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Market Wrap

Tin-Foil Markets

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In recent months, many writers have commented on the Teflon (R) markets. Today, the Dow, at least, could have been called the tin-foil market. Dow component Alcoa (AA) soared after Rio Tinto (RTP) topped its bid for Canada's Alcan Inc. (AL). Within a few minutes of the open, gains in AA and other Dow components such as Home Depot (HD), Wal-Mart (WMT) General Motors (GM) and JP Morgan Chase & Co. (JPM) had led the Dow to a new all-time high. By the end of the day, article headlines noted that the Dow had produced its biggest gain in four years.

The SPX charged up to and ultimately above its all-time closing high of 1539.18. Closing at 1547.70, the SPX is not far off its March 24, 2000 intraday high of 1552.87. The Nasdaq climbed, too, to six-year-highs, with techs ignoring a warning by Motorola (MOT).

Introduction

Retail sales had also been streaming in before the open. Retailers reported mixed results, but any bad news reflected off the tin-foil markets.

Mixed results were seen elsewhere, including the forex market and some breadth measures. In early trading, the U.S. dollar declined against the euro. That result could be seen as a sign of persisting fears about the sub-prime problem. However, both the euro and the U.S. dollar climbed against the yen, at least easing concerns about the yen carry trade. Internals were positive.

Crude costs climbed during the earliest trading. So did ten-year yields. Today the Bank of Canada announced that inflation risks were balanced but that a small rate increase might be needed. The central bank's statement perhaps kept worry about inflation risks primary in the minds of bond traders.

Both rising crude costs and rising bond yields sometimes weigh down equities. Market participants watching the early equity rise must have wondered whether rising crude and bond yields would at some point stop the day's advances. The tin-foil market effect ultimately triumphed. Crude backed off its early gains, giving equities some breathing room. Some viewed the decline of bonds and subsequent rise in their yields as a sign that money was rotating into equities rather than the safer-bet treasuries.

Charts

Annotated Daily Chart of the SPX:

With the SPX not far off its all-time intraday high of 1552.87, make profit-protecting plans for bullish plays. If GE disappoints and smashes expectations for this earnings season tomorrow morning, declines could begin immediately. However, barring that, the most logical pattern for the day after such a big-range day is a consolidation day that may include a punch higher and then a close back at or near that daily Keltner resistance.

Decide tonight what you're going to do with your bullish plays if the SPX should consolidate tomorrow, perhaps beginning again its typical strong-gain-consolidate-several-days routine that was so prevalent for many months. If you're holding front-month (July) calls, such action could be deadly to your premium, with the extrinsic value rapidly seeping away while markets consolidate for days on end.

There's no guarantee this will happen but make your plans in case it does. The same is true of Dow-related options.

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

Annotated Daily Chart of the SOX:

Annotated Daily Chart of the RUT:

I can't always include all the charts I want as it lengthens the report too much, but I did want to note that the TRAN did not echo the Dow's breakout, with the TRAN closing just below the June 1 intraday high of 5348.47. This is another non-confirmation, albeit a minor one.

Today's Developments

Jobless Claims for the week of July 7 and May's International Trade Balance started off the day's releases at 8:30 this morning. The Labor Department reported that initial claims fell 12,000 to 308,000. Those worried about inflationary wage pressures don't want to see this figure drop consistently below 300,000 new claims as that indicates a too-tight labor market. The four-week moving average dropped to 1,500 to 317,750. Continuing claims dropped 4,000, but the four-week moving average of this figure rose by 17,500 to 2.52 million.

Economists predicted that the International Trade Balance would widen to $59.4-60.0 billion, with the previous deficit at $58.5 billion. The trade gap widened to $60 billion. Both exports and imports increased, by 2.2 and 2.3 percent, respectively. It might be tempting to conclude that the stronger increase in imports indicated a continued strong appetite for goods, but economists note that the increase in imports was mostly driven by higher prices and not by increasing volumes of imported goods. Those higher costs were seen in petroleum-related products, of course, with imports of petroleum-related products climbing to their highest level since September.

However, the U.S. did import a record $36.7 for goods such as machinery and machine tools, telecommunications equipment, and other capital goods. That was a good sign to combat the more worrisome ones.

When the numbers were adjusted for prices, the real trade deficit changed very little. Also, for the calendar year, exports have risen 10.8 percent while imports have climbed only 4.5 percent.

Our deficit with China widened, growing 17 percent so far this calendar year. The deficit with Japan decreased to its lowest level in three years.

Natural Gas Storage figures followed at 10:30. Inventories rose by 106 Bcf. Supplies of 2,627 Bcf compare to a year-ago level of 2,691. Natural gas prices were lower for the day but closed within the $6.40-6.80-ish consolidation zone that's been building the last couple of weeks.

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June's Treasury Budget was released at 2:00 EST, with the budget surplus projected to be $25 billion. The Congressional Budget Office pegged it at $27.5 billion instead, slightly above expectations. For the year, the deficit is now $121 billion. A Marketwatch.com article notes that the deficit is about $84.5 billion less than the year-ago level.

