Option Investor
Market Wrap

Confusion Reigns

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+  56.10



2.13 bln

2457 / 800



+  19.40



1.88 bln

2103 / 915

S&P 100


+    2.82





S&P 500


+    6.80







+    6.70





RUS 2000


+    9.61







+  43.40







-     1.60







-     1.69







-     2.27




Total Volume







Total UpVol







Total DnVol







Total Adv







Total Dcl







52wk Highs







52wk Lows




























Confusion Reigns

Confusion was the dominant factor in today's market action. Gains were muted as traders waited patiently for the Intel and Yahoo earnings after the close. The two-day rebound has been less than convincing and there was some serious underlying fear that earnings from the big techs were going to disappoint. With IBM spoiling the party already a confirmation of weakness from Intel would crush sentiment that was already on crutches.

Dow Chart - Daily

Nasdaq Chart - Daily

Fortunately Intel did not disappoint and posted earnings of +34 cents that beat estimates of +31 cents. Revenue was also above estimates. Intel raised estimates for the current quarter and said they were going to raise their capex spending due to stronger than expected business and increased confidence in their 65nm technology. It was a good report on the surface and Intel stock jumped +75 cents to $23.30 in after hours trading. Intel has serious resistance at $23.50 and it will be interesting to see if the bounce is able to break that level on Wednesday.

Yahoo also reported strong earnings and spiked +2.00 in the minutes immediately following their release. Earnings of 13 cents beat estimates of 11 cents on higher than expected revenue. This was a very positive earnings report as echoed by comments from Terry Semel. "Yahoo! entered 2005 on a high note, delivering strong growth and record revenue for the eighth consecutive quarter, further validating the strength of Yahoo!'s business model," said Terry Semel, chairman and CEO. "We are on the cusp of witnessing a significant increase in engagement of consumers on the Internet and believe we are best positioned to capitalize on the many opportunities to which we are exposed." Shares were trading so heavy in after hours that the time and sales screen was moving so fast you could not read it. As traders digested the meat in the report the excitement cooled but not by much. Google reacted even more strongly than Yahoo with a spike to $199 from its close at $191. Google reports earnings on Thursday.

While after hours earnings from the big dogs were positive the morning economic reports were not. The Producer Price Index jumped by +0.7% due to higher energy prices. Analysts again told us not to worry because core prices, after taking away food and energy, rose only +0.1%. I am sure that is encouraging for those of you that don't consume food and energy. Core inflation was stronger among crude products and intermediate products, which should come as no surprise to anyone. Over the first quarter of 2005 the cost of finished goods has risen +5.7% on an annualized basis. Energy goods accounted for +3.3% of that rise. Despite the gains the rate of inflation is still tame against historical standards but the rate of climb is accelerating. The recent drop in oil prices should provide a cooling off period for producer prices as the system adjusts to the long-term impact of higher oil prices.

New Residential Construction fell -17.6% to an annualized rate of 1.84 million in March. This was the sharpest drop over 14 years and analysts were quick to blame higher interest rates for the slowdown. Builders appear to be less optimistic about the future and reducing inventory levels should help maintain prices and reduce costs. Everyone was quick to point out that the weather in March was terrible and not conducive to new home construction. However, applying for a permit to build can occur in any weather and this is what feeds the report not nails driven or concrete poured. The Fed will be very interested to see if this trend continues in April because this sharp a drop in building could have serious long term implications to the overall health of the economy.

Janet Yellen, president of the San Francisco Fed, said today that there were more signs of weakness in the economy. Fed Poole said the inflation outlook was very favorable. These high profile comments may be the Fed's attempt to calm the markets after last weeks drop. Weak economics and comments from Fed heads helped drive rates on the ten-year back down to 4.2% and a two-month low. We are only two weeks away from the next Fed meeting and there is still a 100% chance of another 25-point hike. Traders will still be watching the language to see if the measured pace has changed but there is nothing apparent at this time. The Fed is truly in a box once again. With the economy showing more signs of weakness they can't afford to continue their hike cycle and risk choking the life out of our fledging recovery. With inflation accelerating as evidenced by today's PPI they can't afford not to raise rates and risk letting those inflation fires rage out of control. They are truly damned if they do and damned if they don't. There was evidence of this battle in the recent minutes. The Kansas City Fed wanted to raise rates by 50 points but the Dallas Fed wanted no rate increase. This difference of opinion could keep the Fed in worry mode until everyone gets back on the same page. This could also help keep them on the current track as a middle of the road position.

