much as had been feared.

Bond traders didn't appear so convinced, however. The sometimes defensive bonds rose and yields dropped. The dollar/bonds/yields/equities interrelationships can be complicated to puzzle out, but bond traders apparently put more credence on fears of a softening in equities than they did on worries about whether a strong economy and/or depressed dollar would hike inflation.

The market day included many important economic releases, lengthening this report more than is optimal. The Wrap is divided by the usual subtitles, however, so subscribers who want only charts and an outlook on tomorrow's events can scroll to the appropriate sections.

Introduction

Reports from bourses across the globe have detailed the impact of the falling dollar on foreign companies that have a significant presence in the U.S. Companies such as Hanson Building Materials, a U.K.-based company, had been hit by the impact of the falling dollar. The converse to that thinking is that the falling dollar might be good for the coffers of U.S.-based multinational companies that collect a significant monies in currencies against which the dollar has fallen.

That thinking can be stretched only so far, however, and it wasn't working out that way on U.S. bourses this week. Equities were moving with the dollar. Less worth for each dollar could prompt a rise in inflation or cause slower growth as consumers tightened their hands on stretched-thin dollars. Bond traders didn't appear to be worried about that impact, however.

The release of the Commerce Department's revision of the third-quarter GDP reassured some who had been frightened recently by the spectacle of a U.S. economy slamming into a hard landing rather than merely softening. The headline number surprised to the upside, and the soft pre-market sighs of relief began swelling into that more exultant noise. However, as will be detailed later in the article, that exultant noise may have drowned out some other voices pointing out some troubling aspects of the number.

The exultation also drowned out worries about rising crude prices, declining inventories, and historically low refinery utilization numbers. Perhaps that was because investors in energy-related stocks were yelling the loudest, benefiting from the sector's surge higher as crude prices rose.

Markets paused to take a breath as the time for the Beige Book release approached, but then slowly that exultant noise built up again and markets climbed through the late afternoon.

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Charts

That late-afternoon climb was to produce a new high of the day on the SPX.

Annotated Daily Chart of the SPX:

The SPX's late-day climb was to finally drive it back above its 10-sma, but only that late-day drive succeeded in doing that. Earlier in the day, it had stopped right on that average and pulled back.

The SPX ended the day with 30-minute candles that were pulling back below Keltner resistance. The next Keltner upside target would be at about 1406, but the SPX's struggle with that nearby Keltner resistance made it unclear as to whether that's a viable target or not. Tentative bearish divergences on the 15-minute chart questioned that upside target, too. The TRAN needs to participate better in any rally than it did today before the SPX can break too much higher, I would think, and a TRAN rollover might drag the SPX, OEX and Dow lower, too.

If the SPX pulls back, however, multiple layers of potential Keltner support lie below, so that any pullback would need to be swift and hard to break SPX prices through it. Otherwise, any pullback might result in choppy behavior.

The Dow wasn't able to make it back above its 10-sma's resistance.

Annotated Daily Chart of the Dow:

The Dow's chart looks more bearish than the SPX's, with several comparisons leading to this impression. The Dow clearly fell out of its channel, while the SPX did not do so convincingly before it bounced again. Today's rally couldn't bring the Dow high enough to breach either the bottom of the channel's former support or the 10-sma.

Like the SPX, the Dow ended the day struggling with Keltner resistance on a 30-minute chart. If the Dow is able to pull free of that resistance, the next upside Keltner target is at about 12,314, but it's unclear whether it will be able to pull free. It, too, doesn't tend to run too far in a direction opposite the TRAN's.

If the Dow pulls back instead, the Keltner picture looks much like the SPX's. Layers of potential Keltner support just below suggest that the Dow might be most likely to chop around after any pullback unless that pullback was swift and hard.

The Nasdaq also didn't make it back above its 10-sma, but prices did remain within their rising channel.

Annotated Daily Chart of the Nasdaq:

The Nasdaq had not broken free of Keltner resistance as of the close, but its Keltner support, just below the current level, appears stronger than the SPX's or Dow's. The Nasdaq has to break up through the 2439-ish zone on 30-minute closes before it can push for the next upside Keltner target at about 2457, however, and it's not clear that it will be able to do so as the Nasdaq's afternoon advance also stopped short of a new intraday high. The 15-minute and 30-minute pictures give different pictures of short-term strength and resistance, so don't make a clear projection of the next development. On the 30-minute chart, a pullback toward 2427 looks like the next development, but the 15-minute chart shows support firming so much at that level that prices would likely be repelled. In short, the intraday Keltner charts don't give a clear picture.

The SOX did not participate fully in the day's rally, which also questions the Nasdaq's strength.

