Watching the markets the middle of this week has been like watching reruns on television: predictable and boring. The SPX has reinstituted its old pattern from the rally days before the February and July debacles. It runs higher, consolidates sideways a few days then dips to the 10-sma before repeating the pattern. Since Monday, it's been in the most boring part of the pattern, the sideways move in preparation for dipping to the 10-sma.
This consolidation has fit perfectly with a holding pattern before tomorrow's important non-farm payrolls, but other forces have been at work, too.
Yesterday's spring off support suggested that today would be an up day within in the consolidation pattern. Most major indices did produce slight gains, but a disappointing Factory Orders report and a confused reaction to actions by central banks in the U.K. and Europe chopped up the pattern.
Both the European Central Bank (ECB) and the Bank of England (BOE) announced the expected decisions this morning. Both kept rates steady. Although market watchers anticipated these decisions, the decisions weren't without controversy. In the U.K. in the aftermath of the Northern Rock debacle, the rates at which banks loan each other money remain near historic highs when compared to the central bank's base rate. Some accuse the central bank of being behind the curve, in a claim that should be familiar to U.S. market participants. Others think that a rate cut might have incited panic and welcomed the BOE's decision.
The Bank of England doesn't typically release a statement with its decision, and I didn't find one this morning. The ECB does usually release a statement and, in addition, its head Jean-Claude Trichet usually holds a press conference. Although many market watchers anticipate that the BOE will eventually cut rates, there's nothing cut and dried about the ECB's eventual decision. Until the sub-prime crisis began to spread and even for a while after, the ECB kept affirming its intention to raise rates. Rising inflation in Europe keeps that possibility alive, which has probably been one of the drivers behind the euro's steep rise against the dollar, at least until the last few days had produced a sharp pullback.
ECB head Jean-Claude Trichet's message was characterized as stern. He said that the ECB's assessment of the risks to the economy was attended by "heightened uncertainty." He believes that inflation risks remain and vows that the ECB will act to counter those risks if they rise too high. It should be noted that Trichet, like many I hear on CNBC Europe, appears to expect weakness from the U.S. economy. Trichet mentioned that emerging economies would offset that expected weakness in the U.S.
Trichet was asked about currency matters. The euro has recently soared against the dollar, although as mentioned, it had pulled back the last couple of days into the ECB decision. Trichet merely referred back to recent comments by finance ministers and central bankers, referencing the Group of Seven statement that "excess volatility and disorderly movements in exchange rates are undesirable for economic growth." He noted that he was paying attention to U.S. officials who asserted that a strong dollar was good for the U.S. economy.
I've been wondering, too, if our Federal Reserve hasn't been doing what it can to prop up the dollar. During the worst of the credit crunch, the Fed's frequent repos resulted in a lot of extra dollars sloshing through the system. Over the last several weeks, I've noticed a tendency for the Fed to allow more net-drain days, days in which the new repos don't totally refund the maturing ones. As a result, the amount sloshing through the system has steadily declined from numbers in excess of $30 billion each day, and sometimes in excess of $40.000 or $50.000 billion, to what I see for 10/5, 10/8, 10/9 and 10/10: zero repos currently maturing. Any repos made tomorrow or Monday could of course change that, but the Fed seems to be acting to steadily reduce the amount of money sloshing through the system.
The repos were necessary to bring the rates at which banks loan each other and companies more in line with the Fed's target rate and to encourage banks to lend and not hoard money. We should perhaps view this steady decrease in the amount sloshing through the system as a vote of confidence by the Federal Reserve, but it could conversely be viewed as a possible means of propping up the dollar. As I've said many times on these pages, my economic background is not strong enough to allow me to answer these questions but just to pose them.
Let's look at what charts show us.
Annotated Daily Chart of the SPX:
If the SPX can punch above its July values and sustain numbers above that, it indeed may go parabolic. Until and unless that happens, we should assume that support and resistance that have held before will hold again and patterns that have repeated before will repeat again. Although, in the old high momentum rally days, the SPX sometimes went 10-12 days between 10-sma touches, the more common pattern was 5-7 days. It will be due for a 10-sma test soon, then, and that chart does look far overdue for a pullback to midline or bottom-of-the-channel tests.
The jobs number tomorrow morning has the power to change the outlook, so parabolic remains possible. I think traders want to send prices higher--that's evident by the failure to retrace even to the midline of this channel--but unless prices are broken out of the channel to the upside very soon, I think a deeper retrace is going to be necessary instead.
