Weekly Market Summary,
for Week Ending December 17,2004

Last week saw the SPX trade in an 18-point (1190-1208) range, settling out the week at 1194.22, up 6.22 points, week over week, as the market was consistently turned back from the 1205/8 next upside floor and technical resistance zone, prompting us to issue a flash shorting recommendation at 1203 on Thursday’s close, suggesting that the short position be covered on a test of the 1193 floor support level. Indeed, in Friday’s trade, we issued a flash recommendation to cover the overnight short position, when the market held the test at 1193.50.

Further, we had suggested in our Thursday night comment sheet that all of the upside pressure from the quadruple had already occurred in the first 4 days of last week’s trade, and that professionals were shorting into the Globex session in anticipation of downside market pressure likely to be exerted in Friday’s trade on the December expiry. Also, it is likely that professional and technical trade buying will be evident in Monday’s (12-20) trade, as professional traders roll out into the January option/futures series.

For the coming week’s market action: traders should tee off first downside floor and technical support at 1193, with second support at 1187, third support at 1183, with final and heaviest support being seen on the floor at 1179; on the upside, first floor resistance continues to be 1198/99, with continuing technical and psychological resistance at 1200, and second upside floor resistance at 1203 (moderate) and 1207/8 (heavy). Although volume will be lighter in the coming holiday-shortened week, retail sucker buying will pick up 7-10% (dollar volume) over last week’s trade.

Last week’s economic calendar releases with equity market construction, net of revisions -- Nov. retail sales +.1 vs. -.1 E; X-Autos +.5 vs. +.3 E, mildly bullish; Oct business inventories +.2 vs. +.5 E, sales +1.2 vs. +.8 E, neutral; Oct balance of trade at -$55.5 bil (record) vs. -$53 bil E, mildly bearish; Nov industrial production +.3 vs. +.2 E, capacity utilization at 77.6 vs. 77.8 E, neutral; NY Dec Empire Manufacturing Index at 29.9 vs. 26.3 E, mildly bullish; weekly jobless claims 317,000 - 43,000 vs. 347,000 E, for week moving average at 336,000, 750 - 1,000; continuing claims 2.78 mil vs. 2.79 mil, neutral (due to seasonal distortions); Nov new home sales at 1.77M u. vs. 1.98M u. E (steepest decline in 11 years); building permits 1.98M u. vs. 2.0M u. E, moderately bearish; Q3 U.S. Treasury current account balance at -$164.7 bil (record) vs. -$170.6 bil E, neutral; Dec Philadelphia Manufacturing Index at 29.6 vs. 20.5 E, mildly bullish; Nov CPI at +.2 vs. +.2 E; Core Rate +.2 vs. +.2 E, neutral. Overall weekly economic fundamental construction at 0; 13-week moving average remains at -9.2.

In off-calendar economic releases: the FOMC raised its funds rate 25 basis points to 2.25%, the fifth consecutive increase, in line with market expectations with Fed comment remaining asymmetrical; weekly NMBA mortgage app’s fell 1% with refi’s falling 3.6%, continuing the 13, 26 and 39-week moving average charts, now showing a 46.2% annualized rate of decline in the NMBA composite index, as the speculative bubble in residential property continues to bleed air.

The weekly API/GOE/EIA stats show the expected builds accrued in gasoline, but yet another draw in distillates and LNG, and were construed as equity market ‘mildly bearish’.
Weekly Investor’s Intelligence report’s bull/bear equity market sentiment showed bullishness at 62.9% with bearishness at 20.9%, levels not seen since July 1987 and changing market sentiment readings from ‘overbought-3’ to ‘overbought-2’, the highest overbought reading since the week of March 3, 2000.
The total domestic equity market margin debt was up 1.9%, the 11th consecutive weekly increase, to now stand at a record $219.8 bil, prompting former Federal Reserve Governor Lyle Gramley to suggest, in his most recent BBN interview, that perhaps it is time for the Fed to raise margin requirements to cool down ‘mindless margin buying’ of high PE stocks by the ‘unwashed’.

The CBOE VIX volatility index fell to a record weekly low reading of 11.98 on the 52-week progressive charts, indicating a record level of complaisancy, at current valuations, in the domestic equity markets.

Weekly domestic common-stock neutral-fund inflows were estimated at -$160 mil, the first weekly outflow in the past 11 weeks of steadily declining inflows. Further, foreign selling of U.S. equities increased for the 17th consecutive week, reaching yet another weekly record of $8.6 bil with insider selling reaching an astounding 70-to-1 selling over buying, on a dollar volume basis, and yet another record.

In Treasury trade: we changed our technical posting on the USH contract, basis Wednesday’s 114 close, from ‘near-term overbought’ to near-term very overbought’, prompting us to issue an MOC short recommendation on the close, suggesting the trade be covered on a retest of the 112.12-16 support zone; indeed, we covered the trade, in our model trading portfolio, on Friday’s 112.12 close, generating a $1,625-per-contract profit in the 2-day trade and further changed our technical posting from ‘near-term very overbought’ to ‘near-term neutral-slightly oversold’, with a rally to 112.24 necessary to correct the slightly oversold condition.

In gold trading, we issued an MOC buy recommendation in the GCG contract, basis Thursday’s 438.50 close, noting the floor support, at 436.90, had been held all week and that the technical bounce in the dollar looked tired in that the DXH contract had consistently been met with good-volume scale-up selling on all rally efforts above 82.60 in the previous 5 sessions. We recommended taking profits in the position, basis Friday’s 442.90 close, the exact top of the 441.30-442.90 next upside resistance zone, noting that the contract was meeting moderate-volume trade and technical selling at that level.

Although we continue to like long gold for a possible test of the 447.30-449.20 next upside resistance level, given the tired look of the dollar and the fact that the so-called ‘weak-handed spec longs’ are now largely out of the nearby gold futures/options, in a supply market wherein no fresh ECB sales are expected until February, at the earliest.

Our last week’s comment about oil being a weather-driven market this time of year proved to be prophetic, given last week’s oil market action, in that the weekly inventory data was construed by Tradex to be only ‘very slightly bullish’. As a result, we changed our technical posting on the COF contract from the previous Friday’s (12-10) reading of ‘near-term mildly oversold’ to ‘near-term moderately overbought’ as of this Friday’s (12-17) close, with next upside resistance being the 46.30/50 zone with first downside support at 45.70 (light) and second support at 44.50 (moderate).

In a final note, I would mention that one of the most consistently accurate indicators of future economic growth over the past 30 years has been the price action in the four most economically sensitive industrial metals: steel, aluminum, nickel and palladium; one need only look at the price action of these metals over the past 30 days to understand why Standard and Poor as well as the National Business Roundtable, the two most accurate prognosticators of economic growth over the past 30 years, have recently lowered their 2005 GDP growth estimates.
As always, readers should e-mail us with their particular questions on any of the equity, debt and/or commodity markets we track.