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Daily Newsletter, Thursday, 02/10/2005

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Table of Contents

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

Market Wrap

Market Wrap

  02-10-200   High Low Volume Adv/Dcl
DJIA 10749.61 85.5 10763.94 10664.33 1.86 bln 1759/1479
NASDAQ 2053.1 0.6 2059.65 2040.04 2.08 bln 1406/1659
S&P 100 574.63 2.66 575.44 571.97 Totals 3165/3138
S&P 500 1197.01 5.02 1198.75 1191.54  
SOX 420.46 2.5 425.24 417.07  
RUS 2000 626.81 1.1 627.98 622.26  
DJ TRANS 3567.05 -4.1 3583.71 3559.1  
VIX 11.51 -0.49 11.99 11.38  
VXO (VIX-O) 11.54 -0.58 12.28 11.38  
VXN 17.92 -0.32 18.88 17.82  
Total Volume 4,208M          
Total UpVol 2,097M          
Total DnVol 2,009M          
Total Adv 3684        
Total Dcl 3554        
52wk Highs 331
52wk Lows 92
TRIN 0.86
NAZTRIN 1.21
 

Market Wrap

Thank You AIG

Today's bounce was brought to you by AIG and we thank them for it! AIG beat the street by +6 cents on Wednesday night with a very strong performance after a year of negative events. The hurricane season in 2004 will be remembered by many for a long time but AIG shook it off and an attack by the Spitzer tornado to beat the street and that suggest better times ahead. Helping the bounce by the Dow component was the beginning of lawsuit reform and strong results from Aetna. Aetna said profits rose +22% and raised estimates for the current year and declared a 2:1 split. The news from AET helped accelerate the AIG short covering and the Dow reaped the rewards. AIG gained +3.28 and accounted for nearly 30 of the Dows +85 points.

Other Dow stocks gaining more than a point included UTX +2.16, CAT +1.42, MO +1.12 and HON +1.06. The real key here was AIG. I explained last week how the Exchange Traded Funds like the QQQQ, DIA, SPY, etc are growing rapidly in volume and are favored by hedge funds and program traders. A +3.28 spike in Dow component AIG triggers a big jump in the ETF and that triggers short covering and buying in those ETFs. A major move in just one Dow stock can cause a major buying cycle in the corresponding ETF as stops are hit and that floats all the Dow stocks. Strong buying in the DIA also ripples down into the SPY and the futures as the Dow components are also major components in the other indexes. Once the dominos begin to fall it is a chain reaction until all the programs reach price parity once again. Program trading has grown to such significant levels we will continue to see broader market volatility when these single stock moves occur. According to the NYSE for the week ended Feb-4th 52% of the volume was from programs. This was actually down from 59% in the week ended Jan-14th.

Dow Chart


Nasdaq Chart


Nobody is complaining about the bounce after yesterday's drop but it was purely a Dow day. The Nasdaq failed to rally and barely made it to positive territory before the close. Like Cisco on Tuesday the tech buyers were afraid to venture into the market ahead of Dell's earnings tonight. Dell did beat the street by a penny but the earnings were far from clear. Revenue slowed despite the gain in earnings per share and Dell continued to express concerns about the future. They guided up on earnings for the current quarter but down on revenue. Component prices are dropping and the average PC selling price is shrinking. This is good for consumers but not good for Dell's revenue number. A -$100 drop in PC prices means Dell must sell +10% more computers just to break even on revenue. With HPQ showing weakness with the exit of Fiorina Dell is going to press the attack on prices in an effort to steal more market share while HPQ restructures. IBM is selling its PC division to Lenovo who will likely challenge Dell on the price front. All this is good news for consumers but will continue to pressure Dell on the revenue front and eventually on earnings. Dell fell about -$1.40 in after hours on the news.
 

Analog Devices also reported earnings and missed street estimates. ADI said the lower sales were due to a glut of cheap cell phones manufactured in China. ADI traded down only slightly in after hours but this could setup some more profit taking in chips. With Dell predicting flat sales and lower component prices and ADI admitting cheap chips from China are a growing problem, the semiconductor sector could be under pressure on Friday. The SOX rallied through Tuesday with a strong try at testing the resistance at 430 but has weakened over the last two days to close at 420. The SMH fell slightly after the Dell/ADI earnings and could be indicating some further weakness tomorrow. This could be just some consolidation from the +11% rebound off the January lows but caution would be the key here. A SOX bounce over 430 would go a long way towards pulling the Nasdaq out of its slump.

