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Financials Retrace Gains; Oil Prices Firm On Supply Worries

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The major averages began the week on a sour note as brokers, banks and insurers retraced roughly half of their gains from the recent July 15 lows, while militant attacks on Nigerian pipelines had oil prices firming after a sharp two-week sell off.

Early morning rumors that Merrill Lynch (NYSE:MER) $24.33 -11.59% was looking to sell a significant portion of its collateralized debt obligations (CDOs) weighed on brokers and large money center banks from the opening tick, and did little to help broader market sentiment as Monday's session wore on.

While volume levels were light, declining issues outnumbered advancing issues the entire session, deteriorating slowly with each 120-minute benchmark.

While the Merrill rumors found little traction among popular media outlets, it wasn't until after today's closing bell that the company said it had sold $11.1 billion in the securities and will record a $5.7 billion third-quarter write-down on the sales.

Today's CDO sale will cut the firm's exposure on June 27, to roughly $8.8 billion.

In addition to selling $11.1 billion in CDOs at a substantial loss, the broker said it plans to sell 200 million new common shares worth roughly $8.5 billion in an attempt to cut risk and bolster its capital reserves. The company said it senior management team plans to buy 750,000 shares of the offering, while Singapore sovereign wealth fund Temasek Holdings agreed to boost its take by acquiring another $3.4 billion.

Last tick in this evening's extended session has Merrill Lynch (MER) relatively unchanged at $24.35 after a post-market low of $22.57.

After two weeks of sharp declines, September crude oil futures (cl08u) at the Nymex looked to stabilize by gaining $1.47, or +1.19% to settle at $124.73 after Royal Dutch Shell PLC (RDS.A) $72.62 +0.16% confirmed Monday that some of its production had been disrupted in Nigeria after an attack on its 130,000 barrel-a-day Nembe Creek pipeline. The African nation's main militant group said it bombed two oil pipelines early Monday. Whether a second pipeline had in fact been damaged is still unconfirmed at this time (05:12 PM EDT).

Shell has yet to clarify the extent of the damage, but many oil traders see Nigerian production problems as the key element keeping prices buoyant.

The Energy Information Agency (EIA) said its data showed that U.S. oil demand in May was down 902,000 barrel per day, or -4.4% versus a year ago, at 19.729M barrels per day, the lowest level for any month since May 2003. The EIA said preliminary data had shown a more modest drop of 242,000 barrels a day, or -1.8%.

There was a multitude of earnings reports again today.

Before the bell, Dow component Verizon (NYSE:VZ) $33.60 -2.46% said it earned $0.66/diluted share on revenue of $24.1 billion in the second quarter. The figures were inline with Wall Street's estimate of $0.65/share and $24.18 billion.

At Friday's close, VZ was the seventeenth (17) most heavily weighted Dow component at 2.47% and the twenty-fourth (24) most heavily weighted S&P 500 components at 0.89%.

Only three (3) of the S&P 500's "heavyweights" managed to post a gain in today's session. ConocoPhillips (NYSE:COP) $82.25 rose $0.27, or +0.32%, Occidental Petroleum (NYSE:OXY) $76.08 +0.48% gained $0.27, while Amgen (NASDAQ:AMGN) $60.48 +12.16% jumped $6.56 after Friday evening's favorable results from a Phase III study for its Denosamub drug, which demonstrated significant reduction in the incidence new non-vertebral and hip fracture in women with osteoporosis.

After today's closing bell, Amgen's (AMGN) shares rose to $62.30 in the extended session when the company reported earnings of $0.87/share on revenue of $3.76 billion. Amgen raised it 2008 adjusted EPS guidance range from $4.00-$4.30 per share to $4.25-$4.45 per share. Revenue guidance was upped from a range of $14.2B-$14.6B to $14.6B-$14.9 billion. Amgen attributed the upward revisions to continuing efficiencies and sales momentum.

Other notables had Kraft Foods (NYSE:KFT) $30.83 +4.93% gaining $1.45/share after the company said this morning that it earned $0.48/dilute share on revenue of $11.2 billion. Kraft attributed top and bottom line results to price hikes aimed at offsetting the recent surge in costs of ingredients. At Friday's close, KFT was the forty-second (42) most heavily weighted SPX component at 0.41% of total.

Tyson Foods (NYSE:TSN) $15.09 -7.02% fell $1.14/share by the close after reporting pre-market earnings of $0.03/diluted share on sales of $231 million. Tyson said pork operating margins were +5.8% and 7.5% for the quarter and YTD, but chicken losses reflected higher input costs as fiscal 2008 increases in grain costs expected to approximate $550 million.

U.S. Market Watch - 07/28/08 Close

"Red" was the predominant color for anything equity today, but Treasury's saw strong PRICE gains, with lower YIELDS a result.

I think a strong demand figure for Freddie Mac's (NYSE:FRE) $7.72 -6.65% $2 billion short-term debt auction helped the strong bid for Treasuries. Freddie said it sold $1 billion of three-month notes at a 2.40% rate, compared to 2.54% at a 7/21/08 sale. Today's bid-to-cover, a measure of demand was 3.85 versus 3.30 on 07/21/08. Freddie also sold $1 billion in six-month notes at a 2.654% rate, compared to 2.54% at a similar sized 7/21/08 sale. Bid-to-cover at today's sale was 2.83 versus 2.27 on 07/21/08.

