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Daily Newsletter, Thursday, 04/28/2005

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Table of Contents

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

Market Wrap

The Bounce That Wouldn't

The Bounce That Wouldn't

Disappointing GDP data overshadowed a benign initial claims report and triggered a rally in treasuries. Oil plunged below 50. Earnings were generally benign. The stock indices didn't care, declining throughout the session in a fitful, choppy range, closing at the lows.

Volume breadth started on a negative note and finished on an abysmal one, with nearly 5 declining shares for each advancing on the NYSE and just under 4 on the Nasdaq. Volume was strong overall, with a combined 3.6 billion shares on the NYSE and Nasdaq. Volatility rose as prices declined.

Daily Dow Chart


The Dow got hit for a 128 decline, closing less than a point off the low of 10070 and failing at a high of 10194. The close was below rising flag support, leaving little more than air between here and the 10000 low printed last week. Bollinger support has declined to 9949. However, the daily cycle upturn will whipsaw to the downside on a break of the current low, and would likely kick off the next impulsive leg down below that level, with stronger confluence support down at 9800.

Daily S&P 500 Chart


The SPX paints a similar picture, closing below flag support and suggesting a quick move from here to the 1134 lows. Today's low was at 1143.22, also the closing price. A drop past that level brings in confluence support to 1125. Bulls need to clear the 1162 barrier, above which daily cycle upphase should get going and set up a retest of the 1174 and 1179 levels.

Daily Nasdaq Chart


The Nasdaq also got pasted today, dropping 1.36% to close at its low of 1904, failing at 1927 on the bounce. Unlike its peers, which still have air separating them from last week's lows, the Nasdaq is already there. A failure here targets the bottom of the declining Bollinger channel at 1885, below which 1850 level from last September comes into view.

Daily TNX Chart


Ten year treasuries opened strongly on the 8:30 AM GDP data (see below), and rose in a high volume session to close at the highs. Ten year note yields (TNX) finished the session lower by 6.4 bps at 4.173%. On the daily chart, the drop in TNX smashed this week's lows and reached a new low for the move despite buy signals printed on the 10-day stochastic earlier this week. 4.2% had been the likely candidate for the daily cycle low, and its failure today sets up the possibility of a downside trending move, to the delight of treasury bulls. Next support is in the 4.14%-4.16% zone we recall from December-January, while 4.2% and 4.26% are now upside resistance.

Chart of Crude oil


Crude oil prices gapped lower today, aborting a daily cycle upphase in the early going and breaking briefly to a low at 49.90 before rebounding sharply to close higher by .15 at 51.75. The 49.00-50.00 level was key confluence resistance on the way up and should act as downside support. The financial press attributed the morning's shellacking to concerns about softer US growth (see below), by which reasoning yesterday's decline would be correlated with the abysmal Durable Goods Orders report. If so, however, the weakness in oil is incongruous with the strength in bonds, which would have been attributed to speculation that the Fed would have to take an easier stance in light of the economic weakness. The decline in price was repaired by the close, and the daily print was a bullish doji hammer, but the daily cycle upphase remains stalled. A rise tomorrow should be enough to change that.

Before the bell, the Labor Department reported Initial Claims, with an increase of 21,000 initial claims to bring the total for the most recent week to 320,000, matching expectations. The previous week's 296,000 figure was revised upward to 299,000. The 4-week moving average of initial claims declined 8,000 to 323,000, and the total reported number of unemployed persons declined 76,000 to 2.56 million in the week ended April 16, the lowest figure since March, 2001.


At 10AM, the Conference Board released its Help-Wanted Index, which declined to 39 in March after its consecutive 41 readings in the two preceding months. Expectations were for a reading of 41. The weaker than expected result lines up with soft payroll growth in the last Employment report, but given the predominance of the web over newsprint classified help-wanted advertising, the indicator is of minor interest.

All eyes were on the preliminary Q1 GDP data, however. At 8:30 AM, the Commerce Department reported that GDP rose 3.1%, below consensus estimates of 3.6%. The Core PCE Index rose 2.2% vs. 1.7% in the previous quarter, the weakest growth since Q1 2003. Consumer spending rose 3.5%, slowing its pace of growth from last year Q4's 4.2% and Q3's 5.1% rates. The combination of rising Core consumer prices (the Fed's preferred measure of inflation) and a slowing rate of spending with lower overall output has stagflationary overtones, but the market initially took the data in stride, with bonds rising and equities falling lightly in the premarket. Presumably, yesterday's poor Durable Goods Orders data provided a heads-up as to today's preliminary GDP report. Also factored in is the expectation that weaker-than-expected economic growth and vulnerable consumer picture will help moderate the Fed's policy going forward. The strength in bonds noted above lines up with this picture, as did the sudden strength in oil in the afternoon.

