Option Investor

Daily Newsletter, Thursday, 01/27/2005

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Watch List
  5. Market Sentiment and Statistics

Market Wrap

Get the Bug Spray

  1/27/2005   High Low Volume Adv/Dcl
DJIA 10467.4 -31.2 10498.14 10429.94 1.98 bln 1761/1428
NASDAQ 2047.15 1.1 2053.94 2036.09 2.12 bln 1501/1568
S&P 100 562.36 0.58 563.59 560.01 Totals 3262/2996
S&P 500 1174.55 0.48 1177.5 1170.15  
SOX 403.67 3.6 404.18 397.59  
RUS 2000 616.9 0.33 620.39 614.33  
DJ TRANS 3554.12 16.7 3557.5 3523.96  
VIX 13.24 -0.2 13.57 12.96  
VXO (VIX-O) 12.78 -0.29 13.34 12.76  
VXN 18.58 -0.34 19.13 18.39  
Total Volume 4,351M        
Total UpVol 2,392M        
Total DnVol 1,915M        
Total Adv 3735        
Total Dcl 3414        
52wk Highs 246
52wk Lows 73
TRIN 1.22

The caterpillar ate the gains today and single-handedly turned the market sentiment back to negative. After the opening dip was bought and we started off on a second consecutive day of gains CAT earnings killed the rally. CAT lost -4.60 for the day and that equals well over -30 Dow points. Considering the Dow closed down -31 it was the difference between a gain or a loss for the index. Got any bug spray.

Dow Chart - 180 min

SPX Chart

Nasdaq Chart

Caterpillar blamed their earnings drop on higher material costs despite higher sales and higher prices on those sales. Over the last year steel has risen +105%, copper +37%, oil +33%, aluminum +25% and lead +40%. In is tough to be in the heavy equipment business with commodities rising so quickly. Considering 90% of every product they sell is made of steel a +105% rise in the cost of steel would be tough to pass on to customers. In retrospect CAT still had a respectable quarter and their only sin was missing analysts estimates by eight cents. Posting earnings of +$1.55 for the quarter should never be seen as a negative. Needless to say all the other equipment manufacturers regardless of sector felt the pain of investor flight.

On the economic front all the news was good and that added to the morning bounce. The Jobless Claims rose only +7,000 at 325,000 and only slightly over last week's abnormally low number. It appears the multi month low was the real deal and jobs are growing. This suggests we will see a strong Jobs report next Friday. It also suggests the Fed may be feeling the pressure to raise rates faster if jobs are strengthening.

The Conference Board Help Wanted Index rose to a six month high at 38 and a +2 point jump from the prior months cycle low of 36. This also suggests the jobs report could be stronger. This report is contrary to the Mass Layoff report on Wednesday that rose to announced layoffs of 161,271 for the December period. This was a strong bounce of +31,000 over November but we need to remember that December is a normal layoff month for seasonal workers.

Rounding out the economic picture was the Durable Goods number for December which posted a +0.6% gain and only slightly under estimates for +0.7%. November was revised up to +1.8%. Orders for communications equipment surged +17% in December and rebounded from their -39% drop in November. This sector has been very volatile of late with double digit swings. Computers and related products surged +8.8%. The only real weakness in the report was a broad based slow down in new orders.

These reports continue to paint a mixed picture of the economic recovery. One day we see the manufacturing surveys posting major setbacks and the next day all reports are positive. There is definite turmoil in the economy and real indecision as to the future. On Friday we will get the GDP for Q4 and the estimate is for a +3.4% gain. There are whisper numbers as high as 4.5%. Some analysts feel the Microsoft dividend could have added as much as +1% to the GDP and it is not being factored into the consensus estimates.

After the bell today move than 75 companies reported earnings with Microsoft the big name. Microsoft reported earnings that more than doubled over Q4-2003 and sales that increased +6.5%. MSFT beat the street by two cents but they way they reported it caused some serious volatility. Initially it appeared they missed estimates but after the smoke cleared and all the adjustments were made it was a clear win. The Xbox business is booming as well as software sales in both the consumer and corporate sales. Microsoft raised guidance for both earnings and revenue for the next quarter and the full year. Microsoft earned +$3.46 billion for the quarter. That is a serious chunk of change and a blowout quarter. While Microsoft was glowing about the gains you have to wonder how much of those gains were related to the PC sales spurred by the 2004 tax credit. That credit expired on 12/31 and those wishing to take it had to buy equipment before that deadline. Confirming that premise Microsoft server product sales jumped +18% in the last quarter. Given the weak economic conditions this was a huge jump.

