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Daily Newsletter, Thursday, 03/31/2005

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Table of Contents

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

Market Wrap

The Numbers

In a very uneventful and sideways trading day, the Dow lost -37.17 points closing at 10503.76. The SPX lost -0.82 to close at 1180.59. The Nasdaq composite lost -6.44 to close at 1999.23 and the Nasdaq 100 lost -9.21 to close at 1482.53. On the NYSE 1.6 billion shares traded, 1,977 stocks rose and 1,373 fell. On the Nasdaq Stock Market 1.6 billion shares traded, 1,365 stocks advanced and 1,714 declined.

All in all it was an uneventful and sideways day. Well at least for the equities. The bonds on the other hand had a very eventful and volatile day.

The 8:30 personal income report showing inflation is well under control shot Treasury prices higher this morning. As a matter of fact at 8:30 the 10-year was trading at 108 51/64 and within 3 minutes they were 109 13/64ths. The 30-year was trading at 110 20/32 and by 8:33 they were 111 11/32. Those are huge moves in the bonds.

The 10-year Treasury note closed at 109 19/64 up 35/64ths. The 30-year bond was up 25/32 to close at 111 15/32.

Today's news

Terri Schiavo died at the Pinellas Park hospice where she had been connected to a feeding tube for 15 years. The battle between her husband and her parents over her fate is the nation's longest, most bitter right-to-die dispute. She died 13 days after the feeding tube was removed. She was 41.

Although many think a death by starvation and/or thirst would be a horrible way to die, it really is not. Without brain waves you feel nothing so it is the most natural and humane way to go for those in a permanent vegetative state.

For the first time American International Group (AIG) has acknowledged the existence of serious accounting "errors" behind the seemingly rock solid financial giant.

The accounting errors have to do with the offshore businesses AIG controls, but the focus of the investigation deals with a transaction with Berkshire Hathaway unit General Re. AIG has admitted the transaction included no transfer of risk, so that the money it received should have been booked as deposits rather than income that inflated AIG's reserves. This does not look good for ousted AIG leader Maurice "Hank" Greenberg, whose legal liability "would rest on what he understood about the transfer of risk in the General Re deal and whether he believed the transaction to be questionable."

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Standard & Poor's cut Morgan Stanley credit outlook from positive to stable because of its continuing battle between Chief Executive Philip Purcell and a growing number of unhappy Morgan veterans. Leaders of the revolt against Mr. Purcell hope to persuade directors to replace him.

US Air is looking to find an investor to inoculate the company with $100 million so it can finalize its exit financing and emerge from bankruptcy protection. Finding an investor in an environment of rising fuel prices, operational problems, low employee morale and rising customer complaints is proving to be quite hard, so US Air is finding.

A presidential commission, headed by Judge Laurence Silberman, a Republican, and former Democratic Sen. Charles Robb of Virginia found U.S. intelligence about Iraq's weapons capability was "dead wrong" and that the intelligence community knows "disturbingly little" about the capabilities of North Korea, Iran and other potential enemies.

Research done by Goldman Sachs energy analysts stated that we could head into a period similar to the 1970's when supply disruptions led to a huge rise in oil prices and plunged the U.S. into a crippling recession. The 1970's high oil prices put a gash into oil demand, which eventually led to over-investment in production, which in turn ushered in a period of over supply that kept oil prices below average. This is just your basic supply and demand from Economics 101. Fast forward to the year 2005 and the Goldman Sachs energy analysts are saying we may need another upward correction to create another supply cushion. Unfortunately this may also take oil prices a lot higher than they are now, and a lot higher than in the 1970s and early 1980s, because the U.S. economy is less dependent on oil now.

Economic Reports

At 8:30 we saw the weekly release of the Jobless Claims, first-time claims for unemployment benefits, put out by the Department of Labor for the week ending March 26, 2005. This report showed claims rose last week by 20,000 to 350,000, well above the consensus expectation and an 11-week high. Economists say we are at a pivotal point between expansion and contraction in the job market.