Earnings reports came fast and furious today, with positive results from the defense sector, as well from big names such as PG, GR, DOW, AET, AEP and BDK. Raytheon (RTN) reported Q1 earnings that rose 30% over last year's Q1, up from 30 cents or $128 million on revenue of $4.9 billion to $166 million or 36 cents per share. The company cited strong demand from government and defense-related sectors. The results beat EPS expectations by 3 cents. RTN closed higher by 1.43% at 37.63.

Government spending also boosted Titan (TTN), which grew earnings 633% y-o-y from $3 million to $19 million in the current quarter. EPS rose from 3 cents to 22 cents per share, missing consensus estimates by a penny. Revenues rose from $454 million to $558.9 million. NOC beat estimates as well. Analysts were looking for 91 cents EPS on $7.54 billion revenue, with the company reporting earnings of $1.08 per share on revenues of $7.5 billion. TTN gained 1.84% to close at 17.68.

El Paso Electric (EP) announced earnings of $4.8 million or 10 cents per share, up from $2.9 million or 6 cents in last year's Q1 and beating by a penny. Revenues declined $500,000 from last year's Q2 $104 million figure to $103.5 million. EP cited lower operating and interest expenses for the positive EPS growth. Marathon Oil (MRO) also reported strong earnings that rose from $258 million or 83 cents per share in the year-ago quarter to $324 million or 93 cents per share. Excluding items, EPS was $1.02, missing expectations by 4 cents. Revenues rose 22% from $10.69 billion to $13.01 billion. EP finished lower by 1.96% at 10.03, while MRO lost 2.94% to close at 45.86.

Exxon Mobil (XOM) disappointed, however. It reported earnings that rose from 83 cents or $5.44 billion to $1.22 per share or $7.86 billion, a 44% gain. Excluding a one-time gain from the sale of its stake in Sinopec, earnings EPS was $1.15 per share, missing estimates by 5 cents. Revenues rose 21% to $82.05 billion, but on weaker sales. XOM lost 4.08% to close at 56.00.

Alongside the rise in energy prices, Canadian Pacific Railway (CP) grew net income more than threefold, from $24 million CDN or 15 cents per share to $81 million CDN or 50 cents on revenues that rose from $886.6 million CDN to $1.01 billion CDN. Estimates were for 42 cents EPS. CP closed lower by 2.98% at 34.15.

Coca-Cola Enterprises (CCE) reported a Q1 profit of $46 million or 10 cents, from last year's $104 million or 22 cents per share, missing estimates by a penny. Revenues declined from $4.24 billion to $4.2 billion in the current quarter. The company cited higher costs, waning European sales, and the fact that this year's Q1 was 2 days shorter than the year-ago quarter. Later in the session, Coca-Cola bottling (COKE) reported earnings which fell from 31 cents per share or $2.8 million to 8 cents or $719,000, a 74% decline despite revenues which rose from $287.7 million to $306.3 million in the current quarter. CCE closed higher by 3.78% at 20.32, while COKE lost 1.84% to close at 46.90.

Kulicke & Soffa (KLIC) reported a loss this morning, with last year's Q2 profit of $29.1 million or 44 cents per share falling to a loss of $7.7 million or 15 cents, exceeding analyst estimates for a loss of 14 cents. Revenue fell from $221.8 million to $124.8 million, exceeding estimates of $114.5 million. KLIC expects next quarter's revenues to come in between unchanged and a 10% gain. KLIC closed higher by .39% at 5.15.

Goodrich (GR) grew profits from 39 cents per share or $47 million to 47 cents per share or $58 million in the current quarter, on revenues that grew 10% to $1.28 billion. Analysts were expecting EPS of 40 cents on revenue of $1.23 billion. The company cited strong demand for commercial aerospace parts and upped its full-year estimate from $1.60-$1.80 per share to $1.80-$1.95. GR gained 5.94% to close at 40.13.

There was more good news from Black & Decker, which grew earnings from $86.6 million to $148.7 million y-o-y and beat estimates by two pennies, and PG which reported a 13% rise in Q3 earnings, beating estimates by 2 cents. GlaxoSmithKline (GSK) reported a 17% increase in Q1's profit and closed up 4.96% at 49.76. BDK closed +.54% at 83.34, while PG added .86% to close at 53.99.

After the bell, KLAC, the US' 2nd-largest semiconductor equipment maker, reported a big jump in earnings from 33 cents or $66 million to 61 cents or $123 million on sales that rose from $390 million to $542 million. Expectations were for 56 cents per share and sales of $528 million. KLAC was up 16 cents from his 40.02 close as of this writing.

