bullbearinvestor.com

Monday - January 30, 2006

Fed and Earnings, XLY Forms Rising Wedge, RTH holds support and XLF Broadens

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Good Monday Morning! The Fed meets this week and earnings season remains in full swing. After a sharp move lower on 20-Jan, stocks rebounded last week and recovered most of the options-related losses. I would expect slow trading ahead of the Fed and a pickup in action after the announcement on Tuesday afternoon. Wednesday AM could hold the key to the next significant move and I will be watching for the post Fed reaction more than the pre-Fed posturing. Today, I will look at three key ETFs. Have a good day!

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The Consumer Discretionary SPDR (XLY) is one of the most cyclical of the sector ETFs and therefore most prone to economic fluctuations. The stock has rising the last few months and formed a rising wedge from Oct-Jan. These are potentially bearish patterns, but the bulls get the benefit of the doubt as long as the wedge rising. I am watching the lower trendline for the first signs of trouble. A move below last week’s low (32.86) would break this trendline and put the rising wedge in play. This would call for a continuation of the Aug-Oct decline and project a move below the October low.

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The S&P 500 is not going far without the Consumer Discretionary SPDR (XLY). The Consumer Discretionary SPDR (XLY) is not going far without the Retail HOLDRS (RTH). This is perhaps the most important industry group right now. Even though rising oil prices have not affected the overall market, they have affected the Retail HOLDRS (RTH), which remains in a downtrend and below its mid January high. This weakness is weighing on the S&P 500 and has limited gains. There are signs of support around 94-95, but no signs of buying pressure. RTH needs to break above 98 to reverse the current downtrend and revive the Consumer Discretionary sector. I am also watching RSI, which has been trending lower the last few months. RSI needs to move above the red trendline extending down from late November to turn momentum bullish.

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The Finance SPDR (XLF) broke support on 20-Jan, but recovered last week and gapped higher on Thursday. This is certainly positive price action and makes the support break a bear trap. However, the broadening pattern over the last two months shows a torn market. The higher highs favor the bulls and the lower lows favor the bears. The end result is a broadening formation (magenta trendlines) that whipsaws both. What a mess. As long as Thursday’s gap holds, it should be considered bullish. A move back below 31.5 would be most negative.

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By Arthur B. Hill - Mon 30-Jan-06 at 10:44AM in Market Musings
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Thursday - January 26, 2006

NDX Medium Term Trend and Short Term Trend

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The short-term trend should be considered with the medium-term trend in mind. When the medium-term trend is up, a short-term decline would be a medium-term correction. The medium-term trend is the bigger trend and carries greater weight. Playing a short-term decline is certainly possible, but it is also a dangerous game when the medium-term uptrend holds the bullish trump cards. As this chart shows, the medium-term trend for the Nasdaq 100 is clearly up. The index broke resistance in November, broken resistance turned into support in January and the index continued higher in early January.
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Now lets turn to the short-term trend. The decline over the last two weeks has been sharp and last Friday’s long black candlestick certainly did technical damage to the short-term trend. In fact, it was enough to turn the short-term trend down. However, this short-term downtrend is still just a correction within a larger medium-term uptrend. On the daily chart, the index is trading at support from the October trendline. On the 60 minute chart, the index firmed over the last three days. Firmness should not be confused with strength. Short-term RSI is still trending lower and the index failed to follow through on two prior attempts to break above 1700. Even though the index is trending lower, the battle lines are clear. First, 30-period RSI on the 60 minute chart needs to break the red trendline and move above 50 to turn momentum bullish. Second, the index needs to break above the consolidation highs (1696). Even though there is resistance around 1740-1750 from the prior high, a breakout here would be enough to turn the short-term evidence bullish and expect a resistance challenge.
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By Arthur B. Hill - Thu 26-Jan-06 at 12:15PM in Market Musings
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Wednesday - January 25, 2006

JNJ Misses a Week and Stern Sinks Sirius

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From Dow Jones: Johnson & Johnson (JNJ) posted quarterly net income of $2.2 billion (73 cents a share), compared with $1.2 billion (41 cents) earned for the same period in 2004. Revenue for the latest quarter fell by 1.1% to $12.6 billion. The company noted that the quarter consisted of only 13 weeks in 2005, as opposed to 14 weeks in 2004. According to a poll by Thomson First Call, analysts on average had estimated that the company would have adjusted earnings of 73 cents a share, on revenue of $13.18 billion.

Is JNJ insinuating that the analysts did not factor in the missing week in their forecast? Come on! The company missed the revenue estimates. Moreover, JNJ probably provided the estimates to the analysts. What a lousy excuse. In any case, one look at the charts shows that this stock has been in trouble and remains in trouble. The stock has been trending lower since April and has yet to forge a higher high. Gaps in November and January failed to hold and the stock broke support at 60 with high volume yesterday. While I don’t expect a blood bath in this Consumer Staple stocks, I do not expect higher prices as long as key resistance at 64 holds. More likely, I would look for the stock to work its way towards the mid 50s.

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Careful what you wish for. Howard Stern debuted on Sirius the second week of January and the stock just continues lower. There are a number of possible reasons, but two seem to stand out. First, Stern is sitting on 34.4 million shares and will likely be selling some of these. Second, Stern can say what he wants. Infinity Broadcasting censored Stern in an effort to keep him on the airwaves. Stern is now free of this censorship and can say what he wants. That is a scary thought. Personally, I could stand the show when it was censored. An unleashed Stern is likely to be even worse, or better, depending on your view. This is clearly a love-it or hate-it show and Sirius is betting big that enough will love it. I am not so sure and the stock price seems to agree. There are enough people to hate the show and this will be a turn off. You win some and loose the rest. Is that a way to run a business?

The stock formed a bearish engulfing and gapped lower in mid December. A little profit taking would be normal after the Oct-Dec run, but this is more than just profit taking. The stock is already trading at its October lows and showing relative weakness. There is support around 6, but it would take a move above key resistance at 6.5 to reverse the current downtrend.

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By Arthur B. Hill - Wed 25-Jan-06 at 06:41AM in Market Musings
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Tuesday - January 24, 2006

Google Can't Get Better, Apple Can Get Better and Skype Surprises

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Would there be any tech news without Apple and Google? When was the last time two companies so dominated the spotlight. Even in the internet hey day, there were a dozen or so grabbing the headlines. These two can do no wrong and the sky is the limit. It reminds me of an old story about selling a good stock. When asked why he sold such a great stock, Fred replied: the company said things couldn’t be better? In other words, it got as good as it was going to get.

Perhaps it can get better for Apple as the halo effect takes over to boost computer and software sales. Apple has a relatively small slice of the computer market and there is plenty or room to take market share from Microsoft and the PC world. In contrast, Google already dominates the search engine and advertising markets. While dominance is great, it does limit the ability to increase market share. In addition, there are a lot of big gunners looking to take a slice of the pie away from Google (Microsoft, AOL, Yahoo!, Ebay and Amazon).

A look at the top global brands confirms the resurgence of Apple and the dominance of Google. Also notice that Skype came in at number three on the global brand list. This is quite amazing for a little internet telephony service created in Luxembourg. Ebay now owns Skype and this gives Ebay one of the top global brands.

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By Arthur B. Hill - Tue 24-Jan-06 at 06:59AM in Market Musings
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Monday - January 23, 2006

Top 50 Gadgets, Motorola vs Sony and the Good Oil 90s

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PC World released its list of the top 50 tech gadgets of all time. The iPod came in at number 2, just behind the Walkman. I really don’t think iPod deserves to be ahead of the Polaroid Land Camera or the Phonemate. I guess the poll has a short memory. Motorola (5) and Sony (7) captured the most spots and I will look at their charts below.

1 Sony Walkman TPS-L2 (1979)
2 Apple iPod (2001)
3 (Tie) ReplayTV RTV2001 and TiVo HDR110 (1999)
4 PalmPilot 1000 (1996)
5 Sony CDP-101 (1982)
6 Motorola StarTAC (1996)
7 Atari Video Computer System (1977)
8 Polaroid SX-70 Land Camera (1972)
9 M-Systems DiskOnKey (2000)
10 Regency TR-1 (1954)
11 Sony PlayStation 2 (2000)
12 Motorola Razr V3 (2004)
13 Motorola PageWriter (1996)
14 BlackBerry 850 Wireless Handheld (1998)
15 Phonemate Model 400 (1971)
16 Texas Instruments Speak & Spell (1978)
17 Texas Instruments SR-10 (1973)
18 Diamond Multimedia Rio PMP300 (1998)
19 Sony Handycam DCR-VX1000 (1995)
20 Handspring Treo 600 (2003)
21 Zenith Space Command (1956)
22 Hamilton Pulsar (1972)
23 Kodak Instamatic 100 (1963)
24 MITS Altair 8800 (1975)
25 Radio Shack TRS-80 Model 100 (1983)
26 Nintendo Game Boy (1989)
27 Commodore 64 (1982)
28 Apple Newton MessagePad (1994)
29 Sony Betamax (1975)
30 Sanyo SCP-5300 (2002)
31 iRobot Roomba Intelligent Floorvac (2002)
32 Microsoft Intellimouse Explorer (1999)
33 Franklin Rolodex Electronics REX PC Companion (1997)
34 Lego Mindstorms Robotics Invention System 1
35 Motorola DynaTAC 8000X (1983)
36 Iomega Zip Drive (1995)
37 Magnavox Magnavision Model 8000 DiscoVision Videodisc Player (1978)
38 Milton Bradley Simon (1978)
39 Play, Inc
40 Connectix QuickCam (1994)
41 BellSouth/IBM Simon Personal Communicator (1993)
42 Motorola Handie Talkie HT-220 Slimline (1969)
43 Polaroid Swinger (1965)
44 Sony Aibo ERS-110 (1999)
45 Sony Mavica MVC-FD5 (1997)
46 Learjet Stereo-8 (1965)
47 Timex/Sinclair 1000 (1982)
48 Sharp Wizard OZ-7000 (1989)
49 Jakks Pacific TV Games (2002)
50 Poqet PC Model PQ-0164 (1990)

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Sony (SNE) lagged the Nikkei in 2005, but appears to be playing catch up with a breakout in 2005. The stock surged in 2004 and corrected in 2005 with a large falling wedge. The breakout signals a continuation higher, but the stock has become short-term overbought and ripe for a pullback. Even though a move below the breakout (40) would be negative, I see lots of support around 37.