The 8:30 Commerce Department's monthly Personal Income for February showed U.S. incomes and spending rose but not quite as high as expectations. February personal income was up 0.3%, slightly below forecasts of 0.4%, while personal spending was up 0.5%, in line with expectations. The small 0.2% gain in the price index for personal consumption expenditures excluding food and energy showed that inflation pressures remain at bay. The preferred inflation barometer of Federal Reserve policy makers, the year over year reading, rose 1.6%.

The Fed suggested earlier this month that it was watching for any signs of a surge in prices, and that it would act aggressively to raise interest rates should this come to pass. The Fed is expected to continue to raise the Fed Funds rate this year, but reports like this will keep them doing so at a relatively leisurely pace.

At 10:00 the Chicago PMI gave a surprise to the upside. In March, the business barometer jumped to 69.2, a huge increase over February's 62.7. The stronger figure was due to a surge in production and new orders, while both prices paid and delivery backlogs eased. The employment gauge jumped to its best reading since 1983. An excellent report.

The 10:00 Bureau of the Census' Factory Orders for February reported factory orders increased 0.2% in February after been flat in January, and that orders for long-lasting manufactured goods rose 0.5%, an upward revision from an earlier estimate of an 0.3% advance. Non-defense capital goods orders excluding aircraft, a proxy for business demand, slipped 1.7%.

The Conference Board Help Wanted Index was also released at 10:00. The index, a gauge of labor demand, collected from the help-wanted sections of several U.S. newspapers, held steady in February, but at a level many economists consider high.

Charts

The last time I did a Market Wrap I posted support and resistance Point and Figure charts. I would like to do an update on those charts and try to see if we can tie them into bar charts.

Daily Bar and Point and Figure Chart of SPX

The Point and Figure chart of the SPX has not changed much. It will need to trade to 1160 or below to make another O in the last column and so far the yearly lows have been 1163. If SPX does trade down to 1160 it would give a P&F sell signal but not a very strong one because this market is still above its blue support line and a red resistance line has not yet begun to form. This is still our strongest market. That is the good news.

The bad news is that if SPX were to trade to 1160 and give what I consider a weak P&F sell signal, it would translate to a nasty break of a double bottom on the bar chart. Then add the fact that the double bottom was met with a lower low on the MACD and you can see that the sell signal on the P&F chart becomes a little more ominous. I expect this market to make a 50% retracement from the March high to low, which would be a return to about 1200 and would build a column of Xs. However, I expect the next drop will break the P&F blue support line and the Bar chart's double bottom.

Daily bar and Point and Figure Chart of the DOW

The DOW has added a few Os to the last column but not enough to break the blue support line. This chart gave a sell signal back at 10600 so it is weaker than the SPX, which has not yet given a sell signal. This is once again the good news.

The bad news is this chart. See how predictive the MACD negative divergence in February was (Red lines)? Now look a the MACD divergence this market is currently building (green lines). I expect the DOW to also bounce approximately 50% of the move from March highs to March lows, which would take it to about 10700 and then reverse and take out the March lows. This would put the P&F chart back into a column of Xs, build a red resistance line and then the next column of Os will break the blue support line.

Daily bar and Point and Figure chart of COMPQ

As I stated in my last Market Wrap this is a bearish chart, the red resistance line as started to form and the blue support line has been broken. It has even had its required bounce and made a small column of Xs setting up a picture perfect short entry below 1970.

On the Bar chart, the Nasdaq Composite broke a wedge to the downside (bottom green line). Technical analysis says that this market should return to this line to test it as resistance, a revisit to about 2035, which just happens to be a 50% retracement of the March highs to lows. However, one should take note of the positive MACD divergence from the January lows to March lows (red lines). This is telling me the bounce back to the 50% level I have been talking about so far will most likely be lead by the techs.

Daily bar and Point and Figure Chart of the NDX

This chart hasn't changed too much from the last one I showed you except for the column of Xs that it has started to build fortifying my thought any bounce will be lead by the techs.

Notice how much the NDX bar chart looks like the COMPQ bar chart but when you look at the P&F charts you see a different picture. The P&F charts shows a much more bearish chart of NDX than it does of the COMPQ

Tomorrows Economic Releases

Tomorrow starts off with a bang with the 8:30 release of the Employment Situation. Last month we saw payroll employment increase to 262,000, which was an upward surprise and the consensus for March is a substantial drop to 225,000.

