The total U.S. trade deficit narrowed to $55.3 billion in May as strengthening demand from foreign trading partners and lower oil prices helped to stabilize the deficit after setting a record $60.1 billion in February.
U.S. exports rose to their highest level in history, up 0.2% to $106.9 billion, however, analysts noted that a recent jump in oil prices could have the narrowing trade gap being short lived.
Breaking down the report would reveal the deficit with China rose to $15.8 billion, the highest since last November, due to a 12.8% surge in imports of Chinese clothing and textiles. In the first five months of this year, Chinese clothing and textile shipments are up 53.6% from the same period in 2004. Even with the narrowing of the overall deficit in May, the trade imbalance through this year's first five months is running at an annual rate of $681.6 billion, 10% above last year's all-time record of $617.6 billion. Analysts believe the underlying trends are so strong that the deficits this year and in 2006 will set new record highs. Of course, the backdrop analysis revolves around China and their currency, the yuan, meaning that China's currency and that of other Asian currencies will likely remain undervalued against the dollar. If there is no change, Asian products will remain cheaper in America and American products will be more expensive in China. For that reason, analysts are forecasting that the trade deficit will remain at record levels, raising concerns about the U.S. ability to continue depending on foreigners to hold ever-larger amounts of American dollars and dollar-denominated assets.
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Weekly energy inventory data was released this morning and seemed to draw little broader equity market response. The EIA said crude oil inventories (excluding the SPR) fell by 3.8 million barrels, due in part to some Gulf of Mexico platform shutdowns as Hurricane Dennis approached. Some analysts also pointed to higher prices in recent weeks having refiners delaying purchase of the "black gold." We (you and I) might believe this after two consecutive weeks of 3.8 million barrel draw-downs and oil hovering around the $60/barrel mark. Refiners continued to focus their efforts on distillates. For an eighth week in a row, distillate inventories saw gains. The latest week's tally saw distillates rise by 3.1 million barrels. Unleaded gasoline inventories fell by 2.5 million barrels, after falling by 974,000 in the week prior.
Some of my own tabulations show crude oil inventories still up 0.6%, or 2.04 million barrels compared to 3-months ago. Unleaded stockpiles are up 0.5%, or 1.0 million barrels for the most recent quarter. Meanwhile, distillate inventories are up 15.7%, or 16.3 million barrels as the "chipmunk-refiners" get ready for winter.
On a year-over year basis, I tabulate (from EIA statistics) that crude oil inventories are up 6%, or 18.1 million barrels versus this time last year. Unleaded gasoline stockpiles are up 3.3%, while distillate inventories are up 3.2%.
This is all fine and dandy, but we can perhaps sense some of the "risk premium" that is in the energy markets, where risk comes from any supply disruptions due to weather, or geopolitical events.
Shares of healthcare service provider HCA Inc. (NYSE:HCA) $50.05 -8.85% traded sharply lower and triggered selling in broader healthcare sectors. The company forecasted second-quarter earnings of $0.88-$0.92 a share. From tax settlements to deferred gains to reduction in liability insurance, profits really ranged from around $0.72-$0.76. Analysts were looking for 77 cents per share. What appeared to spook sector bulls the most was the company saying it sees a decrease of 0.3% in same-facility admissions for the second quarter although revenue on this basis is projected at $6 billion for the period. In addition, HCA reaffirmed its 2005 outlook for earnings of $3.05 to $3.20 per share, excluding gains on sales of assets, impairments and tax settlements.
The Morgan Stanley Health Provider Index (RXH.X) 476.22 -2.99% was today's sector loser.
After today's closing bell, stock specific news had shares of chipmaker Advanced Micro Devices Inc. (NYSE:AMD) $19.25 -0.61% trading up 35 cents to $19.60 in the extended session after reporting second-quarter net income of $11 million, or $0.03 a share, down from $32 million, or $0.09 a share in the year-ago period. The results beat Wall Street's expectations as most analysts figured AMD would lose $0.06 cents a share. In the quarter, sales were largely unchanged at $1.26 billion.