SanDisk also reported blowout earnings of +42 cents when analysts were expecting only +27 cents. Shares jumped +$4 after the report. Given the recent flood of stories claiming over production and lower sales this was a very good report. SNDK did guide flat to lower for the current quarter as we wade through that excess inventory in flash memory products.

The real superstar was MicroStrategy. (MSTR) The company reported earnings of +$1.43 with analyst estimates of only 88 cents. MSTR has been a short favorite since its earnings in October caused a +$14 spike in the stock price. It held the majority of those gains for the quarter although we did see some profit taking over the last month. MSTR saw a +$3 gain today as some shorts took the safe route and exited before earnings. Those were the smart traders. After tonight's earnings MSTR jumped another +$15 and those traders still short are feeling the pain again. Profits more than doubled over last year and it definitely appears their problems are over. MSTR fell to $5 in late 2002 and was temporarily halted from trading on the Nasdaq under the MSTR symbol in August 2002. The low for 2004 was $30 and it is trading at $76 in after hours. I am sure everyone reading this bought a couple thousand shares at $5 back in 2002 and you are still holding it. What? You thought they were going bankrupt on the accounting scandals? I am sure quite a few traders are kicking themselves tonight for selling at the bottom.

Semi stocks were well represented tonight with quite a few announcing earnings. Broadcom was probably the best well known and they announced inline with estimates or a penny better depending on who you listen to. NVLS beat the street by +3 cents, CHRT +8, MSCC, ADPT and PMCS reported inline, VSEA missed by -6 and SANM by a penny. Semi stocks traded mostly higher in after hours.

The biggest loser of the day was Overstock.com. OSTK beat estimates by +5 cents but was killed in after hours dropping -$9. The company said margins were not likely to rise above 15% and any future savings would not be passed along to investors. The CEO said any future savings would be used to further the price war with Amazon. Both companies are chipping away at margins in an effort to hold market share.

Oil continues to hover just below $50 but is showing a little weakness ahead of the OPEC meeting this weekend. In an interview today the president of OPEC again said he did not expect a production cut at this meeting. China oil demand growth rates of +14% to +15% were again discussed and he tried to downplay that possibility. He was very elusive on prices but said he did not expect a material decline given the current demand growth and the various geopolitical factors. You can read between the lines there. He did confirm he expected a dip in prices as the heating oil demand in the U.S. slowed with the advent of spring.

The markets began the day mixed with the Dow in trouble from the start. It was never able to return to the 10500-10510 resistance level and fought to hold 10440 support. The Dow has what some are calling a head and shoulders with 10440 the neckline. If that is correct then another breakdown to 10400 could be the start of a significant decline. I would like to think 10440 will hold but it may be wishful thinking at this point.

Since January began the Nasdaq has not posted a three-day gain until today. Even with this minor gain the Nasdaq is still under downtrend resistance at 2055 and weak. The poor showing today could have been a direct result of earnings fear after the close with over 50 tech stocks reporting. While most were better than expected the guidance was mostly flat to down. There were highlights and lowlights but overall the outlook is still cloudy. For the last week we have been stuck in the 2020-2060 range and futures tonight are not suggesting a strong bounce tomorrow. I believe investors are very confused. They see these tech stocks post winning numbers but there is no improvement in sentiment.

The Russell led the bounce yesterday and today but took a beating this afternoon as several sell programs knocked off points. The Russell has been trading in the 605-625 range since Jan-5th and while it appears to be trying to form a bottom every major bounce is sold.

The SPX is still the weakest link as it cannot get back over my 1175 line in the sand. For four days now the SPX has attempted to break back over that resistance with no success. With stronger resistance at 1195 just breaking out from its current range will not confirm a new rally.

