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Daily Newsletter, Thursday, 02/03/2005

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Three Steps Forward, One Step Back

Market Wrap
  02-03-2005   High Low Volume Adv/Dcl
DJIA 10593.10 -3.70 10601.15 10550.09 1.92 bln 1470/1713
NASDAQ 2057.64 -17.40 2066.93 2049.25 1.95 bln 1269/1790
S&P 100 568.21 -2.07 570.28 566.30 Totals 2739/3503
S&P 500 1189.89 -3.30 1193.19 1185.63  
SOX 400.70 -5.10 405.61 397.03  
RUS 2000 629.32 -2.66 631.98 625.60  
DJ TRANS 3579.48 -24.70 3605.28 3568.45  
VIX 11.79 0.13 12.12 11.72  
VXO (VIX-O) 11.78 0.40 12.24 11.71  
VXN 17.36 0.06 17.68 17.20  
Total Volume 4,091M        
Total UpVol 1,318M        
Total DnVol 2,714M        
Total Adv 3085        
Total Dcl 4034        
52wk Highs 418        
52wk Lows 73        
TRIN 1.07        
NAZTRIN 1.91        
PUT/CALL 0.73        

Three Steps Forward, One Step Back

It was a valiant effort but the markets failed to stretch their winning string past three days. However, this was still a victory day for the bulls with most indexes holding the majority of their gains. The Nasdaq was the weakest link after news from AMZN and SBUX and dropped back to prior resistance but it was still a victory for the bulls.

Dow Chart


 

Nasdaq Chart


 

It was a mixed day economically starting with the Jobless Claims, which fell to 316,000 from last weeks 325,000. We are starting to see a new trend to lower levels that suggests the hiring is really beginning to increase or at least the layoffs are slowing. Yesterday's Challenger report showed a drop in layoffs from 109,000 to 92,351 for January. That was a -15% drop in layoffs from the December level. The Jobless Claims have trended lower for the last three weeks and this suggests the worst is behind us. Remember we saw claims of 367K and 357K the first two weeks of the year.

Also jobs positive was the Monster Employment Index, which soared in January to 120 from 113 in December. This is a very strong report and showed strong job gains in retail trade, manufacturing and management. This was an all time high for this index but that only covers a little less than two years. The December 113 number was a drop from November's 117 and that drop has not only been reversed but eclipsed with the new high. This is a better indicator of hiring than the Help Wanted Index, which has been holding at its cycle lows for the last year.

The Jobless Claims, Layoffs and Monster Index all suggest we could have a decent Jobs report on Friday. The general consensus is for +200,000 new jobs and the whisper numbers are holding pretty close to the consensus. Surprisingly there has not been a rush to raise estimates given the positive reports. I believe too many analysts have been ridiculed about the high profile misses over the last year. They found there is no future in picking emotional numbers out of thin air.

The Nonfarm Productivity and Costs for Q4 was also announced today and the headline productivity number grew only +0.8%. This was far below the +1.8% growth in Q3 and the slowest increase in four years. Q3-2004 grew at +1.8% and the consensus for Q4 was for +1.6% growth. The +0.8% growth was somewhat of a shock and continues a downward trend since the blazing growth back in 2003 of well over +5% per quarter. Q3-2003 was the high at +9.0% growth. Today's number is even more troubling because the unit labor costs rose +2.3% and the fastest increase since Q2-2002. Costs are up and growing at multiyear highs and productivity is at multiyear lows. This is a recipe for shrinking profits but it is also has a dampening impact on inflation. If wages continue to be pressured and costs force companies to restrict hiring then there is no fuel for rampant inflation growth. This could be a very good reason the Fed kept its measured pace language because the risks are growing for a stagnant economy and profits.

Factory Orders for December also rose far less than expected. The headline growth was only +0.3% compared to consensus of +0.8% and the prior month at +1.4%. Factory Orders have been volatile of late so we should not rush to judgment. Aircraft orders fell -20.53% but communication equipment rose +18.08% to offset the majority of that drop. Computers orders grew +13.3% as the tax credit incentive spurred end of year buying. In December the internal components of new orders, shipments and back orders reached new highs despite the drop in the headline numbers. Next month the January numbers will give us a clearer picture without the end of year pressures. If the underlying back orders hold through January we could see another volatility rebound in the headline number.

Finally, to wrap up the economics for the day the ISM Services for January fell to 59.2 from December's 63.9. This should not be seen as a serious negative as the end of year period is normally services heavy and January is a regrouping period. New orders held their ground at 60.5 but inventories fell to 49.5 from 56 and prices received fell to 66.6 from 73.6. We can see there is some definite stress in the services sector but January is typically a weak month.

