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Daily Newsletter, Monday, 05/23/2005

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Table of Contents

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

Market Wrap

Op-Ex Epilogue

Op-Ex Epilogue

Last week's option expiration saw call writers caught on the wrong side of a rally that vaulted a wall of disbelief. Those writers watched today as prices continued to rise, trapping those who were exercised on their contracts and assigned short stock positions. Whether today's light volume rally will attract the necessary buying to extend it in the broader time frames is not known. Perhaps it was merely short covering. Either way, as we saw last week, price is the bottom line, and it rose today.

Breadth was bullish but volume was weak, with the QQQQ trading well below its 107 million share daily average at 93 million, and combined NYSE and Nasdaq volume falling short of 3 billion shares at 2.9 billion. Volatility was very low, with the OEX volatility index (VXO) reaching 11.06 and Nasdaq volatility (VXN) touching 15.45. Volume-wise, there were 2.28 advancing NYSE shares for each declining and 2.05 Nasdaq shares advancing for each declining.

Daily Dow Chart


The Dow traded both sides of last week's low at 10500. But the upside break gained strength in the afternoon, minutes after Sanford Bernstein released a research note to the effect that the sum of MSFT's parts is worth in the neighbourhood of 34%-48% more than its current valuation. The Fed's open market desk was also generous, adding to last week's $1 billion plus coupon pass (deliverable today) with a net $3 billion of additional temporary money against Friday's expiring repos. In either event, the markets had all the bids they needed to power price above last week's resistance.

The Dow has resistance at 10570, followed by 10625. The 10-day stochastic reversed its sell signal and is trending on a weak sideways buy signal as price races higher. This could well prove to be a strong bearish divergence, but it's meaningless unless and until the bears step up to the plate. A break below 10500, followed by a close below 10440 should be enough to confirm that bearish signal. But in the meantime, this move remains bullish, light volume or not.

Daily S&P 500 Chart


The SPX added 4.58 to close at 1193.86, tagging a high of 1197.44. As with the Dow, the move looks and feels extended, but the past 6 sessions have seen only the briefest of weakness, and even that resulted in a sharp intraday doji bottom on Friday. Today's low at 1188.76 is in the middle of confluence from 1187-90, below which the 1184 line and 1177 are support. Above the session high, next resistance is at 1202-1204. The daily cycle indicators are overdue for a pullback and suggest the same bullish-trending or bearish-divergence conundrum noted above with respect to the Dow.

Daily Nasdaq Chart


The Nasdaq's rise has been surprisingly uncomplicated, blasting higher after it broke this year's daily descending supply line a week ago Friday. Today's rise confirmed Friday's break above 2045, but the light volume since Thursday means that support at these levels is thinner than it would otherwise be. Below 2040, support is at 2027, with little below that until 1995. To the upside, today's high at 2062.95 is the firs level to watch, followed by 2080 and 2095-2100.

Daily TNX Chart


There was more action in Treasuries today than in equities. Bonds opened weak this morning, with ten year treasury note yields (TNX) printing above Friday's high. That quickly reversed, as European Central Bank President Jean-Claude Trichet highlighted risks to economic growth in Europe to European Parliament. Trichet emphasized the risks posed by high oil prices, noting modest growth and weak inflation pressure. Reuters attributed concerns arising from these comments to traders fleeing euro bonds in favor of US treasuries. It's worth noting that the US is more susceptible to high oil prices than Europe. As one analyst cited by Reuters put it, "...there are probably some shorts getting squeezed out too." 

As the daily chart of the TNX illustrates, shorts have been getting squeezed in the ten year t-note for months now, with each uptick in the TNX aggressively reversed back down. Today was no exception, with Friday's and Thursday's ranges engulfed as the TNX tested support at 4.05%. Descending trendline resistance is at the 4.14%-4.16% confluence. The daily cycle upphase aborted in what proved to be a bull trap, and a move above that level would set up a possible bullish stochastic divergence. With so many false bounces in the TNX since March, I'll be wary of any upside below the descending resistance line. For the day, TNX closed lower by 5.3 bps at 4.072%.

