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Market Wrap

Market Wrap

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Trouble loomed during the pre-market session today. The yield on the ten-year treasury note hit a five-year high this morning, with experts casting around for a reason and not finding any particular trigger. Chinese inflation notched higher and some foreign central bank members sounded a bit hawkish, according to one article. Demand was weak at a treasury auction.

However, if you read Jim Brown's Wrap last night, you know that this selling of bonds and subsequent rise in yields may be part of a weeks-long process of diversification out of dollar-denominated securities by China and other governments. If you're a technical trader, you know the part that momentum can play in a trending move, too.

Even momentum-drive moves must eventually pause, and that's what happened after the ten-year yields hit that early high. Yields dropped.

The pullback in yields allowed equities a bit of a breather before the afternoon's important Beige Book release. Equities gained, pulled back slightly, and then moved sideways, waiting for that release. The release did not produce any bad news. Equities continued the bounce that they had begun this morning, and yields continued the pullback they'd begun from that early high.


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Something else was happening, too. Both the U.S. dollar and the euro were gaining against the yen, perhaps relieving some concerns about the yen carry trade. In fact, the chart of the USD/JPY pair broke above the year's high. As I've been pointing out in charts for several weeks now, some correlation in the action of this currency pair and U.S. equities has been noted lately, so this move could have been deemed supportive of equities, too.

Annotated Weekly Chart of the USD/JPY:

The euro also gained against the yen today. Both developments at least corroborated the gain in equities whether or not they had any causative function. That's a question that's being debated by many of the world's economists these last few months. I'm not going to weigh in with a completely unlearned opinion but instead will acknowledge that there's some quibbling about whether the chicken or the egg comes first in this inter-market relationship.


One headline this afternoon noted that the Dow had posted its best one-day gain this calendar year. Many bulls applauded the strong gains today and many bears lamented them, but I'm more skeptical than the bulls for now. That could change as soon as tomorrow. The one thing that keeps me from being too skeptical is that USD/JPY breakout to a new yearly high, and you can bet I'll be watching that inter-market relationship tomorrow. Here are the rest of the charts.

Annotated Daily Chart of the SPX:

Many proclaimed the bullishness of today's action, noting the bullish engulfing candle. I don't think that candle is proof of anything yet, any more than yesterday's reversal of almost two days of gains was proof that the SPX was going to head lower. We have to consider not only the candle formation but where it occurred. This one occurred in what may well be a building consolidation zone, and they just don't have as much significance there. Look back to last summer and you can find day after day of alternating up and down movements, for several weeks before next direction was found.

We may know next short-term direction as soon as tomorrow, but for now we have volatility within a chop zone that's being established without yesterday being a clear breakdown or today being a clear breakout. Be careful about your expectations here. I wouldn't be surprised to see prices rise to test or pierce resistance tomorrow, but I also wouldn't be surprised for that resistance to ultimately hold, producing another consolidation Thursday.

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

Annotated Daily Chart of the SOX:

Annotated Daily Chart of the RUT:

Annotated Daily Chart of the TNX:

Today's Developments

Today was a busy day for releases, with the afternoon's Beige Book release probably the most important of the day and one of the most important of the week. However, before that release, the day's slate began at 7:00, when the Mortgage Bankers Association released its weekly mortgage application volume survey for the week ending June 8.

The Composite Index, the headline number, increased 6.6 percent week over week on a seasonally adjusted basis and even more on an unadjusted basis. It was higher than the year-ago level by a hefty 16.1 percent. All component indices--refinance, purchase and conventional--increased, too.

Four week moving averages remain mixed, however. Refinancing activity remained at 38 percent of all applications for mortgages. ARM applications increased, a puzzle to me in a rising rate environment, although the average contract interest rate for one-year ARMs did decrease to 5.48 percent from the previous 5.74 percent. The average contract interest rate for a 30-year fixed-rate mortgage increased to 6.61 percent from the previous 6.35 percent.

An hour and a half later, May's Import and Export Prices and Retail Sales were both released. The Labor Department reported that Import Prices rose 0.9 percent, much higher than the predicted 0.2 percent, but still smaller than the gain seen in recent months. It should be noted, however, that April's Import Prices were revised higher with this report. Over the past 12 months, import prices have risen 0.2 percent. Excluding petroleum prices, which rose 2.7 percent, import prices still rose 0.5 percent, their largest gain in six months.

Export Prices rose only 0.1 percent, however. Some categories saw strong gains, but export prices in nonagricultural foods and distilled beverages fell 3.6 percent, and that depressed the headline number for U.S. exports.

Industry analysts believed that Retail Sales would climb 0.7 percent, recovering from the prior 0.1-percent drop. Instead, they shot higher by 1.4 percent. The Commerce Department tagged that as the biggest seasonally adjusted gain in almost a year and a half.

Why did recent same-store sales by retail chain stores and reports by automakers show more weakness? The seasonal adjustments the Commerce Department makes are different than those made by automakers and chain stores.

Gains were made across all categories of sales. Some pundits interpreted these figures as showing that the consumer hasn't been hit as hard as anticipated by higher gasoline prices. However, inflation, particularly in energy-related measures, did play a role in the gains. Industry experts assure market participants that wasn't the only reason for the gains. Excluding gasoline sales, sales rose 1.2 percent.

The combination of an increase in retail sales--strength for the economy--and a sharper-than-expected rise in import prices--troublesome on the inflation watch--may have contributed to that early rise in yields today.

April's Business Inventories appeared next, at 10:00. Economists forecast a rise of 0.4 percent, up from the prior 0.1-percent decline. Inventories met that expectation, gaining only 0.4 percent while sales climbed 0.7 percent. That drove the inventory-to-sales ratio down to 1.27, the lowest it's been since last August. Businesses report that they have about 39 days of sales in inventory, down slightly from the previous 40 days of sales. The strength seen in other areas wasn't true of auto retailers, however.

