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Traffic Jam

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The BKX 100 level is the technical focus du jour.

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Hold me closer tiny dancer
Count the headlights on the highway
Lay me down in sheets of linen
you had a busy day today

(Elton John)


Good morning and welcome back to the anxious pack. After a week full of swings and two-sided trade, we ready ourselves for the earnings parade. The pace will be quick and the action quite furious, offering help for those who are curious. "We needed a rest from the fourth quarter zest," said Hoofy the bull as he beat on his chest, "I'm pretty sure that you'll soon be impressed when the food of our thought has a chance to digest." Can fundies allay the recent dismay and pave the green way to a bovine soiree? Or will little Boo have something to say as his only agenda is pure disarray? Turn around quick 'cause Tuesday is here and we're ready to step in the critter frontier!

Despite the considerable noise last week, the tape barely budged once the dust had settled and the bears backpedaled. It was a moral victory for the Matador Crowd after getting caught in the lopsided lean but they'll take what they can get. As it stands, they can explain the pullback as a macro unwind and the alleviation of overbought technicals. Now, they hope, the broader backdrop that buoyed equities (and provided the steady underlying bid) will reemerge as a matter of course. We've been conditioned to respect the collective agenda and believe in invisible bulls. Therein lies our dicey dilemma and the task that is at hand: How can we know if the ghost story ends without first seeing proof positive in the price action?

There are a multitude of crosscurrents vying for investor attention and while 76 S&P 500 companies will soon paint the tape, they'll only represent one leg under our trading table. As it stands, earnings expected to rise 15.1% vs. recent views (in November) that they would jump 15.7% (First Call). In a world where perception dictates reality, we will need to see a serious string of positive outlooks to shift the tide from the dreaded deceleration dynamic (Q3 earnings growth was a ten-year best 28.3%). And, just so we make sure to cover the other side of the probability spectrum, a wave of upside surprises may not save the day either. After all, as history has repeated many times over, the news is almost always best at the tops and the market will ultimately discount that.

That's not to say that the news is the "best" or, perhaps, even close to it. We're still a rate-dependent country that holds a minority interest in our own debt. And, despite indications that short-term psychology flipped to the other side of the scale, the broader sentiment landscape (VXO, Investor's Intelligence) is a recipe for disappointment and distain. We only need to revisit the mood on the Street the first week of '05 and extrapolate it over a longer time frame. If that smack was a microcosm for what's to come, the path of maximum frustration may be a prolonged and painful process.

First things first--and not to get ahead of ourselves--clues remain nestled in our midst that may help us navigate our way. The piggies (underperforming the S&P) have found themselves back at a rather meaty inflection point. BKX "par" (100)-BKX 100.50 is a zone that offered repeated resistance in September and October and "held" the months thereafter. While we know that rotation (within equities and in the context of a more monolithic macro shift) is playing a huge role in the supply/demand equation, the financials (along with our fave intraday tell (breadth)) should help active Minyans point their toes in the proper direction.

We power up this Tuesday pup to find Europe listening to a bit of chin music, Asia equally pink (slightly red), the metals mixed and the dollar flattish. Its curious that the greenback attack (and attendant twin deficit despair) found its way to the front page of this morning's Wall Street Journal (why now?) but the story is nothing new to old school Minyans. Suffice to say that, after losing a third of its value in as many years, the squalor holler isn't necessarily ahead of the tape.

Good luck today.

R.P.

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