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Market Wrap

Misstep Causes Markets to Stumble

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The markets stumbled on the way to a day of gains. Not until mid-afternoon would the Dow and Nasdaq post modest gains, and, out of those two, only the Nasdaq held onto those gains.

Despite a diving dollar and troubling news from Turkey, U.S. equity futures held onto modest gains until earnings reports hit the wires early this morning. Bank of America (BAC) reported a huge miss that tripped up equity markets.

Until that report, some market watchers could theorize that Citigroup's (C) poor showing might have been due in part at least to Citigroup-specific problems. They didn't believe that after BAC reported. Washington Mutual's (WM) report only exacerbated the fears that loan losses could be hitting harder than anticipated.

Other forces had been at work all week, however, and worsened during the night. The U.S. dollar had been diving from its Friday early morning high of 117.90 and was barely holding 116.00 support as the BAC result was released. After that report was released, the 116.00 support was lost. During the day, the dollar hit a new low against the euro.

Wednesday, the Turkish parliament authorized Turkish troops to follow Kurdish rebels into northern Iraq. That decision kept crude costs near record highs. If Turkey did strike, some feared that the Ceyhan oil pipeline could be shut down, but as early as Wednesday some were calling the new record in crude prices an overdone reaction.

If so, the reaction was only going to become more overdone. With tensions rising and the dollar dropping, crude pushed to new record intraday and closing highs, of $89.55 and $89.47 a barrel, respectively. After the regular close for this contract, it continued pushing higher.

Talk was dire this morning, but by the middle of the day, the typical opex Thursday ennui had set in. Many indices printed doji inside yesterday's price ranges, although the Nasdaq instead printed a tall green candle inside yesterday's range. All in all, not a lot occurred except some further scrambling of chart indicators. Let's take a look.


Annotated Daily Chart of the SPX:

The 1527 support has been tested. It held on a daily close. RSI flattened near the neutral 50 level, and candles for the last two days have sprung up from support. We'll look at intraday charts later and see what they show, but this chart currently shows as much potential for a bounce up to retest resistance as a push down toward what looks like an eventual target: the bottom of the rising channel, a target that could be erased if a bounce is strong enough.

Nothing I see here predicts which will come first.

Annotated Daily Chart of the Dow:

As with the SPX, nothing on this chart predicts whether the Dow will attempt a climb or perhaps prove vulnerable to a retest of 13,700. Both the 10- and 30-sma's are converging with the rising green trendline off the summer's low, so if the Dow does bounce, look for potential resistance or rollovers from that trendline and/or the 10-sma. A sustained break through the 30-sma, now at 13,790, suggests that 13,700 could be retested.

Annotated Daily Chart of the Nasdaq:

Analysts weighed in today with opinions that could have impacted the SOX but didn't do much after all was said and done. ThinkEquity blamed supply constraints when it cut ratings on 7 stocks, including NVDA, ONNN, ISIL, FCS, TXN, INTC and MXIM. Of those companies, TXN and INTC are SOX components. Credit Suisse upgraded INTC, however, and raised the company's target, believing that the company will expand margins, find better pricing environment and higher demand.

Annotated Daily Chart of the SOX:

I've redrawn the RUT's rising channel, as the new version better encompasses the price action.

Annotated Daily Chart of the RUT:

Annotated Daily Chart of the TRAN:

Today's Developments

Today's releases began with the initial and continuing claims at 8:30 EST. Initial claims rose 28,000, with the Labor Department blaming this high number on seasonal volatility near the beginning of the fourth quarter. The four-week average also rose, by 6,000 to 316,500. This average is considered more trustworthy than the weekly numbers.

What's particularly significant about this report is that this week's data was collected at the same time that the Labor Department was collecting data for its monthly non-farm payrolls number that will be released on November 2. Since the increase in claims was the largest since February, some worry that the next non-farm payrolls will be weak. The layoffs were mostly in manufacturing, construction and finance industries.

Continuing claims rose 19,000, with its four-week average falling 1,500. The insured unemployment rate was steady at 1.9 percent.

At 10:00 EST, the Conference Board's September Leading Indicators was released. This is not typically a leading indicator of anything. Today, the Conference Board reported a growth of 0.3 percent in September, with 7 out of ten leading indicators rising. Declining building permits were a drag, but the CB's economist was upbeat, citing the "slow but steady pace" of economic growth even while markets began to deal with the severity of the housing slump during September.


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The Department of Energy released its weekly natural gas storage figures at 10:30. That report was bullish for natural gas prices, with supplies rising 39 billion cubic feet rather than the anticipated 56 billion cubic feet. Still, some credit the record prices in crude this week for dragging the natural gas prices higher, too. Natural gas supplies are at record levels and there's not currently much demand, nor as many shorts as some would expect so that short-covering might not be playing a large role in supporting prices. By the end of the day, natural gas was to close a few cents below yesterday's close, still chopping around near Monday's high.