At 1PM, the results of today's huge $32 billion in combined 13-week and 26-week auctions were announced. Despite slightly higher rates, with the high rate on the 13-week paper at 2.895% and on the 26-week paper at 3.11%, demand was at the low end of average, with bid-to-cover ratios of of 1.98 (13-week) and 2.04 (26-week). Indirect bidders (foreign central banks) took down a respectable $9.2 billion of the total.

In other news, a Financial Reseach Corp. study released today stated that approximately $2 trillion of the $18 trillion of US dollars invested in stocks, bonds, funds and deposit accounts will be shifted from savings/accumulation to retirement income during the next 10 years. This seems to echo statements made by Greenspan in the recent past as to the systemic generational risks posed by the impending retirement of the baby boomers.

Chart of Crude oil


Following this weekend's OPEC meeting, OPEC president and Kuwaiti oil minister Sheikh Ahmad al-Fahd al-Sabah said today that OPEC sees no need to reduce output despite last month's 7% slide in oil prices. Since February of this year, inventories have grown more than 13%, reaching 6-year highs. OPEC has been pumping above quota at record rates during this period. Qatar oil minister Abdullah al-Attiyah stated that inventories are growing too quickly, but did not go so far as to say that supply should be reigned in. However, the Venezuelan oil minister did.

European producer Total announced today that its five French refiners with daily production of 900,000 barrels, would be coming back online today after being shuttered by a recent strike.

On the daily chart of front-month (July) crude oil, we see support at 48 holding since Friday (today's low 48.05) with price within the apex of a bull wedge. The wedge is at the lower end of a broader declining channel. Today's high at 49.50 is first resistance from last week, above which a wedge breakout would target 52 confluence on the way to a potential implied pattern target of 54. Below 48, the bottom of the channel is at 47.50, with next confluence support at 46 if it should break. For the day, despite all of the potentially bearish proclamations and events, July crude oil closed higher by .475 at 49.125. 


It was a quiet session news-wise, with no economic reports and little in the way of corporate news aside from the usual analyst up- and downgrades. Earnings season is all but complete, just the stragglers left. McData (MCDT) released its Q1 results, reporting a loss that shrunk from 9 cents or $9.8 million in Q1 2004 to 2 cents or $2.9 million on revenue that rose from $97.2 million to $98.9 million. "Adjusted" EPS was 3 cents, beating estimates by a penny, while revenue fell short by $100,000. MCDT rose 1.82% to close at 3.35.

Campbell Soup (CPB) reported Q3 earnings that rose from 34 cents or $142 million to 35 cents or $146 million in the current quarter on revenue of $1.74 billion. These results beat by 2 pennies on EPS and $2 million on revenue, and the company reaffirmed its target of 5%-7% growth for fiscal 2004. The company cited strong sales of condensed soups on cold weather in the US, as well as demand for Pepperidge Farm cookies and Godiva chocolates. CPB gained 1.55% to close at 30.81.

Trucker USF's shareholders voted to accept YELL's $1.47 billion acquisition offer, with 99.5% of the votes in favor of the deal. USF shareholders will receive approximately 65% of the price in cash and the remainder in YELL stock. YELL closed lower by .11 at 52.93, while USFC lost .54% to close at 45.74.

The story of this quiet day seemed to be AAPL's consideration of INTC as the next supplier of its chips, a move that would oust IBM. AAPL was sharply higher throughout the session, with analysts discussing the prospect as one that would save it all kinds of money and render AAPL's pricey computers more accessible to consumers. INTC rose, though not nearly as impressively, tacking on just over 1% at the session high. IBM, despite rumors of its potentially losing AAPL's business, rose as well. For the day, AAPL finished higher by 5.89% at 39.76. INTC gained 15 cents to close at 26.50, at multimonth highs, and IBM added a dime to close at 76.51.

Tomorrow, Consumer Confidence will be released at 10AM, but all eyes will be on the FOMC minutes to be released at 2PM. On Wednesday, Durable Goods and Home Sales are scheduled, but Thursday will see the real heavyweights, GDP and Initial Claims. Treasury Secretary John Snow will testify before the Senate Banking Committee on the recent Foreign Exchange Report that day as well. Personal Income and Spending, as well as Consumer Sentiment are scheduled for release on Friday. 