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Motorola (MOT) has been a leader over the last few months and is holding its July breakout. The stock surged above 20 and then formed a triangle in 2005. The subsequent breakout signaled a continuation high and MOT moved to 25. The going has gotten tougher recently, but the breakout is holding and the long-term for MOT is up as long as 19 holds. A pullback to the 19-20 area would offer better risk-reward ratio for new longs.

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My how things change. During the 1990’s, the 12-month moving average for oil moved above $25 per barrel only once. For the most part, oil remained below $25 for over 10 years. These were clearly the good times. The 12-month SMA moved above $25 in May 2000 and has remained above $25 for the last 4 1/2 years. The breakout at $40 is massive and it is holding. This level now turns into long-term support and I really don’t see oil moving below $40 anytime soon.

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By Arthur B. Hill - Mon 23-Jan-06 at 09:34AM in Market Musings
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Friday - January 20, 2006

M3 and the S&P 500

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Mark Hulbert of CBS MarketWatch Reports: ***Madeline Schnapp, Director of Macroeconomic Research at TrimTabs Investment Research, told me that she and her fellow researchers at TrimTabs have explored the econometric relationships between the money supply data and the stock market "every which way from Sunday" -- and that they have found no straightforward correlation between it and the stock market. As a result, she believes that changes in M1, M2 and M3 are "next to useless" as market timing indicators.Not all hope is lost, however. But we do need to refocus what we pay attention to. According to Schnapp, a much better indicator than the money supply is changes in personal incomes.Fortunately, she says that those trends right now are quite positive for the economy in general and the stock market in particular. "After tax income derived from daily income tax withholdings is up a stunning 14.9% the last four weeks. We attribute this remarkable gain to a combination of healthy year-end bonuses and job growth but no matter how you slice it, cash available to invest is building on the sidelines."What would dissuade TrimTabs from its currently very bullish stance? The only things that Schnapp can imagine derailing the economy and the stock market in 2006 are (a) oil "considerably" above $90/barrel, (b) a 2% to 3% rise in long term interest rates, (c) "spiraling" wages and prices, (d) a 10% decline in real estate nationally, or (e) a global pandemic.***

While I know the Fed is going to stop publishing M3 stats, I have data until the end of last year and will use it for a comparison. Using the 12-month Rate-of-Change indicator on M3, we can see three big moves or trends. The Rate-of-Change declined from 1985 to 1993, but the stock market advanced. The Rate-of-Change even dipped into negative territory in 1993 and the S&P 500 traded flat the next two years. Even though the Rate-of-Change was falling, it was still largely positive and money supply was expanding. The Rate-of-Change for M3 began expanding from 1993 to early 2002. Notice that the Rate-of-Change moved above 10% in March 1998 and this helped fuel the stock market in the late 90s. The Rate-of-Change turned lower in 2002 and declined until the end of 2003. The stock market was basically flat during this timeframe with a dip to the Oct-02 low. Most recently, the Rate-of-Change is on the increase again with a trendline breakout in 2004. Even though Trimtabs does not see a relationship, I find the money flowing and this should underpin the bulls. At the very least, M3 growth above 5% is strong and positive for the economy and stocks.

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By Arthur B. Hill - Fri 20-Jan-06 at 06:42AM in Market Musings
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Thursday - January 19, 2006

Retail HOLDRS, Ivanhoe hoe hoe, Cybersource and TradingMarkets Playboy

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The Retail HOLDRS (RTH) is up for a big support test. The stock formed a harami on 5-6 Jan, but follow through failed just above 97. After a gap down on Tuesday, the stock formed a bullish engulfing on Wednesday and this is another bullish candlestick reversal. Follow through above 97.26 would be bullish. Also notice that RSI is trending lower and a break above the red trendline (56) would turn momentum bullish. On the downside, a support break at 94 would be bearish for the group, the Consumer Discretionary sector and the S&P 500.

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From the PRNewswire: - Ivanhoe Energy Inc. (NASDAQ: IVAN and TSX: IE, IE.U) announced today that its revolutionary field- located heavy oil upgrading Commercial Demonstration Facility (CDF) in California has successfully achieved a number of important performance goals culminating in an extended run last week. The successful extended test follows a period of continual incremental enhancements to the CDF over recent months, during which the CDF was operated utilizing a variety of crude oils and operating criteria. Ivanhoe Energy will now begin testing crudes from potential partners with an initial focus on heavy crudes from California and Western Canada, including bitumen from Canada's Athabasca Tar Sands region.

I will admit to being skeptical about companies that only make the news via the PR Newswire. Perhaps more information will be forthcoming today as investor digest last night’s conference call. While the move brought the stock back from the Abyss, this is a continuation of the 2003 advance. The 2004-05 decline formed a falling wedge and the surge over the last few days broke the upper trendline. This is a bullish move and further prices can be expected. Unless, of course, they are selling snake oil.

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Here is a stock making a pre-earnings breakout. Cybersource (CYBS) formed a large triangle over the last 18 months and broke resistance with a high volume surge in early January. This is a low priced issue with above average risk, especially with an earnings report looming next week.

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From TradingMarkets.com: We're now two weeks into the TradingMarkets/Playboy 2006 Stock Picking Contest and 4 of the 10 Playboy models are beating 11,705 out of the 11,739 equity mutual fund managers in the United States. Yes, that's right, 4 of the Playboy models would be ranked in the top 1% of all mutual fund managers if Morningstar tracked their performance!

It is safe to say that anyone who went long two weeks ago would be showing a profit on 9-Jan. This is clearly a publicity stunt and a pretty good one at that. I wonder if they will let the playmates pick stocks for the whole year. Two weeks is not much time to judge and there are 49 more weeks to go. A fun gimmick. That’s all. Keep you eyes on the chart!

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By Arthur B. Hill - Thu 19-Jan-06 at 07:31AM in Market Musings
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Wednesday - January 18, 2006

Barrons' Roundtable versus USA Today

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Barron’s Semi-Annual Roundtable Kicked off and this paragraph made me grin: A jousting, jesting bunch, our crowd doesn't mark its views to market, or each other. No sooner, for instance, did Art Samberg predict U.S. stocks would rise 20% than a devilish Marc Faber declared he's in the 20% camp, too -- in the opposite direction. The case for -- and against -- bonds also got an unusually full airing, enlivened in large measure by Bill Gross' erudite analysis. (He's for some, and against others.)

You gotta love it. Here are two professionals with the same set of data. However, one sees a major move up and the other sees a major move down. This just goes to show that NOBODY really knows where the markets will be a year from now. We are all offering educated guesses, trying to control risk and attempting to extract some profits. It is one of the toughest games you will ever love. All the round table participants love this game and it is a great read. For more on Marc Faber, see his website at www.gloomboomdoom.com

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Here are a few more tidbits from the Barron’s round table:

From Fred Hickey: The people with $7 trillion of real-estate-wealth gains are still spending, but at Circuit City [ticker: CC] and Best Buy [BBY], while Christmas sales were good, store traffic was down

From Felix Zulauf: Two other economies, the U.K. and Australia, are running ahead of the U.S. in terms of housing trends. Their housing markets peaked about two years ago and are now flat. Retail-sales growth of 4% to 5% fell to zero to 1%. That's what's ahead in the U.S. The U.S. economy, will slow decisively during the course of the year, particularly in the second half and in '07.

From Marc Faber: The U.S. still accounts for over 50% of world stock-market capitalization. Japan is maybe 10%, and the rest of Asia, including China, India and Vietnam, is maybe 4%. It doesn't take a genius to see why global managers are overweight Asia, for instance, and underweight the U.S. All the Middle Eastern markets went up in the order of 100% last year. Russia was up about 80%. Even Latin American markets went up 50% to 80%.

From Bill Gross: My market is the bond market. I think the U.S. stock market is fairly valued, but if investors anticipate, as I do, that the Fed will begin to ease interest rates later in 2006, it becomes a bullish indicator. I'm not a glass-half-empty person on the market.

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USA Today also has an investment roundtable for 2006, but it is not nearly as witty or insightful. This excerpt from one of the opening paragraphs sets the blasé tone: For the first time in three years, we are forecasting a gain in the S&P 500 in 2006. Our year-end target is 1400 (10.5% higher than Friday's close of 1267.32). (Henry McVey)

I couldn’t believe what I was reading. This guy forecast the S&P 500 to be down in 2003, 2004 and 2005. As the chart above clearly shows, the S&P 500 was up. Is this a contrarian play? He has finally turned bullish and we are supposed to believe that his string of bad calls has ended. Something is rotten in the kingdom of Denmark.

