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"An Out-Sized PPI Sure Doesn't Help"

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This quote came from a CNBC commentator just prior to the cash-market open. It indicated one possible reason for a pre-open dip in the futures, with the futures having until then weathered the blow Intel had dealt them. Although the FOMC reportedly gives more credence to the CPI, the Consumer Price Index, than to the PPI, the Producer Price Index, this morning's hotter-than-expected PPI did heighten rate-hike fears.


Logic would also suggest that worries about Intel's (INTC) margins and the stock's subsequent decline would also pressure indices since it's an important component of so many, but what would a market day be without a new Dow record? By early afternoon, the Dow was achieving its intraday high of 12,614. Moreover, the SPX had also reached its own record, a six-year record intraday high of 1,435.27. A rise in CAT, PG, JNJ, some financials and crude-related companies' stocks countered the effects of INTC's decline, helping the Dow and SPX produce those new or six-year records.

Neither was to hold those levels into the close, however. The Beige Book and afternoon comments from FOMC member Janet Yellen added to the worry about tomorrow's CPI. A downgrade of CSCO prompted it to join INTC as one of the day's decliners, and indices softened as the close drew near.


Annotated Daily Chart of the SPX:

Despite the nominal new six-year intraday high today, the daily candle indicated indecision more than it did conviction. The SPX may need sideways consolidation or an actual dip to the converging 10- and 30-sma's to confirm their support. If the RSI has reached down to touch the bottom of its triangle, I would expect a bounce attempt, however successful or unsuccessful it might be, to occur at that level. However, if RSI has not yet reached the bottom of that triangle, any bounce attempt might be temporary and another 50-sma test might be needed.

If the SPX is strong, it may not need much of a dip but instead may wait in place until the 10-sma rises beneath it. Keltner charts from the 30-minute up through the daily chart show it ringed by support and resistance that appear about equally weighted, but the CPI is just the release to change that balance. The 15-minute chart showed a likelihood that the SPX would dip toward 1427.50-1428.50 but would likely find short-term support there, but those 15-minute chart setups are likely to be totally

The Dow also pulled back from its high, in this case another all-time high, albeit a record intraday high. The Dow closed below yesterday's record close.

Annotated Daily Chart of the Dow:

If the Dow should pull back rather than rise or consolidate sideways, watch the RSI for clues as to whether the 10- or 30-sma might serve as resistance. I would be reluctant to attempt even a short-term long if price had dipped to the 10-sma but the RSI had not also dipped to support. Also beware attempting a long if the RSI is breaking through its rising trendline. Bearish price/RSI divergence has continued for some time without meaning anything at all, but the DOW is also falling away from that rising trendline, the one whose underside it had been climbing previously.

The Dow's 15-minute Keltner chart provides little information, as prices were perched just above a line that has served as support all week. If the Dow breaks through support, next short-term support should be found near 12,540. This week, strongest resistance has been found at a line currently at 12,613.30, and I would look for short-term resistance just above that level on 15-minute closes, since the line will rise if prices do.

The Nasdaq neared a test of its 10-sma today.

Annotated Daily Chart of the Nasdaq:

On both the daily and the 15-minute nested Keltner charts for the Nasdaq, nearby resistance appeared stronger than support, but the Nasdaq doesn't have far to decline before it hits the 10-sma's support and the breakout level on that triangle. Unless the Nasdaq dives tomorrow, plunging lower, expect some buying to occur before or at the 10-sma, but keep stops tight if you're electing to participate in a long play. The daily Keltner chart presents a possibility for an eventual drop toward 2,425. Such a drop would not be welcome, if it should occur, because that would drop the Nasdaq back inside that green triangle, suggesting that the breakout had been a false one.

The semis didn't do much to support the Nasdaq today, with the SOX closing lower ahead of tomorrow evening's SEMI book-to-bill number.

Annotated Daily Chart of the SOX:

What once had been a solid band of moving-average support is now a separated band, with some moving averages now potentially resistance and some still support. The daily nested Keltner chart suggests that the 72-ema (dark green) or perhaps even 200-ema (neon green) may be retested, but it's not clear whether that would occur before or after a bounce attempt. The 15-minute chart suggests that a bounce attempt would likely occur from the 470-471.60 level before any further dip.

No evidence exists yet to suggest whether the SOX will eventually break through that weakening band of supporting averages or whether it will muster strength and maintain a break higher. A potential continuation-form inverse H&S shows up here. These aren't trustworthy--no H&S is these days--but I still urge that traders watch these formations to gain some insight into whether bears are bulls are strongest at the moment. Just based on the chart, I wouldn't expect much movement at all from the SOX tomorrow. Famous last words?

The Russell 2000 hasn't given any indication of final direction, either.

