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Market Wrap

Market Wrap

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March winds are supposed to be the strongest. This April day, however, winds swept across the market landscape, buffeting bulls and bears alike. Colliding weather bands of economic numbers, currency action, and earnings reports produced those winds. By the end of the day, daily candles had hunched down into cramped doji or inside-day type candles. The often-seen choppy consolidation days after big-range days were produced.


Annotated Daily Chart of the SPX:

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

Those who believe in inside-day trades believe them to be signals of a potential trend reversal. Basically, it indicates the same thing that a doji does--indecision. If markets have been trending, it can signal a waning of momentum in the direction of the trend. As we know from doji, not all potential reversal signals result in a reversal.

Sustained values above today's high would suggest that the Nasdaq was undoing that indecision, but I've been burned before by many an inside-day setup, so I don't believe in them too strongly. Be sure you stay on your toes if you're buying an upside breakout tomorrow in case it soon reverses.

Annotated Daily Chart of the SOX:

Annotated Daily Chart of the RUT:

If other charts showed potential reversal signals in those small-bodied candles, the TRAN's did more. The TRAN's daily candle sliced down through more than half yesterday's range before it bounced in the afternoon, barely missing a confirmation of a reversal signal by closing below the midpoint of yesterday's range. It left behind no small-bodied candle, however, but a large-bodied one. It looked smaller only in proportion to the previous day, but the range between the open and the close was almost 87 points and the TRAN had punched far lower than that during the day.

I like to watch the longer-term picture on the TRAN, however, as displayed on its weekly chart. I believe we ought to watch at least one longer-range chart each time we look at charts, and the TRAN is my choice.

Annotated Weekly Chart of the TRAN

I know some have been watching the daily chart's confirmed inverse or reverse head-and-shoulders formation, too, on the TRAN. I've noted it in many previous Wraps, too. We have competing or battling formations, a potentially bearish one on the longer-term chart, not yet invalidated, and an already confirmed bullish one on the daily chart. I do not like the expansion of volatility after the TRAN moved across the neckline of that inverse or reverse version on the daily chart, however. I was taught that it's troubling when you see an expansion of volatility immediately after some benchmark has been surpassed. Such an expansion of volatility can mean that the move across that benchmark is being question or greeted with emotion-based trading.

I don't have room to include all charts I'd like to include, but I wanted to point out in this section that the USDJPY's daily chart shows the currency pair having charged straight up again to the 23.6 percent retracement of its steep decline off last June's high into March's low. The climb has been choppy off that March low and more indicative, so far, of a bear flag climb than of a V-shaped recovery. I do note, however, that a possible cup-and-handle formation that can be discerned. These are bullish formations but I don't recall them typically being bottoming formations, so I'll remain aware of both possibilities.

These currency pairs do tend to conform a bit better to the Fib levels than some equity charts do, so if this is a bear flag climb, we would expect it to find resistance and roll down again from one of these levels. The April high was been 102.92. Sustained values above that April high might mean that the USDJPY will attempt to climb toward the next Fib level near 106.58. That would be beneficial for U.S. equities, but be wary of the possibility of a downturn from the currently being tested level instead. Equity bulls don't want to wake up tomorrow with the USDJPY diving.

Today's Developments

Today's release schedule featured a full slate but not as full as yesterday's. Weekly initial jobless claims led the day. This release is no longer the throw-away, little-attention-paid release that it once was.

Economists predicted that initial claims would rise to 375,000 from the previous week's 357,000. They rose to 372,000, mostly in line with expectations. The four-week moving average fell by 750, but remained well above the benchmark 350,000, at 376,000. As mentioned previously, when these numbers remain consistently above that benchmark, a slowdown in the labor market is signaled.

Continuing claims rose 26,000 to 2.98 million, their highest levels in almost four years. The four-week moving average rose 29,750 to 2.94 million. The uninsured unemployment rate has been gradually creeping up from the 1.9 percent that we were seeing a year ago, but remained steady this week at 2.2 percent.

