Does end-of-quarter window dressing have anything to do with stock-market performance this week? Some have speculated that it might and that much of the window-dressing money was going to big caps and techs. Certainly the NDX benefited from buying in both categories today, with the NDX opening a few cents above 2100. That pushed the NDX to a level not seen since February 2001, if I'm reading my charts correctly. The NDX closed just off that high of the day, however, trading in a tight range but never again reaching the early high.
After the credit-crunch scares of recent weeks, some attributed this week's stock performance to relief that the U.S. hasn't produced our version of the U.K.'s Northern Rock and to other signs that the credit crunch may be easing. Many of that U.K. bank's customers stood in lines outside the bank's branches a couple of weeks ago, withdrawing their life savings. Today's announcement that Tracinda might take a position in Mastercard (MA) helped create the feeling that the credit problem was easing.
The underperformance of the financials by some parameters today seemed to refute that second argument. Some individual financials such as C and some indices such as the BIX closed minimally higher, but C closed below its opening level and the BIX produced a small-bodied candle in a congestion zone. The BKX produced a slightly stronger candle but didn't even top yesterday's high and stopped near its 50-sma. Those doing the window dressing didn't seem to want too many financials on their books at quarter's end.
Some market watchers might have wondered if crude's strength might have propped up crude-related indices and stocks. Crude closed the regular trading session at $82.88, up $2.58 on Nymex. We can all remember periods when the crude-related stocks prompted big gains in the SPX, OEX and Dow, for example. However, rally participation was mixed in crude-related stocks and indices. For example, the OIX gained, although it didn't break out to a new high, but the XOI moved sideways. Some of crude's gains can surely be attributed to the dollar's weakness.
Volume patterns didn't exactly sound an enthusiastic affirmation of the bounce, either. Volume was again okay today but not particularly big. For example, with the NDX pushing above 2100 at one point, volume on the Nasdaq exchange was far less than 2 billion.
Let's see what charts have to say.
Annotated Daily Chart of the SPX:
Of course there has been some follow-through, so perhaps my comment that there hadn't been any was misleading. I meant that the SPX hadn't clearly broken higher out of the recent sideways trend with a tall green candle. Today's candle was instead indicative of indecision.
If bulls can't garner enough strength to push the SPX prices above 1540 and keep them there, another trip down to midline and 10-sma support, at least, may be needed to recharge. A bottom-of-the-channel test can't be ruled out, either.
The narrow-based, blue-chip-predominant Dow did a better job repeating that old pattern. Now it's approaching top-of-the-channel resistance. If in bullish Dow-related plays, keep following the Dow higher with your stops. Consider carefully tonight whether you would want to hold onto those positions over the weekend with the Dow approaching that resistance as well as its July 17 intraday high of 14,021.95. Remember, as you're making your decisions, that you may be seeing some window-dressing here. Wise older traders on CNBC admitted today that there's still some concern about market stability and that they'd be wary of too much equity exposure right now, preferring to spend any equity dollars on big caps. We're still seeing some defensiveness in the markets, and that's showing up in the way that the Dow and NDX are perhaps outperforming broader but similar indices.
Annotated Daily Chart of the Dow:
Again, my chart annotations might be misleading. The Dow of course did break higher, and more convincingly than the SPX has done. I meant that it hadn't broken out of the channel, and that, until it does, channel resistance might be presumed to hold.
The Nasdaq's daily candle was not a bullish one, but the last time I wrote the Wrap, a potential reversal signal on the Nasdaq was produced that day, too. It resulted in only a one-day pullback before prices climbed again.
Annotated Daily Chart of the Nasdaq:
If a pullback should occur, look for potential support near those rising red trendlines. However, it may soon be time for a deeper pullback if the Nasdaq can't thrust cleanly above the midline level. If enough interest doesn't exist to push it into the upper, bullish half of its rising channel, then a dip toward the 10-sma and bottom-of-the-channel support may be needed.
Annotated Daily Chart of the SOX:
Annotated Daily Chart of the RUT:
Annotated Daily Chart of the TRAN:
Today's economic releases included the final look at the second quarter's GDP. Economists predicted that the GDP would ease slightly to 3.90 percent, down from the previous 3.95 percent. Economists got it wrong, however, with the growth revised to 3.80 percent. Articles still termed this the fastest growth pace in more than a year.
Although consumer spending, business investments and residential investment were all revised lower, those revisions had minimal impact to the GDP. An upward revision in imports was blamed for the downward revision in GDP. Consumer price inflation was also revised higher by a tenth of a point, a troubling trend for those on inflation watch.