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By Arthur B. Hill - Wed 18-Jan-06 at 09:00AM in Market Musings
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Tuesday - January 17, 2006

IBM, Intel and Yahoo! Kick off Earnings Season

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Earnings season kicks off this week with Intel (INTC), IBM (IBM) and Yahoo! (YHOO) reporting earnings today. Today, I will look at the charts for these three key players.

IBM has been trending higher since April 2005, but its January performance is not impressive. The stock fell sharply in December and found support just above 80. There is a big gap around 85-86 and this level acts as resistance. The stock was late to the January rally and only started moving with the 6-Jan gap. However, there was no follow through and the stock traded indecisive the last five days. I must say that I am not impressed with price action since mid December gap and find that this stock shows more weakness than strength. A move above 85 would break the January high and open the door to the low 90s. A move below 80 would fill the 6-Jan gap and be most bearish.

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Yahoo! (YHOO) has also gotten cold feet in January and fell sharply over the last four days. The stock broke resistance at 39 with a strong move in November and then consolidated between 39 and 44. This consolidation was healthy and the 6-Jan gap appeared to signal a continuation higher. However, the gap failed to hold and the stock move below 40, which makes this a bearish exhaustion gap. Technically, the trend is flat and the breakout at 39 is holding. This is a make-or-break point for Yahoo!. A strong stock should hold the breakout and continue higher. A weak stock will not hold the breakout and a break below support at 39 would reverse the current uptrend.

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Intel (INTC) lifted the Nasdaq and Semiconductor group with a strong advance in November. The December decline looks like a falling wedge and the stock broke trendline resistance with a surge the first week of January. The surge faded last week and the stock corrected over the last 5-6 days. This decline looks like a falling flag and a move above 26.7 would signal a continuation higher.

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By Arthur B. Hill - Tue 17-Jan-06 at 09:13AM in Market Musings
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Friday - January 13, 2006

Transports Losing Momo, Utilities Holding Support and Value Line Leads the Way

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The Dow Transports are not off to a hot start in 2006, but the Average is still holding support and still bullish overall. The Average broke big resistance at 3900 in early November and surged to 4300 by the end of the year. The December reaction low at 4050 is the first level to watch for signs of trouble. As long as 4050 holds, the bulls are in firm control. I am, however, concerned about a negative divergence in RSI. The indicator moved above 70 in November and failed to break 70 in December. This lower high formed a negative divergence and shows warning upside momentum. Further weakness below 50 would be bearish for momentum.

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Well, what’s it going to be? The Dow Utilities surged on 3-Jan and then traded flat the next seven days. The rising channel keeps the medium-term trend bullish, but the lack of follow through is disconcerting. A trendline break and move below 400 would be bearish. I am also using RSI for confirmation. RSI broke the October trendline in late December, but quickly recovered. Further weakness below 50 would be bearish. Should the Average hold support, look for a break above the January highs to open the door to higher prices. In addition, the bulls should look for RSI to hold above 50.

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The Value Line Arithmetic Index ($VAY) is one of the broadest market indices around. It encompasses 1700 stocks and is unweighted. This makes it representative of the market as a whole, regardless of market capitalization. The index broke resistance at 1900 and this level turned into support. After a December consolidation, the index broke resistance to signal a continuation higher. My upside target is the upper channel trendline (2080) by early February. A move below consolidation support at 1900 would negate this bullish prognosis.

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By Arthur B. Hill - Fri 13-Jan-06 at 06:20AM in Market Musings
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Thursday - January 12, 2006

Gap Inc, Gencorp, Mircrosoft and Perrigo.

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Microsoft surged in early January and then formed a small consolidation (magenta trendlines). The stock moved higher over the last two days and broke consolidation resistance and this argue for a bigger resistance challenged over the next few days.

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Gap Inc (GPS) is making a bullish bid with a long white candlestick on big volume. The stock failed to partake in the January advance until yesterday. Overall, the stock formed a triangle and a break above 18.7 would be bullish.

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Gencorp (GY) had a sudden change of heart in 2006. The stock gapped down at the end of 2005 and filled the gap with a high volume advance over the last six days. This is an exhaustion gap and the move above the December highs is bullish.

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Perrigo (PRGO) formed an inverse head-and-shoulders over the last six months and broke neckline resistance with a surge over the last seven days. Volume could have been higher, but the breakout is bullish as long as the December low at 14 holds.

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By Arthur B. Hill - Thu 12-Jan-06 at 11:59AM in Market Musings
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Wednesday - January 11, 2006

GM Cuts Prices, Dow Utilities Lagging and Malaysia ETF Forms Island Reversal

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Dow Jones reports: General Motors Corp. (GM) on Tuesday announced plans to slash prices on most of its models as part of an effort to more accurately reflect what consumers are willing to pay and move away from the heavy incentives that confuse buyers and take a bite out of profits. GM is trimming sticker prices across the board on its top-selling Chevrolet brand, as well as on vehicles produced under the GMC and Buick names. Prices will also be slashed on certain vehicles produced by the company's Pontiac and Cadillac divisions.

What a surprise. NOT. I posted a reference to the Chinese entry into the US market yesterday and GM obliges with price cuts across the board. I like the idea of one price and none of this rebate BS. There is nothing like a straight-forward bill. Now if the telephone companies could do the same. The price chart shows signs of capitulation with high volume selling at the end of the year. This is still a falling knife and dangerous to catch. I would expect any bounce to fizzle below 30. Most likely this stocks needs months, if not years, of base building before it will be ready to roll. It will probably be a buy when Dow Jones removes its from the Dow Jones Industrial Average!

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Jon Markman of MSNMoney focuses on 17 stocks that “always” go up.

“Always” and “Never” are dangerous words for traders and investors. Perhaps Markman should re-title this article as “17 Stocks That Went up for 10 Years”.
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The Dow Utilities just haven’t been the same since the October plunge. The S&P 500 and Nasdaq are trading above the October highs, but the Dow Utilities remains well below. In fact, the Dow Utilities has yet to even take out its December high. The rising price channel retraced 62% of the prior decline and met resistance near broken support (~420). The Average bounced with the rest of the market on 3-Jan, but failed to follow through. A move above last week’s high keeps the bulls alive. However, a failure and move below 400 would be most bearish.

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The Malaysia iShares ETF (EWM) has been an underperformer the last few months. The iShares Japan ETF (EWJ) and Asia Pacific (ex-Japan) iShares ETF (EPP) are both trading near their highs and showing strength. In contrast, EWM tested its June lows in December. This test was a quicky though as the stock gapped down and up to form an island reversal. In addition, upside volume was strong and this solidifies support at 6.7. There is still plenty of risk and the stock is short of a breakout, but the gap is short-term bullish as long as 6.7 holds.

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These stocks came across my screens today: WPI, SCI, L, LIZ, TFX, GY, DD, EDO, WGL, PSD, EE AND QLGC.

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By Arthur B. Hill - Wed 11-Jan-06 at 06:42AM in Market Musings
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Tuesday - January 10, 2006

Nasdaq Breadth and Geely Auto

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Laszlo Birinyi of birinyi.com reports in his blog: Nasdaq Upside Volume Above 70%. Friday marked the fourth straight day where NASDAQ Upside volume (total volume of up stocks) as a percent of total NASDAQ volume exceeded 70%. Since 1990, there has only been one other occurrence where volume breadth exceeded 70% for four or more days. As the chart below details, on December 27,1991, upside volume was over 70% for the fourth straight day, in what was the mid-stages of a multi-week rally. The following day, the index rose another 2.48%. Over the next week it rose 4.77%, and over the next month it rose 10.42%

The chart above shows the Nasdaq in 1991 with the blue dotted line on 27-Dec-91. The surge started in late December and continued into the first two weeks of January. The advance began to slow in the second half of January and the index peaked in mid February. Notice that the decline returned to broken resistance and formed a falling flag, which is a bullish correction. The real play was the continuation breakout in October 1992 (green oval). Could that happen again in 2006? A peak in Feb-Mar, correction into October and then a major low? Stay tuned….

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Business Week Online reports: Geely Automobile Holdings Ltd. will show one model at the North American International Auto Show in Detroit in January. "We need to have a presence at an international show like Detroit," says spokesman Zhang Xiaodong. "It will introduce people to our products and our company." The company will show its new Ziyoujian mid-sized sedan. Geely wants to export to the United States but doesn't have a target date. The automaker is privately owned and is based in the east China province of Zhejiang. It makes a line of budget cars and sedans starting at about $4,700. The company sends vehicles to the Middle East and South America, where emissions and safety standards are softer than in the United States.

There is already a glut of cars in the world and this will only add to supply. GM and F already have enough problems and this surely cannot help. While I do not know of the quality, you can be sure that the Geely will be priced competitively and this will put further pressure on GM and F.

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By Arthur B. Hill - Tue 10-Jan-06 at 07:07AM in Market Musings
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Monday - January 09, 2006

Yield Curve Theories, Electronics Sizzle and Dow Theorists Diverge

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Dan Luskin of SmartMoney.com reports: According to the bears, an inverted yield curve is an indication that a recession is coming. They point to the inversion that started in 1978 and ushered in the back-to-back recessions of 1979 and 1981. The inversion that began in 1988 presaged the recession of 1991. And the inversion of 1999 foretold the recession of 2000. On the face of it, all that makes it appear like the bears have an open-and-shut case. It seems that recessions follow yield-curve inversions like sunrise follows the rooster's crow. And, of course, that's the bleak version of reality that the relentlessly negative media has been pushing. But take a deep breath and count to 10. Things aren't as bad as they seem. One thing the bears don't tell you is that the yield curve's track record as an economic crystal ball isn't perfect. It inverted in mid-1998, yet no recession followed. In fact, the years following that inversion were an amazing boom. Don't tell me you've forgotten those wild couple of years leading up to Nasdaq 5000?