Economic reports released today were few.

At 02:00 AM EDT, German consumer confidence declined to a five-year low of 2.1 in August, due mainly to record high energy prices. Economists were looking for a more confident reading of 3.5 after a 3.6 reading in July.

Germany's DAX ($DAX) fell 85 points, or -1.33% on Monday to close at 6,351.15, while France's CAC-40 ($CAC) shed 52 points, or -1.20% to 4,324.45. London's FTSE-100 ($FTSE) was lower by 40 points, or -0.75% at 5,312.60.

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Here at home, the regional Chicago Fed Midwest Manufacturing Index rose last month, due largely to a rebound in auto production. The Chicago Fed Manufacturing Index rose 1.1% for June to a seasonally adjusted level of 106.0.

General Motors (NYSE:GM) $11.00 -7.56% and Ford Motor (NYSE:F) $7.75 -5.94% struggled throughout. Daimler AG (NYSE:DAI) $59.64 -1.98% and Toyota Motor (NYSE:TM) $88.54 -3.57% traded lower.

As I type (07:50 PM EDT) Japan has released its June year-over-year retail sales, which rose 0.3% to 10.99 trillion yen, or $102.3 billion. Japan's Minstry of Economy, Trade and Industry attributed the gain to increased spending on fuel due to higher gasoline prices combined with higher spending on food purchases.

On Monday, Japan's Nikkei-225 ($NIKK) edged up 19 points, or +0.14% to finish at 13,353, while the Yen CurrencyShares (FXY) $92.28 rose 0.43%.

As I type, the Nikkei-225 is lower by 151 points, or -1.13% at 13,202.

Global Equity Indexes, Currencies, Oil, Gold & $HUI.X

On a Monday-to-Monday closing basis (07/21 to 07/28) Asian markets have faired better than European and U.S. counterparts, but each day, gains or losses appear to have traders commenting on the U.S. banks/financials, and/or U.S. economic reports.

In last Wednesday's evening Market Wrap I alerted traders and investors that Dorsey/Wright & Associates broadest of broad Bullish & All (BPALL) had reversed back up to "bull confirmed" status at 32.00% (32.83% actual) and tonight's close remains in column of "X" at 32.31% actual.

In fact, since Wednesday evening's Market Wrap, all major market bullish % have now reversed back up into a column of "X."

As such, I thought today's decline just before the clock struck 02:00 PM EDT with the S&P 500 (SPX.X) 1,243 and the SPY at $124.29, trader and investors should be looking to buy this broad market index for partial positions.

I liked to ProShares Ultra S&P 500 (SSO) for 1/8 positions at $57.82 with a stop at $53.00 and longer-term target of $75.00.

The SSO is a 200% leveraged security on the S&P 500. That is, its moves up and down double the S&P 500.

A 1/8 position in the SSO in my opinion is equivalent to 1/4 position in the SPX, or SPY itself.

To be truthful, today's SPY close $123.59 -1.50% is about $0.42 weaker than this SPX/SPY/SSO bull would have like to see on a Monday, as it is that amount below a WEEKLY Support 1 level of $124.01.

Here's how the SPY traded in mid-March as the various bullish % reversed back higher and internals began suggesting demand was starting to outstrip supply.

SPY (March 6 to April 23 time periods) - 60-min intervals

This is how a 60-minute interval chart of the SPY looked back in mid-March as the major market bullish % and BPSPX reversed back up. Once the BPSPX itself reversed back up in mid-March, the SPY itself found enough buyers to keep closes ABOVE the WKLY S1s at a minimum.

Even on a Monday.

Now here is an SPY 60-minute interval chart, where the SPY closed below this WEEK's WKLY S1 (support level 1).

SPY (June 24 to July 28 close) - 60-minute intervals

Tonight's close below this WEEK's WKLY S1 of $124.01 somewhat concerning to a BULL and I thought SPX/SPY trader and investors should be looking to "buy the pullback" at a WKLY S1 ($124.10) after last week's traded ABOVE the WKLY R1 of $128.20 as internals show demand starting to outstrip supply.

On the above chart, I point to the $125.79 area, and after the SPY cash session close at 04:15 PM EDT, there were a couple of rather LARGE traded posted, that likely were put together during today's session.

One very large block of 7.5 million shares was crossed at a price of $125.79, and not long after, another block of 1.02 million shares was crossed at $123.59.

It is impossible to know if the order was a large BUYER, or large SELLER, but from tonight's close on, BULLS want to see the SPY whip back higher and by WEDNESDAY'S close, get back ABOVE $126.58 and this WEEK'S pivot (mid-point of last week's High/Low/Close pivot tabulation).

We will get NEW MONTHLY Pivot levels (shown in PINK) at Thursday's close, but it would be viewed as PRICE BEARISH if the SPY were to see a SESSION close below $121.94.
 

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