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Market Wrap

Market Wrap

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If our markets struggled to find equilibrium this week among a slew of announcements, earnings and economic developments, we weren't alone. Overnight, global markets reacted with apparent relief to yesterday's late-day recovery in U.S. equity markets. The relief carried over into Europe's open as earnings from European financials proved strong.

Introduction

As the Bank of England and European Central Banks met to decide on interest rates this morning, our futures hovered near fair values. They began improving as the U.S. cash equity market open approached. Both central banks kept interest rates steady, although ECB President Jean-Claude Trichet's address during his press conference possibly signaled a rate hike as early as September.

European banks such as Credit Suisse, Societe Generale and Barclays had strengthened in Europe after their earnings reports. As a CNBC commentator noted this morning, the executives of those banks "went out of their way to reassure" market participants that the European banking industry was not suffering and that there was plenty of deal money.

Other forces were at work. For several nights, CNBC Asia commentators have keyed in on what's happening with the yen carry trade. Early this morning, the U.S. dollar traded at a flat-line level when compared to the yen, but that was to change when the pair moved upward.

The action of that pair had performed as a strong predictor of equity prices lately. Last Thursday, I told market participants that some signs of big-money buying in equities were countered by continuing weakness in the USD/yen chart. I had advised that they should watch that chart the next day to gauge whether the bounce potential would be realized. The bounce did not occur, of course, but those watching the USD/yen action would have been forewarned.

Fifteen-Minute Chart of the USD/Yen:

This chart was snapped about an hour before the cash open today. (This is the reason that I'm not correcting the grammatical error in the annotation. I want to show the action as it existed then to show how this pair can be used to either predict or corroborate equity action.)

Shortly after this chart was snapped, the USD/yen pair's level broke above the triangle that can be seen forming on the right side of the chart. Our futures began improving about the same time, showing either predictive or corroborative action that could have been watched outside of the cash equity markets.

In addition to being reassured by results from European banks and this currency pair's move, market participants celebrated results from Nokia (NOK). NOK's strong results came at the expense of industry peer Motorola (MOT), but MOT investors celebrated right along with NOK's. Crude moved lower, too, during the overnight session.

The stage was set for an early equity bounce, at least. Would such a bounce be a setup for another bout of selling or would it continue?

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The bounce was soon threatened. News of another potential sub-prime casualty surfaced. Accredited Home Lenders Holding Co. (LEND) filed a delayed Form 10-K that mentioned the conditions under which the company could default. The company admitted to facing margin calls and challenges that it called significant. LEND's announced acquisition by Lone Star Funds is still pending according to Marketwatch.com, but some market watchers questioned whether Lone Star would try to renegotiate, given the drop in LEND's price.

That information and the rumor that another large brokerage firm would also report losses related to sub-prime exposure seemed to tip financials over again. By the afternoon, Standard & Poors had downgraded Lehman Brothers, saying that LEH might be impacted more than had been previously thought due to mortgage-related problems, a call that proved to be somewhat controversial, if CNBC's Bob Pisani was correct.

Market participants spent money on safe-haven bonds, driving interest rates lower, while the indices languished in tight ranges near their day's high. Crude had already bounced back into positive territory, pressuring equities. Today, the energy secretary warned OPEC that higher energy prices posed a threat to the U.S. economy.

The day's early optimism had been dampened by the many worries facing equity investors, but anyone watching the USD/yen pair might have been on the watch for a potential bounce in equities. That bounce again came in the last few minutes of the cash equity market day.

Annotated 10-Minute Chart of the USD/YEN for Thursday:

Did today's bounce in equities change anything? Let's look at equity charts.

Charts

Last week's megaphone interpretation of the SPX's shape appears to have been the correct one. The SPX broke below the megaphone's support and ran down to test the 200-sma, first piercing that average and then bouncing strongly and closing above it. Today, the bounce continued, although that end result appeared questionable at some times during the day.

