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Daily Newsletter, Thursday, 04/14/2005

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Table of Contents

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

Market Wrap

It's Not The Oil, It's The Earnings!

It's Not The Oil, It's The Earnings!

The Dow has a back-to-back TRIPLE digit decline. I can see the headlines now! The Nasdaq at a 6-month low!! Not great for stock bulls or anyone else concerned about the economy. Declining stocks outpaced advancers by greater than 3 to 1 on both the NYSE and the Nasdaq.

Volume was heavy at just under 2 billion shares exchanging hands on both the Big Board and the Nasdaq. Option volatility continued to climb; for example, the VIX has run up from the 11 area from Tuesday's close to 14.53 today (+1.22).

Yesterday's (Wed) well publicized announced fall in retail sales got investors focused on an economic slow down. This in turn affects the way investors are scrutinizing earnings reports. The Market is showing no mercy to losers in this game of expectations. Good reports don't get much media play or notice.

Then there was the press play given the U.S. trade deficit when it was reported as having jumped to a negative $61 billion in February; and January's deficit was revised upward to $58.5 billion. A lot of red ink in the current account picture.

People perhaps thought that a pullback to "only" $50 per barrel of crude oil would be bullish news that might carry the day. However, it's not the week-to-week price picture. Investors know that oil can have big fluctuations. But a longer-term outlook is becoming frightfully clear: a possible long-range trend of rising energy prices. The chart of nearby crude futures still looks like it may consolidate at and ABOVE $50



While the double top in the May Crude contract is bearish, an ability to hold $50 suggests that this might be a short-lived top. If $50 a barrel holds as a low, money comes back into energy stocks. If it breaks we could get some cash back into stocks in general.

Time will tell on the volatile crude market, but then there are oil stocks where investors have been making money and the CBOE Oil Stock Index (OIX) shows only a minor pullback in terms of its weekly chart



OIX looks to be in a still-bullish consolidation to me and the recent pullback has relieved the overbought condition considerably.

And its not energy that moves the market per se (like a competing at times "outside" influence like bonds) but how sharply rising energy negatively impacts corporate earnings.

And if consumer demand accounts for some two-thirds of the economy, especially with tech and business spending never having rebounded strongly since the tech bubble burst in 2000, its clear that money going into higher heating bills, gasoline and rising production costs are doing to be a future DRAG on earnings.


And is manufacturing going to save us? Or, keep the current forecasted S&P earnings on track? Not likely, since that is also driven ultimately by consumer demand. And, witness Ford, which began this week from hell for investors after noting Friday that its gas guzzling SUV's had sales that were falling like a stone.

Ford's profit expectation was down 14% lower than previously anticipated. Citing higher raw material, gasoline prices and healthcare costs, F lowered its 2006 profit guidance too. Fitch returned the favor and lowered its credit rating outlook, citing production cutbacks, competition, and "consumer buying patterns shifting away from SUVs", and other such pressures.

There are estimates that energy costs could reduce U.S. consumer spending by a full percent during the first half of the year.

In this regard, IBM was not so encouraging AFTER THE CLOSE -
The company reported late Q1 net income of $1.4 billion, or 85 cents a share, up from $1.36 billion, or 79 cents, a year earlier. OK maybe but expectations are always the thing on the Street of Dreams, as results fell short of Street estimates of 90 cents a share. Sales rose to $22.9 billion, compared to $22.2 billion a year ago and less than the $23.7 billion analysts were expecting.

ECONOMIC RELEASES AND OTHER NEWS -
First-time claims for state unemployment benefits fell by 10,000 to 330,000 in the week ended April 9, roughly in line with forecasts.

U.S. businesses added 0.5% to their inventories in February, while their sales fell 0.4%, the Commerce Department said. The drop in sales was the largest since April 2003.

The dollar gained against the yen (and the Euro) after the International Monetary Fund drastically slashed its growth forecast for Japan.

In the bond market, U.S. Treasury bonds ended broadly higher, drawing support from mounting evidence that the economy may be in a soft phase and from a successful afternoon auction of Treasury Inflation Protection Securities.

