Option Investor
Market Wrap

Financials Get Clocked

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Many investors were expected to be grumpy this morning after losing an hour of sleep to daylight savings time, but a sharp decline in China's trade surplus and negative news flows regarding banks and brokers set a negative tone that accelerated into the close with a rise in U.S. wholesale inventories.

Asian markets set a negative tone when mainland China's Shanghia Composite ($SSEC) fell 154 points, or -3.59% to 4,146 after the country's government said its trade surplus plunged 63% in February, to a one-year low, as Chinese exporters experienced weaker demand from the United States and Europe.

China's General Administration of Customs said the country's trade surplus fell to $8.6 billion, about one-quarter of the $23.7 billion surplus recorded in February last year.

According to the breakdown released by the customs agency, China imported $78.8 billion worth of goods and services, 35% more than in the previous year. Exporters, however, only saw a 6.5% growth in shipments, to $87.4 billion.

Economists attributed the 63% drop in the trade surplus not only to evidence of a global economic slowdown, but unusually harsh snowstorms in China that caused shortfalls in electricity generation, forcing some factories to shut their production lines and postpone shipments.

China's trade surplus with the European Union, its biggest trading partner, narrowed by 15% to $10 billion year-on-year, while it surplus with the United States registered a 23% year-on-year decline to $9.4 billion.

Golman Sachs economists Yu Song and Hong Liang told clients they pay more attention to the combined January-February surplus, which remained significant at $28 billion.

Still, the news rocked parts of Asia with the iShares Malaysia (NYSE:IWM) suffering the most, falling $1.36, or -11.37% to $10.60 on heavy volume of 5.6 million shares.

Additional economic data out of China showed consumer inflation rose 7.1% in January, its highest level in 11 years.

The six-month old inflation spike has been limited mostly to food, which monetary policy has difficulty addressing, but wholesale price data released showed costs of industrial raw materials rose 6.6% in February, the fastest rate in more than three years.

Table- Global Equity Indices, Dollar Index, USO and GLD

From the major global equity indexes I follow on a week-to-week basis, and so far this year (2008 YTD) it would be difficult to say if a slowdown in the U.S. is dragging other benchmarks lower, or if we're simply seeing aversion to global equities.

The strong bid for oil persists and continues to perplex traders, investors and would-be economists that look for the black gold's price decline to confirm a global economic slowdown. Some continue to cite China's stocking of its Strategic Petroleum Reserve as bolstering oil's price.

Closing U.S. Market Watch -

Economic data released today had the Commerce Department saying total wholesale inventories for January rose 0.8% from December's 1.1% gain. January's rise was above economists' forecast for a 0.5% gain.

A look inside January's figures had inventories of furniture and home furnishings up 1.9% from December, while inventories of machinery, equipment and supplies rose 0.9%. End-of-month inventories of nondurable goods increased 1.2% from December and were up 14.9% compared to last January. Inventories of farm product raw materials were up 5.7% from last month and inventories of apparel, piece goods, and notions were up 2.1%.

January's inventory/sale ratio fell to 1.07 from a year-ago ratio of 1.16.

The Securities/Broker Dealer Index (XBD.X) 160.91 -4.65% was notably weak again today.

Bear Stearns (NYSE:BSC) $62.50 -10.81% lead the way lower and traded as low as $60.26 on rumors that the investment bank, a big underwriter of mortgage-backed securities, could be facing a liquidity crisis.

Bear Stearns (BSC) - $2 and $1 box chart

Ace Greenberg, chairman of Bear Stearns' executive committee, dismissed the speculation as "totally ridiculous". The ONLY reason I (Jeff Bailey) see a reason to BUY shares of BSC is if a trader/investor is SHORT the shares as it nears ANOTHER bearish vertical count of $60.00 (this time).

On February 21, a bar chart would show BSC traded up to $85 (see column of X from $80 to $85) and on February 22, traded as low as $80.21 (see column of O from $84 to $81) where after the "buy signal" at $85, that would have been a higher low, perhaps a signal that some demand was starting to return for the stock.

However, the eventual rise to $89, and long column of O from $88 to $75, where the sell signal at $80 generated another bearish vertical count continues to suggest to me that the rallies we're seeing in BSC, if not broader financials is formidable short-covering, and when the shorts have bought back some of their positions to lock in gains, and move to the sidelines, the demand from new bulls isn't there. Thus the "buy the dip and sell the rip" remains the mantra.

The S&P Banks Index (BIX.X) 223.87 -2.56% showed even the more regional banks remained under pressure and after closing just above their 01/22/08 intraday low of 228.54 on Friday, negative comments out of Citigroup (C) regarding further write-downs weighed on the group.

S&P Banks Index (BIX.X) - Weekly Intervals

Friday's close wasn't bullish by any means and the inability to hold a close, even on Monday, above 228.54 would have me assessing further downside to the March 2000 low of 212, which gets close to the mathematically derived MONTHLY S2 (support 2) at 213.82.

In this weekend's Market Monitor at OptionInvestor.com I was reviewing some charts of Treasury yields as well as the S&P Depository Receipts (SPY) and I must say I'm wasn't seeing too many signs of any type of "market bottom" developing at Friday's close.