Then at 9:45 we have the release of the University of Michigan Consumer Sentiment Survey. For March the index fell slightly to 92.9 from Februarys 94.1 and the consensus for April is 92.8 down slightly from March's number.

Then the fireworks start again with the 10:00 release of the ISM Index. Last month the index saw most of the component indices decline and the index itself fall more than a full point to 55.3. Consensus for March is down again to 55. This release is important because the Ism is good leading indicator of overall economic activity.

Also at 10:00 is Construction spending. In January construction spending increased to 0.7%, slightly edging out the consensus forecast. The consensus for February is up slightly to 0.8%

At around 2:00 or so we will get the Semiconductor Billings

After hours

Pope John Paul II has been given the last rites of the Roman Catholic Church as his health deteriorates, a Vatican source tells CNN.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
APC None

New Calls

Anadarko Petroleum - APC - cls: 76.10 chg: +2.05 stop: 72.45

Company Description:
Anadarko Petroleum Corporation's mission is to deliver a competitive and sustainable rate of return to shareholders by developing, acquiring and exploring for oil and gas resources vital to the world's health and welfare. As of year-end 2004, the company had 2.37 billion BOE of proved reserves, making it one of the world's largest independent exploration and production companies. Anadarko's operational focus extends from the deepwater Gulf of Mexico, up through Texas, Louisiana, the Mid-Continent, western U.S. and Canadian Rockies and onto the North Slope of Alaska. Anadarko also has significant production in Algeria, Venezuela and Qatar, and exploration or production positions in several other countries. (source: company website)

Why We Like It:
Here we go again. It looks like the consolidation in the oil stocks over the last three to four weeks may be ending. Comments from Goldman Sachs and their forecast for triple-digit oil in the next few years could easily rekindle the fire under oil-related equities. There are plenty of oil stocks that are starting to look tempting for another trading rally but we're going to step carefully and only add one today. We will be looking at the holders, indices and ishares for potential plays this weekend. We like APC because the stock is producing a nice bounce from support near the $72.00 level (see chart). The bounce actually produced a hammer candlestick pattern and at the end of a bearish trend tends to signal a possible bullish reversal and today's gain was the follow through on that pattern. The stock has also broken through its three-week trendline of lower highs. The MACD indicator is suggesting a new buy signal soon and the RSI and stochastics are already turning positive. It is true that the P&F chart is bearish but the stock could trade up to the $81 level before producing a new buy signal. Our target is the $81.50 region - just under the early March resistance at $82.00. We will plan to exit this play before APC's late April earnings report.

Suggested Options:
We are suggesting the May calls even though we plan to exit near the end of April to avoid earnings.

BUY CALL MAY 75.00 APC-EO OI=4191 current ask $4.40
BUY CALL MAY 80.00 APC-EP OI=3898 current ask $2.25

Picked on March 31 at $ 76.10
Change since picked: + 0.00
Earnings Date 04/29/05 (unconfirmed)
Average Daily Volume = 2.3 million

 

New Puts

None today.


Play Updates

In Play Updates and Reviews

Call Updates

PalmOne - PLMO - close: 25.38 chg: +0.30 stop: 23.25

No change from previous update.

Picked on March 23 at $ 25.71
Change since picked: - 0.33
Earnings Date 03/17/05 (confirmed)
Average Daily Volume = 3.2 million

---

Red Robin Burger - RRGB - cls: 50.91 chg: +0.35 stop: 44.99

If you're following the headlines you'd notice that RRGB delayed its filing of its 10-K yesterday to "further review" how it accounts for leases, which has been a common issue for several retail business lately (source: Reuters). Unfortunately, after the closing bell on Thursday the company announced that it had received a potential delisting notice from the NASDAQ for the 10-K delay. The stock sank to $48.60 afterhours but at the time of this update shares were trading back north of $50 again. Expect some volatility tomorrow.