Apple Computer (NASDAQ:AAPL) $38.35 +0.28% was also in the news, reporting a third-quarter profit of $320 million, or $0.37 a share, on revenue of $3.52 billion. During the same period a year ago, Apple earned $61 million, or $0.09 a share, on revenue of $2.01 billion. Apple beat the estimates of analysts who forecast a profit of $0.31 cents a share on $3.34 billion in revenue. After a choppy extended session, shares of Apple (AAPL) are ticking $39.35. Note: IPod sales climbed to 6.15 million units from 860,000 a year ago.
U.S. Market Watch - 07/13/05 Close
The PRICE-weighted Dow Industrials (INDU) 10,557.39 +0.41% outperformed the major indices to the upside today, boosted largely by another upgrade of IBM (NYSE:IBM) $81.45 +1.76%, this time by Bernstein, citing compelling valuations.
In today's Market Monitor (07/13/05) I made a quick little timetable of recent broker calls on Big Blue. CSFB might have gotten the capitulation bottom on 04/29/05 with their downgrade (opened $76.98). On 06/13/05, Banc of America, who probably bought CSFB's downgrade, upgraded IBM (opened $74.50). Not to play second-fiddle, Caris and Company also upgraded IBM that day.
Don't forget! The INDU/DIA is a PRICE-weighted index, and IBM has now moved up to the second-most heavily weighted price component. CAT is still #1, IBM #2.... ah heck. Here's the INDU/DIA components sorted by price.
Dow Indu. Components - Sorted by Price (07/13/05)
It can be helpful to at least look at some of the components of a WEIGHTED index if you can from time to time. Try and understand, or get a feel for how things have been working.
An string of upgrades on IBM may not seem like a deal, but it would appear the MARKET is listening to some of the bullish calls. With IBM now the second-most heavily weighted component, what IBM does (up/down) is a big deal for an INDU/DIA/DJX trader.
What kind of stock is IBM? Chemical? Drug? No, no, no... it is probably a "computer" or "technology stock." Any other computer/tech stocks in the INDU? Yes! INTC, MSFT, HPQ. Some associations can be made here over the past 5 and 20-days, as well as past 52-weeks, but IBM is the "bigger deal" as it carries more PRICE WEIGHT.
Now... for you S&P 100 Index (OEX.X) traders, which is a MARKET CAP WEIGHTED index, you'll want to know that IBM is roughly the 13th-most heavily weighted component. XOM and GE keep trading places at #1/#2, while MSFT is #3, C is #4 and WMT is #5.
Let's take a quick look at IBM's point and figure chart from www.stockcharts.com. In yesterday's Market Monitor I made some quick comments on IBM's point and figure (PnF) chart.
If YOU are a INDU/DIA/DJX trader, you should think this chart/stock important.
IBM (IBM) - $1 box scale
We've heard fundamental analysts talk about "bottoms up approach to analysis." Same can be done for market technicians. But you've got to look at quite a few charts. While IBM is just one of the 30 INDU/DIA/DJX components, it is currently one of the more heavily weighted components.
A couple of things we might want to note, and what I really like about PnF charting. While we still don't have past wrap archives restored, you might think you're reading an October 2004 wrap, where IBM was a focal stock in that wrap. IBM had just given a triple top buy signal (10/19/04) at $88. Just last week, IBM gives a triple top buy signal at $78.
Now, does IBM look "cheap" to you? Not on a fundamental basis, we'll be arguing that for the rest of our lives. For some fundamentalists, IBM has NEVER been "cheap."
Check this out. Last week we looked at the INDU's PnF chart. Are you seeing what I'm seeing?
I placed little "blue dots" on IBM's chart, as I'm trying to get the feel/observation of a possibly emerging bullish support trend. This type of trend is only put in place, once the bearish resistance trend (red +) are broken to the upside.