This charts shows the 10-year Note Yield less the 13-week Tbill Yield. The 10-year T-Note Yield should be higher and it current is higher. But not by much. The 10-year T-Note Yield is only .0247% higher than the 13-week T-Bill Yield. That is not much of a premium for taking an extra 9 years and 39 weeks of risk! One thing is for sure, the Fed is tightening as long as the red trendline holds and this yield spread narrows. The blue horizontal line marks zero and a move into negative territory would create an inverted yield curve. While this is not always bearish for stocks, it can hardly be considered a positive.
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Dow Jones report: Hot sales of MP3 players and accessories powered strong gains at both Best Buy Co. and Circuit City Stores Inc. in December, sending shares of both higher in pre-market trading Friday. Best Buy(BBY), the nation's largest consumer-electronics retailer, said December sales shot up 12% to $5.7 billion last month, while sales at stores open longer than a year - a key industry metric - climbed 5.8%.

Clothes will come and go, but Electronics will remain hot for some time. BBY gapped higher and formed an island reversal over the last five weeks. Notice that there were no trades at 46 from early December to 6-January. This means that all those with shorts established in the green oval are holding losses and getting the squeeze.

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Dow Theory Buy Signal!

The Dow Industrials broke falling flag resistance and CLOSED at a four year high. According to Dow Theory, this is one piece of the bullish puzzle.

The Dow Transports form the other half of the puzzle and this Average reached a new all time high in late December. Technically, the new reaction highs did not coincide with one and other. However, both reached new reaction highs within two weeks of each other and this should qualify as a Dow Theory buy signal or bullish confirmation.

Mark Hulbert of CBSMarketWatch reports: Does this mean that Dow Theorists are unanimous in believing that happy days are here again? The answer is yes at least for two of the three investment newsletters I monitor that refer to the Dow Theory: Dow Theory Forecasts, edited by Richard Moroney, and TheDowTheory.com, edited by Jack Schannep. Moroney, for example, says that he is inclined to use the DJIA's close above the 10940.55 level as the occasion to increase his equity exposure. And Schannep says that the DJIA's rally on Friday means that "we are 'in the clear' according to the Dow Theory." Richard Russell, however, editor of Dow Theory Letters, is an exception. He is not inclined to make a big deal of the DJIA's confirmation, for at least two reasons. First, he thinks it is worrisome that the DJIA took so long - nearly three months - to confirm the DJTA's strength. Secondly, Russell believes that the Dow Theory also is about values, and stocks' valuations today are far from cheap.

For some strange reason that is what I expected from Russell. Peter Brimelow refers to Russell as one of the “geezers”. He has been in this business for a long time and has certainly paid his dues. However, I think Russell’s bias’ may be getting in the way of his chart interpretations. Either the Dow reaches a new high or it doesn’t. Yes, it did take a long time. However, new highs are signs of strength, not weakness and should be interpreted as such. Russell has been bearish for a long time and yet the markets are hitting new highs. The market tells a different story.
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By Arthur B. Hill - Mon 09-Jan-06 at 08:19AM in Market Musings
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Friday - January 06, 2006

SPX Breakout Holding, XLY Lagging, XLF Challenging Resistance and SMH Breaks Resistance

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Does this chart look bearish to you? Not to me. Certainly not yet anyway. The S&P 500 broke triangle resistance with a strong move in November and then consolidated above broken resistance. Notice that broken resistance turned into support and HELD. The current trading range looks like a consolidation to digest the November gains and a continuation higher is expected as long as 1240 holds.

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The only nagging concern is relative weakness in the Consumer Discretionary SPDR (XLY). The S&P 500 is challenging its December highs and XLY remains below its mid December high. XLY broke trendline resistance with a surge on Tuesday and then consolidated below the late December highs. A follow through breakout would be bullish for this sector and the S&P 500. As long as XLY holds below minor resistance at 33.3, it will remain a drag on the S&P 500.

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The Finance SPDR (XLF) also holds an important key to the S&P 500 and remains below its late December high. XLF led the way higher in October and November. December was flat as a pancake and there is lots of resistance at 32.4. My bias is bullish because this is a consolidation after an advance. A break above 32.4 would fuel further gains in S&P 500, while a move below 31.5 would likely foreshadow a weak first quarter.

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The Semiconductor HOLDRS (SMH) did what it had to do and broke resistance with a strong move above 38.5. The stock gapped higher and closed near its highs for the day. Broken resistance around 38 is now the first test. A strong stock should hold the breakout and a move below 37.7 would signal trouble.

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By Arthur B. Hill - Fri 06-Jan-06 at 06:43AM in Market Musings
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Thursday - January 05, 2006

Hook 'em, Cypress Gets Solar Heat, KFX is Pricey and Jetblu Trying to Breakout

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Hook ‘em Horns! It was a game for the ages with two great teams. Alas, there can be only one winner and Texas managed to get the ball last.

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From a press release today: JetBlue Airways Corporation reported today that its traffic in December increased 27.9 percent from December 2004, on a capacity increase of 26.6 percent.

The stock suffered on Tuesday from downgrades by Merrill and Raymond James and rebounded today with good traffic numbers. However, high fuel costs continue to bite into earnings. On the price chart, the stock formed a nice double bottom in 2005 and pierced resistance at the end of December. This resistance break failed and the stock moved back below 16. Upside volume was good during the surge and a close above 16 would validate the pattern. The upside target would be to around 20. It would be a good idea to keep an eye on oil as well. Broken resistance often turns into support and there could be a return to 16 after a breakout. This would offer a second chance to partake after a confirmed breakout.

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From Herb Greenberg at CBS MarketWatch: Getting the new year off on a high note: Cypress Semiconductor is getting a boost after a report from Lehman Brothers says it's worth $19 as a play on recently IPO'd Sunpower, a solar-cell maker majority owned by Cypress. I had a similar take two weeks ago in my subscription newsletter, Herb Greenberg's RealityCheck. The bullish argument outlined in the newsletter, in retrospect (and admittedly) in a somewhat pre-holiday clunky manner by yours truly, put Cypress at closer to $23. Lehman notes that Cypress is trading below its historical levels of 1.5 to 2-times sales. It's worse than that: As I noted in RealityCheck, subtracting its cash, the semiconductor "stub" of Cypress trades at less than one-times sales.

On the price chart, the stock formed a classic correction pattern in Nov-Dec and broke resistance with above average volume yesterday. The correction retraced 62% (Fibonacci) of the November surge and formed a falling flag (magenta trendlines). The move over the last six days broke the upper trendline and the mid December high. The first target is 17 and a break above 17 opens the door to 20.

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W.D. Crotty of the Motley Fool Reports (30-Dec): On a day when the major averages are taking a downward turn, clean fuel company KFX (AMEX: KFX) soared almost 11% on news that it has completed the first two production runs at its K-Fuel plant in Gillette, Wyo. K-Fuel is described by KFX as the "unleaded gasoline" equivalent for the coal-fired industry. The company takes low-grade coal, removes 80% of the moisture, increases the Btu (heat content) per pound by 30% to 40%, and reduces the mercury content (the stuff that is credited with fouling water around the world) by 70%. Sulfur dioxide and nitrogen oxides will also be reduced by 30%.

Cramer also recommended KFX on mad money and the price chart sports a bullish continuation pattern (ascending triangle). The stock surged above 15 early last year and then consolidated the last nine months. Notice that a higher low formed in November (green arrow) and this shows that buying pressure came in well above the prior low. Buyers just could wait. There is a lot of overhead supply around 18.5 though and this represents resistance. A break above 18.5 would confirm the pattern and project further strength towards the mid 20s. This is a pretty risky play as the company is loosing money and not projected to record any profits this year (2006). At the very least, way for the Cramer pop to wear off!

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By Arthur B. Hill - Thu 05-Jan-06 at 11:43AM in Market Musings
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Wednesday - January 04, 2006

Motorola Strays, Wal-mart Dissappoints and Retail HOLDRS Holding Breakout

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IBD Likes Motorola and reports: Of 68 wireless equipment companies tracked by IBD, it has the highest Earnings Per Share Rating. EPS and sales growth accelerated the last couple of quarters. Cash flow of $1.08 a share appears to be strong.

This is still a turnaround story and the recent attempt to add iPod music to a mobile phone failed. Alas, the company is going it alone with another attempt to integrate music into a mobile phone (Rokr E2). In addition, Motorola is joining the music download business with its iRadio offering that will allow users to download music to their mobile phone. It is a great idea, but there are already a lot of players in this space (Yahoo!, Real Networks and Napster) as well as Sirius and XM Satellite. Motorola may be getting overextended here and my want to stick to its knitting, which is making mobile phones. I think it is find to add music capabilities, but the music downloading should be left to the service providers.

On the price chart, MOT is near its moment of truth. The stock recovered Sep-Oct decline and surged to new highs in late November. After some weakness in December, the stock firmed just above the April trendline and Nov-Dec lows. I am marking key support at 22 and a move below this level would be quite negative. Also notice that RSI formed a negative divergence over the last few months.
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CNNMoney Reports: C. Britt Beemer, chairman of America's Research Group, dispatched researchers to stores in five cities yesterday - Boston, Los Angeles, Denver, Dallas and Orlando, Fla. - where they found relatively few shoppers, considering that it was a federal holiday. "All of us thought that these stores would be packed early and often but it never materialized," he said.

