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Market Wrap

The Rumor Mill

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Introduction

Rumor has it that summer has begun. Despite the official start date of summer not yet having been reached, today began the light-volume summertime trading pattern, complete with a post-Memorial-Day decline in crude prices.

Rumor also has it that former FOMC chief Alan Greenspan believes the U.S. will be more likely than not to sink into recession. Despite that statement, he believes that the possibility of recession may have lessened, according to some sources. Rumor also has it that Warren Buffett disagrees in part, believing that a recession has already begun and that such a recession will be long and deep. Alan Greenspan spoke in an interview London's FINANCIAL TIMES, and Buffett's views were reported in a Reuters article.

Rumors about M&A activity swirled, too. Some of those eddied around Anheuser-Busch (BUD), rumored to be of interest to Belgian brewer InBev. Some rumors swirled around Chemtura (CEM), speculated to be of interest to Blackstone Group (BX) and Apollo Management LP.

In addition, rumors are that analysts believe financials may still be overvaluing their assets. Financials may be feeling picked on these days. Today, Bank of America Corp.'s analysts cut second-quarter earnings estimates for Morgan Stanley (MS), Lehman Brothers (LEH) and Goldman Sachs (GS). The analysts listed many challenges faced by these financials, including a low-visibility environment for the major banks that would persist through this year. The analysts calculate that these companies' values are probably about twenty percent lower than their balance sheet totals. Just last week, an analyst from Ladenburg Thalmann downgraded Goldman Sachs, Lehman Brothers and Merrill Lynch & Co. (MER) and trimmed their 2008 earnings estimates.

Financial giant UBS was in the news again this week, too. Yesterday, it warned that its losses on real-estate holdings outside the U.S. may reach record levels. The Swiss bank's share price suffered today after it initiated a $15.58 billion capital increase through the issuance of share rights, a plan announced last week.

Market participants and market chatter may have focused as much on what was happening in the energy complex as on these concerns and rumors, however. In fact, a MarketWatch lead article's title trumpeted "Falling crude, shifting mood," pointing to what that site's writers thought was the predominant market mover of the day.

Crude costs chopped around the $133.30 a barrel level in electronic trading before the regular session, with the bump higher supposedly prompted by news yesterday confirming that a separatist group had attacked a Royal Dutch Shell PLC pipeline in the Niger Delta. Iranian exports fell, too, although that was later attributed to a seasonal phenomenon.

We know, too, from Jim Brown's writing, that a drop in crude prices can be seasonal, too, declining after the Memorial Day weekend. Armed with that knowledge, we can somewhat discount the many reasons to which pundits attributed the decline that began after the regular session opened today. Crude costs soon hit one-week lows, diving below $130 a barrel. Many also pointed to a stronger dollar as a catalyst, and maybe it was, but a catalyst for what tends to be a seasonal pattern anyway. Crude costs for July delivery closed at $128.85.

Momentum indices moved up early, those fast-moving indices such as the TRAN, RUT, MID, RLX, BIX and others. On the live portion of the site, I warned subscribers that we were seeing those momentum indices that I use as indicators of a sort show those early efforts to steady and bounce markets. Not all were to maintain their gains into the close however, and gains were ultimately somewhat undermined by the knowledge that they were made on light volume. Let's see what they produced after all their efforts.

Charts

Annotated Daily Chart of the SPX:

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

Even if the Nasdaq rises, the chart setup suggests that there will be another test of the rising blue channel's support, either as the bounce stalls and prices move sideways or as the Nasdaq rolls over again to retest it. This will remain the suggested setup unless the Nasdaq sustains daily closes above its 200-sma a bit better than it did a week or so ago. An immediate rollover remains possible, too, but the Keltner charts suggest that the support down to about 2,422 on daily closes is firm enough to at least stall declines for a few days, barring some catalyst that plunges prices lower.

Taken all together, then, this chart suggests the possibility of some chopping around between about 2,422-2,514 might go on for another week or so before we have much of an answer to where the Nasdaq goes next.

Annotated Daily Chart of the SOX:

Annotated Daily Chart of the RUT:

The USDJPY sometimes leads U.S. equity action. Although I don't believe that this inter-market relationship will always persist in its current form, this currency pair has been useful to watch over the last several years because of its leading or corroborative action. For example, on May 8, this currency pair broke through its rising trendline off its March low, suggesting that some indices might do so, too, which subsequently happened. Now we've had the "kiss goodbye" action in which prices rise up to retest former support to see if now acts as resistance. It did, but the USDJPY should have fallen sharply after that test, and it hasn't. It's chopped sideways, forming at triangle. This currency pair isn't showing the expected result, then, and we should be cautious about conclusions about equity markets while it's showing such uncertainty, too.