Dow Industrials (INDU) - 50-point box
Last Wednesday (PINK circle) the INDU was trading 10,300 on the above chart, and despite the "London bombing", market participants remained bullish at the bullish support trend. There are some similarities (I think) in how the INDU looks, and IBM. Both continue to look bullish!
I benchmarked the IBM (10/19/04) and (12/07/04) dates and relative price points of IBM.
Now... something else happened since our last visit. The trading session after July 8th, the very broad NASDAQ Composite ($COMPX) traded a triple top buy signal at 2,120 on its 20-point box chart. Bugger triggered a triple top buy signal on its 10-point box scale on July 8th too! Just like IBM!
NASDAQ Composite (COMPX) - 20-point box
I didn't catch the name of an analyst on CNBC, but he said something that grabbed my ear. I've kind of been thinking the same thing. He thought the major indices were just starting to see a similar "fall rally" as we witnessed in Sept.-Dec. of last year. With some of these triple top breakouts taking place (IBM, INDU, COMPX) I would have to agree that we're starting to see some similarities.
NASDAQ Comp. (COMPX) - Daily Intervals
Boom! Yes, bears would have tried to leverage off the 2,100 level, but on 07/08/05, all heck broke loose. MACD oscillator kicked back above its signal too! Look at my 10/27/04 note when MACD kicked above its Signal when trending into the zero level. Most technicians view a MACD above Signal more powerful when trending into, but still above zero.
See the horizontal PINK dashed line? What I've done here is benchmarked the 12/02/04 close of 2,143.57, with some internal readings. We can see that "bullish leadership" as depicted by the 10-day NH/NL ratio isn't quite as bullish/high as that found in a sharp upward rise, but current readings are still building higher. Same goes for the very broad NASDAQ Composite Bullish % ($BPCOMPQ) from www.stockcharts.com. Not as many 4 and 5-lettered stock symbols showing PnF buy signals with their charts.
These internal readings, combined with the outward appearance (bar chart, PnF chart) should have traders/investors BULLISH, but you're NOT backing up the truck and giving the "c'mone back" as James Cramer likes to use when he's an aggressive buyer of a stock, even when it's getting crushed into the dirt.
Check out that rising 21-day SMA (NOW) and about a week AFTER 12/02/04. The COMPX is turning over (from sellers to buyers in control) and just as 2,100 was formidable resistance, the level becomes support.
Yes... every bear and his/her brother "knew" the top was near late last year. That's why the COMPX bounced like a rubber ball when it re-tested the rising 21-day SMA and 2,100 level!
Keep an eye on the Dow Transports (TRAN) 3,609.62 +0.35%. They've crept above the "Bear Stearns" downward trend and since closing above their 200-day SMA (3,585) on... yes, 07/08, they've just been sitting there.
Oil/energy prices still appear to be a drag here. We may hear that energy traders see a possible sharp decline coming for oil. If so, I would have to think the TRAN has got to get further bid, and really wipe out that 3,650 level, like the move witness in the COMPX at 2,100.
Chubb Corp - CB - close: 86.59 change: -0.36 stop: 83.99
No change from our previous update. Our target is the $89.50-90.00 range.
Picked on June 10 at $ 85.05
Cummins Inc - CMI - close: 76.65 change: +0.41 stop: 73.49
No change from our previous update. Our target is the $77.50-80.00 range.
Picked on June 19 at $ 74.03
Coventry Hlth Care - CVH - cls: 71.69 chg: -1.31 stop: 69.49
Okay, we got the pull back toward the $72.00 level. Now we just need to see that rebound. Healthcare (and CVH) has been the weak link in the market the last couple of days. We would be cautious here and make sure the stock is bouncing. A move over $72.50, maybe $73.00, would be a signal to consider new call positions.
Picked on July 05 at $ 72.75
Fortune Brands - FO - close: 93.45 chg: -0.94 stop: 89.95
No change from our previous update. FO is taking a breather here. Our target is the $95.00-96.00 range.
