Volatility returned to the markets with a vengeance and triple digit days are becoming the norm. Thursday's 200-point gain on the Dow was nearly wiped out by a -150 point drop Friday afternoon but bargain hunters appeared just before the close to recover some of the losses. Market sentiment took another beating as oil soared and negative guidance continued to appear.
Chart - Daily
Nasdaq Chart - Daily
SPX Chart - Daily
There were not any economic reports on Friday but it did not stop the constant flow of economic forecasting. Warnings from Eastman Kodak and Costco helped to dampen outlook for consumer spending and prevented the markets from expanding on Thursday's gains. Kodak posted a loss of -50 cents per share compared to a gain f seven cents in the same period last year. EK took a charge of 53 cents for cost cutting and would have posted a minor profit of +3 cents without this charge. Still analysts were expecting a profit of +33 cents per share and without charges this represents a -30 cent miss on lighter than expected revenue. It was the second consecutive quarterly loss for Kodak and probably not the last. Kodak is cutting -15,000 employees by 2007.
Costco warned on Friday that earnings for the current quarter and the year would be below Wall Street expectations and blamed it on higher gasoline prices. COST said lower margins on higher priced gasoline was pressuring profits as well as consumer spending. COST fell -3.85 on the news. Appliance maker Maytag fell -4.21 after reporting its Q1 profit fell and cutting its forecast for the year in half due to slower than expected consumer sales. They announced some new cost cutting measures and plans to restructure but the damage was already done to the stock price.
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Oil also pressured equities on Friday with a spike back over $55 to a high of $55.95 and a close at $55.30. Last weeks dip to $50 on the May contract has been forgotten. Oil is being pushed higher by continuing refinery outages in Louisiana, Texas and Kansas and an increase in violence in the Middle East. The so called "terror premium" is being priced back into the market ahead of the increased demand of the driving season. The Mecca incident on Thursday put fear back into traders and nobody wanted to be short over the weekend. Two suspected militants and two Saudi security personnel were killed in a gunfight in the Muslim holy city on Thursday. With al-Qaeda still calling on supporters to target oil facilities it is only a matter of time before there is a successful attack. CNBC's Ron Insana interviewed President Bush this week and there was some conversation questioning the ability of Saudi Arabia to raise production any higher if needed. The crown prince of Saudi is meeting with Bush next week in Texas and you can bet the question will be high on the list of topics. One TV personality was calling them serial liars on Friday. I have been saying that since October and listed the facts in my Oil Crisis Report. I heard two separate analysts this week claiming that Saudi could NOT increase production more than +500,000 bbls per day. There is an effort currently underway by Saudi to raise/invest $50 billion to increase production to 15 mbpd by 2009 showing it is not as simple as just opening the valve. Any Saudi increase in production will not happen any time soon and it would only be in the heavy, sour grade of crude. Spot oil is trading below futures contract prices for delivery late this year and that shows buyers are already worried about delivery of product when the home heating oil surge begins. If you took my recommendation and bought oil stocks at $50 you should be a happy camper today.
Google soared to a high of $224 on Friday after reporting earnings that blew away estimates. Analysts, who had been neutral on the stock after its fall from over $200 earlier this year were quick to jump back on the wagon with targets of $250 or higher. Google has surpassed Yahoo as the Internet leader and appears to be increasing their lead very quickly. Yahoo fell -1.00 on the news and appears stuck under resistance at $35.
Dow Chart - Weekly
Dow Chart - 30 Min
SPX Chart - 30 min
On Friday the markets struggled all day to hold on to Thursday's gains and were doing a decent job until 2:PM. A late day sell program appeared right at 2:00 that knocked the Dow to a loss of -150 before buyers appeared at the close. The talking heads blamed it on a report that the U.S. had warned China that North Korea was nearing a test of a nuclear weapon. I seriously doubt this was the cause given the market action before and after 2:PM. It appeared to me that the markets were struggling to hold support levels at 10175, 1940, 1155 and that 2:PM sell program was simply more than the low volume support could handle. When the bottom fell out the buyers showed up right on schedule at Thursday's support lows on the Dow at 10075 and S&P 1145. Note the 30 min chart above and the influence of the 100/130 exp averages. Do you think that is a coincidence the Dow stalled there on the rebound?
