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Market Wrap

Super Tuesday Not So Super

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Introduction

Jim Brown is attending an energy conference and interviewing industry giants this week. I am substituting for him while he collects information that will benefit us all.

It was supposed to be "Super Tuesday," the day anticipated earnings reports from tech companies would lift markets. The day turned out to be anything but super, however, for those long equities. Bears thought it was super.

A number of factors contributed to the declines in almost all sectors today. Telecom-equipment manufacturer Ericsson (ERIC) warned in Europe, pressuring European markets and our futures during the pre-market session. Our markets were hit because ERIC reported lower demand in North America as well as in other markets.

Our futures were also weakened by Citigroup's results, covered in Monday's Wrap. In addition, increased tensions between Iraq and Turkey spiked crude prices to just under $88.00 a barrel during the pre-market session, driving equity futures lower. By the end of the day, crude has reached a high of $88.20 and finished the regular trading session above $87.00. It's at $87.61 as this report is typed.

Turkey has threatened to follow Kurdish separatists into northern Iraq, with that threat escalating tensions between the two countries. Although many industry experts mention the speculative excesses built into current crude prices, other experts worry aloud about short supply. Some call for OPEC members to step up production as the only means of turning prices lower again, but I heard the term "peak oil" bandied about more than once. Jim Brown is meeting this week with Boone Pickens and other industry experts, and it will be instructive for all of us to hear what he's learned when he returns from his trip.

Additional inter-market pressures were added. Overnight, the dollar weakened significantly against the euro and the yen. In addition, net foreign sales of long-maturity U.S. securities amounted to $85.5 billion in August, far more than the $2.7 billion in July.

Talk from the Federal Reserve Chairman Ben Bernanke, the head of the International Monetary Fund (IMF), and Treasury Secretary Henry Paulson also pressured markets. Speaking to the New York Economic Club Monday night, Fed Chairman Bernanke admitted that the contraction on the housing market could adversely impact this quarter and early 2008's economic growth. The hope has been that any adverse impact would be contained to the third quarter, and his statement dashed that hope.

He assured listeners that the Fed was ready to act to help financial markets, noting also that inflation remains in check. I don't know whether Chairman Bernanke has established a track record of alerting markets what to anticipate at upcoming FOMC meetings, but that certainly sounded like a strong hint that the Fed would be more likely to ease than to raise rates, if it acted at all. No matter what the intentions or hints at this point, some must question how much easing the FOMC can contemplate in the face of rising commodity prices.

Bullet points from the IMF's Caruana's take on the financial markets, hitting newswires just before and just after U.S. markets opened, were that while the global financial markets were "out of intensive care," the patient was not out of trouble. The financial crisis would not be resolved in days; instead, the healing process would require weeks and perhaps months. The U.S. dollar could weaken further, Caruana warned.

Treasury Secretary Henry Paulson called the risk to the economy due to the housing crisis a significant one, and he thinks the risks will continue for some time. He wants both government and financial industry assistance to homeowners attempting to refinance, with that assistance falling short of bailing out speculators or lenders who should rightfully (in his opinion) suffer the cost of their bad decisions. Furthermore, he wants measures taken to stop abusive lending practices. He wants Congress to pass the measure that will extend the number of FHA-insured loans that the Federal Housing Administration can make.

Throw in a Bear Stearns downgrade of General Motors (GM), and the day didn't start out or turn out to be a super one for those long equities. Bear Stearns expected auto sales to decline year over year in 2008 and for GM's market share to further erode.

The bad news seemed to come so fast and furiously that this report will be lengthy, even given a necessarily sketchy coverage of each event and earnings report. By the end of the day, market-related headlines were blaming the decline on Fed Chairman Bernanke's "sobering words," but we who use technical analysis know that the genesis of this particular decline showed up as early as last Thursday. That was when the SPX first punched to a new high then reversed, producing a bearish engulfing candle on a day with high volume.

Those reading my Thursday Wraps or my Market Monitor comments know that I've thought that many indices were long overdue for a pullback to the midlines or even the bottoms of the channels in which they had risen off the summer's lows. Even if the markets will continue to be bullish, something we just don't know yet, it's just natural and normal for pullbacks within rising channels to occur. Chairman Bernanke may be getting blamed unfairly.

Charts

The SPX's daily chart proves particularly interesting. For a while, I've been warning that a 10-sma test was needed, but that traders might consider in advance whether they wanted to automatically buy the dip to that 10-sma. The reason that I thought they ought to give that some prior consideration and not buy the dip automatically? I thought that a test of the midline of the SPX's channel and even the bottom of the channel were long overdue. Even if the SPX was going to continue climbing within that channel, a bullish outcome if it happened, it occasionally needed pullbacks all the way to the bottom of that channel. This wasn't doomsday talk, but rather just common sense. Unless it was going to go parabolic, usually a less-likely outcome, it would eventually need to recharge.

