Crude oil printed new record highs today, and a weaker than usual showing from indirect bidders at the Treasury auctions saw bond yields rise. Equities continued their slide from Wednesday on the light volume that has characterized this summer's trading.
Volatility rose, but not by much, and volume breadth was lightly negative (-1.41:1 on the NYSE and -1.72:1 on the Nasdaq) as equities retraced another chunk of the rally, turning the clock back to the latter half of July. With a solid slate of market moving data scheduled for tomorrow, including an FOMC announcement, the most surprising thing about today's trading was not the weak volume or ambiguous internals, but rather the fact that it produced an unambiguously directional move. That's not to say that today's light volume losses might not be reversed tomorrow, but in the meantime, the price action was decisive where the secondary measures were not.
Daily Dow Chart
The Dow lost 21 point to close at 10536, bouncing from a lower low of 10524.91. The morning bounce failed below Friday's high, and the daily cycle downphase crossed the midpoint of its range. 20-day Bollinger support is at 10514, below which is confluence support at the 10440-50 level. Bulls need a close back above 10630-40 to stall the downphase, but in the meantime, and as the weekly cycle downphase (not shown) gets underway, the benefit of the doubt goes to the bears.
Daily S&P 500 Chart
The SOX logged its third day of lower lows and lows lower highs, failing below 1232 and rising less than a point off its low to close at 1223.13, -3.29 for the day. 1218 support is in view below today's low, lining up with confluence support from June and July, as well as the bottom of the 20-day Bollinger channel. As with the Dow, the synchronous daily and weekly downphases favor more downside from here, but longer cycle tops are less certain than those in shorter timeframes. A return to test or even briefly exceed the current August high would change nothing in those longer timeframes- only a strong upside break on a weekly basis close would suggest a more bullish trending move.
Daily Nasdaq Chart
The Nasdaq got clipped for a 13.52 loss to close at 2164, also less than a point from its low and outperforming its peers to the downside. The decline since last Wednesday's close fits well with a bear wedge interpretation, which in this case would imply a target as low as 2050. The daily cycle downphase is less far along than that of the Dow, and 20 day Bollinger support is at 2134. Below 2200, the bears should continue to press. While an intraday corrective upphase is overdue, the market had a "heavy" feel again today, with the bounces flaggy and short.
Daily TNX Chart
Bonds were weaker today as well. UPI reported ominously that Saudi Arabia will be seeking to repatriate $360 billion "invested abroad" during the past year and a half. Foreign Minister Price Saud al-Faisal seeks to return these Saudi funds in the hope of attracting foreign investment, characterizing the money as "national assets".
This follows the theme expressed in recent weeks and months by Asian central banks seeking to diversify their investments away from US assets. As seen in CNOOC's attempted acquisition of Unocal, foreign countries may be losing their appetite for a US-treasury-only diet. However, if they're blocked from spending those US dollars on other US-dollar-denominated assets, (such as Unocal) then the risk is that they may seek to acquire other currencies in exchange for their production, be it consumer items, petroleum products, automobiles or labor. Bonds were weak following the Saudi announcement, but it received next to no coverage in the financial press and probably had little to do with today's rise in yields.
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The Treasury auctioned $52 billion of debt today, via 13-week and 26-week bills, and 3-year notes. $18 billion of 13-week bills generated a bid-to-cover ratio of 2.09, with a high-rate of 3.46%. The 26-week bills generated 2.07 bids for each accepted, a high-rate of 3.68%. These were the highest rates for the year, and while my data is only quarterly before January 2005, these appear to be the highest rates since 2000. Indirect bidders (foreign central banks) purchased $7.4 billion of the total.
On the 3-year notes, the bid-to-cover ratio was 2.31, the high-yield 4.204%, also a new high for the year. Foreign central banks were bigger buyers of this longer-dated debt, purchasing $5 billion of the total, but that 28% participation rate was well below the 40.3% it purchased at the May auction and the 45.6% it averaged in 2004. 3-year notes were not issued between 1998-2003, but today's high-rate easily broke the previous high at 3.821%- the next highest level was set in 1998, at 5.524%. The combination of high-yield and weaker foreign demand was obviously not bullish for treasuries overall.
