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Daily Newsletter, Monday, 02/28/2005

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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

Bull Tackles Bear


Bull Tackles Bear

A strong decline was caught and partially reversed by bears at mid-afternoon in a session that saw higher than average volume across the major indices. Breadth remained negative, however, with declining volume more than doubling advancing volume on the NYSE. On the Nasdaq, the number of declining shares was just over 50% higher than advancing.

The intraday reversal was dramatic because it started just below Friday's lows- at a level where conservative traders were most likely to jump on the Breakdown-bandwagon. While the bounce failed below the session highs, the key daily cycle direction remains up-for-grabs.

Dow Chart - Daily


 

There was something for everyone today, with the Dow's decline kicking off straight out of the gate and making good on the bearish 30 minute cycle setup from Friday's close. That decline had completely reversed Friday's gains by 2PM at the 10730 low, following which a bounce kicked off, reversing most of the session's loss. That reversal was sharp enough to leave a long lower doji shadow on the daily candle print. Had the Dow closed in positive territory, this would have been a bullish doji hammer. It did not, and today's was clearly gratifying for bears. However, the swift rejection at the lows, bullish hammer or not, is a bullish affirmation of support at 10730.

Last week's bounce stalled the strong daily cycle downphase and left daily cycle direction up for grabs. On the one hand, there's a bearish triple top in place below 10875. On the other, the higher lows from January to February could be construed as the beginning of a bullish triangle. Price is the final arbiter, and the break either above 10875, a mere 33 points north of today's high, or below 10720 should be enough to generate a fresh signal on the daily cycle oscillators. For bears, the goal will be to break south of 10580 to invalidate the rising trend off the October low.

Daily S&P 500 Chart


 

SPX bears broke Friday's low, printing an intraday low of 1198 before the afternoon bounce kicked in. The bounce never reached the opening 1210 high, but the same almost-bullish-hammer printed for the day. Bears will want to see a break of the 1198 level, coincident with the 22 day EMA, on the way to a test of the lower rising support line at 1188-89, while bulls are looking for a pennant break above 1210 on the way to triangle resistance of 1218 at the year high. As on the Dow, the SPX's daily cycle setup is entirely ambiguous and will follow the price whichever way it breaks. For the day, the SPX lost 7.77 to close at 1203.6.

Daily Nasdaq Chart


 

The Nasdaq remains significantly farther from its 52 week high than either the Dow or the SPX. Today's high of 2067 remains 125 points shy of the Jan 3rd 2192 print. Last week's closing strength was less substantial than that of its peers, and as a result the daily cycle oscillators maintained a bearish edge to their ambiguous setup. In this case, a range break either above 2075 or below 2025 should resolve the deadlock, but a break below 2040 (today's low 2039) will be enough to restore the daily cycle downphase in the meantime. For the day, the Nasdaq lost .66% to close at 2051.7.

Daily TNX Chart


 

Ten year treasury yields (TNX) advanced further within this month's rally, with TNX adding 8.7 bps to close at 4.359%, a 2.04% gain for the day. These losses for the ten year bond occurred despite a large 9B injection of funds from the Fed's open market desk announced this morning. At 1 PM, the treasury announced the results of its 13 week and 26 week bill auctions. The bid-to-cover ratio for the 21B 13 week treasury bill auction was 2.06, of which indirect bidders (ie foreign central banks) took 4.9B of the total. For the 18B 26 week bill auction, the bid-to-cover ratio was 1.94, with indirect bidders taking 3.5B of the total.

Ten year treasuries have been weak since the TNX's brief move below the 4% line earlier this month. The TNX rally that followed blew quickly past the 4.14%-4.16% confluence and broke the upper descending resistance line off the 2004 high. The 10-day stochastic has entered overbought territory, and while a bullish trending move is possible, particularly on an impulsive upphase such as we've seen during the past 3 weeks, the more likely scenario will be some sort of corrective pullback. A close above 4.4% resistance would likely set off a bullish trending move, while a failure either at the 4.35% or 4.4% level should coincide with a daily cycle top.