TrimTabs said tonight that U.S. equity funds saw outflows of -$747 million for the week ended on Wednesday. This was a reversal of the meager inflows of +$161 million the prior week. The month is not shaping up well and there is no reason to suspect a material rebound. As investors we need to not try and pick a direction while the market decides which way it is headed. We have already seen historical trends evaporate and trying to pick a direction in this range bound muck could be dangerous. My recommendations are still the same. Small long positions over SPX 1175 until the breakout confirms by moving over 1195. Flat under 1175 and short under 1160. Until a direction appears cash is still a position.

Enter Very Passively, Exit Very Aggressively!

New Plays

New Option Plays

Call Options Plays
Put Options Plays
None None

Play Updates

In Play Updates and Reviews

Call Play Updates

Aetna Inc - AET - close: 126.75 change: +1.85 stop: 119.99

AET managed to out perform the broader indices today with a 1.48 percent bounce on Thursday but we remain cautious. The IUX insurance index doesn't look very healthy following yesterday's failed rally at the 320 level. The IUX is currently hovering above its 200-dma and a breakdown would be negative pressure on shares of AET. Right now we'd wait for a move over $129 or $130 before considering new positions.

Picked on January 13 at $127.61
Change since picked: - 0.86
Earnings Date 02/10/05 (confirmed)
Average Daily Volume = 2.2 million


Alliance Resource - ARLP - close: 71.33 chg: -1.23 stop: 69.00*new*

We remain bullish on ARLP but the short-term trend of lower highs makes us very cautious, especially since ARLP didn't participate much in the recent two-day market bounce. Readers can still use a bounce from the $70 level and its 50-dma as a new bullish entry point but conservative traders may want to wait for a move over $75.00. If ARLP can breakout over the $75 level it would produce a new quadruple-top breakout buy signal on its P&F chart. We are raising our stop loss to $69.00 just under the 50-dma.

Picked on January 10 at $ 69.80
Change since picked: + 1.53
Earnings Date 10/28/04 (confirmed)
Average Daily Volume = 115 thousand


Invitrogen - IVGN - close: 69.59 chg: +0.49 stop: 66.00

IVGN managed to continue its rally from Wednesday into Thursday morning and shares broke out over the $70.00 mark. Our entry point to buy calls was at $70.05 so the play has been opened. Unfortunately, the BTK biotech index could not hold on to its earlier gains and pulled on IVGN, which slipped back under the $70 level. Readers can watch for a dip and bounce from $68.00 as a new entry point or we suggest more conservative traders wait for IVGN to trade back above the $70 level and probably $70.50 before considering new bullish positions.

Picked on January 27 at $ 70.05
Change since picked: - 0.46
Earnings Date 02/17/05 (unconfirmed)
Average Daily Volume = 800 thousand


KB Home - KBH - close: 105.77 change: -1.75 stop: 99.50

The homebuilders didn't do much on Thursday as the DJUSHB home construction index gave back most or all of its Wednesday's gains with today's 1.75 percent decline. KBH paced the decline in the sector and pull back toward support in the $105 region. We remain bullish on the stock and the group but it would probably be safer to wait for KBH to breakout from its current short-term trading range before considering new bullish positions. Watch for a move over $108.00. Conservative traders may want to tighten their stops toward the $104 level. If the DJUSHB breaks down under the 800 level we may consider an early exit as well.

Picked on January 13 at $106.00
Change since picked: - 0.23
Earnings Date 03/17/05 (unconfirmed)
Average Daily Volume = 1.1 million


Pulte Homes - PHM - close: 64.39 chg: -1.14 stop: 61.00

PHM paced the decline in the homebuilding sector as well and gave back most of Wednesday's gains. We only have four trading days left before PHM's February 2nd after the closing bell earnings report. Readers may want to exit early to minimized losses. We will consider exiting tomorrow, especially if PHM produces any sort of bounce.

Picked on January 16 at $ 65.99
Change since picked: - 1.60
Earnings Date 02/02/05 (confirmed)
Average Daily Volume = 1.5 million


Pixar - PIXR - close: 88.08 change: -0.40 stop: 84.00

PIXR has bounced back into its short-term trading range between $87 and $90. We remain bullish on the stock and its point-and-figure chart supports our bias with a buy signal pointing to a $100 target. Traders may feel more comfortable waiting for PIXR to breakout over resistance at $90.00 before initiating new bullish plays.

