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Daily Newsletter, Wednesday, 02/02/2005

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Trader's Corner

Market Wrap

State of the Markets

Market Wrap
  02-02-2005   High Low Volume Adv/Dcl
DJIA 10596.79 44.85 10616.37 10544.48 1.96 bln 1761/1071
NASDAQ 2075.06 6.36 2079.58 2064.20 1.97 bln 1733/1269
S&P 100 570.28 2.09 571.04 567.87 Totals 3494/2340
S&P 500 1193.19 3.78 1195.25 1188.92  
SOX 405.83 -2.63 409.34 403.61  
RUS 2000 631.98 3.84 631.98 627.63  
DJ TRANS 3604.17 -1.56 3618.50 3589.58  
VIX 11.66 -0.37 12.06 11.52  
VXO (VIX-O) 11.38 -0.24 12.05 11.22  
VXN 17.30 -0.46 17.97 17.17  
Total Volume 3,933M        
Total UpVol 2,426M        
Total DnVol 1,441M        
Total Adv 3494        
Total Dcl 2340        
52wk Highs 487        
52wk Lows 39        
TRIN 0.85        
PUT/CALL 0.73        

State of the Markets

Tonight at 9:00 EST, President Bush delivers his State of the Union address. During the trading day, markets awaited a state-of-the-economy address of a different type. Traders wanted to read the statement accompanying the conclusion of the FOMC meeting.

Ahead of the afternoon release of that statement, markets climbed, buoyed by recent gains. Investors were also cheered after Google's (GOOG) stronger-than-expected earnings report Tuesday afternoon and Boeing's (BA) report. BA's Q4 profit plummeted 84 percent, but beat expectations. BA forecast that the company would deliver more airplanes next year than last. BA was not to hold onto all of its gains, but did not close the Wednesday-morning gap higher.

By the end of the day, bulls and bears alike were left with more questions than answers.

SPX Chart

The SPX high of the day was 1195.25, with the SPX being rebuffed as it entered that 1195-1196 zone ahead of 1200. Like many indices, the SPX has this week been finding support at its five-minute 100/130-ema's, currently at 1190.32 and 1189.37, with the daily 50-sma nearby at 1189.29.

Bulls want to see the SPX stay above those averages, while bears want to see the SPX crater below them. With the VIX so low, buying bounces from those averages looks risky, but intrepid bulls might try. Intrepid bears might sell rollovers beneath 1200, but both bulls and bears want internals clearly on their side. They don't want to see the mixed-up internals we've been seeing lately, because that often leads to choppy trading while option premium decreases. Both bulls and bears need to be willing to be wrong and jump out if proven so.

Unlike the SPX, the Dow closed only minimally above its 50-sma. Its potential H&S looks cleaner than that on many other indices. The Dow may be one index to watch with regard to its 50-sma tomorrow.

Dow Chart

Nasdaq Chart

Russell 2000 Chart

Except for one misstep post-FOMC, the Russell 2000 has been bouncing from its three-minute 100/130-ema's all week, with those averages currently at 629.29 and 628.97. Those will bearish aspirations will want to see that pattern change, at the least. A drop below those averages before a new high (above yesterday's) is reached will also almost confirm a double-top formation on the three-minute chart, with a drop below 628.65 actually needed for that confirmation.

Intrepid bulls seeking a new entry could watch for a bounce from those same averages, just below the 50-sma, for a new entry, but be cautious and ready to be wrong if considering such an entry. The VIX urges caution with new long plays.

The behavior of the SOX on Wednesday also urges caution. It could not break above its 100-ema today and closed lower, nearly producing a tweezer-top reversal signal. With strong support overhead and likely strong resistance underneath the SOX's closing 405.83 level, the SOX may be due for more choppy, consolidation-type behavior. Bulls want to see it turn up strongly; bears want to see the opposite.

In addition to the SOX and the VIX level, the TRAN produced some cause for bullish concern. Despite lower crude prices at the close and semi-encouraging words from the FOMC, this crude-sensitive and economy-sensitive index produced a doji at the top of its climb, after yesterday's small-bodied candle. After such candles, the TRAN usually either consolidates for several more days before climbing again or else drops. Watch the TRAN, too, for clues as to market behavior.

