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Market Wrap

It's Yields in One Corner; Crude, in the Other

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Going into the day's trading session, yields were favored as the likely driver of market action while crude was the dark horse. It's possible that crude won the day's round as the strongest influence on trading patterns but yields may pull ahead tomorrow, either pushing equities one direction or the other or pinning them down.

During the early morning hours in pre-market trading, U.S. futures traders labored to send futures higher. They gasped to a stop in their efforts as futures approached their fair values. Headlines had attributed earlier weakness in U.S. futures and European bourses to rate-hike worries. Attention during the pre-market session remained on bond yields, almost to the exclusion of another worry: crude prices approaching $70 a barrel.

Introduction

The ten-year yield had just approached its 10-sma from the underside, pausing there, as the cash equity market opened. The euro/JPY and the U.S. dollar/JPY pairs offered no clues as to equity direction, consolidating sideways as they have been for days.

At least during the pre-market session, it looked as if the headline writers might be at least partly right: the outcome might be at least partly dependent on what happened with treasuries. Bear Stearns' (BSC) announcement yesterday that it was unwinding positions related to two mortgage hedge funds focused attention on treasures and yields.

Many market watchers weren't willing to discount the impact of crude prices, however. Shortly after the cash open, crude prices approached the day's high of $69.85, just cents shy of $70.00. Some worry that the strike in Nigeria will result in violence and that shipments could be impacted, driving crude prices higher. The first equity reaction was to pull back as that test of the $70.00 level was attempted.

By the end of the day, ten-year yields ended up near their 10-sma, barely above where they'd started the day, and the USD/JPY had spent the day consolidating sideways, but crude had pulled back sharply from its day's high. Equities had bounced off their lows while crude was doing so, turning the typical consolidation Thursday into a different kind of day, in which many stocks and indices bounced strongly off their lows. Crude for August delivery was to end the day lower by $0.26 at $68.60 per barrel, well off its intraday high. This pullback occurred as an analyst with the Eurasia Group labeled the labor strike in Nigeria as a "grandstanding" effort by the labor unions, as quoted in a Marketwatch.com article.

Charts

The SPX posted a strong gain, but a gain that brought it up into the center of a forming neutral triangle. I wouldn't be surprised to see that triangle narrow further as next week's rate-hike decision approaches.

Annotated Daily Chart of the SPX:

For the sake of clarity, I haven't shown RSI, but it measures 51.6 on the daily chart, a neutral reading to go with the neutral position between support and resistance.

Squarely between strongest support and strongest resistance could describe the Dow's position, too. RSI (not shown) measures a neutral 52.12.

Annotated Daily Chart of the Dow:

The Dow will require a strong push above its recent highs to invalidate the rounding-over appearance on its daily chart. It can be done and has been done, but for now the formation looks potentially bearish.

Annotated Daily Chart of the Nasdaq:

RSI measures a slightly more bullish 58.16 on the Nasdaq chart.

There was nothing neutral about the SOX today, including RSI, which currently measures 72.07.

Annotated Daily Chart of the SOX:

Since early this year, RSI values near 70, when coupled with tests of the upper rising red trendline, have indicating an impending pullback. The SOX can and does trend. If it's about to begin a trending-higher pattern, that elevated RSI level won't matter, but for now, it signals that bulls need to maintain careful account-management plans as resistance is tested.

Annotated Daily Chart of the RUT:


Annotated Daily Chart of the TNX:


Annotated Daily Chart of Crude:

So far, this looks like a choppy pullback and not the start of a steep decline, but then so did some other pullbacks as they began.

Today's Developments

Today's reports on the economy began with the 8:30 EST report on initial and continuing jobless claims for the week of June 16. Experts expected 308,000 initial claims, down slightly from the previous week's 311,000 claims. Instead, the initial claims rose 10,000 to 324,000, their highest level since April. The four-week moving average, deemed more reliable, also rose. It climbed 2,500 to 314,500. Continuing claims rose 39,000 to 2.523 million, but the four-week moving average rose only 250 to 2.500 million. The insured unemployment rate again stayed at 1.9 percent.

Although not an economic report, Freddie Mac reported that the average for a 30-year fixed-rate mortgage fell to 6.69 percent for the week ending Thursday. The previous week's average had been 6.74 percent. FRE reported that rates also decreased in other types of mortgages.

The Conference Board's Leading Indicators does not typically move the markets, but equities began rebounding from an early dip concurrently with the 10:00 release of May's figure. Whether this release prompted the bounce, the bounce was due to the pullback in crude prices, or they all merely occurred at the same time was unclear.

This Leading Indicators number was expected to show an increase of 0.2 percent after the previous decline of 0.5 percent. However, as part of today's release, April's numbers were revised to a more modest decline of 0.3 percent. May's rose 0.3 percent, beating expectations.

Although the Conference Board did not see increases in all the categories in which increases are sought, headlines and equity markets reacted as if the news were all good. The Conference Board's economist felt the same way, noting that the economy might have withstood the negative impacts of higher gas prices and a slumping housing market.

The Department of Energy reported Natural Gas Storage inventories thirty minutes later. Those supplies rose 89 billion cubic feet.

