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Market Wrap

Confirming Fears

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This morning, several developments confirmed fears that a weakening economy could be impacting consumer spending habits; the subprime mess could be spilling over into the broader economy; and the ECB might not be on board to find a global solution to what is increasingly viewed as a global problem. Wal-Mart's same-store sales figures this morning were the first of those developments. The retailer's report confirmed fears that the weak jobs number would translate into weak consumer spending. Many retailers reported numbers that were worse than already dim expectations.

In addition, a U.S. company not related to the mortgage, finance or real estate industries confirmed fears that the subprime mess could impact companies outside those sectors. Exelon Corp.'s (EXC) 2007 SEC report detailed the company's exposure in some of the securities it holds in its investment trusts.

The European Central Bank also confirmed assumptions that it would not ease rates today. Many market participants want a global response to what they feel is a global problem as economies slow and credit woes continue. As expected, however, the European Central Bank left rates unchanged at 4 percent while the Bank of England lowered rates by a quarter of a point to 5.25 percent. The ECB remains more worried about inflation than other concerns.

Jean-Claude Trichet, the ECB's President, said in his statement that "[t]he firm anchoring of inflation expectations over the medium and long term is of the highest priority to the Governing Council." He mentioned "very vigorous money and credit growth" as risks to price stability, and stated that "the current short-term upward pressure on inflation must not spill over into the medium term." He did admit to "unusually high uncertainty" about the eventual impact of the risk reappraisal going on in the financial markets and confirmed that incoming data revealed downside risks to the economy in the euro area. Still, the ECB's focus on inflation remains clear.

Market participants who wanted a global response were likely disappointed by the BoE's quarter-point cut, too. Some had called for at least a half-point cut. In England, lenders have been raising rates, locking out some borrowers who had hoped to refinance their mortgages. The Bank of England's Monetary Policy Committee stressed that it remained worried about inflation. The committee pegged its easing on disruptions in global financial markets and deteriorating prospects for global output growth.

At first, the dollar's reaction to those central bank actions proved puzzling. The dollar strengthened against both the euro and the pound. Given that our Fed has eased and is perceived to be on a path to ease more, that strengthening seemed contrary to what would be expected. However, that reaction was perhaps clarified by a U.S. Treasury auction this afternoon. The participation by central banks was termed disappointing, as was the auction as a whole, with yields going up and treasuries declining as a result. Among currency traders and bond traders, at least, the concerns appear to be swinging back toward worries about inflation.

Despite having fears confirmed, however, most equity indices shook off worries and posted gains. On the SPX, for example, a slide that had initially punched beneath support that had held since 1/23 was stopped in its tracks by an across-the-board buy program. When equities dropped in the afternoon, they managed to hold support and gain into the close.


The SPX's daily candlestick was one that's sometimes indicative of a potential reversal. Such candlestick and other chart truisms often fall apart in the current market conditions, but let's take a look at what else we see. On the SPX, there's no clear next direction depicted.

Annotated Daily Chart of the SPX:

With the SPX daily candle hanging out in the middle of nowhere, between support and resistance, it's difficult to gauge what may happen next. Space doesn't allow me to post both traditional and Keltner daily and weekly charts, so I've stuck with the more traditional charting system, but perhaps the Keltner one will provide some benchmarks. I'll give you some numbers. The body of the daily candle is stuck between current Keltner resistance at 1337.80 on daily closes and support at 1316.30 on daily closes, so we would have to see daily closes outside those boundaries to make predictions. Until there are daily closes above about 1351, however, the SPX maintains some vulnerability to 1300 support.

Well, who are we kidding? In these market conditions, that vulnerability remains even if there's a close above 1351. However, a daily close above the benchmark 9-ema there would show that vulnerability to 1300 has lessened, at least temporarily.

Annotated Daily Chart of the Dow:

On a daily Keltner chart basis, the Dow looks better than the SPX, but it's easier to manipulate this index with a narrower base. The Dow is maintaining daily closes above the Keltner support at 12,191 currently, but it has potential resistance at 12,385-12,400 on daily closes. The Dow needs daily closes above that level to improve its tenor. Potential lower support is at 12,100 and then 11,835 on daily closes.

Annotated Daily Chart of the Nasdaq:

The Nasdaq's daily Keltner chart tells us what we already know: the Nasdaq needs to produce daily closes above 2300-2303 before it's even begun to improve its tenor. Then it faces potential resistance at about 2336, the approximate location of the daily 9-ema by the time the Nasdaq could rise to test it.

Annotated Daily Chart of the SOX:

Annotated Daily Chart of the RUT:

The RUT's daily Keltner chart shows the RUT rising today to challenge its daily 9-ema near 704, without yet being able to close above it. This information merely verifies what we already know from the traditional chart. Until the RUT begins producing daily closes above that red trendline, it looks vulnerable to a quick downturn toward 680 and maybe even 660. A push up through that resistance on a daily close doesn't mean that the RUT will erase all vulnerability to those lower levels, especially since it, like so many other indices, is chopping out a consolidation zone. It does, however, make the immediate likelihood a bit less.

