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Market Wrap

5-Card Texas Hold'em

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In the second-lightest volume trade of the year, the major indexes finished lower with the small caps of the Russell 2000 Index ($RUT.X) 775.81 -0.98% pacing the decline, while the mega-caps of the very narrow Dow Industrials (INDU) 13,403.42 -0.29% gave back a fraction of last week's 2.51% gain.

For those that may not be familiar with the card game Texas Hold'em, it is a derivative of 5-card draw, or 5-card stud, where each player is dealt two cards face down, which only each player themselves can view.

The game is divided into a series of hands or deals. At today's close, I think readers should envision the "flop" (dealer has turned three cards face up) and market participants (or card players) have decided to either play the next round, "the turn," or simply fold and wait for the next game.

It has been my observation in recent weeks that the small caps of the Russell 2000 (RUT.X) have been the weakest of hands a bull could play, and headed into this week's FOMC meeting and closely scrutinized earnings reports from Lehman Bros. (NYSE:LEH) $58.62 -1.47%, Bear Stearns (NYSE:BSC) $115.38 -1.54% and Goldman Sachs (NYSE:GS) $187.61 -1.56%, last week's "lagging" to the upside, and today's "leading" to the downside in the RUT.X doesn't look overly bullish.

One card the dealer turned up this morning drew a negative reaction in Microsoft (NASDAQ:MSFT) $28.73 -1.06%, which did weigh on broader technology.

The European Union's second-highest court affirmed the EU's nine-year pursuit of the world's largest software maker, rejecting the company's appeal and strengthening the Euro-zone's hand as it pushes ahead with cases against other major technology companies.

"The decision very clearly gives the Commission quite broad power and discretion," Microsoft lawyer Brad Smith said. "There are many companies in our industry that have a very large market share." He added that the 248-page ruling would actually affect "every other industry in the world."

In Washington, Assistant Attorney General Thomas O. Barnett said the European ruling "may have the unfortunate consequence of harming consumers by chilling innovation and discouraging competition."

"In the United States, the antitrust laws are enforced to protect consumers by protecting competition, not competitors," he said in a statement. "In the absence of demonstrable consumer harm, all companies, including dominant firms, are encouraged to compete vigorously."

An additional card turned up in the "flop" was the regional NY Empire State Manufacturing Survey (September), which came in at 14.7. The 14.7 reading, while expansionary, was below the 18.0 consensus and prior 25.1 reading.

The index is derived from a survey that asks respondents to rate the level of general business activity as "decrease", "increase", or "no change". Although this survey is limited to manufacturers in New York only, many pay close attention because the New York Federal Reserve releases it weeks before other major reports on manufacturing (e.g., Industrial Production, ISM Manufacturing Index).

One bullish card I saw turned today had to do with merger and acquisition news.

Remember months ago the plethora of M&A news and "Merger Monday" when the markets were seemingly awash with liquidity?

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Shares of defense aerospace/defense contractor EDO Corp. (NYSE:EDO) $54.84 +6.46% closed at another all-time high today after the company said it had agreed to be acquired by ITT Corp. (NYSE:ITT) $63.50 -1.22% for roughly $1.19 billion in cash.

The value of the deal is based on the purchase price of $56/share and the 21.3 million shares EDO had outstanding as of July 31.

Some analysts disagreed whether ITT's offer would spark a bidding war among other defense companies. Raymond James analyst Chris Quilty said in a note to clients it was very likely that rival bids by Lockheed Martin (NYSE:LMT) $99.41 -1.90% and General Dynamic (NYSE:GD) $80.48 -0.78% could help drive the takeover price higher, recommending investors purchase the stock below ITT's offer.

Conversely, Stifel Nicolaus & Company analyst Troy Lahr said new bids would be unlikely given EDO's credit challenges and uncertainty over revenue past 2008.

If nothing else, the new high from EDO gives me a transition to one of today's internal indicators where the NYSE's 5-day NH/NL ratio (see table above) does reverse back up into a column of X.

With so many opinions on what the Fed will do with interest rates this week, and what type of market reaction will be found if the Fed does this, or that, one place I think traders and investors might be able to turn to this week is what the New Highs, or New Lows "say" about where the markets are headed.

NYSE Composite NH/NL Ratio Chart - 2% Box Chart

Institutional traders, especially investment houses, will monitor variations of the NYSE new highs and new lows.

For longer-term investors, they'll focus more on the 10-day NH/NL ratio (depicted by O and X on the above chart). For shorter-term to intermediate-term traders, I show a "f"ive-day NH/NL ratio, where at today's close, we do see a 3-box (from 30% up to 36%) reversal.

On August 22, 2007, the "f"ive-day NH/NL ratio did give a "buy signal" at 16% (exceeded a 14% measure inflection high from 8/09/07).

When I look at the above point and figure style chart of the NYSE 5-day and 10-day NH/NL ratio, it is the 5-day (f) that may help give us the observation of a "range," where going forward, further BULLISH LEADERSHIP could be found should the 5-day NH/NL ratio move further higher to 40%, while BEARISH LEADERSHIP unfold at a 5-day NH/NL ratio of 28%.

It would be LIKELY that the 10-day NH/NL ratio (X,O) follow the 5-day.

With that said, let's take a look at the very broad NYSE Composite ($NYA.X) 9,607.75 -0.68%.