June's chain store sales were released throughout the day. WMT beat expectations as did some other retailers, but Macy's Inc. (M) results led the company to trim its forecast for its second-quarter profit. Costco (COST) also didn't quite meet expectations, but J.C. Penney Co.'s (JCP) same-store sales declined less than expected. Dillard's also fell less than expected.

In other company-related news, MOT reported that poor sales in Europe and Asia prompted a lowering of its second-quarter revenue forecast. The company expects that its second-quarter loss will be deeper than previously forecast, too.

UBS knocked its rating for Royal Dutch Shell down from a buy rating to a neutral rating. The firm noted UBS's 30-percent gain since the middle of March when downgrading the shares, so this appeared to be a valuation call.

Chemical company Huntsman (HUN) agreed to be purchased by Apollo Management's Hexion Specialty Chemicals for $10.6 billion. Russian billionaire Len Blavatnik had also made a bid for the company but didn't take advantage of the time Huntsman gave him to beat Hexion's deal.

AA benefited today from being outbid for Alcan. GE benefited from calling off its offer for two diagnostics units of Abbot Labs (ABT), although the day's candle wasn't particularly bullish and didn't represent a new breakout. Some market pundits thought GE's $8.1 billion offer had been too high.

Whole Foods' (WFMI) stock dropped early today although the stock had made up its losses by the close. Although the CEO's alleged actions may not be a market-moving event, the speculation about his comments in Web chat rooms certainly proves interesting. Allegedly, he employed those chat room comments to advance WFMI and disparage takeover targets.

Tomorrow's Economic and Earnings Releases

Tomorrow's release schedule is a busy one. June's Import and Export Prices as well as June's Retail Sales are reported at 8:30. With Fed Chairman Bernanke's failure to reassure market participants Tuesday, an undue rise in import prices might sour the mood engendered by today's rise. Also on Tuesday, a warning from one retailer and an earnings disappointment from another contributed to that day's decline, so market bulls would like to see a rise in retail sales stronger than the expected 0.3 percent to counter the early week results.

July's Consumer Sentiment is expected at 10:00, with the prior number at 85.3. May's Business Inventories number arrives at the same time slot. So does the Manufacturer's Survey for the second quarter. They're followed by the ECRI Weekly Leading Index at 10:30.

GE should report tomorrow, and the company usually reports in the morning. This report could be market moving since GE is often seen as a proxy for the economy. I noted that although GE did pocket a gain today, the candle was a small-bodied one at resistance, so that GE's performance, at least, could not be seen as confirming the breakouts.

What about Tomorrow?

Today was the Thursday before opex week. That's often a crazy day, one in which markets are driven one way or another as big money positions itself for opex week. For many months, we've often seen weakness on Wednesday, sometimes carrying over into Thursday morning. The Wednesday or early morning Thursday low was often a buying opportunity into the next week, opex week, that was sought and capitalized upon by big money.

Either big money accelerated the schedule by a day, driving markets lower on Tuesday and beginning the buying yesterday morning, or some other pattern is asserting itself. I don't know which might be true, but I do know that the Thursday before opex week is often more about positioning for opex week than about following technical analysis. That positioning may have skewed indicators. When you study the intraday charts below, you'll discover many Keltner breakout moves but was this action skewed and will the breakout moves continue tomorrow?

I'm worried, just a bit, by failures to confirm strength. This could be seen in the failure of the RUT, TRAN and USD/yen pair to lead gains today as well as in non-confirmation by RSI moves on daily charts, in some cases. The USD/yen pair ended up jammed against resistance (intraday Keltner, daily converging 10- and 30-sma's, etc.) In addition, the propensity is for big-range days to be followed by small-range ones. The non-confirmations aren't strong enough for me to declare that the rally isn't sustainable or anything like that, but it does lend some credence to the possibility that markets could follow that often-seen tendency for a big-range up day to be followed by a smaller-range one or even by a decline.

Let's see what the intraday Keltner charts show, but I would urge bulls and bears alike to watch the TRAN, RUT and USD/yen (BUSDJPY on QuoteTracker but I'm not sure what on other charting programs) for confirmation or non-confirmation of equity moves.

Annotated 30-Minute Chart of the SPX:

With such a setup, it is often typical to see prices bounce back and forth between the purple upper channel line and the black upper channel line before deciding on final direction. Barring an impetus for a stronger move, perhaps delivered by GE, that would support the idea that tomorrow could be a smaller-range consolidation-type day. The SPX is in breakout mode, but I'm just not sure whether prices just overran the resistance when shorts were forced to cover at the close. Once the breakout mode is erased, confirmed by the upper purple line holding as resistance on 30-minute closes, it's typical for prices to eventually pull back to the aqua-colored line, but that line will be rising and so will be higher than it is now. It's the 120-ema.

Annotated 30-Minute Chart of the Dow:

Annotated 30-Minute Chart for the Nasdaq:

 

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