Since this final revision was not earth-shattering enough to garner much attention or impact trading, this article won't detail all nitty-gritty details but will move on to the other reports of the day. During the same 8:30 time slot as the GDP, weekly initial and continuing claims were released. Economists suggested that initial claims would climb slightly to 315,000.
Again, those making the predictions were wrong. Initial jobless claims dropped 15,000 to 298,000. While this is of course an encouraging sign for the economy, this is not all good news, or wouldn't be if initial claims and non-farm payrolls from last month weren't so at odds. Jobless claims under 300,000 indicate a job market that might be tight enough to be adding wage pressures to other potential inflation pressures. With the divergence in this report and last month's non-farm payrolls, it's somewhat difficult to ascertain what's going on in the job market, and that makes it difficult to guess what the FOMC might do next with regard to rate cuts.
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Most experts deem the four-week moving average more accurate. That four-week moving average fell, too. It declined 9,750 to 311,500. Continuing claims declined 11,000 to 2.55 million with the four-week moving average falling 5,500 to 2.57 million. The seasonally adjusted insured rate unemployment rate was again at 1.9 percent, with this number alternating between 1.9 and 2.0 percent in recent months.
Some market watchers were left scratching their heads when trying to determine what to believe about jobs and how they might impact Fed decisions. On the whole, market participants today appeared to take the news as good news about the economy and a relief after the non-farm payrolls disaster, potential wage inflation or not.
August New Home Sales were released at 10:00. Industry watchers predicted that new home sales would drop to 830,000, but sales dropped much more than anticipated, to 795,000. That decline was an 8.3 percent drop month over month and a 21.2 percent drop over the last year. The median sales price dropped, too, by 7.5 percent to $225,700. A Marketwatch.com article termed that the largest year-over-year drop in 37 years.
The inventories of unsold homes did decline, but that was due to builders making efforts to lower their inventories rather than to increasing sales. At the current sales rate, that's an 8.2-month supply of homes. Obviously, the credit crunch has hit home, or rather, it's hit new-home sales.
Although articles about this number were replete with cautions about sampling and other statistical errors, KB Homes' (KBH) earnings report certainly did nothing to reassure markets that the new-home sales figures were just out of whack. The builder took a hit with a $690.1 million land-related charge and a $107.9 million goodwill impairment charge, prompting a third-quarter loss. The company's Chief Executive Jeffrey Mezger's statement mentioned worsening conditions, including tighter lending standards and an inventory glut of homes that was prompted, in part, by rising foreclosures. Those conditions likely contributed to the company's delivery of 28 percent fewer homes than in the prior year and reduction in selling price of 7 percent over the last quarter's prices. Mezger doesn't anticipate improvement any time soon, at least not through the end of this year and perhaps into 2008.
Despite Mezger's assertion that the bottom was not yet in, some homebuilders and the Dow Jones U.S. Home Construction Index (DJUSHB) inched higher today. The DJUSHB had approached the bottom of a steeply descending price channel, however, and the minimal gains seen today might have been based on a technical move, a bounce from descending-channel support. The bottom of that price channel now appears to cross near 332. So far, there's no change in tenor on that index's chart. A move above 420 would currently be required to break out of that descending channel. The index closed at 350.58.
The Department of Energy released natural gas inventories for the week ending September 21 at 10:30. Natural gas inventories rose 74 billion cubic feet that week, with that number in line with expectations. Natural gas prices had been falling into the report, but bounced afterwards, leaving a doji with its lower shadow descending to potential support near 6.775. Natural gas futures were at 6.92 at the close.
The Federal Reserve Bank of Kansas released the Kansas district's September Manufacturing Survey at 11:00. This district's report is not as predictive of the ISM or GDP changes as are some of the other reports, so it seldom proves market moving. For September, the bank termed the manufacturing activity "modest" and noted that many companies were trimming inventories.
September's Agricultural Prices rounded up the day's reports, coming in at 3:00. The September Farm Prices Received Index climbed 2 points month over month, the USDA reported. That's good news for producers but perhaps not such good news for those of us paying at the grocery store. Producers of wheat, lettuce, eggs and cattle received higher prices, while producers of hogs, corn, strawberries and onions received lower prices. The Prices Paid Index rose 1 point, with producers paying more for nitrogen fertilizers, diesel fuel and feeder cattle.
