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Market Wrap

Airlines and Housing Offset Tech Gains

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After an option expiration week that saw call sellers scrambling to cover positions into Friday's expiration, the major indexes started the week out mixed to lower with airlines and homebuilders offsetting gains in technology.

The AMEX Airlines Index (XAL.X) 43.00 -5.41% was today's sector loser with shares of AMR Corp. (NYSE:AMR) $20.77 -14.38% grounded after the parent of American Airlines warned late Friday that third-quarter revenue per mile flown by American Airlines passengers would rise 4 to 5 percent from a year earlier, which was less than most analysts were expecting.

Jamie Baker, an analyst with JP Morgan, said AMR's comments pointed to slightly lower revenue and higher non-fuel costs than he had expected for the quarter. Mr. Baker questioned the company's claim that bad weather added to summer costs, calling it "a somewhat flimsy excuse."

Other brokers also weighed in with Bear Stearns cutting their Q3 profit forecast for AMR to $0.71/share from $1.00/share. Morgan Stanley had been at the low end of consensus and raised their Q3 EPS estimate to $0.66/share from $0.54/share.

AMR's cautious Q3 outlook further dampened any bullish sentiment in the commercial passenger group with XAL.X heavyweights Skywest (NASDAQ:SKYW) $24.75 -1.55% (9.65% weighting), Frontier Airlines (NASDAQ:FRNT) $6.04 -0.33%, Airtran Holdings (NYSE:AAI) $9.92 -4.24%, UAL Corp. (NASDAQ:UAUA) $43.23 -6.04%, Southwest Airlines (NYSE:LUV) $14.99 -2.28% and Continental Airliners (NYSE:CAL) $30.46 -6.85% (7.89% weighting) trading lower.

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The housing sector remained weak ahead of tomorrow's housing data (see Saturday's Market Wrap). The Dow Jones U.S. Home Construction Index (DJUSHB) 362.75 -5.22% closed at a new multi-year low.

Economic data released today was largely regional.

The Chicago Fed Index was -0.57 in August, down from +0.03 in July. The three-month moving average decreased from -0.11 in July to -0.21 in August, where the negative value suggests that growth in national economic activity was below its historical trend. The Federal Reserve Bank of Chicago notes that a three-month moving average below -0.70 following a period of economic, would begin to suggest that there is an increasing likelihood that a recession has begun.

After tonight's closing bell, shares of home improvement giant Lowes Companies (NYSE:LOW) $30.55 -0.22% fell to $28.70 in electronic trade after the company said its full-year (2008) earnings will come in at the low end, or below its prior guidance of $1.97 to $2.01 a share, because current sales are trending below earlier expectations. Analysts were expecting the company to post a full-year profit of $1.99/share on revenue of $49.58 billion.

U.S. Market Watch - 09/24/07 Close

The NASDAQ-100 Index (NDX.X) 2,057.25 +0.37% does get a close at a new multi-year high, as does its tracker QQQQ $50.59 +0.45%.

NASDAQ-100 heavyweights Apple Computer (NASDAQ:AAPL) $148.28 +2.86% (10.41% weighting), Microsoft (NASDAQ:MSFT) $29.08 +1.50% (5.43% weighting), Qualcomm (NASDAQ:QCOM) $41.64% +1.98% (4.87% weighting) and Google (NASDAQ:GOOG) $568.02 +1.41% (4.66% weighting) traded higher, while 5th-most heavily weighted shares of networking giant Cisco Systems (NASDAQ:CSCO) $31.88 -1.30% (4.00% weighting) finished lower.

Wynn Resorts (NASDAQ:WYNN) $156.01 +8.67% and Garmin Ltd. (NASDAQ:GRMN) $115.03 +5.82% continued their torrid advances to lead a narrow list of NDX/QQQQ gainers (33 up Vs. 67 down), while telecom equipment maker Tellabs (NASDAQ:TLAB) $9.46 -4.05% and aforementioned UAL Corp. (UAUA) $43.24 -6.04% traded lower.

