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Market Wrap

Major Monday Merger Mojo

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Just as it looked like there may have been some meaningful profit-taking starting to develop last week, buyers returned in force on Monday as a plethora of merger and acquisition activity re-ignited optimism among investors.

Advancing issues easily outnumbered decliners by a 3-to-1 margin at the NYSE, while NASDAQ breadth was positive for a second-straight session by a 7:3 margin.

In the mining sector, shares of Bema Gold (NYSE:BGO) $5.27 10.25% jumped higher after the company said it had agreed to be acquired for $3.1 billion by fellow Canadian gold miner Kinross Gold (NYSE:KGC) $12.01 -9.42%. At Friday's closing prices, the deal valued BGO at $5.85/share which is still below the recent 52-week high of $6.33. Kinross said it would exchange 0.441 of its shares for each BGO share. Pending completion of the deal, Kinross shareholders would own 61% of the new company and shareholders will own 39%. Longer-term both companies said they expect output at the combined company to rise to 2.8 million gold-equivalent ounces by 2009, up from 1.8 million ounces in 2006 and have a cost of sales, per ounce of gold-equivalent metal, of $130 by 2009.

Buyers also gobbled up restaurant stocks in Monday's session after OSI Restaurant Partners (NYSE:OSI) $39.75 22.57%, which owns the popular Outback Steakhouse chain, said it had agreed to be bought by a private investor group for $3 billion, or $40/share.

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Truckers witnessed a bullish session of trade. Swift Transport (NASDAQ:SWFT) $29.84 24.07 rose sharply after the company's largest shareholder and ex-CEO Jerry Moyes offered to buy the company for $29/share, or $2.17 billion. Last year, Mr. Moyes paid a penalty and agreed to step down as CEO after SEC filings revealed that he bought shares of Swift two trading days before the company posted better-than-expected quarterly results. The transaction, which took place in 2004, reportedly yielded Mr. Moyes a $622,000 profit.

Four Seasons Hotels (NYSE:FS) $82.50 29.16% surged more than $18/share after the luxury hotel chain said it had received an offer to be taken private for $3.7 billion by a group of controlling shareholders, including Bill Gates's Cascade Investments, and Kingdom Hotels International. The $3.7 billion offer valued Four Season's shares at roughly $82.

If 10% to 29% premiums from Friday's close weren't enough to raise a short's blood pressure, or lift optimism that some stocks may be substantially undervalued, then KOS Pharmaceuticals' (NASDAQ:KOSP) $77.06 53.84% news that Abbott Laboratories (NYSE:ABT) $47.47 -0.35% was offering $3.7 billion, or $77/share for the company might have been the "deal of the day." Abbott executives said the purchase of KOSP would help the company expand its portfolio of cholesterol drug holdings.

Closing U.S. Market Watch - 11/06/06

Some of the brokers, or the investment banks were likely the "quiet winners" as a result of the merger/acquisition activity.

Goldman Sachs (NYSE:GS) $190 1.53%, JP Morgan Chase (NYSE:JPM) $47.65 1.62%, Morgan Stanley (NYSE:MS) $76.04 2.36%, Merrill Lynch (NYSE:MER) $88.04 1.52% and Lehman Bros. (NYSE:LEH) $76.15 2.31% posted solid gains.

Earnings also found interest among traders.

XM Satellite Radio (NASDAQ:XMSR) $13.17 5.62% rose $1.75 after the company posted a narrower-than-expected loss and said it was on track to turn a profit in Q4. XM said it lost $85.5 million, or $0.32 a share in the three months ending September, compared with $134 million, or $0.60/share, in the same period last year. Analysts were expecting the company to lose $0.46/share in the recent quarter.

XM's rival, Sirius Satellite Radio (NASDAQ:SIRI) $4.02 6.91%, was atop today's list of most actively traded stocks and gained 26-cents.

Coated-stent maker Boston Scientific (NYSE:BSX) $16.89 2.98% rose 49-cents, not nearly as bullish as I would have thought after the company said its sales could rise between 11% and 21% next year, depending on how quickly markets for two types of heart devices break out of slumps. The forecast put sales between $8.65 billion to $9.45 billion next year, which looks to be in line with consensus. While the company didn't give specifics as to bottom line figures, company executives did say they expect double-digit earnings growth. According to recent analysts estimates, Wall Street sees 2006 EPS of $1.82 and 2007 EPS falling 56% to $0.79/share in 2007. A "double-digit growth" based on 2006 EPS assumptions of $1.82, would be 10% at a minimum, or $2.00/share for 2007.

BSX's executives admitted that slowdowns in the company's two key markets make it tough to issues specific financial projections and acknowledged it is taking longer than expected to realize the synergies from the Guidant deal, which they say will eventually expand the company's product line into markets that will see long-term growth.

While there were some upbeat earnings and outlooks, there were also some casualties.

Shares of Internet "close-out" retailer Overstock.com (NASDAQ:OSTK) $14.59 -17.94% plunged to a multi-year low on heavy volume of 2.43 million shares after the company said Q3 revenues fell 6% to $159 million, while gross margins shrunk 1.2%. The one-two punch of falling revenue and shrinking margins had losses building to $24.5, or $1.19 per share.