Whew! Now that the boring economics are behind us we can turn to the market movers. There were a few and mostly in the Nasdaq. Amazon was pummeled with a -$6 loss to $35 after missing earnings by a nickel. Amazon said higher costs for holiday sales hampered profits and investors were quick to run for the exits.

Starbucks said growth in same store sales was slowing with only a +7% growth in Q4. SBUX, the global growth star, was hammered for a -$4.50 drop. With literally a coffee shop on every corner it is going to be tough to fight this trend. About a mile from me in Colorado there are two Starbucks stores on opposite corners of the same intersection plus a third store from another chain on a third corner. It is a good chance the growth story for SBUX may be suffering from the KKD decline and the growth of Dunkin Donuts into a major coffee competitor. The SBUX news knocked -1.50 off of PNRA which has the same metrics of rapid store growth which will eventually taper off.

With AMZN knocking -2 points off the Nasdaq and SBUX -2.95 the index was under pressure from the start. A drop in CSCO took another -1.78 off, AAPL -1.23 and MSFT -1.26 Nasdaq points. Add in another -1 for Ebay's loss and the top six Nasdaq losers accounted for over -10 index points. The other 94 Nasdaq-100 stocks accounted for only fractional impacts and there were no other real losses. The Internet sector was the hardest hit after the Amazon news and there were no earnings after the bell today to provide any positive momentum for tomorrow.

The Nasdaq was the weakest link with a -17 point drop but the drop held right on uptrend support at 2050. This was the same level, which supplied resistance last week. Given the +70 point gain from the 2010 low on Jan-25th the minor loss today was very tolerable. Yesterday's spike to 2080 took it back to the first levels of major resistance at 2100. The resistance band runs from 2080-2110 and with earnings slowing it is going to be difficult to break through that range.

The Dow has now failed for two days almost exactly at the beginning of its 10600-10650 major resistance range. Like the Nasdaq at 2100 the Dow should have a major problem penetrating this resistance. It is obviously not impossible but going to be a challenge. If you remember my index conversation from Tuesday night I suggested the breakout order would need to be RUT, SOX, SPX, Nasdaq and finally the Dow.

The Russell is still holding its own in breakout territory at 630 but the SOX suffered a major failure over the last two days and has pulled back to support at 400 to regroup. It could not break the 410 resistance and needs a major infusion of buying interest to keep it from breaking down once again. This weakness in the SOX set the stage for the weakness in the Nasdaq and likely made the impacts of SBUX, AMZN and CSCO even worse. The failure in the SOX broke the index chain and could continue to make it more difficult for the other indexes to follow through.

Despite the failure in the SOX the SPX did manage to test the major resistance at 1195 on Wednesday and it traded over that level for an entire minute before the sellers literally crushed it back to 1190 as sell programs hit the tape. There is still very strong selling pressure waiting at that level and after today's drop from 1193 it appears there could be some cheaters trying to get in ahead of the crowd.

SPX Chart


 

This leaves us with a strong overhead barrier for Friday with all the major indexes trading below their resistance for the week and an almost complete lack of any news event to provide motion other than the Jobs report. If we had a blowout Jobs number it could actually be market negative as it would put the Fed back on the front line of investor concern. If suddenly we saw a spike over 300K the Fed could retract its measured pace language at the next meeting. The good news is that meeting is not until March 22nd and a long way off. I believe the market would like to see a neutral number right in line with the 200K estimate. This would neither provide a positive or negative impact on the Fed. It would suggest to investors that it was safe to bet on an economy that was adding jobs. Should the number be under 100K we could see some flight to safety ahead of the normal summer doldrums.

Using my SPX indicator I am still only recommending small long positions until we move over 1195 and then take a more aggressive stance. Under 1175 remain flat or short. Should we retrace to 1175 again next week I would view it as a serious negative and would be wary of any long position from that point. I would not worry about it tonight and we will play what the market gives us until the trend changes. Right now we are in a short-term bullish uptrend and the fate of that trend should be decided over the next couple days.

Enter Very Passively, Exit Very Aggressively!