The Conference Board released its March leading indicators at 10:00 am ET, but this release was upstaged by another at the same time. Despite the "leading" in its name, most economists feel that this number tends to be fairly predictable. Barring some surprise that would impact the GDP, little attention is usually paid to this release.

Leading indicators rose 0.1 percent, the Conference Board reported, less than the expected 0.2 percent rise. Although this was still the first rise after five months of declines in a row, the Conference Board did not paint a pretty picture. CB's labor economist said the environment had produced no job growth for three months. Overall profits had dropped, he said. The environment was tough and could get tougher, the labor economist avowed.

The April Philly Fed Manufacturing Survey was released at the same time. This district's manufacturing survey tends to be predictive of the Institute of Supply Management's (ISM) nationwide manufacturing survey, so it's always important to watch. The survey's diffusion index had been expected to improve to -15.0 from the previous -17.4. Instead, it dropped to -24.9, its lowest reading in more than 7 years. This was the fifth consecutive month of negative values for the main diffusion index.

Component indices revealed that new orders dropped to -18.8 from the previous -9.3, shipments fell to -8 from the previous -6.3, and the current employment index fell to -11.1 from -4.7. The average workweek fell, too.

That news was bad enough, but when coupled with inflation measures, it was worse. The prices paid index dropped to 51.6 from the previous 54.4, but the district reported that "55 percent of manufacturers reported higher input prices this month," and noted that manufacturers were also reporting higher prices for their own goods. The prices received index rose to 30.9, the highest reading in more than two years.

The Federal district asked "Special Questions" when surveying firms. Those questions included questions about changes in demand for their products since January and changes in their plans for capital spending since then. More firms reported a lowering of demand and decreases in capital spending and plans for capital spending than did increases in those areas.

The news was not good, but one spot of good news was found in the six-month outlook component. That rose to 13.7 from its previous -0.5. Those who would like to read the entire report can find it on the Philadelphia Federal Reserve's page at http://www.philadelphiafed.org/econ/bos/index.cfm

Around the time of those releases, the Federal Reserve provided its weekly figures for outstanding commercial paper. For the third week in a row, outstanding commercial paper fell. The decline was a seasonally adjusted $10.3 billion. If this is used as a measure of whether the credit crunch is easing, it's certainly not showing much improvement. Only one week out of the last six has shown an increase in outstanding commercial paper.

Expanding the credit discussion to a global arena, the Libor Interbank offering rate, the rate that large banks loan to each other, continues to be too high for comfort. An article today in THE LONDON TIMES mentioned that the British Bankers' Association (BBA) is reviewing its rate-setting policies under increasing speculation that the Libor rate may be losing its trustworthiness. Other sources are speculating that some banks may be hiding the true rates at which they're borrowing from each other out of fear that the Libor rate may spiral even higher. Moves are afoot in the U.K. that are meant to ease the mortgage crisis and the financial crisis caused by difficulty in placing any mortgage-backed paper. This problem has not been solved, and we're not the only ones dealing with it.

The EIA released natural gas inventories at 10:30. Inventories rose 27 billion cubic feet, in the range of the expected 25-32 bcf's that was expected. With crude options expiring today and crude hitting an early high of 115.54 per barrel, much focus was on crude. The high open interest strikes at 110 and 115 were expected to provide some support into the close. Crude finished the regular session at $114.78 a barrel.

The March Semi Book-to-Bill number will also be released today. However, its release will come at 6:00 pm ET, after this report has been submitted and too late for inclusion here.

Federal Reserve Vice Chairman Donald Kohn, Dallas Fed President Richard Fisher and Richmond Fed President Jeffrey Lacker all spoke today. Vice Chairman Kohn spoke of a U.S. financial system that was in need of urgent attention from regulators and the private sector, too. He mentioned the Fed's efforts to improve liquidity. He recommends that regulations be put in place to ensure that banks don't rely too heavily on the Fed to provide that liquidity. He believes small banks may be too heavily exposed to loans in commercial real estate.