Picked on March 10 at $ 48.00
Change since picked: + 2.91
Earnings Date 02/14/05 (confirmed)
Average Daily Volume = 199 thousand
 

Put Updates

Allergan - AGN - close: 69.47 chg: -0.62 stop: 72.51 *new*

Good news! AGN continues to sink and shares have closed under round-number, psychological support at the $70.00 mark. The stock is within $2 of our $67.50 target. Readers can prepare to exit. We are lowering our stop loss to $72.51.

Picked on March 13 at $ 73.09
Change since picked: - 3.62
Earnings Date 04/29/05 (unconfirmed)
Average Daily Volume = 777 thousand

---

Beazer Homes - BZH - close: 49.86 chg: +0.16 stop: 54.01

BZH bounced a bit from yesterday's rebound off the 100-dma but today's bounce failed to hold over the $50.00 mark. Remember that our target is the $48.00-46.50 range. In the news the company confirmed its earnings release date as April 28th.

Picked on March 17 at $ 51.43
Change since picked: - 1.57
Earnings Date 04/28/05 (confirmed)
Average Daily Volume = 742 thousand

---

Google Inc - GOOG - close: 180.51 chg: +0.06 stop: 185.01

It was a relatively low-volatility day for GOOG. UBS came out with concerns that GOOG's capex spending could be higher than expected. The INX Internet index didn't move much today and neither did GOOG. We remain bearish but we're still looking for a drop under $177 before initiating new bearish positions.

Picked on March 10 at $179.49
Change since picked: + 1.02
Earnings Date 02/01/05 (confirmed)
Average Daily Volume = 10.9 million

---

Intl Bus. Mach. - IBM - close: 91.38 chg: +0.70 stop 92.15

Big Blue is showing some strength today but the stock remains under resistance at the $92.00 level. We continue to suggest readers wait for a drop under $90.00 before considering new bearish positions. Don't forget that we're running low on time as IBM's earnings report should be here in the next two or three weeks.

Picked on March 17 at $ 89.86
Change since picked: + 1.52
Earnings Date 04/14/05 (unconfirmed)
Average Daily Volume = 4.8 million

---

MGM Mirage - MGG - close: 70.82 chg: +0.02 stop: 72.51

No change from previous update. Our trigger to go short/buy puts is $68.75.

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

---

Mcgraw Hill Cos - MHP - close: 87.25 chg: -0.64 stop: 90.21

No change from previous update.

Picked on March 15 at $ 88.40
Change since picked: - 1.15
Earnings Date 04/26/05 (unconfirmed)
Average Daily Volume = 751 thousand

---

Millipore - MIL - close: 43.40 chg: -0.19 stop: 46.05

No change from previous update.

Picked on March 16 at $ 43.95
Change since picked: - 0.56
Earnings Date 04/19/05 (unconfirmed)
Average Daily Volume = 358 thousand

---

Pacificare Health - PHS - close: 56.92 chg: -1.70 stop: 62.01

No real change here although PHS did decline 2.9 percent to close at a new 2 1/2 month low. Shares are testing potential support at its 100-dma.

Picked on March 20 at $ 59.04
Change since picked: - 2.12
Earnings Date 04/28/05 (confirmed)
Average Daily Volume = 1.1 million

---

Toll Brothers - TOL - close: 78.85 chg: +1.75 stop: 80.51

No real change here either. We've been expecting a bounce back toward $80.00. More conservative traders may want to wait for a drop back under $76 before considering positions.

Picked on March 17 at $ 76.81
Change since picked: + 2.20
Earnings Date 02/23/05 (confirmed)
Average Daily Volume = 2.1 million
 

Dropped Calls

Amer. Intl Grp - AIG - cls: 55.41 chg: -1.75 stop: 55.95

Hmm.. looks like we were right on yesterday with AIG's failure to produce any follow through on its bullish reversal. This morning the company had its credit rating reduced and management admitted to improper accounting practices. If the stock wasn't already so oversold we would have expected a bigger decline. Shares lost three percent and traded through our stop loss at $55.95.

Picked on March 29 @ $ 58.01
Change since picked: - 2.60
Earnings Date 04/21/05 (unconfirmed)
Average Daily Volume = 9.2 million
 

Dropped Puts

None

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