Annotated Daily Chart of the SPX:

Both bulls and bears could claim victory today. Bulls could assert that instead of the hard down day that was seen after each up day this week, bears could manage only to stall the advance at next resistance. Bears could assert that the resistance held again.

Until and unless the SPX begins producing closes above the aqua-colored 72-ema, bounces remain suspect and the SPX remains vulnerable to another 200-sma test. At least. If you bought this bounce, have profit-protecting plans in place for each important test: at each red trendline and especially at the 72-ema. Would-be bears should watch for rollover potential at each of those resistance levels, but we're due a sharp short-covering rally sometime soon. Don't let yourself be caught on the wrong side of such a rally, if it should occur. Make sure that the advance/decline line, the TRIN and the action of the USD/yen support rollover potential before entering a bearish play. Be ready to bail from bearish plays if a short-covering rally begins.

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 USD/YEN:

The possibility exists, then, that the USD/yen pair has already achieved its downside target. Another interpretation suggests a little more downside to go, perhaps after a rise into either the 200-sma or the head-and-shoulder neckline.

Today's Developments

It's been a big week for important economic releases or events. Today was no exception, although this day's slew of reports was not quite as important as those that have come or will come tomorrow. Monster kicked off the day with the July employment report. Monster summarized the report by saying that the company noted the typical seasonal slowing in July, with the index dropping three points. Monster has noted a July slowdown each year it's compiled its index.

The slowdown in the housing market does continue to impact online hiring in the construction-related fields. In California, the softening spilled over from housing to finance and into the wider service sector, the company noted. This slowdown in housing-related construction was responsible, at least in part, the company said, for a below-average second quarter growth rate, although the year-over-year growth rate did increase slightly above that seen in the previous report. The summary did note that the index was 18 points higher than the year-ago level.

The typical weekly initial and continuing claims report followed at 8:30. The Labor Department noted that initial claims climbed for the first time in four weeks, rising by 4,000 to 307,000 for the week ending July 28.

As you may recall, new claims for two weeks had held close to the 300,000 benchmark. New claims below that benchmark indicate a too-tight labor market that's adding wage pressures to other inflation pressures. The four-week moving average continued dropping and now rests at 305,500. Continuing claims also dropped, by 16,000 to 2.52 million, with its four-week moving average declining by 9,250 to 2.54 million.

The most important release of the day was the revision of June's Factory Orders at 10:00. The Commerce Department revised June's number for capital spending higher, saying it had remained flat rather than declined 0.7 percent, as previously reported. However, that revision and the revised-higher shipments of core investment goods constituted about the only good news in the report. The headline number of total orders for U.S.-made goods rose a less-than-expected 0.6 percent, and that headline number was already being propped up by aircraft orders that rose 31 percent. Without aircraft and other transportation orders, orders fell 0.5 percent.

Other components declined or were revised lower, too. Those included orders for durable goods. Orders for computers and electronics, excluding semiconductors; electrical equipment and primary metals fell. Shipments fell for those categories as well as for fabricated metals and machinery. Inventories rose and the inventory-to-shipments ratio rose to 1.25 from its previous 1.24.

The Energy Department released the weekly natural gas inventories at 10:30. Those inventories rose slightly more than the expected 75 billion cubic feet, to 77 billion cubic feet. The number was interpreted as bearish for natural gas prices, with some caveats. Those caveats, according to a CNBC discussion with an industry analyst, include the record number of shorts in the domestic futures contract as well as the approaching heaviest weeks of the hurricane season. Both could pump up natural gas prices.

Today, Countrywide Financial (CFC) tried to assuage concerns that it could be impacted by the bullets hitting LEND and others in the mortgage industry. CFC said that its liquidity planning had proven effective earlier this year and that it still is.

Starbucks (SBUX) and Walt Disney Co. (DIS) counted among the reporting companies that pleased investors, at least in earliest trading. SBUX investors used the early bounce to unload some inventory, and the stock had turned slightly negative by noon.