Annotated Daily Chart of the RUT:

The RUT's 15-minute Keltner chart shows it ending the day perched precariously on support. If it falls first thing tomorrow morning and doesn't quickly bounce, it sets up a target of 782, but the 50-sma is just under 784, and any piercing of that average may produce a bounce attempt back above it. Unless the CPI moves the interest rates greatly in either direction, I wouldn't expect big movement in the RUT tomorrow, either. If the CPI does surprise and send interest rates spiking, however, it could be possible to break the RUT through its 50-sma on a daily close. In that case, the RUT could be headed toward the 72-ema. Don't attempt a long from that potential support unless the RSI has approached 31-32 and, even then, be careful since it's possible that the RUT could break through support this time.

Annotated Daily Chart of the TRAN:

Watch the TRAN closely tomorrow, because the SPX, Dow, and OEX will have difficulty maintaining any gains if the TRAN is dropping. A look at the 15-minute Keltner chart for the TRAN showed an equal likelihood for a rise to 4,863.50 or a drop to 4,775.50.

Watching 10-year yields tomorrow morning will give traders some insight into how seriously bond traders are taking rate-hike fears.

Annotated Daily Chart of the Ten-Year Yields:

Today's Developments

Today produced a full slate of economic releases. At 7:00, the Mortgage Bankers Association released its weekly mortgage application volume survey for the week ending January 12. That volume decreased 0.6 percent on a seasonally adjusted basis after several weeks of rising volume. It rose on an unadjusted basis and was also higher when compared to the same week a year ago. It rose 9.8 percent when compared to that year-ago level.

Components were mixed. The Refinance Index rose 6.3 percent, and refinancing activity's share of total applications increased to 49.9 percent. Four-week moving averages rose for all components. The average interest rate for a 30-year fixed-rate mortgage rose from the previous 6.13 percent to 6.19 percent, and points increased.

Although these numbers begin to show favorable comparisons to year-ago levels, homebuilder Lennar Corp. (LEN) did not when reporting earnings. Earnings-per-share, net income and revenue comparisons with year-ago level were all unfavorable. LEN reported a loss of $1.24 a share with revenue of $4.27 billion. Thomsom First Call had drawn a consensus prediction of a $1.11 loss on revenue of $4.17.

The company anticipates that 2007's deliveries will be more than 20 percent lower than 2006's. The company expects to met or exceed 2006 earnings, however, with expectations that profitability will drop in the first half but rebound later in the year if certain conditions are met. That outlook or a burst of short-covering or other developments sent the stocks higher. The DJUSHB, the Dow Jones U.S. Home Construction Index, also rebounded, but neither LEN nor the DJUSHB has yet broken above a declining trendline established off December highs. Both will soon face that resistance if they continue climbing.

Another economic release addressed the housing market, the NAHB's January Housing Market Index. This index rose to 35 from its previous 33, the highest level since July, the NAHB concluded. The NAHB used the "worst behind them" phrase when talking about the housing market, but not all were to agree today on that conclusion.


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Fed governor Frederic Mishkin also weighed in on the housing market, saying that the Fed shouldn't try to pop a housing-market bubble, since a rapid collapse of any asset prices can damage economies, as happened in Japan in the 1990's. Articles put his comments in context, however, as he was speaking hypothetically and characterized the determination as to whether U.S. home prices had climbed above their fundamental values as "extremely hard to say." He believes that the Fed should remain vigilant to any sharp decrease in asset prices to ensure that there isn't a spillover into the economy, but he was still speaking hypothetically.

Fannie Mae (FNM) also addressed the housing market, saying that it expects new home sales to drop 7.1 percent this year and existing home sales to decline 8.1 percent. FNM's economists predicted the sales for this year would be the lowest since 2002, and the two-year downturn would be the biggest since 1989-1991.

Does anyone else remember that period the way I do? My husband lost his job during that period because the owner of the company for which he worked was heavily leveraged in real estate, and the owner was forced to sell the company for fire-sale prices when the value of his holdings decreased rapidly. My husband and I and the family of the other attorney with the company were forced to sell our houses and move out of the area. We were lucky to sell our home after only five months on the market and escape with only a $250.00 loss on the home we had owned for four years, but many others in the area were faring much worse. We had difficulty renting a moving van because so many were moving out of the area and none were moving in.

So far, the DJUSHB maintains a rising trendline that it established as it began climbing off the summer's low. I would draw that trendline and watch it closely, however. In early December, the DJUSHB approached a 38.2 percent retracement of the steep decline off the 2005 high, at about 761, and promptly fell back. If the DJUSHB should continue to climb, watch that level as it is approached again, with strongest resistance likely to be near the 50-percent retracement at about 829.50.