Ten year notes were under pressure all day, only briefly dipping into positive territory in the morning, but the strong surge in crude oil (see below) made a 4.40% yield look less substantial than it did last week. Ten year note yields closed higher by 2.7 bps for the day at 4.419%, breaking the key 4.4% resistance level which now becomes support. Next resistance is at 4.44%.
Fannie Mae (FNM) announced that US home prices rose at an annualized rate of 16.5% in Q2, up 14.1% from Q2 2004. This shows upside acceleration, with Q1's annualized rate 12.5%. FNM stated that it sees no sign of slowdown, with Marketwatch quoting FNM's chief economist David Berson as saying that price gains in the middle of the country "were relatively normal" compared with the 20%+ gains in the Pacific, Southwest and Mountain regions.
Daily Chart of Crude oil
Over the weekend, supply fears were renewed by news of a tropical depression threatening the Gulf of Mexico as well as the closing of US embassies in Saudi Arabia today and tomorrow due to terrorist threats. This morning, crude oil opened higher and set a new record (in 2005 dollars). Traders opened their screens to see Sept. crude testing the 63 level. Reuters reported that two years of "unexpectedly strong demand for gasoline" have US refineries struggling to satisfy demand "after a decade of underinvestment." This supply-demand gap has been exacerbated by several unplanned refinery outages during the past few weeks, ConocoPhillips and Valero's being the most recent, and this at the peak of the US easy-motoring season.
Compounding the problem is a widespread, "say it to the hand" denial of the problem. Ever-more powerful and consumptive vehicles are still be produced and promoted by the automakers. Petroleum, of finite and ever-dwindling supply, remains the global energy source of choice, with woefully little progress having been made to date in the development of viable alternatives to power the Western world's, and particularly North America's current lifestyle and expectations. Potentially huge demand from China and India has yet to assert itself, but increasing industrial and economic prosperity in those regions make such development likely if not inevitable. Add in the fact North America's greatest suppliers of the lightest, sweetest oil are in parts of the world that are currently "hot" and not particularly sympathetic to North America's aspirations, as well as the usual environmental and logistic factors that can and routinely do threaten vulnerable infrastructure, and the picture is as bullish for oil as can be.
President Bush signed the energy bill into law today, characterizing the Act as a "critical first step" while conceding that it offered little in the way of short term relief for high prices. The law is said to boost US nuclear power, oil drilling, encourage the conversion of coal into cleaner energy and boost biofuels such as ethanol. Critics noted the Act's wide-ranging assistance and incentives for energy companies already enjoying record profits. Reuters quoted Anna Aurilio, legislative director of the US Public Interest Research Group, saying that "Big energy lobbyists may be cheering the bill's enactment, but ordinary Americans had better hold fast to their wallets. As gasoline prices careen out of control, the bill keeps America speeding down the wrong road toward more oil consumption, more drilling, and more pollution."
Against this backdrop for crude oil prices is the impressive gain already recorded during the past few years. While bearish arguments for the price of oil can be easily refuted on the facts, on a technical basis it's possible that the price has gotten ahead of itself in the shorter term. Bullish traders will continue to buy the dips at support, secondary support in the 59 area and the primary daily trendline at 53. Note the rising triangle on the daily chart below the 62.50-63 area, broken today on the upward surge. Sept. crude futures printed a high at 63.95, pulled back and ran back to touch 63.975 in the 2 minutes before the afternoon close at 63.90, +1.60 or 2.57% for the day.
In corporate news, Alcan (AL) announced earnings which declined from $285 million or 77 cents to $208 million or 56 cents in the current quarter. These were earnings from continuing operations, net of derivative and foreign currency factors. Sales declined from $6.21 billion in Q2 2004 to $5.21 billion this quarter, exceeding estimates by $300 million. On EPS, estimates were for earnings of 61 cents. AL rose 2.17% to close at 33.89, off an intraday high of 34.82 printed in the morning.
Energy company El Paso (EP) reported a Q2 loss of $246 million or 38 cents, down from a $5 million or 1 cent profit in Q2 2004 on revenue which fell 20% from $1.52 billion to $1.22 billion during the period. Analysts were expecting a profit of 13 cents. The cherry on top (for bears) was an SEC request for information relating to its oil-for-food program in Iraq. This was the second SEC request since November 2004, when the SEC inquired about its acquisition of Coastal Corp. EP lost 2.12% to close at 12.03.
