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End Of First Quarter Rebalancing Ends With Vertigo

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Heads were spinning as the first quarter of 2008 comes to and end. After an inexplicable trade in commodities was had on little dollar action, the major averages finished the quarter on a modestly upbeat note with some gyrations of their own.

"Inexplicable" would likely be the key word for the last several trading sessions and some intra-day observations as well as longer-term trade for various indices, currencies and commodities I try and follow has the look that institutional computers were pushing things around into the quarter's end.

The major averages opened fractionally higher to start the session after The National Association of Purchasing Managers (NAPM) said its regional Chicago Purchasing Manager's Index (PMI) came in at 48.2 in March, which was above economists' forecast of 46.0. Levels below 50.00 signal contraction, and while March's reading showed a slower pace of contraction after February's 44.5 measure, some economists remained cautious before drawing too many positive conclusions.

Of the major regional ISM reports, only the Richmond Fed report came in positive in March. Brian Bethune, chief U.S. financial economist at Global Insight said he expects the national ISM to continue slowing from last month, and said it is conceivable to see a "larger drop" than just a few points.

Tomorrow morning we'll get the national ISM where economist's currently forecast a measure of 47.5 and further contraction from February's 48.3. The ISM prices paid is forecast to ease to a 75.1 reading from February's 75.5. Again, figures above 50.00 would indicate a still expanding level of prices paid.

Gold prices jolted higher at their open with the StreetTracks Gold (NYSE:GLD) darting as high as $92.65 (approx. $926.50 spot), but reversed course to trade as low as $89.96 (approx. $899.60 spot), before finishing down $1.47, or -1.59% at $90.38.

Oil prices were equally as volatile and found similar action with the U.S. Oil Fund (NYSE:USO) trading as high as $85.50 at 10:30 AM EDT, but to a session low of $80.36 just after 02:00 PM EDT to finish down $3.01, or -3.65% from Friday's close of $84.37.

Corn opened sharply higher into new all-time high, but then eroded through much of the session after The Department of Agriculture (USDA) released its 2008 planting forecast.

The department said farmers will be planting significantly less corn and more soybeans this year than was forecast in February, but corn planting will stay at historically high levels and prices should stay firm.

May corn at the Chicago Board of Trade (CBOT) finished up 6 3/4 at 567 1/4, 20 3/4 off the high and 10 1/4 up from the low. December's contract closed up 4 1/4 at 581.

May Soybeans sat at limit down for much of the day's session with May soybeans finishing down 70 at 1,197 1/4, 102 3/4 off the high and equal to the low. November's contract closed down 70 at 1,089 1/2, which was equal to the low and 87 off the high.

A wild day for commodities indeed.

Shares of Schering Plough (NYSE:SGP) $14.52 -25.42% and Merck (NYSE:MRK) $37.95 -14.73% were atop today's list of most actives after a panel of cardiologists called on physicians to sharply curtail use of the company's blockbuster cholesterol drugs Vytorin and Zetia.

Earlier this year, partial results from a clinical study on Vytorin, which is marketed through a joint venture of SGP and MRK, showed the drug was no more effective at limiting plaque buildup than MRK's Zocor, a drug that is already available in generic form.

Analysts that follow both SGP and MRK warned investors that the newly released clinical data could severely limit new sales of both drugs, while bringing intense government scrutiny to the companies.

Both stocks finished a fresh 52-week lows.

Semiconductors as depicted by the Semiconductor HOLDRs (NYSE:SMH) $28.72 +0.66% got a modest boost after the Semiconductor Industry Association (SIA) said global semiconductor chip sales rose 1.5% in February versus a year ago. The industry said prices continue to tumble for memory products despite a rise in total units sold.

Micron Technology (NYSE:MU) $5.98 +9.52% edged off it mid-January low and recent lows of $5.50.

Additional news in the chip group had Intel (NASDAQ:INTC) $21.18 +1.87% and STMicroelectronics (NYSE:STM) $10.66 +2.89% seeing gains after the pair said their flash memory chip joint venture looks to turn a profit this year, banking on growth in demand for chips used in wireless devices, set-top boxes and data storage.

Major Global Equity Indices, Currencies, USO, GLD and $HUI.X

Oh what a year 2007 was and their first quarter of 2008 comes to an end.

