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Market Wrap

Conviction Day

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Introduction

This was supposed to be conviction day, the day market participants would decide how to react to the FOMC decision. React they did. After an initial dip, indices charged higher, with the SPX closing above 1,400 for the first time since January. The Dow closed above 13,000.

After some pre-market interest in treasuries, investors dropped them and headed for equities. They dropped commodities, too.

The dollar strengthened. Although European and Asian commentators doubt that strengthening will last without another retest of this year's lows, equities have so far been benefiting.

That strengthening was helped by the fact that our country wasn't the only one making a rate decision this week. The Bank of Japan met last night, keeping rates steady. That central bank has held a bias toward raising rates for the last two years but changed that bias last night, warning of downside risks to the economy.

The Japanese government lowered its growth outlook to March 2009 to 1.5 percent, down from the previous 2.1 percent. The inflation outlook was raised to 1.1 percent from the previous 0.4 percent. Inflation risks remain but those are "cost inflation," not "consumer-led inflation," a CNBC World correspondent noted last night. Some feel that the Bank of Japan is caught between the twin concerns of a weakening economy amid rising inflation, and has as its only recourse intervention in the currency markets.

Also perhaps of interest, Japan's Diet reimposed gasoline and other transportation-related tax surcharges.

If market participants hoped that the two central bank decisions would do great things for the USDJPY, the currency pair matching the U.S. dollar against the yen, they might have been somewhat disappointed. That currency pair made a small gain but did not break out above recent highs. The EURJPY has preformed much more strongly until recent pullbacks, questioning whether yen carry trades might benefit euro-denominated equities more than dollar-denominated ones.

For now, let's look at what all the cheer in U.S. indices accomplished.

Charts

Annotated Daily Chart of the SPX:

Just before the close today, the SPX pushed above the 200-ema, rising ever closer toward that blue trendline and ever deeper into the resistance band now stretching from 1408-1418. I follow the daily 9-ema rather than the more commonly watched 10-sma shown on this chart. As long as the SPX is producing daily closes above that 9-ema now at 1388.20, it's maintaining the short-term uptrend since the middle of April. Bulls should, however, have profit-protecting plans in place as the SPX approaches a test of the converging resistance shown just overhead (blue trendline, horizontal green Fib level, and not-shown Keltner potential resistance just under 1418).

Even if gains are going to remain strong, it's normal and natural for prices to pull back through rising channels, and the SPX approaches the top of the channel again. RSI is near 70. While gains can carry further, bulls need to be aware of the approaching resistance.

Depending on what happens with the non-farm payrolls tomorrow, a pullback could begin immediately or the SPX could zoom up a bit further to test the top of that resistance zone and perhaps even pierce it before beginning a stall or pullback. If a pullback begins, know whether your position can tolerate either a several-days sideways move into a rising 10-sma or an actual pullback.

I don't like the narrowing wedge shape of the SPX's climb, but we saw many such supposedly bearish formations break to the upside in the spring of 2003. It's not impossible that such breaks should occur again. As you'll see later, shorter-term intraday charts show a potentially troubling setup, too. Let that knowledge keep you on your toes in your bullish trades without scary you unduly just yet, since we well know from experience that these supposedly bearish setups can be broken to the upside.

Annotated Daily Chart of the Dow:

Unless the non-farms payrolls or some other development sends futures sharply lower tomorrow morning, I can't imagine that Dow bulls won't try to close the Dow above or at the 200-sma tomorrow. However, unless the Dow is going to break to the upside through this channel, a small-bodied candle that perhaps pierces that 200-sma and the blue channel's resistance but perhaps doesn't close above it seems a possible next action. That's not a given, but it is a warning to bulls to cinch up their stops just in case. The daily Keltner chart shows resistance gathering overhead, beginning at about 13,054 and extending up toward 13,100.

Where would a pullback take the Dow? If it's reinstituting its old pattern, then it would most likely chop sideways while the ascending 10-sma (or my preference, the 9-ema now at about 12,870) rises beneath it, finally bouncing from that average when tested. If it's not and is instead following a less bullish pattern, then a fall through the converging red and lower blue trendlines can't be precluded.

Annotated Daily Chart of the Nasdaq:

There's nothing to prevent the Nasdaq or any of these indices from scrambling up the underside of these rising blue trendlines while those trendlines still essentially maintain their status as resistance on daily closes. An attempt to regain that nice round 2,500 number or even the 200-sma seems a given while the success of those attempts isn't yet a given. Be watchful for a stalling that could begin at any time, remembering the propensity for large-range days to be followed by days producing small-bodied candles.

The SOX's climb was strong.

Annotated Daily Chart of the SOX:

Actually, the SOX's close near the top of that highest blue trendline suggests that a pullback could begin at any moment, particularly with the SOX parked near 400 at the close.

