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Market Wrap

Market Recovers from a Hangover

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Introduction

Equity index futures suffered from a hangover this morning. Amazon's (AMZN) and bond insurer Ambac Financial Group's (ABK) earnings yesterday created the hangover. New York's insurance superintendent Eric Dinallo added to the dizziness, saying that ABK might need to raise more capital. Later, Moody's was to reiterate its negative outlook on ABK's Aaa rating. Apparently fewer are finding their hangover relief from Starbucks (SBUX) these days, too, as that company warned about the second quarter.

Other companies here and abroad released mixed results, but our already hung-over futures had been delivered a blow by developments in Europe and weren't ready to leap up immediately. The reaction of European bourses to German's Ifo report, a damaging earnings report from Credit Suisse, and an inching higher of the LIBOR, the inter-bank lending rate, had sent European bourses lower. Our equity index futures were on the floor and not budging, not even for the likes of what had appeared, on first glance, to be a decent earnings report from MMM.

After a few hours of spent thrashing around between Friday's low and highs, equity indices finally improved, got on their feet, and started climbing. The dollar climbed along with them, while treasures and commodities slipped lower.

Charts

Annotated Daily Chart of the SPX:

The daily Keltner chart doesn't provide much more clarity, either, providing the same information although the information is derived differently. On that chart daily candles line up at resistance with a breakout above that producing a new upside target of 1417.02. However, it wouldn't change the tenor of that Keltner chart at all to see the SPX drop down to 1373.86 or even as deep 1343.67. It would just continue the chopping back and forth between resistance and support. That might not be something we want to contemplate, but there's nothing seen on the chart shown above or the Keltner one to prevent it from happening or even to suggest that it won't.

Annotated Daily Chart of the Dow:

The Dow's support on daily closes and resistance on daily closes is clear, and neither has been broken by today's action. The daily Keltner chart suggests that the Dow is a little more likely to climb toward 13,078 than to drop past 12,699 on a daily close, but it doesn't suggest that the Dow won't drop to test that 12,699 level. Because it's easier to push the Dow around than it is some other indices, I maintain a little skepticism about the firmness of the upside target, but on a daily Keltner basis, it's maintained as long as those daily closes are above 12,699.

Annotated Daily Chart of the Nasdaq:

The Keltner daily chart presents a different picture for the Nasdaq than it does for some other indices. It has hit its potential Keltner target, doing so today. It punched through it and then pulled back at the close, showing that it held as resistance. On this more traditional chart shown above, we see that the Nasdaq acted similarly with respect to its 38.2 percent retracement of the decline off the fall high. It also hit the descending trendline off that high and pulled back from that.

In doing all this, the Nasdaq also approached its 200-ema and the top of the ascending channel in which it's been climbing off the May low. Obviously, even if the Nasdaq is going to be climbing for months more through that channel, something we don't yet know, it's approaching an area in which it's vulnerable to pullbacks through that channel.

It's time for bulls to protect profits while we acknowledge the possibility that the Nasdaq could break up through all that resistance and soar toward the 200-sma. Based on this evidence, I could imagine the Nasdaq pulling back at any moment, but certainly from 2456-2480, if that's tested. It would take sustained daily closes above the 200-ema to convince me that it was headed straight up and not just testing the top of its channel preparatory to pulling back through it again.

Annotated Daily Chart of the SOX:

The SOX's Keltner chart verifies that the SOX has broken out today, and it suggests that the SOX may well hit that 200-ema. Maintaining the breakout on the Keltner chart requires continued daily closes above 384.50, however, so a daily close below that and particularly below the 45-ema now at 376.70, would erase its breakout status and make a drop back toward that green trendline more likely. The SOX is the great trickster over the last six months, seeming to break out and then reversing course, so reserve some skepticism when you look at its chart.

Annotated Daily Chart of the RUT:

The RUT's Keltner chart shows that the RUT is doing battle with resistance that's massed near 724.20. It if can produce daily closes above that, it sets a potential upside target near 740.96, the location of the 200-ema, but nothing on that chart or the one above precludes a drop back toward 702-705 or even 697-698.

Annotated Weekly Chart of the TRAN

The daily Keltner chart suggests that the TRAN could approach 5147, where it would find next Keltner resistance on daily closes, but the way the TRAN is chopping around in a consolidation zone with big up and big down days alternating with the occasional small-bodied candle, it's difficult to make any prediction about what the TRAN does next.

Today's Developments

Most assumed that earnings releases would prove more important than economic releases today. That might not have been true, since some releases provided some happy surprises and some unhappy ones, causing some of the aimless stumbling seen in early market action. Today's releases began, as the Thursday release schedule always does, with the weekly initial and continuing jobless claims. That was one of the releases providing a surprise. Economists anticipated that initial claims would inch up 3,000 to 375,000, but they were wrong.

