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Daily Newsletter, Tuesday, 04/12/2005

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Table of Contents

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

Market Wrap

Measured Pace For Inflation


04-12-2005


High

Low

Volume

Adv/Dcl

DJIA

10507.97

59.41

10529.77

10360.92

1.98 bln

2054/1178

NASDAQ

2005.40

13.30

2007.24

1940.01

1.98 bln

1699/1366

S&P 100

565.88

   3.76

567.04

558.14

Totals

3753/2544

S&P 500

1187.76

   6.55

1190.17

1170.85

 

 

SOX

413.14

-    0.50

413.78

403.20

 

 

RUS 2000

613.03

   5.86

613.67

600.73

 

 

DJ TRANS

3645.99

35.55

3665.64

3568.76

 

 

VIX

11.30

-    0.68

12.83

11.20

 

 

VXO (VIX-O)

11.64

-    0.95

13.18

11.45

 

 

VXN

16.24

-    0.66

17.56

16.19

 

 
Total Volume

4,289M

 

 

 

 

 

Total UpVol

2,813M

 

 

 

 

 

Total DnVol

1,394

 

 

 

 

 

Total Adv

4212

 

 

 

 

 

Total Dcl

2991

 

 

 

 

 

52wk Highs

104

 

 

 

 

 

52wk Lows

292

 

 

 

 

 

TRIN

0.96

 

 

 

 

 

NAZTRIN

0.53

 

 

 

 

 

PUT/CALL

1.18

 

 

 

 

 

Measured Pace For Inflation

The Fed minutes for the March meeting were released at 2:PM and the party started almost immediately. In brief the Fed members felt that an accelerated pace of rate hikes did not appear necessary at this time. Inflation pressures have picked up in recent months but still remained under control. The Dow was down -81 at the time and Nasdaq down -20 but those losses were quickly erased as traders bought stocks and shorts got squeezed.

Dow Chart - Daily


Nasdaq Chart - Daily


SPX Chart - Daily


The morning started off ugly with the U.S. trade deficit jumping to -$61 billion and an all time high for February. January's deficit was also revised upward to $58.5B. The trade deficit with China narrowed to $13.8B from $15.3B but the jump in oil prices offset that decline. Oil imports grew to $13.3B from $11.9B in January. The U.S. has trade deficits with China, Japan, Brazil, Korea, Taiwan and Canada. Imports rose 16.8% over the same period last year with exports rising only 8.7%.

The record trade deficit pushed equities over the cliff and the Dow fell -81 points to 10360 by mid afternoon and the release of the FOMC minutes. Those minutes were expected to be bearish in view of recent inflation numbers and slowing growth. Most analysts had expected some stronger language about the future pace of rate hikes. The minutes showed the Fed was concerned about inflation but felt it was under control. The committee also repeated its current status by saying removal of the rate accommodation could continue at a measured pace. Traders immediately seized on this as confirmation that there would be no 50-point hikes in our future. However, there were plenty of points to worry about. Participants said "uncertainty about the intensity of inflation pressures had risen in response to recent developments and possible inflation outcomes were tilted to the upside." They also addressed the "measured pace" language. "Some participants expressed the view that such language could constrain future policy inappropriately as the odds that the committee might need to step up the pace of policy firming were thought to have increased." Some members felt, "measured" ought to be removed not only because it limits policy action including a pause or more aggressive tightening, but also because some members felt the odds of a 50-basis point tightening had increased."


The key point in the minutes was this language, "although the required amount of cumulative tightening may have increased members noted that an accelerated pace of policy tightening did not appear necessary at this time." Pimco's Bill Gross said this completely erased the potential for a 50-point hike for at least the next three meetings. He felt as long as the measured pace language remains it would take at least two meetings to remove it and change their bias to a more aggressive stance. Also, the current top for the Fed is thought to be 3.5%, up 75 points from our current 2.75% rate. That takes care of the May, June and August meetings and puts us near the fourth quarter before there is any major change in policy.

The release of these minutes was feared by traders after the apparent accelerated concern for inflation as expressed by several Fed heads over the last couple weeks. There was a strong fear that the minutes would suggest a coming removal of the measured pace language and an acceleration of the rate hike process. This thought process had pushed Dow and Nasdaq to their lows for the year just before 2:PM. The surprisingly tame minutes sent bonds soaring with yields falling to a five week low. Oil, down -1.00 at the time of the announcement fell another buck to $51.80 as money fled oil and headed for equities. The Dow rebounded from 10360 to 10529 in about 45 min. This was a 169 point reversal and a stunning change in fortunes. However, much post event analysis suggests the spike could be in trouble.

