Interdum stultus opportuna loquitur...

Monday, July 25, 2005

USRant: Weakness Arrives On Cue...

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When the ducks line up, there is no excuse for surprise when the quacking begins. The behaviour of the market on Friday walked like a duck, quacked like a duck - it even had on a sailor suit with no pants. It was pretty clear that we had a member of the family Anatidae on our hands. I commented thusly:

The two red balloons in the later afternoon indicate weakness is likely on Monday morning - the CCI hit 336 (WAY overbought, and enough in its own right to warrant a short), then diverged as the market made another new high (the second red balloon).

Sure, those who - sensibly, in my view - believe that Mondays (and Monday mornings in particular) tend to exhibit mindless bullishness, might have stayed their hand until there was some confirmation of Friday's declaration (by me) of Monday weakness. Those who did, got what they were after, and they got it in spades... yet another textbook CCI divergence. Check out the chart...

Dow 15-minute chart

So following Friday's divergence, there was another, larger divergence today (after a little early weakness followed by a bounce in the post-repo half-hour); regardless of whether the short was taken at the open or at the second divergence, it  turned into a nicely profitable directional call.

However XBATH - the eBay $40 August Put Option discussed last week and de-facto entered at $60 - softened $5 back to $75 as EBAY failed to participate in the soft market. I hate it when that happens. That said, it opened the day at $100, up 66% from the Rant entry price in just 2 sessions.

And could there be anything more infuriating than the failure of the VIX futures to reflect an 11% rise in the underlying VIX? VIX has gone from 10 (at which point 'buying volatility' was advised) to 11.17... and the VIX futures have softened further - not in any way that will break the bank, but it's typical of the more thinly-traded contracts that they do whatever the big guys want them to do, and to hell with the relationship between the contract and the underlying. It annoys me greatly that an otherwise perfect call (calling the VIX low) hasn't yet resulted in a profit.

Federal Reserve Open Market Operations

The Fed's Open Market Operations desk performed 2 repurchase operations.

  • a $5.5billion, overnight repurchase entirely in T-backed collateral undertaken at a 1.1 basis point discount to the Fed Funds Rate (FFR); and
  • a $6billion, 8-day repurchase entirely in T-backed collateral, undertaken at a 1 basis point discount to the FFR.
Neither of those blobs of money - large though they were - had enough discount to FFR. I also notice that the Fed is now undertaking its repos later and later (today's were done at 9:45 and 10:05 a.m. - in the past they happened at 8:45 a.m.). Also, the Fed is also slower to inform the market.

Major US Indices

The Dow Jones Industrial Average lost 54.7 points (0.51%), closing out the day at 10596.48 points. The index hit an intraday high of 10686.53 at 10:48 a.m. NY time, and fell all the way to 10591.55 at just after 3 p.m. NY time (this coincided with an intraday TICK reading of -900 - as I mentioned the other day, the S&P futures are always good for a bounce when the TICK gets that low). The close under 10600 doesn't look particularly meaningful, but there is no indication from the closing action of anything resembling bullishness of the early part of tomorrow. With all the indices having rocketed off the downward spike after the London Bombings, a rest is well overdue.

Within the blue-chip index, 5 stocks rose, the biggest gainers being Exxon Mobil (XOM, +0.74% to $59.94) and Hewlett Packard (HPQ, +0.50% to $24.30), which accounted for 4 Dow points between them. Losers in the Dow numbered 25 and were led by Johnson & Johnson (JNJ, -1.52% to $63.34) and United Technology (UTX, -1.35% to $50.45), with these two stocks contributing -13 Dow points worth of downward pressure on the index. Volume traded was tilted in favour of the losers by 191m shares to 92.6m.

The broader S&P500 lost 4.65 points (0.38%), ending the day at 1229.03. Within the index, gainers numbered 148, while 341 S&P500 stocks fell for the day. Volume was tilted 2.0:1 in favour of the losers with 1017.55 million units traded in the losers as compared with 506.11 million traded in the winners .

Over at Times Square, the Nasdaq Composite lost 13 points (0.6%), to close at 2166.74, while larger-cap technology issues fared better with the Nasdaq100 losing 7.19 points (0.45%), to end at 1593.57 points. Within the tech benchmark, gainers numbered 30, while 66 Nasdaq100 stocks fell for the day. Volume was tilted 2.1:1 in favour of the losers with 423.78 million traded in the losers compared to 199.59 million in the winners .

NYSE Volume was chunky, with 1.7 billion shares changing hands, while Nasdaq Volume was about average, with 1.49 billion shares being shifted from one online brokerage account to another (and back again, in all likelihood).

