Option Investor

Daily Newsletter, Monday, 05/02/2005

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Table of Contents

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

Market Wrap

Fed Ahead

Fed Ahead

The various markets traded an uncertain session on light volume ahead of tomorrow afternoon's FOMC announcement. Volume was well below average, with QQQQ failing to trade half of Friday's shares.

Breadth flip-flopped several times, with volume favoring the bulls and bears at various points but never decisively. Advancing volume prevailed, however, with 2 advancing NYSE shares for each declining and 1.24 advancing Nasdaqs for each declining. Both the TRIN and the TRINQ finished in neutral territory, with combined volume coming in just above the 3.1 billion mark.

Daily Dow Chart

The Dow bounced from a higher low at the top of Friday's range at 10188, closing just under the 10258 high at 10251. The daily cycle upphase is on unequivocal buy signals from the failure to retrace any of Friday's strong gains, and above 10260, next serious resistance is up at 10360.

Daily S&P 500 Chart

The SPX retraced a small part of Friday's gains but dojied back up, spending the rest of the session above the range. The low came at 1154.7, finishing less than a point off the 1162.87 high. As with the Dow, a daily cycle upphase is in progress off a bullish stochastic divergence, and a break of 1162 and 1166 resistance will have its next test at 1172 and 1180 confluence.

Daily Nasdaq Chart

The Nasdaq did not close on its highs, finishing 5 points below at 1928 after bouncing from a low of 1916. Despite its being the weakest of its peers, the Nasdaq also respected Friday's bullish high volume doji print, and while the daily cycle upphase is weaker, it's still an upphase. The higher stochastic low against the lower price low is bullish as well, but the true test will be at the declining resistance line in the 1950 area. Above that, 1975-80 is the heavier resistance, followed by 1996 and 2020.

Daily TNX Chart

The Treasury announced its market financing estimates for the quarter. It now anticipates paying down $42 billion in debt during Q2, the first such reduction in four years due to strong tax receipts and large recent State and Local security issuances. Today, the Treasury auctioned $28 billion worth of 13-week and 26-week bills today. Indirect bidders took just over $7 billion of the total, the 13-week bills fetching a high rate of 2.87% at a bid to cover ratio of 2.16 and the 26-week bills a high rate of 3.085% and 2.13 bids for each accepted.

Ten year treasuries lurched lower immediately following the announcement at 1PM. The ten year note yield had opened below the key 4.2% resistance level and bounced sharply above it following the disappointing ISM release at 10AM (see below). The yield pulled back following completion of the t-bill auction but held above 4.2%. The daily cycle oscillators began turning up from oversold territory last week, with Friday's doji reversal from 4.15% a likely candidate for the daily cycle bottom. Above 4.24%, the new upphase for TNX should be confirmed, targeting 4.3% and 4.4% resistance above. For the day, TNX closed lower by 0.7 bps at 4.194%.

Chart of Crude oil

Crude oil opened in the red after printing an overnight low one tick below 49 but bounced back to closed higher by 1.175 at 50.90, off a high of 50.957 and 2.36% for day. The daily print was an inside day within Friday's wide range, still well within the downtrend off the April high. Bulls need to clear 52 resistance to challenge the current downtrend.

In economic news, the Commerce Department reported that March construction spending rose by 0.5% in March, beating expectations by 0.2%. Private sector construction spending was up 0.5%, while public sector spending rose 0.3%. The National Association of Realtors reported that pending sales of US homes declined 0.3% in March, while still being 1.7% higher from March 2004's levels.

Shortly thereafter, the Institute for Supply Management reported its ISM Index for April. The Manufacturing Index fell to 53.3% from its March reading of 55.2%, the 5th consecutive month's decline and the lowest level since July 2003. Expectations were for a reading of 54.6%. The ISM Job Index also fell from its 55.2% reading in March to 52.3%. Readings above 50% indicate expansion, below 50% contraction.

PricewaterhouseCoopers later reported that IPO activity for Q1 2005 has been strong, as the average deal size rose from Q1 2004's $201.1 million level to $251.4 million, a 25% increase. Proceeds from IPOs for the quarter rose from $8.6 billion last year to $10.8 billion in the current quarter.

In corporate news, Brocade (BRCD) warned that revenues will come in lighter than the previously anticipated $155-$161 million at $144-$145 million for the quarter. The company cited weak demand, and expects net earnings of 7 cents per share. BRCD closed lower by one cent at 4.34 on more than double its average daily volume.

