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Market Wrap

The Rescue Gazette

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Introduction

Lately, it seems as if "rescue" is the word du jour in the financial news. Today was no different. Rescue plans have spread across the globe. Five of France's banks banded together today to start a financial vehicle that will rescue any of the five that might sustain a run on its funds.

The five include BNP Paribas, Societe Generale, Calyon Credit Agricole, Natixis and HSBC France. Some of those are names we recognize in the U.S. BNP Paribas is a name familiar to those who remember the damage done to equities across the globe when the bank stumbled earlier this year. The thought of the damage a run on BNP Paribas could do is like a little tickle in the back of your throat. You're not sure if you're being a hypochondriac to worry about it, imagining disasters that never come, or if that tickle is the first dread warning of a terrible flu.

This morning, BNP Paribas currency analysts addressed some of the worries being felt across the globe, and they weren't offering comfort for that tickle in the back of the throat. Those analysts said that even if the money markets should normalize, that won't necessarily prevent the credit crunch from worsening. They pointed to Japan in the late 1990s as an example of how functioning money markets could not prevent a credit crunch.

Banks across the globe were feeling that little tickle last night. Bourses across the globe caught their worry. Headlines noted that mega banks fell five percent in Japan. They dragged the Nikkei 225 2.48 percent lower. Other Asian indices dropped, and European ones were trading sharply lower as the 8:30 am EST U.S. economic release slot approached. The PPI was about to be released.

That hotter-than-expected PPI should have stunned markets, but market participants seemed too nauseated by the week's dizzying movements to react. A stronger-than-expected retail sales figure salved the tickle and staved off further signs of the flu. In addition, the strong PPI and resultant inflation fears pushed yields such as those on the ten-years higher, and that helped plump up the sagging dollar. Partly as a result, crude prices headed lower as did natural gas prices.

The U.S. dollar moved higher against the yen, testing a 50 percent retracement of its steep decline off the early October high. For the last couple of years, movements in the USDJPY (U.S. dollar in relationship to the Japanese yen) have tended to precede or corroborate movements in U.S. equities, but equity indices zoomed right past that 50 percent retracement pre-FOMC while the USDJPY languished behind.

Because of the USDJPY's importance in the yen carry trade, this proved concerning to many, me included. The USDJPY wasn't confirming equity strength, at least by this measure. Many equity indices fell back below that 50 percent retracement level after the FOMC result. Now we'll see whether the USDJPY can sustain values above the 50 percent level just above 112.50 or whether it's knocked back strongly from this test, information that might prove a useful guide to equity traders.

With the volatility this week, studying equity index charts might or might not be a useful guide, but let's look anyway.

Charts

Annotated Daily Chart of the SPX:

A potential head-and-shoulders formation is setting up with the right shoulder being chopped out now. A move much above the aqua-colored 72-ema, especially on a daily close, would negate the formation. A rollover beneath Wednesday's low, if sustained, would confirm the formation. The nature of the right-shoulder-building process scrambles indicators and makes predictions difficult, if not impossible, so just watch the invalidation and confirmation levels for clues. The shape of today's candle suggests a bounce attempt in the making, while the dead stop at recognized historical as well as Keltner resistance questions the sustainability of the rally attempt. The reaction to tomorrow's CPI could break the impasse.

Annotated Daily Chart of the Dow:

Neither the Keltner channel chart nor this one provides many clues as to next direction. The shape of the candle indicates that there's some buying going below 13,400, but the Dow is getting stalled on daily closes below October's congestion zone.

Annotated Daily Chart of the Nasdaq:

Support on the daily close at the descending red trendline, resistance at the 72-ema: which is more important? Neither this chart nor the daily Keltner chart gives a prediction of next direction. The daily chart suggests an upside target of 2726 if the Nasdaq can produce daily closes above about 2677, and a downside target of 2618 if the Nasdaq begins producing daily closes beneath about 2648, but neither of those "if" statements has had its conditions met yet.

