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Market Wrap

Teacups

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Introduction

Remember those teacups you used to ride at amusement parks or county fairs? They appeared to be fairly tame rides, tame enough for young children as well as their older siblings.

Even before the ride revved up, however, some older brother or sister would start twisting the wheel in the center, rotating the teacups. The younger siblings would be dizzy before the ride even started slinging them in circles. They would be traveling in circles within circles.

We retail traders are the younger siblings. We all jumped into those teacups sometime yesterday, and big money twisted that those wheels straight through today. It's possible that the real ride hasn't even started.

As markets opened today, equities attempted to rise and but then looped sideways. A sharp downturn in financials soon after the open looped the SPX lower. Oppenheimer and Lehman Brothers (LEH) cut earnings estimates on many big financials. Oppenheimer homed in on Merrill Lynch (MER) and UBS (UBS), and Lehman focused on Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC).

Some industry watchers noted increasing put buying in some of those financials. By mid-day, Lehman was forced to address rumors that it was facing a Bear Stearns-type event, calling rumors of trouble unsubstantiated. Lehman claimed that the rumors were being circulated by short sellers of the stock, a suspicion that the SEC reportedly took seriously enough to begin investigating who might have circulated such rumors.

An interesting twist was given to those teacups by early news relating to the credit crunch. Judge John Gabriel, a Bexar County, Texas district court judge, ordered banks to fund the buyout of Clear Channel (CCU) by Thomas H. Lee Partners and Bain Capital, two private-equity funds. Refusing to fund the merger would "interfere with or thwart consummation of the merger agreement," the judge concluded.

Citigroup (C), Morgan Stanley (MS), Credit Suisse (CS), Deutsche Bank (DB), Royal Bank of Scotland and Wachovia (WB) had previously agreed to provide funding and have now declined to do so. Citigroup issued a statement vowing that it and the other named banks will vigorously contest the suits. Those banks dropped today, but whether it was because of that news, the downgrades or rumors circulating through the markets appeared unclear.

Let's look at charts and see if our dizzied minds can make any sense of them.

Charts

Annotated Daily Chart of the SPX:

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

Annotated Daily Chart of the SOX:

Annotated Daily Chart of the RUT:

Annotated Weekly Chart of the TRAN:

Today's Developments

Today's most important economic release was the final Q4 GDP and Chain Deflator. The market anticipated that the final numbers would equal the prior versions, including 0.6 percent growth for GDP and a 2.7 percent rise for the chain deflator. As expected, the Bureau of Economic Analysis reported a final number 0.6 percent GDP growth. The annualized rate grew 4.9 percent in the fourth quarter. The chain deflator was 2.4 percent, lower than anticipated.

I know some of you are wondering because I used to wonder: what is the chain or GDP deflator? Imagine that certain goods were produced in the U.S., goods valued in today's dollars. However, it's difficult to compare that value to goods produced at another period because the dollar has changed in value. Economists account for that by using the deflator. Computations are performed to treat the GDP as if the dollar were constant in value. Some compare it to the CPI, the Consumer Price Index. In fact, some believe it better measures inflation.

What was the good news in this release? The decrease in the GDP deflator was good news. Also, the report revised consumer prices lower. Instead of the prior 4.1 percent annualized rate, this final report toted up a 3.9 percent annual rate. Core prices, PCE, were revised lower to a 2.5 percent annualized rate from the prior 2.7 percent. Consumer spending on services was revised higher. For the full year, consumer prices rose 3.4 percent, but those core prices the Fed watches rose a more moderate 2.1 percent. That was at least close to the Fed's comfort level, if not quite there.

The bad news? Corporate profits dropped 3.3 percent, far more than the prior 0.0 percent. Investments in business equipment and structures and inventory building were revised lower. Overall consumer spending was for the quarter was 2.3 percent, much lower than the prior quarter's 2.8 percent. Gross domestic purchases, a computation that includes the total value of all services and goods purchased by U.S. residents, fell 0.4 percent. A MarketWatch.com article notes that this is the first decline in this component since the last quarter during the recession period of 2001. Another article called the overall gain the lowest since late 2002.

Whatever that report revealed, the just-about-concluded current quarter and next quarter concern economists. Many expect flat numbers for the current quarter and a decline of about 1 percent for the next.

Those who would like to read the entire report can find it at this link.