Auto parts makers were hurting as they reported earnings for the quarter. Delphi (DPH) got slammed for more than 14% in premarket trading as it reported a net loss of $338 million or 60 cents per share, down from a profit of $143 million or 25 cents in the year-ago quarter. The company warned that bankruptcy is possible, and cited lower demand as a result of waning production from GM, high raw-material costs and obligations for pension and health care benefits. The company's non-GM business outside the United States performed well. While the hyenas were tearing into DPH, Visteon (VC), which was spun off from F in 2000, warned of an expected $1.2 billion or $9.49 per share loss but noted that sales to customers other than Ford rose 29% in the current quarter. In DPH's case, the loss was attributed to production cuts from GM. DPH rose 2.42% to close at 5.08, while VC rose 15.63% to close at 9.84. GM closed lower by .63% at 34.97, while F closed unchanged at 10.36.
Tomorrow is scheduled to be a doozy of day, with the preliminary Productivity report for Q2 and Wholesale Inventories for June in the morning and the FOMC policy announcement in the afternoon, followed by Cisco's quarterly report. In recent announcements, we've seen a relatively muted response to the Fed's announcement. A 25 bp increase is widely expected, and participants will be paying closer attention to the accompanying policy statement. On the one hand, the Fed's been consistently denying inflation-risk, particularly net of "volatile food and energy prices." On the other hand, rallies in the price of energy, food, real estate, healthcare and virtually everything else that people need in the ordinary course of their lives indicate differently. If the Fed is too easy, those rallies will be more likely to gain strength. If the Fed is too tight, so the argument goes, those rallies will be pressured, as will the credit bubble and the many markets it supports. Boil this dilemma down to the hundreds of millions of trading decisions being made in the currency, treasury, commodity and equity markets in the minutes and hours following the FOMC announcement, and you have the makings of a choppy, treacherous tape. Be careful, and as Jim says, enter passive, exit aggressively.
New Long Plays
New Short Plays
Yellow Roadway - YELL - close: 51.77 chg: -0.85 stop: 55.01
Why We Like It:
Picked on August 08 at $51.77
Long Play Updates
LM Ericsson - ERICY - close: 34.46 chg: -0.12 stop: 32.99
We see no change from our weekend update. We're still watching for a dip into the $34.00-33.50 region if the markets turn south.
Picked on August 03 at $35.19
Sara Lee - SLE - close: 20.49 chg: +0.12 stop: 19.74
There is no change from our weekend update. We are still on the sidelines. Our suggested entry point to go long the stock is at $20.75.
Picked on August
xx at $xx.xx <-- see TRIGGER
Short Play Updates
Adobe Systems - ADBE - close: 26.74 change: -0.36 stop: 30.01
No change from our weekend update although we're thinking about adjusting our suggested entry point from $28.00-28.50 to $27.50-28.00. No changes yet.
Picked on July xx at $xx.xx <--
Assured Guaranty - AGO - close: 23.03 chg: +0.30 stop: 24.05
There is no change with our strategy in AGO. We're still on the sidelines waiting for AGO to confirm the bearish reversal. Our suggested entry point to short the stock is $22.39. Today's bounce from the simple 50-dma is not a good sign but considering the weakness in the broader market we're not giving up yet.
Picked on August xx at $xx.xx <-- see TRIGGER
A.S.V.Inc - ASVI - close: 45.75 chg: -0.75 stop: 49.01
ASVI is trending lower with the market. The stock continues to look a bit overbought from its May-July rally and we're looking for a consolidation toward the simple 200-dma.
Picked on July 28 at $45.87
ATI Tech. - ATYT - close: 12.36 change: -0.12 stop: 13.26
ATYT managed to bounce twice from the $12.30 level today but the overall trend was indeed bearish. Now that the SOX has reversed we expect ATYT to retest its July lows. Our target is $11.50-11.20.
