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Market Wrap

Bullish Surprises as Big as Texas

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Stocks edged lower on Monday after last week's bullish option expiration, as a mixed morning session turned modestly weaker just after 01:00 PM EDT on news out of Nigeria that gunmen battled security forces in the country's southern oil region.

After settling lower into Friday's May crude oil expiration, the unrest in Nigeria found June Crude Oil futures on the Nymex (cl07m), now the front month contract, settling up $1.78, or 2.78% at $65.89.

One of tonight's after-hours winners comes from an earnings report out of chip maker Texas Instruments (NYSE:TXN). The stock finished today's regular session down 9 cents at $32.41, but surged to $35.47 in tonight's extended session after reporting quarterly earnings of $0.35/share, which was above consensus estimates for $0.31/share. The company said Q4 revenues were $3.19 billion, which was slightly above consensus estimates for $3.15 billion.

Texas Instruments is the largest weighted stock in the Semiconductor HOLDRs (AMEX:SMH) $35.97 -0.71%, which jumped to $36.81 in Monday's extended session.

On Friday (04/20/07) the SMH closed above the $36.00 level, something it hasn't been able to do since May'06. There was great debate on Friday (04/13/07) in the OptionInvestor.com Market Monitor regarding "valuations" and the SMH's range between $33.00 and $36.00. If tonight's extended session trade is any indication of the future, then market participants seems to side with the "undervalued" camp, and a major technical breakout to the upside is at hand.

Last week's 4.6% gain in the S&P Banks Index (BIX.X) 397.34 -0.85% was paramount to last week's new highs for the S&P 500 (SPX.X) 1,480.93 -0.23% in my opinion. As I get caught up on last week's action, the gains for the financials, where regional bank weakness was providing bullish caution, was last week's biggest bullish surprise in my opinion.

Monday tends to be a day where merger and acquisition deals are announced. Today's biggest deal had London-based banker Barclays PLC (NYSE:BCS) $58.27 -2.88% saying it was buying Amsterdam-based ABN Amro (NYSE:ABN) $48.16 -2.29% in a $91 billion stock deal. ABN said it had also agreed to sell its LaSalle unit, which operates more than 400 branches across Illinois, Michigan and Indiana to US-based banking giant Bank of America (NYSE:BAC) $50.51 -1.03% for $21 billion.

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Other M&A deals had NASDAQ-100 component MedImmune (NASDAQ:MEDI) $56.57 +17.82% finishing atop today's most actively traded after the biotech-concern said it agreed to be bought by London-based AstraZeneca PLC (NYSE:AZN) $55.91 -5.30% for $15.6 billion (11.5 billion euro). Two weeks ago, shares of MedImmune surged from the $38 level after the company said it would no longer resist disappointed shareholder's calls for the sale of the company.

Activist investor and billionaire Carl Icahn recently revealed that he owned just over 1% of MedImmune's stock, and called the company's management "lackluster."

AstraZeneca hopes to close the deal in June. If consummated, AstraZeneca said the acquisition would increase the company's proportion of biotechnology drugs in its pipeline from 7% to 27%, and enlarge its total pipeline by 45 projects to 163 projects.

While MedImmune was trading another multi-year high, shares of fellow NASDAQ-100 component Sirius Satellite Radio (NASDAQ:SIRI) $2.80 -6.04% fell to its lowest since September 2004 as pessimism grows for how much value a combination between it and fellow NASDAQ-100 component XM Satellite Radio (NASDQ:XMSR) $11.13 -3.13% will generate.

Bank of America's Jonathan Jacoby said implied stock prices of SIRI and XMSR suggest the odds of an SIRI/XMSR merger coming to fruition have dropped to 35%. Mr. Jacoby cut his price target on SIRI to $2.75 from $3.50 and XMSR's to $12.50 from $17.00.

U.S. Market Watch - 04/23/07 Close

While the AMEX Biotechnology Index (BTK.X) was today's sector winner, closing at another all-time high, homebuilders as depicted by the Dow Jones US Home Construction Index (DJUSHB) 634.99 -2.03% and the AMEX Airline Index (XAL.X) 52.68 -1.93% were today's sector losers.

After reviewing last Wednesday's Mortgage Bankers Association's weekly application survey and the CME's various regional housing futures contracts (Aug'07, Nov'07 and Feb'08) I'd have to surmise that last week's +8.82% rise was largely short-covering.

On Friday, the CME's Aug'07 Composite Housing Futures (composite of Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York Metro, San Diego, San Francisco and Washington DC) settled 214.80, just off a benchmarking low of 213.20 observed on 03/30/07. The CME's Nov'07 Composite Housing Futures settled 211.60 on Friday, also just off a 03/30/2007 benchmarking low of 211.40.

Housing sector watchers might perk up should we see Nov'07 futures exceed the Aug'07 contract prices.

Dow Jones US Home Cons. ($DJUSHB) - 5-point box chart

The supply (O) and demand (X) chart of the DJUSHB has been giving some conflicting buy signals of late. In late February, the traded at 715 on 2/22/07 was quite bearish as a spread triple bottom sell signal was given just below bullish trend. The double top buy signal at 640 didn't was "false", or weakness was found once again on 3/27/07 when a double bottom sell signal was generated at 615. On Tuesday of last week (4/17/07) a reversing back higher buy signal was generated at 610.

The pattern the DJUSHB has NOT been able to produce is two consecutive "buy" signals.

When looking at the above chart of the DJUSHB, a BULL and/or BEAR is probably observing some confusion as market participants feel things out.

I'd be more DEFENSIVE, or bearish below the recent relative high of 655. My bar chart shows the 200-day SMA trying to round flat from downward trend 660.00.

This is probably the TOUGHEST sector to trade bullish/bearish right now, but continues to be a MAJOR focus of traders and investors. I would avoid the group if at all possible.

Today, Dow Jones News Wire noted that a paper co-authored by Mr. Greenspan said home equity served as a growing source of funds for U.S. consumer spending from 2001-2005, financing close to 3% of total personal consumption expenditures.

Semiconductor HOLDRs (SMH) - Weekly Intervals

Tonight's news and after-hours action in Texas Instruments (TXN) should bring renewed interest to the sector, which has been lacking for more than 6-months. While TXN is not a component of the NDX/QQQQ, three of the 5 top-weighted stocks in the SMH are NASDAQ-100 components. Tonight's bullish-looking surprise of TXN should have bears running for cover in the group as earnings season is just beginning.

With the major indexes either at all-time highs, or new multi-year highs, overhead supply is limited, and bulls on a broader scale may hold back their willingness to sell, instead, looking for further gains.

The SMH is perhaps an "ideal" sector to be buying the technical breakout that has been doing nothing for 6-months, where the break higher really brings in the momentum bulls, and short-covering from bears that questioned valuations, but can no longer question the price action.

I'd like to thank Linda Piazza for filling in for me last Monday.
 

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