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Market Wrap

Market Wrap

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Wall Street started the week out on a positive note with the major indexes posting fractional gains.

Based on this morning's readings, and volume observations of individual stocks listed on the NYSE, total volume on the NYSE as posted in the above table is probably inaccurate.

U.S. economic data continued to show modest, yet stable signs economic growth at the factory level.

After a surge in March factory orders (+4.3%), The Commerce Department said factory orders increased a more tepid 0.3% in April, which was below the 0.8% increase economists had expected.

The Commerce Department noted a sharp 23.4% decline in demand for ships and boats, which reversed a 13.3% increase in March.

A 10.7% decline in commercial aircraft orders also reversed huge gains the past two months.

China's Shanghai Composite ($SSEC) fell 330 points, or -8.26% to 3,670 on Monday, as retail investors there continued to lock in gains and fret about a hike in stock-trading tax, the latest move from China's central bank (People's Bank of China) to cool a market that had nearly tripled in value the past year. It was the index's biggest one-day decline since February 27, which set off a brief global market.

"The Chinese market does not have much liquidity and when it moves, it moves in one direction. Any big swings should fuel concerns about global money investing in emerging markets and other risky assets," said Norihiro Fujito, general manager at Mitsubishi UFJ Securities Co. Ltd.'s investment research and information division.

Shanghai Composite ($SSEC) - 50-point box

Having gained roughly 56% since January to its recent highs of 4,300, or 43% from a triple top buy signal at 3,000 in mid-February, the rather illiquid stocks of the $SSEC broke support at 3,850 on Monday.

While I do not put great weight into INDEX bullish and bearish vertical counts derived from the institutionally followed point and figure charting methodology, these bullish and bearish vertical counts serve as an initial too for RISK/REWARD assessment.

Having exceeded it BULLISH vertical count of 3,950, Monday's trade at 3,850 and currently building to the downside column of "O" has a bearish vertical count to 3,200.

Investor psychology may have also taken a hit.

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On Friday, Bloomberg quoted one Chinese investor, Ge Hong, a 30-year-old Shanghai post office worker as saying, "I'm very worried and I don't know what to do." Ge said she lost 2,000 yuan ($262) in the May 30th decline, more than half a month's salary for the average postal worker in the city.

Mark Mobius, who oversees about $30 billion as managing director of Templeton Asset Management, said in an interview last week that a 30% decline would be "healthy" for the Chinese market.

As I look at the $SSEC, a 30% decline from the recent highs of 4,300 would equate to a pullback to roughly 3,010.

Hong Kong's Hang Seng ($HSI) - 50-point box

The more institutionally held Hang Seng ($HSI) bucked the mainland weakness by rising 126 points, or 0.62% on Monday and closed at 20,729.

On May 9th, I captured Dorsey/Wright's World Bullish Percent Bell Curve. Similar to the various MARKET and SECTOR bullish % measures I follow, and update trader on in the OptionInvestor.com Market Monitor, we can perhaps take get a feel for how STRONG, yet OVERBOUGHT (levels above 70% are deemed overbought on a quantitative basis).

World Bullish % Bell Curve - 05/09/07

Money/cash tends to rotate within a country, and around the world. The MARKET (in this case, a GLOBAL market) is great at SELLING HIGH RISK, and BUYING LOWER RISK. On May 9, the Shanghai Composite ($SSEC) closed at 3,875, which was prior to its recent highs of 4,300.

Here's Dorsey/Wright's World Bullish % Bell Curve as of Friday evening's closing measures.

World Bullish % Bell Curve - 6/01/07

Again, Shainghai's Composite is full of rather illiquid shares, and perhaps Ge Hong's comments give us a feel for investor sentiment.

Do you see some of the "rotation" taking place that I mentioned might be set to take place in my May 21st market wrap? Even China said it had agreed to place $3 billion of its foreign exchange reserves with US-based private equity group Blackstone that day.

From last Tuesday's Market Wrap, and continuing coverage of my May 21 wrap "Another Piece of the Puzzle Falls Into Place" I'm following, and making some minor adjustments.

US Large Cap, Small Cap, China and Japan

While data feeds on China's Shanghia Composite don't allow for me to track that index in my benchmark table, I think the point and figure chart of the $SSEC, if not the Global Bullish % suggest investors are exiting the quantitatively HIGHER RISK situation there, and opting for other regions of the world.