Annotated Daily Chart of the RUT:

Annotated Daily Chart of the TRAN

The TRAN, of course, has been charging up toward its July 2007 high of 5487.05. On a weekly Keltner chart, it's got a potential upside target of 5528, but I would begin watching for stalling or rollover potential at any point.

Today's Developments

Today's announcements began with the April Monster Employment Index. Ahead of tomorrow's Non-Farm Payrolls, anything with the word "employment" gains attention. Monster's index continued an upward trend established two months ago, moving up seven points. Seasonal hiring sent demand higher in the accommodation and food services industry. In its report on this sector, Monster noted a trend that has been discussed in other venues, including an NPR program I heard recently. An influx of foreign visitors due to the weak dollar has been improving the outlook on industries relating to tourism.

The industry of management of companies and enterprises also produced sharp gains. Government hiring stayed "active," in Monster's phrasing, producing a rise in the public administration industry. The company believed that the financial services sector saw some stabilization, although it noted the layoffs in the banking industry. The utilities and mining, quarrying and oil and gas extraction industries declined.

Seventeen out of 20 industries and 21 out of 23 occupations produced gains in online job availability. Monster also noted that, at its current 186, the index was still down six percent from last April's 174.

That was about the last good news related to employment this morning, however. April's Challenger Gray & Christmas layoff report was released at 7:30 am ET, and that report showed a troubling trend. Major U.S. corporations announced 90,015 job reductions. That's the highest number since September, 2006, and 68 percent higher than March's report.

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Financials proved responsible for announcements of 23,106 of those layoffs. Telecommunications companies announced that they would lay off 8,007. The transportation, manufacturing, agriculture and services industries, suffering from rising energy costs, also announced layoffs. This report does not consider whether layoffs will occur immediately or whether they'll be accomplished by voluntary reductions such as buyouts, retirements or other means.

Initial and continuing claims provided the next look at employment numbers. Economists had predicted that after last week's sharp drop in initial claims to 342,000, claims would rise again to 360,000. Instead, initial jobless claims rose 35,000 to 380,000.

These numbers prove misleading, however, due to the continual revisions of the previous week's number. Those revisions have usually been toward higher initial claims. Last week, the claims dropped 33,000 and this week, they climbed 35,000. Two weeks ago, at the time of my April 17 Wrap, initial jobless claims were 372,000, so there's an 8,000 difference, not a 2,000 difference.

The Labor Department reported that the four-week moving average fell 6,500, but that would have been due to the influence of last week's aberrant report with its supposed 33,000 drop in initial claims. Continuing claims rose 74,000 to 3.02 million, a four-year high. The four-week moving average of those claims rose 16,750 to 2.98 million, an almost four-year high.

March's Personal Income was expected to slip to a 0.3 percent gain from the previous 0.5 percent. The Commerce Department noted that incomes did rise 0.3 percent, but so did consumer prices. Headlines this morning pointed to the inflation's erosion of income gains, resulting in an unchanged number for real disposable incomes for the month. Real disposable incomes have increased 0.9 percent for the year.

Consumer spending growth inched a little higher than expectations, at 0.4 percent rather than the anticipated 0.3 percent. After adjusting for rising prices, however, that spending gained only 0.1 percent. Although I heard some commentators espouse the "consumer is strong" view based on this number, others believe that the adjusted level hinted that consumers may not spend the way out of recession for the U.S. Real spending on durable goods fell 0.5 percent, while real spending on non-durables rose 0.2 percent. The personal savings rate dropped to 0.2 percent of disposable incomes.

Perhaps some hope lies in the fact that consumer prices rose at the slowest year-over-year pace in five months, but that was still 3.2 percent. Those much-touted core prices rose only 2.1 percent, which puts the rise for core prices at just over the Federal Reserve's perceived comfort zone.

Futures' traders didn't like the results of these reports. Futures had been marginally above fair values before the reports. Afterwards, they dropped to levels slightly below fair values. Treasuries rose slightly.

After the market opened, two numbers came in quick succession, however, and they changed the tenor: March's construction spending and the April ISM Index. Of the two, the ISM garnered the most attention, so let's get construction spending out of the way first. Because so many reports were released today, the coverage of each will be brief so that the Wrap doesn't run too long.

Construction spending had been expected to drop by 0.7 to 1.0 percent. It dropped a bit more than expected, by 1.1 percent, and that was from a revised lower prior reading. The prior reading had been a rise of 0.4 percent, revised to a drop of 0.3 percent. This report encompasses spending on residential, non-residential and public new construction, but the market rarely pays it much attention.

Some predicted that the Institute of Supply Management's (ISM) index would slip to 48 percent from the prior 48.6 percent, with 50 percent being the benchmark for an expanding versus contracting economy. Instead, the ISM came in steady at 48.6 percent, but that's the third month of figures below that expansion/contraction benchmark.