Initial claims fell 33,000 to 342,000, the lowest level in two months. It was below that 350,000 benchmark that marks problems in the labor market. However, economists warn of the volatility of the weekly number and its frequent revisions, so that the four-week moving average is deemed a better barometer. For example, last week's number was revised higher by 3,000, and revisions have mostly been to higher levels over the last month or two. The four-week moving average fell 7,250 to 369,500, still well above that benchmark.

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Continuing claims fell 65,000 to 2.93 million. The four-week moving average rose, however, 20,500 to 2.96 million. That's the highest number of continuing claims in almost four years. The U.S. insured unemployment rate remained at 2.2 percent.

March's durable goods number required a look under the headline number before its true outlook could be discerned. Different sources listed expectations differently, with some saying that economists predicted a rise of 0.6 percent after the previous drop of 1.7 percent and some saying economists had predicted a decline of about 0.3 percent. The headline number dropped 0.3 percent, in line with some of those expectations and below others.

However, as commentators on CNBC noted this morning, not all the news was bad despite the drop. Excluding the transportation orders, for example, durable goods orders rose 1.5 percent, about three times the expected rise for that component. Economists point out that much of the decline in the headline number could be pegged on a strike at American Axle & Mfg. Holdings. That strike helped drive orders for motor vehicles and parts 4.6 percent lower.

Orders for computers rose. Orders for core capital equipment goods remained at previous levels, not declining as they had for the two previous months.

Inventories jumped 1.1 percent, however, and that's of course not good news. Although manufacturers have attempted to keep inventories tight, learning from the last recessionary period, this jump means that, unless demand picks up, more layoffs and cutbacks in production could result. For some companies, strong overseas demand have kept orders stronger than they have been in other recessionary periods, but market watchers should be factoring in some doubt about the sustainability of that overseas demand.

Last night, Germany got a third-in-the-row troubling look at its economy. The PMI, ZEW and then this morning's Ifo sentiment number all pointed to signs that Europe may be following in the footsteps of the U.S. rather than decoupling and providing support as our economy softens. Germany's economy has been the strongest in Europe, propping up other countries that are already seeing some softening.

Other facets of the durable goods report showed shipments of durable goods falling 0.4 percent, but that was far less than February's 2.6 percent drop. Shipments of core goods rose 1.2 percent.

Orders for civilian aircraft, machinery and fabricated metals rose 5.5, 6.2 and 1.7 percent, respectively. Orders for electrical equipment dropped 6.6 percent, however.

Any comfort offered by under-the-headlines studies of the durable goods numbers was undone by new home sales. March's new homes sales were expected to drop to 577,000-580,000 from the prior 590,000 but instead dropped to a seasonally adjusted annual rate of 526,000. This was a 17-year low. When reporting this figure, the Commerce Department also lowered February's previous annualized sales number to 575,000 from 590,000. This downward revision may also happen with March's number since this report doesn't factor in cancelled sales.

Month-over-month comparisons show new home sales dropping 8.5 percent. Economists had predicted a decline of only 1.7 percent.

Builders have been taking steps to decrease inventories, steps that reduced the number of completed new homes to 189,000, but a lower sales pace means that the months needed to clear that inventory of homes rose to 11. That's the most in almost three decades.

Median sales prices fell 13.3 percent to $227,600. That's the biggest decline in almost four decades. Average sales prices dropped to $292,200, an 11.3 percent decline. That's the biggest drop seen since the department began keeping records. Despite the negative report, the DJUSHB, the Dow Jones Home Construction Index, bounced hard today. However, it bounced within a week-long consolidation pattern that's forming within the values of an old congestion zone that trapped the DJUSHB through most of February. I don't think there's much to be determined by that bounce today.

Analysts and government statisticians warn that new homes sales numbers are volatile and have a large standard error, but the trend of weakness in the housing market is one that's being reported elsewhere in the world. This morning in the U.K., March figures showed that approvals for mortgages dropped 46.2 percent from the year-ago level, with this information coming from the British Bankers' Association. Activity has been cut almost in half, too. Property prices slipped. Despite a rate cut by the Bank of England in April, lenders aren't passing that cut on to mortgage borrowers. The LIBOR, the rate at which banks lend to each other, set by the BBA, inched higher again yesterday, raising the specter that the credit market is tightening again.

In recent weeks, we've been getting evidence of that tightening, too, in the weekly figures for outstanding corporate paper. Today, the Federal Reserve released figures showing that outstanding paper fell for the fourth week in a row. Moreover, the drop accelerated to -$21.9 billion on a seasonally adjusted basis. Once again, financials took the biggest hit. Asset-backed paper fell $10.8 billion.