On the price chart, the Retail HOLDRS (RTH) broke resistance at 94 with a surge to 100 and then fell back over the last several weeks. Broken resistance is turning into support and the stock formed a harami over the last two days (green oval). The long lower shadow on Tuesday shows intraday selling pressure and a strong recovery by the close. However, follow through is required and a move above 99 is need to break resistance and turn bullish.

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Dow Jones reports: Wal-Mart Stores Inc. had a disappointing showing during December as consumers tightened their pocketbooks and waited for deeper discounts -- and gift cards -- before picking up merchandise.

Don’t think that Wal-Mart is indicative of the overall retail environment. WMT is a low-end retailer - pure and simple. Their stores are messy and chaotic. The only reason to shop there is to save money. There will always be a need for the Wal-marts of the world, but other retailers are becoming competitive AND offering a nicer shopping experience. It is these shopper that buy the higher margin items.

On the price chart, WMT met resistance at broken support (51) and RSI become overbought in late November. While the S&P 500 traded flat in December, WMT become to weaken and broke trendline support. The decline continued in 2006 with a break below the December low and this stock remains in the dog house.

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By Arthur B. Hill - Wed 04-Jan-06 at 10:52AM in Market Musings
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Tuesday - January 03, 2006

$200 Oil!, Light Sweet Breakout, Aluminum Soars and the Yield Curve Narrows

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Here is the lead paragraph from the Barron’s Interview with Matthew Simmons:

SINCE PUBLISHING Twilight in the Desert: the Coming Saudi Oil Shock and the World Economy this past summer, and touching off one of the great debates of the early 21st century, energy banker Simmons has been squarely in the spotlight. Simmons argues that Saudi oil fields, contrary to reports, have been in decline for some time, and he views skeptically Saudi claims that it can adequately boost supply to meet accelerating demand. Simmons, who has headed the Houston-based energy investment banking firm Simmons & Co. International for 30 years, is no stranger to bold calls and controversy. His vision of higher energy prices through much of the 'Nineties never really materialized, for instance. For why it's different this time and oil could be headed to $200 a barrel by 2010, give a read.

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Looking at the daily chart, Light Sweet Crude found support at 55 and broke the upper trendline of a falling price channel in early December. There is support around 55 from the Sep-03 trendline as well and it looks the late December test was successful. A break above 62 would complete the reversal and call for a continuation of the May-Aug advance.

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The Yield Curve continues to narrow with the rate of the 10-year T-Note yielding just over .5% more than the rate on the 13-week Tbill. Think about that for a moment. Investors are not getting much premium for going out 10 years and this makes short-term instruments more attractive. Why lock yourself in for 10 years? In May 2004 the 10-year T-Note Yield was over 3.5% (35 on the chart) higher than the 13-week T-Bill Yield. The narrowness of the yield curve is likely to put pressure on interest rate sensitive issues, groups and sectors (housing, finance, utilities, REITs).

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Somebody is buying up aluminum. High Grade Aluminum is up over 25% in the last six months. It is getting overextended as it nears the upper channel trendline, but the trend is clearly up and clearly strong. Demand stems from China (surprise), airplanes (Boeing/Airbus) and as a substitute for steel, which is heavier.

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By Arthur B. Hill - Tue 03-Jan-06 at 09:57AM in Market Musings
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Wednesday - December 21, 2005

CSCO Lags, Hasbro Not So Happy and A Return to Growth

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Lack of follow through is the name of the game for some stocks. Cisco (CSCO) filled the November gap with a nice surge at the end of November. However, the stock failed to break resistance at 18. Instead, the stock broke support at 17.35 and remains flat at best. For the Nasdaq to get some traction, I would like to see Cisco take out 18 with good volume.

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Tis the season for toys and Hasbro, but the price chart looks rather ominous. The stock formed a rising wedge that returned to broken support at 20. Like the rest of the market, HAS consolidated the last four weeks and support at 20 holds the key. A break would be bearish. Should the stock hold support, look for a move above 21 to ignite the bulls.

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The Wall Street Journal reports: After years of strong performance by value stocks, those that are considered undervalued based on their earnings or assets, managers have become increasingly bullish on growth-oriented sectors such as health care and technology, according to the quarterly Investment Manager Outlook survey by Russell Investment Group. Managers also believe that the Federal Reserve will soon stop raising interest rates, and they are expressing more confidence in the U.S. consumer.

Judging from the chart above, it would appear that growth stocks have done pretty well the last few years. However, the pattern looks like a massive rising wedge. The bulls have nothing to fear as long as it rises. A move below the lower trendline and October low would break this rise and usher in a major trend reversal.

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By Arthur B. Hill - Wed 21-Dec-05 at 05:42AM in Market Musings
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Tuesday - December 20, 2005

Discounts Already, Iran and Europe, Look Out Google and Modest Returns

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Bloomberg reports: Macy's will keep its East Coast stores open until midnight starting tomorrow to lure shoppers. Sears, Roebuck & Co. is promoting ``The Big Finish'' sale with at least 50 percent off jewelry, cameras and video recorders. U.S. department stores are fighting to win sales in the final stretch of the holiday season. The companies have turned to price cuts and added incentives such as express gift wrapping to compete with Wal-Mart Stores Inc., which spurred sales in November by offering large discounts.

Is Macy’s competing with Wal-Mart? Sears, maybe, but not Macy’s. I don’t know how the logic flows. Wal-mart may have great prices, but the stores are a mess and I will not step foot in one during Christmas. However, I do think there is some merit in the big finish promotions. Early discounts point to disappointing sales. In addition, consumers will start seeing these discounts and wait for even more discounts. I think it is best to simply buy a gift card and let the bearer enjoy the post-Christmas sales!

The chart for the Retail HOLDRS (RTH) is still bullish. I am watching the blue trendline extending up from late October and December support at 96 for signs of trouble. The stock is meeting resistance near the August support break and a move below 96 would target a decline below 90. Ouch.
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CNNMoney reports: It's tempting to think of these different assets (bonds, stocks, commodities, real estate) as sitting on a seesaw, with one naturally rising as the other falls. But listen to bond market heavyweight Bill Gross and you might start to think of your investments as being spread across an air mattress as it's being inflated: Press down on one part and another pops up, but gradually everything gets higher and higher. Gross thinks this mattress is just about full, which could mean a long period, perhaps a decade, of low returns. "Almost all assets people can buy -- bonds, stocks or houses -- are back in the 4 percent to 6 percent mode," Gross says. "If people are expecting 10 percent-plus returns, they're in trouble."

After a sharp decline in 2002, the Dow put on a stellar performance in 2003. However, the Average has traded flat in 2004 and 2005. The Average has traded between 11000 and 9700 the last two years. The only way to milk a 10% return here would be to buy the bottom and sell the top. How likely is that? Not very. However, the Dow remains in an uptrend as long as the 2005 low holds. While returns might not be stellar with 11700 close at hand, a serious decline can be averted as long as 10000 holds.

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From Dr. Joe Duarte's Market Intelligence Report: As Iraq seems to be heading for some kind of stabilization, we now have a new crisis point in the Middle East, Iran. Iran is a bigger problem than Iraq, due to its higher level of political organization, and its increasingly tight relationship with Russia. Of course there is a North Korean connection, and Iran is also increasingly friendly with Venezuela and Cuba. What makes this situation more interesting, though, is that the Europeans, increasingly under siege by their own Muslim populations, as in France recently, suddenly have a major stake in how this works out. Furthermore, Europe's economies are flat, in the best of terms. Rising unemployment, questionable inflation, and a general feeling of "going nowhere," are pervasive in the E.U. In other words, Europe, which was against the U.S. invasion of Iraq, is not necessarily against taking serious action against Iran.

I agree with his assessment for the most part. However, I do not think Europe has the stomach for the military option. This was proven in the build up to Iraq. Had Europe and Russia joined American and the UK in the Iraq invasion, Iran would be having second thoughts about enriching uranium. Tough talk would hold water. However, the Iraq debacle proves that Iran has little to fear from Europe. The European diplomats can talk as tough as they want. Iran knows that when push comes to shove, Europe will not be doing the shoving, just the jaw-boning.

As you can see from the CAC 40 chart, the stock market in France is doing quite well and talk of a war with Iraq is not a factor. The index is challenging its 2002 highs and remains in a strong uptrend.
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David Kirkpatrick of FORTUNE reports: .....Yes, I love Google, but my first prediction is that a year from now we won't think that the search company is the invincible behemoth that we do now......One reason for this a new concept known as "community-powered search." Yahoo is forging an early lead over Google in this fast-evolving technology with its acquisition last week of del.icio.us for a rumored $35 million (the actual amount was undisclosed). Del.icio.us operates on principles similar to the popular MySpace. But whereas that social network site helps members find dates, form groups, and share music picks, del.icio.us helps members find hot information--websites that others have found useful. (News Corp. (Research) recently bought MySpace, for $580 million.)

How is this for a bullish chart? Yahoo! (YHOO) broke triangle resistance and the breakout is holding. As long as the stock holds above 39, the breakout must be considered bullish and higher prices are expected next year.

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By Arthur B. Hill - Tue 20-Dec-05 at 07:36AM in Market Musings
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Monday - December 19, 2005

Consolidate and Continue, XAU Holding Breakout and Internet HOLDRS Nearing Resistance

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After a nice big surge in November, the major indices have moved into a December funk for the second time in two years. At present, I consider the current this “funk” a trading range or consolidation after a sharp advance. Trading ranges can break either way and odds favor a continuation of the prior move, which was up. Moreover, consolidations often occur near the mid point of the entire move.