Daily chart of Crude oil


 

Crude oil rose strongly to an intraday high of 52.20 on the Nymex amid weekend violence in the Middle East and a storm on the Northeast. Whatever the external facts, crude oil has been in a strong daily cycle upphase similar to that discussed on the ten year treasury yield above. The upphase launched from a higher low above 45 and continued for the latter half of February. That upphase has reached overbought territory on the 10-day stochastic, and like the TNX, is at levels at which it would be prudent to cinch up bullish stops. With upper channel resistance at 53.10 and the upper Bollinger band at 52.28, the benefit of the doubt on a daily cycle basis should begin to shift from the bulls to the bears this week. For the day, crude oil gained .5% to close at 51.75.

At 8:30AM, the Commerce Department reported that US Consumer Spending came in flat for the month of January, with nominal Personal Income falling 2.3% for the month. The 2.3% decline came on the heels of December's record 3.7% gain from the MSFT dividend payment, and resulted in the steepest drop in 11 years. Expectations were for a .1% increase in personal spending and a 2.6% drop in personal income. The Personal Consumption Expenditure price index rose .2% for the month, with the core PCE rising .3%, the largest gain since October 2001.

At 10AM, the Commerce Department reported that US new home sales declined 9.2% to an annual rate of 1.106M in January, a 4.2% decline from January 2004. This reading missed expectations of 1.13M. December's reading was revised up to 1.218M from its reported 1.098M level. Inventory rose to a record 438,000, which is a 4.7 month supply of new homes and the highest inventory-to-sales ratio in over 4 years, and the median sales price fell from $229,700 to $199,400, which is the lowest since December 2003.

Also at 10AM, the February Chicago Purchasing managers index was released, coming in higher than the expected 60% reading at 62.7%, and showing economic expansion for the 22nd consecutive month.

There were several big mergers and acquisitions announced today. Two years after their last set of failed negotiations, Federated (FD) announced this morning its agreement to purchase rival May (MAY) for 17B in a deal that will create the largest chain of department stores in the US. The deal values May at its 10-day average price ending Friday, $35.50 per share, and is expected to incur approximately 1B in merger-related costs for FD over the next 3 years. It will yield estimated cost savings of $450M and is expected to increase FD's earnings by 2007. MAY shareholders are to receive $17.75 in cash and .3115 of an FD share for each share of MAY stock. As well, FD will assume 6B of MAY's debt and announced that it would increase its annual dividend to $1 per share.

Following the announcement, S&P placed both FD and MAY on Creditwatch negative. FD's longterm debt is currently rated "BBB+," while MAY's is rated "BBB." For the day, FD lost .6% to close at 56.45, while MAY declined 2.32% to close at 34.53.

Trucker YELL announced that it will buy USFC for $1.47B comprised of $639M in cash, $731M in YELL stock and the assumption of $99M worth of USFC's debt. USF shareholders will be offered $45 or .9024 YELL shares for each USF share. Under the deal, YELL's business will reportedly grow to more than 9B in annual revenue and employ more than 70,000 workers with 1000 service locations. YELL expects the deal to increase earnings within 12 months of closing. YELL got clocked for a 5.81% loss at 57.75, while USFC rocketed to a 23.13% gain at 47.80.

In other merger news, Dow Chemical (DOW) announced that it will purchase up to 19.9% of MCEL and collaborate with the latter to develop and market portable fuel-cells for consumer and military use. Under the deal, DOW will take an initial 3% preferred equity position in MCEL, and, pending certain development goals, will have the option to acquire an additional share in MCEL to a maximum of 19.9% for $5M in cash. MCEL will seek shareholder approval for the issuance of the new stock. DOW lost 2.58% for the day to close at 54.79, MCEL gaining 37.57% to close at 2.38%.