The outstanding corporate paper of foreign financials dropped for the third week in a row as worries deepen about the extent to which foreign financials are exposed to the problems experienced due to the difficulty in placing asset-backed paper. This morning, Credit Suisse delivered its earnings report while most U.S. market participants slept. Its loss was wider than expected, and the company also reported that it would take credit-related write downs of 5.3 billion Swiss francs.

The Energy Information Administration, the EIA, released weekly natural gas inventories at 10:30. That report showed a net increase of 24 Bcf to 1,285 Bcf's in storage. That's still 274 Bcf's less than the year-ago level and 25 below the five-year average, the EIA's data showed. Natural gas had punched higher today but dropped by the close. Crude dropped $2.22 today to close at $116.09 a barrel on the Nymex.

In the U.S., companies releasing earnings today included Whirlpool (WHR). As part of that report, the company trimmed its earnings outlook for this fiscal year to $7.00-7.50 with one previous estimate having been at $8.61. The miss seems so significant that I'm not certain that source was correct or that I read it correctly. Investors seemed to agree that the miss was big, sending prices sharply lower. Sales rose but net income, at $1.22 a share, was lower than the anticipated $1.63 a share.

Dow Chemical's (DOW) report featured an EPS of $0.99 on revenue of $14.82 billion, higher than the anticipated $0.94 on revenue of $13.8 billion. However, the EPS and net profits were lower than last year's during this quarter as the company dealt with higher energy and feedstock costs. The company said its second quarter will be good as the international outlook hedges the impact of a softening U.S. economy.

Aetna (AET) reported earnings, excluding items, of $0.92 a share on revenue of $7.74 billion, with revenue a little higher than the anticipated $7.71 billion. The company affirmed its full-year 2008 operating earnings.

Ford Motor Co. (F) surprised by producing a profit of $0.05 rather than the anticipated loss of $0.15, despite declining revenue. Chief Executive Alan Mulally has been executing his turnaround plan to bring the company back to a profit in 2009. That plan has so far included cost reductions in North America, including a buy out of 4,200 hourly workers. The company produced strong profits in international regions, including Europe. If data from the last week, including Germany's, is correct, those strong profits may not continue as the decoupling theory shows further evidence of falling apart. F's stock leaped higher today, but couldn't maintain all those gains, pulling back from its $8.79 high of the day to close at $8.40.

Motorola (MOT) reported a loss that widened to $194 million or $0.09 a share on revenue of $7.45 billion. Analysts had anticipated a loss of $0.07 a share on revenue of $4.75 billion. The company's report indicated that sales in the company's mobile-devices unit had continued to be poor. However, the loss from continuing operations was less than the year-ago level of $218 million and included a $0.04 charge related to severance costs from 2,600 job cuts. MOT's stock didn't do much of anything today, with prices staying entirely within yesterday's range.

3M Company (MMM), a proxy for the global economy, like GE, reported earnings of $988 million or $1.38 a share with revenue of $6.46 billion. Analysts had expected $1.33 a share with revenue of $6.33 billion. With two-third of sales from international units, the company was able to offset what it called "economic challenges in the U.S." However, as with other companies, early signs of weakness in Europe question whether such offsets will be available in the future.

That may be one reason for the stock's sharp decline in early trading. Another might be the fact that its $988 million net compares to $1.37 billion in the year-ago first quarter. MMM ended the day at $79.16. This was well below yesterday's $80.63 close but also well off its $77.55 low of the day.

Company-related news today included Merrill Lynch's (MER) announcement that it would not trim its dividend. Most indices composed solely of the different financial groupings rose strongly today, but one source noted that those gains were already underway before MER made its announcement. Although financials rose, the financial-based indices I checked today rose only within big narrowing formations on their daily charts. I didn't find breakouts.

In other company-related news, Wendy's International revealed today that the company had agreed to be acquired by the parent of the Arby's chain, Triarc Cos. Both boards have approved the plan, which would include a swap of common stock for the shareholders of Wendy's, at about a six percent premium to yesterday's closing price.

The big after-hours development was Microsoft's (MSFT) earning report, of course. With sales that were softer than expected and guidance that was deemed disappointing, MSFT was trading much lower, at $30.31, as this report was prepared. Net income was $0.47 a share or $4.38 billion with analysts predicting $0.45 a share. Those elements beat current expectations, but EPS was lower than the year-ago period. That year-ago period included a deferral that had added $0.12 a share, however.

Revenue of $14.45 came in a little lighter than the expected $14.57 billion. The company guided analysts to expect fourth-quarter earnings of $0.45-0.48 a share and revenue of $15.5-15.8 billion. Analysts had previously expected $0.48 a share and revenue of $15.5 billion. Revenue in the units that include Windows operating system software and Office software suite fell. The division that includes the Zune media player and Xbox video game produced a revenue gain. As this report was prepared, analysts hadn't yet sorted out information related to the Vista operating system, citing difficulty making comparisons due to a deferral MSFT in the year-ago period related to its marketing program for Vista.

