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Daily Newsletter, Thursday, 06/30/2005

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Table of Contents

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

Market Wrap

Hello This is the FOMC, Please Hold

Hello This is the FOMC, Please Hold

That's essentially what the market did for the past day and a half. I don't think anyone expected any surprises from the Fed but no one was willing to place their money on the table until we got past the FOMC rate announcement, or more importantly policy announcement. So the equity and bond market went on hold today until we got the announcement past us (no surprise, a +0.25% rate increase, maintain their accommodative policy with a measured pace, etc.). The market then did its usual cha-cha-cha dance into and after the FOMC announcement and sold off into the close. Prices dropped down near Monday's lows so now we're left wondering if we'll get a double-bottom test (some bullish divergences support that idea), or if we'll just continue lower tomorrow. Maybe the charts have some answers. As the Fed talks about inflation and the need to control it, and have us watching what the right hand (interest rates) is doing, what we don't see is what the left hand (M-3 money supply) is doing which is stuffing the money channel to combat something else they see in the economy and it's certainly not related to inflation. And while we print a lot of money, foreign bankers are forced to follow suit so the problem we're creating isn't just our own. I think it may be one reason the ECB is fighting off efforts to lower interest rates to combat a slowing European economy. They know they're already fighting it.

The net result of the FOMC meeting is that the Federal Reserve's policymaking committee left its statement largely unchanged from May's statement. The committee said current rates remain "accommodative" and said once again that it believes rates can be raised at a "measured pace." The FOMC slightly modified its assessment of the economy from the May statement, reflecting more moderate inflation data. 
"Although energy prices have risen further, the expansion remains firm and labor market conditions continue to improve gradually," the committee said. "Pressures on inflation have stayed elevated, but longer-term inflation expectations remain well contained."
The vote to raise rates was unanimous. It was the ninth straight meeting at which the FOMC raised rates by a quarter point after the fed funds reached a four-decade low of 1% in mid-2003. The bond market voiced their opinion about the Fed's move by displaying with their finger how many friends the Fed has, and proceeded to drive interest rates lower by rallying bond prices.


There are some potentially bullish things happening in the market on a short term basis and leads me to believe we could get a rally over the next couple of weeks. But Monday's lows need to hold. They can break a little as long as the market doesn't stay below them and doesn't break it by a lot. I think a rally at this point would surprise a lot of bears and may in fact be a reason why we'll get a rally--short covering always helps fuel the fire. But looking under the hood of the market shows some ominous things brewing down there. And if more traders start getting very nervous, we may not have a pretty summer for the bulls. We all have heard and know how deeply in debt our country, companies and consumers are. Our current account deficit is in horrible shape. When interest rates start jacking up again, and so far the bond market has been resisting the Fed on this, everyone will feel the pinch. Oil prices are still near record highs even after a pullback, and they're probably headed higher. High energy prices are a not-so-hidden tax on everyone which will be especially aggravating as we head into next winter.

Additionally, companies have significantly under-funded their pension plans over the years. The latest large company to shed its pension plan was United Airlines in order to help itself get out of bankruptcy. They won't be the last. Most airlines are in the same airplane and now have a problem competing against the likes of United since United no longer has the burden of carrying an under-funded pension plan (we the tax payers are taking on the burden through the also under-funded Pension Benefit Guarantee Corp, PBGC). Watch for most of the airlines to follow suit. Northwest is already talking about it. The PBGC is telling the Senate that the number of pension plans that are more than $50 million short of promised benefit levels has risen from 221 in 2000 to 1,108 in 2004, and that those funds have an average of just 69 percent of promised benefits on hand. The PBGC also estimates that the under-funding of traditional defined-benefit plans deepened by $100 billion last year, to a total of $450 billion. The federal PBGC itself has net funding of only $39 billion dollars to meet its obligations, indicating that should the defaults start rolling in congress will need to provide additional funds to keep pension recipients from losing their retirement nest eggs completely.

The Senate is considering several fixes but will likely fund additional pension relief through additional borrowing, a prospect that could add to upward pressure on interest rates, should the money be borrowed from domestic sources. Under-funded pension plans rose significantly in the past few years primarily from over inflated estimates for what the funds would be able to generate in the market place, such as upwards of 9% returns. As a comparison the top 100 corporate pension funds earned an average annual investment return of just 1.3 percent between the end of 1999 and the end of 2003. This higher expectation allowed companies to overstate their pension funding and allowed them to stop contributing since they believed the market would do the contributing. This problem is getting a lot of attention at the moment but unfortunately it's been years in the making and there will be a lot of pain before it gets better. The bottom line is that it will become another burden on the public either by loss of pension accounts, additional taxes or higher interest rates, and probably a combination of all the above.