Rather than trying to determine exactly what happened to cause the afternoon drop it is more important to look at the markets from a broader viewpoint. The Dow has fallen to 10,000 from 10984 in about seven weeks. That is nearly a -10% correction and a drop that should have quieted the bears and given the bulls an entry point to love. The surprise economics/earnings on Thursday morning bought buyers back into the market and a monster short covering rally appeared. Unfortunately, just like the short covering spike on Apr-12th there was no conviction behind it. Resistance held, volume dried up and weak support finally failed. Declining volume beat up volume 3:1 on Friday and new 52-week lows beat new highs 295:78. Is that confirmation of a +200 point rally? Not in my book.
Before I get too bearish I need to fill in that picture some. The afternoon dip found buyers exactly at Thursday morning's support on the Dow and S&P. Secondly, given the shaky geopolitical scene, higher oil and a coming FOMC meeting there was little reason to be long over the weekend. Traders who were jerked out of their shorts on Thursday had no real reason to get back in before the weekend uncertainty. The lack of conviction by both buyers and sellers left the market vulnerable to any program trade that happened to appear. I am not going to draw any conclusions from Friday's trading. I believe it was a throw away day that should be ignored.
Next week will be critical to market sentiment. We will have sales numbers on both new homes and existing homes on Mon/Tue. Both are expected to fall but it will be the magnitude of the fall that is important. Any surprise gains could go a long way towards soothing the market. Tuesday we also have Consumer Confidence, Mass layoffs and the Richmond Fed Survey. After the surprising strength in the Philly Fed survey on Thursday any future survey results will be far from a sure bet. Wednesday has Durable Goods and Oil Inventories. Thursday could be a big day with the first look at the Q1 GDP. The final for Q4 was +3.8% growth and while the consensus estimate for Q1 is +3.7% there are whisper numbers in the +4.2 to +4.4 range. A low number here could be a serious blow to the market while a high number could produce a bounce. However, bad news here could be good news, etc. A low number means the Fed would be less likely to continue raising rates while a high number could mean an acceleration of rates. Tough to play by the rules when 2+2 does not equal four. Friday is the really big day with Semiconductor Billings, Employment Cost Index, Personal Income, NAPM, Consumer Sentiment and Chicago PMI. This will bring April to a close economically although it will only set the stage for the FOMC meeting on Tuesday May-3rd.
Next week's Fed meeting has got to be one of the most cussed/discussed in recent memory. The official bet is for another quarter point increase and a retention of the measured pace language. However, there have been over a dozen Fed speeches over the last two weeks and confusion reigns supreme. Some led you to believe that the Fed would take a pass soon while others led you to believe they were poised to trash the measured pace language in favor of rampant rate hikes. Inflation reports have been alternately heated and tame with energy weighing on the economy far more than any rate hike. On Friday Fed Governor Kohn set the stage for next weeks round of speeches by saying the Fed should not hesitate to raise rates just because the housing market would suffer. And, the size and persistence of current imbalances (trade and budget deficits) pose a risk that may prove disruptive. His stance was rather hawkish and suggests there is more support for continued hikes than we have seen in recent reports.
June Crude Chart - Daily
SOX Chart - Weekly
I believe the current market outlook is no different than it was last week or the last month. The risk for equities is still to the downside with critical support at 9800 not 10000. We could see 10K serve as the bottom of our current range but I do believe it will be broken. Earnings are coming in better than expected at +12.7% growth but guidance has been weak. This week's rebound was almost completely short covering without any material improvement in internals and no follow through. We are entering the "sell in May and go away" period and I believe many more investors will use that strategy this year than last. The economy is lackluster and the Fed is raising rates. Two simple facts that many retail traders will see as a reason for a summer vacation away from the markets. Indexes and ETFs, the favorite vehicles for hedge funds could be trapped in the twilight zone of summer as some individual stocks rise and some fall giving index traders no trend to trade.