THE BOTTOM LINE
Investors are just not seeing any compelling reason to be in equities as they look toward summer. Investors remember the pain suffered last year and they would rather not repeat this in the next few months. Seeing last year as an example, there seems to be the general expectation that we won't see much of a lift in the market before fall.

My take on the market for a while that there would be another shot down, making new lows and that the retracement of the last advance would be more than the 50 percent that had been completed up through last week. If so, the Dow (INDU) would go to 10,200



I commented on projections for the major Indexes in my most recent weekend "Index Trader commentary (seen on the web site). If interested in backtracking to this, click here.

My further downside projections vary from 1157-1158 in the S&P 500 (SPX), to around 554 in the S&P 100 (OEX), 1920 in the Nasdaq Composite and 1430 in the Nasdaq 100 (NDX). In these price areas, if reached, an Index option trade should set up. This market continues to bring excellent TRADING opportunities!

MORE -
The washout may be over by Tuesday a lot of negatives about earnings and the state of the economy may have been discounted by then. And, there are plenty of earnings releases to come next week. And, if such companies and stocks as tech heavy hitters like Intel, EMC, JNPR, LU, STX, SGI, SMDI, TER, YHOO, etc. report next week, it could well set the stage for a rebound.

This is exactly the point in the earnings cycle where there is still enthusiasm for coming guidance on the numbers and there have not been enough disappointments to spoil some of the bullish sentiment that has been around.

I have been commenting (in my weekly Index Trader column) that, as prices fell steadily from the S&P 100 (OEX) peak at 586, that trader "sentiment", as I measure it on my unique sentiment indicator, was "too bullish" for the major indices to be at a final low

It's possible that 554 could hold as support in the OEX, at a retracement of half of the October to early-March advance. I will wait and watch, in terms both of exiting any puts and taking a speculative buy on calls to see how it holds up. A bottom may develop around 550-551 for example. But perhaps one dip a few points under that area will be part of a final wash out before there is a good tradable rebound; e.g., back up to the trendline resistance in the 565 area.



In my "sentiment" model, the lower (blue) line should get down into the overly "bearish" extreme at least once at a significant bottom. It instead has kept rebounding. This indicator tends to lead, not follow the market; i.e., a dip to the extreme I am talking about might well precede a market low by 1 to as much as a few trading days.

Market Wrap began the week with a mention of a Street Analyst who raised their firm's 2005 earnings outlook for the S&P 500 earnings from $72 to $74.5, saying that concerns surrounding higher oil prices, interest rates and unit labor costs may be "exaggerated." This may be in part be due to their related 5% growth target for the Eurozone, with Japan having growth potential of 10%. I'm not sure what these guys are smoking to think that these regions will so substantially out-grow the U.S. of A. It's a WORLD economy!

MORE MARKET NEWS and INFLUENCES -
GM fell nearly 6% to a 12-year low of $26.66, pressured by regulatory questions, healthcare costs, the potential for a cut in its annual dividend and JP Morgan cutting earnings estimates for the company.

Alcoa Inc. fell 1.6% along with others in the mining, metals and steel area as prices extended their recent losses amid a growing lack of conviction about the sustainability of copper, silver and gold and other prices. Gold has turned decidedly bearish technically as the Gold and Silver Index (XAU) closed below 88.

Other notable Dow decliners include Caterpillar (CAT), down nearly 4%, DuPont (DD) off about 3, and 3M (MMM) down 2.2%.

NOT EVEN INVESTOR FAVORITES ARE IMMUNE
The small cap sectors represented by the Russell 2000 (RUT) may have been thought to have the ability to escape what else was happening in the market. But, these stocks and sectors were shown to ultimately be in the same boat as the rest of the market. Charles Dow said that a "rising tide" lifts all boats and the reverse was true also!



SNAPSHOT of OTHER MAJOR STOCK INDEXES -

S&P 500 Index (SPX) Daily chart:
Because I've seen trendlines like the one shown below, dating from the August low, hold before, I will we watching this one. This trendline currently intersects in the 1157-1158 area. Stay tuned on that. To negate the current chart/technical picture, at least short-term, a rebound to back above 1165 is needed. Coupled with the ability to stay ABOVE this level, at the prior low



A fall to the 1144-1145 area would be a call buying opportunity in my view as this is my current worst-case downside for this current move.

