Option Investor
Market Wrap

Two Days Not a Trend

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      01-18-2005           High     Low     Volume   Adv/Dcl
DJIA    10628.79 + 70.79 10628.94 10500.58 2.01 bln 2212/1057
NASDAQ   2106.04 + 18.10  2106.19  2078.04 2.01 bln 1994/1188
S&P 100   569.53 +  5.09   569.53   562.01   Totals 4206/2245
S&P 500  1195.98 + 11.46  1195.98  1180.10 
SOX       406.55 +  3.40   406.99   399.90
RUS 2000  624.87 +  7.39   625.81   615.29
DJ TRANS 3589.22 + 20.06  3594.07  3559.33
VIX        12.47 +  0.04    13.15    12.30
VXO (VIX-O)12.67 -  0.18    13.66    12.56
VXN        18.75 +  0.18    19.74    18.72  
Total Volume 4,281M
Total UpVol  2,998M
Total DnVol  1,128M
Total Adv  4817
Total Dcl  2560
52wk Highs  318
52wk Lows    62
TRIN       0.66
NAZTRIN    0.81
PUT/CALL   0.72

For the first time in 2005 the S&P has posted back to back gains. Bulls are backslapping each other and high fives are evident everywhere. Has the bull returned to 2005? It is too soon to really tell for sure but traders are now breathing easier as the indexes pull back from the brink once again. Two days does not make a trend but it could be a good start.

Dow Chart

Nasdaq Chart

The day started off with a shock as oil prices soared to $49.50 and the NY Empire State Manufacturing Survey fell back to 20.1 from 27.1 for January. The manufacturing activity dropped sharply in New York state in January and the December number was revised down from 29.9 to 27.1. The NY Survey has been volatile of late with activity jumping very erratically between 14-30 over the last eight months. While the headline number was bad the internal components were worse. New Orders dropped from 36.1 to only 20.1 and Shipments backed off to 26.2 from 35.6. Inventories fell into negative territory at -10.9 and Employment fell to 12.7 from 15.7. This was not a positive report but it has been very volatile. Unless a trend develops to the downside it will likely be just watched carefully as a potentially bearish economic indicator forming and a reason for the Fed to not get to aggressive in future rate hikes.

The NAHB Housing Index dropped only slightly to 70 from 71 and the recent cycle high made in December. We have been hovering around 70 since August and this continues to indicate that the housing market remains strong. However all three components did pull back slightly but home buying over the holidays is not normally strong. We are heading into the spring buying season and these numbers should continue to be strong. The downside will be higher rates ahead and higher energy prices taking money out of buyers pockets. We are hearing more about speculative excesses in several major markets and that suggests we are nearing a top but buyers continue to appear.

The negative Empire survey and the high oil sent the indexes lower at the open but that dip was short lived. Oil prices had risen on worries the current cold front could last up to two weeks and the weather man has now rescinded that outlook. Funds that had speculated on that event causing further shortages took profits on the new announcement. The high for the day at $49.50 was quickly sold and stops were hit taking the price back to $47.72, nearly -$2 off the high before buyers stepped back into the market. Oil closed at $48.45 and up only slightly for the day. Tomorrow's oil inventory report will cause that volatility to continue.

Complicating this short-term play was comments from the IEA that demand could increase +500,000 bpd in Q1. The EIA also said they expected demand to increase and their number was +1.4 mbpd or more. The IEA said supply dropped -50K bpd in December even before OPEC said they would cut production by one million bbls. In reality that cut has only seen a drop of -600K bpd and supplies are already running tight. With the OPEC meeting coming on Jan-30th the expectations for a new cutback in production are slipping. With demand increasing and prices hovering near $50 there is no need for OPEC to support prices any further. Support is already priced into the market with the increased demand. Demand from China spiked again in Nov/Dec and could continue to grow +8% to +13% according to IEA analysis today. There should be a drop in price after the inauguration and the Iraq elections as we enter spring and a period where demand temporarily slows. This should be seen as a buying opportunity for oil stocks when it occurs.

The Fed has something in the works and their team of speakers hit the road today and will continue to do so this week. Two Fed heads made comments on the economy today and there are seven more speeches later this week. Philly Fed president, Santomero, said inflation risks were balanced but the Fed needed to remain vigilant as the economy continued to expand. Minnesota Fed president, Stern, said the economy was solid and inflation would remain low. If the rest of the speeches continue this train of thought it could be seen as the Fed giving us the all clear signal that rate hikes were going to pause. Very seldom do they mount a strong speaking campaign with the same thread unless they are trying to warn the bond markets of changes ahead. The next Fed meeting is Feb-1st so the timing is right for a message.

The inauguration is only a day away and the $40 million extravaganza is going to be a huge target. Besides the actual event there are dozens of sideshows attracting huge crowds. There will be a parade with over 11,000 people just in the parade itself and is expected to attract several hundred thousand in attendees. There are nine formal balls where the rich and want to be rich will mingle and trade business cards in hopes of future dealings. Each of these poses another chance for potential problems. This could weigh on today's rally as we get closer to Thursday.