All eyes will be on the Fed meetings on May-3rd and June-28th for signs of a
halt in hikes. Until that sign is seen there is no reason to hold equities. Once
they do pause it will
be the all-clear signal for investing once again. Now is
the time for watching the opposing forces as they circle each other on the
battlefield. The inflation monster and the retiring Fed head in the grudge match
of the century. Greenspan would probably like to go out a winner one last time
and preferably not with the economy in another Fed induced recession.
Unfortunately for Greenspan the Fed's movements are being hampered by an oil
slick of historic proportions that is taxing consumers
at every turn. Like
gawkers slowing down at a traffic accident investors will be moving to the
sidelines for the summer to see who ends up on the stretcher. Greenspan may end
up winning the inflation battle but the harsh medicine could put the economy
into an interest rate coma. The potential outcome could keep investors cautious
until fall and without conviction the path of least resistance is still down.
Definitely enter passively and exit aggressively.
Avalonbay - AVB - close: 70.05 change: +1.53 stop: 67.49
Why We Like It:
BUY CALL JUL 65.00 AVB-GM OI= 758 current ask $6.40
Picked on April 24 at
CDW Corp - CDWC - close: 55.68 chg: -1.07 stop: 58.01
Why We Like It:
BUY PUT JUL 60.00 DWQ-SL OI=1655 current ask $5.40
Picked on April 24 at $ 55.68
Lehman Brothers - LEH - close: 90.47 chg: -0.43 stop: 92.51
Why We Like It:
BUY PUT JUL 90.00 LES-SR OI=2526 current ask $4.00
Picked on April xx at $ xx.xx <-- see TRIGGER
Eaton Corp - ETN - close: 60.31 chg: -0.35 stop: 58.25*new*
Thus far ETN is performing as expected. We added the stock after shares began to bounce from a deeply oversold condition. The combination of the market bouncing from support and ETN bouncing from a long-term trendline of support and also showing P&F chart support looked like a winner. We are still targeting a move into the $62-63 range but given the overall bearish trend in ETN and the broad market indices we'd focus on exiting near $62.00. Traders began to buy the dip toward $60.00 on Friday afternoon so we're expecting some follow through next week. However, we would not be looking to enter new bullish positions here. We are going to raise our stop loss to $58.25.
Picked on April 18 at $ 58.51
Nucor - NUE - close: 53.15 chg: -0.45 stop: 49.95
NUE is a new play we added to the call candidates list on Thursday night. The stock is bouncing from support near $49 and its 200-dma's. Considering NUE's oversold status from its five-week decline we suspect that the stock can rally back toward $60.00 but we're using a trigger at $55.05 to open the play. A reprint of Thursday's play description follows:
The broad market bounce is likely to give shares of NUE a boost as investors respond to its positive earnings report. The company reported earnings today that were well above analyst estimates. Profits actually tripled from the same period a year ago. The company also reaffirmed its Q2 guidance and raised its dividend. We believe that bargain hunters will also be drawn to the technical picture. Not only is NUE oversold from five weeks of declines but the stock is bouncing from support. NUE has price support and technical support in the $49-50 range and this looks like a good spot to speculate on a stronger rebound. Short-term technical oscillators have turned positive. However, it's worth noting that the P&F chart is currently bearish. We want to see confirmation that NUE has indeed reversed course. Our suggestion is to use a TRIGGER at $55.05. There could be round-number resistance at the $55 level in addition to its 100-dma. We can wait for NUE to trade at $55.05 and then target a move toward $60.00 or higher. We are using a very wide stop loss and traders may need to adjust it for their own comfort level.