Tyson Foods (TSN) reported Q2 earnings of $183 million or 21 cents per share on sales of $6.4 billion, down from $263 million or 33 cents one year ago. Revenue rose $200 million from last years Q2. Analysts were expecting 17 cents and sales of $6.15 billion. TSN gained 3.32% to close at 17.45 on over 3 times its average daily volume.

Nortel (NT) reported a Q4 profit of 3 cents per share or $133 million on revenue of $2.62 billion, down from $528 million or 12 cents on revenue of $3.27 billion in last years Q4. The results include some $118 in one-time charges and $134 million in customer financing recovery gains. The companys gross margin was 45% of sales. Analysts were looking for $2.51 billion in revenue and margins in a range of 40%-44%. NT got smoked for a 7.23% loss, closing at 2.31.

Avon (AVP) reported Q1 earnings of $172 million or 36 cents on revenue of $1.88 billion, up from 31 cents or $148.1 million in the year-ago quarter, beating estimates by a penny. The company raised its guidance for 2005 full-year EPS from a range of $1.95-2$ to $2.12-$2.17. AVP lost 3.12% to close at 38.83 on triple its average volume.

Another wrinkle in the ongoing Qwest/Verizon/MCI triangle, with VZ sweetening its offer for MCI in the wake of Qwests later offer. MCI had given VZ until today to revisit its already-accepted bid. This morning, it was announced that VZ had upper its offer for MCI to $8.45 billion, in a deal comprised of $5.60 in cash to be paid upon MCI shareholder approval, in addition to the great of .5743 VZ shares for each MCI shares, or VZ shares, or cash valued at $20.40 per MCI share. While the latest offer falls slightly short of the Qwest offer on the raw numbers, MCI said that it considers the VZ offer to be stronger on a "risk to versus reward" basis. Later in the session, Q stood down, stating that "It is no longer in the best interests of shareowners, customers and employees to continue in a process that seems to be permanently skewed against Qwest." Q closed higher by 2.05% at 3.49, VZ lost 2.35% to close at 34.96, and MCI lost 3.13% to close at 25.70.

In a related story, it was reported that the SEC is looking into the trading of Q's shares. In particular, certain trades that intervened to support Q's price on days when the shares were dipping below the minimum threshold on the terms of its buyout offer for MCI are being examined.

The markets got a lift from AIG, which announced yesterday that it will restate its earnings to 2000. The restatement will correct accounting errors that exaggerated the company's net worth to the tune of $2.7 billion. The company's 10-page statement indicated that AIG expects to file by May 31st. It placed part of the blame on former executives, stating that "certain entries appear to have been made at the direction of certain former members of senior management without appropriate support." The restatement will trim approximately 3.3% from the company's net worth, which $1 billion more than the previous estimates of $1.7 billion. Moody's responded by reducing AIG's long-term debt rating from "Aa1" to "Aa2," as well as the ratings of a number of AIG's related companies. AIG closed higher by 5.09% at 53.44.

Yellow Roadway (YELL) announced that it has upped the cash portion of its $1.37 billion big for tucker USF. USF shareholders would receive approximately 65% in cash and 35% in YELL stock, changed from a 50-50 split of cash and stock. However, there will no longer be a cash election component of the deal for USF shareholders, and YELL shareholders will no longer be required to approve the deal as the number of new shares issued will be less than 20% of the total issued and outstanding. The USF shareholder vote is expected to take place on May 23rd. YELL gained 4.18% to close at 51.05 on twice its average daily volume.

Retailer Neiman Marcus (NMGA) announced that it has accepted to be acquired to by 2 private equity firms, Texas Pacific and Warburg Pincus, for approximately $5.1 billion. NMGA got pummeled for the session, near the end of which Moody's announced that it had placed the company's debt ratings on credit watch negative. NMGA got clipped for a 5.45% loss to close at 92.96 on nearly 9 times its average volume.

With all eyes turning to tomorrow's FOMC rate decision, today's economic highlights presented the Fed's dilemma clearly. With the Fed Funds rate at levels that remain very stimulative, the benefit has been bypassing US manufacturing and employees. Both sectors remain weak, while the corporate sector is strengthening as seen in the strong increases in quarterly IPO deal-size and total proceeds. More stimulation will not necessarily serve the purpose that the Fed seeks to achieve, like pumping more air into a leaky tire. The ten year note yield popped above 4.2% resistance shortly after the ISM report, simultaneously with June gold futures breaking below the key 432 support level.