There was some discussion this morning in the Market Monitor concerning various technical indicators that are at levels commensurate with a top. The gist of this was that under normal conditions, the indicators will mark the top of a move, and price will have a respectable chance of complying. Currently, there are strong bearish divergences on the daily and longer intraday tiemframes, with weak volume and a general feeling of overextension, all of which suggest a downside move to follow imminently. On the other hand, the bullish action of longer term cycles turning up would cause these daily and intraday cycles to trend in overbought, and could cause all of the indicators that usually work so well to max out as the overall level of the market rises. While this type of trending move is less common, it is very unhealthy to get caught on the wrong side of one. 

For that reason, caution is warranted for bears and bulls alike. The market will tip its hand. Downside is certainly due, possibly corrective, possibly impulsive. It may not come at all. If the downside supports noted above do not break shortly, then the market is demonstrating a clear upside bias, particularly given the toppy, divergent daily cycle indicators. Tight stops and attentive account management are the rule until the market confirms or rejects last week's direction.

 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
None None

New Calls

None today.

New Puts

None today.


Play Updates

In Play Updates and Reviews

Call Updates

Amerada Hess - AHC - close: 91.15 chg: +1.09 stop: 86.25

A rebound in crude oil prices and positive broker comments and an upgrade for oil giant Exxon Mobil (XOM) helped fuel a rally in the oil sector. The OSX oil services index added 1.35 percent while AHC paced the sector's gains. While crude oil does look very oversold from its recent highs near $60 a barrel (looking at the July contract) it remains a tempting prospect to buy a bounce. We remain cautious on shares of AHC. There has been a lot of talk about market professionals suggesting investors rotate out of energy stocks and into technology stocks. We're not suggesting new plays in AHC at this time and we are modifying our target to be $93.50-94.00 to adjust for AHC's descending channel pattern. 

Picked on May 17 at $ 89.41
Change since picked: + 1.74
Earnings Date 07/27/05 (unconfirmed)
Average Daily Volume = 1.6 million 

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Amer. Intl Group - AIG - close: 53.45 chg: -0.31 stop: 52.49

There is nothing new to report on for AIG although there was another story about employees of AIG being subject to a criminal probe by authorities. We remain on the sidelines waiting for AIG to breakout over resistance at the $55.00 level (and thus surpassing its 50-dma). It's very possible that AIG will not breakout and the MACD indicator could be suggesting that AIG is preparing to turn lower. Our trigger to buy calls is at $55.05. 

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/09/05 (confirmed)
Average Daily Volume = 15.5 million 

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Caterpillar - CAT - close: 94.04 chg: +0.41 stop: 89.00

We see no change from our previous update on 05/22/05. We still suggest watching for a dip as the market looks short-term overbought.

Picked on May 18 at $ 92.35
Change since picked: + 1.69
Earnings Date 04/20/05 (confirmed)
Average Daily Volume = 2.8 million 

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Career Education - CECO - close: 35.14 chg: +0.44 stop: 32.45

Ding! We have been triggered in CECO. The stock actually gapped higher this morning to $35.24, which is above our trigger to go long at $35.05 so we are adjusting our entry. The move follows some positive broker comments after digesting CECO's recent shareholder meeting. While we like the bullish breakout over resistance at $35.00 and its 200-dma we would suggest that traders be patient and look for a probable dip back toward the $34.00-34.50 region and buy a bounce there (or even a dip to the $33.50 level if the market declines too quickly). 

Picked on May 23 at $ 35.24
Change since picked: - 0.10
Earnings Date 05/02/05 (confirmed)
Average Daily Volume = 2.5 million 

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Federated Dept Stores - FD - cls: 69.48 chg: +0.62 stop: 64.45 

Almost there! FD added another 0.9 percent on Monday and is quickly approaching our target in the $69.95-70.00 range. In the weekend update we suggested that more conservative traders consider an earlier exit in the $69.50-70.00 range and FD hit $69.50 this afternoon. While we are holding out for a target closer to the $70 level a quick glance at the RLX retail index suggests that exiting early may be a good idea. The market is short-term overbought and due for a dip. We are not suggesting new bullish plays in FD. 