In a week packed with important economic developments, Wednesday's rated among the most important. That proved true not only in the U.S. but also in Europe. Germany's January unemployment rate revealed that the number of unemployed rose over 5 million, as had been feared, its highest level since WWII according to a Bloomberg article. Germany's December retail sales surprised to the downside despite anecdotal evidence that December's sales had been strong. These numbers questioned whether Germany's domestic demand would be strong enough to promote economic expansion.

The eurozone December PPI surprised, too, falling. Economists touted December's generally lower crude prices as being behind the drop. Inflation concerns have waned in Europe with data over the last week, but European markets traded cautiously ahead of the Fed's rate-hike decision and the FOMC take on U.S. inflation and other economic matters.

In the U.S., too, the Fed watch eclipsed the usual Wednesday-morning releases in importance, but those other releases included the report by the Mortgage Bankers Association. Monday's data had shown December new home sales below expectations, only slightly above the revised-lower November figure and more than 100,000 below expectations. Wednesday morning, the MBA's figures refuted any weakness, showing that all components rose. So did the rate for 30-year, fixed-rate mortgages.

The DJUSHB, the Dow Jones U.S. Home Construction Index, dropped into the FOMC announcement, but then recovered and closed off its low of the day. It also closed off its high of the day, producing a doji at the top of a climb. Homebuilders have seemed inoculated against worries produced by spotty data or increased mortgage rates, but watch the reaction tomorrow. Bulls don't want to see this index open below the 846.19 close today and then stop dropping. Bears, be aware that the homebuilders remain in a strong uptrend, but we're watching to see if this key index continues higher. The daily chart shows a possibility of a bearish rising wedge, but we saw some of those break to the upside today on intraday charts. Bearish is bearish only if it breaks to the downside and stays there.

Late last week, the MBA announced its own state-of-the-economy projections. The MBA sees the Fed continuing to increase rates 50 to 65 basis points by the end of 2005 to combat a projected slight rise in inflation, but appears to believe that long-term rates will remain supportive of the housing and commercial real estate markets. The MBA projects a GDP of 3.6 percent, lower than 2004's but still above trend. The organization sees "continued" strength in employment, strong but modestly lower productivity gains and a modest slowing in the housing market. While the supposed previous strength in employment might be argued, today's Challenger results did show that January layoffs in the U.S. fell 15 percent to 92,351, and were the lowest since August.

With markets taking their post-FOMC short-term dip as the Nymex closed, it's important to look at how developments in crude impacted the markets today. It's unclear whether the equity dip was coincidental, since it went against expectations with crude closing lower. Perhaps it just took traders some time to digest the FOMC news.

Crude costs stabilized near $47.00 ahead of the release of crude inventories data. Some had expected crude inventories to grow by 1.3 million barrels, distillates to increase by 2.4 million barrels and gasoline supplies to ease slightly. Just as the American Petroleum Institute and the Department of Energy offer conflicting inventories numbers, those economists' estimates for today's inventories numbers conflicted with those who estimated that distillate supplies would fall and crude would increase by more than 1.3 million barrels.

The conflicting stances didn't stop there. Before the release, a Libyan spokesperson suggested that OPEC might make an interim session decision if crude prices justified such a move, seemingly warning that crude prices wouldn't be allowed to drop too low. A Qatar official reportedly said that such a decision was unlikely ahead of the March meeting.

News of the steps taken to circumvent a U.S. court's steps to prevent Russia's state-owned Gazprom from buying a Yukos unit at bargain-basement prices surfaced, too. The until-then-little known Rosneft was reportedly able to purchase the Yukos unit when China lent Russia the money against future oil deliveries. Rosneft was then to merge with Gazprom, but some questions still surround that merger due to the U.S. court decisions and threats by Yukos officials to sue. With China and Russia behind the effort to de-privatize the unit, I don't know that I'd be bet strongly on the success of those suits.