Annotated Daily Chart of the Dow:
Today, I told subscribers to the live portion of the site, the Market Monitor, that they should be cautious before jumping on an SPX 10-sma test, too, with an automatic long entry. Since a deeper pullback within the context of this rising channel appears overdue, don't jump in automatically if prices are crashing through the 10-sma's. If there's some hesitation at the 10-sma or if there's a piercing of it and an immediate bounce back above it, you've got a hard decision to make. Before you take an entry, make sure all your ducks (calves?) are in a row and have a get-out point predetermined in case prices roll down again.
Annotated Daily Chart of the Nasdaq:
The Nasdaq's relatively longer lower shadow today suggests some follow-through early tomorrow morning, but if there is upside follow-through, remember that this is the context of a still-needed retracement to the 10-sma.
Annotated Daily Chart of the SOX:
Annotated Daily Chart of the RUT:
Annotated Daily Chart of the TRAN:
Today's reports began with Monster's September Employment Index. With yesterday's ADP presaging a weaker-than-anticipated Non-Farms Payroll tomorrow, any report related to employment may rate attention. Monster's Index had risen in August, but was flat, again at 186, for September. This steadiness was true of the headline index as well as of the annual growth rate (eight percent) and of many of the industries and occupations that the index tracks. Monster admitted that white-color occupations and especially the financial sector were taking a hit from the sub-prime mortgage fallout, but said that hit was yet to show any dramatic effects in the broader service sector. In addition, the construction industries and transportation and warehousing joined arts, entertainment and recreation in showing September's highest rate of increase in online job availability.
We know that transportation offers an outlook on the economy: ordered goods must be shipped. As Jim Brown has been reporting in his Wraps, many in the transportation industry have been warning that all is not well with our economic world, so this employment number in that sector was good to see. Before we get too excited, however, we should realize that transportation should be showing an increase in September in a normal seasonal buildup ahead of the holiday season. This component rose six percent. I'm not sure what this component showed last September, so I'm not sure if this is a weaker-than-expected growth for the month. It was enough growth to retain transportation and warehousing as the top growth industry year over year. Real estate and rental and leasing of course showed the largest decline in online job opportunities, falling 5 percent month over month.
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Weekly initial and continuing claims arrived next. Initial claims increased 16,000 to 317,000, their highest level almost a month. That's not something that market watchers want to see ahead of tomorrow's employment numbers. The four-week moving average rose 500,000 to 312,750, also the highest level in almost a month. Initial claims for the previous week were revised to a decline of 12,000 to 301,000.
Continuing claims fell 10,000 to 2.54 million. The four-week moving average fell 12,750 to 2.56 million. The seasonally adjusted insured unemployment rate remained at 1.90 percent.
The most important report of the day was August's Factory Orders. Economists predicted that the headline number would decline 2.6-2.9 percent. The Commerce Department reported a steeper decline of 3.3 percent. Orders for durable goods slumped 4.9 percent, while orders for nondurable goods fell a more moderate 1.6 percent. Ex-transportation, orders fell 1.7 percent. Orders for core capital goods eased 0.5 percent. Shipments fell 1.6 percent.
July's factor orders were revised lower to 3.4 percent. The previously reported number had been 3.7 percent.
The Department of Energy released natural gas storage numbers next, at 10:30. Industry watchers had forecast a build of 67 billion cubic feet. The actual build was less, at 57 bcf's.
Much happened among financials today, even if the financial-related indices didn't move all that much. Bear Stearns (BSC) spoke to analysts today. Management said that the asset-management unit's performance should not take a major toll on BSC's profits. BSC mostly stayed within yesterday's range, but did close minimally lower.
The new chief executive didn't believe that there existed any balance-sheet problems in that unit that could cause serious problems to the parent company. He also assured analysts that steps had already been enacted to more effectively manage risk and that plenty of investors remain interested in alternative assets. The company is not looking for infusions of cash from outside, analysts were told.
THE FINANCIAL TIMES reported that Kohlberg Kravis Roberts & Co., a private equity firm, is in talks with Citigroup (C). C has reportedly talked to several private-equity firms about its intention to provide financing needed to acquire some of the leveraged loans on C's books, and that's reportedly the purpose of its talks with KKR, too. KKR is seeking money to allow one of its existing hedge funds to buy impaired debt. Talking about "Risky Business," but KKR doesn't appear to be alone in its attempt to do so. C's investors didn't like the news, but, on its face, this is good news for those worried about the credit crunch. We haven't yet seen the outcome for KKR and others, however. For today, let's just take it at face value, as an encouraging sign, but as only one tentative sign. We wouldn't plow our total savings into something because of one tentative indicator, but it would alert us to pay attention. I think this news should be taken with that distancing in mind.