Picked on January 18 at $ 88.24
Change since picked: - 0.16
Earnings Date 02/10/05 (confirmed)
Average Daily Volume = 934 thousand


Texas Industries - TXI - close: 61.55 change: -0.19 stop: 59.00

TXI is coming to a decision point. The stock has been consolidating lower the past two weeks under a steady trend of lower highs. Now shares are approaching round-number support at $60.00 and its longer-term support at the rising 50-dma. Almost every time TXI pulls back toward the 50-dma the stock looks bearish but it has consistently bounced for months now. We expect it to bounce again but we're keeping our stop loss at $59.00 just under this support level. It is worth noting that there is a bearish divergence between the stock price and its MACD indicator.

Picked on January 09 at $ 60.18
Change since picked: + 1.37
Earnings Date 12/16/04 (confirmed)
Average Daily Volume = 238 thousand


Put Play Updates

Adobe Systems - ADBE - close: 56.17 change: +0.16 stop: 57.11*new*

Shares of ADBE have bounced from the $55.30-55.35 range for three days in a row now. We've been suggesting that short-term traders take profits early for four days now. The sideways consolidation could be a potential bottom forming or it could just be a speed bump on the way lower. We are going to lower our stop loss to $57.11, right at the simple 10-dma. We are not suggesting new positions and we're still suggesting short-term traders consider an exit under $56.00. We will adjust the newsletters exit to $55.35 and if ADBE hits it again we'll close the play. Tomorrow will be exiting. The MSFT earnings after the bell were positive and that could spark a ramp higher in the software sector. Be prepared.

Picked on January 06 at $ 58.99
Change since picked: - 2.82
Earnings Date 03/17/05 (unconfirmed)
Average Daily Volume = 2.3 million


Apollo Group - APOL - close: 77.02 chg: -0.10 stop: 81.01

We are encouraged by the steady trend lower in shares of APOL but we wish the stock would pick up the pace. The descent has been a slow one. Tonight after the bell rival educator DeVry (DV) appeared to miss earnings by 3 cents per share and this could put pressure on the education sector tomorrow. A breakdown under the $76 level (and the 100-dma) would be good news for the bears.

Picked on January 23 at $ 77.61
Change since picked: - 0.59
Earnings Date 12/16/04 (confirmed)
Average Daily Volume = 2.4 million


Black & Decker - BDK - close: 79.56 chg: +0.09 stop: 82.49

This morning BDK produced a minor oversold bounce following Wednesday's sharp decline but the stock failed to hold on to its gains. Today's close back under the $80 level is positive for the bears and we would expect some follow through tomorrow. More conservative traders can wait for a new relative low under 78.90 before initiating new positions.

Picked on January 26 at $ 79.47
Change since picked: + 0.09
Earnings Date 01/26/05 (confirmed)
Average Daily Volume = 659 thousand


Nike Inc - NKE - close: 86.45 chg: +1.30 stop: 87.01

NKE produced a 1.5 percent bounce on Thursday as rival Reebok (RBK) turned in a positive earnings report. RBK beat estimates by 6 cents and guided higher going forward. Shares of RBK added 6 percent but closed well off its highs for the session. We remain untriggered in NKE and wait for shares to break the $85 level and hit our entry point at $84.65. Until then we're happy to sit on the sidelines. More aggressive traders can wait for a failed rally under the 10-dma or 50-dma as a potential entry point.

Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 12/16/04 (confirmed)
Average Daily Volume = 1.1 million



Kmart Holdings - KMRT - close: 88.27 chg: +1.87 stop: 92.49

It would appear that Monday's high-volume breakdown under support at the $90.00 level was nothing more than a bear-trap and we were sucked right in. We alerted readers that KMRT could see some volatility as Sears (S) reported earnings on Thursday and that's exactly what happened. Sears' net profits were down 86 percent from a year ago but the company still beat analysts' estimates by 10 cents this morning. This helped propel KMRT to a 4.4 percent rally and shares traded past our stop loss at $92.49.

Picked on January 24 at $ 89.90
Change since picked: + 4.45
Earnings Date 03/16/05 (unconfirmed)
Average Daily Volume = 2.4 million


Watch List

Watch List

How to use this watch list:
Readers can use the candidates below as a springboard for their own research. Many are in the process of breaking support or resistance or in the process of starting new trends or extending old ones. With your own due diligence these could be strong potential plays.