So we've got some darkening clouds approaching and if trader mood starts to sour because of all these dark clouds, the longer term picture could change bearish earlier than I had been thinking. I'd really like to see a rally into mid-July to fulfill some timing and Fibonacci targets. In the meantime let's see what we can glean from the charts for tradable action tomorrow and into next week. Remember that tomorrow is the last day before a long weekend and therefore could be a very quiet trading day. Just what we need.

DOW chart, Daily


Another red candle after only 1 green one does not look bullish here. The new trend line up from March 2003 through the April low, currently sitting near 10255 would be a logical support level so any further decline tomorrow morning, watch to see if support is found there. Otherwise we could see the DOW challenge the April low.

SPX chart, Daily


SPX bounced off its 1191 support level (broke below it briefly on Monday) and is now back down testing it again. There are several moving averages just below that could support this index but a break below 1191 brings 1175-1180 into play. If we can get a bounce started tomorrow, the bullish up-channel remains in play.

Nasdaq chart, Daily


The NAZ continues to look more bullish than the blue chips which actually has me leaning bullish on the market. It looks like it's consolidating under some stiff resistance at 2100 in what could be interpreted as the right shoulder of an inverse H&S pattern, with the neckline at 2100. Right now it's fighting to stay above the recaptured uptrend line from October 2002 but if that can't hold then the 50 and 200-dma's are just below acting as a potential safety net.

SOX index, daily chart


Like the NAZ the SOX looks like it's consolidating and preparing for an assault on resistance just overhead. Its 50 and 200-dma's are just below, as is the recaptured uptrend line from October 2002.

BKX banking index, daily chart


While the blue chips are sporting potentially bearish looking patterns, the banks are looking more bullish (as are the brokers, see below). This index is currently bouncing between the 50 and 200-dma's but it looks like it's consolidating and preparing for an upside breakout.

XBD Securities Broker Dealer index, weekly chart


Jeff's closing comment in his Wrap last night caused me to look at this index and I was amazed to see how much it has soared. There is nothing bearish about this index. Well, maybe a few bearish signals are starting to show up--a negative divergence on this weekly chart is becoming apparent at the new price high but these divergences can take weeks to play out. In the meantime, I agree with Jeff's comment that a strong broker dealer index is not usually associated with a bear market.

This morning's economic numbers and announcements barely caused a ripple in the pre-market futures or in the bonds. That subdued response lasted most of the day until FOMC. May's personal income rose 0.2%, slightly below expectations (+0.3%) while last month's read of 0.7% was revised lower to +0.6%; personal spending was unchanged, versus forecasts of a 0.1% rise. More notably, the core PCE deflator rose 0.2% from 0.1% which left a 1.6% year-over-year rate, suggesting inflation is under control. Personal savings rate rose to 0.6% while real spending was flat versus +0.1% expected.

Initial claims fell a lower than expected 6K to 310K, the lowest level since April. The 4-week average fell 10,250 to 323,500 and continuing jobless claim rose 4K to 2.6M. New M&A activity should have boosted traders' morale some but again just a ho hum response. Bank of America (BAC) has agreed to acquire MBNA Corp (KRB) for $35B, a roughly 31% premium to yesterday's closing price. This helped KRB but hurt BAC and BAC hurt the DOW. The strength of the M&A activity has helped the broker dealer index as shown in its chart above.

At 10:00 we got the Chicago PMI which fell to 53.6 versus a consensus for 54.0. Despite the small decline, any level above 50 reflects positive growth and, more notably, the index is consistent with the 51.5 estimate for tomorrow's national ISM report. The Help Wanted index came in at 37 versus 40 expected.

If you wanted a more exciting market to play today, oil was the place to be today. After settling slightly at the open, it bounced a dollar and then sank nearly $2 before getting a bounce into the close. The oil pits must be having a lot of fun these days. Oil's chart looks like it could find support near its current price.

Oil chart, August contract, Daily


After making a new high above $60 this week, oil is pulling back. The daily oscillators are in hard down mode right now so it seems the pullback has further to go. But it has pulled back to the mid-line of its up-channel so we'll see if that provides support. The 50-dma at 54.60 would be the next logical support level.