CALL JUN 50.00 NUE-FJ OI=399 current ask $5.30
Picked on April xx at $ xx.xx <-- see TRIGGER
Patterson Cos. - PDCO - close: 50.20 chg: -0.60 stop: 49.75*new*
We are still disappointed that PDCO has not performed better. Yet the stock has managed to ignore a lot of the market's volatility this past week. We added PDCO a few days ago with the strategy to go long on a dip back toward the $50.00 level. Our entry point was $50.75. We expected traders to buy the dip toward round-number, psychological support at the $50.00 mark, which is also underpinned by rising technical support at its simple 50-dma. Thus far the stock is still holding above support but there has been no bounce and the technical indicators continue to sour. We would hesitate to begin new bullish positions. Our suggestion would be to wait for PDCO to trade over $51.50 before opening new bullish plays. We are also tightening our stop loss to $49.75, just under the 50-dma. If PDCO breaks down we want to be taken out very quickly.
Picked on April 18 at $ 50.75
KB Home - KBH - close: 109.20 change: -2.05 stop: 115.01
Whether or not you believe the housing market is in a bubble ready to burst or whether the home market will remain strong there is no denying that shares of KBH have broken their up trend that began in August-September 2004. This could just be a long, overdue correction before housing stocks rise again but traders can capitalize on the pullback. We like KBH's breakdown under the $110 level and its 100-dma that occurred three sessions ago. KBH's P&F chart is in a sell signal pointing to a $100 target. We agree and are targeting a drop toward the $100 level. The major market indices are currently in an intermediate down trend and that is going to put pressure on homebuilders since investors will feel the heat and begin to sell their winners to lock in profits. Next week could bring some additional volatility with the latest housing numbers but the short-term trend for KBH is still bearish. On Thursday we suggested that readers wait for another drop under $109 before buying puts again. The stock is close to falling under the $109 level now. More aggressive players could open new positions now. KBH does have an upcoming 2-for-1 stock split on April 29th but given the current market environment we do not believe it will be a factor in KBH's decline.
BUY PUT JUN 110.00 KBH-RU OI= 320 current ask $7.10
Picked on April 20 at $108.98
MGM Mirage - MGG - close: 66.70 change: -1.99 stop: 71.51 *new*
The MGG put play is shaping up pretty well. The stock is following our script and shares just closed at a new relative low. We suggested that readers watch the $70.00 level for resistance and use a failed rally there as a new bearish entry point. MGG did just that and now the stock looks poised to continue lower. We're also encouraged by MGG's weakness considering that the stock was upgraded to an "add" on Friday. Plus, the P&F chart's sell signal points to a $55.00 target. There is potential support at its exponential 200-dma near $63.00 but we believe that MGG will be able to trade into the $62-60 range, which is our target. We are going to lower our stop loss to $71.51.
BUY PUT JUN 70.00 MGG-RN OI= 5930 current ask $5.10
April 20 at $ 67.10
Ishares Dow Jones Energy - IYE - cls: 73.14 chg: +0.25 stop: 69.95
Target achieved. Crude oil prices continued to climb on Friday and that gave oil stocks and the IYE a boost. Shares of IYE traded above the $74.00 level on Friday before the afternoon sell program hit the market. Dip buyers did step in late Friday afternoon and more aggressive traders may want to consider holding on to bullish positions in IYE for another day or two. We wouldn't be surprised to see IYE trade up into the 74.50-75.00 range. Our concerns about holding on to oil stocks is that botht he OIX index and OSX index tagged their simple 50-dma's in addition to testing the tops of their descending channels. Granted these could just be bull-flag patterns for the whole group but until the oil indices breakout above their short-term trendline of resistance we would be careful. We wanted to catch a short-term pop higher and that's what we did.