The day's big release, at least during the normal market hours, followed at noon. The October Philly Fed Survey, a survey of manufacturers in the Fed's Philadelphia District, said that manufacturing activity grew, but at a "somewhat" slower pace than in September. The headline number or diffusion index dropped to 6.8 from September's 10.9, so perhaps "somewhat" was a bit disingenuous. Expectations had been for a drop to 7.0-8.0, depending on the source.

The Fed district thought it "significant" that more (46 percent versus 30 percent in September) companies reported a rise in prices for inputs, and the report also noted more price increases for finished goods. This sent the prices-paid component higher by 17 points while the prices received gained only 9 points.

Demand for manufactured goods dropped 12 points but remained in positive territory, the district report. The current shipments index fell 21 points, dropping below 0, and perhaps indicating why we're were not seeing the TRAN mimicking the performance of other indices in recent weeks. Balancing this was more optimism seen from manufacturing executives in October than in September. The future general activity index climbed to 41.5, its highest level in almost three years even though the future shipments index declined.

The last release of the day will be an important one, the SEMI Book-to-Bill number for September, but it's released at 6:00, after this article will be submitted.

Many companies reported earnings today, but some would argue that Bank of America's (BAC) report garnered the most attention. In what was termed a big, even a shocking, miss, BAC reported earnings of $0.82 a share versus forecasts of $1.06. Year-ago earnings had been $1.18 a share. Revenue missed too, with a reported $16.3 billion against an anticipated $18.301 billion. With shaking heads, television commentators kept pulling out bullet points to quote. Those included trading revenue that dropped 93 percent over the year-ago level. The loss in trading revenue amounted to $607 million, an unanticipated level of loss. The company cited "unprecedented market disruptions," but said even given those, it was disappointed in its own performance. Capital market losses offset other solid performances, the company said.

The company also increased its credit loss provisions to $2.03 billion from the year-ago level of $1.17 billion. While this was ahead of what some had expected before other financials began reporting this week, those other reports had hinted that this loan provision would be adjusted upward, so this figure wasn't as big a surprise as others. Non-performing loans were up 39 percent. This, too, was somewhat in line with what other financials were reporting, so, although it might have been shocking earlier in the reporting period, it was not as surprising at this point, after other reports. However, the number of non-performing loans does suggest, as did earlier reports, that the anticipated rise in non-performing loans is escalating faster than had been anticipated.

BAC opened at $48.44 this morning, gapping far below yesterday's $50.03 close. It sprang up off the early lows to close at $48.75, still far below the previous close, but well off its low of the day. It was surprising, considering the hit that some financials were taking early in the day at least, that markets performed as well as they did.

Another financial, SunTrust Banks Inc. (STI), reported earnings that took a $0.28 a share hit due to the need to mark to market valuations on trading assets and liabilities and loan warehouses that had been previously carried at fair value. Earnings were $1.18 a share on revenue of $2.04 billion, with expectations at $1.29 a share and $2.05 billion, respectively. Investors must have expected worse. After some initial volatility, the stock settled into a gain for the day.

Washington Mutual (WM) and E*Trade also disappointed. Punk, Ziegel & Co. was quick to downgrade WM to a sell rating, and Merrill Lynch joined in with its own sell rating. WM gapped lower and stayed lower today, closing at $30.64, well below yesterday's $33.07 close.

In other news related to the financial sector, the SEC has announced an informal investigation in stock trades made by Countrywide Financial's (CFC) CEO. Others argue that these trades were made after negative news about CFC was already made public and the stock had already dropped, so that this sale should not be considered insider trading. CFC gapped slightly lower, but whether that was due to this news or the negative news about housing and loan losses was difficult to determine.

Other companies reporting earnings before the bell included Pfizer (PFE) and Fairchild Semiconductor (FCS). Pfizer took a $2.8 billion pretax charge to end the company's investment in Exubera, an inhaled insulin drug. That charge and lower sells of a cholesterol drug sent its third-quarter profit down sharply from the year-ago level. Excluding those charges, Pfizer earned $0.58 a share on revenue of $12.28 billion, beating estimates of $0.52 a share on revenue of $11.77 billion. The company lowered its outlook for fiscal 2007's net income, but raised its forecast for adjusted profit.

PFE attempted to rise but couldn't maintain all of its gains. The announcement hit other stocks that were involved with Exubera or developing their own inhalable insulin drugs, and more bad news was to come. After the close, the FDA announced that it was approving a labeling change for some of the most popular impotence drugs, including PFE's and LLY's versions. That labeling change will indicate that the drugs can cause sudden hearing loss.

Headlines on FCS noted that the company beat expectations on both revenue and EPS. Net income and profit dropped, and guidance for the next quarter was in-line. FCS investors didn't mind the in-line guidance. They sent FCS sharply higher, but not above its 9/21 high of $19.33. $19.00-19.33 is likely to provide strong resistance.

Steelmaker Nucor (NUE) benefited from a better-than-expected earnings report, climbing up to test its 200-sma. McGraw-Hill (MHP), Textron (TXT), and UnitedHealth (UNH) all turned in better-than-expected reports.

