Option Investor
Market Wrap

Tug and Pull

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The major indices found modest gains to start the week after broker UBS made positive comments on the technology sector and upgraded shares of Dow heavyweight International Business Machines (NYSE:IBM) $98.90 +1.51%.

UBS cited improving fundamentals in IBM's core business and a belief that acquisitions in the software market will expand the company's growth rates and spur margin expansion.

While IBM was trading new multi-year highs in today's session, commodity prices as depicted by the CRB Index (CEC:CRY) 290.73 -0.13% hovered near Friday's 2-year low as crude oil found a choppy trade.

Stocks were weak at the open as February Crude Oil futures (cl07g) crept above the $57 level on news that Russian oil exports to Europe via neighboring Belarus had been halted as a trade dispute between Moscow and Minsk spread into several other European countries, including Germany and Poland.

Russia accused it neighbor of siphoning off oil destined for Europe via a 2,500-mile-long pipeline that has the capacity to transport over 1.2 million barrels a day to eastern and central Europe and generally works at, or close to full capacity.

February Crude (cl07g) settled down 22 cents, or -0.39% at $56.09 with trader's jitters calmed on thoughts that the impact of a short-term stoppage would have minimal impact on European supply, as refiners in the region (European Union) maintain strategic oil stocks, while warmer weather across much of the U.S. continued to keep buyers of the "black gold" on the sidelines.

Monday's economic calendar here in the U.S. was light. Consumer credit jumped to a 6.2% annual rate in November. The Federal Reserve said consumer debt increased a seasonally adjusted $12.3 billion during November, after falling $1.3 billion, or 0.6% annualized, in October. November's increase was the strongest in three months, and higher than economists' forecast of a $4.5 billion.

The Federal Reserve said outstanding debt stood at $2.39 trillion and the end of November. The figures do not include mortgages or any debts backed by real estate.

Most of the increase in November came in credit-card debt, which surged 11.9% annualized ($8.6 billion). Nonrevolving credit, such as auto loans, increased by a 3% annual rate ($3.8 billion) in November.

General Motors (NYSE:GM) $30.58 +1.12%, Ford Motor (NYSE:F) $7.73 +1.44% and Toyota Motor (NYSE:TM) $133.97 +0.18% finished Monday's trade with gains, while DaimlerChrysler (NYSE:DCX) $61.01 -0.35% finished fractionally lower.

U.S. Market Watch - 01/08/07 Close

Merger and acquisition activity remained brisk, with consolidation in the oil patch giving a modest lift to energy stocks.

Dow component General Electric (NYSE:GE) $37.55 -0.02% said it would pay $1.9 billion for privately held Vetco Gray, a supplier of drilling and production equipment. GE said the sellers were a consortium of Candover, 3i and JP Morgan (NYSE:JPM) $47.95 +0.33%.

The Houston Exploration Co. (NYSE:THX) $50.69 +4.10%, which traded a 52-week low on Friday said it reached an agreement to be acquired by Denver-based Forest Oil Corp. (NYSE:FST) $30.13 -3.49% for $1.5 billion in cash and stock. THX said shareholders would receive an estimated $740 million in cash and the rest in FST shares.

The THX/FST marriage found a lukewarm reception as FST's offer was well below the $62 that an activist hedge fund, Jana Partners, offered THX this past summer.

In June, Jana Partners disclosed it had acquired more than 12% of THX's shares on the open market, but doubts began to surface in September that a deal would be consummated between the two when THX said it wanted to explore strategic alternatives.

Caremark RX (NYSE:CMX) $56.64 +0.51%, which has agreed to be acquired by CVS (NYSE:CVS) $31.35 +0.57%, rejected a higher, unsolicited $25.5 billion offer from Express Scripts (NASDAQ:ESRX) $68.78 -0.11%. Express Scripts said that it has notified Caremark of its intentions to nominate four candidates to the Caremark board at the company's next shareholder meeting.

Shares of apparel retailer Gap Inc. (NYSE:GPS) $20.26 +7.25% jumped as high as $21.04 intra-day after CNBC, citing unnamed sources, reported that the parent of Gap, Old Navy and Banana Republic has hired Goldman Sachs (NYSE:GS) $203.73 +2.35% to help it look at strategic alternatives. Gap executives refused to comment on the report.

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Internals Look to be Impacting Price

I continue to test and monitor my recent commentary where I began alerting traders and investors to some sign of internal weakening at the NASDAQ spilling over to the NYSE.

In last Wednesday's Market Wrap I reviewed two VERY BROAD indicators, which measure advancing issues vs. declining issues.

