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      12-09-2004           High     Low     Volume   Adv/Dcl
DJIA    10552.82 + 58.60 10562.51 10418.63 2.03 bln 1636/1438
NASDAQ   2129.01 +  2.90  2134.23  2097.86 2.27 bln 1375/1722
S&P 100   566.37 +  2.56   567.11   559.87   Totals 3011/3160
S&P 500  1189.24 +  6.43  1190.51  1173.76 
SOX       425.46 -  6.50   428.48   414.02
RUS 2000  629.19 -  1.96   631.15   621.74
DJ TRANS 3709.21 - 14.70  3723.09  3680.11
VIX        12.88 -  0.31    13.71    12.77
VXO (VIX-O)13.23 -  0.49    14.59    13.23
VXN        19.84 -  0.17    20.94    19.63 
Total Volume 4,591M
Total UpVol  2,482M
Total DnVol  2,038M
Total Adv  3433
Total Dcl  3573
52wk Highs  207
52wk Lows    54
TRIN       0.86
NAZTRIN    0.78
PUT/CALL   0.80

While the chip sector may be getting coal in their stocking this year there were some stocks receiving votes of confidence from Santa's elves today. The housing sector proved to be the golden child and the sector most likely to be blessed with holiday dollars. It was a mixed market but one that closed at the highs and returned hopes to traders that a Santa rally may still appear.

Dow Chart

Nasdaq Chart

The day did not start off well with the Jobless Claims rising to 357,000 for the week and well above estimates. This is the second week in the 350K range and rising. Analysts were quick to suggest the jump was due to seasonal factors but it was still disconcerting. They claimed the Thanksgiving week prevented many from filing claims and they ended up filing the week after. Since the Thanksgiving week was also high at 349,000 I don't really buy this but it makes a good sound bite. We have seen multiple reports on jobs that have failed to show meaningful gains over the last two weeks as well as an upsurge in planned layoffs. Starting to look a lot like trouble ahead.

Import Prices jumped +0.2%, less than the prior month at +1.5% but more than consensus at -0.1%. The main factor for the drop was a -2.6% fall in energy prices. Non-petroleum imports rose +0.7% to hold the index in positive territory. Non-petroleum prices are up +3.4% for the year. Export prices also rose at +0.3% despite a decline in agricultural prices. With crude oil prices up +60% over the same period last year it is amazing the total index is not much higher.

Wholesale Inventories rose +1.1% and more than twice consensus estimates. Wholesale Sales rose +1.6% and the prior month was revised upward to +0.8%. The very sharp increase in inventories came after a four-month low in September. It appears that inventory replenishment is underway across all sectors in anticipation of a continued rise in sales. The inventory/sales ratio has remained flat at 1.15 for five months despite the jump in both inventories and sales. This suggests further gains are ahead.

Investors were not interested in the economic news today but focused instead on the multiple warnings in the chip sector. CYMI, ALTR and XLNX all warned on revenue last night and the impact to the SOX was immediate at today's open. The SOX dropped to 414 at the open and a drop of more than -4%. That drop stretched the losses from the Tuesday high over 450 to more than -8% in three days. This was a serious drop out of the recent range and below support at 430.

While the news was bad we need to keep in focus that 50% of the income for ALTR and XLNX comes from chips needed by the communications sector. We know that the cell phone sector is currently buried in inventory but they are selling new phones. The rapid change in models requires a constant supply of new chips and a constant dwindling of demand for old ones. Those old ones may only be several months old. The current demand is a moving target compared to more stable chip applications. Weakness in XLNX and ALTR is not necessarily weakness in the broader chip sector.

One problem with ALTR is broad based and could be a serious challenge. Cisco is a major customer of Altera for communication chips used in their routers and switches. Altera is seen as a leading indicator for Cisco's health. This caused a little more concern than normal and pushed CSCO lower. However, Cisco just affirmed growth estimates of +13% earlier this week and I doubt they would have been so public if business was bad.

After the monster chip drop at the open that pushed the SOX to 414, Nasdaq to 2100 and Dow back to the gap fill from last Wednesday at 10425 a miracle appeared. NSM announced earnings about 12:15 and did not warn. While that may seem like an generic event it turned the tide for the chip bears and they were forced to cover those large short positions they had just entered. NSM matched lowered earnings estimates and guided inline for the current quarter. No excitement there but they went on to say that the inventory correction was almost over. Specifically they said customers felt inventory levels were where they needed to be and the correction was now behind them. They said orders for portable power management products had risen more than 25% over last year. This sudden reversal of fortunes for chips sent the indexes soaring on short covering and the gains lasted into the close.

Adding fuel to the fire was an IDC report that said PC sales are now expected to rise +10% in 2005 to more than $200 billion. They said commercial shipments were rising and the outlook was improving.