This weekend, though, I also followed up on a report I'd written on the corrective fan principle several months ago, one that sought to determine when the downturn would be finished. That downturn was long finished, of course, and it finished with the expected strong surge in prices once the third trendline of the corrective fan had been broken. What surprised me, though, was to find that a third trendline could already be drawn on the rise off the summer's low. I correlate these fan lines with RSI trendlines. By Thursday evening, when I was telling traders in the Wrap that they would be hearing some talk about a key reversal signal, RSI had broken through its third trendline.

Since RSI often leads prices--the reason that I like RSI--but sometimes gives false signals, it was time to begin watching for a price breakdown below the third trendline. That trendline is the dark green one shown on the chart below. I alerted subscribers in the Market Monitor Friday and in the Trader's Corner Saturday.

Annotated Daily Chart of the SPX:

The break below the green trendline occurred concurrently with the break below the midline of the rising channel. Both suggest a steeper decline. A decline to the bottom of the rising channel might be possible, although some support exists at about 1527. Watch RSI. If a key support level such as 1527 or the bottom of the channel is hit at the same time that RSI closely approaches or dips below 30, bounce potential exists. I, however, would not be surprised to see a retracement to the horizontal red line, a 38.2 percent retracement of the climb off the summer low. I'm not predicting it yet nor am I suggesting it as a downside target but just wouldn't be surprised by it.

A problem exists, however. According to the corrective fan principle, the drop through that green trendline should have resulted in a precipitous decline. The decline was obvious, but I wouldn't call it precipitous yet, and I bet you wouldn't, either. Bears, keep your hopes and targets realistic and protect profits as I've been suggesting you do on the Market Monitor.

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Bulls, I don't see a new buy opportunity just yet, but I've been wrong at other times. INTC and YHOO reports after the close, covered later in this article, may bounce markets tomorrow, but until the SPX maintains closes again above that rising green trendline, the charts suggest that looking for rollovers on any bounces should be the tactic employed.

This is option expiration week, if anyone needs reminding, which can exacerbate volatility, so a rollover isn't guaranteed, of course.

The Dow's chart shows similar characteristics. I have not included RSI on this chart but have included moving averages. That's because the 10-sma approaches key resistance levels and the 30-sma, key support levels.

Annotated Daily Chart of the Dow:

As long as the Dow is producing daily closes below that green trendline and the 10-sma, selling bounces may remain the best tactic, but watch for bounce potential if the bottom of the channel and 30-sma are hit.

Annotated Daily Chart of the Nasdaq:

Conference calls for YHOO and INTC have not yet been held, but their after-hours trading performance suggests that, without any more bombs of the sort that ERIC delivered today, the Nasdaq could attempt to bounce. The shape of today's candle suggests the same thing. RSI says something different, so be careful if you're tempted to buy any bounce.

Annotated Daily Chart of the SOX:

A strong INTC-induced bounce could bring the SOX back up to test that lower trendline or perhaps even the top one, but this chart is not suggestive of strength, so watch for rollover potential.

Annotated Daily Chart of the RUT:

Annotated Daily Chart of the TRAN:

Today's Developments

As mentioned earlier, so many earnings announcements and economic releases occurred that only sketchy descriptions of each can be included. Today's slate of releases began with the National Retail Federation's results on their survey of 7,837 shoppers. According to CNBC at least, the NRF has a good record on predicting holiday shopping habits. This time, the organization predicts that consumers will spend about 3.7 percent more than they did last year.

This was not encouraging news for retailers or for the economy as a whole, and the NRF's conclusion was that retailers would probably respond to the survey results with "very promotional" tactics. After scanning their results, the NRF suggested that discounters were likely to beat out other retailers this holiday season. Gift cards, clothing and accessories and video games were on the lists of those surveyed. The percentage of shoppers planning to shop online also increased.

September's Industrial Production followed at 9:15. Most market watchers felt that production would rise 0.1 percent, less than the prior 0.2-percent rise. Output did rise 0.1 percent for the month and at a 4 percent annualized rate for the fourth quarter. The Federal Reserve said that a drop in motor vehicle production kept production from rising more than 0.1 percent. September's output of motor vehicles and parts declined 3.3 percent.

The headline number met expectations, but it met them against revised-lower numbers for June, July and August. August's output was revised lower to a flat level. Capacity Utilization was 82.1 percent, slightly below the prior 82.2 percent.

October's NAHB Housing Market Index hit the markets at 1:00. The prior index value had been 20.0. October's slipped to 18. Both print articles and CNBC spots proclaimed this the lowest index reading ever reported. NAHB began tallying the index in 1985. The Case-Schiller home price index recorded a 3.9 percent drop in home values over the last year. Although industry members reported that strong incentives were interesting consumers, traffic of prospective buyers declined from 17 to 15.