Annotated Daily Chart of the SOX:

While the SOX's slide down that former resistance is not particularly bearish, its action must be placed in the context of a strong rally today. The SOX clearly did not participate and that's troublesome. RSI approaches a supporting trendline of its own. Watch its action if prices and the RSI should pull back further tomorrow, as RSI might give the first heads-up that the SOX has finished its consolidation and is ready to either bounce or fall farther and test that river of moving averages flowing beneath it.

The SOX was caught in a tangle of Keltner lines as the day closed, giving little hint of next direction.

Annotated Daily Chart of the RUT:

The RUT ended the day jammed just under 30-minute Keltner resistance, hovering just above 15-minute Keltner support. The 30-minute chart suggested that a pullback to 782 might be necessary and the 15-minute one showed an upside target of about 790.50.

When intraday charts are scrambled as they are, several conclusions can be made. Some might decide that Keltner channels or any similarly scrambled charting tool is a useless one or they might decide that a clear message is being delivered: bulls and bears are still sorting out what's going to happen next and the outcome isn't yet clear. That's my conclusion. Both intraday and daily charts are sending that message, in my opinion, not a surprise when markets sort through the likely impact of rising crude prices and the myriad of economic reports today.

Space doesn't allow me to provide as many charts as I'd like, but I do have one other I'd like to post: the TRAN's.

Annotated Daily Chart of the TRAN:

For those who may not remember the discussion of a couple of weeks ago, the TRAN's longer-term pattern shows the possibility for a large, continuation-pattern inverse H&S. These are not trustworthy formations, but they should be watched. I noted at the time that, even if this was a reliable pattern, that the TRAN needed a right shoulder for that pattern and that would likely mean a pullback to the 30-sma and perhaps lower, and a somewhat lengthy consolidation period there. I wouldn't be surprised to see the TRAN drop to the 4650-4660 zone, at least, although I'm not sure that will happen tomorrow.

Today's Developments

At 7:00, the Mortgage Bankers Association reported another decline in its weekly mortgage application volume survey. The volume declined 3.9 percent week over week on a seasonally adjusted basis and fell 1.6 percent year over year. Components were mixed, with the week-over-week numbers for refinancing falling a seasonally adjusted 9.6 percent week over week but applications to buy a home climbing 1.3 percent for the same period. The rate for a 30-year, fixed-rate mortgage stayed at 6.13 percent. The rate for ARMs inched lower, but the percentage of homebuyers applying for an ARM dropped to its smallest level in three years.

The next economic-release slot produced the Commerce Department's first revision of the GDP for the third quarter. That number rose to a 2.2 percent annual growth rate, an upward revision from its earlier 1.6 percent estimate and far above the expected revision to 1.8 percent. This number measures the value of all goods and services produced. In real terms, the economy has expanded three percent. Markets greeted the number enthusiastically.

My lack of an economics degree may be hindering my thinking here, but I was concerned about some elements of this report. Higher inventories contributed to the upward revision. Imports were lower than in the first estimate, too, also contributing to the upward revision since it meant that the deficit was lower. However, higher inventories and lower imports could both point to slowing demand. That inventory building may have come in a hefty percentage from the auto industry, too, with a third of the GDP growth attributed to the production of motor vehicles. Will those autos sell at an equally hefty pace? My first impression, economics-challenged as I might be, was confirmed by the discussion in a Bloomberg article, quoting a JPMorgan Chase Bank analyst who suggested that the combination could lead to a "significant inventory correction in the fourth quarter."

Consumer spending had also slipped from its previous estimate, although it was still termed the major contributor to GDP growth, rising 2.9 percent and contributing 2 percent to the GDP growth. Business investment climbed 10 percent, much higher than the second quarter's 4.4 percent, and contributed to that upward revision in the third-quarter GDP, too.

Home construction dropped to its lowest level in 15 years, a Bloomberg article noted. This was a drag on the GDP revision.

The core personal consumption expenditure price index, a key measure of inflation that is tied to consumer spending, was reported at 2.4 percent. That number is higher than the Fed's comfort zone at 1-2 percent. The third-quarter's preliminary chain deflator was released today, too, and it stayed at 1.8 percent, which was the expectation.

Yields did rise momentarily when the bond market opened, perhaps reacting to this portion of the GDP revision. However, they fell to a new low before rising in a choppy manner to retest that early day's high.

Those worried about a tight labor market's impact on inflation might have been reassured when the second-quarter's real disposable incomes fell 1.5 percent, lower than the previously reported 1.7-percent gain. That drop certainly doesn't promise much good news in the consumer-spending front, but real disposable incomes rose 3.7 percent in the third quarter. The personal savings rate was disappointing, dropping 1.4 percent in the second quarter and 1.3 percent in the third.