After the bell, Continental Airlines (CAL) announced that it has reached a tentative agreement with its employees which, if ratified by the various unions, would save the company an estimated 500M annually. The company also announced that it has reached a deal with Boeing (BA) to delay aircraft acquisition for one month to permit the unions to finalize these new contracts. CAL finished the day lower by 1.65% at 10.71.

Tomorrow the market will get Auto Sales and Truck Sales throughout the day, as well as Construction Spending and the ISM Index at 10AM. With today's ambiguous action, there's a good chance of sideways chop as traders wait for the other guy to make the first move. Today's high and low can be treated as preliminary benchmarks, and a break of either will provide the first clue as to the outcome of the more significant daily cycle direction discussed above.

 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
NoneNone


Play Updates

In Play Updates and Reviews

Call Updates

Hartford Financial - HIG - cls: 71.95 chg: -0.95 stop: 69.95

News that NY Attorney General Spitzer is widening his probe into insurance giant AIG sent the insurance sector lower. Shares of AIG fell 2.2 percent and broke down under several key moving averages including the 50-dma, simple 200 and exponential 200-dma's. Volume was above average on the drop and AIG looks poised for further losses. This is bad news for the rest of the group. AIG is a huge insurance company and its breakdown will put pressure on HIG. Readers have to decide if they're going to hold on and see if HIG will bounce at support again near the $70 mark or consider an exit now to minimize any losses. We're going to hold on for another day and see what happens tomorrow before we make any decisions.


 

Picked on February 06 at $ 71.17
Change since picked: + 0.78
Earnings Date 01/26/05 (confirmed)
Average Daily Volume = 1.2 million

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KLA-Tencor - KLAC - close: 49.41 chg: -1.40 stop: 47.75

Uh-oh! Readers need to be careful here. The SOX index was trading higher early in Monday's session but the overall weakness quickly pulled the group lower. This effectively negates the marginal breakout over long-term resistance at the 200-week moving average on Friday. The bad news for us is that KLAC traded high enough to trigger our play at $51.11 before turning lower. This might be seen as a failed rally and with the SOX not seeing any follow through we would be very hesitant to consider new bullish positions. Readers can look for a bounce near the $48.00 level in KLAC but we'd prefer to wait for another move over the $51 level before considering new bullish positions!


 

Picked on February 28 at $ 51.11
Change since picked: - 1.70
Earnings Date 01/20/05 (confirmed)
Average Daily Volume = 5.1 million

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Loews Corp - LTR - close: 71.28 chg: -0.96 stop: 69.95

Readers need to be careful here with LTR as well. If you didn't read the HIG update in this newsletter then we encourage you to do so. The breakdown in AIG is going to pressure the entire sector. Now LTR did manage a small bounce from its rising 20-dma but it doesn't look very strong. This weakness doesn't look healthy for LTR. Conservative traders may want to exit early. We're going to stick it out another day before considering an exit as LTR still has round-number support at the $70 level.


 

Picked on February 15 at $ 74.15
Change since picked: - 2.87
Earnings Date 02/10/05 (confirmed)
Average Daily Volume = 452 thousand

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PACCAR - PCAR - close: 75.26 chg: +0.26 stop: 71.99

As expected PCAR broke out over resistance at the $75.00 level. The stock actually traded toward the $76 mark before pulling back with the market's weakness today. The good news is that traders bought the dip near $74.00 establishing this level as support. If you missed the bullish entry point this morning this still looks like a bullish entry point now but it may be prudent to confirm market direction first (a.k.a. don't go long if the market is going down). We have been triggered at $75.25.