As I began preparing some of tonight's wrap and a "Q1 in Review," I wanted to check some of my thoughts and observations to see where we've been, and hopefully where we're going.

Let's first look quickly at 2007's totals, to see just what may have been "in play" for the first quarter of 2008.

One thing that becomes VERY OBVIOUS to me is the importance of the U.S. Dollar Index (DXY).

Just looking at some numbers, Japan's Nikkei-225 ($NIKK) fell 11.1% in 2007 and it picked up some steam to the downside in the first quarter falling 18.2%. With that I'll note the US Dollar (USD) fell 6.1% vs. the Yen in 2007 and picked up steam to the downside, falling another 10.8% in Q1. I'd have to say the weakening $/yen remains a point of concern for Japanese exporters.

China - Global economic slowing? Profit taking? The Hang Seng ($HSI.X) had a respectable 39.9% gain in 2007, but gives back 17.8% in Q1. Mainland China's Shainghai ($SSEC) surged 96.7% in 2007 and gives back 1/3 in Q1, falling 34.0%. As we look at some of the more "developed" economies in Europe and here in the U.S. we may begin to see how some of the economic slowing, and credit crunch see profit taking in Q1 for China's primary equity markets.

Now some notes of interest, where it would appear that currencies didn't have a MAJOR impact on equities in 2007, but at some point, or some LEVEL, the weakening of the dollar vs. the euro has pressured things notably.

Both Germany's DAX and France's CAC-40 would be more closely tied with the euro. The DAX really "outperformed" in 2007 with a 21.1% gain, but gives back an "underperform" 18.2% in Q1. France's CAC-40 was relatively flat, gaining 1.3% in 2007, but gives up 16.2% in the first quarter. I (Jeff Bailey) have to consider the euro's strength vs. the dollar (Euro/US$) during the now completed Q1 (+8.3%) having also created some concern among European exporters.

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Britain's FTSE-100 seemed to "match" the U.S.'s S&P 100 (OEX.X) gains for 2007 with the GBP/US$ showing the pound rising 1.2% against the dollar in 2007. It would be notable that the FTSE-100 was down 11.7% in Q1 with the GBP/US$ relatively unchanged. Meanwhile the S&P 100 Index (OEX.X) down a nearly similar 10.5% in Q1.

Now the major U.S. equity benchmarks, where despite all that ails us, the Dow Industrials having risen 6.4% in 2007, gives back that gain and then some having fallen 7.6% in Q1. Based on some of the earnings press releases I've read of these 30-multinationals, the weaker dollar certainly helping.

The NASDAQ-100 gained 18.7% in 2007. Harly the 96.7%, or 39.9% found in China's main indices, but is the Q1 14.5% decline alarming, or more inline with economic slowing?

The broader S&P 500 (SPX.X) not all that different than its narrower S&P 100 (OEX.X) on a 2007 basis, or Q1.

The very broad and "smaller capitalized" Russell 2000 ($RUT.X) had an "underperforming" 2007, but that weakness hasn't really abated in Q1 (-10.2%), but for a group that I would think be more sensitive to U.S. economic slowing and the NEGATIVES of a credit crunch, its Q1 decline doesn't stand out as overly "alarming", but tracks the larger-cap U.S. majors so far this year.

USO (oil) and GLD (gold) really continue to trade INVERSE the dollar, or the Dollar Index (DXY) and this continues to have me providing some focus, or emphasis that the dollar is of major importance to traders and investors.

Some of last week's action and even today's has me observing, and thinking that there was a lot of quarterly rebalancing by institutions the last few sessions.

Bottom Line: Just a quick glance at the above table on either week-to-week changes, or 2008 YTD change in context to 2007 changes gives me the observation that "Asia" isn't going to heck in a hand basket, but Japan's weakness has a great deal to do with the yen's strength versus the dollar (or dollar's weakness vs. the yen). Perhaps China seeing "profit taking," as european and U.S. economic slowing trend.

But CURRENCY relationships certainly seem to be OVERRIDING variable in all of this..

It has only been the last week that I draw more of an oil/gold relationship with the Euro/US% and more of a U.S. Equity relationship with the US$/Yen.

In this weekend's Market Wrap, I'll be filling in for Jim Brown and will review some of the supply/demand charts of the major currencies. My thoughts as of tonight for U.S. equity traders is that the US$/Yen trade remains a point of concern.