As mentioned earlier, equity investors had been in an optimistic mood pre-inventories numbers. The numbers and sputtering about OPEC interim moves did nothing to dampen that enthusiasm. Equities ran up into the crude inventories and then ran up higher afterward. The Department of Energy reported that crude inventories fell 300,000 barrels, distillates declined 2.9 million barrels, and gasoline stocks increased by 1.6 million barrels. Crude prices dropped but then began coiling either side of $47.00. They later broke out of that coiling pattern to the downside and closed lower, at $46.65.

After the initial reaction to the crude inventories numbers, markets settled down to await the 2:15 afternoon announcement. Most economists and market watchers expected the 25-basis-point hike, which did occur, but were more concerned with the language adopted by the FOMC. That language alluded to balanced growth and inflation risks and kept the "measured" pace language as to its schedule of removing its accommodative monetary policy. The FOMC repeated language that gives it options to react as necessary to preserve price stability. It sees the risks for inflation and the longer-term outlook for inflation as being well contained. The statement termed growth moderate and related that labor market conditions continue to recover.

Markets greeted the rate hike and accompanying statement with a ho-hum reaction, the announcement followed by little movement on charts. Television commentators turned to discussions about President Bush's address. Then, as the Nymex closed with crude lower, markets zoomed up, but were soon rebuffed. They zoomed around a bit more at the end of the day. It's possible that new equity bears grew worried when indices couldn't be driven lower and covered, but that remains to be seen tomorrow.

After-hours, AMZN reported earnings that noted Q4 net income soaring. AMZN cited stronger sales, at $2.54 billion against $1.95 billion in the year-ago period. Electronics and overseas sales helped produce those results. AMZN also noted a one-time tax benefit as helping the company reach that net income. It earned $0.82/share or $347 million, up from $0.17 or $73 million a year ago. Without that one-time tax benefit, however, AMZN would have earned only $0.35/share or $149 million. Some information suggested that analysts had expected $0.40/share without that charge. Investors took note and sold AMZN in after-hours. As this report was prepared, AMZN traded at $36.13, down from the $41.88 close. Ouch. NQ futures dropped, too, in after hours, but only slightly.

When not talking about AMZN and other reporting companies, however, commentators turn again to a discussion of President Bush's address. Many anticipate a focus on Social Security reform in his 40-minute speech. The president will likely promote the benefits of his plan to younger workers and seek to reassure those approaching retirement age that they will receive those anticipated checks. Some worry that he may not explain how that goal will be accomplished, while others suggest he will delineate exactly what he means when he claims that those at or nearing retirement age will receive promised benefits.

Many also expect President Bush to address other planned initiatives, including placing limits on medical malpractice lawsuits, establishing an immigrant guest worker program, and approving his energy bill. He will of course also address developments in Iraq and elsewhere, devoting the second half of his speech to international issues. Those hoping to hear an exit strategy for Iraq are likely to be disappointed, those in the know suggest.

One source tags Thursday as the day seeing the largest number of earnings releases this week, with ample opportunities for upside fireworks like those from GOOG yesterday and downside like AMZN's this afternoon. Earnings expected tomorrow morning before the open include those from AutoNation (AN), BMC Software (MBC), Comcast Corporation (CMCSA), International Paper (IP), MedImmune (MEDI), PacifiCare Health Systems (PHS), PepsiCo (PEP), Raytheon (RTN), Rio Tinto PLC (RTP), Sherwin-Williams (SHW), Sonic Foundry (SOFO), Starwood Hotels & Resorts (HOT), and Gillette (G), among others.

Those hoping for relief from the onslaught of various economic releases will gain no relief Thursday except perhaps in the relative unimportance of the releases as compared to Wednesday's. Thursday's economic calendar includes the usual 8:30 release of jobless claims but expands to include 4Q Nonfarm Productivity, 4Q Unit Labor Costs, December Factory Orders, and January's Non-Manufacturing or Services ISM. If the FOMC had mentioned fears about inflation, that 4Q Unit Labor Costs might have drawn much attention, but since the FOMC termed those inflation worries well contained, this number might not be important, either. Most of these numbers can be predicted by previous releases or other information available. January's same-store sales might garner more attention, so pay attention to the RLX, too. The RLX faces its own 100-sma, with a gap above that to be challenged, too. Resistance looks tough.

 
 




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