MSFT reported Q1 profits of $2.56 billion or 23 cents per share, up from 12 cents or $1.32 billion in Q3 last year. The EPS figure included a 5 cent charge for legal items, however. Revenues were up from $9.18 billion to $9.6 billion. Expectations were for 32 cents earnings compared with the 28 cents (excluding items) and for revenues of $9.83 billion. The stock had closed at 24.45, -2.16%, but was up to 24.73 as of this writing.

For tomorrow, we'll open with the Employment Cost Index for Q1, Personal Income and Personal Spending for March, followed by Michigan Sentiment for April at 9:45 and the Chicago PMI for April at 10AM. Today was a troublesome day for equities, which declined despite the tentative daily cycle buy signals, the big morning drop in oil prices and the drop in treasury yields. On the one hand, the daily cycle picture continues to favor an upside turn in treasury yields and the stock indices. Today's plunge did not break last week's lows, despite the Nasdaq's, and so it looks like a bottom trying form at these levels. But the bounce has been very slow to arrive, with the Nasdaq peering over the edge of the cliff tonight and the indices closed right on their session lows. If bulls fail to put something together tomorrow, it could get downright ugly.
 

 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
None MAR
  PH

New Calls

None today.
 

New Puts

Marriot - MAR - close: 63.37 chg: -2.52 stop: 66.11

Company Description:
MARRIOTT INTERNATIONAL, INC. is a leading lodging company with more than 2,600 lodging properties in the United States and 65 other countries and territories. Marriott International operates and franchises hotels under the Marriott, JW Marriott, The Ritz-Carlton, Renaissance, Bulgari, Residence Inn, Courtyard, TownePlace Suites, Fairfield Inn and SpringHill Suites brand names; develops and operates vacation ownership resorts under the Marriott Vacation Club International, Horizons, The Ritz-Carlton Club and Marriott Grand Residence Club brands; operates Marriott Executive Apartments; provides furnished corporate housing through its Marriott ExecuStay division; and operates conference centers. The company is headquartered in Washington, D.C., and has approximately 133,000 employees. (source: company press release)

Why We Like It:
We like MAR as a bearish candidate because the bullish up trend has been broken. Shares of MAR were very strong for months but the stock peaked a couple of weeks ago ahead of its April earnings report. When the market tanked mid April shares of MAR broke down under its trendline of support and its simple 50-dma and its 100-dma. The market's recent oversold bounce helped lift MAR just high enough to retest the $66.00 level (and its 40 and 50-dma's) as new resistance. Now MAR is turning lower on big volume nearly double the norm. Short-term technical oscillators are turning bearish. This looks like an opportunity to capture a quick decline toward the $60.00-58.00 range. The $60.00 level is likely to be round-number support while the $58 level should be supported by its simple 200-dma.

Suggested Options:
We are suggesting the June puts although Julys will certainly work.

BUY PUT JUN 65.00 MAR-RM OI= 150 current ask $2.95
BUY PUT JUN 60.00 MAR-RL OI= 512 current ask $0.09

Picked on April 28 at $ 63.37
Change since picked: - 0.00
Earnings Date 04/21/05 (confirmed)
Average Daily Volume = 1.2 million

---

Parker Hannifin - PH - close: 59.08 change: -0.99 stop: 62.01

Company Description:
With annual sales approaching $8 billion, Parker Hannifin is the world's leading diversified manufacturer of motion and control technologies and systems, providing precision-engineered solutions for a wide variety of commercial, mobile, industrial and aerospace markets. The company employs more than 48,000 people in 46 countries around the world. (source: company press release)

Why We Like It:
It looks like shares of PH have been in trouble ever since the stock lost its upward momentum back in December 2004. There was a sharp drop in mid January as investors reacted to the company's earnings report where PH missed earnings estimates. The stock managed to rebound somewhat through February-March only to find resistance near $70.00. In late March PH crashed again after issuing an earnings warning. Ever since shares of PH have been pinned under resistance near $62.00. Now with the major market averages on the verge of breaking down yet again we suspect this could be an attractive entry point for put positions in PH. Technical traders will note that PH's MACD is nearing a new sell signal and its RSI and stochastics are turning bearish again too. Plus, the stock's P&F chart is in a sell signal with a $44 target. Our target is the $55.00-54.00 region. More conservative traders may want to wait for a little confirmation and only initiate new plays on a decline below the $58.00 level.

