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Market Wrap

Yahoo! Tumbles, While Crude Oil Rumbles

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Investors locked in some gains after last week's FOMC decision to cut its fed funds target 25 basis points to 2.00%, while shares of Yahoo! Inc. (NASDAQ:YHOO) $24.37 -14.99% tumbling more than $4.00/share after Microsoft (NASDAQ:MSFT) $29.06 -0.61% withdrew its $47.5 billion offer.

According to news reports, Yahoo! shareholders said they would support a move by activist shareholders to replace the company's board of directors after playing hardball with the world's largest software company.

While Yahoo! shareholders sound "hot under the collar," energy prices spike higher for a second-straight session as supply concerns and unseasonably cooler weather forecast helped set the bullish tone.

June Nat Gas futures (ng08m) jumped $0.4010, or 3.72% to settle at $11.178, which is just shy of last Monday's June contract record settlement of $11.329.

June Crude Oil (cl08m) surged to a record intra-day high of $120.36 before settling up $3.65, or 3.14% at $119.97 on a trifecta of technical buying, renewed supply concerns out of Nigeria, Iran and Iraq as well as tight US stockpiles into the summer driving season.

Closing U.S. Market Watch - 05:00 PM EDT

Despite a 2-day surge in crude oil prices, which tend to come on euro strength against the dollar, the euro rose a more tepid 0.47% to tick 1.5496 at today's 05:00 PM EDT close.

Meanwhile, equity weakness mirrored that of dollar weakness vs. the yen, with the dollar slipping 0.51% to 104.85.

At 10:00 AM EDT, stocks tried to recover from their opening tick lows after the Institute for Supply Management (ISM) said its services index rose to an expansionary 52.0 reading in April versus April's contracting measure of 49.6.

Readings above 50 in the ISM indicate growth. Economists expected a 49.1 reading for April after three consecutive months of declines.

Wells Fargo's head of foreign exchange strategy Nick Bennenbroek said "the report is consistent with the trend we have been seeing that the U.S. economy is not as disappointing as many initially thought."

In the above U.S. Market Watch, I've highlighted in blue some of the indices we might view as more "service" related, where the services sector represents roughly 80% of U.S. economic activity (banks, airlines, hotels, restaurants and retailing).

I think we also saw some further sign that market participants see a Fed that may start to "stand pat" on further rate cuts.

Today's results from the Treasury's 13-week auction showed less-than-bullish demand for this very short-term maturity and its yield ($IRX.X) backed up 8.5 basis points to 1.550%. Just days after the Bear Stearns (NYSE:BSC) $10.70 -1.83% bailout by JP Morgan (NYSE:JPM) $48.00 -1.35%, the 13-week yield plunged to 0.20% on Thursday 03/20/08.

Instead, buyers showed a greater appetite for the 5-year Treasury Yield ($FVX.X) as it's yield fell 2.4 basis points to 3.135%.

5-year Yield ($FVX.X) Chart - Daily Intervals

Today is a great day to quickly review the 5-year Yield ($FVX.X) chart and review what it may be "saying."

As noted in prior wraps and teachings over the years, I've suggested that traders and investors try to keep some type of "consistent range" on various indices.

For the 5-year Treasury Yield ($FVX.X), a SHORTER-TERM Treasury yield, I'm still keeping a 10/15/07 relative high to 01/23/08 relative low RANGE with a conventional retracement bracket.

During times of "distress," it is not unusual to see market participants plough cash into shorter-dated Treasuries, perhaps like they did just days before, and the day of the "Bear Stearns failure."

But despite the "sky is falling" mantra, and a Fed targeting fed funds at 2.00%, sellers in this bond now have its yield having risen roughly 93 basis points from it 3/17/08 closing yield of 2.202%.

Current levels are certainly going to be finding both some TECHNICAL yield buying at the conventional 38.2% and 150-day SMA (32.15; 3.215%).

Associating YIELD and PRICES is difficult, so let's take a look at the iShares Lehman 3-7 Year (NYSE:IEI) $107.15 +0.15%, which would be a security that would approximate the 5-year's price action.

iShares Lehman 3-7 Year (IEI) - Daily Intervals

Just as the 5-year YIELD is at a near-term YIELD resistance, the IEF is at its near-term PRICE support.

Now, we must think not only about what market participants might that are LONG the 5-year, or IEI from $111, or $108.36, but what about those that are/were SHORT this bond when the "sky was falling?"

Think about this. If short at $110.02, that trade would be PROFITABLE by 2.6% and I (Jeff Bailey) would have to be looking for some near-term SHORT COVERING at these PRICE levels.

Why you ask? Because at that time, this security would have been YIELDING roughly 2.5%/year. In such a short amount of time passing, a SHORT can lock in a very HANDSOME bond-related gain, without owing much dividend (per IEF), or interest (per a 5-year T-bond).

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Furthering my thoughts that we could see some TECHNICAL buying in the 5-year Yield, which could have some cash taking PROFITS from equity is this.

I (Jeff Bailey) do NOT see the FOMC raising its target on the fed funds rate anytime soon.

Today, shares of mortgage lender Countrywide Financial (NYSE:CFC) $5.38 -10.03% were among the most active on broker comments that S&P 100 heavyweight Bank of America (NYSE:BAC) $38.97 -2.06% may lower its buyout offer to $2.00/share due to further write downs should it complete its buyout of CFC.

The various parts of the BOND market are SO IMPORTANT to monitor.

Then tie with a MAJOR index like the S&P 500 (SPX.X), or its tracker and the S&P Depository Receipts (SPY).

SPY and DIA Montage - Daily Intervals

At tonight's close, I'm seeing a MAJOR correlation with the shorter-dated 5-year Treasury and the S&P Depository Receipts (SPY) $140.83 -0.48%. Not only at TREND, but the 150-day SMA.

IWM and QQQQ - Daily Intervals

While the VERY BROAD iShares Russell 2000 (IWM) has worked itself above trend, here we would want to note a TIE as it relates to the Oct-January RANGE.

Encouraging this May expiration to see the IWM's "Max Pain" theory value actually RISE to $71.00 from $70.00, suggesting option traders starting to get more bullish.
 

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