Housing builder Toll Brothers blew out earnings with a +93% surge in profit for the last quarter and the entire housing sector celebrated. TOL said demand for homes was soaring and it also raised its estimates again for 2005. Analysts were expecting $1.97 for the quarter and TOL posted earnings of $2.22 per share. The company expects earnings in 2005 to be 40% over 2004 and sales to climb nearly +$2 billion to $5.35B. TOL jumped +6.88 on the news.

Stocks rose all afternoon despite rising oil prices and comments from various OPEC states that they were all in agreement on cutting production to increase prices. This sudden change in commentary is removing the negative bias we have seen for the last two weeks. Oil has rebounded to $42.65 overnight and if the OPEC meeting in Egypt this week follows through on these production cuts then $45 oil or higher is just around the corner again. I believe it is only a matter of time before much higher prices are a matter of life.

I spent several months researching my "Coming Oil Crisis" report we are giving away with the year end renewal special. I can guarantee you that gas prices as we know them will be ancient history by the end of this decade. You will not hear this in the mainstream press but production is already falling in all but FOUR oil producing countries. Those four are very close to their peak. Check out this chart of the production levels for the non OPEC oil producing countries. With the billions being spent on exploration the results are clear. We are running out of oil and much higher prices are ahead. Anyone concerned about how to profit from it or just survive it needs to sign up for the special and get the report. The number by each name is the year production began to decline.

Oil Depletion Chart for non OPEC Countries

After the bell today UTX said it expected growth of +10% to +15% in earnings in 2002. They also said they were going to buyback $600 million in shares in 2005. The stock spiked to over $100 in after hours from a close at $99.48.

Telecoms also helped push the markets higher after CIEN beat estimates and news broke about Sprint and Nextel in merger talks. CIEN jumped nearly 25% after posting sales that were stronger than expected and forecasting stronger growth ahead. CIEN back from the dead? I am not too excited yet with a close at $2.86 and the high for the year at $8.14. FON jumped +7.9% and NXTL gained +6.5% after the Wall Street Journal speculated they were in merger talks to create the 3rd largest wireless company.

For tomorrow there are no major economic reports and stocks will be left to find their own level. We are only a week away from a quadruple witching Friday and recently we have seen increased volatility on the Friday before expiration. With a positive bias at the close today we could be looking at some positions squared early and positioning in advance for any end of year rally.

The Dow dropped to 10418 at the open due to the negative chip news and the higher than expected jobless claims. This exactly correlated with the 10417 low for this current range set back in November. Bears were drooling at the chance for a collapse of this support but it did not happen. Instead buyers bought the dip once again but for 90 minutes there was extreme caution as the index ticked slightly higher. The NSM news at 12:15 triggered a couple buy programs that appeared to be short covering programs and the rest as they say was history. If three major chip warnings could not break support and one little positive statement from NSM was enough to erase those warnings then the bears decided to run for cover. The Dow closed +133 points off its lows and very near the highs. Only four hours separated the Dow from an impending crash and rebounding to less than 50 points from 10600 resistance once again. Those end of year buyers who were waiting for a better entry have got to be thinking tonight the train could be leaving the station without them.

The Nasdaq cratered to 2097 on the semi news and held at support at 2100 for the first two hours of trading. The NSM news reversed the SOX and that sent the Nasdaq back to 2130 and resistance from yesterday in the blink of an eye. The Nasdaq fought that resistance and lost but dip buyers again appeared at 2120 and sent the index back over 2130 for the last hour. Profit taking appeared at the close but 2130 held as resistance turned support. With 2100 support from the end of November apparently holding firm it gave the tech buyers confidence and baring any negative news over night we could easily see 2150 again soon.

The weakest link was the Russell with a strong drop back to 621 and just over the 620 support from early November. Buyers reluctantly appeared on the NSM news but it still lagged the other indexes the rest of the day. It closed negative and failed to reach the highs from yesterday at 631. The rebound failed twice at 630 and tonight the Russell futures are much weaker than the other contracts. The Russell, more so than the Nasdaq, is very influenced by chip stocks. The Russell has more chip stocks by weighting than any other index with tech stocks in general the third largest group in the index. Technology problems and especially chip sector problems are very damaging to the index. The Russell has led the markets down for three consecutive days and we need to see a break over 632 to confirm a break in that trend.

Russell Chart

For Friday the market may still be confused. I have repeatedly told you to buy the dip above SPX 1175 and we saw the dip to that level bought strongly this morning. The SPX closed right at 1190 and 1192-1195 is strong resistance. A break over that level should setup the end of year outlook and could attract a lot of short covering. This will be the key for Friday. With the expiration week ahead anything is possible and while I would be surprised to see a breakout on Friday it is definitely possible. I would expect more uncertainty instead of more bullishness but after today's rebound that uncertainty may be fading. Continue to buy the dips over 1175 and add to positions over 1195.

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Jim Brown
Editor

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