Annotated Daily Chart of the USDJPY:

I can't always include all the charts I'd like to include or this article would stretch out to an impossible length. I do want to mention again that a lot of the momentum-type indices that tend to be the recipient of speculative type buying led the charge this morning. The TRAN was one, benefiting of course from the drop in crude prices. The TRAN closed near its high of the day, above Friday's high. However, it's not yet risen into a retest of the rising price channel in which it had climbed off the March low nor into a test of the 10-sma. Those might still be resistance when retested. If the TRAN rises to that 10-sma, now just below 5,305 or even up to the former price channel, now at about 5,380-5,380, I would watch carefully for rollover potential.

Other mo-mo type indices showed tried to lead the way, but not all could maintain their lead. The RLX, the S&P retail index, gained, but fell sharply off its high of the day, so that the candle produced was not a particularly bullish one. The BIX, the banking index, gained at first, but fell back to end the day with a doji, which could be considered a potential reversal signal, but an unconfirmed one as yet. Similarly, the DJUSH could not hold onto its gains. The MID, the S&P MidCap Index, gained strongly but traded entirely within the body of Friday's candle, creating an indecisive, inside-day candle.

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We like to see these momentum indices try to lead the way. It's a sign that traders feel safe enough to venture away from the generals and engage in trade that are a bit more speculative. However, this light-volume and not conclusive attempt felt as if traders knew it was supposed to be the momentum indices that gained and jumped into them. It felt a big engineered, although not in any conspiracy-related way, but rather engineered by traders who jump first into the mo-mo stocks and who may ultimately be wrong. That's what's left to be proven.

Today's Developments

The U.S. schedule of economic events began with Fed Governor Kroszner speaking at 8:15 am ET in Sao Paolo. The title of his speech was "Prospects for Recovery and Repair of Mortgage Markets." This was the topic of his speech last Thursday in Washington, D.C., and so didn't prove market moving.

San Francisco's Federal Reserve President Janet Yellen also spoke. Yellen is a non-voting member. While acknowledging that the financial markets are not yet functioning normally, she affirmed her belief that the Fed's recent actions as well as the fiscal stimulus should help the economy. She expects inflation to moderate over the next couple of years, but she doesn't feel that inflation concerns can be ignored.

The day's allotment of releases inundated market watchers with information about the housing market, however. The next two releases were the S&P/Case-Shiller Home Price (HPI) Composite-20 Index at 9:00 am and New Home Sales at 10:00. The first was expected to decline 14.3 percent after a prior decline of 12.7 percent. Economists anticipated that new home sales would dip to 522,000.

The S&P/Case-Shiller Index fell 14.4 percent to 172.2. The first quarter's number dropped to 159.2, below the prior 170.6. Although headlines claimed that the decline in home prices accelerated, that acceleration was only slightly stronger than the anticipated descent. Keene Little has been busy charting the data from this report and I look forward to seeing whether it's included in Thursday's Wrap, which he will now be writing.

The Commerce Department noted that April's new home sales rose 3.3 percent to a seasonally adjusted 526,000, slightly above expectations. March's sales had dropped to 509,000 units, the lowest number since the early 90's. The number of new unsold homes on the market dropped 2.4 percent to 456,000 units. At the current sales rate, that represents a 10.6-month supply.

While some could take cheer from that report, others pointed to the comparisons with April 2007 numbers. Sales were 42 percent lower than last April's. The median sales price was down 1.5 percent compared to last April. Worse, a commentator on CNBC this morning noted that housing prices have dipped only to the 2000-2002 levels and remain well above prior levels. Not all the air has leaked out of this particular bubble yet, that commentator suggested.

The 10:00 release slot also featured Consumer Confidence, with May's number expected to dip to 59.5-60.0 from the prior 62.3; and the Richmond Fed Index, expected to rise to 1 from zero. The Conference Board reported that consumer confidence dropped far deeper than forecast, to 57.2. Although the dip was deeper than forecast, it probably didn't surprise many, given the flood of local and national coverage given to the impact of higher fuel prices. As I type, a local news station on in the background provides statistics meant to help consumers adjust their tire pressures to conserve gasoline usage.