Picked on April 18 at $ 70.78
Imagine struggling in a losing trade and having an instant message pop up on your trading screen. An account representative suggests an educational site you might visit. That was my situation a few months ago when I opened a new trading account. I was surprised, not a little chagrined, and unhappy at the thought of someone looking over my shoulder as I traded. I had opened and funded the small account as a practice account while experimenting with a new trading vehicle. I didn't expect nor did I find the first trades to be my most expert ones, and I didn't want someone following along, watching. Since then, however, I've changed my mind about that initial contact and my brokerage's instant messaging capabilities.
That contact was part of a trend explored in the March 2005 issue of ACTIVE TRADER magazine in an article by David Obuchowski. Some online brokerages include instant messaging as one of the tools available to traders. Benefits include faster response times than might be found with email or telephone questions. Traders avoid the aggravation of elevator music while on hold for the next telephone representative. They also shorten the two-week wait I once experienced between my question to a charting service and the customer service rep's not-so-helpful answer. Shortcomings include the disordered communications typical of instant messaging. I'm a fast typist, so that I might have asked a question and added a qualification or a second question before the account representative could formulate an answer to the first question. The transcript can not be read as a chronological account of the conversation, and opportunities for misunderstandings result.
Due to the possibility for misunderstanding amid regulatory rules attached to instant messaging between client and brokerage, brokerages do not typically accept trades via instant messaging. Although my broker's "Foreign Currency and Options Brokerage Agreement" does not appear to specifically address this issue, some agreements do. In Buchowski's article, the author references CyberTrader's caution that trading instructions and fund transfer information will not be accepted via CyberTrader's version of instant messaging.
With some online brokers, new capabilities go beyond an ability to answer a quick question now and then via instant messaging. Early in my experience trading with the new platform, I wanted to set up a buy stop trade with a trailing stop. Unable to find the correct method for setting up such a trade on the new platform, I contacted my account representative via the instant messaging capability. As if reaching through the computer monitor to my keyboard, the account rep was able to take over my screen, pull down the appropriate menu tabs, click them and show me how to initiate the trade. Buchowski notes that both Terra Nova and CyberTrader offer similar capabilities. Terra Nova calls its version WebEx; CyberTrader, "Go To Assist/Desktop Streaming."
Just as my brokerage's representative did not wait for a message from me requesting help to improve my trading prowess, some sites don't wait for a request for help before offering this other service, either. According to Obuchowski's article, CyberTrader representatives call new clients and schedule a session in which the rep takes over the trading screen, demonstrating various capabilities while the new client watches. My account representative offered the same type of welcome session. This service goes beyond the typical canned instructive videos offered by many online brokerages. Perhaps I'm a slow learner, but having once spent an hour watching and re-watching a training video for eSignal, looking for the nonexistent tab the instructor clicked in order to change symbols on a chart, I can appreciate the time-saving capabilities of such a service.
Not all online brokerages offer instant messaging capabilities or make them as easy to use as mine or those mentioned in Obuchowski's article. Among brokerages offering them, optionsXpress offers a "Live Help" icon at the top of each page, Interactive Brokers offers "General Chat," and Fidelity appears to offer a chat with a live representative. Not all online brokerages plan to offer such services. Buchowski interviewed representatives of E*Trade. The brokerage discontinued a similar service after it found little customer interest. Ameritrade uses an instant messaging service when setting up new accounts, but hasn't developed a proprietary platform. Some of the other brokerages mentioned in this article might limit their instant messaging services to similar uses.
Reliability, fast execution and low-cost trades rightfully rank more importantly than instant messaging when considering an online brokerage. Still, when evaluating a new online charting service or brokerage, explore the availability of instant messaging and the conditions under which such help is available. However, if you're easily embarrassed, perhaps ask if you're going to be tactfully offered educational help if your trades dont appear to be working well.
TTFN (Instant-message speak for "Ta-ta for Now.")
Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Linda
Piazza, and all other plays and content by the Option Investor staff.
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