 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
CBENone
RHD 

New Calls

Cooper Industries - CBE - close: 70.01 chg: +0.85 stop: 67.49

Company Description:
Cooper Industries, Ltd., with 2004 revenues of $4.5 billion, is a global manufacturer of electrical products and tools and hardware. Incorporated in Bermuda, the Company's administrative headquarters are in Houston, TX. Cooper has more than 26,000 employees serving more than 90 manufacturing locations around the world, and sells products to customers in more than 50 countries. (source: company website)

Why We Like It:
We like CBE for its relative strength and breakout through the top of its trading range and round-number, psychological resistance at the $70.00 mark. CBE was a big winner through September-November of last year but the stock has spent most of the last three months consolidating those gains in a range between $65 and $68. The company reported earnings several days ago and beat Wall Street expectations. This helped fuel a rebound and now CBE is breaking out to the upside. The P&F chart is bullish with an ascending triple-top breakout buy signal with a $74 target. We are willing to go long with today's close over $70. Today's 1.22 percent gain is a decent show of strength given the broader-market pull back. More conservative traders may want to wait for CBE to trade over the $70.40 level before initiating positions. CBE's all-time high is $70.37 dating back to May of 1998. Our target is the $74-75 range.

Suggested Options:
We are suggesting the April calls although July strikes would work as well. We do not see an April $75 strike yet but one should be available soon.

BUY CALL APR 65 CBE-DM OI= 733 current ask $5.70
BUY CALL APR 70 CBE-DN OI= 272 current ask $2.30

Picked on February 03 at $ 70.01
Change since picked: + 0.00
Earnings Date 01/25/05 (confirmed)
Average Daily Volume = 436 thousand

RD Donnelley - RHD - close: 60.76 change: +1.69 stop: 57.95

Company Description:
RHD publishes 389 directories, with total distribution of approximately 28 million serving approximately 260,000 local and national advertisers in 19 states. RHD publishes 260 directories under the Sprint Yellow Pages. brand in 18 states with total distribution of approximately 18 million serving approximately 160,000 local and national advertisers, with major markets including Las Vegas, Nevada, and Orlando and Ft. Myers, Florida. In addition, RHD publishes 129 directories under the SBC. Yellow Pages brand in Illinois and Northwest Indiana with total distribution of approximately 10 million serving approximately 100,000 local and national advertisers. (source: company website)

Why We Like It:
We like RHD for its relative strength and its bullish breakout over round-number, psychological resistance at the $60.00 level. If you check out RHD's long-term weekly chart you'll notice that the stock has a habit of producing these long bullish trends. Currently RHD is in a rising channel that began last summer. More importantly RHD is rebounding off the bottom of this rising channel and Thursday's breakout over resistance at $60.00 was fueled by volume that was way above average. The MACD indicator has produced a new buy signal. RHD looks like a decent momentum play and traders can target a short-term move to the $64-65 region. We see three risks that readers should be aware of. First, we cannot find a solid date for RHD's Q4 earnings report. To the best of our knowledge RHD is likely to report on February 25th or 28th. We would not want to hold over the report. Second, RHD does not trade a lot of volume, which normally makes us cautious. Third, the P&F chart looks very extended and the bullish price target has already been hit.

Suggested Options:
This is a short-term momentum play and we plan to be out before the end of February. However, we do not see much volume in the March calls so we're going to suggest the May strikes. Unfortunately we do not see a May 65 strike yet but expect one will become available soon.

BUY CALL MAY 55 RHD-EK OI= 338 current ask $7.10
BUY CALL MAY 60 RHD-EL OI= 468 current ask $3.60

Picked on February 03 at $ 60.76
Change since picked: + 0.00
Earnings Date 02/27/05 (unconfirmed)
Average Daily Volume = 186 thousand

New Puts

None today.


Play Updates

In Play Updates and Reviews

Call Updates

Amerada Hess - AHC - close: 91.17 change: +1.30 stop: 84.99 *new*

Integrated oil player AHC continues to push higher. The stock added another 1.44 percent to breakout and close over round-number, psychological resistance at the $90.00 level. The stock also closed near its high for the day, which is bullish especially considering the market weakness on Thursday. Our target is the $94.00 level and readers can prepare to exit. Actually short-term traders may want to consider exiting now considering AHC's rise. We are raising our stop loss to $84.99.


 

Picked on January 31 at $ 86.65
Change since picked: + 4.52
Earnings Date 01/26/05 (confirmed)
Average Daily Volume = 1.2 million

Texas Industries - TXI - close: 64.28 change: +0.11 stop: 59.95

Once again TXI is testing resistance at the $64.50-65.00 range. When we first initiated this play our short-term target was the same range. TXI hit this old target again today. Short-term traders may want to strongly consider exiting for a profit here. While we expect a bullish breakout over $65.00 it could take another couple of weeks to occur. Our current target is the $69-70 range.


 

Picked on January 09 at $ 60.18
Change since picked: + 4.10
Earnings Date 12/16/04 (confirmed)
Average Daily Volume = 238 thousand

Put Update

None today.

Today's Newsletter Notes: Market Wrap by Jim Brown, all other plays and content by the Option Investor staff.

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