April's reading was revised higher to 62.8. Worry about jobs pushed the May reading lower. As I've been saying for a while in my Thursday reports, consumer confidence numbers were once closely watched and then less so, but I believe their importance is rising again as we gauge the impact that higher energy and foods costs have on spending habits. The fear is that a low enough dip in consumer confidence will result in more saving and less spending on the part of worried consumers. Although over the long run, we and our country should be saving more and spending less, those worrying about recession want the spending habit maintained for now.

While the Richmond Federal District's report doesn't prove as important as the Empire State and Philly Fed reports often do, its take on the manufacturing sector still provides confirmation or refutation of what the earlier releases of the Empire State and Philly Fed reports showed. In that Richmond report, manufacturing, shipments and new orders all moved lower but expectations rose. Raw prices for materials climbed. The general impression was that the slowdowns moderated and the inflation pressures did, too, and that optimism climbed.

However a look at the actual numbers showed that the seasonally adjusted manufacturing index dropped to -3, into negative territory and below expectations. Shipments and new orders also moved down into negative territory. The jobs component, while rising, stayed in negative territory. Employment improved but stayed below the benchmark zero. New orders climbed to 19, a 13-point jump, and the orders backlog moved up to 15, an 11-point climb. Manufacturers expected to pass along higher materials costs as they could not absorb those costs.

Stock-specific news included information that a private equity group was investing more than $530 million in homebuilder Standard Pacific Group (SPF). The news initially sent SPF higher, but it couldn't hold onto all its gains. The DJUSHB, the Dow Jones Home Construction Index, spent another day chopping around what my Keltner charts tell me may be support on daily closes at about 321. There's as yet been no resolution to whether this support will hold or the DJUSHB will plunge through it toward 300 again, with that zone marking March's support level.

Telecom operator TeliaSoneria said today that it will introduce Apple's (AAPL) iPhone to the Baltic and Nordic markets it covers. AAPL and Google (GOOG) both benefited in early trading, prompting much of the early bounce in the tech-related indices.

Tomorrow's Economic and Earnings Releases

Tomorrow's economic reports include the important Durable Goods Orders. Economists predict that the headline number will decrease 1.5 percent while the core orders will decline 0.4 percent. The core orders exclude the volatile big-ticket transportations items, and this core orders number is actually the one to watch.

All other potential economic events relate to the slate of Fed speak, beginning with Minneapolis Fed President Gary Stern at 12:50 and Dallas Fed President Richard Fisher at 9:00 in the evening. Stern is a voting member, and he is expected to take questions. Fisher is also a voting member whose talk in San Francisco will center on inflation and debt.

However, it's probably important to know about a talk occurring in Tokyo overnight. The Bank of Japan's new governor, Governor Masaaki Shirakawa, will speak at an international conference at 9:15 pm ET, I believe. The talk will occur at the 2008 International Conference that the Bank of Japan's Institute for Monetary and Economic Studies is sponsoring. Since he's relatively new on the job, taking over for Toshihiko Fukui only after a prolonged political wrangling about the identity of the new appointee, currency traders will be gleaning every word he speaks. His words could impact currency trades, which of course could impact equities.

What about Tomorrow?

The action occurred today amid a backdrop of light volume and an impression of some indices wandering around, not sure whether to follow their stronger siblings or just hang around without doing much. Although the VXO (old VIX, derived from OEX options) and VXN dropped, the VIX and RVX, the Russell 2000's volatility index, actually closed a little higher, although both had dropped well of their highs of the day. Whatever was going on, it wasn't a strong confirmation of the day's gains, at least.

Let's see what the intraday charts show, with those results ranging from the strong performance of the Nasdaq to the more tepid one of the Dow.

Annotated 30-Minute Chart of the SPX:

Annotated 30-Minute Chart of the Dow:

Annotated 30-Minute Chart of the Nasdaq:

Annotated 30-Minute Chart of the Russell 2000:

Light volume, some volatility indices ending the day higher while prices did, too, some inconclusive action: it's not easy to make any prediction about next direction ahead of tomorrow morning's numbers. In actuality, I've been operating with a possible scenario that includes potentially choppy price action between some of the parameters shown above and on daily charts, such as below the converging 10- and 200-sma's on some charts and above key resistance. The USDJPY narrows into a triangle, a visual representation of the indecision. With this kind of action, don't be too quick to make decisions about next direction, but do be quick to collect profits and especially to protect them once you have them.
 

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