While Overstock's point and figure charts was adding some "O"s to its chart in the form of supply exceeding demand, shares of drug developer Adolor Corp. (NASDAQ:ADLR) $7.69 -44.83% were doing the same after the company said the FDA has requested more safety data on their postoperative bowel treatment Entereg.

The agency sent the companies an approvable letter on the drug, requesting 12-month safety data that includes analysis of serious cardiovascular events from an ongoing study. That study is focusing on the drug as a possible treatment to relieve constipation in people who must take opiates for cancer and other chronic pain. Phase III clinical trials showed mixed results.

The bigger they come... the faster they rise?

Good gravy! What took sellers 6-day to accomplish, took buyers less than 6-hours to erase.

Dow Industrials ($INDU) - 50-point box chart

Since late August, the Dow Industrials ($INDU) has been on a rocket-ride. The $INDU is extended above it breakout of 11,300, but overhead supply, or resistance in relatively nonexistent.

New bull entries have the greatest amount of RISK, but that doesn't always matter near-term when there's no overhead supply (old longs looking to get out). Internals as depicted by the very narrow Dow Industrials Bullish % ($BPINDU) from StockCharts.com (just 30 stocks) are very strong, but also "overbought" above the 70% reading at 86.66%. That has 26 of the 30 Dow components currently showing a point and figure buy signal associated with their supply/demand chart. Remember! X is up/demand and O is down/supply.

On the above 50-point box chart, support is viewed at 11,700. However, a 3-box reversal back up to 12,150 would have bulls pressing the issue higher with a tight stop at 11,950.

Last week, Jim, Linda, Keene and I received an email from a subscriber asking why we all use/show charts on various time intervals?

In last week's Market Monitor, I touched on the subscriber's question, saying that I think every trader, or investor should look at different time intervals.

If you're not a day trader, then you don't need to look at intra-day charts. But a swing trader, or investor, you'd better look at a lot more than a couple of months of trade.

LOOK AT THE BIG PICTURE first. That is, try and get a BROAD PICTURE of supply/demand. Not just a month, or two, but several months. Identify the MAJOR levels of resistance/support, then work in (smaller time frames) from there.

The conventional scale of a point and figure chart is a great place to start.

One technique a point and figure chartist will also use is to "cut down" on your box size.

I look at the above $INDU chart and say "It is extended, but is there a price point after this pullback that would be an early warning that supply is starting to overcome demand?"

Let's cut down our box size to 25-points, from 50-points. A bar chartist might think of this as looking at a weekly interval bar chart, then a daily interval bar chart.

Dow Industrials ($INDU) - 25-point box chart

The 25-point box chart of the $INDU adds some "noise" or more action than the conventional 50-point box chart, but it is evident that since September 26th, the pattern of higher lows and higher highs continues. See that "sell signal" on September 22nd at 11,475? Right now, as of tonight's close, a similar trade would be found IF the $INDU traded 11,950. For those that have been reading my commentary since mid-September, you should remember my notes/observation during that time that the major market bullish % ($BPNYA, $BPCOMPQ, $BPSPX, $BPOEX and $BPNDX) were all starting to reverse up and signal some meaningful internal strength building.

I think the Dow Industrials ($INDU) needs to see a trade at 11,925 at a MINIMIMUM to even begin to think sellers are gaining control over buyers.

As BULLISH as you can make it look!

One technique I'll use to try and find weakness, is to make a chart look as BULLISH as I can. Get the chart to tell me where I was wrong from the BEARISH perspective, and where BULLS have been the winners.

For a couple of weeks, some traders in the Market Monitor have been "feeling the pain" from the bearish side in the S&P Depository Receipts (AMEX:SPY) $138.08 1.12% as profit takers REFUSED to take any profits, where in fact, buyers continued to press the SPY well above the November $136 Put strike. Adding to the "pain" was declining volatility, or option premiums, even as the SPY came back to my 10/17/06 bearish entry point.

At Friday's close, today was a day I thought it would either be a "put up, or shut up" trade, where any November out the money put option holders (out the money= prices below current level of trade) needed to see a break. I don't think we got it today, and an unconventional $0.40 box chart may be a good box size to have the SPY looking as BULLISH as I can get it.

S&P Depository Receipts (AMEX:SPY) - $0.40 box chart

One of the best ways to get a feel for a market, or index is to trade it. At Friday's close, I think many S&P 500 traders could feel some pressure building, and traders holding put options, had a feeling today was a "make or break" session.

In the first 60-minutes of trade, over 15 million SPY shares changed hands, and for the most part, it was up, up and away.

That action still gives me the feel and observations that there are some BIG SHORTS, or bears that are still trying to get "squared up," or get things under control and any resumption of strength, regardless of how "overbought" things seem, continues to build on itself.

A $0.40 box chart of the SPY would have the SPY showing 5 continuous "buy signals" (a column of X exceeding to the upside a prior column of X) without a single sell signal (a column of O exceeding to the downside a prior column of O). First sign of any weakness here would be a trade at $135.60.
 

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