Worse yet is the potential pressure that over-stimulation can bring to bear on consumers. Costco's CEO Jim Sinegal in a speech today noted that he's seeing price inflation beginning to creep in "for the first time." Those of us who follow the markets have been observing it for years in the commodity, real estate, foreign currency, equity and bond rallies. What Sinegal is highlighting is that this inflation is impacting consumers' ability to purchase the products Costco sells- a clearly negative effect of the Fed's stimulative policies. The Fed finds itself in a difficult spot, as usual, and the dilemma provides ample fuel for inflationists and deflationists, bulls and bears alike. The announcement is scheduled for 2:15PM EST.

Also scheduled for tomorrow is Factory Orders for March and, throughout the day, reports from the various manufacturers on April's truck and auto sales. As is usually the pattern, volume should be thin and get thinner approaching 2PM, following which the pre-Fed volatility will kick in. With many participants waiting for a sign of direction in the wake of the announcement and many fading the initial move and fading the fade and so on, tomorrow afternoon promises to be more action than many like to handle. For now, the daily cycles favor upside for equities while an upphase for treasury yields is overdue. As Jim says, enter passively, exit aggressively.


New Plays

New Option Plays

Call Options Plays
Put Options Plays

New Calls

Invitrogen - IVGN - close: 74.98 change: 1.71 stop: 71.49

Company Description:
Invitrogen Corporation provides products and services that support academic and government research institutions and pharmaceutical and biotech companies worldwide in their efforts to improve the human condition. The company provides essential life science technologies for disease research, drug discovery, and commercial bioproduction. Invitrogen's own research and development efforts are focused on breakthrough innovation in all major areas of biological discovery including functional genomics, proteomics, bioinformatics and cell biology -- placing Invitrogen's products in nearly every major laboratory in the world. Founded in 1987, Invitrogen is headquartered in Carlsbad, California and conducts business in more than 70 countries around the world. The company globally employs approximately 4,500 scientists and other professionals and had revenues of more than $1 billion in 2004. (source: company press release)

Why We Like It:
Overall we remain mostly bearish on stocks with the major averages still in an intermediate downtrend. However, IVGN looks like one of the exceptions. The stock has been very resilient and avoided most of the market's weakness these past few months. Instead shares of IVGN have consolidated sideways after breaking its multi-month bullish trend in late March. The company's recent earnings report was positive and the company guided higher for 2005. Now shares are on the verge of breaking out over resistance at the $75.00 level. We also like IVGN's bullish P&F chart that currently points to an $85.00 target. Please keep in mind that any significant market downturn will weigh on, stall and possibly reverse IVGN's advance. Yet if the markets continue to bounce or merely chop sideways then IVGN can keep climbing. Our strategy is to use a trigger to confirm IVGN's bullish breakout over the $75 level. Our entry point will be $75.51. Our short-term target is the $80 level. Our time frame is about six weeks.

Suggested Options:
We are suggesting the June calls although Mays and August strikes have more open interest.

BUY CALL JUN 70.00 IUV-FN OI=175 current ask $6.70
BUY CALL JUN 75.00 IUV-FO OI=501 current ask $3.40
BUY CALL JUN 80.00 IUV-FP OI=154 current ask $1.35

Picked on May xx at $ xx.xx
Change since picked: 0.00
Earnings Date 04/28/05 (confirmed)
Average Daily Volume = 888 thousand

New Puts

None today.

Play Updates

In Play Updates and Reviews

Call Updates

Avalonbay - AVB - close: 71.98 change: -0.02 stop: 67.49

No change from our previous update on 05/01/05.

Picked on April 24 at $ 70.05
Change since picked: 1.93
Earnings Date 04/21/05 (confirmed)
Average Daily Volume = 345 thousand


Chubb Corp - CB - close: 81.47 chg: -0.31 stop: 77.49

No change from our previous update on 05/01/05.

Picked on May 01 at $ 81.78
Change since picked: - 0.31
Earnings Date 04/25/05 (confirmed)
Average Daily Volume = 1.2 million


Golden West Fincl - GDW - close: 63.17 chg: 0.84 stop: 59.95

No change from our previous update on 05/01/05.

Picked on April 26 at $ 62.55
Change since picked: 0.62
Earnings Date 04/20/05 (confirmed)
Average Daily Volume = 1.3 million


Nucor - NUE - close: 51.10 chg: 1.33 stop: 49.95

No change from our previous update on 05/01/05. Our current trigger to go long is at $55.05 but more aggressive traders might want to consider longs if NUE pushes above the $52.50 level.

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: 52.85 chg: -0.20 stop: 49.49

No change from our previous update on 05/01/05. Shares of WBSN tested overhead resistance at the $54.00 level early this morning. Our target is the $59.00-60.00 range.