Major Market Statistics
Dow Jones Industrial Average10596.48-54.7-0.51%
Nasdaq Composite2166.74-13-0.6%
NYSE Volume1.7bn--
Nasdaq Volume1.49bn--


My 9-stock "bellwethers" group fell by an average of 0.85%; notice that C bucked the trend again (this time refusing to budge to the downside).

  • General Electric (GE) -$0.30 (0.86%) to $34.77;
  • Citigroup (C) +$0.11 (0.25%) to $44.53;
  • Wal Mart (WMT) -$0.09 (0.18%) to $49.45;
  • I.B.M. (IBM) -$0.24 (0.28%) to $84.20;
  • Intel (INTC) -$0.23 (0.86%) to $26.52;
  • Cisco Systems (CSCO) -$0.47 (2.43%) to $18.85;
  • eBay (EBAY) -$0.14 (0.34%) to $40.88;
  • Fannie Mae (FNM) -$0.89 (1.52%) to $57.51; and
  • Freddie Mac (FRE) -$0.95 (1.45%) to $64.70.

Market Breadth & Internals

NYSE declining Issues beat out advancers by 2072 to 1220, for a single-day A/D reading of -852; and Nasdaq losers exceeded gainers by 1902 to 1169. The 10-day moving average of the A/D line fell to -210.0 on the NYSE, while the 10dma of the Nasdaq A/D fell to -157.7.

On the NYSE declining volume was greater than volume in advancing issues by 1094.5 to 556.7 million shares; On the Nasdaq declining volume exceeded volume in advancing issues by 906.8 to 560.4 million shares.

281 NYSE-listed stocks rose to new 52-week highs, and 26 posted fresh 52-week lows, while on the Nasdaq there were 173 stocks that hit new 52-week highs, and 17 which fell to fresh 52-week lows.

Market Breadth Statistics

Advancing Volume (m)556.74560.37
Declining Volume (m)1094.47906.8
New Highs281173
New Lows2617

Market Sentiment Statistics
CBOE Volatility Index11.170.656.18%
CBOE Nasdaq Volatility Index13.650.75.41%
Equity Put-Call Ratio0.730.1219.67%
10-day PCR0.540.011.89%
SPX-VIX Ratio110-7.24-6.17%

Bond Market Analysis

Bonds fell at the long end, with the yield on the benchmark 30-year Treasury bond rising 2.3 bps to 4.465%.

The middle of the yield curve was broadly lower: five year yields rose to 4.066%, and ten-year yields rose to 4.247%.

Spreads between short-dated (2-yr) Treasuries and high-grade corporate bonds of similar maturity profiles were 3.0 bps tighter at -3.0 basis points; spreads between longer dated Treasuries and their corporate AAA counterparts fell to 39.0 bps for 10-year AAA, and 72.0 bps for 20-years. At some stage I will develop some RantCharts to enable people to watch these spreads graphically (as I do) - they actually behave quite well, technically speaking.

Credit spreads (spreads between corporate bonds of the same maturity profile but different creditworthiness) were broadly wider with the AAA-A spread on 20-years 15.0 bps wider at 50.0 basis points and the 10-year AAA-A spread 10.0 bps wider at 13.0 bps.

Treasury Yields
UST 13wk (yld)3.31500%
UST 2Y (yld)3.920.030.77%
UST 5Y (yld)4.0660.0280.69%
UST 10Y (yld)4.2470.0240.57%
UST 30Y (yld)4.4650.0230.52%

The Banks Index lost 0.32 points (0.32%), closing at 101.1; within the index,

  • Golden West Financial (GDW) -$1.39 (2.08%) to $65.58;
  • Comerica (CMA) -$0.85 (1.35%) to $62.20;
  • Northern Trust (NTRS) -$0.45 (0.88%) to $50.76;
  • MBNA Corp (KRB) -$0.19 (0.74%) to $25.50; and
  • PNC Financial Services (PNC) -$0.34 (0.61%) to $55.26.

The Broker-dealer Index shed 1.16 points (0.67%), ending the day at 170.95; the ticket clippers lined up as follows -

  • E*Trade (ET) -$0.27 (1.72%) to $15.40;
  • Charles Schwab (SCH) -$0.21 (1.52%) to $13.60;
  • Bear Stearns (BSC) -$0.96 (0.91%) to $104.22;
  • Lehman Brothers (LEH) -$0.97 (0.91%) to $106.03; and
  • A G Edwards (AGE) -$0.39 (0.85%) to $45.43.