 

Picked on February 28 at $ 75.25
Change since picked: + 0.01
Earnings Date 02/01/05 (confirmed)
Average Daily Volume = 1.0 million

Put Updates

Bear Stearns - BSC - close: 99.50 chg: +0.89 stop: 102.51

You can thank Wachovia for BSC's strength this morning. The stock gapped higher and raced to $100.65 before fading after the firm upgraded BSC to an "out perform" this morning. While we are encouraged that BSC could not hold the $100 level the stock still managed to close over its rising 100-dma. We were cautious on Sunday and we're still cautious today. BSC does look like it could be trading in a descending channel. A failure near the $102.50 level would support the descending channel pattern. Plan your strategy accordingly.


 

Picked on February 20 at $ 97.84
Change since picked: + 1.66
Earnings Date 03/22/05 (unconfirmed)
Average Daily Volume = 934 thousand

Drops

None today.


Trader's Corner

Trader's Corner

From a daytraders point of view we have to be very aware of the economic reports that are due to be released throughout the day. Some reports may have no impact what so ever yet others will move the market in ways that make you wonder just who is driving. Then some reports that don't usually make an impact can all of a sudden move the market because the information has been perceived as bullish or bearish. You just never know so it is always prudent to step aside from trading until the waters calm.

But from a longer-term investors point of view you really don't care how the market reacts to reports intraday you only care about the long term affects the information my have on the market.

Following is a list of some of the more important economic reports traders and investor alike will typically monitor.

GDP (Gross Domestic Product)

Put out by the Bureau of Economic Analysis, the GDP is the broadest measure of the health of the US economy. Real GDP is defined as the output of goods and services produced by labor and property located in the United States. GDP is an important number to watch because it provides the greatest detail of all sectors and reflects income as well as expenditure flows. Sector coverage includes durable and nondurable goods, structures, and services.

Because of the detail available in the GDP reports, it provides the single most encompassing picture of economic activity available along with estimates of output based on both demand and supply. Then combined with employment data, GDP data gives an important measure of productivity growth.

GDP is released at 8:30 EST approximately one month after the end of each quarter.

ISM Index

The Institute of Supply Management surveys 300 purchasing managers in 20 different industries (weighted according to their contribution to GDP) across the country on their new orders, production, delivery times, backlogs, inventories, prices, employment, export orders and import orders. They put the data together in a monthly composite called the ISM index.

This index provides very timely information on manufacturing activity so has become a leading indicator of economic activity and is perceived as a good indicator of inflationary pressures.

Index values above 50 indicate an expanding economy, while values below 50 indicate an economy in contraction.

Another part of the ISM is the ISM Services Index or sometimes called ISM Non-Manufacturing Index that is released 2 days after the ISM Index. This index is a survey of firms in the service sector.

ISM Index and ISM Service Index for the previous month are both released at 10:00EST the first week of the current month.

CPI (Consumer Price Index)

Put out by the Bureau of Labor Statistics, the CPI is the difference in price from one month to the next for a fixed basket of consumer good and services. It is used as a common measure of inflation because economists can compare the cost of this basket of consumer products to what they cost last month or a last year. The "Core CPI" doesn't include food and energy prices.

Economic theory states that inflation increases when supply cannot keep up with demand, which usually occurs at or near the peak of the business cycle and when the unemployment rate is low. Therefore a rising CPI can indicates increasing inflation or a falling CPI can shows that supply is keeping up with demand and inflation is at bay.

Since the CPI is the most widely used measure of inflation, it has become an indicator of the effectiveness of government policy.

CPI is released at 8:30 EST around the 15th of the month for the previous month's data.

PPI (Producer Price Index)

Put out by the Bureau of Labor Statistics, the PPI is a measure of the price changes in different types of goods at various stages in the production process. It tracks price changes for most industries in the country including agriculture, electricity and natural gas, forestry, fisheries, manufacturing and mining.

The PPI is considered a good indicator and forecasting tool for future inflation as higher prices for crude oil and intermediate-type goods usually precede higher prices for finished goods. Therefore, a rising PPI or a consensus forecast for a higher PPI might precede higher interest rates (especially longer-term rates), which in turn can lead to declining stock prices. Please keep in mind that the PPI is only for domestic production of physical commodities and does take into account inflation sources such as imported goods.

