Airline Deal Helps Markets Soar Past Costco Fiasco
Costco had investors scared early when there was a mysterious delay to their earnings, but cooler heads prevailed. It was a strange story this morning when investors were waiting for news of COST's earnings report before the bell, but to no avail. In some sort of strange mix up, the press release didn't hit the wire in a timely fashion. This caused some degree of panic and the stock was halted before the opening. The word was that Costco had provided some sort of earnings warning, but facts were hard to come by. This set the stage for more fear on Wall Street during the morning hours.
But the Bears eventually had to give up and go home because this market was ready for a relief rally. Quite frankly, if it wasn't for relief rallies, we wouldn't have any rallies at all. The Nasdaq sunk to 3042.66 to the year's low before bouncing back, and this bounce had legs behind it. The rally that ensued took the Composite up 200 points off that low to settle out at 3270.58, just a touch off the day high. How was volume you ask? Great question, as we all know that is the one missing ingredient that everyone is waiting for. It did come in much better than expected at over 2 billion shares. It had been a long time since we've seen this kind of volume. Some may say that the incredible volume in COST at 144 mln shares traded inflated the total volume, but even without the extra 100 mln, the Nasdaq would have still been pushing 2 bln. Advancers still beat the decliners 24 to 16 though.
Take a look at the technical picture on the Nasdaq chart for the week and it's easy to see why we need a relief rally. At today's low, we were off 15% in less than a week. It is my feeling that the NASDAQ will have a tough time going below the 2900 level, but I won't be surprised to see it try once this relief rally subsides. Note the downtrend is still in tact.
The DJIA also had a strong day, thanks to the strength in the Transports. This typically forgotten sector of late decided to shine on news that UAL, parent of United Airlines, would be acquiring US Airways (U). The full story is listed below, but it was definitely welcome news to the ailing markets. The DJIA closed up 113 to 10535, up just over one percent. The volume was good here too at over 1 billion shares. The Transports gained 74.80, or 2.71%. Advancers and Decliners were even at 14-14. The technical picture on the DJIA isn't stellar, but you can make a case for support at 10,400. The problem is, what is the real upside? A move over 10,600 could be clear sailing back to 10,800.
The moves on some individual stocks were amazing. Let's run through a couple to give you an idea. RMBS opened at $150, fell to $144, before rattling off 24 points to the upside to close at $168.38. SDLI opened at $168, dropped to $147.50, and rallied to close at $175.31. A $28 intraday swing. It was a similar story in AETH, ISSX, SEBL, INKT and EBAY. Money was rushing in at a rapid clip in the final two hours. The VIX was all over the map too. As high as 31.20, before tanking to the low at 27.64.
So the disappoint of the day was Costco (COST) earnings. They missed analysts' estimates of $0.27 by a penny and warned that fourth quarter earnings will be sub-par. Yet, what was really disappointing and confusing for investors was the early release. At 5AM EDT, the earnings report was faxed to about 300 investors and analysts, resulting in pre-market selling. It wasn't until 9:30AM EDT that the report came across BusinessWire. Needless to say, COST may find itself in a heap of legal trouble with the SEC if these reports of selective disclosure prove to be true. This controversy certainly will be heated as disgruntled investors seek recourse. COST was down 21%, or $8.63, in regular trading to close at $32.
The merger market continues to heat up as United Airlines (UAL) made a surprise $11.6 bln bid for rival U.S. Airways (U). This move raises the question of whether there will be a realignment in the airline industry. Government scrutiny is certain as the merger raises anti-trust questions as well. Analyst speculate that this announcement is just the beginning of airline wheeling and dealing. American Airlines (AMR) is expected to made a competing bid for U. Under the terms of the merger, UAL would pay $60 per share of U.S. Airways, which is a 128% premium to yesterday's closing price. DLJ analyst James Higgins cut his rating on UAL from a Buy to Underperform as he believes this move could put pressure on UAL's future earnings. He also downgraded AMR to a Market Perform from a Buy in expectation of their competing bid. AMR fell $2.56 to $30.06. UAL slid $7.19, or 12%, to $53.19. U shares benefited from the news soaring 85%, or $22.44, to close at $48.75.
Once again, MSFT has its hands full with the government as a federal judge rejected MSFT's request for more time to examine the breakup proposal. Questioning the effectiveness of a two-way breakup of MSFT, U.S. District Court Judge Jackson entertained the suggestion to divide MSFT into three companies rather than two. He also put the remedy phase of this case on a fast track by ordering the government to submit a revised plan by Friday. Jackson only granted MSFT 48 hours to examine that plan before it becomes court record. This is a severe blow to the MSFT legal effort which was requesting an additional six months to depose witnesses and prepare for more extensive hearings. It is expected that Judge Jackson may issue a final judgment within two months. MSFT shares rallied today with the NASDAQ, closing up $2.38 to $65.56.
This market has been a tough one to play if you learned to trade options in the past year. You are probably used to the bulls returning at each dip, right? I have found way to the sidelines and have been staying there for the most part. I love to trade, but hate trying to fight the trend. One bullish note though, typically when we have as many puts as calls in the plays section, we are nearing a bottom. This morning I looked at all of our puts plays to see most of the stocks down another 10-12%, taking them to absurdly low levels. They have been great plays, but when the puts start looking that attractive, I use it as the contrarion. When it looks too good to be true, well...you know. Besides, I have been waiting for the return of volume to the 2 billion level and we got that today. I will really be excited if we can do that tomorrow in front of a three-day weekend. Not likely, but that would have my online broker back up in my browser in a heartbeat.
There is one economic report due out Thursday. It is the revision to first quarter GDP. Analysts expect a 5.4% number and anything less should lift the markets. A good number, with good market volume will bode well for the up coming week. To reiterate Jim's thought yesterday, it is always darkest before the dawn.