Option Investor
Market Wrap

In A Word .... Utilitarian!

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The major indexes started the week mixed-to-lower with transports and financials offsetting an electrifying deal that sent the utility sector surging higher in a very brisk trade at the big board.

The NYSE Composite ($NYA.X) 9,421.44 +0.01% jumped to an all-time high early in the session, but finished fractionally higher on heavy volume of 2.7 billion shares.

Electricity provider TXU Corp. (NYSE:TXU) $67.93 +13.17% provided a "shock" to market participants after the company said it had agreed to be taken private in a buyout deal valued at $45 billion, including debt. The deal currently values TXU's shares at $69.25.

The acquisition of the Dallas-based utility, Texas' largest utility, is being led by private equity firm Kohlberg Kravis Roberts & Co. and Fort Worth-based Texas Pacific Group and investment banker Goldman Sachs (NYSE:GS) $214.00 -1.15%.

Shares of TXU were among today's most actively trade, pushing just over 48.4 million shares changing hands, which was very heavy considering average daily volume of 3.3 million share the past three months.

The transaction was endorsed by environmental activist groups who were previously critical of TXU's plans to build 11 coal-fired power plants in Texas. Earlier today, the consortium said it plans on abandoning TXU's previous plans to build additional coal-fired plants in the state.

A quick glance at the coal sector shows James River Coal (NASDAQ:JRCC) $7.40 -5.85% leading weakness in the group today, while Peabody Energy (NYSE:BTU) $42.91 -3.44%, National Coal Corp. (NASDAQ:NCOC) $4.72 -3.27% and Massey Energy (NYSE:MEE) $25.23 -2.69% round out the list of percentage losers. China's Yazhou Coal (NYSE:YZC) $53.01 +4.97% bucked industry weakness, leaping higher for a third-straight session to close at an all-time high.

Banc of America Securities analyst Daniel W. Scott wrote in a research note that the possible canceling of TXU's prior plans to build additional coal-fired plants in Texas could hurt sales at Arch Coal (NYSE:ACI) $32.78 -2.38% and Peabody (NYSE:BTU). Mr. Scott said TXU probably would have bought Powder River Basin coal for its plants, and Arch and Peabody are the maid producers of that type of coal.

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Adding to today's above-average volume at the big board was a brisk trade (65.84 million shares traded) for Advanced Micro Devices (NYSE:AMD) $15.68 +6.73%. The stock has been a regular contributor to the small number of new lows at the NYSE, but not today. Speculation resurfaced again today that the chipmaker might be a leveraged buyout candidate. FTN Midwest Securities analyst JoAnne Feeney said that AMD's recent acquisition of Allegheny Technologies (NYSE:ATI) $107.08 -0.67%, and the debt that accompanied the purchase, a deal might help iron out the kinks in the company's finances.

Speculation that AMD might be "in play" as an acquisition target wasn't the only stock seeing some upside activity today.

Shares of Dow Chemical (NYSE:DOW) $44.99 +3.54% jumped as high as $47.26 earlier this morning after a U.K.-based tabloid, Sunday Express, said the company could be a target of a leveraged buyout. In an unsourced report, said tabloid said the chemical giant might get a takeover offer worth as much as $54 billion. Recent SEC filings have DOW's outstanding shares totaling just over 959 million. If the SPECULATION were to become reality, the deal could value DOW's shares at roughly $56.30.

Shares of DOW traded heavy volume of 37.3 million, roughly 7-times its average daily volume of 5.5 million shares.

U.S. Market Watch - 02/26/07 Close

While TXU jumped and the broader utility sector depicted by the Utilities HOLDRs (AMEX:UTH) $139.70 +3.01% lead today's sector winner list, the Dow Transports (TRAN) 5,036.72 -2.36% and Broker/Dealer Index (XBD.X) 246.51 -1.63% were sector losers.

All of the TRAN components witnessed a lower trade with Continental Airlines (NYSE:CAL) $41.40 -3.81%, truckers YRC Worldwide (NASDAQ:YRCW) $44.72 -3.55% and JB Hunt (NASDAQ:JBHT) $27.12 -3.38% pacing the decline. Overnight shipper FedEx (NYSE:FDX) $116.99 -3.29% was also weak.

Cautious comments out of Bank of America and Bear Stearns regarding valuations for some of the freight movers were cited for today's transport weakness.

Treasuries found another strong bid in today's session with the shorter-dated 5-year yield ($FVX.X) falling 4.6 basis points to 4.614%, while the longest-dated 30-year yield ($TYX.X) mirrored the move, falling 4.9 basis points to 4.733%.

Ex-Fed Chairman Alan Greenspan once again sounded a word of caution, saying there is still a "possibility" that the U.S. economy could fall into a recession later this year after expansion began in 2001.

A Change of Status!

In the above U.S. Market Watch I note that StockCharts.com's NASDAQ Composite Bullish % ($BPCOMPQ) http://stockcharts.com/webcgi/Pnf.asp?S=$BPCOMPQ achieved "bull confirmed" status since my last Market Wrap of 02/12/07. This VERY BROAD indicator of market strength/weakness achieved "bull confirmed" status at the close of trade on 02/14/07 at a 60% bullish reading.

