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Market Wrap

The Fed Man Cometh

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      02-10-2004           High     Low     Volume Advance/Decline
DJIA    10613.85 + 34.80 10626.66 10559.26 1.75 bln   2111/1129
NASDAQ   2075.33 + 14.80  2075.33  2060.44 1.66 bln   1988/1192
S&P 100   566.35 +  2.63   567.18   563.07   Totals   4099/2321
S&P 500  1145.54 +  5.73  1147.02  1138.70 
W5000   11181.46 + 64.70 11183.26 11108.16
RUS 2000  592.83 +  7.34   592.85   584.69 
DJ TRANS 2921.86 + 18.20  2921.86  2887.96   
VIX        15.94 -  0.45    16.76    15.84
VXO (VIX-O)15.55 -  0.22    16.09    15.32
VXN        24.50 -  0.71    25.44    24.28 
Total Volume 3,713M
Total UpVol  2,324M
Total DnVol  1,328M
Total Adv  4644
Total Dcl  2639
52wk Highs  628
52wk Lows     7
TRIN       1.14
NAZTRIN    0.86
PUT/CALL   0.72

Investor positioning ahead of the Greenspan testimony tomorrow kept the markets in a tight range but it could not keep them from posting a decent gain for the day. The Dow closed back over 10600 and the Nasdaq surged to 2075. Not a bad day when you consider the fear some have of the Greenspan testimony.

Dow Chart - Daily

Nasdaq Chart - Daily

The morning started off slow despite the Chain Store Sales for last week showing +1.8% growth. That was the strongest growth since December and about six times the average for the last five weeks at -0.3%. The year over year gains were +5.9% and the strongest growth since November. The cold weather is helping sell the remaining coats and sweaters and clearing the shelves for the spring wardrobe change. The ICSC raised its estimates for February to a range of +4.5% but it would still be below the +5.7% level for January. With the tax refunds beginning to flow soon the sales for late Feb and all of March should be very strong.

The Richmond Fed Survey rose to 18 and up from 8 in December. This was the second highest level in the last year with the high being 20 last October. That October number was the result of the hot 3Q carry over that pulled the numbers back from negative territory. New Orders and Back Orders both improved although the long term outlook slipped slightly. New orders rose to 24 and the highest level since Jan-2003. Back orders rose to 7 and the highest level since June-2000. The employment component fell -8 points and back into negative territory. Future employment expectations fell to a four-month low. I guess the Richmond area did not benefit from any of those "found" jobs from last week. Inflation pressures increased with prices paid rising faster than prices received. Raw materials prices continue to climb across the board with energy prices spiking again today on news from OPEC. With commodity prices rising and prices received still falling due to excess capacity there is a profit squeeze in our future. Bottom line here is increased production and output but continued drop in hiring as manufacturers continue to try and lower employee costs.

The news today was not earnings but fixation on what Greenspan might say on Wednesday. Opinions were plentiful and differing. The consensus was an optimistic outlook on the economy and nobody expects any problems there. The cloud over the market is the potential for any language that will suggest a rate hike in the near future. There is a growing concern that the Fed could raise rates preemptively this summer to avoid a later pre election hike. Earnings are still running in the +28% range for the 4Q and guidance has mostly been stronger than expected. If we did put in back to back quarters of strong earnings growth the Fed might feel the need to open the pressure relief valve slightly after the April earnings cycle. There is a meeting on May-4th and another two day meeting beginning on June 29th. This gives them three maybe four more employment reports to see if jobs are picking up before making a decision. IF they were going to hike the bond groupies are projecting a hike at the June meeting. The Fed funds futures are suggesting the rate will be hiked to 1.25% by August. There is no July meeting making the June meeting the target.

Traders are hoping for a sign from Greenspan that nothing has changed and the Fed is planning on being patient at least until June. What they will probably get is nothing. Depending on Greenspan's mindset he will give them nothing but useless Greenspeak and leave them as confused as before. He has in the past taken advantage of a very few public appearances to "correct" the market's understanding of the Fed position with a well structured sentence or two. This is very rare occurrence but it does happen. What I would expect is a simple "economy growing slow but ramping up" context and a restatement of the "Fed can continue the current accommodative stance until capacity utilization and job creation improve". The bond bulls will interpret it in view of their outlook and go their merry way. Just in case Greenspan says something he did not mean to say or gets home to find the market interpreted it different than he expected then he gets a second chance to correct the statement on Thursday with a repeat appearance. The average change in the bond market when Greenspan gives his testimony is a full point. There are always fireworks in bonds when he speaks before Congress. The stock market is far less reactive but in this current mode we could be bond reactive.

While it seems the market has come to a screeching halt while we wait for the master to speak that outlook is not true. We have had a very strong week in my opinion. The Dow jumped +140 points from its lows on Friday and the trend this week has continued upward. We did consolidate on Monday with a higher high but it was only a minor pullback at the close. That was corrected today with another higher high and a close over 10600. This was the highest close for February and we are nearing the 10650 resistance that gave us fits in January. Not a bad month so far for the Dow and February is historically the 3rd worst month of the year.