Oil continued its rebound from yesterday's dip to $44.50 and closed tonight at $47. Today's gain of +$1.50 was a continuation of yesterday's strong dip buy from the lowest level in a month. Crude inventories slipped slightly on Wednesday and natural gas levels fell sharply by -176 Bcf but traders took profits ahead of the weaker demand in March. That dip was bought strongly by those waiting for any break in price to enter. Oil stocks continue to soar with XOM, COP, CVX, OXY and the XLE all at new all time highs. Those hoping for a pullback in individual oils in the spring are watching these stocks soar and could be thinking about chasing the price instead of waiting. Lowes, (LTR) said today that the day rates on their floating rigs had more than doubled in the last six months and demand was continuing to increase. Oils and homebuilders seem to be impervious to any market weakness.

KKD, the Boston Chicken of the donut sector, continued to move lower with news that they had hired a turnaround expert for $400,000 a month to try and return them to profitability. They also continue to warn that future liquidity is going to be a challenge and the "B" word has begun to surface. Once bankruptcy rumors begin to fly the sharks begin to circle and suppliers refuse to deliver more product without upfront payments. KKD fell to close at $6 and well off its $50 highs.

The plunge in bond yields to under 4% on the ten year reversed sharply today after the Jobless Claims came in at only 303,000 and the lowest level since October 2000. This was completely unexpected and it pushed the four-week moving average down to 315,000 and the lowest level since November-2000. The last four weeks have seen a sharp drop in claims and today's number is only a couple ticks above 300K. Once claims fall below 300K it would be a strong signal that employment is improving and that will wake the Fed up from its measured pace slumber. Also hurting bonds was news the Treasury Budget for January actually showed a surplus of +$8.7B instead of further losses. We have seen three months of sharp deficits totaling -$117.9 billion. Today's positive number was expected after news that federal revenues were up +9% for the same period. Both these reports suggest the economy may be finding traction and faster growth is ahead.

With the Dow close at 10747 it is only about 125 points away from its multiyear highs. If you only looked at the Dow you would think the markets were really healthy. Today's AIG bounce pushed the Dow to its highest close for 2005. Unfortunately the market consists of more than 30 stocks and all the other major indexes are well off their February highs.

The Nasdaq bounced off the first edges of resistance at 2090 on Tuesday and dipped as low as 2040 today before a slight rebound on short covering into Dell's numbers. The Nasdaq chart is troubling and it appears we could have a retest of 2020 support in our future. The bulls really wanted to see that 2100 resistance level broken but we could not even make a decent test. The 100-day average is 2044 and that average held during the January drop. A break now after all the earnings excitement has passed could be ugly.

The Russell 2000 tried three times over the last week to break resistance at 640 and failed. Today it continued yesterday's drop to a low of 622 before rebounding slightly into the close. I believe it was also short covering ahead of Dell. The Russell has strong support at 605-610 and the close at 626 puts it right in the center of its current range but with a downward bias. The three-week rally off the January lows reached the 50% retracement level today at 622. This was a logical bounce point from the short term oversold conditions but the bounce was weak.

The S&P is between the Dow and Nasdaq in strength and today's close at 1197 is still close enough to Tuesday's 1205 high to be within breaking distance should a buying frenzy break out. I am not holding my breath this is going to happen. While the Nasdaq and Russell are developing a negative bias the S&P is still clinging to its bullish trend. In short the various market signals are very mixed and we are entering a calendar period where weakness could develop.

