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Daily Newsletter, Tuesday, 03/29/2005

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Table of Contents

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

Market Wrap

Buyers Have Left the Building


03-29-2005


High

Low

Volume

Adv/Dcl

DJIA

10405.70

- 80.00

10520.84

10396.24

2.16 bln

935/2184

NASDAQ

1973.88

- 18.60

2002.65

1968.58

1.80 bln

804/2256

S&P 100

555.90

-   3.75

562.12

555.05

Totals

1739/4440

S&P 500

1165.36

-   8.92

1179.39

1163.69

 

 

SOX

410.66

-   5.30

418.10

408.66

 

 

RUS 2000

604.63

- 10.49

618.82

603.75

 

 

DJ TRANS

3673.57

- 67.20

3755.06

3665.21

 

 

VIX

14.55

  0.80

14.68

13.38

 

 

VXO (VIX-O)

13.93

  0.78

14.06

12.88

 

 

VXN

18.03

  0.29

18.21

17.46

 

 
Total Volume

4,265M

 

 

 

 

 

Total UpVol

970M

 

 

 

 

 

Total DnVol

3,360M

 

 

 

 

 

Total Adv

1978

 

 

 

 

 

Total Dcl

5019

 

 

 

 

 

52wk Highs

81

 

 

 

 

 

52wk Lows

271

 

 

 

 

 

TRIN

1.45

 

 

 

 

 

NAZTRIN

1.17

 

 

 

 

 

PUT/CALL

0.66

 

 

 

 

 

Buyers Have Left the Building

The indexes gave up ground once again as the quarter end approaches. Monday's window dressing attempt failed at resistance and those buyers brave enough to attempt a rebound entry ran for the exits. This typically bullish period on the calendar has turned ugly and this does not bode well for the weeks ahead.

Dow Chart - Daily


Nasdaq Chart - Daily


The morning started off rocky with the second consecutive monthly drop in Consumer Confidence. The final March reading came in at 102.4, -2 points below February. The expectations component pushed the headline number lower with a drop from 96.1 to 93.7. Those planning on buying a home fell from 4.1% to 3.7% and those planning on buying a car fell from 7.2% to 5.7%. There was a significant jump in those feeling jobs were harder to get. With oil/gas prices holding near their highs it is not surprising that confidence is slipping. As long as gasoline remains over $2, well over in some areas, consumers are going to grimace in pain with every fill up. This will translate into further drops in sentiment if prices do not ease before the summer driving season.



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Today was the last day of relative calm for economic reports. The pace begins to pickup starting tomorrow with the GDP. The next three days are packed full of reports that should give us a clue for the coming quarter. The NAPM, PMI, ISM and Jobs report are the headliners for the next three days but there are plenty of others. Oil inventories will be out again on Wednesday and expectations are for another increase as the cold weather moderates into spring.

The news outlets were glued to the Qwest, MCI, Verizon story all day and I will not repeat it here. More important to the health of the market was a sharp drop in cyclical stocks like CAT and materials stocks like PD and NUE. After months and months of vertical rises the cyclical/materials stocks may have finally fallen victim to the profit taking they deserve. CAT fell -4.42 after Morgan Stanley issued a report saying the sector was at or near its peak. The machinery stocks have risen 100% over the last 18 months and Morgan felt the economic cycle might be peaking. Morgan suggested investors take profits and there was a rush for the exits. With profit growth in the sector over the last four quarters at 100%, 100%, 80% and this quarter expectations at 50%, Morgan Stanley could be right about the end of the boom. Profits are clearly slowing but that does not mean 50% growth is bad.

The same comments sent shares of the materials stocks lower with Phelps Dodge falling -5.79 and Nucor -3.70 to lead the drop. PD also said business was not as strong as expected and this helped accelerate the plunge. Steel stocks took a hit on news that Seabreeze Partners were negative on future expectations. There was also news from overseas that four plants were being closed due to excess global steel inventory. This close to the end of the quarter I am sure this is giving fund managers indigestion. With no material window dressing attempt for equities in general and oil holding over $54 it appears funds were hoping to exit the quarter with tidy profits in energy/materials stocks. If the selling continues fund managers may have to abandon that plan.

Pfizer may have taken a serious hit today after the Austrian Patent Office invalidated its patent on the main ingredient in Lipitor. PFE vowed to appeal and its patent will be in force for the expected year long process. Ranbaxy Laboratories has additional suits in other countries including the U.S. to void Lipitor patents. Several readers have asked me if PFE was a buy at this level given their strong pipeline and low price. I cautioned that it appears to be open season on drug companies and with hostile fire coming from all directions. I would want to see a positive trend develop before risking money in that sector.