As the 2004 chart shows, the Nasdaq consolidated near the midpoints of the Aug-Dec advance and the Jan-Apr decline (black boxes).

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On this next chart the Nasdaq consolidated near the midpoint of the May-Jul advance. This consolidation lasted a month and ended with a breakout at 2100. As long as the December consolidation lows hold, the bulls are on firm footing and a continuation higher is expected. The advance from mid October to late November was one big move and there could still be another.

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The Internet HOLDRS (HHH) led the Nasdaq in November and then turned flat in December. The stock established short-term support at 66 and a move below this level would be negative. There is a lot of support around 60 from the prior consolidation and April trendline. I would not turn long-term bearish on this group unless HHH breaks 57.

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The Phila. Gold & Silver Index ($XAU) continues to hold its breakout and remains in bull mode. Though not exact, the same chart principles apply to XAU as with the Nasdaq. The breakout must be considered bullish as long as it holds. XAU formed a huge trading range and the breakout at 114 forged a new 52-week high. The index consolidated a bit and then moved higher in early December. Allowing for a little buffer and taking the May trendline into consideration, I will set support at 110 and remain bullish as long as it holds.

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By Arthur B. Hill - Mon 19-Dec-05 at 01:30PM in Market Musings
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Friday - December 16, 2005

Oracle Sales Rise, Lennar Beats, Program Trading and A China Rebound

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Therese Poletti of Mercury News reports: Oracle, the world's second-largest software developer, reported a 19 percent jump in fiscal second quarter revenues, but a 2 percent drop in net income due to acquisition costs and stock options expenses.The Redwood City business software giant said its customers running PeopleSoft products are renewing support contracts at a higher rate than when PeopleSoft was a stand-alone company. Oracle completed its acquisition of PeopleSoft in January.

I find this report more encouraging than the report fro HPQ, which reported higher earnings without a significant rise in revenue. ORCL is growing revenue and the costs mentioned look temporary. However, the stock still has its “technical” work cut out. ORCL gapped lower in September and never recovered from this gap. The stock has been stuck in a range with resistance at 13.1. A move above 13.1 would turn this chart bullish and I would stay out as long as it trades below this level.

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Dow Jones reports: Lennar Corp.'s (LEN) fiscal fourth-quarter net rose 53%, boosted by higher home deliveries The homebuilder also reaffirmed its fiscal 2006 earnings guidance of $9.25 a share, which is lower than the average analyst estimate Lennar's fiscal fourth-quarter income rose to $581.2 million, or $3.54 a share, from $379.7 million, or $2.29, a year earlier. Results were higher than Wall Street's average estimate of $3.34 a share, according to a survey of 16 analysts by Thomson First Call Revenue for the quarter ended Nov. 30, rose 42% to $5.03 billion from $3.55 billion a year earlier, higher than Wall Street's average estimate of $4.96 billion.

Don’t count the home-builders out too soon. The whole world is turning bearish on this group and yet they still seem to delivery at earnings time. Sure, it will stop one day, but tops can take a while to form. Lennar (LEN) bounced off the Aug-03 trendline and broke resistance at 60 with a strong move over the last week. The big trend is up and this breakout is simply a continuation of that trend.

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The Wall Street Journal Reports: Program trading in the week ended Dec. 9 accounted for 57.9%, or an average of 968 million shares daily, of New York Stock Exchange volume. Brokerage firms executed an additional 675.5 million daily shares of program trading away from the NYSE, with 1.4% of the overall total on foreign markets. Program trading is the simultaneous purchase or sale of at least 15 different stocks with a total value of $1 million or more.

Do you think these program trading platforms are based on fundamentals? I cannot speak for all, but my guess is that most of these algorithms are not based on fundamentals and have more to do with technical analysis. With more than 50% of the trading driven by program trading (non-fundamentals), traders ignore technical analysis at their own risk. This goes for investors as well.

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Jim Jubak of MSNMonday reports: Global growth means a risky 2006 global economy. China and India are likely to grow faster than expected in 2006. If that overheats the global economy, look for commodity and oil prices to spike.

On the price chart, the Shanghai Composite shows lots of support around 1000 and started to firm over the last seven months. A break above the September high would be bullish.

By Arthur B. Hill - Fri 16-Dec-05 at 06:21AM in Market Musings
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Thursday - December 15, 2005

Apple Is Not Finished, AK Steel and Sirius Seem Rational, Gold Corrects and RIMM Set for Long Battle

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Troy Wolverton of TheStreet.com reports: When Apple Computer introduced the flash-memory based iPod nano earlier this year, many analysts quickly dubbed it a "must have" gift for the holiday season. If Amazon.com customers are any indication, the analysts were correct. The e-tail giant allows customers to create "wish lists" on their site. Among the 44 most requested products in the company's electronics store are all four iterations of the iPod nano. But it's not just Apple's nanos that are in demand. Nine different iPod models -- representing all but one device in the company's digital music player lineup -- are listed among Amazon's most requested electronics products.

Apple is not about electronics, but rather religion. The iPod has set the stage for this stock to become a computer/electronic powerhouse for the next decade. In addition to the iPod sales, there will be subscription revenues from music sales and iPod add-ons. The halo effect will lead to a surge in Mac sales and this will lead to a new generation of Mac users. Sure, the stock is pricey and overbought, but you can bet that pundits will be buying the dips. On the price chart, I see support around 55-60, but doubt that the bulls will let this one fall so far and I would expect a bounce if the stock hits 65.

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John Shinal of CBSMarketWatch reports: Investors in Research in Motion Ltd. should be prepared to see the BlackBerry maker pay close to $1 billion if it settles its long-running legal battle with NTP for terms that are looking both reasonable and possible.A settlement with the small patent-holding company that won a patent-infringement case against RIM is more likely than it was a month ago, now that the two parties are talking through a mediator and after several more legal setbacks for RIM

This stock may go the way of Rambus (RMBS). Remember them? They are engrossed in legal battles and their whole future depends on the outcome of these battles. In contrast, the tobacco companies have legal battles, but they also have stable revenues and high profit margins to support these battles for a long time. RIMM is in the tech world and it is easy to fall from grace once you loose your footing. On the price chart, the stock broke support at 70 and this level turned into resistance. There is nothing bullish to report as long as 70 holds.

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James Dlugosch, editor of The Rational Investor newsletter, reports: Bar none my favorite stock for 2006 is Sirius Satellite Radio (SIRI) . That may be a surprise as SIRI does not look or feel like a value opportunity given its very small amount of current sales relative to its market capitalization. And yet in an environment of tight fisted conservative corporations and a risk averse market, I believe SIRI to present a fabulous contrarian opportunity to Rational Investors. Another favorite of mine for 2006 is AK Steel (AKS). In a market seeing valuations of whole number multiples of sales, AKS trades for a mere fifth of trailing sales. The company is expected to grow its earnings by 20% in 2006 and yet shares only trade for a mere 10 times the forward estimate of 77 cents per share.

On the price chart, AK Steel suffered a sharp decline early this year and then formed a triangle consolidation. Notice that there is support from broken resistance around 7. A break above the upper triangle trendline (9) would be bullish and open the door for another run above 15. A move below the lower trendline (6.5) would be bearish and target further weakness below 5.

On the price chart, SIRI failed at resistance with a bearish engulfing and gap down. This is a volatile stock and it found support just below 7 from the early November lows. There is some hope as long as 6.7 holds. Further weakness below 6.7 would be quite negative. Look for SIRI to fill the gap with a move above 7.5 to revive the bulls.

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Bloomberg Reports: Gold in New York plunged 2.8 percent, the biggest drop in a year, on speculation demand will slow from Japanese investors after the Tokyo Commodity Exchange increased the cost of trading the metal. The Tokyo exchange, the world's second-largest metals and energy futures market, boosted minimum deposits for trades to curb speculation after gold surged to a 24-year high of $544.50 an ounce on Dec. 12. Gold sold in yen climbed 18 percent in the five weeks ended Dec. 9. Tokyo gold trading last month was the most since February 2003 at 1.92 million contracts. Tokyo's higher margin payments have ``pulled some of the speculative interest out of the market,'' said Paul McLeod, vice president of precious metals at Commerzbank Securities in New York.

Excuses, excuses. There is always a reason somewhere. The New York Mercantile Exchange announced on 28-Nov that margins rates for the gold futures contract will increase to $1,500 from $1,000 for clearing and non-clearing members and to $2,025 from $1,350 for customers. This did not seem to affect the price of gold for some reason. Perhaps Gold just become overbought after RSI moved above 80 and it raced above the upper channel trendline. The decline is certainly sharp, but this just puts gold back into rising price channel that has been in place since September.

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By Arthur B. Hill - Thu 15-Dec-05 at 06:41AM in Market Musings
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Wednesday - December 14, 2005

Hewlett's Sales, Brookfield Homes Insider Buying and the Nikkei's Outside Reversal

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From Dow Jones: Hewlett-Packard Co. on Tuesday issued a 2006 sales forecast range with a midpoint that lagged Wall Street expectations, sending its shares lower even though the computer giant said profit would be higher than expected.

Surprise, surprise. Just look at the charts for DELL and LXK. HPQ might be able to cut costs to increase profits, but the real trick will be increasing sales. You can only cut costs so far. Investors should be wary of earnings growth in the absence of sales growth. On the price chart, HPQ formed a long white candlestick, doji and long black candlestick. The stock gapped down and closed weak on high volume yesterday. There is still support at 28.5, but downside volume is outpacing upside volume and the pattern over the last three days looks like a bearish evening doji star.