Initial and continuing weekly jobless claims were announced during the same 8:30 am ET time slot. Industry experts had anticipated that initial claims would drop to 360,000 from the previous 378,000. First, the government revised last week's number lower to 375,000. Then it noted a 9,000 drop to 366,000. One caveat to that number was that Puerto Rico's office was closed for Easter, so no claims were taken from Puerto Rico.

Although the drop in initial claims was good to see, the number of claims was larger than anticipated. Also, initial claims consistently above 350,000 signals trouble in the labor market. The four-week moving average is above 350,000, at 358,000 this week.

Continuing claims fell 5,000 to 2.85 million. The four-week moving average continues to rise. It climbed 25,250 to 2.82 million. The insured unemployment rate stayed at 2.1 percent.

The Federal Reserve Bank of Kansas City released its manufacturing survey today. This federal district's report isn't considered as predictive of the ISM's report on national trends in manufacturing as some others, but it did repeat some patterns seen in other reports. Activity declined as did expectations for the future. Price pressures rose, and producers were attempting to pass through some of those price increases. All in all, it was not a cheery report.

At 10:30 am ET, weekly natural gas inventories showed that inventories fell once again. The Energy Information Administration (EIA) said the drain was 36 billion cubic feet which turned out to be lower than analysts expected. Still, with prices across the energy complex rising, natural gas posted a gain, too, of $0.06 cents.

Light, sweet crude rose $1.68 to close at $107.58 a barrel on the New York Mercantile Exchange. Jim has spoken of many forces impacting crude costs, but saboteurs gave those reasons a savage twist this morning. They attacked a pipeline near Basra in southern Iraq, causing an explosion that hit one of two oil export pipelines in southern Iraq.

Repair teams had not yet been able to approach the burning pipeline by early this morning. Up to a third of Iraq's exports might be lost, some theorized, an event that would impact crude supplies for the globe but that would also impact Iraq's ability to recover economically. Oil brought in $60 billion and 95 percent of Iraq's revenues last year, commented Ned Colt of CNBC.

Iraq's oil ministry said that after the fire is put out and repairs can begin, at least three days will be required to bring it back online, but it denied that exports would decline. An AP article this afternoon noted that exports had declined 1.2 million barrels a day from typical rates of $1.56 million barrels.

The incident emphasized the ease with which saboteurs can attack southern Iraq's hundreds of miles of above-ground pipelines. If the decrease in supply wasn't enough to drive up prices by itself, the fear premium certainly was.

As is typical each Thursday, the Federal Reserve released figures on outstanding commercial paper. On a seasonally adjusted basis, outstanding commercial paper, a measure of how tight credit is for companies, eked out a modest $2.2 billion gain. In a reverse of what's been typical lately, it was the financials that prompted that gain while non-financials saw declines across the board in both domestic and foreign categories. The only category of financial paper that did not produce a gain was, no surprise, in asset-backed paper.

Homebuilder Lennar (LEN) reported better-than-expected earnings today. Analysts had predicted a loss of $1.07 a share, but the company posted a narrower loss of $0.56 a share.

In other news related to the housing sector, Moody's has put Toll Brothers (TOL) on alert for a credit review. Moody's pointed to TOL's efforts to reduce inventory, less effective than some other builders' efforts, as prompting the review. TOL also has more exposure to such housing sectors as high-rise and mid-rise towers, Moody's claimed.

Several Fed speakers were on tap today, and at least one directly referenced the crisis caused by the subprime mess. Speaking before the National Association of Hispanic Real Estate Professionals Legislative Conference in Washington, D.C., Governor Randall S. Kroszner noted the particular concerns of Hispanic communities "given that the subprime market was the source of home purchase loans extended to many in the Hispanic community." The problems have resulted in a "virtual shutdown of the subprime market," with the damage extending beyond that market and into other sectors of the mortgage market.

Before discussing steps that might be taken to protect homeownership in Hispanic and other communities, Kroszner's speech addressed some of the practices that led to the subprime mess and its impact on those communities.

Is there any way to identify asset bubbles before they grow too large and unmanageable? Many economists, reportedly including former Fed Governor Alan Greenspan, believe it's impossible to identify such asset bubbles until they burst.

Minneapolis Fed President Gary Stern addressed the possibility that those previous theories might be wrong. For those reading these pages over previous years, the whole issue appears to be a no brainer. Of course it's possible. Many writers warned of an asset bubble in the Internet stocks in the late 90's, and you heard many, especially Keene Little and former writer Jonathan Levinson, warning of the bubble in the housing market over recent years. Those bubbles did not seem particularly difficult to pinpoint before they burst.