Dallas Fed President Fisher is more hawkish than some, as we know, and he continued that tone today. He said that more rate cuts could promote inflation, compounding the problems in our economy.

Earnings reports captured attention, too, with markets reacting both to today's reports and yesterday's after-hours reports such as IBM's and EBAY's. Before the open this morning, Merrill Lynch (MER) reported a $1.96 billion or $2.19 per share loss. The loss from continuing operations was $2.20 per share. The company swung to that loss from a $2.16 gain in the year-ago period. Analysts had anticipated a loss, but only of $1.96-1.98 a share from continuing operations.

Revenue was $2.93 billion, which was also below the expectation of $3.35 billion according to one source. This revenue reflected $4.5 billion in a decline in hedge values, valuation adjustments on CDO's, collateralized debt obligations, and write downs. Merrill Lynch has already written down $24 billion in previous quarters. Even without those declines, revenue would have dropped 26 percent.

The value of hedges went down because they're provided by bond insurers, and those insurers have seen their credit ratings under review by the ratings agencies. We all know the story behind the CDO's by now. Companies holding those CDO's have been forced to write down their valuations from their previous higher book values to more realistic marked-to-market values. The company wrote down $2.3 billion due to its exposure to residential mortgages and leveraged finance deals, but those were offset by a $2.1 billion benefit.

Along with its earnings report, the company announced that by the end of the year, it will trim its workforce by 4,000 employees. If financial advisers and investment associates are excluded, that amounts to about 10 percent of the company's workforce. The company expects to save about $800 million on an annualized basis, with $600 million expected to be saved this year. It will likely take a $350 million restructuring charge in the second quarter as a result.

The good news is that the report wasn't worse, although some headlines, such as that on Reuters, termed the loss a big one. Many had feared a bigger miss. Also, chairman and chief executive officer John A. Thain took the opportunity to assure markets that MER's capitalization included an $82 billion excess liquidity pool. Calling the company "well capitalized," Thain said he didn't anticipate a need to raise more capital in the near future.

The company also produced record revenue in the rates and currencies division and global wealth management. Losses were offset to some degree by that $2.1 billion benefit mentioned earlier. That apparently resulted from widening credit spreads that changed values on long-term liabilities. The company's stock was to end the day at $46.71, up $1.82 from the previous day's close on volume well above the 30-day average volume.


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Although MER produced a bigger-than-expected loss, futures reacted with relief this morning, climbing a bit off their pre-release levels. However, market participants were also reacting to disappointments from Nokia (NOK) and Pfizer (PFE). NOK's profit rose 25 percent but the company said mobile device sales would drop in value below previous forecasts this year. PFE's problem was the opposite: the company's profit dropped 19 percent but it held steady its previous profit guidance for the year.

Analysts had expected NOK's first quarter report to include earnings of 1.38 billion euros or 0.38 a share. Instead the company reported earnings of 1.22 billion euros. Excluding one-time costs, the EPS was the expected 0.38 a share. The company blamed its lowered guidance on weakness in the dollar against the euro, economic weakness in the U.S. and possible future weakening in Europe. Economic weakness was hitting value rather than volume on sales of mobile phone devices, a spokesperson said. Other commentators outside the company also point to increased competition and a move toward lower-margin products as impacting the company.

Market share slipped to 39 percent from the previous 40 percent, but still stayed well above the year-ago level of 36 percent. Those gains from the previous year were not seen in North America, however, where NOK continues to lose market share. With some industry analysts questioning NOK's line of new products--or, rather, the dearth of new products--coming on line in the next quarter, some believe the company will have a tough time improving its market share in the U.S. in the near future. A company spokesperson was quoted in a Marketwatch.com article as calling the iPhone a "niche product," an attitude some analysts think will hurt the company.

PFE was hit by increased competition from generic drugs for some of its best selling products. Over recent years, PFE has lost patent protection for many of its best-selling drugs and has recently lost that protection for another: Zyrtec.