The Nasdaq is not doing as good but is well off its lows. The close at 2075 was right at the month end resistance and about +63 points off the lows. This is great considering the rebound off the 50 dma but there are tougher levels above for the index. If the Nasdaq can get over the 2075 resistance it can then take aim at the very strong 2150 resistance level. The Nasdaq is dragging some heavy baggage along with its move. One piece of that baggage is Dell, which announces earnings on Thursday. While they are not expected to miss there is some worry that they could show the wear and tear of a major price war. Their major competitor HPQ while not a Nasdaq stock does not announce until the following Thursday. This sets up a great potential for an option play on HPQ which I will layout following this commentary.

The Nasdaq will probably rejoice more over some good news from Dell than it will from any positive Greenspeak. Because of Dell's position as the second biggest PC maker they will impact all the component sectors with their market view. The Dow will also hear from a couple major components tomorrow. Disney and Coke will report earnings and there is much to speculate about. PIXR posted record earnings after their success with the Disney films. This would suggest Disney should also post better than expected earnings and this has been priced into the stock over the last couple days. KO has also seen a significant bounce after hitting the 50 dma last week. KO has been under fire from channel stuffing allegations that go back for several years. Coincidently KO said Japan results could be very strong and that is where the majority of the stuffing allegations were focused. Their earnings will be heavily scrutinized. Both stocks could find some profit takers on the announcement without any material upside surprise to provide a catalyst.

While the Tuesday bounce was encouraging it did come on very low volume of only 3.7B shares compared to the 5B+ shares we were seeing on the last rally to this area. The internals remained very strong despite the lackluster volume. Advancers were nearly 2:1 over decliners and new highs rose to 628. This was more than twice the level we saw on the lows last week. The dip buyers are still alive and well. The market saw a major drop at 2:12 just as a rumor hit that the Washington Dulles Airport had been closed. That rumor knocked about -50 points off the Dow and the dip was immediately bought. The rumor did take some of the excitement away from the buyers and it was not until the last 30 min before they united to push it back over 10600 again.

Assuming Greenspan does not attack the markets, the weak dollar, tax cuts or throws his support to Kerry for the election we should be in good shape. The Dow has a three day uptrend in place and the Nasdaq is poised to break out over 2075 resistance. We are only 93 points away from 10705 and the highs for the year on the Dow. The Nasdaq is only -88 points from its high of 2152. While this is positive I would not expect a sudden bullish ramp to new highs. We are simply trading at the high end of our range and we should continue to trend up once this week is over.

We need to remember that February is the 3rd worst month of the year historically and is known for consolidations. This is exactly what we have been doing for the last nine days on the Dow and it may not be over despite the current uptrend. The Nasdaq saw more serious profit taking but despite the rebound could also till be vulnerable. Dell will be the key more than Greenspan but he is still a risk. The game plan should still be "buy the dip" until something changes. Personally I think there are quite a few traders hoping Greenspan takes aim at the markets just so they can get a better entry point. Dow 10475-10500, Nasdaq 2020-2050 support should hold on any minor verbal attack. I know my long positions would be perfectly happy to see a catapult spike back to 10700 tomorrow but I would also eagerly take advantage of any dip to add to those positions.

Enter Passively, Exit Aggressively.

Jim Brown
Editor

HPQ Earnings Play

With Dell announcing earnings on Thursday and HPQ not announcing until the following Thursday we have an opportunity for a cheap speculative play. HPQ should react violently to any Dell news but they do not announce themselves for another week. This gives us two chances to profit from a HPQ option.

HPQ is currently $24.11. The Feb-$25 call is only $.40 and the $22.50 put is only $.20. The odds are very good that Dell will say something positive given the PC sales in the 4Q. This should spike HPQ to the $25 level or higher as HPQ is really on fire and has a broader business model than Dell. What is good for Dell is also good for HPQ. With HPQ announcing a week later we could then see a ramp for HPQ on positive expectations for their earnings report.

While I would be comfortable buying HPQ Feb-$25 calls at 40 cents each as a lottery play that may not fit the risk profile of every reader. Dell could say something negative and both get knocked for a big loss.

Therefore, if you are a risk taker jump on the HPQ calls and hope Dell surprises to the upside. If you are conservative then buy the calls and the puts, currently 60 cents total and roll the dice. That puts you in the camp that does not care what the earnings are just as long as they send the stock into a directional frenzy.

I am suggesting February options because of the timing involved. I do not want to speculate with the March options because they cost more and make an insurance strategy less appealing. If you are uncomfortable with selling your Feb options on expiration Friday then go with March. (Mar-25 calls = 65 cents, 22.50 puts = 50 cents) Regardless of which options you choose this is a speculative play and you can lose all or part of your investment if the stock remains between 22.50-25.00 prior to expiration.

HPQ - Chart



 
 



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