Whether I or the JPMorgan economist might have had some reservations, market bulls had few and they pinned the shorts in losing positions, forcing them to buy to cover and contribute to the market explosion. Name any sector and it was rising into the release of the Beige Book.

October's New Home Sales were reported in the middle of the morning. The Commerce Department reported that those dropped 3.2 percent, falling to a seasonally adjusted annual rate of 1.004 million. For the past year, those sales have fallen 25.4 percent. Although the number of new homes on the markets fell 0.7 percent, the number of months it will take to sell those homes at the current sales rate climbed to a 7-month time period, up from the previous 6.7 months. That's a number that industry and market analysts think important. Any concern about that number was perhaps tempered by the 1.9-percent year-over-year rise in the median price for a new home.

Before the release of crude inventories, crude for January delivery had already been moving higher, continuing a bounce that had begun on 11/20. Weather reports pointed to colder weather, and speculation increased that OPEC will further cut production at its December meeting. That speculation was increased midday when Algeria's oil minister said that OPEC might need to trim production.

Expectations for crude inventories were not met, as drawdowns in distillates and gasoline surprised analysts. Builds of up to 500,000 and 700,000 barrels were expected, respectively. Instead, the Department of Energy reported drawdowns of 1.0 million and 600,000 barrels, respectively. Analysts had been all over the map with expectations for crude inventories, with some saying they would drop 300,000 and some claiming they would climb 2.1 million. Crude inventories dropped by 300,000 barrels. Refinery utilization was at 88.1 percent, with a CNBC guest analyst noting that this level remains below historical levels, needed levels and expected levels.

Crude futures for January delivery were to climb into a $62.35 a barrel close, gaining $1.36. By the afternoon, many segments on CNBC dealt with the likely impact and some credited rising crude prices, rather than the impending release of the Fed Beige Book, for stalling markets midday.

The afternoon produced the last economic release of the day, the Beige Book. Many expected the various regions to report further drops in the housing market and further tightening in the labor markets, with neither of those conclusions good news for the markets. They were expected, however, and had little immediate impact on the markets.

Of the various regions, most reported moderate growth, the report said, but Dallas was decelerating from high levels while New York and Richmond were accelerating. The retail outlook for the holiday season was "cautiously optimistic," with consumer spending increasing in October and early November. That increase did not include Boston, where sales softened, and Dallas, where expectations were not met.

As was anticipated, auto and housing-related producers showed some weakness. Most districts reported a continuation of the weakening in single-family construction. Some districts also reported a slowing in mortgage lending and some, a slight rise in delinquencies. Several noted that demand for commercial and industrial loans remained steady or had even moved higher, however.

In general, manufacturing activity was deemed "positive." High-tech industry trends were strong in several districts, with Dallas noting that both high-tech industry and energy-related manufacturing activity proved strong.

Vehicle sales continued to be soft, with inventories rising in several districts. Chicago said vehicle sales were steady and St. Louis said they improved, but five districts reported that sales were slow or had actually declined.

Labor markets were tight, as expected, with particular mention made of high-skilled occupations. Wage pressures rose for some specialized professions, but were "generally moderate."

Demand for services and temporary staffing firms were termed strong, but again Dallas mentioned softening demand. Chicago also noted softening demand for temporary staffing firms, and Atlanta and Cleveland said that demand for freight services had declined.

Those desiring to see the complete report can find it at the following link: http://www.federalreserve.gov/Fomc/BeigeBook/2006/20061129/default.htm

Because today presented so many economic developments, this report will only glance at company-related news. Pfizer (PFE) announced late Tuesday that it would lay off 20 percent of its sales force in the U.S. It gapped higher, but soon dropped to test its gap and closed inside it. In the same sector, Dynavax Technologies (DVAX) has been conducting a Phase III trial that compares its version of a hepatitis B vaccine to that of Glaxo and found statistically significant differences. DVAX shares soared in the pre-market session. It, too, gapped higher, ran a bit, but then dropped back from the day's high. It did say above its gap, however. GlaxoSmithKline's (GSK) shares were climbing, too, early in the morning, with this European company being one of those companies benefiting from the easing of the selling pressure on the dollar. It did drop down into its gap.

3COM (COMS) announced its participation in an unusual action related to a joint venture in which COMS and Huawei would each bid for the other's stake in the joint venture. Investors didn't like the news and drove the stock lower. Nestle might sell its medical-nutrition business and acquire Gerber Products, various news sources revealed.

Bear Stearns raised its price target on Apple Computer (AAPL) to $100. AAPL had received an even higher new price target yesterday, and the stock was a topic of conversation in many articles and on televised discussions. AAPL closed at $91.99, a few cents higher than yesterday's $91.81 close. Verizon Communications (VZ) received an upgrade. It closed at $34.89, up from yesterday's $34.00 close. Prudential raised the price target on Boeing (BA) to $99.00, and the stock gained. Both Ford (F) and General Motors (GM) benefited when Ford confirmed that 38,000 of its work force has accepted buyout offers.