It is worthwhile to follow the PPI because it is a good indicator of wholesale and commodity price pressure and can predict changes in the CPI.

PPI data for the previous month is released at 8:30 EST during the 2nd week of the current month.

Employment Situatione

Put out by the Bureau of Labor Statistics, the Employment Situation report is a timely measure of the current state of the economy and is probably the most widely watched report in the financial markets today. The more people who work and the more money they make, the more money they spend, which will increase the demand for goods and services.

This report includes employment data, change in average hourly earnings, change in aggregate hours worked and the change in the unemployment rate, things the Fed watches closely when setting the Fed Funds Rate.

Previous month's data is released at 8:30EST the first Friday of the current month.

ECI (Employment Cost Index)

Released by the Bureau of Labor Statistics, the ECI is also a widely followed report in economic circles. The ECI measures changes in labor costs (including salaries, wages and fringe benefits) and gauges underlying trends in payrolls as a cost of production. It is especially useful in analyzing the relationships between productivity and inflation.

Look for changes in the growth rate of the index - a higher rate indicates a potential inflation and a lower rate may signal stalling growth.

The report is released at 8:30 EST in the last week of the month after a quarter.

Retail sales

Put out by the Bureau of Census, Retail Sales (or Monthly Advance Retail Trade Survey (MARTS) is the timeliest report of consumer spending patterns excluding any type of services. It is regarded as one of the more important reports because it is timely, although a little short on exactness. Just like the CPI, a rising retail sales number may indicate that demand is about to outstrip supply and that will lead to higher inflation. However, since the data doesn't include services but does include gas, cars and food, it is very volatile and subject to large seasonal changes.

It is released at 8:30 EST around the 14th of the month for the previous month.

Housing Starts

Put out by the Bureau of Census, Housing Starts is a monthly measure of current residential construction activity.

Housing Starts is a good indication of the current trends within this industry and is therefore a good indicator of consumer optimism, since most people will not start building a new home if their economic future is bleak.

It is released at 8:30 EST around the 16th for the previous month.

University of Michigan Consumer Sentiment Survey

Since consumer spending makes up roughly two-thirds of all economic output it is important to the health of the economy and therefore important to measure consumer confidence. Declining confidence will usually lead to weaker consumer spending and increasing confidence will usually lead to stronger consumer spending.

University of Michigan Consumer Sentiment Survey measures consumer confidence from a telephone survey of 500 consumers each month. Each month 60% of the responses are from new interviewees and 40% are interviewed for a 2nd time.

The index is fashioned to show the consumer's present situation and also expectations for the future. Strong numbers from the expectations indicator show that consumers may be more willing to spend in the future but weak expectations may be a harbinger of weaker spending and a slowing economy.

The preliminary report is released at 10:00EST the 2nd Friday of the month and is based on 1/2 the sample while the final release, the last Friday of the month, is from the whole sample.

Jobless Claims

This weekly report released by U.S. Department of Labor is the number of initial claims and the number of continuing claims made for unemployment insurance. It can be volatile because of its frequency and can be skewed by holidays and natural disasters so it is usually smoothed by a four week moving average.

Jobless Claims is released each Thursday morning at 8:30EST.

So what do we do when these numbers are released? Most of the numbers or the reports will not make a huge difference to the market but the ones you should watch are the CPI, PPI, Employment Situation, ECI and GDP. My suggestion is to know when these reports are due and, if daytrading, stand aside until the dust settles from their release. Let the smart money (not saying your money isn't smart, just not as smart) make the decision. Watch the S&P and Nasdaq futures to see if the news was positive or negative, then trade accordingly.

Remember plan your trade and trade your plan

Today's Newsletter Notes: Market Wrap by Jonathon Levinson, Trader's Corner by Jane Fox, and all other plays and content by the Option Investor staff.

DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

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