Earnings are breaking out all over and the majority have been very good. IBM was the biggest name after the close and beat the street by a nickel. IBM earned a profit of over $3 billion for the quarter on sales of more than $27B. This huge cash windfall is due mostly to their services division which ended the quarter with an $111 billion backlog of orders. IBM said it was comfortable with analysts estimates of $5.55 per share for the year and $102 billion in revenue. IBM also said they might beat that revenue target. IBM rose only slightly in after hours trading.

Yahoo also reported earnings that beat the street by +2 cents and gave guidance only slightly better than analysts had expected. YHOO jumped less than +$1 on the news. YHOO could see some pullback on Wednesday because traders typically expect a really strong outlook from Yahoo and the slightly better guidance may not hold the stock at these levels.

AMD announced earnings that missed estimates by -3 cents but that should come as no surprise after last weeks warning. Better chip news came from Motorola, which beat the street by +3 cents and from Freescale (FSL) the MOT spin off which beat the street by a penny. Juniper beat the street by a penny and succeeded in lifting the networkers in after hours. Seagate Technology (STX) beat by a nickel and guided higher.

Not all the earnings news was good. JDSU warned that it would miss street estimates because of a $13 million revenue drop associated with one customer and litigation expenses. KKD said they had ousted their CEO of seven years and hired a turnaround expert to rescue the donut maker from its problems. KKD warned that persistent sales declines in the current quarter may lead to its third quarterly loss for the year. Stephen Cooper, the new guy at the top has 30 years of experience in troubled companies like Enron, Polaroid, TWA, Pegasus Gold and most importantly Boston Chicken. KKD stockholders should be especially aware that BOST shareholders were left out in the cold when it was reorganized. I personally would not want to be a holder with Cooper at the helm. The easiest fix for him is a bankruptcy, close non performing stores and issue new shares to debt holders. He has done it before and as a hatchet man he is not really concerned about being nice and once KKD is back in shape he will move on leaving lots of bodies in his wake. All three of the officers blamed for the KKD problem, CEO, COO and CFO have now departed.

As we approach option expiration this Friday the market has put together two days of back to back gains. The S&P closed at 1195 and +20 points off the critical 1175 area we were watching for a breakdown signal last week. With earnings and guidance mostly positive we could continue to see gains although OpEx and the inauguration could now combine to keep us range bound until next week. With the futures barely positive at 7:30 tonight it appears there is some concern already creeping into the market. The earnings were good but the guidance was not good enough for traders to throw caution to the wind and go on a buying spree.

There are about 100 companies announcing earnings on Wednesday with EBAY, QLGC, QCOM, SYMC, LU, GM, CIT, COF and CIT leading the list. There has not been any real pre earnings ramp on any of the majors as caution ahead of earnings seems to be the game plan. This is good in the sense that we do not have a lot of expectations built into the market and we remain oversold despite today's bounce. The potential is there for a continued move up next week if the earnings continue to be solid and there are no negative inauguration events.

With today's bounce we are in the neutral zone for the Dow. We are just over last weeks congestion range but just under the 10650 resistance and the congestion range from the prior week. This is the nearly perfect place to ride out the rest of the week with a Friday/Monday move over 10650. The Nasdaq is only slightly better off with a close just under the 2010 resistance high for the last two weeks. With positive tech earnings we should continue to press that level and a breakout could setup a new move back to the highs.

SOX Chart

The SOX stretched its gains for two days now and posted the second consecutive close over 400 and a five day closing high at 406. The 410-resistance level is just above and from the after hours trades in the SMH it appears the positive earnings from MOT/FSL offset the earnings miss by Rambus and there is no bias for the open.

The strongest move was by the Russell with a breakout to a two week high at the close at 625. Only the slimmest thread is holding it back from a new move back towards the highs at 660. That would be a big leap of faith and we are far from seeing any confirmation. However, if the Russell is leading the pack it suggests the funds are putting money back to work and maybe the fund flows have finally appeared.

For the rest of the week I would be cautiously optimistic ahead of potential event risk and option expiration. We typically see OpEx activity late in the week before and early of OpEx week with the last three days relatively tame. There are probably lots of option hedges in place for the inauguration event risk and Friday could be a major unwind day if nothing happens.

While writing this article I was struck with the different world Bush faces over the next four years compared to what he thought he was facing when he took his last oath in Jan 2001. The world as we new it came to an end eight months after his last oath and he is facing an even bigger crisis over the next four years as he attempts to extract the U.S. from Iraq and face the coming energy crisis. Hopefully the war on terror has seen its biggest battle as we continue to mop up the remaining cells still trying to cause trouble. It will never be over but hopefully the lack of funding and the lack of a centralized backbone has weakened the resolve of those Al Qaeda members still in the system. If we get past Thursday without a terror event the country will probably relax even further and we can get back to contemplating the potential for a new bull market.

Jim Brown
Editor

"Men who try something and fail are infinitely better off than those who try nothing and succeed."



 
 



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