In the countless post event interviews there were numerous analysts that did not see any change in Fed position. The Fed is still on track to raise at least three more times and the committee discussed removing the "measured pace" statement. Nothing really new here but you would have thought the markets had seen something written in invisible ink. In reality it was a classic "sell the rumor, buy the news" reaction. Bears were leaning heavily on the market this week after four days of gains last week. We had completely retraced all the gains and returned to the lows for the year once again. Traders expected the worst from the minutes and were seriously short in expectations of a support failure at 10360. When the minutes failed to live up to the bearish expectations the contingent of traders on the sidelines jumped in and shorts suddenly found themselves on the wrong side of the market. The afternoon spike was a picture perfect short squeeze.

The question now is of course will it hold? This is exactly the point in the earnings cycle where there is still enthusiasm for the coming guidance and there have not been enough disappointments to spoil the sentiment. We are also right back on the high end of our recent range (10360-10550) and nearing resistance once again. We have retraced this range several times now and time is running out. Economic reports increase in frequency and importance as the week progresses as do earnings. I would still be very careful about any long at this level.

There is a strong feeling we could be heading into a repeat of the summer from hell. That is what traders call the summer of 2004. Volume was very light, the markets were trendless and nobody made any money until October. With the Fed trying to suppress the economy and at least three more hikes ahead of us there is very little excitement about being in stocks until the Fed rests. This suggests this summer could easily be a repeat of 2004 or worse.

The wild card here is still oil prices. The sharp drop in oil prices at 2:PM as bonds and equities rallied clearly showed some sector rotation. Inventory levels are continuing to grow and Saudi Arabia is committed to pumping every barrel they can as we move into the driving season. Add in the normal Q2 demand slump and we should be seeing some lower prices. Oil has resisted breaking the $52.50 level as investors held on to their belief that the initial dip was just temporary. With the close at $51.80 tonight we could see some sell stops hit and finally get the real break we have been looking for. If oil does break lower those profits could be shifted to equities as earnings take center stage. That is a lot of "ifs" but I think you get the picture. $50 oil will be the key to watch. If $50 holds we could see that money come right back to energy stocks. If it breaks we could get a rush of cash back into equities as profit taking accelerates. I always think it is strange that half the market will be taking profits at $50 while the other half will be celebrating an entry point at $50. Those differing views are what makes a market and produces profits for us all.

Oil Chart - Daily


SOX Chart - Daily


Russell 2000 Chart - Daily


The earnings parade is finding it more difficult to dodge the warnings left by the early reporters. I visualize the band members in a parade stepping around the manure piles left by horses in front of them. The piles of earnings manure are accumulating and the big horses have yet to appear. Foundry warned after the bell that earnings would fall well below prior estimates due to weak sales to North American business customers. Does that mean Cisco is also seeing weak sales? Software companies are still leading the parade and leaving droppings everywhere. Compuware warned after the close that earnings would be 6-8 cents and well below the 13 cents expected. They said more revenue was being deferred due to slower than expected acceptance of licenses. BMC Software and Computer Associates also warned. TZOO reported earnings that were below estimates. Revenue was up but so were expenses. There are more examples of earnings challenges but I believe you are getting the picture.

So far those who have reported have been only the pre-show and the main event begins next Tuesday with Intel, EMC, JNPR, LU, STX, SGI, SMDI, TER and YHOO to name a few. Notable earnings the rest of this week include several chip makers, AMD, ASML, LRCX on Wednesday along with Apple Computer. On Thursday we have FCS, RMBS and SUNW. I highlighted the chipmakers on purpose. The SOX finally broke support at 410 and dipped to 403 intraday today. It appeared the biggest supporter of the Nasdaq had finally cracked and a major plunge was just ahead. That dip reversed on the afternoon short covering to end back over 410 but it may only be temporary. Investors will begin to see some real earnings reports over the next week on chip stocks and without some positive guidance there is no future for techs. The book-to-bill at .78 is the backdrop and investors are holding the SOX at 410 hoping for positive news that we have seen the bottom. If those hopes are dashed by the first handful of chip earnings then the Nasdaq is in trouble.

Actually the Nasdaq is not the only index already in trouble. The Dow was slowly sinking with IBM, AIG and GM the primary anchors. The choppy markets have soured investor sentiment to the extent that Ameritrade saw volume drop -2% for the quarter and over 50,000 investors closed their accounts. According to AMTD this was the highest closure rate in over 10 quarters. Trading volume on Monday was barely 3.2B shares and the lightest trading day of the year. It was even lighter than the pre-holiday volume we have seen. Volume has been declining for a week to reach that level. Investors are just not seeing any reason to be in stocks as summer approaches. Retail investors remember the pain from last year and they would rather have a weekly root canal than suffer through the April-October 2004 period all over again.