Annotated Daily Chart of the SOX:

Annotated Daily Chart of the RUT:

A study of this chart shows the following facts. The RUT has been moving off November's low in a flag-like shape, a possible bear flag. Today, it broke through the flag's support but managed to scramble back to that flag's support by the close. That means that the support held on a daily close, but the bullish/bearish evidence has been scrambled now. Bulls want a quick move up through that channel again beginning early tomorrow, and they want to pay special attention to a test of the converging 10- and 30-sma's. Bears want a rollover either from the current level or from those converging averages, showing that the move up this afternoon was just a kiss-goodbye retest of the former support.

If there's a rollover, RUT bears should prepare profit-protecting plans in case there's a test of the 750-752 zone. Other charts set a potential target for that level but also suggest potential, if possibly temporary, support on daily closes exists in that zone. It's possible that the RUT will continue to slide down along that descending red trendline. If the RUT bounces instead, watch for stalling or rollover potential near 770-772 and again at about 787-795.

Annotated Daily Chart of the USDJPY:

Because of the importance of the yen carry trade to our equity performance in the U.S., keep this currency pair on your radar screen. At some point, the inter-market relationships may shift, but for now, you want the direction of this currency pair corroborating the direction of your trade.

Today's Developments

Weekly Initial Claims for the week ending December 8 totaled 333,000, falling 7,000 from the previous week's report. This is still 21,000 more initial claims than this time last year, pointing out one reason that some market watchers have remained concerned about a general upward trend in jobless claims. However, the four-week moving average also dropped, by 2,000, soothing some of those concerns. Last week, the four-week moving average was still climbing.

Continuing claims rose 38,000, and the four-week moving average of this figure rose 18,750. Continuing claims now number 2.61 million, and that's the highest it's been in almost a year. That posits the theory that those who lose their jobs are having more difficulty finding new ones.

Two other important economic releases occurred at 8:30 EST. One was November's Producer Price Index or PPI. If initial claims presented some modestly positive news, PPI overrode that news. Economists had predicted a sharp rise of 1.6-1.8 percent, with the October number having been a more anemic 0.1 percent.

Some believe that the Fed had access to these numbers before making their decision Tuesday, and that the disappointing Fed decision might have predicted a sharper-than-expected PPI. They were right.

PPI rose 3.2 percent, the biggest jump in more than 34 years. The core PPI, excluding food and energy, rose more than expected, too, 0.4 percent. This jump resulted in a 7.2 percent rise over the last year, the biggest jump in more than 26 years. Core prices have risen 2.0 percent over the last year.

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Energy costs of course pushed the headline number higher. Wholesale energy prices rose 14.1 percent, a record change. Gasoline prices climbed 34.8 percent, also a new record. Intermediate energy-goods prices rose 13.3 percent, another new record. Crude goods prices jumped 8.7 percent, and crude energy material prices rose 17.0 percent.

The FOMC couldn't have been happy about what it saw in this number if the committee indeed had access to these numbers. The failure to drop rates as much as market participants wanted probably resulted from increased inflation worries due to these numbers. The FOMC apparently studies core intermediate goods prices as a favorite inflation indicator, and that rose 1.0 percent, its largest rise in 18 months.

November's Retail Sales also appeared at 8:30, providing at least some counterbalance to the PPI. Industry watchers expected sales to rise 0.6-0.7 percent after October's gain of 0.2 percent. Instead sales rose a much sharper 1.2 percent. That brings retail sales up by 6.3 percent for the last twelve months. If auto sales, the only sector to report weakness, were excluded, retail sales rose 1.8 percent. Excluding autos, sales climbed 7.4 percent the last 12 months.

Food sales rose 1.0 percent, but one has to wonder how much of that increase was due to price increases and not to more numerous sales. Similarly, gasoline station sales rose 6.8 percent, producing their largest gains in more than a year. Again, however, increased gasoline prices were certainly responsible for at least some of that gain. If gasoline sales were excluded, retail sales rose only 0.6 percent in November.