This report included another negative read on the employment sector, with index component dropping to 45.4 percent from the previous 49.2 percent. Also disturbing was a climb in the prices index. That rose from 84.5 percent from the previous 83.5 percent. The index measuring new orders remained steady.

The ISM's summary included the statements that "[m]anufacturers are in a situation where both new orders and production are slowly declining, but prices continue to rise at highly inflationary rates." I didn't find any mention of that statement in press coverage of the report. However, the ISM did note that seven industries reported growth, and the index measuring backlog of orders rose for the first time after six straight months of declines.

In the interest of keeping this Wrap as short as possible on a day that featured many reports, I've provided only a brief synopsis of the ISM's report. That report does include an interesting discussion on the connection of the overall PMI number to GDP, indicating that the January through April average "corresponds to a 2.5 percent increase in real Domestic product (GDP)." Those who prefer to read more details can find the entire report on the ISM's site at this link.

Apparently, market participants weren't as concerned with the third month in a row in contraction territory, believing perhaps that the worst is over and blue skies lie ahead. Many equity indices hit an early low just before the ISM was released then began a choppy climb that gradually gained steam and screamed higher into the close.

The Federal Reserve also released its weekly figures on outstanding corporate paper this morning. Continuing a disturbing trend, outstanding corporate paper dropped another week, this time by a seasonally adjusted $21.2 billion. Even more disturbing, asset-backed paper was responsible for the bulk of the drop, $17.7 billion. This report gives market participants a read on how easy or difficult it is for corporations and businesses to place short-term corporate paper, the kind they use to meet short-term cash needs and fund operations. If they can't place this paper, they must go to banks for more expensive loans.

In an obliquely related report, the Bank of England today announced in its twice-yearly report that the process of marking to market some the values of some illiquid securities such as CDO's might be understating the value of those securities. The credit crunch might have resulted in such actions going too far, the bank warned.

The International Monetary Fund has so far not agreed, with the IMF's estimate of credit-related losses being higher than many other estimates. However, the Bank of England purports that losses could be much less than either the market estimate or the IMF's, with those at $400 billion and $900 billion, respectively, while the Bank of England believes $170 billion may be closer to the mark (pun intended).

I've heard other recent arguments against the mark-to-market process, saying that it might be distorting the value of these securities. The Bank of England appears to espouse that argument. In its report, the Bank of England called other figures exaggerated. Risk appetite will gradually appear again, the Bank of England noted, and it believes that its own liquidity program will help reestablish that risk appetite. Still, significant risks remain, the bank warned.

Unless there's some reason for the continuing sharp declines in outstanding corporate paper that I don't understand, the Federal Reserve's figures would seem to support the idea that risks remain. The LIBOR rate doesn't seem to back up the Bank of England's conclusion that risk appetite will increase, or at least doesn't suggest that it has just yet. Although, as of yesterday, this Interbank lending rate was lower than year-ago levels for most categories, all were at or higher than week-ago levels. Many have been closely watching LIBOR rates, looking for signs that financial institutions were less worried about their peers' hidden risks and more willing to loan to each other.

To contradict all those figures showing some worry about the credit concerns, this afternoon, CNBC reported that fewer banks such as discount banks and investment banks are going to the discount window. That result was celebrated. We seem to be getting differing views on how concerned we should be.

The next release related to the energy complex. The Energy Information Administration said that natural gas inventories rose 86 billion cubic feet. Industry experts deemed that a bearish report. Also in the energy complex, crude prices fell below $111.00, although they were $112.52 as this report was prepared.

Industry-related news included reports from the Semiconductor Industry Association (SIA) and the automobile industry. The SIA acknowledged weakness in memory revenue but said that weakness had hidden overall strength in semiconductor sales. If memory chips were excluded, sales would have risen higher than the reported 3.8 percent. Worldwide demand propped up those numbers, taking up some of the slack from the weakening U.S. economy. Pricing pressure continues for DRAM and NAND chips, however, the SIA noted.

Auto sales figures included a 12.2 percent drop in U.S. sales for Ford Motor Company. Sales of the previously popular F-Series pickup declined 21 percent. GM's sales dropped 22 percent. The trend of eschewing fuel-burning vehicles for those with higher fuel economy accelerated, with Toyota producing a 3.4 percent increase in U.S. auto sales, provided by stronger Camry and Prius sales.

The numbers would have been worse if seasonally adjusted. April 2008 included two more selling days than the year-ago April.