I mentioned on Tuesday that the "Why buy?" question was beginning to make the rounds now that earnings were nearly over. Guidance has been less than exciting but still positive. The challenge is the lack of excitement ahead. Q1 earnings are 60 days away and with the weak guidance there is some concern that there could be disappointments. However, with the economics pointing to an expanding job market that could change quickly. The conflicting signals makes our crystal ball cloudy and direction is far from certain. For our purposes we need a new benchmark for market health and for me that is now Nasdaq 2100. Over the last month we were looking to be long over SPX 1175 but the short-term resistance target of 1205 has been reached and has failed for now. The reason for the failure was mostly the Nasdaq weakness. Since a chain is no stronger than the weakest link we need to use that weak link as our new market indicator. I would look to buy a Nasdaq dip to 2020 but only with a cautionary position. Once under 2020 I would be short. If we continue to wander between 2040-2100 I would remain flat until the 2100 resistance breaks. For swing traders there would be a potential short at 2095 on any weakness. We could see another attempt to try for 2100 and a second failure would be very bearish.

Enter Very Passively, Exit Very Aggressively!


 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
EBAY NONE

New Plays

eBay Inc - EBAY - close: 81.22 chg: +2.23 stop: 76.94

Company Description:
eBay is The World's Online Marketplace.. Founded in 1995, eBay created a powerful platform for the sale of goods and services by a passionate community of individuals and businesses. On any given day, there are millions of items across thousands of categories for sale on eBay. eBay enables trade on a local, national and international basis with customized sites in markets around the world. Through an array of services, such as its payment solution provider PayPal, eBay is enabling global e-commerce for an ever-growing online community. (source: company website)

Why We Like It:
Investors have finally decided to step back in and test the waters with EBAY. The company held its 2005 strategy conference today and the comments were positive. President and CEO Meg Whitman was quoted as saying, "eBay's potential for growth is greater today than it has ever been... we are extremely confident in the future." EBAY suffered a morning dip but traders quickly jumped at the opportunity and the stock rallied back over the $80 level to help confirm yesterday's new buy signal in its MACD indicator. Short-term technical oscillators like the RSI and stochastics are also positive. If you believe in P&F charts then this bullish play would be considered aggressive as we're fighting a pretty bearish P&F sell signal. We believe that if the markets can tread higher or even churn sideways then EBAY is likely to produce an overdue oversold bounce back toward the $87.50 region, which we'll use as a target.

Suggested Options:
This is likely to be a short-term four-to-six-week play. We're suggesting the March calls.

BUY CALL MAR 75 XBA-CO OI= 6841 current ask $8.00
BUY CALL MAR 80 XBA-CP OI= 8970 current ask $4.70
BUY CALL MAR 85 XBA-CQ OI=14743 current ask $2.45


Picked on February 10 at $ 81.22
Change since picked: + 0.00
Earnings Date 01/19/05 (confirmed)
Average Daily Volume = 13.8 million
 

New Puts

None Today.


Play Updates

In Play Updates and Reviews

Call Updates

None today.

Put Updates

Apollo Group - APOL - close: 74.02 chg: -2.42 stop: 80.11

Good news for the bears. APOL completely bucked the market's bullish bias today and broke down to new relative lows under technical support at the 100-dma and round-number support at $75.00. Volume was above average on today's decline suggesting more weakness ahead. Remember that our target range is the $72-70 region.

Picked on January 23 at $ 77.61
Change since picked: - 3.59
Earnings Date 12/16/04 (confirmed)
Average Daily Volume = 2.4 million
 

Drops

Amerada Hess - AHC - close: 94.88 change: +2.88 stop: 84.99

Target achieved! Oil stocks continued to charge higher and AHC helped lead the charge. AHC added 3.13 percent to breakout past resistance near $94.00 level and close at new all-time highs. Our target was the $94.00 level and we're closing the play.

Picked on January 31 at $ 86.65
Change since picked: + 8.23
Earnings Date 01/26/05 (confirmed)
Average Daily Volume = 1.2 million


Goldman Sachs - GS - close: 112.77 chg: +1.32 stop: 105.00

GS has been trading inside our $110-115 target range for the last few days. We had been hoping to see GS hit the $114 region before closing the play and shares added another 1.18 percent today. We felt that in spite of today's market rally it would be more prudent to close the play here. Readers willing to keep the play open should strongly consider raising their stop loss. We would suggest somewhere under the 10-dma at about $109.50 as a stop.

Picked on January 30 at $106.12
Change since picked: + 6.65
Earnings Date 03/17/05 (unconfirmed)
Average Daily Volume = 3.4 million
 

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