CVX $54.06 +0.52 - Oil giant CVX is hitting new one-month highs and testing its descending trendline of resistance. A move over $55.00 could be a bullish entry point.

XOM $51.75 +0.05 - Oil titan XOM is showing a similar pattern. Shares are testing resistance at $52 after eight weeks of consolidation. A breakout could be used as a bullish entry point. XOM also looks like a potential covered call candidate.

ETR $69.74 +0.46 - ETR is another energy stock but this one is an electric utility. Shares have broken out of its three-month trading range to hit new all-time highs. This could be a bullish entry point. An alternative would be to wait for a pull back toward the $68.50 level.

POT $80.83 +1.45 - POT is breaking out over the $80.00 mark. Technicals are positive and shares look ready to run toward resistance and all-time highs near $84.00.

ITW $86.26 -0.74 - Looks like we had nothing to fear over ITW's earnings. We alerted readers to the breakdown under major support at $90.00 a few days ago but didn't play ITW because of its January 27th earnings. The company reported today. ITW beat by a penny but guided lower. We're going to watch for an oversold bounce and then consider shorting a roll over under $90.

FBP $54.95 -1.92 - Investors were not pleased with FBP's earnings report today or they are just selling the news. The stock broke support at the 100-dma and the $55 level. The next stop looks like support near the $50 region.

Market Sentiment and Statistics

A Bullish Friday?

The major indices failed to produce any follow through to the two-day rally this week. That had many market pundits calling the rebound nothing more than an oversold bounce. However, after the closing bell tonight there were plenty of positive earnings reports, especially for the tech sector, and MSFT ranks at the top of the list.

Will the after hours earnings news and a positive earnings surprise for MSFT spark a rally in the NASDAQ tomorrow? The possibility certainly exists and considering how the major indices are still short-term oversold from January's decline we could easily see a rally tomorrow.

Impacting any rally will also be the GDP number tomorrow. The previous quarter had GDP growing at +4% and Wall Street is looking for GDP to slip to +3.5% growth. Anything too far below that number could suck the wind out of any rebound.

Overall some of the sentiment indicators suggest that the market may bounce anyway merely because we are oversold but the current trend remains a bearish one at least short-term. Trade carefully. Friday afternoon could be boring as investors may turn defensive ahead of next week's two-day FOMC meeting.

Market Averages


52-week High: 10868
52-week Low : 9708
Current : 10467

Moving Averages:

10-dma: 10489
50-dma: 10593
200-dma: 10279

S&P 500 ($SPX)

52-week High: 1217
52-week Low : 1060
Current : 1174

Moving Averages:

10-dma: 1176
50-dma: 1188
200-dma: 1134

Nasdaq-100 ($NDX)

52-week High: 1635
52-week Low : 1301
Current : 1507

Moving Averages:

10-dma: 1523
50-dma: 1578
200-dma: 1468

CBOE Market Volatility Index (VIX) = 13.24 -0.20
CBOE Mkt Volatility old VIX (VXO) = 12.78 -0.29
Nasdaq Volatility Index (VXN) = 18.58 -0.34

  Put/Call Ratio Call Volume Put Volume
Total 0.84 814,116 681,175
Equity Only 0.53 624,288 332,165
OEX 1.20 13,302 16,011
QQQQ 1.49 48,426 72,396

Bullish Percent Data

Current Change Status
NYSE 71.4 - 0.2 Bear Correction
NASDAQ-100 63.0 - 0 Bear Alert
Dow Indust. 66.6 - 0 Bull Confirmed
S&P 500 70.6 - 0.2 Bull Confirmed
S&P 100 73.0 - 1 Bull Confirmed

Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold.

Bull Confirmed - Aggressively long
Bull Alert - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert - Take defensive action if long
Bear Confirmed - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend

5-dma: 1.17
10-dma: 1.13
21-dma: 1.21
55-dma: 1.06

Extreme readings above 1.5 are bullish, and readings below .85are bearish. These signals don't occur often and tend be early,but when they do, they can signal significant market turningpoints.

Market Internals

Advancers 1510 1440
Decliners 1294 1517
New Highs 122 78
New Lows 17 45
Up Volume 1141M 1083M
Down Vol. 812M 1018M
Total Vol. 1973M 2122M
M = millions  


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