Reporting companies today also included International Paper (IP). Although the company appeared not to meet earnings expectations of $0.54 a share on revenue of $5.4 billion, earnings were sharply higher than the year-ago period and the company reported "continued margin expansion."

Bank of America initiated coverage of Hewlett-Packard (HPQ) today with a buy rating. Other company-related news included Dell's (DELL) announcement that it would buy Corporate Express' ASAP Software unit for $340 million. The company expects the deal to close in its fiscal third quarter. Another deal in the making involved Fiserve (FISV), with that company announcing that it would acquire Checkfree (CKFR) for a 30-percent premium to CKFR's Wednesday closing price. Of course, CKFR has dropped more than 11 percent since the middle of June into yesterday's close. These two announced deals, coupled with the reassurances of the European banks about the credit crunch, must have reassured some that all liquidity has not yet dried up.

News that had more negative connotations for the market came from Mattel (MAT). The company announced a recall of toys from its Fisher-Price unit. The toys contain hazardous levels of lead paint, the company revealed.

After the close, Take-Two Interactive (TTWO) announced that it would delay the introduction of "Grand Theft Auto IV" video game by up to six months. The company also lowered forecasts for the full year.

Tomorrow's Economic and Earnings Releases

Tomorrow ushers in two important reports: July's Employment Report and ISM Non-Manufacturing Index, with the report on jobs probably the most important of the two. Tuesday's ADP was much weaker than expected, leading some to conclude that the expected 135,000 jobs will not be produced, but the ADP number has missed, famously, several times. A slightly weaker-than-expected jobs number might reassure market watchers who fear that a tightening job market might be adding to inflation pressures, especially ahead of next week's FOMC meeting. A too-weak number might raise fears that the economy is weakening, and the potential consumer along with it. This jobs number needs to be just-right Goldilocks number, in my opinion.

The Employment Report is due at 8:30 and the non-manufacturing ISM at 10:00. At 10:30, the ECRI Weekly Leading Index follows, but it may garner little attention. When I substitute for someone on a weekend Wrap and have to include this report among Friday's happenings, I sometimes have difficulty even finding the release.

June's Semiconductor Billings will also be released tomorrow. Those are typically released after the market close, however.

The earnings calendar will be heavier than it usually is on a Friday. PG, WY, TM, PGR and EOG comprise some of the reporting companies.

What about Tomorrow?

I knew what to expect today after yesterday's late-day bounce. Various chart indicators suggested that we would see some carry through of that gain.

I don't have a clue about tomorrow's direction. Tomorrow will be about positioning ahead of the FOMC meeting as well as reacting to the jobs number and recent volatility. Worries about the yen carry trade continue in Europe and Asia. Those worries are the subject of much debate on late-night market-related programs issuing out of Asia, so that currency pair as well as the euro/yen pair should be watched. We should not oversimplify, but a rise in the USD/yen pair generally has been supportive of equities, and a decline generally pressures them.

Let's at least look at some short-term levels to watch, levels that might be important in earliest trading tomorrow morning.

Annotated 10-Minute Chart of the SPX:

Annotated 10-Minute Chart of the Nasdaq:

Annotated 10-Minute Chart of the RUT:

Let's analyze these charts a bit. They all look similar with regard to these moving-average-based Keltner channels, don't they? That says to me that there was some institutional involvement in getting them where they were.

But where were these setups as of the closed? Prices were parked right at resistance that held all day, resistance that shows up on the daily charts, too. We see this type of action many times heading into important economic events, with prices on many indices parked right at important resistance or important support, ready to roll down or bounce through the next level. Tomorrow's jobs number is one of those important events, especially as that report will have some impact on how people position their portfolios ahead of next week's FOMC meeting.

Whether prices will burst through resistance or roll down from it won't be and can't be determined by me today, but you should have part of your answer by tomorrow morning's response to the jobs report.
 

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