Market participants weren't convinced of the health of the retail sector. Influenced at least in part by Costco's (COST) earnings report, the RLX, the S&P Retail index, dropped to a new low for the week.

The Department of Energy released the last figure of the day: the Weekly Natural Gas Storage figures. Last week, the government had said stores of natural gas dropped 88 billion cubic feet. This week, with colder weather already pushing natural gas prices higher, the draw was a greater-than-expected 146 billion cubic feet.

Although not an economic report, Lehman Brothers Holdings' (LEH) report might as well have been. The company beat expectations of $1.47 a share, reporting $1.54 a share on earnings of $886 million. However, that represents an 11 percent drop from the year-ago level and the third quarter in a row that the company's earnings have fallen.

In Tuesday's Wrap, Jim Brown had speculated that Lehman would have to book some of its negative valuation adjustments on trading assets, and the company did so. Net revenue dropped 60 percent, but some articles still mentioned a credibility gap for the financials, and LEH's conference call included the statement that the company isn't yet ruling out further reductions in the valuations of its assets. Merrill Lynch questioned the 2008 profit estimates set by analysts, saying they were too high.

However, one print headline touted Lehman's ability to ameliorate $3.5 billion in mortgage losses with $2 billion in hedge gains. Investors weren't sure what to believe. LEH dropped for the day, but closed well off its $58.50 low of the day, producing a big long-legged doji that mostly stayed within the big triangle shape forming on LEH's daily chart. Indecision was made evident by that doji.

In other news related to the financials, Banc of America Securities cut Washington Mutual (WM) to a sell rating. That was a little late, don't you think, with WM falling from $35.00 to today's $15.50-ish level since September?

WM dropped but produced a small bodied candle that gapped below previous support. Such candles can be potential reversal signals, but the completion of that signal would require a gap higher tomorrow and then a continued and strong gain from there. I personally would not be putting anything other than lotto money in a long play on a financial right now. It's possible to argue that they've fallen too far and it's time for a bounce, and that argument might be right, but you could have argued the same thing when WM was consolidating near $28.00, and the bottom just fell out from that level. If you're contemplating a long play or are already in one, you certainly want to see that gap higher tomorrow.

Another reporting company, H&R Block (HRB), said that it would take $74.8 million in charges as it exited the mortgage market, dismantling its Option One Mortgage Corp. unit. The company reported a larger-than-expected net loss in its second quarter. Intraday, investors drove the price drove to a new low below the October low.

CCountrywide (CFC) said that November's mortgage loan fundings totaled only $23 billion, 40 percent less than the previous November's fundings. The good news is that's five percent higher than October's fundings. Average daily mortgage loan applications were also sharply lower than the year-ago levels. CFC gapped lower, but like WM produced a small-bodied candle that could be a potential reversal signal. The fact that it also gapped below a rising bear flag doesn't prompt me to act on a potential reversal signal, however.

Other company-related developments included news that Dow Chemical (DOW) and Petrochemical Industries Company of Kuwait have formed a 50/50 joint venture. The joint venture will comprise a global petrochemicals company that both anticipate being a market-leading entity. DOW surged higher this morning, gapping above its 200-sma, but it couldn't manage to hold onto all its gains. Investors long the stock would like to see it consolidate above that 200-sma, now at 44.09, and not gap back below it.

Honeywell (HON) was another company in the news. The company led expectations for 2008 earnings to $3.65-3.80 a share on sales of $36.1-36.7 billion. Previous expectations had been earnings of $3.67 a share on sales of $36.35 billion. The company's statement spoke of the "great year" the company expected to have, and investors rewarded the company by sending the stock price sharply higher.

Biogen (BIIB) might not be looking forward to as great of a new year. The board reported that the company did not find a buyer, and shares were hit hard in premarket trading and showed the effect at the open. BIIB gapped below its 200-sma, falling from its $75.88 close yesterday to its cash market open at $55.12 today. It scrambled back up to its 200-sma by the close. The high valuation of the company as well as uncertainty about Tysabri, the company's MS drug, were blamed for the dearth of willing buyers.