Picked on April 27 at $ 52.85
Change since picked: 0.00
Earnings Date 04/26/05 (confirmed)
Average Daily Volume = 751 thousand

Put Updates

Adobe Systems - ADBE - close: 57.15 chg: -2.32 stop: 60.26*new*

Shares of ADBE produced some excitement on Monday. The stock started the day higher and traded above the $60.00 mark before quickly turning around. Shares sank toward a new two-week low as investors sold ADBE in a knee-jerk reaction to news of competition from Microsoft. Evidently MSFT's next operating system will have certain features that will compete with Adobe's Acrobat and PDF e-paper products. More than one analyst came out midday to defend ADBE suggesting it will take years before MSFT will become serious competition in this space. ADBE managed to stem the bleeding today near its simple 200-dma. We are lowering the stop loss to $60.26.

Picked on April 26 at $ 59.12
Change since picked: - 1.97
Earnings Date 06/16/05 (unconfirmed)
Average Daily Volume = 3.3 million


CDW Corp - CDWC - close: 54.86 chg: 0.17 stop: 58.01

No change from our previous update on 05/01/05.

Picked on April 24 at $ 55.68
Change since picked: - 0.82
Earnings Date 04/19/05 (confirmed)
Average Daily Volume = 920 thousand


Infosys Tech. - INFY - close: 58.42 chg: -0.78 stop: 62.51

INFY displayed some relative weakness today with another 1.3 percent decline. The move is probably somewhat fueled by a two percent drop in Indian markets today. In the news there was a note that INFY raised its current year earnings forecast by a small amount but the adjustment is only due to a change in accounting procedure. We see no changes from our previous update on 05/01/05. Readers can still expect INFY to make a run towards the $60.00 level before turning lower.

Picked on April 26 at $ 58.24
Change since picked: 0.18
Earnings Date 04/14/05 (confirmed)
Average Daily Volume = 504 thousand


Lehman Brothers - LEH - close: 88.45 chg: -3.27 stop: 94.05

The XBD broker-dealer index was one of the worst performers on Monday with a 1.9 percent decline after UBS downgraded the sector from a "buy" to a "neutral". UBS is concerned about the brokerage sector's prospects over the next three to six months where they see "limited upside for stocks" (-CBSMW). UBS also downgraded Goldman Sachs, Merrill Lynch and Lehman Brothers from "buy" to "neutral". Meanwhile Morgan Stanley also downgraded Goldman Sachs and Lehman Brothers from "over weight" to "equal weight". Volume on LEH's 3.5 percent decline was very strong at almost three times the norm, which suggests more weakness ahead. Our target is the $86-85 level.

Picked on April 29 at $ 89.45
Change since picked: - 1.00
Earnings Date 03/15/05 (confirmed)
Average Daily Volume = 2.3 million


Marriot - MAR - close: 61.30 chg: -1.45 stop: 65.01 *new*

MAR displayed even more relative weakness on Monday with a fresh 2.3 percent decline on volume even higher than Friday's. The stock is now at a new three-month low. We are lowering our stop loss to $65.01. Our target is the $60-58 range.

Picked on April 28 at $ 63.37
Change since picked: - 2.07
Earnings Date 04/21/05 (confirmed)
Average Daily Volume = 1.2 million


PACCAR Inc - PCAR - close: 69.14 change: 1.24 stop: 70.01

Red alert! PCAR produced a 1.8 percent rally on Monday and closed over its exponential 200-dma. The stock is very close to overhead resistance at the $70.00 mark and its simple 200-dma. In the news today PCAR announced that its Board of Directors had approved the repatriation of $1.5 billion in profits. Bears need to see resistance at the $70 level hold. We are concerned because PCAR has closed above its two-month trendline of resistance. We are not suggesting new bearish positions and more conservative traders may want to exit now to avoid further losses. More aggressive traders may want to adjust their stop loss above the minor resistance level at $70.40.

Picked on April 27 at $ 66.45
Change since picked: 2.69
Earnings Date 04/26/05 (confirmed)
Average Daily Volume = 1.0 million


Parker Hannifin - PH - close: 60.08 change: 0.14 stop: 62.01

As expected shares of PH failed to breakout over resistance in the $61.50-62.00 range. We see no other changes from our previous update on 05/01/05.

Picked on April 28 at $ 59.08
Change since picked: 1.00
Earnings Date 04/18/05 (confirmed)
Average Daily Volume = 1.2 million

Dropped Calls


Dropped Puts



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