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The most important report of the day didn't arrive until noon. The Philly Fed Survey, one of the two district manufacturing surveys that are presumed to give some insight into the important national ISM report, was released at that time. Economists had predicted that June's number would be 5.0-8.0 percent, depending on the source, up from the previous 4.2 percent. Instead, the headline number jumped to 18.0 percent in June, a much bigger jump than had been anticipated by even the most optimistic of the predictions I had found. It was apparently the highest number this diffusion index had reached in two years.

Neither equities nor bond yields reacted strongly at first, although the initial reaction was bond-yield and dollar positive and equity negative. This immediate reaction was likely due to today's global attention to rate-hike fears. That immediate reaction was soon reversed, however.

This report surveys mid-Atlantic area manufacturers. The reporting firms did note cost pressures, but only a few more manufacturers reported the ability to pass those costs on to their customers. The prices-paid index eased to 29.7 from May's 32.3, and the prices received index rose to 5.1 from May's 2.2. New orders rose but shipments declined. Employment eased to 5.6 from the previous 12.9.

In company-related news that had wider impact for U.S. equities, Merrill Lynch (MER) auctioned assets it had seized from the mortgage hedge fund that was unwound. MER received prices that reassured markets somewhat, according to some articles.

In other company-related news, GE said that it had halted talks with Pearson PLC to bid for Dow Jones and Company.

Tomorrow's Economic and Earnings Releases

Tomorrow will be light on economic releases, with only the May Mass Layoffs, reported at 10:00, and the ECRI Weekly Leading Index, reported at 10:30. All money managers will be busy positioning their portfolios ahead of next week's two-day rate-hike meeting, however, with that meeting on the 27th and 28th.

Although not an economic release or an earnings' release, tomorrow's launch of the Blackstone IPO, if it does occur, could certainly impact trading, too. As Jim noted on Tuesday, this could be the fourth largest IPO in U.S. history, with some noting that it could be the sixth largest globally. The launch could produce a drain on funds allotted to equities tomorrow. News reports today said that investors from Asian, the Middle East and Europe are interested in acquiring shares of this IPO.

The emphasis should remain on how this IPO "could" use up available equity funds, however, as an exciting debut could also pump up enthusiasm for equities and draw cash from the sidelines. Some market watchers believed that today's midday bounce was attributable at least in part to enthusiasm for equities ahead of that IPO.

The emphasis on "could" is also due to the unique structure of this IPO. Few voting rights are conveyed because those buying the IPO buy only a piece of its management division, an AP article noted. Some market watchers have questioned whether pre-launch interest will turn into post-launch buying.

And, of course, there's another "could" caveat. This afternoon, U.S. Representative Henry Waxman requested that the SEC delay the IPO. He wants a Congressional hearing before the IPO takes place. I did not see a decision as this report was written and cannot judge how likely the SEC is to rule in favor of Representative Waxman's request. I did hear a lot of yelling on CNBC as various commentators including the former SEC head debated the propriety and outcome of this request, but I did not hear any resolution.

What about Tomorrow?

With few economic reports to distract traders tomorrow, the Blackstone IPO, crude costs and especially pre-FOMC position of portfolios may govern the action on equity markets. I don't believe anyone predicts that the Feds will hike rates, but many fear a change in the statement accompanying the decision. Bond yields may assume exaggerated importance tomorrow, so it will be important that our subscribers watch them, too.

Annotated 30-Minute Chart of the SPX:

With SPX prices closing 30-minute periods above the central basis line now at 1519.08 all afternoon, it might be possible to determine a slightly bullish bias to this chart, but that would be stretching it. I've found that when channels line up like this, prices tend to move with equanimity across the lined-up-in-the-middle basis lines for these channels without it meaning much when they do.

Annotated 30-Minute Chart of the Nasdaq:


Annotated 30-Minute Chart of the RUT:

The SOX's chart is different. The SOX is in breakout mode, with the breakout level now at about 509.00-509.50 on 30-minute closes. Until and unless the SOX begins closing 30-minute periods beneath that breakout level, which will change as the day progresses tomorrow, it's in breakout mode. Do beware if the SOX were to gap lower beneath that level tomorrow and then find resistance there on attempts to bounce. That may mean that this climb through the rising price channel on its daily chart is ending.

I can't give you any more than that and can't pull predictions out of a hat. It's big money that drives the markets, with their concerted actions setting up chart formations. If they can't decide on a direction or if they'd decided not to take a new direction and the charts indicate that lack of direction, who am I to be able to predict where markets will go? There's a slight, slight bullish bias on some charts and the springs from the day's low suggest the possibility of more upside, but the setups on these intraday charts really suggest a neutral bias more than anything else.

We don't have economic numbers to determine direction tomorrow, and few companies reporting earnings. The focus will likely be on what will happen next week. It's a bit unusual for markets to start clamping down into that deadly dull pre-FOMC meeting behavior this soon, but I've seen it happen. I can give no suggestions other than that inter-market relationships--currency, bond yields and crude--might assume exaggerated importance in such a climate. Lately, equities have tended to move in opposition to bond yields and crude prices and in concert with the movement in the USD/JPY and EUR/JPY.

There is no guidance to be found in these charts other than guesswork, so if you're tempted into the market, commit fewer funds than usual. Be prepared for a possible prolonged choppy mess, as that's certainly one possibility.
 

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