In a statement that some found startling, Stern said that it wasn't possible to rule out a credit crunch. Ah, haven't we already been experiencing one? It's chilling to consider that he might be referencing something far worse, a complete shutdown in the credit markets.

As the end-of-quarter period approaches, those fears heighten. Reports circulate that credit tightens even further. The Libor rate, the London Interbank Rate is the rate that major banks establish daily as the rate at which they're willing to loan to each other. That rose to its highest level since December.

Our central bank and others acted cooperatively today to help lenders who required more funds for end-of-quarter needs. Our central bank did so through its first Term Securities Lending Facility auction. That auction achieved a positive bid-to-cover of 1.15 but a stop-out rate of only 0.33 percent, some sources noted. The stop-out rate is the lowest rate the Fed accepted. The auction will result in the Fed lending $75 billion for 28 days.

Cleveland Fed president Sandra Pianalto also spoke. As many Fed speakers have done lately, she provided an overview of the actions the Fed has taken to ease the effects of the credit crunch. She wants market participants to remain aware that the U.S. has experienced other stressful periods, and that the stresses will abate.

Damage wasn't limited to financials or even the indices in which they're included. Oracle's (ORCL) disappointing report yesterday resulted in another $1.51 loss today. In addition, Lehman trimmed price estimates on Google (GOOG), with the company also having reported disappointing "pay per click" numbers. GOOG lost $14.11.

After hours, Accenture (ACN) jumped after it raised its third-quarter revenue and per-share forecasts when presenting its second-quarter report. Apollo dropped heavily after it reported a loss.

Tomorrow's Economic and Earnings Releases

Tomorrow's releases will begin with February's Core PCE Inflation figure at 8:30 am ET. February's Personal Income and Personal Spending will also be released during that time slot. Those numbers have the ability to move markets. Core PCE Inflation will slip to 0.0-0.2 percent, economists predict, reduced from the previous 0.3 percent.

At 10:00 am ET, another potentially market-moving number will be released, March's Revised Michigan Sentiment. Economists' predictions range from 70.5-71.0, with the prior number 70.5.

Companies reporting earnings include homebuilder KB Homes (KBH).

What about Tomorrow?

Before we talk about tomorrow, we probably need to cast any such outlook in a broader perspective. From a daily chart perspective, we see lots of confusion with indices chopping around in some short of price channel or wedge or triangle formation for months. Those charts show confusion, and those of us trying to trade the markets are feeling it. We're being spun first one direction and then the other, and our older siblings, aka big money, is twisting those teacups first one direction and then another without warning.

I repeat what I've said before: the whole point of spotting such formations is that you can understand and predict strange price action and stay out of the markets if you get dizzy too easily. No prediction can be made from these formations other than that price action is likely to be dizzying and unpredictable.

If we concentrate on U.S. coverage of U.S. equities, we take in a bunch of good old American optimism along with the news. There's nothing wrong with that, and I consider myself an optimistic person in my everyday life. I like good old American optimism. However, if we read or listen to coverage from around the globe, the perspective appears a bit different.

Part of that different perspective arises from the outlook on the U.S. economy, the likely actions of the FOMC and the resultant reaction by the U.S. dollar. Although the dollar's dive to multi-decade lows has likely prompted some short covering by those who have been short the dollar for months or up to more than a year, any resultant bounce won't last, many global experts believe. In an interview for CNBC Europe this morning, Clifford Bennett, chief economist for Sonray Capital Markets, claimed that the recent currency moves have not been about euro or yen strength so much as dollar weakness. He believes that the full fallout from the subprime mess has not yet been faced, and the Fed will lower rates perhaps as much as another 75 basis points at its next meeting. He believes that perhaps after a period when some long-time shorts take profits, the dollar will turn lower again.

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My daily chart, for example, shows that the USDJPY's climb off a multi-year low reached this month looks choppy, like a possible bear flag. The USDJPY will hit potential resistance on that chart between 101-102. The possibility of stalling or a downturn exists there although short-covering could easily carry the USDJPY higher, up to 105-106, while U.S. equities gain along with this currency pair.

The possibility of another rollover in the USDJPY fits the view shared by others around the globe. Not all agree that the long slide in the USDJPY was due only to dollar weakness and not yen strength, however. Some note that the strength has mostly been against the U.S. dollar. The shape of the EURJPY's daily chart has varied from the USDJPY's this year.