Weekly commercial-paper data was also released today, with this data collected through September 26. As defined by the Federal Reserve, "[c]ommercial paper consists of short-term, promissary [sic] notes issued primarily by corporations." Companies use this commercial paper to raise the cash they need since it might cost them less than bank loans. Bloomberg.com reported that the drop in commercial paper slowed after the Fed cut. While the total outstanding still declined, the slowing of the decline was interpreted to mean that commercial paper is not deteriorating as quickly as it had been. Still, FTN Financial's chief economist was quoted as saying that the commercial paper market was not yet on sound footing and wouldn't be as long as it was declining.
Why does this matter to us and to mom and pop trader? Perhaps you remember the name BNP Paribas SA, the bank that froze withdrawals from some of its mortgage-asset-backed investment funds on August 9. Yields on commercial paper soared that day because those issuing the paper couldn't entice others to take the paper on anything less than stellar yields. No one wanted to touch commercial paper, and that meant that companies couldn't easily get the money they needed.
If you don't remember all of this, take a look at the SPX or any other index's chart for August 9, and your memory will be jogged. For those who would like to study the actual government release with charts, it can be found at the following site. You'll find a chart there that shows the steep drop in commercial paper, but I just didn't have room for any other charts in this article.
For now, this report does show some encouraging signs or at least signs that allow us to breathe a little. Yields on overnight commercial paper are now at their lowest since August 30, 2006, all courtesy of the Fed's action at its last meeting.
Despite the encouraging Mastercard news mentioned earlier, today offered more confirmation that potential suitors or buyers are being impacted by the credit crunch. Sallie Mae's potential buyers balked at paying the previously agreed-upon $25.3 billion to take over the student loan giant, blaming higher borrowing costs as well as federal legislation that will adversely impact the company. This morning, Sallie Mae claimed it was entitled to a $900 million breakup fee if the consortium of buyers balks.
Company-specific news included continued speculation that Bear Stearns would sell a minority position in itself. Freddie Mac (FRE) settled with the SEC on its accounting fraud charges, with FRE to pay $50 million. Chevron Corp. announced a share buyback that will total 7.5 percent of its market capitalization. Other company-specific news was that Microsoft's (MSFT) release of its "Halo 3" videogame was the most successful U.S. release in entertainment history.
Tomorrow's Economic and Earnings Releases
Tomorrow's reports include the important September Chicago PMI. This report, due at 9:45 EST, is expected to remain steady at 53.8. Previous to that report, August's Personal Income will appear at 8:30 and New York's September NAPM will be released at 9:00.
Releases at 10:00 EST include August's Construction Spending, expected to drop 0.3 percent, and September's Consumer Sentiment, forecast to inch higher to 84.0 from the previous 83.8. The ECRI Weekly Leading Index will follow at 10:30.
What about Tomorrow?
Annotated 30-Minute Chart of the SPX:
Annotated 30-Minute Chart of the Nasdaq:
Annotated 30-Minute Chart of the RUT:
The USDJPY didn't put on a convincing confirmation of equity gains. It did break above the trendline of a possible bull flag (not shown on the chart below), but then it slipped back to and slightly below the trendline by the close. Is this a retest of former resistance or a sign that momentum waned here, too? This could be important to equity performance, so watch the USDJPY levels (listed as "yen" on CNBC's crawl above the screen if you don't have the feed on your charting program) tomorrow morning. Equity bulls want to see it higher but should be aware of that looming resistance near 116.40.
Annotated 30-Minute Chart of the USDJPY:
So, what do I think? On balance, I'm a little concerned about the sustainability of the current move and wonder if some signs aren't showing that pullbacks toward stronger support, mostly in the 10-sma areas, are needed. The SPX didn't follow through on its old patterns, which probably should have prompted a stronger move by today. That stronger move kind of fizzled. The TRAN certainly isn't confirming strength. Some financials gained today, but the gains weren't huge. Volume wasn't huge, either, exuberantly greeting the recoveries off the summer's low.
My conclusion then has to be that this could indeed be some window dressing. I think the SPX needs to post a stronger gain, the TRAN needs to rise along with her sister index, the Dow, and the USDJPY needs to break out of its congestion zone, and all that needs to be accomplished as soon as possible for the bulls' sakes. Otherwise, I think pullbacks to recharge and retest support may be needed.
For tomorrow, I would have to look at internals and the indicators I watch, such
as the USDJPY action, before it's possible to gauge whether window-dressing will
be powerful enough to recharge indices or whether they'll need to pull back soon
toward those 10-sma's. Join us on the Market Monitor tomorrow morning and I'll
tell you what I'm seeing there.