Banks traded mostly lower with the S&P Banks Index (BIX.X) 362.12 -1.60% and KBW Bank Index (BKX.X) 106.72 -1.62% stride-for-stride after Merrill Lynch downgraded Well Fargo (NYSE:WFC) $35.96 -0.77% to "neutral" from "buy" and KeyCorp (NYSE:KEY) $32.88 -2.43% and Regions Financial (NYSE:RF) $30.06 -1.47% to "sell" from "neutral," citing their recent stock performance and rising credit losses amid the housing downturn and credit crunch.

Exacerbating the weakness in the financials was a Reuters report that Germany's Deutsche Bank (NYSE:DB) $126.34 -2.27% may have to write-down a $40.96 billion loan portfolio by $2.4 billion. The investment banking giant declined to comment, but the write-down would amount to almost 6% of its total pipeline of leveraged loans promised to clients.

Global Equity Benchmarks and Currencies Table

With many global equity benchmarks showing gains since last Monday's Market Wrap, which encompasses Tuesday's FOMC decision on interest rates, I think traders and investors will now begin to focus on Wednesday's (11:10 AM EDT) commentary out of Europe and the ECB's President Jean-Claude Trichet when he addresses the ABP European Pension Summit, in the Netherlands.

On Saturday, Mr. Trichet will deliver a speech titled "Challenges to the International Monetary System: Rebalancing Currencies, Institutions and Rules" at the Salzburg Seminar, in Austria.

With the euro still showing strength against the US$ and the Japanese yen, it becomes apparent to me (Jeff Bailey) that the ECB may well have to lower rates.

I will note to traders and investors that Great Britain's Pound (GBP), or Great Britain is NOT directly impacted by the ECB (European Central Bank).

Japan's Nikkei-225 ($NIKK) showed what I would consider to be a very anemic "bounce" and with the BOJ hesitant to raise rates from 0.50%, the ECB may well have to follow the Fed's move and begin easing.

Over-the-Counter Bullish % (BPOTC) Reverses Up!

Market participants may have already begun to factor in some ECB rate cuts on the heels of last week's FOMC action as the VERY BROAD OTC Bullish % (BPOTC) from Dorsey/Wright and Associates reverses back up into a column of X and begins to confirm the reversal up in the VERY BROAD NYSE Bullish % (BPNYSE).

OTC Bullish % (BPOTC) - 2% box

At the close of Thursday's trade (09/20/07) the VERY BROAD OTC Bullish % (BPOTC) from Dorsey/Wright & Associates reversed back up into a column of X.

It is thought by market technicians (like myself) that a "healthier" market advance sees broader strength, and that's what I'm seeing as 41.73% of roughly more than 3,000 four and five-lettered stock symbols listed at the NASDAQ now show Point and Figure buy signals associated with their supply (O)/demand (X) charts.

StockCharts.com's NASDAQ Comp. Bullish % ($BPCOMPQ) also reversed back up into a column of X from 34% to 40% and finished at 43.55% as of tonight's close (+0.28% Monday).

NASDAQ Composite ($COMPQ) - 20-point box

The reversal UP in the $BPCOMPQ certainly gives internal "confirmation" to the double top "buy signal" from 09/04/07 at 2,640. I've highlighted in "PINK BOXES" the approximate REVERSAL UP points that would correspond to the $BPCOMPQ.

As of tonight's close (09/24/07) all major market bullish are signaling that DEMAND is back in control of U.S. Equity Markets.

The "last" to reverse up has been the ($BPCOMPQ).

One way I would use the above observation is to now have a more BULLISH bias as internal strength broadens out.

The first sign of MEANINGFUL weakness in the NASDAQ Composite chart above would be a trade at 2,520.

From current levels of trade (2,668), that would equate to a 5.54% decline.

I would NOT condone, nor suggest FULL BULLISH POSITIONS, but look to initiate NEW positions should we see a 2.5% pullback in either the NASDAQ Comp., or other major U.S. Index.

For the WEAKEST and also broad Russell 2000 Index ($RUT.X), I would now have to initiate a STOP LOSS should the RUT.X trade 824. If FULL POSITION SHORT, look to REDUCE short exposure to 50% on a decline to 784.

For iShare Russell 2000 (IWM) $80.39 -0.70%, this would be equivalent to a STOP at $82.40, and REDUCE short exposure to 50% on a decline to $78.40.
 

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