Picked on July 03 at $ 90.51
Intuit - INTU - close: 48.70 chg: +0.60 stop: 44.90
Software continues to rise and INTU tacks on another gain today. Shares are nearing our target in the $49.50-50.00 range.
Picked on July 07 at $ 46.51
Lowes Corp. - LOW - close: 62.20 chg: -0.15 stop: 56.90
No change from our previous update. Our target is the $64.50-65.00 range.
Picked on July 11 at $ 60.73
Noble Energy - NBL - close: 80.14 chg: -0.75 stop: 75.99
No change from our previous update. Our target is the $84-85 range.
Picked on July 05 at $ 78.15
Quanex - NX - close: 56.95 change: -0.34 stop: 52.99
No change from our previous update. Our target is the $59.50-60.00 range.
Picked on July 07 at $ 55.10
Pediatrix Med Group - PDX - cls: 76.51 chg: -0.02 stop: 72.34
No change from our previous update on Monday. This continues to look like a bullish entry point. Our target is the $80.00-82.00 range.
Picked on July 11 at $ 76.10
Reynolds American - RAI - close: 80.45 chg: +1.09 stop: 76.49
RAI is getting a boost today. The stock added 1.37 percent on above average volume to breakout over the $80.00 level. Giving it a boost was news that RAI is raising its quarterly dividend by 10.5% to $1.05. Plus, JPMorgan raised its price target on larger rival Altria Group (MO). Our target is the $84-85 range.
Picked on July 10 at $ 78.83
Rio Tinto - RTP - close: 128.25 chg: -0.55 stop: 123.33
No change from our previous update on 07/12/05. RTP looks poised to hit our target in the $129.50-130.00 range but more conservative traders may want to consider taking some profits now. We noticed that volume was very strong today for RTP.
Picked on June 27 at $123.33
Toll Brothers - TOL - close: 54.64 chg: +0.05 stop: 49.90
No change from our previous update on 07/12/05. Our target is the $57.50-60.00 range.
Picked on July 10 at $ 51.98
Sunoco Inc - SUN - close: 121.22 chg: -0.83 stop: 114.99
No change from our previous update. Our target is the $124.50-125.00 range. SUN has a 2-for-1 split on August 1st.
Picked on July 03 at $117.87
Wellpoint Inc - WLP - close: 69.35 chg: -0.79 stop: 67.49
We remain on the defensive here. The momentum in the health insurance stocks has died. We're likely to exit early if WLP trades under $68.75, which looks like minor support over the last week.
Picked on June 05 at $ 68.40
OIN SUBSCRIBER QUESTION
Of course this most recent rally, again over 4 strong days like before, has been led by the broader market; e.g., the S&P 500, the un-weighted S&P 500, the Russell 2000, and so on.
As far as my 'sentiment' indicator goes, it has recently shown a bullish extreme, above what has been seen since the December high. The two similar extremes are highlighted on the chart above by the yellow circles. The prior (Dec.) example of a similar high bullishness led to a tradable downswing, but the RSI then was also then registering an 'overbought' extreme; not true yet in this recent advance.
The bullish extreme in my sentiment indicator was quite far ahead of the top in early-March and therefore not useful just in and of itself (as a sell 'signal').
When bullishness gets very pronounced and for days or weeks, it is often the sign of a stronger than usual advance ahead; what could call a trend 'leg'. The lag time between such high 'sentiment' readings then also grows LONGER. If this pattern is being repeated here, then OEX will go on to new high above 585, before coming down in a significant way.
I also note that this indicator, or any other, shouldn't be relied on alone, no matter how good it is and this one is very good indeed. However, only if the trend/price pattern started to suggest a top, would I then give more attention to the high bullishness (such as seen on my 'sentiment' indicator above), and consider trading against the existing trend; e.g., by buying puts in what has been an uptrend.