Annotated Daily Chart of the TRAN:

Today's Developments

Today's releases included January's Chain Store sales. Wal-Mart (WMT) was supposed to save the day for retailers and, therefore, for the economy. However, its 7:30 release disappointed. Industry watchers had expected sales to rise 2 percent; instead, they rose only 0.5 percent. Gift card redemptions fell below expectations, the company said, and bad weather contributed to the slow sales.

Target (TGT) also disappointed, but Costco (COST) beat estimates and Big Lots (BIG) matched them. J.C. Penney's (JCP) same-store sales dropped far less than the expected 6.3-percent decline, and Children's Place (PLCE) reported same-store sales that rose 6 percent from the previous year's comparable period. Ann Taylor (ANN) also beat expectations.

However, the weakness wasn't limited to stores such as WMT and competitor TGT or to their sector. Macy's (M) disappointed, as did Nordstrom Inc. (JWN) and West Seal (WTSLA).

Initial and continuing jobless claims have garnered more attention lately, and that was the next release on the slate for today. Market watchers anticipated that initial claims would pull back a little from last week's 375,000, to about 342,500. When the release came at 8:30 am ET, last week's 375,000 initial claims had been revised higher to 378,000. This week's claims did decline, but only by 22,000 to 356,000.

While that's the lowest number reported in two weeks, it did nothing to improve equity futures in the pre-market session. The Labor Department cautioned that there had been difficulties adjusting for the Martin Luther King Jr. holiday. The more reliable four-week moving average climbed 8,500 to 335,000.

Continuing claims added their own concerns. Continuing claims--representing those who have lost their jobs and are unable to find new ones--have been on a mostly upward trajectory. That continued this week, with the number rising to its highest level in more than two years. Those claims climbed 75,000 to 2.78 million, and the four-week moving average rose 24,250 to 2.73 million. The seasonally adjusted insured unemployment rate rose back to 2.1 percent.

December's Pending Home Sales index from the National Association of Realtors appeared at 10:00 am ET, confirming fears about continued weakness in home sales. Industry experts had predicted a decline of 1 percent, but the decline was a greater-than-expected 1.5 percent drop. November had shown a 3-percent decrease. The index declined 24.2 percent year over year.

Both the NAR and other economists predict that the housing market will remain soft at least through the first half of this year, with the weakness suggested by a deteriorating labor market. Some pointed to actions that may help, including raising loan limits for conventional mortgages, as long as such actions are enacted quickly. NAR believes that new home sales may decline 17.7 percent this year but may rise into the high single digits in 2009.

Congress confirmed that an attempt would be made to raise conforming loan limits for Freddie Mac and Fannie Mae in the economic stimulus package. Democrats favor the increase. They want these two companies to help those borrowers hurt by the subprime mess and the resultant credit crunch. While the director of the agency overseeing Freddie Mac and Fannie Mae asserts that these agencies have already been helping borrowers refinance, some say they haven't been doing enough. Republicans reportedly do not favor the lifting of the limit.

By late today, Dow Jones and other news sources were reporting that the Senate had voted in favor of a package that includes rebates up to $600 for workers and $300 for veterans or seniors living off Social Security benefits. Tax incentives for businesses are also included. As this report was prepared, information was not yet available on whether the plan included a lifting of those loan limits for Freddie Mac and Fannie Mae.

Freddie Mac reported on average mortgage rates for last week. Those rates for a 30-year fixed-rate mortgage inched lower to 5.67 percent, down from the previous week's 5.68 percent. Freddie Mac's chief economist noted that the rates were moving--or not moving--in concert with Treasury bond yields for the period.


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The Department of Energy released information on weekly natural gas storage at 10:30. The Energy Information Administration, the EIA, said that natural gas supplies dropped 200 billion cubic feet. Industry watchers had expected a smaller decline of only 170 bcf's.

Sometime this morning, the Fed released its weekly figures on outstanding commercial paper, confirming that the credit crunch remains a factor for corporations. As happened two weeks ago, those figures again showed a decrease in outstanding paper, by a seasonally adjusted $8.6 billion in this case. Most of that decrease came in asset-backed paper, with outstanding asset-backed paper falling $9.9 billion. Financials saw decreases across all categories (Total, Domestic and Foreign) while non-financials saw gains across all categories.

News from the bond insurers this week was meant to reassure market participants. Yesterday MBIA (MBI) announced its plans to raise cash. Today, investors and market watchers learned that Bank of American (BAC) had taken a 7.1 percent position in bond insurer Ambak (ABK). The news didn't appear to be particularly reassuring to investors of any of the three companies, but perhaps that was because of other news. Moody's has downgraded bond insurer XL Capital's (XL) credit rating to A3 from its previous AAA rating. ABK and MBI have been scrambling to avoid downgrades.

