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A Struggle Ending in a Stalemate

January 17, 2008

By Sam Collins

Yesterday was wild with the bulls and bears in hand-to-hand combat during the entire session. At one point the Dow Industrials (DJI) were up 35 points while, at the same time, the S&P 500 (SPX) was off by two and the NYSE Composite (NYA) was down 95.

Technology stocks opened lower as a result of Intel (INTC) reporting disappointing earnings following Tuesday's close. The big chipmaker said that net profit advanced by 51% and reported earnings of 38 cents a share, but analysts had been expecting 40 cents.

However, the real blow came as a result of its Q1 forecast -- the company is looking for a slowdown due to U.S. economic conditions and continued pricing weakness.

But the financial stocks rebounded after JPMorgan (JPM) said that it would write off just $1.3 billion, an amount far short of what was expected, and the stock rose 5.8%.

Additionally, Merrill Lynch (MER) gained over $2, and Bank of America (BAC) and Wells Fargo (WFC) closed higher, too. But Citigroup (C) fell to a new low closing at $26.24, down 70 cents.

Before yesterday's open, the Labor Department said that consumer-level inflation is expected to rise by 0.2%. In other economic news, the U.S. Home Builders' Housing Market Index rose slightly in January, and the output from factories, mines and utilities was unchanged in December.

At the close Wednesday, the Dow was off 35 points at 12,466, the S&P 500 lost eight points at 1,373, and Nasdaq (NASD) was down 23 at 2,395. The NYSE Composite fell 99 points to close at 9,073. Volume on the NYSE topped 2.1 billion shares and 3.4 billion shares traded on Nasdaq, but despite the down day in the broader indices, there were slightly more gains than losses on both exchanges.

Crude oil fell again after the government said that U.S. inventories rose for the first time in nine weeks. The February contract was off $1.06, closing at $90.14, and the Amex Energy SPDR (XLE) closed at $71.45, down $2.46. Gold was down for the second day, with the February contract plunging $20.60 to $882. The PHLX Gold/Silver Index (XAU) was down $9.40 at $181.01, ending just above the support provided by the 20- and 50-day moving averages.

What the Markets are Saying

Yesterday was a struggle that ended in a stalemate with the blue chips pulling in some buyers, but the small- and mid-caps have broken with the Russell 2000 (IWN) and the S&P 600 (SML) both hitting new lows last week.

And now crude oil is having problems holding current prices. If the black gold contract falls through support at $86, it could signal a breakdown from a double-top.

Because the major indices are loaded with energy-related equities, a break in oil could be the final straw that pushes the big indices over the edge.

The sentiment numbers that I watch are oversold, but not by extremes that would signal a bottom. Therefore, investors should use rallies to reduce current positions, especially in technology and energy issues.

Today's Trading Landscape

Earning are expected from: Advanced Micro Devices (AMD), TD Ameritrade (AMTD), Bank of New York Mellon (BK), BB&T Corp. (BBT), BlackRock (BLK), Briggs & Stratton (BGG), CIT Group (CIT), Comerica (CMA), Continental Airlines (CAL), First Horizon (FHN), IBM (IBM), Int'l Game Technology (IGT), Molex (MOLX), Novartis (NVS), Parker-Hannifin (PH), PNC Financial (PNC), PPG Industries (PPG), Seagate Technology (STX), Skyworks (SWKS), Votorantim Celulose (VCP), Washington Mutual (WM) and Xilinx (XLNX).

And the following economic data are due: December Housing Starts (consensus expects 1.145 million), Building Permits (consensus expects 1.135 million), January Philadelphia Fed (consensus expects -1.0), and weekly Jobless Claims.

According to The Wall Street Journal, Merrill Lynch (MER) reported a Q4 loss of $9.83 billion ($12.01 a share) and took write-downs of $11.5 billion. But there is also some thought that MER may not have written off all of its subprime problems.

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Sam Collins is ChangeWave's Chief Technical Analyst and a Registered Investment Adviser who manages portfolios for a fee. He can be reached at samailc@cox.net.