After-hours saw several stocks climbing. Tivo and Hot Topics were among those stocks.

Tomorrow's Economic and Earnings Release

Tomorrow's economic releases will bring other important economic releases: the Chicago PMI, and another one that might assume some importance in the current climate, October's Personal Income and Consumption. The Personal Income number will be released at 8:30, at the same time slot as Initial Claims. Personal income is expected to be up 0.5 percent. Personal Spending is expected to rise 0.1 percent. November's Chicago PMI will be released at 10:00. Expectations are for a rise to 54.5-56.0, up from the previous 53.5. October's Help-Wanted Index will also be released at 10:00.

Companies reporting earnings tomorrow include CATS, HRB, HNZ, SFD and CAKE.

What about Tomorrow?

The short of it? My gut tells me it could be a choppy consolidation day with prices chopping somewhere roughly between today's high and yesterday's low.

If you want to read more, here's what I think: In my opinion, yesterday's doji-type day and today's rise were givens. They don't prove anything yet. All along as the indices have climbed through their rising channels off the summer's lows, I've been annotating graphs with the comment that "there's nothing bearish here yet" or "markets are just following their usual climb-then-consolidate-sideways patterns." Beginning about two weeks ago, however, I began sounding a more cautious note. The climbs felt more frantic, a sign of a frenzy of buying. The VIX hit troubling levels, although I don't use the VIX as a market-timing tool and I don't suggest anyone else does, either. The downturns were sometimes sudden and bigger than they had been. On some indices, RSI can trend sideways at "overbought" levels for weeks, but on some others, the RSI levels were more ominous because RSI didn't tend to stay at high levels long. When they turned down, the index in question usually did, too.

I began escalating my cautions about ratcheting up stops as prices climbed. I began suggesting that if there were pullbacks to the bottom-of-the-channel levels, that bulls be particularly cautious about buying the pullback in this instance. I wasn't suggesting that bears jump into the game with both feet. Not yet. And I'm still not, but something feels different here and has for a couple of weeks.

I still feel that caution is warranted, particularly as we head into December's FOMC meeting. Although I'm cautious and now in a wait-and-see mode, I'm not surprised by the steadying of the indices on their 30-sma's and the strength of this morning's rally. For months, bulls have been rewarded each time they bought at the bottom of those channels, so why wouldn't they buy and buy in force? The bullish fervor has not been extinguished because of a few days of consolidation last week and then one strong decline this one, but if bulls keep getting knocked back at former-support-turned-resistance, some of that fervor will evaporate.

Monday's decline was strong and that has to have caused a few bulls to step back off the field. On the SPX, it appears to have been the most precipitous decline since July, when the SPX began forming the channel in which it has climbed off the July low.

Until proven otherwise, we can't qualify today's rally as anything more than a relief rally. On many indices, the rallies stopped at or below their 10-sma's. Most other times when the indices had fallen beneath that average to test the bottom-of-the-channel support, they powered right through that 10-sma and kept going, closing above it on the same day they pushed through it. While the SPX did close above its 10-sma today, it didn't exactly power through it as it had on those other instances. Something has changed, and whether that "something" is significant or not has yet to be proven.

Any bulls not stopped by Monday's decline need to have their trading plans in hand and their get-out points determined in case it's time for a prolonged sideways move out of those channels, consolidating all these gains of the past month, or an actual downturn. That plan should allow for the possibility that markets could power right up through their rising channels again because nothing has yet proven that prices will not do that.

Nothing has proven that they will, either. Want-to-be risk-taking bears should watch the internals as the 10-sma's and/or the midlines of those rising channels are tested to gauge whether there's a possibility of an imminent rollover. Before even considering entering a bearish play, no matter how good the setup appears to be, bears should have already taken time to decide how they'll deal with the possibility that the setup may not play out as expected. Will tight stops be set in case there's another swoosh higher? Will wider stops be set so that a bear isn't stopped out just before markets capitulate and rollover, increasing the potential loss if they don't do so? There are points to be made for each tactic, and the one chosen should depend on a trader's stamina and account size, among other factors.

Some might choose to wait it out until there's more proof, and that probably would have been my chosen tactic before I switched to credit spreads rather than pure call or put buying, especially when bullish plays have a history of working for months on each and every pullback. My gut tells me that tomorrow could be a choppy day, and that bulls and bears have some battling to do. I think I'd have stepped back and waited for the battle to be over and for me to have a better idea of which team was winning before I joined in. If you're not in already, you might consider that, too.
 

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