The expectations component for sales for the next six months remained at 26. Builders thought their efforts had helped them to reduce inventory and be ready for a market recovery that they expect in the second half of next year.

Earnings reports, warnings and company news certainly moved the market today, but the number of such reports means that they can be covered only briefly if this article is to be kept to a readable length. Chief among those were Ericsson's. ERIC warned investors to expect shrinking margins and third-quarter operating profit that could drop about 36 percent. The company blamed lower demand for mobile network upgrades, and included North America in the regions that were seeing lowered demand.

Financials were in the news today. Many market watchers felt that lower expectations for financials had been factored into the markets, and, as long as their fourth-quarter guidance appeared sound, markets would be ready to climb. I didn't ascribe to that theory, because markets exceeding their previous highs didn't appear to be baking in any bad news to me. That theory wasn't to be tested, however, since C warned Monday that its fourth quarter could also be harmed by the credit crunch.

Wells Fargo (WFC) disappointed this morning with earnings less than anticipated but its president wants investors to remember that WFC produced record revenue. WFC is the country's second-biggest mortgage lender, but it has stopped making subprime loans during this quarter. With delinquencies rising 30 percent, WFC also added to loan loss reserves, with the company blaming softness in the residential real estate market that its president expects to continue a couple more quarters. The company anticipates more problems in consumer credit. This again added to worries that the credit crunch problem will not be contained in the third quarter.

In an interview with Reuter's, WFC's executive vice president Mary Coffin said that there will be some customers that the banking industry will not be able to save from the results of falling home prices, rising ARMs payments and higher unemployment. She announced an initiative, HOPE NOW, that wants to contact customers before they get in so much trouble that foreclosure is inevitable.

The news didn't end with the close of the trading day, either. After the close, Countrywide Financial (CFC) announced that it was taking a $125-150 million charge. The charge was a pre-tax restructuring charge related to job cuts. CFC was lower in after-hours trading.

Bear Stearns (BSC) figured in the news before the market open when it downgraded GM, and it was to figure in the news again later in the morning. China Citic Bank may want to take a stake in BSC, some speculated. Many industry experts debated the workability and advisability of such an alliance that is, as yet, a whispered-about alliance and not a confirmed one. Included in the discussions were ratings of how much risk various financial entities had allowed on their balance sheets due to the subprime and other credit problems. Seasoned market watchers have asserted lately that the repackaging of various securities and the structuring of reports makes an evaluation of how much risk financials have allowed to creep into their balance sheets increasingly difficult.

US Bancorp (USB) beat estimates, although net income fell 2.2 percent. KeyCorp (KEY), a holding company for KeyBank National Association, missed estimates. The miss was produced when KEY experienced declines in values of mortgages and losses from loan sales.

Outside the financials, reporting companies included Delta Air Lines (DAL). DAL's earnings beat expectations. Domino's Pizza (DPZ) reported this morning, with the company reporting that margins were being squeezed due to an inability to pass on rising costs for supplies and interest expenses to consumers. Is this another sign that the subprime mess is extending beyond the lenders and residential homebuyers, with tightening credit hitting other companies?

A Domino's representative said on CNBC this afternoon, "At the end of the second quarter, we didn't think it could get worse, but at the end of the third quarter, it was worse." He assured investors, that "we're going to get it together," however, pointing out the need to boost domestic same-store sales. Sales outside the U.S. rose 8 percent, he said.

Other companies reporting included Johnson & Johnson (JNJ) and Genentech (DNA). JNJ's net income fell 7.7 percent, but that included a restructuring charge. Excluding that charge, the company reported revenue earnings of $1.06 a share, with Thomson Financial's survey of analysts turning in an expectation for $0.99 a share. Some commented on concerns about some of JNJ's products being under pressure. Excluding expenses, DNA reported revenue of $2.91 billion and earnings of $0.73 a share, with Thomson Financial pegging expectations at $2.93 billion and $0.72 a share.

In other news, Apple (AAPL) said that its new Mac OS X Leopard operating system will be available October 26 at 6:00 p.m. AAPL leaped higher today, closing at $169.58 and trading at $171.20 in after-hours trading as this report was prepared.

IBM, YHOO and INTC reported after the close. IBM beat estimates, reporting earnings of $1.68 versus $1.67 expected and revenue exactly in line with expectations. As this paragraph was prepared, the conference calls had not yet been held for any of these companies, so after-hours trading patterns should be viewed with some skepticism, but IBM was trading at $118.04, down from its $119.60 close.