The PPI, the Producer's Price Index, was released pre-market, too, like the MBAA's figures on the housing market. The PPI rose 0.9 percent in December, much higher than the anticipated 0.4-0.6 percent climb. While the FOMC reportedly pays more attention to the CPI, the Consumer Price Index, than the PPI when it's studying inflation risks from higher prices, the CNBC commentator was right when he said that this hotter-than-expected number "didn't help" the inflation outlook.

The volatile energy and food costs led to the increase, with the core PPI that excludes these costs seeing a much tamer 0.2-percent climb. That core reading had been expected to be flat, so it was still higher than anticipated. For the year, the PPI rose 1.1 percent, much lower than 2005's 5.4-percent increase. Core PPI rose 2.0 percent, however, more than 2005's 1.6-percent increase, and that increase isn't desirable, although not alarming yet.

While there's probably nothing here that will change the FOMC's stance one way or another, the PPI does raise the importance of tomorrow's CPI, given that the PPI was a bit hotter than expected. This is especially true since some components of the finished-goods component of the PPI rose, with prices of finished consumer goods rising 1.2 percent. While the PPI is not the FOMC's main gauge, this heightens concern that the CPI might show that the rising costs of finished consumer goods are being passed on to the consumer, and that might be reflected in a hotter-than-expected CPI number tomorrow.

December's Industrial Production was released about forty-five minutes after the PPI, and that number was also stronger than expected. Output was particularly strong in the high-technology and motor vehicle sectors, with those contributing to a 0.7-percent rise in output for November. December's industrial production rose 0.4 percent, much more than the expected 0.1-percent rise. Capacity utilization was 81.8 percent, in line with expectations. In addition, November's industrial production was revised to show only a 0.1-percent decline, with the original number pegged at a 0.2-percent drop.

Although crude inventories are normally released on Wednesday, this week's Martin Luther King, Jr. holiday postponed that release until tomorrow, January 18 at 1:00, with this information coming from the Department of Energy's website. Last night in his Wrap, Jim Brown addressed some of the speculations about a U.S./Saudi deal that would help the Saudi's weather lower crude prices and also lower the influence Iran has on decisions that would impact crude prices. This morning, the Saudi oil minister spoke in India, reportedly saying that crude prices are "very healthy," a statement that would not, on its face, be supportive of crude prices, especially with the February contract due to expire shortly. However, crude closed higher today, and was at $52.24 in extended trading as this report was prepared.

The other major economic event of the day was the 2:00 release of the Fed's Beige Book at 2:00. With the FOMC worried about inflation pressures, the twelve districts' report of tightening labor conditions, wage increases in business sectors and worries about rising benefit costs should not have been welcome. However, in the section concentrating on prices, the report noted several districts in which price pressures were easing, while "[o]verall prices increased moderately."

Economic growth was only moderate, the report concluded. The housing market continued to soften, with that softening impacting manufacturing in those companies that manufacture products for the residential construction industry. Perhaps to be expected, loan activity was lower in some districts, especially when focusing on residential lending. Vehicle sales were sluggish in several districts.

Good news included expansion in the services sector and "modest increases in retail sales," although reports were mixed across the districts. Also, commercial real estate markets were generally strong.

For those unfamiliar with the Beige Book, this report is produced eight times each year and is a compilation of anecdotal information from the twelve districts. Current economic conditions are broken into District and sector. For those who would like to read the entire report, it can be found at the following link: http://www.federalreserve.gov/FOMC/BeigeBook/2007/20070117/default.htm

After the Beige Book's release, San Francisco's Fed governor Janet L. Yellen was characterized as mulling over the question of why the labor market would be "going gangbusters" while the economy was not performing the same. Could that combination to be pointing to increasing inflation pressure? She posed this question, although not in these exact words, when speaking to the Arizona Council on Economic Education. According to some listeners, Yellen's interpretation was that the wage pressures would likely soften, the more benign of the two possible resolutions. She reportedly believes that the FOMC is well-positioned to rein in inflation pressures but confessed that she believes that the current weighting of risk might not change for many months or perhaps even longer. It's may take some time, she concluded. While this statement is "the company line," as a CNBC commentator tagged it, it's still not what equity bulls want to hear.

Whether due to the Beige Book's influence, Yellen's statement, a combination of the two, or a compilation of the effects of the day's releases that served to heighten worries about tomorrow's CPI rather, the indices softened about that time. Some big-cap companies saw their stock prices softening ahead of Apple's (AAPL) after-the-close earnings report, too, and that certainly weighed against the indices.

Cisco (CSCO) collected its third downgrade this week, this one from Merrill Lynch. The stock was downgraded to a neutral rating, with the analyst citing valuation as a primary cause for the downgrade. After closing Friday at $28.92, the stock closed at $26.94 today, losing almost $2.00 in two days of trading.