Piercing 1180 in SPX would be an upside bullish breakout.

Nasdaq Composite (COMP) Index Daily chart:
The Composite (COMP) could fall to the 1920 area. A rebound back above 1970 would regain some bullish footing on the chart. Absent that, I anticipate lower prices.



A move to the lower downtrend channel line in the COMP is not a prediction, but it does show the sweep of the current trend and sort of "maximum" downside possibilities.

Nasdaq 100 (NDX) Index Daily:

1430 is a definite possibility here for the completion of my long-anticipated 62% retracement in the Nasdaq 100 (NDX)



It's also clear in my view that the key support was the prior low at 1460 and this level needs to be regained for NDX to get back on a bullish track.

Nasdaq 100 tracking Stock (QQQQ) Daily chart:

35.25 is my target for the Q's. The stock needs to regain 36 to turn its chart/technical picture around. With the case of a prior low like this (36), the stock needs not only to pierce it again and overcome any selling in this area, but then advance from this area.



Volume should expanded in the DIRECTION of the trend to be consistent and it sure jumped today.

Good Trading Success!

 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
None EXPD
  IWN

New Calls

None today.
 

New Puts

Expeditors Intl Was. - EXPD - cls: 49.31 chg: -0.81 stop: 52.51

Company Description:
Expeditors is a global logistics company. Headquartered in Seattle, Washington, the company employs trained professionals in 170 offices and 12 international service centers located on six continents linked into a seamless worldwide network through an integrated information management system. Services include air and ocean freight forwarding, vendor consolidation, customs clearance, marine insurance, distribution and other value added international logistics services. (source: company press release)

Why We Like It:
Disappointing retail sales have fanned the flames of investors' fears of an economic slow down. The transportation sector is getting hit hard since it is a big target for profit taking after its 2004 rally. The Dow Transports just broke down under its simple and exponential 200-dma on big volume. Meanwhile, EXPD, which had already broken below its 200-dma's a few days ago, is closing under the $50.00 level for the first time in months. The technical picture looks pretty sour and the P&F chart also shows a triple-bottom breakdown sell signal with a $42.00 target. However, it is worth noting that the P&F chart does show EXPD near support. Normally, this would persuade us from not playing the stock but considering the market weakness we are going to add EXPD anyway. Shares are somewhat oversold so be prepared for a possible bounce toward the $52.00 level before EXPD trades lower. We are starting the play with a stop loss at $52.51. Our target is the $46-45 region and we plan to exit before EXPD's earnings report which is only three weeks away.

Suggested Options:
We are suggesting the May puts because we plan to exit before the May earnings report.

BUY PUT MAY 50.00 URP-QJ OI=747 current ask $4.80
BUY PUT MAY 45.00 URP-QI OI= 91 current ask $0.60(?)

Picked on April 14 at $ 49.31
Change since picked: - 0.00
Earnings Date 05/04/05 (unconfirmed)
Average Daily Volume = 748 thousand

---

Ishares Russ 2000 Val - IWN - cls: 178.04 chg: -3.21 stop: 183.51

Company Description:
The Ishares Russell 2000 Value Index Fund represents a sampling of the Russell 2000 Value index and tries to perform according to the index.

Why We Like It:
Now that the major indices are breaking down left and right we wanted a way to play the "market". Unfortunately, the DIA Dow Diamonds and the NASDAQ 100 QQQQs don't seem to move fast enough for short-term directional option plays. That's why we're suggesting readers consider puts on the IWN or the Russell 2000 Value index Ishares. We like the IWM as well but the IWN appears to offer more movement, which is what we want in an option play. Looking at the chart of the IWN we see a technical breakdown below support at the 180 level and its simple and exponential 200-dma's in the 179 region. Volume was heavy on the sell-off today. Technical oscillators are naturally negative. The IWN's P&F chart shows a sell signal with a 162-price target. We are going to target a move to the 170 level over the next six to eight weeks.

Suggested Options:
We are suggesting the May puts. The next month available would be August puts.