The Philadelphia SOX (Semiconductor) index lost 3.02 points (0.64%), at 472.17

  • Advanced Micro Devices (AMD) -$0.74 (3.61%) to $19.75;
  • Taiwan Semiconductors (TSM) -$0.20 (2.17%) to $9.01;
  • Infineon Tech (IFX) -$0.21 (2.06%) to $9.99;
  • Micron Technology (MU) -$0.21 (1.76%) to $11.72; and
  • Broadcom (BRCM) -$0.73 (1.7%) to $42.27.

Gold & Silver Markets

Gold rose $0.90 (0.21%) to close at $425.90 per ounce. It's still hostage to the USD, and everybody is being absolutely inundated with how good the Chinese yuan rebasing will be for the US trade accounts; this is slowing the willingness of ForEx markets to re-price the USD.The newswires are absolutely awash with echo-chamber talking heads repeating bromides about how the Chinese are going to engineer a soft landing for the US... like China owes the US a favour.

They're absolutely wrong about a lower USD leading to a better trade balance, thanks to the relationships of the elasticities of import and export demand and supply - which nobody looks at (particularly not politicians).

There are two key theoretical criteria for whether an exchange rate change affects the trade balance - one is called the Marshall-Lerner condition, and the other is called the Robinson-Metzler-Bickerdycke criterion (some textbooks change the order of the names). The Marshall-Lerner condition is a subset of the RMB criterion, as the ML condition only deals with a subset of the trade elacticities.

Suffice it to say that the US import demand elasticity is low - imports don't respond much to changes in the exchange rate. That's mostly because the US has eviscerated its import-competing sector. Furthermore, the decline in the US manufacturing base means that export supply can't react very rapidly to an increase in international competitiveness.

Anyhow - that's a little excursus on why the Chinese move is irrelevant to the trade balance. Now think a little harder... if the Japanese and other Asian economies with large bilateral trade surpluses with the US (Korea, for example) see the writing on the wall, they ought also to diversify away from USD in their reserve holdings. What does a lower Asian  aggregate USD-reserve holding mean for the US bond market? Yes. Pain.

Anyhow - Gold's not going to go anywhere until the ForEx market wakes up and prices the USD lower.

The Gold Bugs Index dipped 2.58 points (1.28%), to 199.34

  • Harmony Gold (HMY) -$0.30 (3.56%) to $8.13;
  • Coeur d'Alene (CDE) -$0.08 (2.27%) to $3.45;
  • Hecla Mining (HL) -$0.09 (2.09%) to $4.22;
  • Gold Fields (GFI) -$0.21 (1.92%) to $10.74; and
  • Golden Star (GSS) -$0.05 (1.59%) to $3.10.

Silver rose $0.03 (0.35%) to close at $7.12 per ounce. The Gold and Silver Index (XAU) lost 1.08 points (1.16%), ending the day at 92.1 points.

  • Harmony Gold (HMY) -$0.30 (3.56%) to $8.13;
  • Placer Dome (PDG) -$0.42 (2.76%) to $14.80;
  • Gold Fields (GFI) -$0.21 (1.92%) to $10.74; and
  • Anglogold Ashanti (AU) -$0.46 (1.28%) to $35.53.
Precious Metals and Indices
PHLX Gold and Silver Index92.1-1.08-1.16%
AMEX Gold BUGS Index199.34-2.58-1.28%

Oil Market

Oil was firmer, rising by $0.37 per barrel, closing at $59.02 per barrel. The Oil and Gas Index (XOI) advanced 3.09 points (0.33%), at 942.59

  • ConocoPhillips (COP) +$0.98 (1.6%) to $62.23;
  • BP (BP) +$0.93 (1.41%) to $66.88; and
  • Marathon Oil (MRO) +$0.59 (1.03%) to $57.99.

The Oil service stocks (OSX) Index rose 1.56 points (0.98%), ending the day at 161.12

  • Baker Hughes (BHI) +$1.75 (3.18%) to $56.80;
  • Schlumberger (SLB) +$2.60 (3.16%) to $84.88; and
  • Halliburton (HAL) +$1.57 (2.95%) to $54.86.
Energy Complex
Reuters CRB308.750.550.18%
Crude Oil Light Sweet59.020.370.63%
Heating Oil1.60660.021.56%
Natural Gas7.285-0.1-1.34%
Unleaded Gas1.706-0.02-1.27%
AMEX Oil Index942.593.090.33%
Oil Service Index161.121.560.98%

Currency Markets

USD Exchange Rates
US Dollar Index89.55-0.11-0.12%
Australian Dollar0.76340.00070.09%
Swiss Franc1.2945-0.002-0.15%
Canadian Dollar0.82060.00050.06%