Despite the rebound my outlook has not changed. I still believe resistance at 10550, 2020, 1195 will hold without a major catalyst to push them higher. Average earnings guidance will not do it and any high profile misses could pull the rug out from under those buyers still trying to force long trades. Even if we do breakout on some good news I would be skeptical of any gains. I would continue to be patient and focus on energy stocks. We are getting the Q2 drop in prices we have been expecting and rather than trying to chase tech stocks, banks, builders or cyclicals, the best plan is still energy. The 100-day average should be initial support and it is currently $49. That makes the psychological $50 level more likely to hold. The 200-day is $45 so plenty of near term support. I would start nibbling on positions at $50 and add to them on any dip under $50. That could be wishful thinking on my part but many times the profit taking can become quickly overdone and that would be an opportunity for me. Another build in inventory levels on Wednesday could push us to that $50 level. Just because the summer doldrums are ahead does not mean we can't be investors. Definitely, enter passively and exit aggressively.
 

 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
KBH None

New Calls

KB Home - KBH - cls: 122.91 chg: 3.86 stop: 117.00

Company Description:
Building homes for nearly half a century, KB Home is one of America's premier homebuilders with domestic operating divisions in some of the fastest-growing regions and states: West Coast -- California; Southwest -- Arizona, Nevada and New Mexico; Central -- Colorado, Illinois, Indiana and Texas; and Southeast -- Florida, Georgia, North Carolina and South Carolina. Kaufman & Broad S.A., the Company's publicly-traded French subsidiary, is one of the largest homebuilders in France. In fiscal 2004, the Company delivered homes to 31,646 families in the United States and France. It also operates a full-service mortgage company for the convenience of its buyers. (source: company press release)

Why We Like It:
Homebuilders turned in a very strong session with the DJUSHB home construction index adding 2.99 percent. We also note that the DJUSHB index's MACD indicator just produced a new buy signal. Meanwhile shares of KBH produced a strong bounce from rising support with volume coming in well above average. KBH actually closed at a new five-week high and its technical oscillators look bullish. It is worth noting that KBH's P&F chart is currently in a sell signal. We believe that with KBH's upcoming 2-for-1 stock split on April 29th and the rebound in the sector that shares of KBH could trade to the $130.00 level. There is potential resistance near $126 but our time frame is six weeks. We would not be surprised to see KBH actually trade toward the $135 region or $67.50 on a post-split basis.

Suggested Options:
We are suggesting the May calls although readers may want to consider the July calls.

BUY CALL MAY 120.00 KBH-EV OI=1772 current ask $7.00
BUY CALL MAY 125.00 KBH-EW OI= 959 current ask $4.20
BUY CALL MAY 130.00 KBH-EX OI= 686 current ask $2.40

Picked on April 12 at $122.91
Change since picked: 0.00
Earnings Date 03/21/05 (confirmed)
Average Daily Volume = 1.4 million
 

New Puts

None today.


Play Updates

In Play Updates and Reviews

Call Updates

Anadarko Petroleum - APC - cls: 75.70 chg: -1.13 stop: 72.45

No change from previous update on 04/10/05.

Picked on March 31 at $ 76.10
Change since picked: - 0.40
Earnings Date 04/29/05 (confirmed)
Average Daily Volume = 2.3 million

---

Carpenter Tech - CRS - close: 61.58 chg: 0.45 stop: 59.95

No change from previous update on 04/10/05. Our trigger to go long is $64.05. More aggressive players may want to consider today's intraday bounce from the $60.00 level as a new bullish entry point.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: 0.00
Earnings Date 04/25/05 (confirmed)
Average Daily Volume = 334 thousand

---

Occidental Petrol. - OXY - cls: 71.67 chg: -1.10 stop: 67.99

No change from previous update on 04/10/05. We would definitely wait for a bounce before considering new bullish positions.

Picked on April 03 at $ 73.64
Change since picked: - 1.97
Earnings Date 04/26/05 (confirmed)
Average Daily Volume = 2.4 million

---

Oil Service Holdrs - OIH - cls: 96.85 chg: 0.85 stop: 92.49

No change from previous update on 04/10/05. We would definitely wait for a bounce before considering new bullish positions.

Picked on April 03 at $ 98.70
Change since picked: - 1.85
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 3.9 million

---

Red Robin Burger - RRGBE - cls: 52.53 chg: -0.95 stop: 49.49

RRGBE hit some profit taking this morning but managed to bounce back some by the close. The company announced that it has received a compliance letter from the NASDAQ and shares will begin trading again under the previous symbol of RRGB on Wednesday. We continue to suggest that readers consider exiting now. Our target is at $54.00.