Picked on May 17 at $ 66.60
Change since picked: + 2.88
Earnings Date 05/11/05 (confirmed)
Average Daily Volume = 2.9 million 

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Eli Lilly - LLY - close: 58.72 change: -0.18 stop: 57.99 

LLY's relative weakness today is discouraging and we're starting to think we may need to exit early here. There was an early rally Monday morning but shares failed near $59.50. The company issued a press release today with positive news regarding a clinical trial of its Cialis drug for ED patients. We are not suggesting new plays at this time and if we don't see signs of strength soon we'll exit, maybe as early as tomorrow. We'd rather rotate out of LLY and into something that is moving.

Picked on May 04 at $ 60.15
Change since picked: - 1.43
Earnings Date 04/18/05 (confirmed)
Average Daily Volume = 4.7 million 

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Reynolds American - RAI - cls: 82.87 chg: +0.20 stop: 77.95

No change from our previous update on 05/22/05. We're still suggesting that readers look for a dip before considering new bullish positions.

Picked on May 16 at $ 81.31
Change since picked: + 1.56
Earnings Date 04/27/05 (confirmed)
Average Daily Volume = 866 thousand 

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United Technologies - UTX - cls: 107.64 chg: +2.49 stop: 102.45

Wow! We expected UTX to be strong but we didn't expect to be triggered so soon. Over the weekend we added UTX with a suggested trigger point to buy calls at $106.25. This would put UTX above resistance at the $106 level. Shares soared on Monday for a 2.3 percent gain to close at a new all-time high. Today's breakout helped produce a new triple-top breakout buy signal on its P&F chart, which now points to a $131 target. Our target is the $114.00-115.00 range. Readers can choose to chase the breakout or a better strategy might be to wait for a dip back toward the $106 level, which should now act as short-term support.

Picked on May 23 at $106.25
Change since picked: + 1.39
Earnings Date 04/20/05 (confirmed)
Average Daily Volume = 2.0 million 

Put Updates

Precision Castparts - PCP - cls: 75.73 chg: +1.08 stop: 75.05

No change from our previous update. We are still waiting for PCP to breakdown under support 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

Dropped Calls

Hovnanian - HOV - close: 58.53 chg: +1.71 stop: 52.49 

The drop in bond yields today helped push mortgage rates lower yet again and traders bought the housing sector. This pushed HOV to an intraday high of $59.32. That's enough to hit our target in the $59.00-60.00 range. The $60 level looks like round-number resistance where shares failed back in early March. Traders who haven't exited yet can probably expect some profit taking in HOV, especially if the major averages take a dip.

Picked on May 06 at $ 54.26
Change since picked: + 4.27
Earnings Date 05/31/05 (confirmed)
Average Daily Volume = 1.2 million 

Dropped Puts

MGIC Invest. - MTG - close: 61.07 change: +1.02 stop: 61.11

As we feared over the weekend the market's strength finally helped push MTG through resistance near its 50-dma, the $61 level and the top of its descending channel. We've been stopped out at $61.11. 

Picked on May 15 at $ 58.91
Change since picked: + 2.16
Earnings Date 04/14/05 (confirmed)
Average Daily Volume = 742 thousand 

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Parker Hannifin - PH - close: 61.60 change: +0.93 stop: 62.01

Hmm... we cannot find any news or catalyst to explain it but shares of PH surged higher after the open this morning to push through technical resistance at its 50-dma and price resistance near $62.00. The move also temporarily pushed PH above its six-month trendline of resistance. We have been stopped out at $62.01. The fact that PH failed to close over the $62.00 level may suggest this is just another test of resistance or that the stock is building a slightly ascending channel or trading range. 

Picked on April 28 at $ 59.08
Change since picked: + 2.52
Earnings Date 04/18/05 (confirmed)
Average Daily Volume = 1.2 million 

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