Oil Index chart, Daily


As oil consolidates its gains so too does the oil index. Its correction actually looks a little less severe than oil's. The daily oscillators say more downside but so far it looks like only a correction and it should lead to another high once it's done.

Transportation Index chart, TRAN, Daily


The Trannies got a lift from lower oil prices. It has a lot of resistance just overhead between its 50 and 200 dma's and the downtrend line from the year's highs. I continue to view this index as one of the more bearish ones and may be the one giving us a heads up about what the broader market is doing. It could be leading us to the downside just as it has been doing--it topped out first and was the heads up that not all is well with the economy. This is exactly how the DOW Theory came about from Mr. Dow's observations.

U.S. Home Construction Index chart, DJUSHB, Daily


The housing index has been attempting to bounce back up to its high but the daily oscillators are not supporting it. This bounces looks like a good short.

U.S. Dollar chart, Daily


The US dollar is also trying to bounce back up and recapture its high. But the pattern of the climb is now looking choppy and this is usually indicative of an ending pattern. The fact that the oscillators are not supporting the climb back up also looks bearish.

Gold chart, June contract, Daily


After a very bullish spurt to the upside, gold is pulling back some and the daily oscillators look like more downside to come. A pullback to its 50-dma at 430.50 would not be out of the ordinary.

Stocks closed out the last day of the second quarter almost exactly as it began on April 1--noticeably lower--as new M&A activity, falling oil prices and lower bond yields failed to offset another 1/4% rate hike and no indication as to when the Fed will cease. So many were hoping the Fed may provide a clearer picture as to when the tightening may come to an end and when it became apparent that more rate hikes were on the horizon, investors closed out their positions as nine out of ten economic sectors closed lower. 

Materials was the worst performing sector as investors pared losses in underperforming groups like steel, paper, diversified metals and chemicals as Q2 came to a close. Technology was weak across the board, as profit-taking in Oracle (ORCL 13.23 -0.33) following yesterday's 5.5% surge, overshadowed upside FY05 earnings guidance from BMC Software (BMC 17.96 +0.59). Consumer Staples was also under pressure, led by a 2.3% decline in Coca-Cola (KO 41.74 -0.96) and weakness in McCormick (MKC 32.53 -0.77), which beat analysts' forecasts by a penny but guided Q3 and FY05 earnings below consensus.

Despite falling bond yields, Financial was also weak, as a 2.8% decline in Bank of America, which is the second most influential component in the sector, weighed heavily on the sector. Morgan Stanley (MWD 52.47 -0.85) was also in focus, but confirmation that former president John Mack has been appointed as Morgan's CEO was greeted with mixed reviews, as the stock was off 1.6%. Industrials were also an influential leader to the downside, as a 7.0% surge in Boeing (BA 66.00 +4.33) shares was not enough to offset a 4.9% drubbing in 3M Company (MMM 72.30 -3.74)--Boeing named 3M Co. Chief W. James McNerney as its new CEO. Airliners got whacked (-3.29%). Green sectors included the Natural Gas index, the Utility Sector index and the DJ REIT index. Biotechs were even on the day.

Tomorrow's economic reports include the following:


Tomorrow could see a reversal of today's post-FOMC decline, a common enough occurrence to be watchful for it. The market is at important support levels so any further breakdown will not be good for the bulls. It would then be more clearly a time to short rallies. Until then be careful of continued whipsaws and tomorrow could be a little worse than usual since we can probably expect lighter volume as we head into a holiday weekend. Trade light, trade carefully and take profits early. Good luck.

 
 




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

AmerisourceBergen - ABC - close: 69.15 change: +0.55 stop: 65.57*new* 

Try as it might ABC's rally today fell short of our target of $69.50. The stock hit an intraday high of $69.46. We remain bullish and are encouraged by today's relative strength. More conservative traders may want to exit here to avoid any pre-weekend profit taking. We are raising the stop loss to break even at $65.57. Today ABC confirmed that it will report earnings on July 21st. 

Picked on June 13 at $ 65.57
Change since picked: + 3.58 
Earnings Date 07/21/05 (confirmed)
Average Daily Volume = 1.3 million 

---

Ashland Inc - ASH - close: 71.87 chg: +0.56 stop: 67.95 

ASH continues to be strong and added another 0.7 percent on above average volume today. Our target is the $74.75-75.25 range.