The only bright spot in the indexes was the SOX, which did give up its gains but held at support at 410 while all other indexes were breaking down. This may be helping to hold up tech stocks but you could not tell it from the Nasdaq, which hit new five month lows. Tomorrow Microsoft has its quarterly analyst meeting and we could hear about its business outlook but investors sold into the news. MSFT closed at $23.92 and a new 10-month low. MSFT set a cycle high just over $27.50 back in November but it has been downhill ever since. Big cap techs can't find a bid and no amount of strength in the SOX is going to revive the Nasdaq without big cap buyers. The SOX may be acting as a brake on the current decline but I fear it is starting to slip.

The Nasdaq tried for three days to use 2000 as support then for four days to regain that support once broken. Today's drop to 1972 appears to be tech investors throwing in the towel after failing to hold that 2000 level. The close at 1972 was almost exactly on the up trend support from October 2002 and it represents a level that MUST hold or the next stop could be 1750 and the August 2004 lows. The 200-day average at 1992 held for four days but it is now history and the break constitutes a strong sell signal for techs. The Nasdaq setup looks like a potential repeat of the March 2000 top but at a lower level. We saw the index chop around at its highs for several months only to post a climax peak and drop into oblivion.

The Dow dropped -79 points and came within 20 points of its 200-day average at 10376. While this is a clear line in the sand it is not as critical as the Nasdaq 200. The Dow tends to notice the 200 but not react to it while tech investors historically use the Nasdaq 200 as their buy/sell signal. The Dow has support at 10400 dating back to September and a break here could easily see a drop to 10000 or lower.

The S&P dipped very close to my 1160 target I mentioned last week as a critical level. 1160 would be the level I would bet on for a rebound but like I suggested last week it would only be a trading bounce. If 1160 breaks it could be a sharp drop to 1100 with 1065 a very likely target.

S&P Chart - Daily


SPX Chart - Weekly


Nasdaq Chart - Weekly


What the heck happened to our markets? You can sum it up in four words that matter most. "Don't fight the Fed." Historically 66% of Fed tightening scenarios result in a recession within two years. With the Fed ratcheting up their Fedspeak towards more aggressive moves ahead the storm clouds are growing. Investors were having trouble getting excited about slowing growth as we moved into 2005. Now with high-energy prices, slowing economic news, rising inflation and a hostile Fed it is just not a positive environment for equities. The Fed pumped massive amounts of cash into the system post 9/11 and dropped rates to multi-decade lows. Now that the economy has recovered from the 9/11 shock they have to remove that IV tube of cash and force the economy back onto its own two feet. Unfortunately inflation is rising faster than they would like while other global economies are slowing. France, Germany and the EU in general are struggling and there were several comments in the news today that growth in China was also slowing. (Stick around, next week somebody will claim China is exploding again.) This global economic weakness is not supplying the necessary buyers to pull the U.S. out of its current phase. With the bull market in its third year and aging rapidly investors doubt there is much excitement ahead. This economic malaise is transferring into the equity markets and investors everywhere are deciding cash is a position.

The failure of Monday's window dressing attempt convinced investors that it was time to exit and today's internals were terrible. Down volume was more than 3:1 over up volume and decliners beat advancers more than 2:1. Since March 4th we have seen a steady decline in individual new 52-week highs and a steady rise in new 52-week lows. This is a very strong indicator of market sentiment and it is not painting a pretty picture. The indexes hit their recent highs on Friday March-4th and Monday March-7th and it has been downhill ever since. The new 52-week lows on the Nasdaq were 154 on Tuesday and a level not seen since Oct-25th 2004. The following image shows the numbers for the overall market since March 4th when new highs hit 650. That was the highest level since Dec-2nd.



With two more days left in this quarter and serious economics ahead I am sure we will see additional volatility. Funds hoping to escape the quarter with their gains intact are going to be holding their breath as the clock ticks away. Those seeing the writing on the wall for a post end of quarter dip will probably try to take some profits early and move to cash. There could still be an attempt at window dressing but in this environment it may take the form of preventing further drops rather than pushing the markets higher. The outlook for the rest of the week is very cloudy but my outlook for Q2 is very negative. The big report will be the Jobs report on Friday and as the first day of the new quarter funds will probably act on the news. I believe investors will decide the easy money has been made and memories of the March 2000 top will hasten exits on fears of a repeat. This could be an ugly summer for equities in general. Oil prices are holding just over $54 but another inventory build announcement on Wednesday could set the stage for a post end of quarter drop. I would be a buyer of oil stocks around their 100-day average or any dip of oil to $50 or below. Check out the Leaps Trader section from Sunday for individual symbols and entry points. Definitely, enter passively and exit aggressively.
 