Net income was $2.8 billion or $0.41 per share. Excluding items, the company would have reported earnings of $0.61 a share. Analysts had expected $0.66 a share with adjusted earnings of $0.67 a share. Revenue of $11.85 billion also disappointed. Analysts had expected $12.04 billion. The chief executive claimed that it wasn't right to compare this quarter's results with year-ago results because of the timing of its loss of patent protection on Norvasc and Zyrtec. The same timing issues won't impact the company's earnings reports next year. The company does expect revenue to remain flat until newer product sales begin to make up for the losses on those other drugs, which should occur in 2009.

Google (GOOG) reported after hours. Excluding special items, the company reported earnings of $4.84 net revenue of $3.7 billion. Analysts expected the earnings excluding special items to be $4.55 a share on net revenue of $3.61 billion. That didn't tell the entire story, however, as analysts were quick to delve into information on the revenue from paid clicks. They've been concerned that the slowdown in the U.S. would result in fewer paid clicks and lower revenue from the core search advertising business.

GOOG said that overall paid clicks climbed 20 percent from the year-ago level. Although lower than the previous quarter's 30 percent growth, a company spokesperson said it was due in part to changes that the company has made in the graphics of site, shrinking the formats of search ads while also shrinking the number of accidental clicks. The company has introduced other changes meant to increase revenue from advertisers, including hiking costs of keywords. As this report was prepared, shares had soared above 526 in after hours trading. As we always caution on these pages, however, after hours trading patterns do not always carry over into the next day.

AMD also reported. The company's net loss of $358 million or $0.59 a share with revenue of $1.5 billion compared to expectations of a loss of $0.48 a share on revenue of $1.52 billion. A year ago, the company lost $1.11 a share, and after-hours traders must have been celebrating that, rather than the apparent miss, when they were sending the stock higher in after hours. As this report is prepared, AMD was trading at $6.35.

E-Trade Financial Corp (ETFC) also reported after hours. The company's exposure to mortgage securities continues to impact it, with the company reporting a net loss of $91.2 million or $0.20 a share. Analysts had predicted the company would lose $0.10 a share. As this report was prepared, the stock had jumped up to $3.78, however, so someone found something to like in it, at least for the afternoon.

Tomorrow's Economic and Earnings Releases

Tomorrow's releases include only the March Regional-State Unemployment number and the ECRI Weekly Leading Index. Important earnings tomorrow include those from C, CAT, HON, and SLB.

What about Tomorrow?

Annotated 15-Minute Chart of the SPX:

As long as the SPX is maintaining 15-minute closes above the thin red 9-ema, the strongest upward momentum is preserved. Bears want to see sustained 15-minute closes below that 9-ema and then a tumble through the other levels listed here. The daily chart setups suggest that more consolidation is a possibility tomorrow along with a potential reversal. The short-term charts suggest that, barring a strong down move, the earliest reaction might be some chopping around until clearer chart setups are found.

Annotated 15-Minute Chart of the Dow:

Annotated 15-Minute Chart of the Nasdaq:

Annotated 15-Minute Chart of the Russell 2000:

Going into today, my best guess was that we'd see a doji-type day on most indices, so I'm not alarmed by that fact itself on behalf of the bulls. However, since I often use the TRAN as a sort of leading indicator for the SPX, OEX and Dow, I closely watched its steep decline today. That's more than a little worrisome for equity bulls. I wasn't impressed by volume patterns today. The advance/decline line, as reported by my provider, reached a high of +236.00 today, hardly any kind of endorsement of strength. Yet the VIX and VXN declined, although that could perhaps be written off to some degree to option expiration effects.

Most daily candles on most indices would suggest the same thing: consolidation or an actual pullback next, but some chart signs on the RUT and Nasdaq, even before GOOG's after hours gains, made me question whether it wasn't consolidation or gains for those indices.

Unfortunately, this uncertainty is typical of consolidation periods. The chart characteristics are mixed up because bulls and bears are, and bulls are buying what bears are dumping, and neither has gained strength over the other. Those doji and inside-day candles on daily charts are the visual representations of uncertainty. We have to wait until it gets sorted out. I'm just not sure that will happen tomorrow.

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