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Barron’s Online Report: An insider at Brookfield Homes (BHS) has been building up his stock holdings, perhaps demonstrating that there's little foundation for pessimism. In the past week, President and Chief Executive Officer Ian Cockwell snapped up 106,000 Brookfield shares in the open market at prices between $47.44 and $49.36. All told, he plunked down over $5 million for the stock. Cockwell now owns 461,829 shares of Brookfield altogether.

Nobody knows a company and its outlook more than the CEO and this is a clear vote of confidence. You can also see from the chart above that this stock has held up relatively well when one considers what happened to some of the other home-builders. Perhaps it was his buying that held it up! Upside volume continues to outpace downside volume and the stock gapped up two days ago. The bulls rule as long as the gaps holds.

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Is the Nikkei 225 finally getting tired? The index is up almost 50% since May and only suffered a minor correction in October. The index gapped up last week, but formed an outside reversal on Tuesday. A move below 15000 would fill the gap and make it a bearish exhaustion gap. While I would not be up for shorting the index, this could lead to a pullback into the 14000 area. There is support around 14000 from the August trendline, October resistance and the November consolidation. The time for a bullish heads up is when 10-day RSI dips below 50 (green circles).

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By Arthur B. Hill - Wed 14-Dec-05 at 02:16PM in Market Musings
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Tuesday - December 13, 2005

NDX Adds Google, The General Leads and Pfizer Surges

The Nasdaq 100 finally has Google (GOOG). The Nasdaq announced 11 new additions to the Nasdaq 100 and 11 deletions. The additions are not that surprising, but I was a bit surprised to see Novellus (NVLS) drop from the list.

New additions to the Nasdaq 100 and QQQQ

ACTIVISION-ATVI
CADENCE DESIGN-CDNS
CHECKFREE-CKFR
DISCOVERY HLDG-DISCA
EXPEDIA-EXPE
GOOGLE-GOOG
MONSTER-MNST
NII HOLDING-NIHD
NVIDIA-NVDA
PATTERSON UTI-PTEN
RED HAT-RHAT
URBAN OUTFITTER-URBN

Removed from the Nasdaq 100

CAREER EDUCATION-CECO
DOLLAR TREE-DLTR
INTERSIL-ISIL
INVITROGEN-IVGN
LEVEL 3 COMM-LVLT
MILLENIUM PHARMA-MLNM
MOLEX-MOLX
NOVELLUS-NVLS
QLOGIC-QLGC
SANMINA-SANM
SYNOPSYS-SNPS
SMURFIT-STONE-SSCC
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Google (GOOG) is a true powerhouse and deserves to be in the Nasdaq 100. I would imagine that this stock went on the fast track as the Nasdaq 100 could ill-afford to leave this high flyer out. The stock is in a clear uptrend, but also overbought as it moved above the upper channel trendline. This is not a bearish forecast, but should serve as an alert to longs to prepare for a consolidation or even a correction.

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Pfizer is up big today on big volume. This is still a bottom pickers play, but the stock formed a harami on Monday and then gapped higher on Tuesday. This confirms the harami. The stock is poised to form a long white candlestick and the high volume move solidifies support from the October and December lows.

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For clues on the large-caps, I am watching General Electric (GE). The stock broke resistance with a big gap in November and then corrected over the last few weeks. Volume on the correction was unusually high and the stock is firming around 35.2. A break above 36.2 would signal a continuation higher and be bullish for the large-cap dominated indices (OEX, SPX).

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By Arthur B. Hill - Tue 13-Dec-05 at 03:15PM in Market Musings
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Monday - December 12, 2005

SPX and NDX Daily Chart Analysis

The Nasdaq 100 remains in an uptrend and the current trading range is just a consolidation or rest within this uptrend. Just like December 2004, the index has turned indecisive in December 2005. NDX established support at 1670 with the 1-Dec gap and this holds the short-term key. A move below 1670 would open the door to a correction and the downside target would be broken resistance around 1620. I really see a support zone around 1600 (1590-1620). Keep in mind that the index forged an important breakout in early November and this turned the medium-term trend bullish. It would take a move below 1590 to undo this breakout and challenge my reason for turning bullish on the daily chart.

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The S&P 500 broke resistance around 1240-1245 and this breakout is holding. The index consolidated the last few weeks, but this should be viewed as a rest within the ongoing uptrend. The advance from mid October to end November was sharp and a consolidation is perfectly normal. A move below 1250 would turn the short-term trend bearish and argue for a deeper pullback with the first target around 1230. For now, there is no sense questioning the breakout and uptrend.

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By Arthur B. Hill - Mon 12-Dec-05 at 02:19PM in Market Musings
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Friday - December 09, 2005

Fed Funds versus Stocks, The Yield Curve and Newmont's Trading Range

Do interest rates really matter? The NYSE Composite did just fine from 1995 to 2000 when the Fed Funds rate stayed mostly above 5%. It was not until the Fed Funds rate began falling that the NYSE Composite started falling (2001). This is a clear case of the stock market moving lower when interest rates also moved lower.

Why is that? The Fed lowers interest rates when it sees economic weakness. Even though lower interest rates translate into a lower cost of capital for businesses, it appears that the economic weakness argument has been winning lately.

The Fed Funds rate bottomed in Sep-03 and the NYSE Composite turned up a few months before this bottom. Both have been rising since Jul-04 (almost 18 months). The Fed raises rates when it sees signs of economic strength and the stock market does not seem to mind higher rates as long as they are tied to economic growth.

The first rises (1% to 4%) were the easy part as the Fed Funds rate returns to normal (~5%). The increases from here (4%) will bring the rate closer and closer to 5%, which appears to be neutral territory. As long as rates rise, we can assume that the economy is in good shape or that the Fed sees inflation on the horizon. It could even be a little of both as both gold and stocks move higher.

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Another way to assess monetary policy is with the yield curve. This is done by subtracting a short-term yield from a long-term yield. In this example, I am subtracting the 13-week T-Bill Yield from the 10-Year T-Note Yield. Long-term rates should be higher than short-term rates and this creates a normal yield curve. When short-term rates are higher than long-term rates, the yield curve is inverted and this is bearish.

In the last ten years, the yield curve has only been inverted once (Aug-00 to Jan-01). This coincided with a major top in the NYSE Composite. Currently, the yield curve is still normal and the Fed is tightening. You can clearly see that the spread between the 10-year T-Note Yield and 13-week T-Bill Yield has narrowed significantly over the last several months. Many bond market pundits are calling for an end to this tightening phase as the spread approaches zero. That remains to be seen, but one thing is clear: the direction is down and the trend favors more tightening. Unless inflation gets out of hand, the Fed is unlikely to push this spread below zero and produce an inverted yield curve. If gold is warning of a serious uptick in inflation, then this spread could turn negative and the Finance sector would be hit pretty hard.

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Newmont (NEM) has formed the mother of all consolidations. Since NEM first broke above 35, gold has advanced from below 400 to above 500. However, NEM remains stuck in a long-term trading range. Did NEM secretly hedge production? Probably not, but the stock is not keeping up with gold, which broke its 2003 and 2004 highs. NEM is current challenging resistance and a breakout at 51 would be hugely bullish. The pattern looks like a sharp advance and (20-50) and long flag (35-50). A break above 51 would signal a continuation of the prior advance and project a move to around 65 (50 – 20 = 30, 35 + 30 = 65). We could also consider the trading range a large rectangle formation and a breakout would project a move to around 65 (50 – 35 = 15, 50 + 15 = 65).

By Arthur B. Hill - Fri 09-Dec-05 at 01:49AM in Market Musings
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Thursday - December 08, 2005

Finance and Internet Lead Lower, Dynegy Firms, OmniCell Challenges Resistance and Agrium Breaks Out

The Finance SPDR (XLF) led the market lower yesterday as interest rate sensitive issues bore the brunt of selling pressure. The Nasdaq is not so interest rate sensitive and held up a lot better. Relative weakness in the Finance SPDR (XLF) will weigh on the S&P 500 and NYSE Composite because this sector makes up around 20% of these indices. On the chart above, XLF failed to hold the 1-Dec and 6-Dec gaps (gray oval). In addition, the stock broke its prior lows and 30-period RSI on the 60 minute chart moved to its lowest level in months. All this amounts to a short-term trend change for XLF and this will weigh on the S&P 500.

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While the Finance SPDR (XLF) leads the S&P 500 lower, the Internet HOLDRS (HHH) is trying to pull the Nasdaq lower. This ETF does not include Google, but it did not need Google in November with a surge above 70. Now, however, I am seeing relative weakness as HHH gapped higher on 1-Dec and already filled this gap. Strong stocks hold their gaps and the Internet HOLDRS (HHH) is not showing strength. The stock also broke the trendline extending up from 1-Nov and 30-period RSI moved to its lowest level since October.

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So what was up on Wednesday? Dynegy (DYN) managed a small gain. The stock surged in early November and broke falling wedge resistance with good volume. The decline over the last few weeks occurred on lower volume and the stock is firming around 4.5. A break above the 30-Nov high (4.8) would get the bulls moving again.

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Agrium (AGU) surged above falling price channel resistance with good volume over the last two days. This is an agricultural-chemical company that competes with Monsanto, which reported good earnings.

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Omnicell (OMCL) is showing strength with a high volume surge over the last five days. The stock is challenging resistance around 11 and looks poised to breakout.

By Arthur B. Hill - Thu 08-Dec-05 at 06:30AM in Market Musings
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Wednesday - December 07, 2005

A Gap and a Shooting Star, Inflation Easying and Gold Surging, Pepsi Closing in on Coke, Will Google and Apple Surpass Microsoft?

