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Daily Newsletter, Tuesday, 05/17/2005

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Table of Contents

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

Market Wrap

Treasury Hosts Bear-B-Cue

Equities spent most of the session drifting within yesterday's range on light volume as various intraday cycles turned lower. That changed at 2:30, when the Treasury released its semiannual currency report. In it, the administration reiterated its threats against China should the ongoing currency peg not be released in the future, but avoided any immediate or formal sanction.

The markets cheered the news, with treasury bonds managing to hold their earlier gains and equities rocketing upward out of their range, breaking to new highs for the move. Volume breadth had been negative for most of the day but recovered, finishing positive on both exchanges, 2.49 advancing NYSE shares for each declining, 1.29 advancing Nasdaqs for each declining. 

Daily Dow Chart

The Dow, on fresh daily cycle sell signals coming out of last week, added 79 points to close at 10331, 5 points off the high. The daily cycle downphase stuttered but did not abort. In last night's Market Wrap, I noted that the Macd confirmation had yet to print, and that remains the case tonight, with the signal line bouncing. Pricewise, the 10320 resistance was broken, but until the May high has been violated, the possibility remains that we're merely seeing a retest of the daily cycle high. Above 10400, the downphase will reverse early, while a break below today's low at 10213 will set up a test of 10150, below which downphase should confirm.

Daily S&P 500 Chart

The SPX hit a high of 1174.35, closing just below it at 1173.80 for a 8.11 point gain. The daily cycle downphase stalled but did not reverse. A closing break above 1176-77 resistance should be enough to do it however, and bears need to see a break of 1160 very soon to avoid an upside whipsaw in the daily cycle stochastic. While the downtrend from March remains mostly intact, one more day like today could be enough to change it.

Daily Nasdaq Chart

The Nasdaq closed higher by 9.72 on its session high of 2004.15. It was a small gain, but it crossed important resistance at 1996-2000 and extended the daily cycle upphase deeper into overbought territory. Next resistance is at 2020-2025, but with price hugging upper Bollinger resistance and overbought, the extended upphase will have to begin a trending move to reach or surpass it. More bullishly, however, the downtrend from the January high is in jeopardy, and the past week has shown us a steady pattern of higher highs and higher lows. Bears need a break back below 1996, with a close below 1975 to generate the first bearish kiss on the daily cycle stochastic.

Daily TNX Chart

The Treasury auctioned $12 billion worth of 4-week bills today. The auction drew a bid-to-cover ratio of 2.36 with a high rate of 2.55%. Foreign central banks took a modest $2.4 billion of the total. Just like yesterday with the 13- and 26-week auctions, today's 2.36 bid-to-cover ratio was the lowest since the beginning of April and below the average for each year since 2002, demonstrating weak demand.

All eyes were on the Treasury at 2:30, when it released its current report. It was widely expected that the report would cite China as a currency manipulator in view of its ongoing Yuan peg to the US Dollar. Instead, the report stated that the US will be prepared to find China guilty of manipulating its currency if it fails to alter its current policies, calling the peg a threat to global growth.

Treasuries remained firm throughout the session, ticking lower following the 2:30 release but closing in the green after touching a new 3 month high. The ten year note yield closed lower by 0.8 bps at 4.117%.

Chart of Crude oil

OPEC released its monthly report this morning, which suggested that daily world demand would decline by 80,000 barrels per day to 83.94 billion barrels on high prices and weakening economic growth. However, the report also stated that OPEC would have to pump at its highest rate ever to meet demand during Q3 and Q4, because of a steep decline in output from non-OPEC oil producers, notably Mexico and Russia. OPEC expects demand to reach 28.9 million barrels per day in Q3 and 30.5 million bpd in Q4.

Tomorrow will see the weekly inventory data, with expectations for a 900,000 barrel increase in crude oil inventories, a 620,000 barrel increase in gasoline supplies and 1 million barrel increase in distillates.

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Later in the session, Saudi Oil Minister Ali al-Naimi reassured investors that global oil demand would not exceed reserves, and that Saudi Arabia possessed the capacity to meet high sustained demand should such be required. Following his statements, the price of front-month crude oil futures rose back to positive territory. The CEO of Saudi Aramco, Abdallah Jum'ah, reiterated the statement for those who might not have been persuaded by the state oil minister, stating that his job is maintain between 1.5 and 2 million barrels' worth of excess capacity at all times. Marketwatch reported his statement as, "By God we do have the resources." Crude oil fell back to unchanged in the minutes following his statement, declining further as the session wore on.

