Option Investor
Market Wrap

Small Caps Weak In Narrow Trade

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The major averages finished mixed with only the small caps of the Russell 2000 (RUT.X) 754.01 -1.13% giving traders much action ahead of tomorrow's jobs report.

Today wasn't the first day the small caps have traded weak either. Having fallen five days in a row for a 6.52% decline, the RUT.X has relinquished all but 6-points of it pre-Christmas holiday gains as investors position themselves for the New Year.

With credit markets still roiled and oil prices having reached $100.09 on the Nymex today, the last seven trading sessions hint that market participants are questioning the sustainability of U.S. economic growth in 2008.

Certainly we've seen some year-end rebalancing of portfolios taking place. Tax-strategy positioning (realization of capital gains to offset capital losses), as well as inventory adjustments. Not just for equities, but many financial instruments. Even commodities like oil.

Economic data released before the opening bell had the Automatic Data Processing payroll data showing the economy added 40,000 private sector jobs last month, which was above the 30,000 forecast of economists polled by Dow Jones, but below the 45,000 forecasted by Forex Factory. November's figures were revised lower from 189,000 to 173,000.

Just as I (Jeff Bailey) am filling in for Linda Piazza this evening so she can spend time with her family over the extended holiday week, I'm relatively sure that many economists were unable to be reached for their fine-tuned ADP forecast.

While stock futures found a modest bid on the report, an equal amount of selling was found at 08:30 AM EST when the Labor Department said first time claims for unemployment benefits for the week ended 12/28 fell to 336,000 from an upwardly revised 357,000 (revised up from previously reported 349,000).

At 10:00 AM EST, the U.S. Census Bureau said November factory orders showed a 1.5% increase ($6.2 billion) to $430.3 billion, which was nearly double the 0.7% forecast.

New orders for manufactured durable goods in November, down four consecutive months, decreased $0.2 billion or 0.1% to $214.1 billion, revised from the previously published 0.1% increase.

This followed a 0.5% October decrease.

New orders for manufactured nondurable goods increased $6.4 billion or 3.0 percent to $216.3 billion.

However, a look inside the figures would show that a 15.9% rise in petroleum orders accounted for much of the gain. Excluding that gain, new orders fell 0.2%.

Inventories increased 0.8% in November, which reduced the inventory-to-sales ratio to 1.22. Tight inventory levels are a major bulwark against a recession because firms won't need to cut back production or employment severely if demand stalls.

Unfilled orders rose 1%, with the gains largely concentrated in civilian aircraft.

Orders for transportation equipment rose 1.5% in November, including a 20.8% jump in civilian aircraft orders. Excluding transportation, orders rose 1.4%. Excluding a big drop in defense goods, total orders rose 2.1%.

Orders for electronics fell 1.2%. Orders for machinery dropped 2%. Orders for electrical equipment rose 1.2%, while orders for primary metals increased 0.7%.

Orders for chemicals fell 1%.

Closing U.S. Market Watch

February Crude Oil (cl08g) traded as high as $100.09 as the clock struck 12:00 PM EST.

At 10:30 AM EST, the Energy Information Agency (EIA) said crude U.S. crude oil stockpiles fell by 4.05 million barrels to 289.5 million barrels. It was the 7th-straight week of draws as refiners paired inventories into the end of 2007.

While stockpiles of crude oil fell, refiners increased their crude oil inputs by 164,000 barrels per day to 15.382 million barrels per day.

There's little room for error as it relates to any disruption in crude oil imports as the number of days of supply for crude oil falls to 19.0 days.

Total gasoline stockpiles jumped by 1.98 million barrels to 207.8 million barrels.

By session's end, February Crude (cl08g) settled down $0.44, or -0.44% at $99.18.

February Unleaded (rb08g) settled down $0.0275, or -1.07%.

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The continued decline in crude oil stockpiles and builds of refined products did have some of the refiners notably weak in today's session.

Valero Energy (NYSE:VLO) $66.67 -4.00% and Frontier Oil (NYSE:FTO) $38.01 -3.65% are two names I follow closely in the OptionInvestor.com market monitor.

Valero Energy (VLO) is one of my "Top 5" bullish picks for 2008, but I'm looking for an initial entry at or below the $63.00 level.

All a trader investor is looking for is a "signal" that refining margins are improving.

In the above U.S. Market Watch, you can see from the 5-day Net% and 20-day Net% that oil prices have risen 2.63% vs. 0.79% for unleaded in the last 5-day Net%, while the 20-day Net% has oil up 13.6% vs. 13.39%. This gives us the observation that the "margin" or crack spread between unleaded and oil is narrowing.

That will put pressure on refiners near-term, but the dynamic is understood, or easily comprehendible.

To trade, or invest in the refiners, I have shown the following relative strength chart of Continuous Unleaded ($GASO) and Continuous West Texas Intermediate ($WTIC) on a 0.40-box chart.

Continuous Unleaded vs. Continuous WTIC - 0.40-point box

Oil's sharp rise in recent months and a more "gradual rise" in refined products like unleaded gasoline has my crack spread chart showing some basing action, but that rise on oil (an INPUT for a refiner) and the more gradual rise in the refined product (an OUTPUT for a refiner) still leaves margins under some pressure.

The summer driving season is just less than 6-months from now and I think it is time to start getting interested on the BULLISH side for the refiners.

Santa's Failure To Show May Portent Somber 2008

The last 5 days of a calendar year and first two trading days of the New Year mark what may traders and investors call the "Santa Claus Rally" period.

According to The Stock Trader's Almanac, Santa Claus tends to come to Wall Street nearly every year, bringing a short, sweet, respectable rally within the last 5 days of the year and the first two in January. This barometer has been good for an average 1.6% gain since 1969 (1.5% since 1950). Santa's failure to show tends to precede bear markets, or times stocks could be purchased later in the year at much lower prices.

The Stock Trader's Almanac discovered this phenomenon in 1972.

At tonight's close, the 2008 "barometer" would suggest weakness into the latter part of 2008.

In my last Market Wrap from 12/24/07 Santa was certainly making his rounds to bullish households and while the internals suggested improvement and an oversold bounce was at hand, we're right back where we started in mid-December.

S&P 500 Index (SPX.X) - 30-minute intervals

Some readers may be familiar with The Stock Trader's Almanac findings, and its historical significance for longer-term market direction.

Today's close below the 1,485 "Santa Benchmark" is perhaps one hint that we'll see a weaker equity market.

On the above chart, I display my QCharts trading software's WEEKLY Pivot levels, which are used by institutional computers to manage inventory of stocks.

Now here is a look at some YEARLY Pivot Levels as we lay the ground INITIAL groundwork for the year ahead.

SPX Yearly Pivot Levels - 2000 to 2008

Another gain for the SPX in 2007! That's the good news for bulls.

But if The Stock Trader's Almanac history that "Santa's Failure To Show" at this year's benchmark and the January 2nd intra-day high on the SPX 1,471.77 is any indication that 2008 might not be as bullish, then traders and INVESTORS may want to take note.

For 2001, the SPX fell well below its Yearly S2, and while you and I have undoubtedly read bearish headlines for the last 5-years that the "sky is falling," I'd hate to think we become complacent in 2008.

S&P 500 Index ($SPX) - 10-point box

Go ahead! Take the "For 2007" yearly pivot levels of 1145, 1282, 1356, 1493, 1567 and draw them on the above chart, see what you come up with.

In late November, the SPX did briefly violate its bullish support trend (blue +) at 1,430. That was the FIRST break of trend since a move above its then bearish resistance trend (red +) back in March of 2003 at SPX 875.
 

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