Also of interest was the Federal Reserve's urging Congress today that Congress limit the ownership of industrial banks. A banking loophole had allowed the formation of industrial loan companies or ILCs, but the Federal Reserve's spokesperson argued before the Senate Banking Committee that ILCs operate outside the rules attaching to commercial banks. Any change would be of particular interest to retailers such as Wal-Mart (WMT) and Home Depot (HD). WMT dropped its attempt to form an ILC after the company received heavy criticism. The criticism came although the company had assured critics that it needed the ILC only for purposes of processing credit card payments and other types of payments. The Federal Reserve's spokesperson called for "[l]egislative action that clarifies the role and supervision of ILCs." DAI, FCFC, CEN and SNFCA currently have pending applications for ILCs.
Company-specific news included an announcement that investor William Ackman had taken a 5-million share stake in Sears Holding (SHLD). Marriot International (MAR) turned lower after its earnings report showed revenue that declined year over year. Sprint-Nextel (S) was featured in an article in THE WALL STREET JOURAL. Sales of Microsoft's (MSFT) Halo 3 totaled more than $300 million in the first week the product was available.
In other news, GenTek (GETI) received a bid to be acquired, a $33.50 per share bid that the company deemed too sparing. Research in Motion (RIMM) reported after the bell. As this report was prepared and submitted for publication, RIMM had just reported and was trading at $94.95 in after-hours trading, down from its close at $100.54. Headlines touted its report with some feeling that the after-hours action was the result of disappointed investors who had expected even more. The conference call had not been heard, so perhaps there was something more behind the reaction or perhaps there wasn't.
Tomorrow's Economic and Earnings Releases
Tomorrow begins with the most important economic number of the week, September's Non-Farm Payrolls. Last month's release sent a shock wave through the markets, and market participants want to be reassured tomorrow that the 4,000 drop was an anomaly. By midweek, economists were predicting 110,000-115,000 new jobs, but the ADP suggested that it might be far less. It might be that anything over the 78,000 or so new jobs that the ADP predicted, when government jobs were added to private-sector ones, might be reassuring to markets, but I don't think anything much less than that is yet baked into the markets.
The ECRI Weekly Leading Index and August Consumer Credit will be the last releases of the week, with those at 10:30 and 3:00, respectively.
What about Tomorrow?
Daily charts are set up so that something--Non-Farm payrolls perhaps?--should push them down into a 10-sma test. Intraday charts are set up a little differently, however. Let's take a look.
Annotated 15-Minute Chart of the SPX:
Annotated 15-Minute Chart of the Dow:
If the Dow turns lower from this mid-channel resistance and falls, the psychological impact could weigh down other indices such as the SPX and OEX, particularly since if the TRAN turns lower, too.
Annotated 15-Minute Chart of the Nasdaq:
Such a retest would constitute a test of the red trendlines seen on the daily chart. It should also be noted that these Keltner lines are dynamic. A swift drop would send that lower-channel support lower, too, perhaps toward and slightly below 2700.
Annotated 15-Minute Chart of the Russell 2000:
All in all, I get the feeling from studying these charts that investors are waiting for permission from the jobs numbers tomorrow to pile into more long positions and drive prices higher, but the charts themselves look set up for a 10-sma test. A drive higher without a 10-sma test first would be a momentum-driven push without recharging first. Such momentum-driven moves can of course be further fueled by surprised shorts rushing to cover their positions, but they can also lose momentum quickly like a balloon that has leaked a critical amount of helium and can no longer keep afloat. While charts look set up for a 10-sma test, in all honestly, I'm afraid of an early pop instead, afraid because it could get reversed.
Will investors get the news they want, the goldilocks jobs numbers that say the
markets are weak enough for the Fed to cut but not weak enough to prompt a
recession? Are we really out of trouble with the credit crunch? Would any gains
be sustained? That, I don't know. Whichever direction markets head tomorrow,
watch the black-channel levels on the intraday charts above, watching for
reversals from those channel lines. Be wary of an early pop outside either an
upper or lower black-channel
line, especially during the first 15-minute period
and especially if prices close back within the channel by the end of that
period. Those first amateur-hour moves are not always trustworthy.