One thing I did mention last week, which I'm showing in the BIX.X chart tonight is where I used conventional retracement on the BIX.X, not from the Oct'07 relative high, but from its all-time high.

Then as if to mark "the bottom" in the BIX.X at its 1/22/08 intraday low, a day where we saw intraday lows in the majors (except for NDX/QQQQ on 1/23/08), I now add a "-19.1%" fibonacci level. What that may reveal near-term is that the BIX.X has some correlative DOWNSIDE to the mathematically derived QUARTERLY S2 of 192.00.

One of the reasons I began using MONTHLY Pivot levels was in the event a stock, or index began violating to the upside, or downside as the case is with the BIX.X some of the more conventional 0% fibonacci levels.

We can see from the BIX.X that indeed some very "old" levels of historical lows like the October 2002 low does find some technical buying, I (Jeff Bailey) think it rather unlikely that there are "old bulls" using an October 2002 low to further liquidate positions they've held dating that far back in time.

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The more "technical nature" of support most likely comes from BEARISH short-covering. In essence ... "if found a bottom there before, and just in case that's the bottom again, I should take some profits."

Then, once that level gets violated on a closing basis, further liquidation comes as does shorting.

For now, I would have to say it would take a FRIDAY, or end of WEEK close back above 264 at a MINIMUM to think bullish the banks.

Now I want to touch on some observations I began making late Friday evening, Saturday morning in the OptionInvestor.com Market Monitor.

What I was actually doing was reviewing some things for MYSELF in order to try and grasp the technicals at hand. Not only for the equity markets, but the interest-rate sensitive markets like Treasury yields themselves.

Due to horizontal width limitations, I'm not able to show some of the charts I displayed in the Market Monitor, but I'll do my best with a MONTHLY Interval chart of the S&P Depository Receipts (SPY) $127.57 -1.64% to give a bar chart "big picture look."

S&P Depository Receipts (SPY) - Monthly Intervals

I was making some historical notes as to Fed rate cuts and then the eventual Fed rate hikes in order to get a feel and observation for how the SPY traded during the last recession and then expansion, and it was rather clear that the "Greenspan Fed" was certainly looking at the economic data and responding to that data as it eased and then hiked rates.

Not surprisingly though, the SPY itself, perhaps a depicter of the U.S. economy turned LOWER before the Fed started seeing sign of economic slowing, and the SPY turned HIGHER before the fed started seeing sign of economic strength, thus raising rates.

Now, even on a MONTHLY interval chart, with 21-pd (21-month), 50-pd (50-month) we see some SIMILARITY today as to the 2001 downturn.

On the above chart I'm only marking as "(A)" a relative low from October 2004 and the week of trade encompassing 09/11/2001, a day that may have changed the world as we knew it, to observe that how even during extreme times of stress and panic, buyers will look at a longer-term inflection point to buy weakness. But once that relative low is taken out, as was the case in July 2002, the break of the relative low can find notable selling declines.

The "dark purple" retracement from $157.52 to $126.00 would be the retracement that I've been showing in several market wraps as the "current near-term range" of decline from the recent October highs to the January 22, 2008 intra-day low.

One observation that I think is important as to the DARK PURPLE and the PINK retracement was the "overlapping" of retracement at the $132.00 level. In my technical opinion, that becomes a BIG HURDLE for bullishness. In essence, it represents a LEVEL OF SUPPORT that was holding for several WEEKS, where now it has been BROKEN TO THE DOWNSIDE, thus a level of FORMIDABLE RESISTANCE.

Now lets "zoom out" a bit and look at a WEEKLY Interval chart, which again, I'm limited by horizontal width, so I'll show a "that was then" chart of the SPY during the last recession, and eventual expansion.

SPY 3/19/2000 to 5/16/2004 - Weekly Intervals

There are several observations a technician can make, but a rather obvious one to me was how the 21-pd and 50-pd "cross-over" points really seemed to mark turning points for decline/contraction and advance/expansion.

What was also notable was that as the SPY fell from "the high" of $155.75 to that 09/16/01 low of $93.80 (PINK retracement), the rally stalled at 38.2% retracement.

Now here's what I'm looking at in the SPY, where the last several weeks we observed some consolidation, where the RESOLUTION to that congestion and attempted base building is to the downside.

SPY - Weekly Intervals

Long-time subscribers would know that if the financials were breaking out to the UPSIDE I'd be saying "buy the SPY" as the financials are probably the "most key" equity sector for the SPY.

However, the financials and BIX.X specifically are BREAKING DOWN further.

And the SPY certainly looks to be FOLLOWING.

With Dorsey/Wright & Associates' S&P 500 Bullish (BPSPX) in "bear confirmed" status at 24.10%, this indicator tells us that only 24.10%, or roughly 120 of the 500 stocks comprising the S&P 500 still show a point and figure buy signal associated with their charts.

In January, this widely followed indicator of internal supply/demand fell to a low measure of 14.00% on its chart and would currently suggest the SPY's PRICE lows will are vulnerable to being BROKEN to the DOWNSIDE and a DEFENSIVE market posture is warranted.
 

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