Companies reporting earnings today include ACS, ADP, CAH, MNST, WYN, WYNN, and XOM. Exxon (XOM) reported profit of $10.89 billion or $2.03 a share. Analysts had expected net income of $2.12-2.14 a share on net income of $10.79-11.65 billion. Revenue rose to $116.8 billion but did not match expectations of $124.4 billion. Capital and exploration costs rose 30 percent from the year-ago period, to $5.49 billion. Production declined 5.6 percent when compared to the year-ago period, but if losses from Venezuela and other such effects were excluded, production dropped a more modest 3 percent. I didn't find any information about whether problems in Nigeria that shut down production were a factor. CNBC also reported that the company's margins were squeezed.

Williams Cos. (WMB) reported earnings of $500 million or $0.84 a share. Excluding items, earnings would have been $0.57 a share, still higher than the anticipated $0.51 a share. WMB also guided full-year consolidated earnings expectations higher, to $1.70 to $2.10 a share from the previous $1.60 to $2.00 a share. Production in natural gas has increased, the company noted, and prices for the fuel have increased, too.

Other company-related news related to a LONDON TIMES article speculating that Microsoft (MSFT) might offer more for Yahoo (YHOO). The article speculated on a new price of $32-33 a share.

Tomorrow's Economic and Earnings Releases

Tomorrow's Non-Farm Payrolls at 8:30 am ET is guaranteed to capture attention. Some predict that payrolls will fall 75,000.

The other important economic release for tomorrow comes thirty minutes after the open: March's Factory Orders.

The other numbers tomorrow are the ECRI Futures Inflation Gauge and Weekly Leading Index, released at 9:40 and 10:30 am ET, respectively. Those are not expected to move markets.

Companies releasing earnings tomorrow include CVX and ICE.

What about Tomorrow?

Annotated 30-Minute Chart of the SPX:

Here's how to read this chart. If the SPX should maintain those values over the (approximate) 1408.27 level tomorrow morning and should furthermore maintain values above the top megaphone trendline, it's set a potential upside target of 1419.91. However, be aware that the SPX is moving up into a zone of potentially strong resistance from multiple types of resistance, and that today was one of those big-range days that tend to be followed by either a doji or similar candle or an actual pullback. If the SPX gaps lower tomorrow morning, and particularly if it maintains values below about 1404, it may be headed back toward next support near 1396-1399 or perhaps even closer to 1392.

These Keltner lines are dynamic and will change as the day progresses. I don't like these big megaphone formations and distrust everything that happens within them, so be careful. I distrusted the drop this morning as much as I did the afternoon's zoom as it all looked like a part of a being-established broadening pattern.

If the SPX should dive through to the bottom of that shape, so have profit-protecting plans in place for that test, if in bearish positions. Be careful, though, as the tough thing about broadening formation is that they're . . . broadening. It's tough to tell when resistance or support has been broken.

AAnnotated 30-Minute Chart of the Dow:

The Dow looked weaker by comparison to the SPX, but the same cautions apply. Sustained 30-minute closes above about 13,020 would target the top of the expanding megaphone shape, but bulls should have profit-protecting plans in place for a test of that level up to the 13,128 level. Remember that these lines are dynamic and will move in the direction of the price movement. br>
Sustained 30-minute closes beneath the 9-ema (thin red line) signals that something has changed on the short-term, and may target the 12,900-12,914 level or perhaps even stronger support at the 120-ema, now at 12,864. If the Dow declines through to the bottom of the megaphone, watch there for potential support.

AnnAnnotated 30-Minute Chart of the Nasdaq:

The sdaq broke through at the last minute today, creating a breakout status on the 30-minute chart that would be maintained if it maintains 30-minute closes above about 2475.30 tomorrow morning. A gap below that level and particularly sustained values below the 2469.30 or 2460 level would signal that something had changed and that the Nasdaq might be headed to test 2440-2445 or even 2415. Support might be found at any of those levels. If the Nasdaq descends to the bottom of the megaphone shape, watch for potential support there.

AnAnnotated 30-Minute Chart of the Russell 2000:

By now, you recognize the levels to watch on this chart. r>
It must be said that any descent all the way through these megaphone would be a bearish outcome, whether the support is broken tomorrow or not. Widening price patterns at the top of the climb off this year's lows indicate more emotion-based trading. While an upside break can't be precluded, the presence of these formations keeps me wary.

Barring some strong reaction to the non-farm payrolls tomorrow morning, I don't see anything here to suggest that you pile into bearish entries. However, I do see reasons to continue to work on your profit-protecting plans for your bullish trades. Particularly if you're in May options, ask yourself tonight what you'll do if the indices should consolidate sideways tomorrow and then you're faced with a weekend's worth of time premium decay before you know whether the consolidation will be followed by more consolidation, a decline or even a climb.

I won't be on the live portion of the site tomorrow, but many able writers and commentators will be. Watch for their moment-by-moment commentary on what they're seeing. As today proves, the action can change moment by moment.
 

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