In addition, Standard & Poor's joined Moody's in attempting to revamp its rating system. Today S&P announced that it would consider changing its rating system as a result of the subprime mess and resultant fallout. S&P wants to include liquidity, volatility and other issues that can influence the performance of the securities it rates. S&P will appoint an ombudsman and also hire an external firm, with those assigned duties of determining any conflicts of interest.

Information from Exelon Corp. (EXC) confirmed some of our worst fears about the broadening impact of the subprime mess. EXC is a large U.S. power company. Today investors learned that its investment trusts hold securities that are backed by subprime mortgages. Those trusts are meant to support the company's pension plan and provide for the future costs related to shutting down nuclear power plants. Because the value of those mortgage-backed securities has fallen, EXC may need to add extra funds to those trusts, their 2007 report noted.

Reporting companies today included homebuilders that confirmed the impact of the credit crunch. Despite those confirmations, the DJUSHB, the Dow Jones Home Construction Index, and the stocks of many of the reporting builders gained.

One builder reporting earnings was D.R. Horton (DHI). The company took a charge related to abandoned land options and inventory impairments, resulting in a loss of $0.41 a share for the quarter that ended in December. Net sales orders were more than halved when compared to the year-ago figures. Cancellation rates were 44 percent.

M.D.C. Holdings (MDC) reported a widening loss, with this builder also taking charges related to abandoned land-option contracts and other costs. Net orders also were slashed in half for this builder when compared to year-ago levels. M/I Homes Inc. (MHO) reported a loss of $5.06 a share, including various charges.

Genworth Financial (GNW) reported net operating income of $0.71 a share against expectations of $0.69 a share. Without the exclusions, the company earned $0.40 a share.

Not all reporting companies were builders or financials, of course. PepsiCo (PEP) beat expectations but the year's estimate of at least $3.72 compared to the previous estimate of $3.74.

Tomorrow's Economic and Earnings Releases

Tomorrow's releases include December's Wholesale Trade at 10:00 am ET and the ECRI Weekly Leading Index at 10:30. Neither is anticipated to be market moving.

What about Tomorrow?

Annotated 15-Minute Chart of the SPX:

This chart suggests that gains could be sharp if the SPX breaks above that neckline and above Keltner resistance. I've seen such setups followed by the sharp moves they predict, but be wary of any predictions in this market environment. Be especially wary of a quick punch above 1350 first thing tomorrow morning that's just as quickly reversed.

If the SPX should instead fall first thing tomorrow morning, strongest support on 15-minute closes appears to be near 1319-1323.

Annotated 15-Minute Chart of the Dow:

Annotated 15-Minute Chart of the Nasdaq:

The Nasdaq's short-term Keltner support is weaker than that seen on the previous charts. There's support down to about 2268, but the Nasdaq needs to climb or consolidate sideways a while to pull that potential support up near other support, firming it.

Annotated 15-Minute Chart of the RUT:

So, what do I think? I think there's a chance there could be a gain or sideways consolidation tomorrow. If you were attempting to read charts and take positions based on those charts today, though, you know how much worth a chart reading has in these market conditions: about as much worth as a palm reading.

I think, on the intermediate term, we're looking at the markets being within choppy zones that may narrow their ranges a bit, making trading miserable as they narrow and narrow. I think that possible action must be put into the context of markets that might still need to retest lows or make new ones but are long overdue for a real relief rally. So, that's the reason, in my opinion, for the choppy and so far volatile consolidation.

What does that mean? That means you're trading at your own risk if you're trading those choppy consolidation zones that are setting up. You better be good at getting in and getting out quickly because markets are turning on a dime without even bothering to set up the typical signals that they're about to do so. You need to know where resistance or support might lie and have a plan in advance for dealing with that support or resistance, because sometimes you're literally given only seconds to react before the reversal begins.

This is not trading for the faint of heart, or, if I may be frank, for the "little of account size." You can be a great trader and great, too, at managing trades and keeping your losses small, and still get a small account chopped and diced until there's nothing but mush left. If you've got a big account and you're trading a contract here and a contract there, it's not going to hurt you, but even a contract here and a contract there are going to hurt if your account is a $3,000 or $5,000 one and you're getting whipsawed back and forth several times a day.

If you're finding that happening and lambasting yourself for not having adequate trading skills, it may not be your trading skills at fault. If they were working before and they're not now, you need to realize that trading conditions have changed. Almost every week, we're hearing about some "not since" loss or gain that's occurred, and I'm hearing people who have been in the pits or trading for syndicates comment on how difficult these markets have been to gauge. A trading friend wrote this afternoon and called this day's action "like shuffling deck chairs on the Titanic."

Particularly if you've got a small account, there is absolutely nothing wrong with stepping back, listening to some webinars, reading some books, and paper trading some great new combination trade you've heard about while all those craziness is going on. You can get excited about the new trades you're going to try when market conditions improve, with your trading account safe and sound while you're doing so.

My job is to tell you what's going on and to give you my best guess as to what might happen next when a guess is reasonable, but I'd be remiss if I also didn't tell you the times when it's just not a great trading environment.

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