If one of the problems with this morning's earnings reports had been the dire statements about the coming quarter, INTC delivered good news when it provided its forecasts. Earnings were $0.31 a share against expectations of $0.30 a share, but revenue of $10.1 billion more soundly beat expectations of $9.6 billion. Gross margins of 52.4 percent were far above the sequential comparison of 46.9 percent, but, even better, was INTC's suggestion that gross margins for the next quarter would be 57 percent. The company projects gross margins for the full year at 52 percent.

The company also raised revenue guidance for the next quarter. They said revenue should be $10.5-11.1 billion, with the previous expectation at $10.4 billion. They also said they were spending more on chip equipment, good news for the chip equipment makers. As this report was prepared, ahead of the conference call, INTC was trading at $26.45, up from its $25.48 close.

YHOO reported earnings of $0.11 per share against expectations of $0.08 a share. Revenue at $1.28 billion beat expectations of $1.24 billion. The company said to expect fourth-quarter revenue at $1.30-1.45 billion with the previous estimate at $1.37 billion. Commentators on CNBC's "Fast Money" expressed some skepticism about a single quarter's results, but after-hours traders were less concerned. YHOO was trading at $28.91 as this report was prepared, up from the close of $26.69.

They were also unconcerned about another YHOO-related development. Today, a House committee has asked that two YHOO executives clarify their testimony about the role the company played in the arrest of a Chinese journalist, with some accusing the two officials of lying.

CSX also reported after the close. Excluding items, earnings of $0.67 a share beat expectations of $0.62 a share. CSX does not trade after the close.

Breaking news after the close featured Bristol-Myers Squibb's drug ixempra. This drug for women whose breast cancer has spread received FDA approval. That was good news for BMY investors and breast cancer patients. BMY traded at $29.95 after closing at $29.24.

Tomorrow's Economic and Earnings Releases

Tomorrow includes a number of important economic releases, as discussed by Jim Brown in this weekend's Wrap, but the day will begin with the lesser-watched weekly MBA figures on Mortgage Applications. At 8:30 EST, September's CPI and New Residential Construction (Housing Starts and Building Permits) will hit the wires, and either of those could be important. Special notice will be paid to the CPI. That's expected to rise 0.2 percent after a prior drop of 0.1 percent. With crude prices rising as they have been and with many trying to sort out whether the Fed will raise rates, drop rates or keep them steady, this number will be important.

CNBC's airwaves have been full of people warning that our markets haven't yet factored in the full brunt of the decline in the housing market and the subprime mess, and those discussions have heightened this week. In this climate, New Residential Construction figures might be expected to garner attention, too. Markets expect a drop to 1.288 million units from the previous 1.331 million.

The typical weekly crude inventories might promise to be more than a ho-hum affair tomorrow, too. That weekly 10:30 release might at least bring about much more discussion of what is going on with crude and why there's not been the typical post-summer-and-hurricane-season dip.

At 2:00, the Fed releases its Beige Book, a compilation of anecdotal evidence from all the Fed's districts. The Beige Book could move the markets, so decisions need to be made prior to its release about holding onto positions or locking in full or partial profits.

Many important companies report tomorrow. Those include ABT, EBAY, JPM, MER, MO, MTG, NITE, UTX and WM.

What about Tomorrow?

Daily charts show different potentials, with the Nasdaq looking as if it might be ready for a bounce or a decline through its rising-channel support. The shape of its daily candle and after-hours results suggest the bounce will come, although RSI doesn't support that idea. The SPX, OEX and Dow look as if they need further retracement. ES contracts moved higher after the close right along with the NQ, however. So did the USDJPY, one of the indicators that I watch, with the USDJPY's direction sometimes predicting or corroborating that of U.S. equities.

With the exception of the USDJPY, which might have been bouncing in light volume to retest broken support, these are bounces prompted by IBM, INTC and YHOO results. These results hadn't yet been thoroughly dissected as futures stopped trading this afternoon or as this report was prepared. As Jim Brown reported this afternoon, YHOO earnings reports often trigger a sell-off of the stock, so we should be cautious in our assessments of what will happen tomorrow.

If there is a bounce, however, the SPX, Dow, SOX and RUT should be watched for rollover potentials at the levels marked on their charts. A strong and sustained surge through those trendlines marked on those charts would question the validity of those trendline breaks, but for now, I'd be a little leery of an early pop during amateur hour. The Nasdaq proves a little more difficult, but I would definitely watch how it behaves near the 10-sma since that average (2776.80 at the close) turned prices lower again today.

Let's look at some intraday charts with the idea that if the pop in futures continues through the open and through those 8:30 economic releases tomorrow morning--certainly not yet a given--we'll be looking at pops up toward the 120-ema's on these charts at the open.

Annotated 10-Minute Chart of the SPX:

Annotated 10-Minute Chart of the Nasdaq:

Annotated 10-Minute Chart of the RUT:

 

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