Picked on March 10 at $ 48.00
Change since picked: 4.63
Earnings Date 02/14/05 (confirmed)
Average Daily Volume = 199 thousand

---

Research In Motion - RIMM - cls: 75.40 chg: -0.32 stop: 72.49

No change from previous update on 04/10/05. Our trigger to go long is $78.25.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: 0.000
Earnings Date 04/05/05 (confirmed)
Average Daily Volume = 10.1 million

---

Whole Foods - WFMI - close: 101.13 chg: 0.35 stop: 98.99

No change from previous update on 04/10/05. As expected WFMI has tested the $100 level and begun to bounce.

Picked on April 06 at $104.16
Change since picked: - 3.03
Earnings Date 05/03/05 (unconfirmed)
Average Daily Volume = 956 thousand
 

Put Updates

Allergan - AGN - close: 70.83 chg: 0.71 stop: 72.51

No change from previous update on 04/10/05. Conservative traders may want to turn defensive here with the BTK biotech index looking stronger.

Picked on March 13 at $ 73.09
Change since picked: - 2.26
Earnings Date 04/27/05 (confirmed)
Average Daily Volume = 777 thousand

---

Beazer Homes - BZH - close: 49.68 chg: 1.52 stop: 51.01*new*

Heads up! The DJUSHB home construction index turned in a very strong session adding 2.99 percent on Tuesday. Shares of BZH outpaced the move with a 3.15 percent rebound toward resistance at the $50.00 level. Thus far BZH remains in its bearish trend of lower highs but if the stock breaks out over the $50.00 level readers may want to exit quickly. We're lowering our stop loss to $51.01.

Picked on March 17 at $ 51.43
Change since picked: - 1.75
Earnings Date 04/28/05 (confirmed)
Average Daily Volume = 742 thousand

---

Pacificare Health - PHS - cls: 57.32 chg: 0.26 stop: 60.05

No change from previous update on 04/10/05.

Picked on March 20 at $ 59.04
Change since picked: - 1.72
Earnings Date 04/28/05 (confirmed)
Average Daily Volume = 1.1 million

---

Starbucks - SBUX - close: 47.95 chg: 0.44 stop: 51.75

No change from previous update on 04/11/05.

Picked on April 10 at $ 48.62
Change since picked: - 0.67
Earnings Date 04/27/05 (confirmed)
Average Daily Volume = 4.3 million

---

Wynn Resorts - WYNN - cls: 64.49 chg: 1.95 stop: 68.05

Today's bounce took a big bite out of our paper profits. WYNN added 3.1 percent after Legg Mason started coverage on the stock with a "buy" rating and an $80 price target this morning. So far the short-term bearish trend is still in effect but traders should be cautious. If the stock trades over the $66.00 level more conservative traders may want to exit early to minimize any losses.

Picked on April 03 at $ 66.04
Change since picked: - 1.55
Earnings Date 04/29/05 (unconfirmed)
Average Daily Volume = 1.1 million
 

Dropped Calls

Potash Corp. - POT - close: 85.06 chg: -2.14 stop: 85.99

Something happened late Tuesday morning that caused POT to crash through the $86.50 level and its 50-dma near $86.00 on rising volume. Unfortunately, we cannot find any news item to explain what sparked the sell-off. We have been stopped out at $85.99.

Picked on April 05 at $ 90.18
Change since picked: - 5.12
Earnings Date 04/27/05 (unconfirmed)
Average Daily Volume = 504 thousand
 

Dropped Puts

Intl Bus. Mach. - IBM - close: 85.75 chg: -0.45 stop 90.05

IBM produced another high-volume decline and shares came within 17 cents of our target at the $85.00 level this afternoon. We strongly suggest that readers consider exiting here. Even through IBM did not hit our target at the $85.00 level we're going to close the play early. Traders can choose to keep the play open since IBM is showing so much weakness. Bear in mind that shares of IBM are very short-term oversold and due for a bounce. Earnings are expected on April 18th.

Picked on March 17 at $ 89.86
Change since picked: - 4.11
Earnings Date 04/18/05 (confirmed)
Average Daily Volume = 4.8 million

---

Mcgraw Hill Cos - MHP - close: 84.84 chg: -0.80 stop: 88.51

Target achieved! It took longer than we expected but MHP finally broke down under the $85.00 level and traded into our target range of $85.00-84.00. The technical breakdown looks like bad news but MHP did manage a meager bounce from the simple 200-dma this afternoon. We are closing the play per our strategy.

Picked on March 15 at $ 88.40
Change since picked: - 3.56
Earnings Date 04/26/05 (unconfirmed)
Average Daily Volume = 751 thousand

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