Picked on July 17 at
Biogen Idec - BIIB - close: 38.42 chg: +0.30 stop: 40.01
Lehman Brothers downgraded biotech stock Genzyme and that helped propel the whole sector lower. Actually the BTK biotech index hit new three-week lows and appeared to confirm its recent bearish reversal. That's good news for our play in BIIB, which was triggered today when BIIB traded at $37.99 this morning. BIIB did bounce and traders who are looking for entry point might consider waiting to see if the bounce carries BIIB toward the $39 level. A failed rally near $39.00 (or under $40.00) would work as an attractive entry point for shorts. Our target is the $35.00-34.50 range.
Picked on August 08 at $37.99
Anheuser Busch - BUD - cls: 44.30 chg: -0.38 stop: 46.25
No change from our weekend update. We are targeting the $40.25-40.00 range before its October earnings.
Picked on July 28 at $44.77
D.R.Horton - DHI - close: 36.76 change: -1.69 stop: 40.51
The homebuilders got hammered again today as investors worried about rising interest rates and the affects on the housing industry. The DJUSHB home construction index lost 3.3%. Shares of DHI under performed its peers with a 4.39% decline on big volume. This broke the simple 50-dma. Shares do look a little short-term oversold so we wouldn't be surprised to see a bounce. Readers can watch for the bounce to fail under the $39.00-39.50 region and use it as a new bearish entry point. Our target is still the $35.00-34.50 range.
Picked on August 07 at $38.45
Intl Game Tech. - IGT - cls: 26.86 chg: -0.25 stop: 29.01
We see no change from our weekend update. IGT has broken down to new three-month lows and under support near the 27.00 mark. Our target is the $24.50-24.00 range.
Picked on July 21 at $27.21
Juniper Networks - JNPR - cls: 23.11 chg: -0.52 stop: 25.11
Tech stocks were some of the worst performers today and JNPR under performed its peers with a 2.2% decline. Tomorrow and Wednesday should be interesting. All along we've been saying that one of the biggest risk to shorts here is any unexpected good news from CSCO when they report earnings after the closing bell on Tuesday, August 9th. Our target for JNPR s the $21.50-21.00 range.
Picked on July 21 at $23.90
LifePoint Hosp. - LPNT - cls: 46.48 chg: +0.16 stop: 47.26
There is no change from our weekend update. We remain on the sidelines waiting for LPNT to confirm the breakdown under its trendline of support. Our suggested entry point $44.95 under round-number support at the $45.00 mark (and technical support at its 100-dma). Traders can take note that LPNT produced another failed rally under its five-week trend of lower highs today.
Picked on August xx at $ xx.xx <-- see TRIGGER
Royal Caribbean - RCL - cls: 45.63 chg: -0.10 stop: 48.01
No change from our weekend update. Our target is the $41.25-41.00 range.
Picked on July 27 at $45.50
Triad Hosp. - TRI - close: 47.65 chg: -0.53 stop: 50.51
TRI sank to another new three-month low today under its late July dip. That's good news for the bears. Our target is the $45.50-45.00 range above its simple 200-dma.
Picked on July 25 at $49.20
Xilinx - XLNX - close: 27.49 chg: -0.33 stop: 29.01
So far so good. The SOX semiconductor index continues to turn lower under some long overdue profit taking. That is pushing XLNX lower as well with the stock breaking support. We see no changes from our weekend update. Our target is the $26.10-26.00 range.
Picked on August 04 at $27.91
Closed Long Plays
Kerzner Intl - KZL - close: 58.98 chg: -0.72 stop: 58.99
Time has run out and we've been stopped out. KZL broke down today under its 100-dma and 200-dma, which should have acted as technical support. Yet we had planned to exit today anyway to avoid holding over KZL's earnings report that is due out tomorrow.
Picked on July 22 at $61.01
Closed Short Plays
Air T, Inc. - AIRT - close: 11.31 change: -2.49 stop: 15.01
We would say our target has been achieved but in reality our target has been surpassed. We have to be honest here. If we had known that AIRT was going to report earnings after the bell on Friday we would not have held over the event. The reaction could have just as easily have been positive and we would be at a loss. Instead the reaction was negative (-18% today) and AIRT opened at $11.55 and dropped to $11.30. We are closing the play at the opening price since it's under our suggested target.
Picked on August 03 at $13.84
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