Reporting companies included JP Morgan Chase (JPM) with the company reporting $1.26 a share, including a $622 million after-tax gain that resulted from the company's exit of the corporate trust business. Income from continuing operation was $1.09 a share. Revenue and earnings-per-share comparisons to year-ago levels were all favorable. Thomsom First Call reportedly expected earnings-per-share of $1.09. JPM closed at $48.43, above Tuesday's $48.39 close, but the day's candle was an ugly one with long upper and lower shadows and with a close below the day's open.

After hours, Apple (AAPL) reported earnings. Piper Jaffray called the numbers "blockbuster numbers," with earnings-per-share at $1.14 versus an expected $0.78 and with revenue blowing away expectations, too. IPod sales were 21 million units versus 16 million units expected for the quarter. However, the company issued what was considered conservative guidance and Mac sales were 1.5 million, below the expected 1.7 million units. Many were looking forward to the conference call to clarify how disappointing the guidance might be considered and how to weigh the mixture of strong iPod, revenue and EPS performances against the other disappointments. Discussions during the day had also considered what might happen with the options investigation and how that might impact Jobs' presence with the company. Much discussion was devoted to whether a criminal charge would result from the investigation and whether investors might be too severely punished if such a charge resulted. AAPL said it was voluntarily providing the government with options-dating data. As this report was prepared, the stock traded at $94.11 in after-hours trading, down from the day's $94.95 close. This was down significantly from an after-hours spike to $98.00.

Tomorrow's Economic and Earnings Releases

Tomorrow will include many important economic developments, including December's CPI, to be released at 8:30, the same time as both weekly jobless claims and December's New Residential Construction. Expectations for the CPI are for a rise of 0.4 percent, and traders don't want that figure to come in too much hotter or higher than that. December's New Residential Construction could impact markets on a normal day, but it may fall by the wayside on a day with so many other important events.

Fed Chairman Bernanke's testimony before the Senate Banking Committee comes next, with that testimony to begin at 10:00. The Conference Board's December LEI figures will be released at the same time, but that's not typically a market-moving release, and it shouldn't be when it's pitted against Bernanke's testimony, either.

Natural-gas inventories will be released at 10:30. After that comes the important January Philly Fed Survey, with this survey of manufacturing strength often moving the markets because it is one of the two that provide some insight into the ISM. The Department of Energy's site lists the crude inventories release time as 1:00. After the market close, the December SEMI Book-to-Bill number will be released.

Important companies announcing earnings tomorrow include MER, UNH, SLM, COF and BK.

What about Tomorrow?

My gut feeling last week wasn't as helpful as I wanted it to be, so this is 'fess up time. My best guess was that we would see some upside follow-through on some indices Thursday morning, which did occur, but I thought that that traders ought to watch for rollover potential at key levels that I pinpointed. Last Wednesday, neither the RUT nor the TRAN had fully participated in that day's rally, and I warned that they had to do so in order for the rally to continue even over the short-term. I showed traders levels to watch for upside breakouts on charts, particularly on the Nasdaq's chart.

I did suggest that participation by the RUT and the TRAN might mean that gains would persist, and also noted that the Thursday before opex week tended to produce results that weren't particularly amenable to technical analysis. I warned traders not to persist in a losing position. However, my gut feeling was that the advance would stall or roll over, and that didn't happen. The RUT and TRAN participated, with the RUT's participation occurring despite rising treasury yields. The rally continued that day. So, that's my confession.

Tomorrow is opex Thursday, the last trading day for SPX, RUT and SOX options. Opex Thursdays tend to feature prices that clamp down about midday, producing lots of frustration for traders who entered plays early and then got caught in non-performing plays. Several charts present configurations that support the thought that a similar event could occur tomorrow. The SOX and RUT are two of those indices, for example. The SPX has produced one of those spike-higher-then-consolidate patterns that it's been so good at producing lately, and if the typical pattern holds, it needs another day or two of small-bodied candles before it moves big again. It does show a possibility for a 13-15 point move in either direction, but the pattern suggests that's the less-likely outcome.

Based on the history of opex Thursday action and these chart characteristics, an early CPI-produced move followed by consolidation seems the most likely outcome tomorrow, but I personally wouldn't be surprised by an actual downturn. That's not my best-guess prediction for tomorrow, because the CPI results could undo anything we're seeing on the charts tonight, but I just wouldn't be surprised to see it. Typically when the SPX begins consolidating above the 10-sma and the RSI reaches the top of its own trendline, the SPX eventually pulls back to the 10-sma, and I just wouldn't be surprised if that happened tomorrow rather than waiting the typical day or two until it happened.

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