It had been thought by some that the small caps of the Russell 2000 Index ($RUT.X) were a "high risk" asset class here in the U.S. several weeks ago.

Last week, I had actually profiled a SHORT position in the iShares Japan (EWJ) $14.73 +0.34% on May 24 at $14.34, which was BEFORE the People's Bank of China tripled a share-trading tax on the May 30th.

I noted early that morning that the EWJ's morning's low was right at our short entry of $14.34. It was as if market participants were saying "It's not Japan," that then had us getting stopped out of that 1/2 position short on Friday at $14.62 or a -1.95% loss.

As I continue to follow the "China Revelation" and put the pieces of the puzzle together, I have to think, based on observation that market participants are jitter over the changes that the People's Bank of China are now having to deal with, in regards to past yuan manipulation, and market participants are indeed opting of "safer havens" or "less risky" regions of the globe.

Closing U.S. Market Watch - 06/04/07

Monday did find some M&A news.

The most notable M&A activity in my opinion was that subprime lender Accredited Home Lenders (NASDAQ:LEND) $15.12 +9.88% said it had agreed to be acquired by private equity firm Lone Star for $400 million, or $15.10/share.

The sale comes just two months after the San Diego-based company obtained a $230 million term loan from hedge fund Farallon Capital.

I followed shares of LEND closely from late February, and noted the $230 million cash infusion from hedge fund Farallon Capital.

Should we see any other "stressed" subprime lenders also find future cash infusions from hedge funds, be alert to the company being a prime take-over candidate.

Contract electronic manufacturer Solectron (NYSE:SLR) $3.88 +15.13% was atop today's list of most actives at the big board, turning 123.9 million shares after the company said it had agreed to be purchased by larger rival Flextronics (NASDAQ:FLEX) $11.54 -1.36% for $3.6 billion in cash and stock.

The AMEX Airline Index (XAL.X) 50.95 -2.74% was today's sector loser after Continental Airlines (NYSE:CAL) $37.45 -6.09% said late Friday its overall passenger unit revenue fell between 0.5% and 1.5% from May 2006 levels.

J.P. Morgan Securities analyst Jamie Baker wrote in a research report he believes that Wall Street overall expected about 1% growth.

Goldman Sachs' Robert Barry said CAL's weak figures are partly due to the difficult year-ago comparisons. "But we also see the result as further evidence of an increasingly unfavorable domestic supply/demand dynamic, engendered by slowing demand growth, rising supply, and aggressive low cost carrier pricing."

Energy equities depicted by the OIX.X, OIH and XNG.X were broadly higher, in part on news that Cyclone Gonu is expected to hit the Persian Gulf in the next 18 hours (from time of this writing).

"There is concern the storm could disrupt shipping," said Phil Flynn, an analyst at Alaron Trading Corp. "Any type of disruption or in crude supply right now would be critical to a world thirsty for oil."

July Crude Oil (cl07n) at the NYMEX settled up $1.13, or +1.74% at $66.21 in Monday's trade.

S&P 500 Index ($SPX) - 10-point box

Ask any trader/investor about "valuation," or "risk" and you'll get at least 4 different answers.

Is China's Shanghai ($SSEC) a bit "overvalued?" Some may say Yes! It achieved its bullish vertical count of 3,950 and until just recently, was up anywhere from 43% to 56% since January.

Is the widely followed S&P 500 Index ($SPX) "overvalued?" Still some room to its longer-term bullish vertical count of 1,890, with downside RISK being assessed to 1,470 at a MINIMUM, and 1,360, which would be a double bottom sell signal, which would negate the bullish vertical count currently being constructed.

In last Tuesday's Market Wrap I showed a weekly interval bar chart of the tracking S&P Depository Receipts (AMEX:SPY) $154.10 +0.01%, where I thought it would at least take a CLOSE below $150.86 (another assessment of downside risk) before I thought supply would be getting an upper-hand on demand.

The lowest the SPY has traded since Tuesday, May 29th was the next morning and buyers gobbled up the People's Bank of China "bad news" from a session low of $151.34 to a close of $153.48.
 

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