As we always do, I caution that after-hours reactions are not always carried through to the next day.

Tomorrow's Economic and Earnings Releases

Tomorrow's economic releases include April's Consumer Sentiment, released at 10:00 am ET, and the ECRI Weekly Leading Index, released at 10:30. While I believe that consumer sentiment will gain importance as we worry about how high gasoline and food prices and prospects of a weakening job market may influence spending habits, the number might not be as important tomorrow. What might be a stronger factor is positioning ahead of next week's FOMC meeting.

I watched a video featuring Greg Ip of WSJ.com discussing whether the Fed was likely to lower rates by a quarter point next week or not lower rates at all, the two possibilities he considered. He expounded on pros and cons of each choice and concluded that the Fed was more likely to lower rates a quarter point. He believes that the Fed is likely to say something in the accompanying statement that will hint at a pause to gauge the effect of the rates cuts so far. I haven't had the opportunity to listen to his views previously, so I'm not sure whether he's got a good track record of Fed predictions, but I do know that other commentators across the globe are beginning to think similarly.

Of course, then market participants must decide how the markets would react to that news. If there's a quarter-point easing and hints of a pause that's accompanied by assurances that the Fed will be ready to step in again if needed, I wonder if the markets won't react with some relief. I'll be thinking about it more over the weekend, and I suggest that you read Jim Brown's Wrap and do some thinking of your own.

It's still my belief that the markets might be in for more downturns, so I'm thinking in terms of what might happen over the next couple to few weeks, not in terms of the bottom being finally put in place. Perhaps it has been, but I don't think that's proven yet, at least not to my satisfaction.

Important earnings tomorrow might include GT's and HRZ's.

What about Tomorrow?

MSFT is of course a component stock of several indices, so if weakness continues tomorrow, that could give more weight to the drop-and-test-support scenarios presented below.

Annotated 15-Minute Chart of the SPX:

Of course, if the mood is soured enough by disappointment from MSFT, presuming that continues tomorrow, a strong whoosh lower would undo the bounce potential.

If I had to guess what would happen next based solely on this chart, I would think the SPX would likely drop toward 1358.80, finding support at the then-current level of that 45-ema, and then attempt a bounce. That bounce might stall at or near 1393.50, and then we would see what happened next.

Of course, this is based on an intraday chart, with notations and observations that point out its failures over the last few days to predict where exactly support or resistance might lie. It's been helpful, but not as predictive as these Keltner charts frequently are. Such is the nature of choppy trading conditions. Seeing such action doesn't mean that the Keltner charts have failed. Instead, such action instead points out the choppy nature of the price movements and warns market participants that, although they make think they have prime setups, those can change the moment they click through their orders.

But, let's suppose that action unfolds as the chart suggests it might. From this juncture, it then looks just as likely that the SPX would then curl down toward the descending red trendline as it would rise toward 1403.41. Such a curling down would only constitute a retest of that bull flag's former resistance to see if it holds as support, and so would not, in itself, be a terrifying thing to have happen, although it would certainly do damage to call plays entered today.

However, if the SPX drops much further than that, it will be approaching the confirmation level of a potential double-top (Friday's and today's). Although the SPX of course punched higher than Friday's high today, the values are roughly consistent with a potential double top.

I don't know which is most likely to occur: the normal and natural retest of an old resistance line and a bounce from it or a deeper decline that confirms a double top. I've been saying for several days on the live portion of the Option Investor site that it looked about equally likely that the SPX could stall at Friday's high or that it could push up into the 1408-1417 zone and stall there.

Of course, there's the possibility that we'll get our answer right away tomorrow morning, and that the SPX will shoot higher right away, doing away with all that curling over and retesting business and just charging up to the next resistance zone. Or that it could see a strong whoosh lower and do away with all the bounce potential.

Annotated 15-Minute Chart of the Dow:

The same possible double-top cautions should be considered here, although the Dow moved high enough today that it questions whether the two highs could be considered broadly equal. Still, Dow bulls do not want sustained values beneath the 15-minute 120-ema, with that average now at 12,764.

Annotated 15-Minute Chart of the Nasdaq:

The Russell 2000's chart looks a little different. Like the Nasdaq, there's no question of a double-top formation, but for a different reason. The Nasdaq reached a high well above last Friday's but the Russell 2000 hasn't approached Friday's high yet.

Annotated 15-Minute Chart of the Russell 2000:

It's time to note that several of my best-guess scenarios have been oh-so-wrong over the last couple of months. Believe me, I care when that happens, but either I make best guesses and risk that happening now and then or I don't offer any best guesses at all. Markets have been volatile and hard to gauge. The point of this mea culpa, however, is to say that you shouldn't bet the farm on trades right now or incur any more risk than you can afford to lose on anyone's impression of what might happen, including mine.br>  

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