All the news after the close was not positive. Avaya missed estimates by a mile for Q1 and warned they would miss estimates for all of 2005. The company just raised estimates in January for a +27% jump in revenue over 2004 levels. That estimate is now void. Avaya reported earnings of only 7 cents compared to estimates of 17 cents. The company cited early signs of weakness in the U.S. technology market.

This was completely contradictory to the Lucent earnings which quadrupled on demand for wireless products. Earning for Q1 rose to +6 cents compared to analyst estimates of +4 cents. There were some items contributing to the higher earnings but it was still a solid quarter. This was the 7th consecutive quarter of profits after 13 quarterly losses. At $2.63 this is a stock that may have turned the corner and you can buy it for the price of an option.

We are about a third of the way through the Q1 earnings cycle with several hundred companies still to report this week. The earnings have been mixed but are coming in slightly above expectations on the S&P. Some of the average boost is a direct result of the energy stocks and their very strong profits. Guidance elsewhere has not been exciting. As of yesterday 266 companies had given guidance since April 1st. 135 of those had lowered estimates for the current quarter. This equates to 50% and a much higher number than normal. Funds are still starving for cash with inflows of only $117 million for the first two weeks of April. This compares to an average inflow of $6.3B according to AMG Data.

Crude Oil Chart - Daily

SOX Chart - Daily

SPX Chart - Daily

Investors were quick to buy the dip on oil with solid gains off Friday's lows. The current contract for crude traded just over $50 for four days and held that psychological level but oil stocks did break. COP and XOM for example traded within pennies of their 100-day average and buyers were waiting. COP dipped to $98 on Monday before rebounding to close at $104.50 today. I would be really surprised if this bounce didn't fail but I would hate to bet against it. That $50 level is calling and the main reason for the bounce was emotional more than fundamental. Refinery problems in Texas, Kansas and Louisiana are slowing the build in gasoline inventories ahead of the diving season. Those problems are temporary and they should help increase the buildup of oil supplies in the interim. Inventories are out tomorrow morning and part of today's bounce could have been short covering in front of those inventory levels.

The Intel news tonight was followed by the semiconductor book-to-bill which rose to .81 for March and up from .77 in February. This was only slightly higher and should not provide any material help for an Intel bounce. Orders fell during the month but billings fell even faster. This produced a higher headline number but the news was actually negative since both components fell. With the Novellus CEO only "cautiously optimistic" about the chip-equipment market and guiding below analyst estimates there is still a weak foundation for chips in general. Texas Instruments painted the opposite picture saying markets are improving and the inventory backlog was behind them. I am presenting the opposite views to show that it is not a broad based recovery and it is more stock specific depending on what products make up the bulk of their sales.

Even if all the tech news had been positive we are still headed into the low volume summer months and this is not a period where most investors want to hold tech stocks. This should keep a cap on any gains as we work our way through the remainder of the earnings cycle. It does not take much good news to produce a couple days of positive markets given the crash last week to strong support levels. We were extremely oversold and Monday's opening dip to strong support at 10021/1904/1140 was a no brainer entry for a trading bounce. Unfortunately the bounce has been lackluster and any Intel/Yahoo move on Wednesday has a lot of overhead resistance to fight.

The lack of any further drops or material selling this week confirms my thought that the three-day drop last week was tax related selling. The opening dip on Monday was margin call selling and a knee jerk reaction by retail traders to the weekend news. The internals were pretty good today with advancers running better than 2:1 over decliners but volume was still anemic. New highs across all markets amounted to only 55 and new lows ticked in at 245. The talking heads on TV were bubbling about the volume and internals but given the oversold conditions I would have expected better numbers if there were a real rally in our future.

The Dow chart just does not show any excitement and there is strong resistance at 10275 and again at 10500. The path of least resistance is still down given the indecision about the economy and the Fed. The Nasdaq should get an opening bounce on Wednesday but 1960-2020 represents a strong resistance range and tech companies are not on the same page for their outlook. With 50% of guidance for this cycle guiding lower I would be very careful owning tech stocks. SPX 1160 is now strong resistance and I would watch that level for signs of a failure should we move up on the Intel/Yahoo news.

I believe we are still slightly oversold despite two days of lukewarm gains. The odds favor more choppy, range bound trading as the rest of the earnings filter through the markets. This makes me neutral for direction and cash is a position until a new trend begins. I still like oil at the 100-day average and I would continue to add to positions under $50. For other stocks there are just too many unresolved factors ahead of a historically weak period on the calendar. Tomorrow we will get the consumer version of the PPI and the Fed Beige Book along with oil inventories. The economic week wraps up on Thursday with the Chicago Fed National Activity Index and the Philly Fed Survey. I would remain cautious and definitely, enter passively and exit aggressively.


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