NASDAQ Composite (COMPQ) - Daily Intervals

I've benchmarked the COMPX's 02/14/07 close of 2,488 with a DASHED GREEN horizontal line to StockCharts.com's very broad NASDAQ Composite Bullish % ($BPCOMPQ) achieving "bull confirmed" status at 60% Bullish. That's 60% of roughly 3,000 four and five-lettered stock symbols that find their point and figure (supply/demand) charts now showing a "buy signal" intact.

We can QUANTIFIABLY say that the COMPX's internals are STRONGER today than they were back in March of last year (2006).

Banks trade soft. Two potential reasons why.

On Friday I alerted traders and investors to be looking for some weakness in the banks as depicted by the S&P Bank Index (BIX.X).

One of the PRIMARY reasons is some damage to a bull's psychology, where bulls find themselves VERY, VERY, VERY profitable, while two (2) stocks that have been grabbing headlines in the subprime lending arena exhibit further weakness.

While we've been hearing for years, if not quarters and months, that past Fed policy would lead to a "collapse" of the financial system, the continued weakness in shares of New Century Financial (NYSE:NEW) $15.24 -1.80% after fellow subprime lender Novastar (NYSE:NFI) $7.96 -6.13% should have banking bulls exercising caution.

I want to quickly discuss the "psychological" impact of NEW's trade in recent sessions.

New Century Financial (NEW) - Daily Intervals

Earlier this month, shares of NEW gapped lower from the $30.00 level, perhaps "confirming" some bear's words of doom and gloom would show up in the credit markets.

From a TECHNICAL perspective, the above chart of NEW would suggest the stock was trading BEARISH into the news. The stock gaps down on the initial "shock," or release of the negative news that the company would have to increase its loan-loss reserves.

Market PSYCHOLOGY may well have IMPROVED when NEW rose, or showed a "relief bounce" back to/near the $20.00, but upon trading back below $17.00, then taking out post-warning lows, SENTIMENT, or PSYCHOLOGY toward "financials" takes a hit, or becomes further BEARISH/cautious.

By using a fibonacci retracement, attached from the $30.16 level to today's lows, a trader or investor can actually use a stock like NEW to attach PRICE levels to SENTIMENT for some of the financials.

With NEW and Novastar Financial (NYSE:NFI) $7.96 -6.13%, which was the latest "supbrime" lender to warn, these two (2) stocks become important names to monitor.

That's ONE reason why I believe banks and even some of the brokers (that have subprime mortgage lending exposure) have traded weak in recent sessions. An "aversion to risk" when hefty profits are at stake.

Another reason is that Treasuries have been finding an aggressive amount of buying, where their YIELDS have been driven lower.

In just the last 5 trading sessions, the shorter-dated 5-year yield ($FVX.X) has fallen 6.2 basis points to close tonight at 4.614%. Compare that 4.614% yield to the current FOMC target for Fed funds of 5.25%. For a bank that LENDS money, even to its BEST customers at a PRIME rate, that becomes a "squeeze" on lending margins.

The longest-dated 30-year yield ($TYX.X) has also fallen notably in the last 5 sessions, down 5.5 basis points to 4.733%.

S&P Banks Index (BIX.X) - Daily Intervals

I've labeled the daily bars on the BIX.X that show "reactions" to NEW's and NFI's recent warnings.

Using the same "drag it up" 0% retracement I've been showing for other major indexes like the S&P 500 (SPX.X), it is notable that today's low comes smack on the BIX's 19.1% retracement, a level of fibonacci retracement that would be a "1st level of downside risk" that is realized. The trend dating clear back to an October 2005 relative low of 327 may suggest that some BEARS did some buying today.

Now, "2 shoes have dropped" in the subprime lending arena.

A stock I think we should keep a VERY close eye on, that is MUCH LARGER than NEW or NFI combined would be shares of Dow component Citigroup (NYSE:C) $52.68 -2.02%, which is also a HEAVYWIEIGHT for the SPX.X and S&P 100 Index (OEX.X).

Citigroup is a banking GIANT, and does have a mortgage arm "CitiMortgage," which is a BIG player of purchasing mortgages that may be subprime.

Recent news items that I've mentioned in the OptionInvestor.com Market Monitor strongly suggest that regional banks, as well as some of the subprime lenders like NEW and NFI will originate, then SELL mortgages to many of the SUPER REGIONALS, or MONEY CENTER banks like Citigroup (C).

Note in the above U.S. Market Watch that the PHLX Bank Sector Index (BKX.X) 118.91 -0.58% is down 1.77% the past 5 days, compared to the BIX falling 1.29% the past 5 days.

If I were to not only analyze NEW and NFI's continued weakness from a technical, then perhaps FUNDAMENTAL perspective, we could also be seeing a MARKET RESPONSE that begins to factor in the possibility that some of the BIGGER PLAYERS in the mortgage loan industry may have to INCREASE their RESERVES for POTENTIAL "bad loan" risk. Thus weighing on their bottom lines.

The MARKET will hold the answer, and it can't hide BUYING, or SELLING.

"Financials" as an industry comprise the BIGGEST weighting in the S&P 500 (SPX.X) and small cap Russell 2000 Index (RUT.X), thus the IMPORTANCE for monitoring the banks at a minimum.
 

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