One company's better-than-expected earnings results were not well received. Deutsche Bank downgraded eBay (EBAY), citing a 2-percent transaction volume growth that might decline even further, higher costs of ads and other costs, and increasing disengagement by users. Those better-than-expected earnings have been attributed to acquisitions and a trimming of listing fees, analysts say. EBay gapped lower and fell to a two-month intraday low of $37.63 before climbing off that low before the close.

Google (GOOG), AMD and Capital One Financial (COF) reported after the bell. GOOG reported earnings of $3.91 per share versus an anticipated $3.78 per share. Gross revenue was $4.23 billion, but comparing apples to apples, revenue without TAC was $3.01 versus an expected $2.939. As this report was prepared, analysts were just digging into the GOOG report and the conference call had not yet been held, but a CNBC analyst was expressing concern over GOOG's hiring of approximately 1,600 people this quarter, bringing their full-time employees up to 15,916. He said analysts had wanted to see fewer than 15,000 full-time employees in a sign that GOOG was controlling costs. Just a few minutes after the report was released, GOOG was still doing a lot of jumping around. It was at $643.08 but had traded as low as $620.00 (40,111 shares at that price according to my Time & Sales figures) and as high as $660.00.

AMD was last trading at $14.78, up from its $14.55 close. The company reported a loss, noting rising costs, but its sales increased 23 percent.

Credit-card issuer COF was trading at $68.20, up from its 4:00 close of $66.00 as this report was prepared. Charges related to its shutting down of GreenPoint Mortgage prompted a loss of $0.21 a share on revenue of $3.77 billion. Analysts had expected a loss of $0.30 a share on revenue of $4.13 billion.

Tomorrow's Economic and Earnings Releases

Tomorrow's only release is the ECRI Weekly Leading Index, a little watched number. Of more importance might be Germany's PPI, The UK's third-quarter GDP and Canada's September CPI, all released before our market opens.

Attention should focus instead on companies reporting earnings. Those include CAT, HOG, HON, MMM and SLB. CAT's CEO has been making dire statements about the state of the economy this week, if I'm remembering correctly, so that company's report might be particularly feared.

What about Tomorrow?

I hesitate to even mention this, but you'll hear and may have already heard it elsewhere. Tomorrow is the 20th anniversary of "Black Monday." We've all heard many stories about "Black Monday," with the most striking one to me being that volatility rose so high that some who were long calls saw their calls rise in value as markets dropped so precipitously. Urban tale or truth? I don't know.

I thought about ignoring the anniversary. I don't want to be accused of attempting to frighten subscribers, but I finally came to feel that I'd be remiss not to mention this important anniversary. Also, I'm wondering if there might not be some effort to prop up the markets tomorrow to avoid inducing fear if markets started to roll down.

What's my attitude about information like this? The history that most interests me is the history of what it means when the TRAN doesn't lead or even follow the Dow higher? What does it mean when so many wise and tempered ones on CBNC and central bank heads across the globe warn that we really don't know the state of things yet?

What interests me most, though, is what I see happening on the charts. I've already, over recent weeks, dealt with the need for the indices to retrace to the midline or bottoms of their rising channels, which has been done or partly done in most cases. I noted last Thursday the potential key reversal day that you'd hear some mention. This weekend in my Trader's Corner article, I noted that the SPX's RSI had broken below its rising trendline off the summer's low and that we should start watching in case the SPX prices were about to do the same. They did. Because they did, I think it's possible that the SPX could have ended the latest rally, but I know well that even that corrective fan principle that suggests it's the end is right, the SPX could climb the underside of that former trendline off the summer's low and even produce a new high or two while climbing it, before dropping away.

Am I scared? No. I don't know that any decline is going to happen, and, even if it does, I don't know that it will be anything more than a short-lived retracement and a bunch of chopping around afterwards. So far, despite the fears and the lack of visibility about how hard our financials have really been hit, markets are holding up well.

Studying these charts allows me to make just-in-case plans, and I've done that. I encourage you to do it, too, and then you don't have to worry about what happens: you just put your plan into effect. I've positioned my trades so that I won't be hurt in case there should be some sort of downdraft.

A study of the charts still shows that so far, we're not seeing anything other than a normal need for retracement showing up on the charts. Now prices are at a do-or-die, fall-out-of-the-channels-or-bounce-through-them point. They'll do one or the other. You just need to know where your stops are going to be in each case.

I continue to believe that, for the SPX at least, as long as it's producing closes beneath that rising green trendline on the daily chart, the trendline off the summer's low, the best tactic is looking for rollovers. Since anyone who bought each bottom-of-the-channel (the price channel has a different lower trendline, see above) touch previously has been rewarded, I highly anticipate bounce attempts, barring some kind of cascading fall that scares people off. That doesn't mean that I think buying the dips (other than scalping plays for experienced and aggressive traders) is the best tactic right now. The SPX could still be vulnerable to a little more downside even if it is going to stay inside that rising channel, which we don't know yet. So, that's my opinion.

Anyway, let's see what intraday charts show.

Annotated 10-Minute Chart of the SPX:

I'm switching to a 15-Minute Keltner chart for the Nasdaq, as that best fits the Nasdaq's actions.

Annotated 15-Minute Chart of the Nasdaq:

Annotated 15-Minute Chart of the RUT:


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