The uncertainty about the Bank of Japan's leadership may continue to create uncertainty in the currency markets and, hence, in the equity markets. The Bank of Japan now is led by two deputy governors with no replacement named as of this moment for former Governor Fukui. The government claims that the ability to coordinate with other global central banks has not been undermined. However, the current climate suggests that Japan is unlikely to intervene in currency markets as it reportedly once did quite frequently.

It's my view that the uncertainty in the currency markets also contributes to these crazy market actions. I think those currency traders are doing a little teacup twisting of their own, but in their cases, they might just be trying to hold onto those wheels in the center of the teacups for dear life rather than trying to move the teacups. Maybe that's what big money is doing, too.

Now to the intraday charts, with the context--uncertainty and no prediction of next direction--established.

The SPX's 30-minute chart illustrates why it's important that the SPX bounce right away or else scramble back above 1325.76 within the first 30 minutes if it drops first thing tomorrow morning.

Annotated 30-Minute Chart of the SPX:

If bearish, protect yourself by watching for the possibility that any early drop toward 1323-1326 could then result in a bounce back above that 1325.76 zone.

However, all of us who can draw a straight line realize that the SPX has been declining in a falling price channel since Tuesday. While that could be a bull flag, its gyrations are large compared to the price action that preceded it, so that's a questionable diagnosis. I do at least keep it on the radar screen. For now, the SPX is in a declining price channel and that's not anything but short-term bearish. The SPX would have to break north of that channel and, moreover, sustain prices above it, before anything changed.

Remember, these are crazy markets and anything can happen. This is not just me abstaining from my responsibilities to interpret charts, but is me interpreting them to say they're showing an "anything can happen next" setup. A sustained break below the levels indicated above could result in a sharp decline, while a bounce could result in more chop, even into next week, before we have any kind of prediction of next action.

The setup is the same for the Dow.

Annotated 30-Minute Chart of the Dow:

Watch for the possibility that the Dow could drop toward 12,275 early tomorrow and then reverse higher, back above that central basis line now near 12,300. Sustained values below the 12,300 level rather than a quick blip below it suggest the possibility of a test of 12,200 and maybe even, if the day is really bad, that lower value at the lower Keltner channel on the 30-minute chart. Do not count on such potential targets being met, but if you're thinking about stepping in with a long position, do factor that potential vulnerability into your decision making.

If the Dow rises, gains could be choppy. Look for potential resistance on 30-minute closes near 12,345, 12,400, and 12,585.

Annotated 30-Minute Chart of the Nasdaq:

The potential exists for the Nasdaq to continue sliding toward 2260 and then only then attempt a rebound, but if that support is lost, consider a potential target near last week's low and then at the lower Keltner channel boundary. The same cautions exist as were mentioned on the other charts.

Annotated 30-Minute Chart of the RUT:

If the RUT sustains values below about 683.50-685.50 (ranges from several charts), the potential for a steep drop exists. If the RUT drops toward 685.50 but then rises, any gains could be choppy. Charts will have reset by that time, but currently potential resistance on 30-minute closes exists at about 697, 702 and 708.

So, what do I think? I've stared at charts all afternoon, comparing them to other charts, comparing setups to others, studying every bit of minutiae and every indicator I can find. If these were normal times, I'd think the most likely event would be an early dip and then a quick attempt at a bounce and then . . . who knows what. As I've said often times lately, these are not normal times, and my best guesses have been wrong more often than usual, too. On the live portion of our site, I've been calling for consolidation these last few days and for today to be a day in which we figure out whether late February's pattern will be repeated or something more bullish will occur. Mostly those calls have been right, but today the price action settled just at the point where it's difficult to make a call for tomorrow.

I'm troubled by a tendency seen over the last couple of days. According to my Keltner charts, we've had lots of bullish setups, lots of instances when support looked far stronger than resistance. In normal times, such relative strength of support when compared to resistance would have bounced the indices before they even approached support, but instead indices kept battering away at that support. I didn't necessarily expect indices to bounce far. I'm waiting to see if last Wednesday's highs will bring a halt to any gains before I make up my mind.

Something is wrong. I don't know if it's all those rumors or something else, but I'm always worried when I see a failure to capitalize on a chart setup. Watch the USDJPY ("yen" on the CNBC crawl) and the RUT. They may give first clues.
 

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