At tonight's close, I want to update you on StockCharts.com's NASDAQ Summation Index ($NASI) and NYSE Summation Index ($NYSI), where internal weakness, though modest, does continue.

At tonight's close, the $NASI (see Wednesday's Wrap and charts) has slipped to a -40 measure on the 20-box chart, and that weakness does look to be "spilling over" to the $NYSI, which has slipped to a +760 measure. In essence, I'm seeing signs of WEAKNESS (NASDAQ) pulling STRENGTH (NYSE) lower.

As you review tonight's U.S. Market Watch (see above) and 5DyNet%, some of the internal concern for WEAKNESS does look to be unfolding.

It is a "pull and tug" between the VERY BROAD indexes like the NASDAQ Composite (COMPX) 2,438.20 +0.16% and the NYSE Composite (NYA.X) 9,041.12 +0.17% and their advance/decline lines, as well as recent PRICE action, which reveals a very good test of recent past PRICE action for the S&P 500 (SPX.X) 141.19 +0.46% and its "tracker" as depicted by the S&P Depository Receipts (AMEX:SPY) $141.19 +0.46%.

Tonight' I want to show you some "computerized" price action in the S&P Depository Receipts (AMEX:SPY), where for the first time since mid-August, I'm seeing some "hesitancy" from computers to be AGGRESSIVELY buying a MONTHLY Pivot. That is, a mathematically derived "midpoint" for a month.

S&P Depository Receipts (SPY) - Daily Intervals

Undoubtedly, some of the internal measures I've been commenting on the past couple of weeks have been "subtle weakness" and the broader (500 stocks) SPX/SPY price action from my 12/22/06 "neutral" market call in that evening's Market Monitor, and 12/27/06 Market Wrap would also depict "neutral" market call still justified.

In today's Market Monitor, it was noted that fellow market analyst Marc Faber, who some have nicknamed "Dr. Doom" issued some very bearish comments today.

Usually, I don't pay that much attention to what a long-term bear, or bull says, but I reviewed some of "Dr. Doom's" calls of late, and I was very interested is his change of posture since he turned short-term BULLISH on 09/22/06, just as some of the very internal indicators like the $NASI and $NYSI were signaling bullishness, as well the institutionally follow S&P 500 Bullish % ($BPSPX) was about to signal "bull confirmed" status for the S&P 500.

The PRICE action I want to point out tonight is that while VERY SUBTLE to my (Jeff Bailey's "neutral" stance), the SPY itself does linger BELOW its MONTHLY Pivot ($141.28) for a second-straight session.

Now to the past pattern that suggests institutional computers aren't AGGRESSIVELY buying. Perhaps they too are programmed to a more "neutral" stance. It is here that I think a trader/investor begins to monitor PRICE action for SIMILARITY to the past, or DIVERGENCE to the past.

On the above SPY chart, I've marked various inflection lows with a "This," where the SPY began to show BUYERS at/near a MONTHLY Pivot (M Piv). Yes, hindsight is 20/20, but do you see how it looks as if institutional computers have been programmed to buy each and every pullback at a monthly Pivot since mid-August?

Again, two days, or sessions of trade do NOT make for a "bear market," but over the years, during my tenure here at OptionInvestor.com, I've usually noted that the INTERNALS are first hint to PRICE action.

Similarity: SPY would hold above $140.28, if not see gains back above $141.28, then $142.28 and once again see gains above MONTHLY R1 (M R1= $143.58) as it has in November and December.

DIVERGENCE: This is what a trader and investor will also want to be alert for, and what the INTERNALS have been providing some alert to (in my opinion). SPY would make a move BELOW $140.27 and trade its MONTHLY S1 (M S1= $139.33).

And while the NASDAQ and NYSE Summation's have a/d breadth showing subtle weakness for the internals, I'm also continuing to follow each major market Bullish %.

While it would take a 72.00% reading for the S&P 500 Bullish % ($BPSPX) to reverse back lower, tonight's 74.00% reading also hints that some DEMAND (X) is abating at still strong, but overbought level.

S&P 500 Bullish % ($BPSPX) - 2% box chart

StockCharts.com's S&P 500 Bullish % ($BPSPX) achieved "bull confirmed" status in early September (red 9) and it would currently take a 72.00% reading to reverse lower to "bull correction" status. It would then take a 68.00% reading to fall further to "bear alert" status.

Conclusion: My observations continue to suggest a more cautious bull stance at what looks to be a bull market taking a rest. Internal measured discussed the past few weeks do show sign of weakening, and the S&P 500 (SPX/SPY), which most market followers deem a good measure for the U.S. economy, or "market," does have price action stalling near-term after an impressive gain this past summer.
 

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