I mentioned that the broader market indices like the S&P 500 (SPX) have been providing the lead in this current rally phase. Here's the weekly SPX chart below. The breakout above its long-term trendline was significant.
The 'validity' of the bullish breakout seen in the below highlighted (down) trendline, was tested by the pullback to the trendline. The rebound FROM it was suggesting a longer-term trend breakout or change in direction to up.
I'm talking about the MAJOR trend and some would say that the major trend went from down to up by mid-2003. More on that when I complete my little past 3 week chat in this space (the Trader's Corner) on Charles Dow's market observations and 'theory'.
Well, when the Dow 30 LEADS a market advance, in a 'solitary walk of the Dow', it's an indication that the rally may not have enough buying power to keep the broader market afloat. You can then be alert to S&P and Nasdaq tops, and be ready to buy puts.
When INDU goes to a new high or low, but the related Dow Jones Transportation (TRAN) does NOT follow suit, this has proved to give useful info or insight into the market trend. Both should go to new highs or lows to 'confirm' the major trend. Looking at the INDIVIDUAL charts of ALL the 30 stocks in INDU is far easier than looking at all 100 of S&P 100 stocks, or just the biggest companies in that index, since it is capitalization weighted.
I studied ALL 30 Dow stock charts today, as surveying all can provide insight into whether the Dow will break out ABOVE the down trendline. Or, even to below it.
Of the 30 Dow stocks, I rank 19 as having neutral to bearish trends, 8 as having bullish trends and 2 charts in transition from bearish to possibly bullish. The other noteworthy thing is that most have stopped going down. So, the potential is there, if about 5-6 more Dow stocks got enough buying to lift them.
The Dow Transports (TRAN) have broken out above its down trendline, so may be 'leading' INDU here. In either case, both averages have to surmount and go above their prior highs as noted by the dashed horizontal lines and the red down arrows on the two charts in one above.
All in all, whenever I think the Dow Industrial average is not worth tracking as closely as the other major indexes, I take a risk that the INDU chart is not going to tip me off to something coming up; e.g., significant potential for a reversal.
The very-regular symmetrical triangle being traced out by INDU as highlighted in the above chart, shows (perhaps better than the other indices) that buying and selling forces my be poised to go strongly in one direction or the other; one side is 'ready' to overwhelm the other. There's potential for a sizable further advance, based on the upside possibilities for around 2/3rds of the Dow stocks, even if they have a limited 'oversold' rebound.
I wrote last week on how Dow brilliantly observed way back, and which is still true today, that trend PHASES go from 'accumulation' by savvy insider type buyers to more and more participation by the investing 'public', as in directly buying/selling stocks, to 'distribution' of the same stocks accumulated earlier (by the pros to the public).
At the end of this phase, eventually we get to 'panic' selling. This sets up the market again for a new phase, after however many months or years, for a new period of accumulation of undervalued stocks, once key insiders start sensing an better earnings trend ahead.
Dow also created the defining category of what are the TYPES of trends.
TRENDS ARE OF THREE TYPES
The primary trend is one lasting a year or more up to several years. There are counter movements in the direction of the major trend and these trends in the opposite direction, Dow called secondary price movements. It is still somewhat unclear whether the MAJOR market trend is now up. It seems it may be; investors are increasing acting like it is.
Secondary trends develop after bullish or bearish expectations for the market get overly one-sided and ahead of the fundamentals related to earnings prospects. Eventually a 'reaction' develops that causes prices to correct back to a more realistic price level. Reactions or corrections are price swings that are in the opposite direction of the main or major trend. Once these run its course, the primary trend resumes.
The segments that make up the price swings that are both in, and against, the direction of the primary trend can also be referred to as intermediate price swings or moves when they last a few weeks to a few months only. The intermediate trend is of keen interest to those trading stock and index options.
