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Market Wrap

Merger Monday. Oil Looks Ready For An Advance.

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The major indexes recouped most of last week's losses in a bullish post quadruple witching expiration, where strength in the dollar against the yen and an abundance of merger activity buoyed investor optimism.

Monday's session here in the U.S. found buyers at the open, as foreign bourses saw strong gains on the heels of the Peoples Bank of China saying it was raising rates by 0.27 basis points, bringing the one-year deposit rate to 2.79% and its lending rate to 6.39%. It was the third time in 11 months that the BOC has raised rates in an attempt to cool the country's rapid growth. The bank's policy appeared to be working as growth in spending on factories and real estate slowed to 23% in the first two months of the year from a peak of 31% in the first half of 2006.

Hong Kong's benchmark Hang Seng Index ($HSI.X) jumped 313 points, or 1.65% to 19,266, while Japan's Nikkei-225 ($NIKK) gained 265 points, or +1.59% to close just above the psychological 17,000 level at 17,009.

The dollar found gains against the yen, where of late, equities both here in the U.S. and abroad have seeming mirrored strength in the dollar versus yen, and weakness when the yen strengthens against the dollar.

Monday's dollar/yen cross rate saw the USD/JPY gain 0.69%, or 0.81 points to 117.51 from Friday's final tick of 116.70. Still, the USD/JPY remained range-bound from 115.50-118.50 against the yen, and closed today's session just below last Monday's close of 177.72.

Currency traders will be keeping an eye on things later this evening as the Bank of Japan is tentatively scheduled (no firm date/time) to address interest rates. According a poll by Forex Factory, market participants see the Bank of Japan holding rates steady at 0.50%.

In my opinion, a surprise move out of the BOJ would be for them to RAISE rates. That could have the yen strengthening further against the dollar.

European bourses saw Britain's FSTE 100 gaining 0.96%, German's DAX adding 1.39% and France's CAC-40 jumping 1.43% on Monday.

U.S. Market Watch - 03/19/07 Close

My QCharts' percentage changes for 5-dayNet% longer may be incorrect. I have validated, or edited some of the 5-dayNet% changes for accuracy (blue squares).

Crude Oil futures for April (cl07j) are being rolled ahead of Tuesday's expiration, where April delivery settled down $0.52, or -0.91% at $56.59. May Crude Oil (cl07k) on the NYMEX settled up $0.12, or +0.20% at $59.70.

Meanwhile, April Unleaded (rb07j) settled higher by $0.051, or +2.67% at $1.9481. May Unleaded (rb07k) gained a more modest $0.029, or +1.55% to settle $1.8991.

Look for the crude oil commodity to be firm-to-higher as the summer driving season is just months ahead. I'm looking for refiners that have temporarily "shut down" some of their operations for maintenance ahead of this summer's unleaded switchover to start seeing some steadier draws on crude oil supplies.

U.S. Oil fund (AMEX:USO) - $0.50-box chart

As depicted by the U.S. Oil Fund (AMEX:USO) $48.70 +0.57%, oil the commodity is giving some "mixed signals" and remains longer-term bearish. But I think oil traders are going to be getting BULLISH in comings sessions, perhaps this Wednesday's EIA inventory data will spark the longer-term advance and refiners gear up for this summer's driving season.

Some BULLISH observations dating back to mid-January is the notable advance/demand (column of X) from January 19th to February 5th, where during that time we saw some interest from market participants with a nice heavy VOLUME build. That advance from $43.50 to $49.50 was a "low pole warning" and a pattern that point and figure chartists will look for as a potential sign of a bottom.

I like the STRATEGY of picking up an initial position, say 1/4, or 1/2 position to try and mitigate some bullish RISK, where a stop could be placed at $47.00, or $46.50. In my opinion, the USO should NOT trade $46.50 AFTER Wednesday's EIA inventory report.

Another Merger Monday ...

If you had a stock that benefited from today's merger activity, you probably know it by now, but just because the major indexes aren't trading at multi-year highs, that doesn't mean M&A activity has taken a rest.

Confirmed M&A of U.S.-based companies exceeded $15 billion. While foreign deals of U.S.-traded ADR's also found some action on M&A news.

Herbicide and pesticide service provider Servicemaster (NYSE:SVM) $15.15 +12.47% said it had agreed to be acquired by a private investment group in a deal valued at $5.5 billion, which included the assumption of $1.02 billion in debt.

Health service provider Triad Hospitals (NYSE:TRI) $51.72 +4.78% confirmed it has agreed to be acquired by Community Health (NYSE:CYH) $34.78 -5.48% for $5.1 billion.

Drilling contractor Todco (NYSE:THE) $39.24 +19.70 saw its shares gain more than $6.00 after the company said it had agreed to be acquired by Hercules Offshore (NASDAQ:HERO) $25.32 -4.70% for $2.3 billion in cash and stock.

American Depository Receipts (ADRs) of energy producers Braskem (NYSE:BAK) $15.01 +16.53%, Ultapar Participaceos (NYSE:UGP) $24.92 +5.99% and Petrobras (NYSE:PBR) $87.84 +1.92% gained after companies agreed to purchase petrochemical concern Ipirange for $4 billion. The news ignited some speculation among traders and investors that a merger between two, if not three of the consortium (BAK, UGP, PDR) might be in the works.