If demand is robust in the next months, this sets up businesses for a round of increased production and a subsequent boost in the GDP. The business inventories number isn't typically seen as a market moving release.

The API and Energy Department differed in their assessments of crude inventories, as they almost always do. The API reported that crude inventories climbed 1.7 million barrels while the Energy Department said they increased only 100,000 barrels. The API thought gasoline supplies fell by 3.1 million barrels while the DOE thought they were unchanged. The API reported a fall of 2.7 million barrels in distillate supplies while the Energy Department thought they rose 300,000 barrels.

The differences seemed more pronounced than the typically are. Crude futures climbed, but stayed within the consolidation formation that's been forming for several months, visible on a weekly chart. Weekly closes beneath the 50-sma and above the 20-sma have been the norm since the week of March 19, and nothing can be presumed about next direction until that pattern is broken. My charts produce a weekly 50-sma of 67.55 and a weekly 20-sma at 65.59, so the noose is tightening. Remember that these are weekly averages, and it's possible to pierce a weekly average intraweek yet hold to its resistance or support at the close of the week.

Then came the Beige Book, released at 2:00. Headlines trumpeted news that was considered good, with moderate growth and nothing alarming on the inflation front. All twelve districts reported growing manufacturing activity and consumer spending. Housing remained weak, with the South and the Midwest also suffering from the slump. All districts reported flat or declining mortgage lending. Inflation pressures were observed, but not growing worse. Those pressures included hiring, with hiring increasing in several regions. Rising energy and food prices also contributed to the pressures.

All in all, investors decided they hadn't heard anything that they hadn't heard before and reacted with relief. Those who would like to read the details can find this report, prepared by the Federal Reserve Bank of Philadelphia at this link.

The U.S. Treasury also produced its semi-annual report on currency manipulation. Experts did not expect the Treasury to cite China. As expected, the report did not cite China as a manipulator of currencies. Beats me, but that's what the Treasury Department said. In fact, none of our major trading partners was termed a manipulator. The Treasury Department did censure China, however, saying the country needed to move more quickly toward a stronger and more flexible currency. It was only for technical reasons that China escaped that classification as a manipulator, some concluded.

Weakness in Apple (AAPL) continued today. Last Thursday, AAPL had left a long upper shadow on its daily candle, suggesting that there had been some sellers waiting at the day's high.

Other stocks in the news were Boeing (BA) and Illinois Tool Works (ITW). BA boosted its 20-year forecast for its aircraft deliveries around the globe and Merrill Lynch upgraded ITW.

Lots of deal making still figured in the news. The Dubai government may buy Barneys New York from Jones Apparel, according to The New York Post, as quoted in a Marketwatch.com article. Investors have offered $46 a share for Biomet (BMET). Ceridian Corp.'s (CEN) largest shareholder apparently isn't happy with the deal CEN accepted from its buyers and has hired Lazard Freres to look for other deals. Early news reports noted that Lehman (LEH) had taken a meaningful position in SkyPower Corp. Alcoa (AA) might receive a counteroffer from Alcan (AL), Bear Stearns noted today.

Tomorrow's Economic and Earnings Releases

Tomorrow includes an economic release as important as this afternoon's Beige Book, if not more so. At 8:30 tomorrow morning, May's Producer Price Index (PPI) will be released, with expectations for the rise to moderate from the prior 0.7 percent to 0.5 percent.

The first quarter's Quarterly Services number appears at 10:00. That's not a number that I regularly follow, so I have little insight to provide.

The typical Natural Gas Inventories follows at 10:30, with May's Semi Book-to-Bill the last to arrive, at 6:00. This number can and does impact markets, but market participants may be paying far more attention to positioning their portfolios ahead of Friday's CPI than they are to the book-to-bill number.

Companies reporting earnings tomorrow include ADBE, BSC, CATS, DLM, GLBC and GS. BSC and GS continue the reporting among financials that has been going on all week, of course.

What about Tomorrow?

Tomorrow ends trading for SPX and many other index options for the June option-expiration cycle. OEX options trade through Friday, of course.

Some pin-them-to-the-number action is often typical for an opex Thursday after markets have stopped reacting to the early morning economic releases. This would fit with what we're seeing on the daily charts, too, with many indices mired in consolidation zones, caught between nets of support and resistance, and perhaps even needing to consolidate today's gains.

The PPI and the currency inter-market relationships are the wildcards, however. Those index charts look as if it will take a strong push to break through either support or resistance, and the PPI could deliver it. If we get a renewed influx of cash from those assured that they don't need to unwind their yen carry trades, that could, too.

Here's what's showing up on short-term charts.

Annotated 8-Minute Chart of the SPX:

Annotated 8-Minute Chart of the Dow:

Annotated 8-Minute Chart of the RUT:

Many factors seem right for a consolidation Thursday tomorrow, including the propensity for Thursdays to produce consolidation, the special propensity for an opex Thursday to do so, and the need to consolidate today's huge gains that stopped just shy of potential resistance in many cases. Remember that consolidation does not preclude a push higher that is then rebuffed.

However, that USD/JPY breakout argues against that conclusion, suggesting a stronger rise in equities while the pullback in yields at least allows breathing room for that to happen.

I'll be keeping a close eye on those inter-market relationships and suggest that you do so, too, looking for as many of them to be supporting your trade as possible. You can watch these relationships prior to the cash-market open, after the PPI is released, to get some idea about the earliest market reactions, at least. I literally would not rule anything out at this point, so be especially careful with your trades, watching stops and maybe keeping positions a bit smaller than is typical for you.

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