I'm going to "mark" the not only the 8/22/07 close (when the 5-day NH/NL ratio gave the buy signal), but I'm also going to mark the 8/09/07 close.

NYSE Composite ($NYA.X) - Daily Intervals

You can "count the bars" on the NYSE chart above and see that the NYSE Composite ($NYA.X) trades just higher than it did 5-day's ago.

When I look at the NYSE 5-day NH/NL measure (f), perhaps you can see the IMPORTANCE of what plays out over the next five sessions.

What I do this evening is view an further PRICE strength and a NYA.X CLOSE above 9,700 as BULLISH, with the 5-day NH/NL ratio giving a second "buy signal" at greater-than, or equal to 40.00%. I would have to think that a CLOSE BELOW 9,499 is BEARISH and would likely have the 5-day NH/NL ratio "confirming" such price action with a measure of less-than, or equal to 28.00%.

In Friday's OptionInvestor.com Market Monitor, I also laid out some NYSE new high and new low "benchmarks."

The greatest number of new highs found on the NYSE since the "reversal up" has been 70 on 09/12/07. The greatest number of new lows has been 133 on 9/10/07.

The reason I focus on the NYSE NH/NL internals is that this broad group of stocks is what institutions tend to "buy and hold" when they see fit. When they are SOLD, that gives many the observation that BIG MONEY is SELLING.

NASDAQ-listed stocks tend to be "traded" stocks, thus we will associate them as being more volatile. Volatile stocks tend to be TRADED, not bought and held.

S&P 500 Index ($SPX) - Daily Intervals

I don't have too much further to add to last Monday's Market Wrap regarding the S&P 500 ($SPX) chart. One development that has taken place was a "doji" (where open and close is equal) that was created last Wednesday (09/12/07) when the SPX closed 1,471.56.

Technicians (those that rely on charts) as part of their market analysis (like myself) will view a "doji" as some type of market equilibrium, where buyers and sellers have agreed on PRICE.

Not today's SPX low of 1,471.82.

On Thursday, PRICE resolution was to the UPSIDE of the "doji," and a very subtle hint that demand might be outstripping supply.

However, BUYERS (demand) couldn't quite close the deal above 1,485.

One internal indicator I have a very close eye on right now is the S&P 100 Bullish % (BPOEX) from Dorsey/Wright and Associates.

This would be an INTERNAL measure of supply/demand regarding the BIGGEST 100 of the S&P 500.

S&P 100 Bullish % (BPOEX) - As of 9/14/07 Close

At the time of this writing, I do not yet have today's action update from the institutionally followed Dorsey/Wright and Associates regarding the S&P 100 Bullish % (BPOEX).

However, as of Friday evening's close, of the 100 point and figure charts (supply/demand) in the narrow but BIG cap S&P 100, 67% of the point and figure charts were showing a "buy signal," while 33% were still on a "sell signal."

On August 16, just 39% of these 100 stocks (39 of the 100) still had a buy signal associated with the chart. On 8/17/07 the BPOEX would have reversed up to "bear correction" status.

Should we see a net gain of 1 stock, or 1%, this narrow, but BIG cap market index would achieve "bull confirmed" status.

Here's a point and figure chart of the S&P 100 (OEX.X) on a conventional 5-point box chart.

S&P 100 Index (OEX) - 5-point chart

The OEX is trying to work its way ABOVE the bearish channel (just a 45-degree angle). We can easily "tie" the S&P 100 Bullish % chart and the OEX chart together and see how the recent addition of reversing "buy signals" has the OEX itself looking strong.

From a pure supply (O) and demand (X) picture, the OEX can be BOUGHT with a STOP at either 670 (where O would exceed prior column of O). Further sign of strength would be another "buy signal" (first buy signal was at 690, when column of X exceeded prior column of X) at 700.

Bottom Line:

I do remain rather cautious from both the BULLISH and BEARISH point of view.

I do think traders and investors alike are best served to be BULLISH larger-cap names, and NARROWER indexes like the Dow Industrials (30 BIG CAP STOCKS), or S&P 100 (100 BIG CAP STOCKS), or NASDAQ-100 (100 BIG CAP NON-Financial) stocks.

I would avoid, or trade BEARISH the smaller-cap index, such as the Russell 2000 ($RUT.X), and a security like the iShares Russell 2000 (IWM) $77.23 -1.10% is an ETF (electronic traded fund) that traders/investors will utilize for small-cap exposure.

Here is a very quick snapshot of where the major global equity benchmarks stand at tonight's close, as well as some of the major currency relationships.

Global Equity Benchmarks and Currencies Table

In some of my Monday evening Market Wraps, I've been showing the above table of global equity index benchmarks.

At the far right of the table, I'm showing an approximation of what would be the "Q3 to Date" percentage gains and losses.

Is a "global recession" upon us?

I would have to say that China's HangSeng and Shanghai certainly don't depict some type of global economic slowdown.

One item that is rather "clear" is how Japan's Nikkei-225 shows an 11.13% decline so far this quarter. And we will note that the US$/Yen shows the dollar WEAK against the yen, which could be viewed as a NEGATIVE for Japanese exports to the U.S. We can also see the Euro/Yen showing the euro WEAK against the yen, which here too could be viewed as a negative for Japanese exports to the Eurozone.
 

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