U.S. Market Watch - 3/31/08 Close

There would be a rather long list of observations I've made in the OptionInvestor.com Market Monitor the last few sessions that has me thinking much of what we've seen the past week has been end-of-quarter "manipulation" and rebalancing of portfolios.

Too many commodities, stocks and indices have found "round number" support, or I'll note how some "like stocks" are trading at very similar highs and lows during the course of a day to not get the observation that computers were not squaring things up into the quarter's end.

One thing I did late this afternoon was counting the number of trading sessions this quarter. May count was 61 (partial sessions counted as 1).

In the above U.S. Market Watch, I make some notes, using a very unconventional 61-day SMA, but utilizing the S&P 500 (SPX.X) as the benchmark index for U.S. equities.

Certainly it would be difficult to see very many equity sectors in the U.S. Market Watch ABOVE their 61-day SMA when the SPX.X fell 9.9% this past quarter.

Some areas that "outperformed" relative to a 61-day SMA are noted.

An example of some modest PRICE relative strength finds the Biotechnology Index (BTK.X) 737.41 +2.53% closing just below its 61-day SMA of 739. In essence, the BTK.X has "outperformed" the broader SPX.X so far this quarter. This would suggest to me that this group may NOT be finding as much selling as the broader market, and begs the question why? A place to be monitoring for bullishness.

The Semiconductor HOLDRs (SMH) $28.72 +0.66% also closes just below its 61-day SMA of $28.86. Similar to the biotech's, this group showing some PRICE relative strength over the past quarter relative to the SPX.

Now look at the various "financials" and how far BELOW their respective 61-day SMAs. The XBD.X's 61-day SMA is well above at 183.50. If anything, the group still provides a drag and would mirror some of the "credit crunch."

The Dow Transports (TRAN) a STRONG surprise with its 61-day SMA down at 4,573. Airlines (XAL.X) well below their 61-day SMA 32 so its non-air that buyers seem to favor, or a place where sellers have been less attracted.

Here's further recap that I posted in this evening's Market Monitor.

61-day SMA Notables -

Probably the "biggest surprise" I could note for the first quarter would be the Dow Jones Home Construction Index (DJUSHB) 375.16 +2.91% outperforming the broader SPX.X.

In the face of all the negative media reports, even reports from builders, mortgage companies, you name it, this group of builders and associated building-product retailers as a whole is "steady" to higher for the first quarter.

Now, tonight I spend more time looking at some bigger picture 2007 gains, then narrow in with the Q1-to-date percentages.

I could show some bar charts, or intra-day charts, but when it comes down to it, I really feel that much of last week's trade, and even today's, was LARGELY end of quarter gyration where I could just as easily flip a coin as to try and tell you where we are headed tomorrow, or the remainder of the week.

One reason I'll "benchmark" to the 61-day SMA, would only be for a Q1 glance of what MARKET PARTICIPANTS haven't been bigger sellers of, for it would be these areas that may be set to turn, and OUTPERFORM the broader market, or the S&P 500 (SPX.X).

I do think that oil and gold's trade, may be highly tied to the Euro/US$ and today, on an intra-day basis, that analysis "would NOT make sense," thus just one observation of "rebalancing" taking place. The Euro/US$ was little changed, yet oil gets hit hard, as if bulls were simply booking gains.

We should monitor the DXY early in a new month, as it tends to have inflection points at/near the beginning of a new month. A new quarter could be equally influential.

US Dollar Index (DXY) - Daily Intervals

About the only "fundamental" reason we might monitor the dollar for strength in the next several sessions is trader "anticipation" regarding tax receipts from tax-payers for 2007.

The DXY has NOT been able to hold a close above its shorter-term 21-day SMA (72.51) since falling below on 2/21/08.

S&P 500 Index (SPX.X) - Daily Intervals

Even if I have observed some "manipulation" of prices into this quarter's end, it would appear to me that BEARish manipulators still hold the upper hand.

While I don't rely HEAVILY on MACD, or Stochastic oscillators, I will use them as a "swing vote" when I'm uncertain.

With overriding trend still LOWER, then MACD below zero and rather flat suggests bullish caution.

If a RANGE between 1,350 to 1,250 is developing, then Stochastics turning lower from ABOVE 70.00 would suggest the SPX.X is headed to the lower-end of that range.

The variable as I see it with the 21-day SMA is the U.S. Dollar Index (DXY).
 

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