BUY PUT MAY 185.00 IWN-QQ OI=128 current ask $8.50
BUY PUT MAY 180.00 IWN-QP OI=370 current ask $5.00
BUY PUT MAY 175.00 IWN-QO OI=280 current ask $2.75

Picked on April 14 at $178.04
Change since picked: - 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 324 thousand
 


Play Updates

In Play Updates and Reviews

Call Updates

Red Robin Burger - RRGBE - cls: 51.75 chg: +0.56 stop: 49.49

No change from previous update on 04/12/05. RRGB is showing a lot of relative strength here.

Picked on March 10 at $ 48.00
Change since picked: + 3.85
Earnings Date 02/14/05 (confirmed)
Average Daily Volume = 199 thousand

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Research In Motion - RIMM - cls: 71.33 chg: -3.22 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: + 0.00
Earnings Date 04/05/05 (confirmed)
Average Daily Volume = 10.1 million

---

Whole Foods - WFMI - close: 99.15 chg: -0.97 stop: 98.99

All right! This could be time to abandon ship. The market sell-off helped pull WFMI under round-number support at the $100 level and technical support at the 50-dma. There is still some minor price support near $99.00 and that's why our stop loss is under the $99 level. Conservative traders may just want to exit now anyway. We're going to keep the play open and let our stop do the work for us.

Picked on April 06 at $104.16
Change since picked: - 4.61
Earnings Date 05/03/05 (unconfirmed)
Average Daily Volume = 956 thousand
 

Put Updates

Starbucks - SBUX - close: 46.87 chg: -0.24 stop: 51.75

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

Picked on April 10 at $ 48.62
Change since picked: - 1.75
Earnings Date 04/27/05 (confirmed)
Average Daily Volume = 4.3 million

---

Wynn Resorts - WYNN - cls: 62.16 chg: -2.61 stop: 68.05

No change from our previous update on 04/12/05 and 04/10. Our target remains the $60.50 level.

Picked on April 03 at $ 66.04
Change since picked: - 3.88
Earnings Date 04/29/05 (unconfirmed)
Average Daily Volume = 1.1 million
 

Dropped Calls

Carpenter Tech - CRS - close: 55.79 chg: -4.83 stop: 59.95

It's time to remove CRS from the play list. The big market breakdown was shadowed in shares of CRS, which dropped below support at the $60.00 level and its 100-dma. CRS never traded at or above our trigger to go long at $64.05 so we are closing the play as unopened.

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

---

KB Home - KBH - cls: 116.01 chg: -5.09 stop: 117.00

The homebuilders were not spared from the market sell-off on Thursday. The DJUSHB home construction index lost 4.12 percent to breakdown through the bottom of its recent trading range and to breakdown below its 100-dma. Likewise shares of KBH lost 4.2 percent on heavy volume to break big support at its rising 50-dma. We have been stopped out at $117.00.

Picked on April 12 at $122.91
Change since picked: - 6.90
Earnings Date 03/21/05 (confirmed)
Average Daily Volume = 1.4 million
 

Dropped Puts

Allergan - AGN - close: 71.53 chg: +0.98 stop: 72.51

Drug-related stocks saw strength today as investors put their money into old-fashioned safe haven stocks. Shares of AGN rallied midday to the $72.80 level, which was more than enough to hit our stop loss at $72.51. We have been stopped out.

Picked on March 13 at $ 73.09
Change since picked: - 1.56
Earnings Date 04/27/05 (confirmed)
Average Daily Volume = 777 thousand

---

Beazer Homes - BZH - close: 46.23 chg: -1.87 stop: 51.01

Target achieved! The homebuilding stocks were hit hard today in the sell-off and BZH lost 3.88 percent. The stock has surpassed our trading range of $48.00-46.50. We are closing the play at the bottom of the range (since BZH hit the top of the range a few days ago).

Picked on March 17 at $ 51.43
Change since picked: - 5.20
Earnings Date 04/28/05 (confirmed)
Average Daily Volume = 742 thousand

---

Pacificare Health - PHS - cls: 54.27 chg: -1.78 stop: 60.05

Target achieved. PHS fell below minor support at the $56.00 level and lost 3.17 percent on very heavy volume today. The stock quickly traded into our exit/profit range of $55.00-54.00. We are closing the play at the top of the range.

Picked on March 20 at $ 59.04
Change since picked: - 4.77
Earnings Date 04/28/05 (confirmed)
Average Daily Volume = 1.1 million
 

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