 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
None MGG

New Calls

None today.
 

New Puts

MGM Mirage - MGG - close: 70.25 chg: -2.51 stop: 72.51

Company Description:
MGM MIRAGE, headquartered in Las Vegas, Nevada, is one of the world's leading and most respected hotel and gaming companies. The Company owns and operates 11 casino resorts located in Nevada, Mississippi and Michigan, and has investments in three other casino resorts in Nevada, New Jersey and the United Kingdom. (source: company website)

Why We Like It:
After an incredible run from August 2004 through early February 2005 it finally looks like MGG is going to see a correction. The stock has effectively been churning sideways for the last couple of months between $70 and $80 but now shares are starting to breakdown and volume was more than double the norm on today's test of support in the $69.00-70.00 level (and its 100-dma). We suspect that with the broader market showing weakness MGG could be a big target for profit taking. Yet part of the challenge is that both the major averages and MGG are at support. If the market bounces then we'd expect MGG to bounce too. Before initiating any bearish positions in MGG be sure to confirm market direction. Due to the major averages being at support we're going to use a TRIGGER to open the play in MGG. Our entry point will be $68.75. This would put MGG below today's low and the January low. The P&F chart is already bearish with a sell signal pointing to a $60 target. We want to target the top of the early December gap near $62.00 so our target will be $62.00-62.50. We cannot find a firm earnings date for MGG but the data we have suggests MGG will report in very late April or early May. Once MGG does establish a Q2 earnings date we'll plan to exit before the company reports.

Suggested Options:
We are suggesting the May puts although the June strikes have much more open interest.

BUY PUT MAY 70.00 MGG-QN OI= 81 current ask $3.70
BUY PUT MAY 65.00 MGG-QM OI= 0 current ask $1.60

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: 0.00
Earnings Date 05/01/05 (unconfirmed)
Average Daily Volume = 997 thousand
 


Play Updates

In Play Updates and Reviews

Call Updates

Amer. Intl Grp - AIG - cls: 58.20 chg: 1.18 stop: 55.95

AIG proved to be one of the Dow's best performers on Tuesday with the stock adding more than two percent on volume more than three times the norm. The move was fueled by news that its CEO Greenberg would step down and the company would promote a new leader. Meanwhile there was also talk that Eliott Spitzer's investigation into AIG was coming to a close. Our strategy was to go long (buy calls) on a move over $58.01. AIG traded at our trigger this morning. We are a little disappointed that the stock did not hold on to more of its gains but the rest of the market looks pretty weak. If the Dow continues lower tomorrow watch the $57.00-57.50 level in AIG for possible support. We would consider buying a bounce from this area. We would not open new bullish positions if the Industrials keep falling lower.

Picked on March 29 @ $ 58.01
Change since picked: 0.19
Earnings Date 04/21/05 (unconfirmed)
Average Daily Volume = 9.2 million

---

PalmOne - PLMO - close: 24.86 chg: -1.28 stop: 23.25 *new*

Uh-oh! PLMO lost 4.89 percent and broke down under the $25.00 level. This is a significant under performance compared to the rest of the market and the drop under what should have been support at the $25.00 mark is bad news. Conservative traders may want to exit here to minimize any losses, especially with the major averages selling off. We'll keep the play open for now but we're watching the $24.00.00 level as the next area for possible support. A drop under $24.00 and we'll probably close the play early. We are raising the stop loss to $23.25.

Picked on March 23 at $ 25.71
Change since picked: - 0.85
Earnings Date 03/17/05 (confirmed)
Average Daily Volume = 3.2 million

---

Red Robin Burger - RRGB - cls: 50.42 chg: 0.19 stop: 44.99

No change from previous update.

Picked on March 10 at $ 48.00
Change since picked: 2.42
Earnings Date 02/14/05 (confirmed)
Average Daily Volume = 199 thousand
 

Put Updates

Allergan - AGN - close: 70.41 chg: -0.35 stop: 75.01 *new*

Weakness in Pfizer (PFE) helped pull the drug sector lower and AGN fell near the opening bell but managed to rebound by the close. Looks like the bulls aren't giving up on the $70 level without a fight. We are lowering our stop loss to $75.01.

Picked on March 13 at $ 73.09
Change since picked: - 2.68
Earnings Date 04/29/05 (unconfirmed)
Average Daily Volume = 777 thousand

---

Beazer Homes - BZH - close: 50.05 chg: -2.15 stop: 54.01

CNBC had yet another analyst on today discussing the homebuilders and his outlook was not positive. The DJUSHB index lost 1.88 percent to close at a new two-month low. Shares of BZH lost more than four percent to hit its own two-month low and test support at the $50.00 level. Our split adjusted target is the $48.00-46.50 range. Given the bearish market environment we're going to target the lower end of our range. However, more conservative traders may want to consider exiting near $48.50 or anywhere near the rising 100-dma, which could act as possible support.

