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Market Wrap

Majors Finish Mixed; Treasuries Hold Strong Bid

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The major equity indices started the week out mixed in a notably, yet surprisingly light volume trade, as investors weighed an upbeat outlook from chip maker Intel (NASDAQ:INTC) $25.34 -0.51% against speeches from various Fed officials regarding the current credit crunch and its impact on the U.S. economy.

Some signs that momentum bulls are moving back to the sidelines present themselves in the new high/new low measures as the NASDAQ's 5-day NH/NL ratio reverses back down into a column of "O" at 50.00%.

It would currently take a closing measure of 32.00% for the NYSE 5-day NH/NL measure to reverses back lower, and that looks eminent as new highs at the big board begin to stall from Tuesday's inflection high of 60, while new lows begin to build greater than the 35 found on August 28th.

The major indices did gap modestly higher at the open after Intel said its revenue and profit margin for the third quarter should come in at the high end of, or exceed, its July forecast, thanks to "stronger-than-expected worldwide demand for its computing products." The chip giant said it now sees revenue of $9.4 billion to $9.8 billion, compared with prior revenue forecast of $9 billion to $9.6 billion.

The world's largest semiconductor company also told investors that gross profit margins, a key measure of profitability, is expected to be at the upper half of the company's previous estimate of 52% of revenue, plus or minus a couple of percentage points.

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October Crude Oil futures (cl07v) were strong for a 6th-straight session ahead of tomorrow's OPEC meeting. In their first gathering in six months, OPEC's representatives reportedly have various views on output quotas after last week's employment figures here in the U.S. hinted further of a cooling economy.

One proposal floated today called for a modest increase of 500,000 barrels a day.

October Crude Oil futures settled up $0.79/ barrel, or +1.03% at $77.49.

As traders returned from an extended Labor Day holiday, greater enthusiasm for Treasuries was found ahead of next week's FOMC decision on interest rates.

The shorter-dated 5-year yield Treasury bond found another strong round of buying, falling below the 4.00% level for the first time in nearly two years.

CClosing U.S. Market Watch - 09/10/07

San Francisco Fed President Janet llen said she thinks downside risks to the U.S. economic outlook have clearly risen in the wake of recent financial market turmoil, but the implications for monetary policy still remain uncertain.

"Some markets have become downright illiquid," she said in a speech to the National Association for Business Economics convention in San Francisco. While the Fed's recent responses to the market turmoil have been "helpful, these actions have not, however, served as a panacea," she said..

55-year Treasury Yield ($FVX.X) - Daily Intervals

In my last Market Wrap (8/20/07) I had marked the "low yield" on the 5-year ($VX.X) at 4.186%. Friday's strong round of buying drove its yield further lower and today's closing yield of 3.983% should solidify a 25-bp cut in Fed Funds to 5.00%, and I would also have to think an additional 50 bp, or 25 bp cut in the discount rate.

I say this now, and will test it late, but I think any decision by the FOMC to lower rates much more than a COMBINED 75 basis points (Fed Funds + Discount Rate) would trigger a broader market equity sell off as market participants would view such action as heightened economic concern.

RRussell 2000 Index ($RUT.X) - Daily Intervals

From a macro-economic perspective, the "small caps" as depicted by the Russell 2000 Index ($UT.X) remain most vulnerable to downside price action. Most have a lesser-degree of export exposure that may come from a weaker U.S. dollar, and with Fed observing spots of illiquid credit markets, that's just another area of risk to avoid near-term.

II do observe some stability after the Fed's 8/17/07 decision to lower the discount rate, but action in the 5-year YIELD ($FVX.X) now suggests addition liquidity is called for.

S&P 500 Index (SPX.X) - Daily Intervals

When I returned to my regular duties here at OptionInvestor.com on Tuesday, September 4th, the S&P 500 Index (SPX.X) had closed back above some important resistance at 1,485 and looked as if it might be set to stage a more meaningful rebound.

However, the continued strong demand for Treasuries still suggests to me that a defensive posture is warranted as last Tuesday's 5-year Yield ($FVX.X) decline below 4.20% gave a pretty good read on Friday's job report.

It had been, and continues to be my analysis, based on observation, that the RUT.X is WEAKEST (small and broad), and the S&P 500 Index (broad) is the next weakest major index.

With the shorter-dated 5-year Treasury Yield ($FVX.X) still falling, it would have to still be my analysis that equity buyers are hesitant.

As for BIG and NARROW, the Dow Industrials (INDU) 13,127.85 +0.11% certainly has NOT set a bull's world on fire, and trades relatively unchanged from my last Market Wrap on 8/20/07 close of 13,121.

Dow Industrials (INDU) - Daily Intervals

Despite dollar weakness, which should bode well for U.S. companies that EXPORT goods and services abroad, the mega-caps of the Dow Industrials are little changed the past couple of weeks.

NASDAQ-100 Index (NDX.X) - Daily Intervals

While "big tech" remains rather volatile, the NASDAQ-100 Index (NDX.X) 1,960.20 +0.09% is the only major index to still hold a close above its 6/04/07 close. That would also be very close to the NDX's 50% retracement.

NDX heavy-weight Apple Inc. (NASDAQ:AAPL) $136.71 +3.74% got a strong bounce from its curling higher 21-day SMA today after the company said its iPhone sales hit 1 million units ahead of forecast.

If looking for an INDEX to test MARKET SENTIMENT against, this would be "the index." br>
I'd have to say sentiment BULLISH on closes ABOVE 1,933 and more BEARISH BELOW 1,933.
 

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