Costco (COST) pulled the retailing index lower this morning after reporting in-line earnings. Its profit margins disappointed investors. After closing at $70.19 yesterday, the stock opened at $65.52 today, but it managed a several-point climb off that early morning level.

Tomorrow's Economic and Earnings Releases

Tomorrow's November Consumer Price Index (CPI) could likely produce a market reaction, particularly if the core CPI is hotter than expected. Today's hotter-than-expected PPI might have taken some of the sting out of the CPI if it is also hotter than expected, however. The headline number is expected to rise 0.7 percent.

The CPI's 8:30 am EST release will be closely followed by the November Industrial Production at 9:15. Industrial production fell 0.5 percent in October but is expected to rise 0.1 percent in November.

The last release of the week is the little-watched ECRI Weekly Leading Index at 10:30.

What about Tomorrow?

As Keene pointed out in last night's Wrap, the Thursday before opex week often produces the low from which markets rally into opex week or the high from which they decline. Its action is often reversed. As Keene also pointed out, this doesn't always happen, but it happens often enough that we should remain leery about our expectations after watching today's action. On top of that wariness, we have to layer wariness over anything that happens in this volatile market, because the action of days can be reversed in hours or minutes.

But if there's a reversal next week, what's it reversing? Today's action was undecided, with the charts I've already provided showing both fodder for both bulls and bears. Volume patterns were thoroughly negative, though, and volume was far from big enough to say it was any kind of capitulation day. Some buying was definitely going on. There were bounces from the day's lows on most indices, but the volume wasn't big enough to convince me yet that it was big money people doing the buying, or that, if they were, they were doing anything other than nibbling.

Watch the TRAN if you're trading the SPX, OEX or Dow. It's been a fairly good short-term indicator lately, although I'd use it only as one of many indicators and not as a proof that markets will go this way or that.

Also watch the USDJPY. It climbed to a test this week of the 50 percent retracement of its decline off the October high. Currency movements are considered purer than equity movements, more amenable to technical analysis. Although I haven't always found that to be true, currency traders do tend to pay more attention to Fib levels, and the 50 percent retracement is often powerful resistance on the first test. Equity bulls want to see an overnight push through the 112.50-112.60 zone, and they want that push higher sustained. Equity bears want to see the USDJPY roll down again from this test.

Tonight Japan's fourth-quarter Tankan Survey will be released. This is definitely a market mover in Japan, and it can certainly impact the USDJPY. What happens in Japan tonight could be as important to our equities as what happens tomorrow morning with the CPI. What equity traders don't want to see is a strengthening yen that pushes the USDJPY sharply lower.

This isn't an absolute market-timing tool, but I'd be careful of placing too large bets on equities that are contrary to what you're seeing on the USDJPY. Doing that would be akin to making a large bullish bet when the advdec line was negative and headed lower or making a large bearish bet when the advdec line was positive and surging higher. It might work, you might catch a turning point, but you might not, either, as you're entering contrary to the evidence when you make a large equity bet that's opposite the direction of the USDJPY.

Intraday charts were scrambled by this week's action and could be scrambled again by overnight and early morning action tomorrow, but let's look at them anyway to see what we can glean from them.

Annotated 15-Minute Chart of the SPX:

Annotated 15-Minute Chart of the Dow:

Annotated 15-Minute Chart of the Nasdaq:

Annotated 15-Minute Chart of the RUT:

These charts present mixed pictures. The Nasdaq and RUT are weaker by Keltner standards than the SPX and Dow, but both the SPX and Dow have reached levels that might present resistance and prompt at least a small pullback.

In truth, anything that is shown on these charts can and has been wiped out within moments with the volatility we've seen. With Japan's Tankan survey tonight and our CPI tomorrow, news and especially currency movements may play a much larger part than anything showing up on intraday charts. For short-term guidance, watch the TRAN and USDJPY, and the performance of your chosen vehicle with regard to its 15-minute 9-ema. If you're bullish, you want continued closes above those averages; if bearish, below them.
 

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