Picked on March 17 at $ 51.43
Change since picked: - 1.38
Earnings Date 04/21/05 (unconfirmed)
Average Daily Volume = 742 thousand

---

Fedex Corp - FDX - close: 93.21 chg: -1.39 stop: 96.01

The good news is that the Dow Transports (-1.79%) appears to be leading the Dow Industrials lower. The drop under the 3700 level in the Transports is good news for the bears. Shares of FDX followed with its own decline. The challenge now is that the Transports are nearing significant support stretching back to last August. Of course if the Transports break this support, currently near 3650, then the sector could easily slip towards the rising 200-dma, which will probably coincide with the January low (you can see all of this on a daily chart of the Transports). If you remember we were playing FDX on a short-term basis. We expected that the Transports would turn lower and FDX would fall toward the $90 level. Tomorrow could be an important day as we see if there is any follow through to the downside. Today's decline does look like a new bearish entry point but pay attention to the action in the Dow Transports.

Picked on March 27 at $ 93.89
Change since picked: - 0.68
Earnings Date 03/17/05 (confirmed)
Average Daily Volume = 1.8 million

---

Google Inc - GOOG - close: 179.57 chg: -1.85 stop: 185.01

GOOG continues to flirt with the $180 level. News that the company bought web-analytics firm Urchin Software had no noticeable affect on the stock. However, today's decline could be used as confirmation that yesterday was indeed a failed rally. Yet we would still prefer to see shares under $177 before considering new bearish positions.

Picked on March 10 at $179.49
Change since picked: 0.08
Earnings Date 02/01/05 (confirmed)
Average Daily Volume = 10.9 million

---

Cheniere Energy - LNG - close: 63.66 chg: -2.64 stop: 70.01*new*

LNG is almost there! The stock lost almost four percent on Tuesday's session. Shares broke under the $64.00 level but are still clinging to the 100-dma. Our target is the $62.50-60.00 range and tomorrow could be our exit if the markets and LNG continue lower. Conservative traders may want to consider exiting now since LNG is down almost six points from our entry. We are lowering our stop loss to $70.01.

Picked on March 11 at $ 69.49
Change since picked: - 5.83
Earnings Date 03/10/05 (confirmed)
Average Daily Volume = 517 thousand

---

Intl Bus. Mach. - IBM - close: 90.60 chg: -0.44 stop 92.15

IBM is showing some relative strength as bulls and bears fight it out near the $90.00 level and its 200-dma again.

Picked on March 17 at $ 89.86
Change since picked: 0.74
Earnings Date 04/14/05 (unconfirmed)
Average Daily Volume = 4.8 million

---

Mcgraw Hill Cos - MHP - close: 86.06 chg: -2.30 stop: 90.21

Finally! Today's market decline helped spark a breakdown in MHP from its two-week consolidation. Volume was more than double the daily average. The stock is nearing our short-term target in the $85.00-84.00 range. Readers can prepare to exit. Conservative traders may want to exit anywhere under $85.50. We'll wait for $85.00 or lower.

Picked on March 15 at $ 88.40
Change since picked: - 2.34
Earnings Date 04/26/05 (unconfirmed)
Average Daily Volume = 751 thousand

---

Millipore - MIL - close: 44.17 chg: -0.31 stop: 46.05

No change from previous update.

Picked on March 16 at $ 43.95
Change since picked: 0.22
Earnings Date 04/19/05 (unconfirmed)
Average Daily Volume = 358 thousand

---

Pacificare Health - PHS - close: 57.98 chg: -1.05 stop: 62.01

The action in PHS on Tuesday looks like another failed rally at the $60.00 level but this time shares neared the 10-dma before rolling over again. We are still keeping a wary eye on the rising 100-dma near $56.50 but today's decline could be used as a new entry point.

Picked on March 20 at $ 59.04
Change since picked: - 1.06
Earnings Date 04/28/05 (unconfirmed)
Average Daily Volume = 1.1 million

---

Toll Brothers - TOL - close: 77.19 chg: -0.08 stop: 80.51*new*

TOL did lose 1.28 percent on Tuesday but shares fared better than the DJUSHB home construction index. Plus, TOL remains inside the current eight-day trading range. We remain bearish and we're lowering the stop loss to $80.51.

Picked on March 17 at $ 76.81
Change since picked: 0.36
Earnings Date 02/23/05 (confirmed)
Average Daily Volume = 2.1 million
 

Dropped Calls

None
 

Dropped Puts

None

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