Good day! Despite an afternoon sell-off, most stocks and indices finished on the plus side and the gaps are largely holding. The 1-Dec gap remains the most important gap. 15-day RSI on the QQQQ chart formed a small negative divergence over the last two weeks and this shows less momentum. In addition, the shooting star reflects a failed rally and this reinforces resistance around 42. However, I will return to the gap and long white candlestick for the final say. The bulls have the edge as long as these hold.
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From Dow Jones: U.S. economic growth and inflation will moderate in 2006, but so will the unemployment rate, according to a group of business leaders, academics and others gathering at a recent Chicago Federal Reserve symposium, the bank said Monday.

Somebody forgot to tell gold about moderating inflation. The StreetTracks Gold ETF (GLD) surged above 50 last week and above the upper channel trendline this week. The trend is clearly up, but getting overbought as RSI crosses 70 for the third time in the last few weeks (gray oval). As long as RSI holds its late November low, momentum is with the bulls. A move below 63 would open the door to a correction that could see GLD pull back to 48-49.
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From the Wall Street Journal: If things don't change, Coke CEO Neville Isdell could be remembered for being in charge when the King of Pop lost its throne. Pepsi is within striking distance in stock-market capitalization for the first time since Coke shares hit the market in 1919.

From the price chart, you can see that Coke’s market cap is roughly 1/2 what is was in 1998 and Pepsi’s market cap is almost double what it was in 1998. This comparison got me to thinking. In five years we may be able to swap Google for Pepsi and Microsoft for Coke. Or, perhaps even Apple (AAPL) will surpass Microsoft in five years. The Coke analogy goes to show that if you loose the young up and coming, you loose - period. Apple is clearly winning the hearts, minds and wallets of the hip.

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By Arthur B. Hill - Wed 07-Dec-05 at 06:48AM in Market Musings
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Tuesday - December 06, 2005

Elan, Doubling Up, Four Year Cycle, Gadget Boom and xBox

Ken Kam of Marketocracy is playing in the MSN Strategy Lab (click here). In his most recent update, he adds to his Elan (ELN) position and makes a great point about add-ons. First, he likes ELN because the FDA granted Tysabri priority review status. This means the FDA will complete its review in six months instead of 10 months. Ken thinks this is because the FDA knows that Tysabri fills a ”big unmet medical need”.

Bullbearinvestor.com highlighted ELN when the stock broke falling wedge resistance on 8-November. This breakout held and the stock surged on great volume a few days later. The stock has since consolidated and found support at 10. There is still a lot of risk, but the chart points to higher prices.

Ken first purchased ELN in early November and this is an add-on purchase at a higher price. He notes that some of his best trades come from second buys at higher prices. Once prices move higher, the market is telling you that you are right and it makes sense to add to your winners. In contrast, a losing position is telling you the opposite and it makes sense NOT to add. The prudent action is usually to close the position and move on.

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According to eBay president and CEO Meg Whitman, a staggering 40,000 Xbox 360 consoles have been sold on eBay. As reported by Dow Jones last night based upon a presentation at the CSFB Annual Technology Conference, the 40,000 unit figure has left pundits flabbergasted. If launch supply estimates from American Technology Research are accurate, that would mean that 10% of all Xbox 360 consoles sold in the US were either sold or resold through eBay. Simple amazing and this shows the power of Ebay.

Is this a buy-on-rumor and sell-on-news scenario? Notice how MSFT moved higher ahead of the launch and then traded flat. The stock broke falling wedge resistance with a surge on Thursday and this is bullish as long as 27.5 holds.

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Here is a second tier gold stock that is holding the gap. Like Gold itself, Bema Gold (BGO) has been moving higher the last few months and gaped up on high volume. Upside volume remains robust and the stock formed a flag. Watch for a move above 3.1 to signal a continuation higher. As a low priced gold stock, this issue carries above average risk.

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From Dow Jones: Gadget Boom Drives Up Demand for Chips - Worldwide sales of semiconductors rose 6.8% in October, bolstered by strong demand for consumer electronics, such as cell phones, MP3 players, digital cameras and personal computers. I think this is evident from the Semiconductor HOLDRS (SMH) chart, which broke out to new highs and is suddenly leading the Nasdaq. This little semiconductors are part of everything with a battery or electrical cord. The real growth is going to come from outside the computer world and this may explain Intel’s new partnership with Micron.

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From CBS MarketWatch (click here): Razr sharp: By bringing Silicon Valley zeal to a Midwest tech giant, Motorola Chief ExecutiveEd Zander has helped spark a major turnaround . in the company. For this and more, he’s the MarketWatch CEO of the Year for 2005. On the price chart, MOT formed an outside reversal last week and failed to move higher on Thursday. The stock declined on high volume the last two days and suddenly shows relative weakness.

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David Fuller of FullerMoney.com (click here) notes the following: History shows that the second year of a US presidential cycle (2006 in this instance) is the least rewarding on Wall Street. No coincidence or fluke, this ties in with the four-year presidential term. In the second year of the Fed's effort to clean out the Aegean Stables after fiscal excesses, US short-term interest rates often reach a peak. Repeated hikes in the Federal Funds Rate eventually create a headwind for the stock market, not least in the current cycle because rising rates will also slow house price appreciation and consumer spending. That's the bad news for 2006 but fortunately it eventually becomes good news.

By Arthur B. Hill - Tue 06-Dec-05 at 09:17AM in Market Musings
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Monday - December 05, 2005

Hold that gap, Utilities underperforming, TIPS gap down and OPNW looks weak.

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Good day! The gaps keep coming and the gaps keep holding. QQQQ gapped higher on Thursday and this gap is getting an immediate test today. It is ok to take back some of the gains seen on Thursday/Friday, but not all. A move below the gap and below last week’s low would be most detrimental to the bullish cause.

Here are some gaps from January 2003. The first one on 9-Jan held (green oval) and QQQQ moved higher. The second one did not hold and the index stalled for a few days (blue oval). There was a support break on 15-Jan and then a gap down on 17-Jan (red oval). This gap broke support and filled the first gap. QQQQ best hold its last gap or else….
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While the Dow Industrials and Dow Transports are trading above their summer highs, the Dow Utilities remains well below its early October high and has yet to recover from the October thrashing. A rising flag formed over the last few weeks and a move below 385 signals a continuation lower.

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The S&P Small-Cap EFT (IJR) formed a hanging man on Friday. This is a bearish candlestick reversal pattern that requires confirmation and a move below 58 would be short-term bearish. Notice that support at 58 stems from broken resistance.

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Bonds were hammered last Thursday and money moved out of bonds and into stocks. The iShares ~20-year T-Bond Fund (TLT) and iShares Lehman TIPS Bond Fund (TIP) both moved sharply lower. However, the TIP gapped down and broke below its November low. If inflation were a real concern, I would expect this bond to hold up much better than its non-inflation-hedged counterpart (TLT). The relative weakness in TIP shows that bond investors are more concerned with economic growth than inflation. TOP needs to move above 104 for inflationary concerns to move back to the forefront.
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Openwave Systems (OPNW) has been underperforming and looks weak. The stock broke support in mid October and then surged in late October. The surge lasted one day and the stock traded flat in November. The Nasdaq surged to new highs in November and this shows relative weakness. While the Nasdaq gapped higher and closed strong on Thursday, OPNW broke support at 16.5 with high and looks headed lower.

By Arthur B. Hill - Mon 05-Dec-05 at 11:19AM in Market Musings
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Friday - December 02, 2005

The Gap, Gas and Retail Sales, December, US Dollar not afraid of ECB plus GE, SYMC, CSCO, SIRI, HPQ and WMT.

Stocks opened strong and closed strong. Thursday’s gap is bullish until proven otherwise (filled). It is as simple as that.
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Barry Ritholtz (http://bigpicture.typepad.com/comments/) is bullish on retail sales because of falling gas prices.

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From the Capital Speculator (www.capitalspectator.com): The dollar has found a reprieve in the last three months, in part due to the stillness that has characterized the monetary policy of the European Central Bank. The ECB has kept the Continent's benchmark rate at 2% for the last 30 months while the Fed has incessantly raised the price of money since June 2004 to the current 4.0%, thereby creating a tidy premium in dollar assets over euro-based counterparts. The Capital Speculator notes: Although that premium isn't about to evaporate any time soon, the ECB may start lifting rates, giving dollar bulls new reason to worry.

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I will not be impressed with Cisco unless it can break 18.

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SIRI also failed to partake in the rally and closed below its open.

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GE failed to partake and closed below its open.

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HPQ failed to partake yesterday and actually gapped down. Hmm….

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Steve Todd of the Todd Market Forecast (www.toddmarketforecast.com) notes: Let's talk December. In the 56 years since 1949, the 12th month has been up 41 times and down 15 for a batting average of 73%. The average gain has been 1.8% which makes it the best month in Dow terms over the past half century. If the other months had done as well, the average yearly gain would have been 23%.

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SUNW announced that it will bundle much of its software and offer it for free to customers. This is all about eliminating the barriers to revenue, said Sun Chief Operating Officer Jonathan Schwartz in a telephone interview. Sounds like a way to eliminate revenue altogether!

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Microsoft will make its Windows OneCare Live "computer health" service available to all comers for free in a "beta" test designed to see how well it works on a massive scale of potentially millions of consumers. Microsoft plans to support OneCare with a monthly subscription fee once it is formally launched some time next year. Look out Symantec.

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AP Reports that Wal-Mart Stores Inc. (WMT) charged the wrong price to shoppers in California and the Midwest at a rate that exceeds those set by federal guideline