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Market Wrap

Stocks Mixed; Oil Retreats

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The major averages finished mixed-to-higher to start the week in an active yet choppy trade, where despite rising tensions between Iran and the U.S. in the Straits of Hormuz over the weekend, oil prices tumbled to settle down $2.82, or -2.88% at $95.09 on the Nymex.

On Saturday, five Iranian revolutionary guard boats harassed three U.S. Navy warships sailing in the Straits of Hormuz with threatening moves and radio transmissions.

While February Crude Oil Futures (cl08g) traded as high as $98.40 at their floor session open, selling prevailed toward the close with traders citing both warmer temperature forecasts this week for much of the eastern U.S. Traders also cited some plain old profit taking on demand concerns from slowing U.S. economic growth.

Meanwhile, February Natural Gas futures (ng08g) gained $0.038, or 0.48% to $7.879/mmbtu as the storm that left tens of thousands of Californians without power headed east to parts Utah, Colorado and New Mexico with frigid temperatures expected to increase demand for the primary heating commodity this week.

Treasuries found price gains at the 5, 10 and 30-year maturities with yields falling with traders anticipating further rate cuts coming when the Federal Open Market Committee meets at the end of the month. The benchmark 10-year Treasury Yield ($TNX.X) fell 1.5 basis points to 3.839%, its lowest yield close since June 27, 2005.

New high and new low indications remain weak, yet very "oversold" short-term.

Today's 425 new lows at the big board were fewer than Friday's 561, while today's 375 new lows at the NASDAQ also an improvement from Friday's 475.

Still, Friday's 475 new lows at the NASDAQ were notable as it took out the more recent 11/08/07 low measure of 445 (81 NH/445 NL) and would suggest to this analyst some further slippage at the bottom.

It is difficult to simply note the number of new highs and new lows on a given session, but more meaningful if seen visually with a chart.

Here is an updated NYSE NH/NL Ratio Chart where I show both the "f"ive day average ratio and the 10-day average ratio using the Point and Figure methodology of O (supply outstripping demand) and X (demand outstripping supply).

NYSE NH/NL Ratio Chart - 2% box scale

The NYSE's "f"ive day NH/NL ratio has been slowly retreating from the 32% found on 12/28/07. Having reached a recent inflection high of 40% (on chart) on 12/12/08, this more intermediate-term indicator of bullish/bearish leadership has been trying to stabilize at 22% since 12/24/07.

Should we see the number of NH's exceed 62 and NL's fewer than 300 at the big board, that could be clue of a strong short-term bounce, fueled largely by short covering.

NASDAQ Comp. NH/NL Ratio Chart - 2% box scale

We can see from the NASDAQ's "f"ive day NH/NL ratio that a range is being developed for this short-term indicator of bullish/bearish leadership. Recent 40% inflection highs came on 12/11/07 and 12/28/07 and were one "reason" I thought bulls should protect gains in my 12/24/07 Market Wrap.

I should probably suggest that BEARS be protective of some handsome short-term gains tonight.

Not unlike the NYSE, the NASDAQ's 10-day NH/NL ratio has been treading water around the 28% measure since mid-December.

One additional note regarding some NH and NL indications that should be concerning to BULLS is that Friday's number of new lows among the S&P 500 components had just 7 stocks achieving a new 52-week high, while 134 members saw a new 52-week low trade.

I checked my spreadsheet and that is the largest number of new lows I've observed since I began tracking the S&P 500 components NH and NL on February 27, 2006.

U.S. Market Watch -

The Biotechnology Index (BTK.X) 789.89 +2.10% and Pharmaceutical Index (DRG.X) 342.95 +2.57% were both atop today's list of sector winners.

Shares of Biogen Idec (NASDAQ:BIIB) $59.22 +7.24% once again threaten to reclaim a still rising 200-day SMA after the drug maker said 2007 earnings will be above the top end of its previous estimates and that revenues are expected to rise 15% per year through 2010.

Schnitzer Steel (NASDAQ:SCHN) $61.80 -2.90% plunged as low as $58.19 at the open, but found buyers just above its rising 200-day SMA ($58.12) after the company said earnings rose 17% to $24.7 million, or $0.85 per share in its recently completed first quarter. The company did say it was seeing some pricing pressures in California and that tight global shipping markets could weight on future results.

In Thursday's Market Wrap, I once again touched on the "crack spread" between oil and unleaded gasoline. Tonight's 5-dayNet% and 20-dayNet% would show further deterioration and some narrowing of margins for refiners.

Shares of Valero Energy (NYSE:VLO) $63.70 -0.68% did trade under the $63.00 level, a good entry point for an INITIAL position, say 1/4, but no more than 1/2 position (if you normally buy $10,000 of a stock as FULL position, then perhaps buy $2,500, or $5,000 at this point) but understand for more meaningful strength than the recent inflection high of $72.00, "crack spread" improvement must eventually confirm (see Continuous Unleaded vs. Continuous WTIC chart from Thursday). You can see a FREE chart at StockCharts.com by simply typing $GASO:$WTIC in the symbol field.