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

BUY PUT JUN 60.00 PH-RL OI= 52 current ask $2.85
BUY PUT JUN 55.00 PH-RK OI= 63 current ask $0.90

Picked on April 28 at $ 59.08
Change since picked: - 0.00
Earnings Date 04/18/05 (confirmed)
Average Daily Volume = 1.2 million
 


Play Updates

In Play Updates and Reviews

Call Updates

Avalonbay - AVB - close: 71.02 change: -0.40 stop: 67.49

No change from our previous update on 04/26/05 and 04/24/05 although if the markets continues to fall tomorrow we would expect a dip toward the $70.00 level and its 100-dma. Our target remains the $75-76 range.

Picked on April 24 at $ 70.05
Change since picked: + 0.97
Earnings Date 04/21/05 (confirmed)
Average Daily Volume = 345 thousand

---

Golden West Fincl - GDW - close: 62.26 chg: -1.40 stop: 59.95

Yuck! GDW has erased all of Wednesday's gain. If the market continues south tomorrow we'd expect GDW to pace the decline. Look for the $60-61 region to act as support. No change from our previous updates.

Picked on April 26 at $ 62.55
Change since picked: - 0.29
Earnings Date 04/20/05 (confirmed)
Average Daily Volume = 1.3 million

---

Nucor - NUE - close: 49.77 chg: -0.61 stop: 49.95

Today's GDP numbers could be the turning point we alluded to yesterday. NUE's midday bounce quickly failed and all signs appear to be pointing to another leg lower for NUE. Shares have not quite broken the 200-dma just yet so we're keeping NUE on the play list but our trigger to go long is still at $55.05. Per our comments yesterday readers may want to switch directions and buy puts on NUE if the stock trades into the $49.00-48.50 range.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/21/05 (confirmed)
Average Daily Volume = 3.3 million

---

Websense - WBSN - close: 51.60 chg: -1.25 stop: 49.49

No change from our previous update on 04/27/05. Look for a dip to and bounce from the $50.00 region as a potential bullish entry point.

Picked on April 27 at $ 52.85
Change since picked: - 1.25
Earnings Date 04/26/05 (confirmed)
Average Daily Volume = 751 thousand
 

Put Updates

Adobe Systems - ADBE - close: 58.47 chg: +0.02 stop: 61.51

We're a little surprised by the relative strength in ADBE today but shares struggled under the $59.00 level and the bounce was fading by the afternoon. No change from our previous updates on 04/26/05.

Picked on April 26 at $ 59.12
Change since picked: - 0.67
Earnings Date 06/16/05 (unconfirmed)
Average Daily Volume = 3.3 million

---

CDW Corp - CDWC - close: 53.86 chg: -1.65 stop: 58.01

Another tough day for tech stocks hit CDWC pretty hard. Shares lost 2.97 percent to under perform most of its peers. Our target remains the $50.00 region.

Picked on April 24 at $ 55.68
Change since picked: - 1.82
Earnings Date 04/19/05 (confirmed)
Average Daily Volume = 920 thousand

---

Infosys Tech. - INFY - close: 57.48 chg: +0.88 stop: 62.51

Hmm... we're a little perplexed by the sudden show of strength in INFY. Granted the stock was oversold and due for a bounce but given the sell-off in tech and software issues today we would have expected INFY to help lead the way lower. It's very possible that INFY was reacting to a late day bounce in the Indian markets today (INFY is based in India). Look for the $60.00 level to act as resistance and use a failed rally under $60.00 as a new bearish entry point.

Picked on April 26 at $ 58.24
Change since picked: - 0.76
Earnings Date 04/14/05 (confirmed)
Average Daily Volume = 504 thousand

---

Lehman Brothers - LEH - close: 91.63 chg: -1.73 stop: 92.51

No change from our previous updates on 04/24/05 and 04/27/05. Our trigger to buy puts is at $89.45.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: - 0.00
Earnings Date 03/15/05 (confirmed)
Average Daily Volume = 2.3 million

---

PACCAR Inc - PCAR - close: 66.81 change: -0.46 stop: 70.01

No change from our previous update on 04/27/05.

Picked on April 27 at $ 66.45
Change since picked: + 0.36
Earnings Date 04/26/05 (confirmed)
Average Daily Volume = 1.0 million
 

Dropped Calls

Patterson Cos. - PDCO - close: 50.07 chg: -0.54 stop: 49.75

Early morning weakness on the economic news was enough to send PDCO under support at the $50.00 mark and its 50-dma. Shares did manage to bounce near the lows from last week and rebound back over the $50 level but the damage is done. PDCO hit our stop loss at $49.75 so the play is closed. If PDCO trades under the $49.00 level we might consider bearish positions.

Picked on April 18 at $ 50.75
Change since picked: - 0.68
Earnings Date 05/19/05 (unconfirmed)
Average Daily Volume = 789 million
 

Dropped Puts

None

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