Crude oil finished higher by .25 at 48.85.

The Labor Department reported the Producer Price Index rose 0.6% in April, exceeding forecasts for a 0.4% rise. Net of food and energy, the Core PPI rose 0.3%, again exceeding the expected 0.2% increase. The PPI has risen 4.8% from April 2004, and the Core PPI is up 2.6% y-o-y.

Also at 8:30, the Commerce Department reported that Housing Starts rose 11% to 2.038 million units (annualized), exceeding expectations for 1.96 million units. Building Permits rose to a 2.13 million unit annualized rate, the largest gain since December 2002.

At 9:15, the Federal Reserve reported that US Industrial Production declined 0.2% in April, missing estimates for a 0.2% increase. Capacity Utilization fell from 79.4% in the previous month to 79.2% in April, missing expectations for unchanged at 79.4%.

Home Depot (HD) reported earnings that rose 13.6% from $1.1 billion or 49 cents per share to $1.25 billion or 57 cents in the current quarter on sales of $18.97 billion. Gross margins reached a record 33.5%, with the price of the average item up to $58.25. Expectations were for 55 cents and sales of $19.26 billion. The company announced that it plans on closing 15 of its upscale Expo Design Center stores, and to convert another 5 to Home Depot stores. The remaining 34 profitable Expo stores will continue to operate. HD gained 3.99% to close at 38.86.

BJ's Wholesale reported net earnings that rose from $16.1 million or 23 cents in Q1 2004 to $18.6 million or 27 cents, beating estimates by 3 cents. Revenue rose from $1.65 billion to $1.81 billion, beating estimates by $100,000. BJ closed higher by 4.56% at 29.59.

Staples (SPLS) reported net income for Q1 of $159 million or 21 cents on revenue of $3.9 billion, up from $125 million or 17 cents in the year-ago quarter. These results beat by a penny, the company citing an increase in North American sales for the gains. SPLS rose 4.97% to close at 21.56.

After the bell, HPQ announced Q2 earnings that rose from $884 million or 29 cents in 2004's Q2 to $966 million or 33 cents on revenue of $21.57 billion. Excluding items, earnings were 37 cents. Analysts were expecting earnings of 36 cents on revenue of $21.4 billion. The stock was higher by .85 as of this writing, trading 22.40. 

AMAT reported an 18% decline in net earnings, at $305 million or 18 cents for the quarter, down from $373 million or 22 cents in Q2 2004. Revenue declined to $1.86 billion, an 8% drop. Nevertheless, these results beat estimates by a penny and $600,000 on revenue. The stock dropped 23 cents afterhours, trading 15.81 as of this writing.

Tomorrow, the Consumer Price Index and the Core CPI are scheduled for release at 8:30AM. The markets showed substantial strength today despite the less than stellar volume. The question that remains is whether the Nasdaq was seeing a terminal move in the toppy daily cycle upphase, or whether it's the start of a trending move and, for the Dow and SPX, an upside whipsaw and bear trap. The influence of op-ex week adds a further layer of confusion. Equities had been weak ahead of the 2:30 Treasury release, but obviously not weak enough.

With so many conflicting factors, the simplest approach will be to follow price and watch the nearby support and resistance levels. Upside should be more tenuous than downside due to the toppiness in the daily cycle oscillators. Further gains tomorrow have the potential to ignite covering from whatever shorts remained after this afternoon's sharp rise. Whether such a move will be able to attract bulls from the sidelines will be the issue.


New Plays

New Option Plays

Call Options Plays
Put Options Plays
AHC None
FD

New Calls

Amerada Hess - AHC - close: 89.41 chg: +1.36 stop: 86.25

Company Description:
Amerada Hess, headquartered in New York, is a global integrated energy company engaged in the exploration for and the production, purchase, transportation and sale of crude oil and natural gas, as well as the production and sale of refined petroleum products. (source: company press release)

Why We Like It:
Crude oil has spent the last few days trying to build a base above technical support at its 200-dma. That has given oil stocks a chance to bounce from the bottom of their descending channels. The OSX oil services index is doing just that - bouncing from the bottom of its descending channel. We see a similar pattern in AHC but AHC's rebound is off both the bottom of its channel and near technical support at its 200-dma's. Plus, AHC's candlestick chart is showing a three-day bullish reversal pattern. This is purely a trading bounce play. We are looking for AHC to rally back toward the top of its channel in the $94-95 range. We're willing to go long at current levels. More conservative traders may want to wait for AHC to trade above the $90.00 mark, which could act as round-number resistance. Our time frame is probably less than two-weeks.