Within these intermediate price moves are day-to-day price fluctuations that Dow called minor trends. These can be a few hours to a day or a few days theyre most often contained within a week period. The minor trend is of even more significance to option traders; if, for nothing else, then 'timing' put or call entry when the short-term trend turns in the SAME direction as the intermediate term trend.
Both intermediate and minor trends are of importance to traders primarily minor trends are all that concern a day trader who will likely complete every trade within the same day. Intermediate trends are of importance to investors when they are looking for the best point to enter the primary trend or to add to their position(s) in a stock or go more heavily into stocks.
THE PRIMARY TREND
An essential guideline as to a trend being a primary bull market is that each advance within the advancing trend should reach a higher level than the rally that preceded it. And, each reaction or counter-trend move should stop at a level that is above the prior major downswing. The reverse would need to hold true to be considered a primary bear market trend.
An analogy to the primary trend is that it is like the tide of the ocean. In the rising tide, each wave comes in to a higher and higher point. And, just as the rising tide lifts all the boats, a bull market takes all stocks higher. The waves in an outgoing tide gradually recede away from a high point and all boats fall with it.
A primary up trend is considered to be a bull market and primary down trend, a bear market according to Dow. If you are an investor in terms of your time horizon and investment goals, you should attempt to buy stocks as soon as possible after a bull market has begun.
An example of a prior shift in the major trend in terms of an EXAMPLE only is shown in the chart below, taken from the 1990 1991 period, showing both a primary down trend or bear market and the primary up trend or bull market that developed following it
You will notice from this period shown in the above chart that the duration of the primary bear market trends were relatively short compared to the duration of the primary uptrends. On average this has been true since the 1950s due to the longer periods of economic expansion and shorter periods of recession there is more urgency to end a recession.
The last bear market can be said to have ended at least by mid-2003. That major down trend was about 2 and half years. But, compare this to the multiyear bull market that preceded it; e.g., from about 1994 to 2000; or, taking an even longer view of an overall bull market existing from around 1982 to 2000 (discounting the 87 crash as it was so short-lived).
This fact of the relative duration of bull and bear markets also relates to the fact that investors tend to stagger their purchases over the duration of bull markets, providing ongoing buying power, whereas selling out is often closer to being a one, two or three time decision; also, would be buyers stay away and dont tend to 'support' the market on the declines, especially in a panic phase.
Frequently, these secondary countertrends retrace anywhere from a little over a third to as much as 2/3rds of the prior advance or decline. Very common is to see retracements of 50% of the prior price swing that was in the direction of the primary trend. It is not always easy to decide when and if a secondary trend is underway, but there are technical analysis tools that will help
To continue an ocean analogy, if the Primary trend is like the TIDE, the secondary trend is like the WAVES of the ocean. They can be big and they can knock you over, but they will come in and go out within the bigger movement of the tide the major or primary trend.
Lastly, we could say that the minor trend could be one that is set off by the actions or words of an individual for example, the chairman of the Fed when that individual makes a statement hinting at the direction of policy regarding Fed bias toward raising or lowering of interest rates. Or, the precipitating action might be a statement from a key company in a key industry about their actual or expected earnings or profit trends.
Last, but not least is the theory of 'confirmation' and 'divergence' of Charles Dow, already discussed in the prior articles I referred you to. Based on this concept of Dow's came all that followed, where technical INDICATORS (e.g., RSI) are seen to be 'confirming' or not confirming PRICE moves to new highs or lows.
Also, the way that volume is seen as confirming the price trend or diverging from it if so, a clear warning sign. Dow indicated that volume was a 'secondary' indicator to PRICE but it was important to watch as a confirming aspect.
On balance, Charles Dow made a huge contribution to the understanding of market behavior; or, 'human' behavior as it manifests in trading and investing in stocks. I still benefit from re-reading his main principles of market behavior from time to time.
Good Trading Success!
Today's Newsletter Notes: Market Wrap by Jeff Bailey, Trader's Corner by Leigh Stevens, and all other plays and content by the Option Investor staff.
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