I did not profile a CALL Option Trade in today's Market Monitor at OptionInvestor.com for Valero, but would be looking to RISK $3.00/contract (1 contract = $300) in the June'08 $72.50 calls (ZPY-FV). I would want an expiration to at least be found as the summer driving season begins.

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Signs of Recession?

Several sessions ago I mentioned in the OptionInvestor.com Market Monitor that my 2008 forecast was for a "modest recession" to be found in 2008.

In Friday evening's I reviewed some of the various TECHNICAL reasons for why I think that market participants see a "modest recession," where economic indicators would confirm such analysis is April'08.

Of course, this is only from the belief that the market is a FORWARD LOOKING instrument.

Let's first get some updates on the major market bullish % from the institutionally followed data from Dorsey/Wright and Associates.

At the time of this writing, Dorsey/Wright had only tabulated the NYSE Bullish % (BPNYSE), the Over-The-Counter Bullish % (BPOTC) and the S&P 500 Bullish % (BPSPX).

StockChart.com's equivalent symbols would be $BPNYA, $BPCOMQ and $BPSPX.

All we're doing here is measuring the number of point and figure charts that have a "buy signal" still intact on their supply (O) and demand (X) charts.

Major Market Bullish % -

My "modest recession" call still has some work to be done as for any confirmation of that analysis, I would have to see an NYSE Bullish % (BPNYSE) measure of 32%, which would signal further deterioration and a "sell signal" for the more institutionally held stocks listed on the NYSE. There are just more than 3,000 stocks listed on the NYSE, so this is a VERY BROAD indicator of supply (O) and demand (X).

Here perhaps you can begin to see how the BPNYSE seems rather SIMILAR to the NYSE 10-day NH/NL measures.

Measuring two different types of internals, but both weak and nearing "oversold" levels. For the major market bullish %, levels at or above 70% are deemed "overbought," while levels at or below 30% are deemed "oversold."

Also a broad measure would be the BPOTC. Again, just more than 3,000 supply demand charts. One stack containing those charts with a "buy signal" still intact, the other stack containing those charts with a "sell signal" intact. On 11/19/07 the BPOTC generated a "sell signal" at 32% and suggested that supply of stock was outstripping demand on a broader measure.

For the S&P 500 Bullish % (BPSPX), there are now roughly 171 stocks (34.14% of 500 = 170.7) with a PnF "buy signal" intact on the chart, but 329 showing "sell signal" intact on the supply (O) and demand (X) chart.

One reason I see a "modest recession" in 2008 is that I again received multiple email at the beginning of 2008 (as I did 2003, 2004, 2005, 2006 and 2007) regarding the sell-off of biblical proportions about to happen.

While some "scenarios" of why the U.S. economy as best depicted by the S&P 500 (SPX.X) 1,416.18 +0.22% have been witnessed (ie housing bubble, credit crunch) we are now at some more "oversold" broader market measures and I would then have to think that market participants have largely accounted for some type of economic slowdown.

With most economies always experiencing a cycle (expansion and contraction), the thought of a "modest recession" in 2008 isn't out of the question.

January and Q1 Pivot Levels - High/Low/Close derived

In Thursday's Market Wrap, I showed some historical SPX YEARLY Pivot levels.

The above table is January's MONTHLY Pivot levels, which may bring this month's PRICE action into closer perspective.

We could "zoom out" a bit and take a look at Q1 2008 levels.

Just as we observed in Thursday's Market Wrap that the SPX had just kissed its YEARLY Pivot (1,470), we also see that the SPX has not yet been able to trade its QUARTERLY Pivot (1,483.56), or its MONTHLY Pivot (1,476.19).

One additional level I noted in my 12/03/07 Market Wrap is the Dow Diamonds (DIA) $128.06 -0.08% MONTHLY S1 for January ($129.78).

For me, and perhaps another trader/investor that initiated a 2 million share trade at roughly $128.98, January's MONTHLY S1 becomes important.

Certainly the Russell 2000 ($RUT.X) 723.95 +0.32% ability to trade its MONTHLY S1 would give hint to some U.S. domestic economic weakness.

The thought here is that the bulk of small caps would be more dependent on U.S. economic trends as the bulk of stocks derive most of their revenue and earnings here at home.

Russell 2000 ($RUT) - 10-point box

Most institutional traders and investors will view the $RUT on a 4-point box chart, but for purposes of tonight's Market Wrap, I'm showing its chart on a 10-point box to bring into view some of 2005 and 2006 trade.

The major observation isn't just the new 52-week low, but the violation of some meaningful support that held for all of 2007 with the $RUT having NEVER traded 730.

The ability for the $RUT to trade 730 and now 720 certainly would suggest to this technical analyst (Jeff Bailey) that some more meaningful economic slowing is perceived by market participants.
 

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