Suggested Options:
We're going to suggest the June calls.

BUY CALL JUN 85 AHC-FQ OI=213 current ask $6.00
BUY CALL JUN 90 AHC-FR OI=423 current ask $2.90
BUY CALL JUN 95 AHC-FS OI=460 current ask $1.20

Picked on May 17 at $ 89.41
Change since picked: + 0.00
Earnings Date 07/27/05 (unconfirmed)
Average Daily Volume = 1.6 million 

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Federated Dept Stores - FD - cls: 66.60 chg: +1.64 stop: 62.49

Company Description:
Federated, with corporate offices in Cincinnati and New York, is one of the nation's leading department store retailers, with annual sales of more than $15.6 billion. Federated operates more than 450 stores in 34 states, Guam and Puerto Rico under the names of Macy's and Bloomingdale's. The company also operates macys.com and Bloomingdale's By Mail. (source: company press release)

Why We Like It:
A string of positive earnings results from the retail sector today have inspired new strength in the group. We're suggesting FD as a momentum play given today's high-volume bullish breakout over resistance at the $65.00 level. Volume on today's breakout was well above the average. The move also produced a new P&F buy signal that points to an $88 target. We're only targeting a short-term move toward the $70.00 level, which could be round-number resistance. Readers can choose to go long at current levels or look for a possible dip back toward the $65.00 region, which should now act as new support. More aggressive players can put their stop loss under the $62 level, which is clear support. More conservative traders may want to tighten their stops close to the $64 region. We're placing ours at $62.49.

Suggested Options:
We are suggesting the June calls.

BUY CALL JUN 65.00 FD-FM OI=1563 current ask $3.30
BUY CALL JUN 70.00 FD-FN OI= 204 current ask $0.95

Picked on May 17 at $ 66.60
Change since picked: + 0.00
Earnings Date 05/11/05 (confirmed)
Average Daily Volume = 2.9 million 

New Puts

None today.


Play Updates

In Play Updates and Reviews

Call Updates

Caterpillar - CAT - close: 91.96 chg: +1.58 stop: 89.00

Almost there! CAT surged another 1.74 percent on Tuesday with the stock breaking out over its simple 50-dma and its six-week trend of lower highs. The move was fueled by a strong Dow and news from CAT that its April retail sales rose 20 percent. Our trigger to go long/buy calls is at $92.35 above its simple 100-dma. We are going to wait for CAT to hit our entry point. However, more aggressive traders might want to consider new bullish positions here given what appears to be a breakout above the neckline of its inverse/bullish H&S pattern.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/20/05 (confirmed)
Average Daily Volume = 2.8 million 

---

Hovnanian - HOV - close: 54.18 chg: +0.53 stop: 49.99

The housing sector paced the rally in the S&P 500 today despite news that April new home construction rose 11 percent, more than anticipated. Shares of HOV look poised to breakout to new relative highs. We are still suggesting that readers wait for a move over $54.50 before considering new bullish positions but more aggressive traders may want to consider new positions here. In the news HOV announced it will report earnings on May 31st. We will plan to exit this play on the preceding Friday, May 27th.

Picked on May 06 at $ 54.26
Change since picked: - 0.08
Earnings Date 05/31/05 (confirmed)
Average Daily Volume = 1.2 million 

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Invitrogen - IVGN - close: 77.99 change: +0.15 stop: 71.49

The BTK biotech index was one of the very few sector indices not to trade higher today. Yet IVGN continues to show relative strength with another gain, albeit a small one. The stock looks poised to breakout over the $78 level. Our short-term target is the $80.00 region.

Picked on May 03 at $ 75.51
Change since picked: + 2.48
Earnings Date 04/28/05 (confirmed)
Average Daily Volume = 888 thousand 

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Eli Lilly - LLY - close: 59.56 change: +0.16 stop: 57.49

LLY produced more headlines today. This time the drug giant said that a phase II study of a brain cancer drug was showing positive results. The stock price didn't react much. We continue to suggest readers wait for a move over $60.00 before considering new bullish positions.