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Shares of Netherland's largest bank ABN Amro (NYSE:ABN) $41.36 +14.12% finished well above their gap-higher open of $39.47. The stock jumped on speculation that it was in talks to be acquired by United Kingdom's Barclays PLC (NYSE:BCS) $53.35 -0.28%. After the close, ABN confirmed it was in "exclusive preliminary discussions with Barclays PLC concerning a potential combination of the two organizations." At tonight's close, ABN's market capitalization is roughly $78 billion, while Barclays market cap is approximately $87 billion.

Subprime "shift"....

In this weekend's Market Wrap, Jim Brown mentioned that subprime lender Accredited Home Lenders (NASDAQ:LEND) $8.95 -17.88% was going to sell $2.7 billion in subprime loans at a discount in order to free up capital so it could cover margin calls.

While Accredited Home Lenders did not give specifics as to whom they might sell some of the $2.7 billion in loans to, a MarketWatch report on Friday said that chief financial officers of Bear Stearns (NYSE:BSC) $147.12 +1.1%, Goldman Sachs (NYSE:GS) $202.44 +1.7% and Lehman Bros. (NYSE:LEH) $72.30 +1.60% all said they expected these assets to come on market and that they would be buyers at the right prices.

To me, this "sounds" very similar to what took place months ago in the natural gas arena, when hedge fund Amaranth disclosed it had lost anywhere from $6 to $9 billion as natural gas prices plummeted and moved against the firm's bullish strategy. Banker JP Morgan (NYSE:JPM) $47.58 +1.16% reportedly picked up the assets for $2 billion by late September, and within days, the firm had sold enough of the natural gas futures portfolio to shift more than 50% of its risk to others.

Late Friday evening, in the OptionInvestor.com Market Monitor, I quickly reviewed the AMEX Securities Broker/Dealer Index (XBD.X) 230.88 +1.64%, as BSC, GS and LEH comprise this index.

It may well be that some of the subprime lenders are taking some appropriate action, and "shifting" some of there now realized RISK to the major brokers. And these BROKERS know how to manage risk!

As such, the XBD.X becomes a focal point for me, perhaps you, and I want to show what I think are some meaningful PRICE observations as it relates to some of the "warnings" bears reiterated in mid-September as to why the brokers were headed lower.

AMEX Broker/Dealer Index ($XBD.X) - Weekly Intervals

Last week's decline in the XBD.X came right at its mid-September breakout, where the brokers were getting ready to launch to an all-time high.

On Friday, we learned that one strategy the subprime lenders will look to take for liquidity is to sell some of their loans to the big brokerages, which have demonstrated over the decades, an ability to assess and then manage risk.

Technically, it "makes sense" that the XBD.X found support last week where it did. That was a level (221) where some long-time "broker bears" were shorting/putting the XBD.X in mid-September.

Two questions we all have is "how much further downside risk is there?" and "how long will this last?"

The XBD.X may give some guidance.

The most recent "correction" we have to draw on is the decline from mid-April 2006 to mid-June 2006, when the XBD.X fell 21%.

That was about 2 months!

The current "correction" looks to have begun in earnest in mid-to-late February, and to last week's inflection low, would equate to a 14% decline.

We might then get an idea that based PURELY on PRICE, and given recent history, the XBD.X may be roughly two-thirds of the way through a correction, if we are to use mid-April 2006 to mid-June 2006 as the most recent example.

In Friday evening's Market Monitor, I also reviewed Dorsey/Wright & Associates' Wall Street Bullish % (BPWALL), which measures the percentage of "Wall" Street-like stocks showing point and figure buy signals still associated with their charts, looking VERY SIMILAR to sector internals found in late May 2006.

As of tonight's closing measure, Dorsey/Wright's BPWALL was unchanged at 45.24%.

Bullish % For Wall Street (BPWALL) - 2% box chart

Imagine if you will that you are keeping track of 100 stocks' point and figure charts. In one stack, you place only those that show a "buy signal" still intact on the PnF chart. As of tonight's count, you'd have roughly 45 stocks in the "buy signal" stack (thus 45.24% bullish) and another 55 stocks in the "sell signal" stack.

Do you see some of the INTERNAL similarities of the BPWALL today, that would have presented themselves in early June (blue 6) of last year?

What we can say on a QUANTITATIVE basis is that the BPWALL is as WEAK as it was in late May, but there has also been a lot of RISK REMOVED when this bullish % was up at 82%.

S&P Depository Receipts (AMEX:SPY) - Weekly Intervals

With some subprime "risk" being shifted to the brokers, and the brokers an excellent "tell" (as are banks, if not financials in general) a group of stocks that tends to LEAD advances and declines for the S&P 500, there are also some SIMILARITIES taking place today (this week) that took place last spring and early summer.

I'd currently be assessing downside RISK over the next couple of MONTHLY (about 8 more weeks) to SPY $134.00. That would equate to about an 8% decline from the recent highs of $146.00.

That type of decline may well come IF the XBD.X were to see a similar 21% decline from recent highs.

As of tonight's closing measure, Dorsey/Wright's bullish % for the S&P 500 (BPSPX) rose 0.81% (net gain of 4 stocks to point and figure buy signals) to 66.80%, just up from a recent low measure at Friday's close of 66.00%.

Since August of 2004, Dorsey/Wright's bullish % for the S&P 500 has not fallen to 46.00% and has been a LEVEL OF RISK that seems to find BUYERS really holding firm over SELLERS.
 

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