Picked on May 04 at $ 60.15
Change since picked: - 0.59
Earnings Date 04/18/05 (confirmed)
Average Daily Volume = 4.7 million 

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Reynolds American - RAI - cls: 81.54 chg: +0.24 stop: 77.95

This morning RAI saw some profit taking after Monday's big gain but traders stepped in to buy the dip near $80.50. The stock ended higher on the session and continues to look like a bullish entry point here. Our short-term target is the $85-86 range.

Picked on May 16 at $ 81.31
Change since picked: + 0.23
Earnings Date 04/27/05 (confirmed)
Average Daily Volume = 866 thousand 

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Research In Motion - RIMM - cls: 72.45 chg: +2.54 stop: 66.85

That's much better! Yesterday we were a bit concerned with RIMM's lack of participation in the technology rally. Now the stock is out performing with a 3.6 percent gain that has pushed RIMM above its 40 and 50-dma. RIMM has closed at a new one-month high and is challenging its 100-dma. Yesterday we suggested that reader look for a move over 70.50 or 71.00 before considering new bullish plays. If you missed the move this morning RIMM still looks attractive here. Just remember this is a high-risk, aggressive play. Our target is $76-77 range.

Picked on May 10 at $ 70.51
Change since picked: + 1.94
Earnings Date 04/05/05 (confirmed)
Average Daily Volume = 1.7 million 

Put Updates

L-3 Comm. - LLL - close: 67.60 chg: -0.33 stop: 69.55 

Today's session could spell good news for the bears. There was no follow through on Monday's big rebound in LLL despite news that the company has one a five-year $45.5 million Navy contract. We're a little hesitant to suggest new bearish positions with the major stock averages climbing higher but a move under $67.00 might be used as a new bearish entry point.

Picked on May 10 at $ 68.01
Change since picked: - 0.41
Earnings Date 04/26/05 (confirmed)
Average Daily Volume = 855 thousand 

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Marriot - MAR - close: 62.52 chg: +0.64 stop: 63.37 

We are really close to pulling the plug on this bearish play. Today's gain helps confirm yesterday's minor technical breakout and the technical indicators are looking more positive. The MACD just produced a new buy signal. The stock is trading under minor resistance in the $62.50-63.00 region but we don't expect it to hold. We're not suggesting new bearish plays. If we do not get stopped out soon we may exit early on any dip back toward the $61 level. 

Picked on April 28 at $ 63.37
Change since picked: - 0.85
Earnings Date 04/21/05 (confirmed)
Average Daily Volume = 1.2 million 

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MGIC Invest. - MTG - close: 59.55 change: +0.15 stop: 61.11

No change from our previous update on 05/15/05. MTG tried to rally above the $60.00 level this afternoon and failed. Readers may want to use another decline below the $59.00 mark as a new bearish entry point.

Picked on May 15 at $ 58.91
Change since picked: + 0.64
Earnings Date 04/14/05 (confirmed)
Average Daily Volume = 742 thousand 

---

Precision Castparts - PCP - cls: 73.85 chg: -0.05 stop: 75.05

No change from our previous update on 05/15/05. We are waiting for PCP to breakdown below support near $72.00 and hit our entry point at $71.95. 

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: - 0.00
Earnings Date 05/03/05 (confirmed)
Average Daily Volume = 492 thousand 

---

Parker Hannifin - PH - close: 59.44 change: +0.98 stop: 62.01

The market-wide rally today inspired some bargain hunting in shares of PH. We expect the stock to continue rebounding toward the $60 level and its 40-dma. No change from our previous update on 05/15/05.

Picked on April 28 at $ 59.08
Change since picked: + 0.32
Earnings Date 04/18/05 (confirmed)
Average Daily Volume = 1.2 million 

Dropped Calls

Avalonbay - AVB - close: 75.25 change: +0.62 stop: 72.95 

Target achieved. As expected AVB continued to rally from yesterday's bounce at the simple 10-dma. The stock has traded into our target range of $75.00-76.00. We are closing the play. Traders who choose not to exit can watch out for resistance at the December high near $76.

Picked on April 24 at $ 70.05
Change since picked: + 5.20
Earnings Date 04/21/05 (confirmed)
Average Daily Volume = 345 thousand 

Dropped Puts

None

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