Picked on June 16 at $ 70.05
Change since picked: + 1.82
Earnings Date 07/25/05 (unconfirmed)
Average Daily Volume = 1.1 million 

---

Chubb Corp - CB - close: 85.61 change: -0.08 stop: 82.49

CB's loss of 8 cents today sounds like relative strength to us considering the DJIA's 99-point decline.

Picked on June 10 at $ 85.05 
Change since picked: + 0.56
Earnings Date 07/26/05 (confirmed)
Average Daily Volume = 1.2 million 

---

Rockwell Collins - COL - close: 47.68 chg: -0.09 stop: 46.49 

The DFI defense sector index was one of the few sectors that closed in the green today. We're disappointed that shares of COL didn't follow suit but the stock continues to look like a bullish candidate and its MACD is narrowing more closely toward a new buy signal.

Picked on June 27 at $ 46.75
Change since picked: + 0.93
Earnings Date 07/26/05 (unconfirmed)
Average Daily Volume = 800 thousand 

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Cummins Inc - CMI - close: 74.61 change: -0.58 stop: 70.95

No change from our previous update. Our target is the $77.50-80.00 range. 

Picked on June 19 at $ 74.03
Change since picked: + 0.58
Earnings Date 07/21/05 (unconfirmed)
Average Daily Volume = 970 thousand 

---

Coventry Hlth Care - CVH - cls: 70.75 chg: -0.99 stop: 68.49

No change from our update on Wednesday. We are suggesting a trigger to buy calls at $72.75. Our target is the $77.50-80.00 range.

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/26/05 (unconfirmed)
Average Daily Volume = 1.0 million 

---

Fording Candn Coal - FDG - cls: 92.20 chg: +0.40 stop: 88.49 

No change from our previous updates.

Picked on June 19 at $ 90.30
Change since picked: + 1.90
Earnings Date 07/25/05 (unconfirmed)
Average Daily Volume = 384 thousand 

---

Rio Tinto - RTP - close: 121.92 chg: -1.89 stop: 119.99

The action in RTP today doesn't look very healthy. The stock is testing its recent low and support near the 40 and 50-dma's. Traders may want to turn defensive. If RTP trades under the June 27th low of $121.45 then we would expect it to test the $120.00 level as support or its 200-dma at $120.25. We would not suggest new positions here. Wait for a bounce.

Picked on June 27 at $123.33
Change since picked: - 1.41
Earnings Date 08/03/05 (unconfirmed)
Average Daily Volume = 160 thousand 

---

SLM Corp - SLM - close: 50.80 change: +0.56 stop: 48.95

We would be long calls on SLM with the stock above the $50.00 level but we would hesitate to initiate new positions with the major averages sinking.

Picked on June 20 at $ 50.92
Change since picked: - 0.12
Earnings Date 07/14/05 (unconfirmed)
Average Daily Volume = 1.8 million 

---

Molson Coors - TAP - close: 62.00 chg: +0.62 stop: 59.49

No change from yesterday's update. TAP continues to show relative strength and is challenging resistance near the $62.00 level and its simple 50-dma. Actually, if you want to be technical, TAP has broken through its simple 50-dma, which is at 61.95. If the broader indices continue to sink we would expect TAP to retest the $60 region as support.

Picked on June 29 at $ 61.38
Change since picked: + 0.62
Earnings Date 07/28/05 (unconfirmed)
Average Daily Volume = 909 thousand 

---

Wellpoint Inc - WLP - close: 69.64 chg: -0.02 stop: 65.90 

WLP hit yet another new high today at $71.23 but it's having a terrible time holding on to any gains. If the major averages continue to sink we'd look for a dip back toward the $68.00 region.

Picked on June 05 at $ 68.40
Change since picked: + 1.24 
Earnings Date 07/27/05 (unconfirmed)
Average Daily Volume = 3.5 million

Put Updates

Ambac Fincl. - ABK - close: 69.76 chg: -0.90 stop: 71.51

Good news! It does look like yesterday was a failed rally at resistance and today's decline back under the $70.00 level looks like a new bearish entry point to buy puts. Our target is the $65.50-65.00 range but we do not plan on holding past ABK's earnings report.

Picked on June 26 at $ 69.62
Change since picked: + 0.14
Earnings Date 07/20/05 (unconfirmed)
Average Daily Volume = 992 thousand 

---

ESCO Tech. - ESE - close: 100.80 chg: -0.20 stop: 102.51

Our aggressive put play in ESE is still in hot water but we're encouraged to see that ESE is struggling under its three-week trend of lower highs. We would not suggest new bearish positions until ESE traded under $99 or $98 again.

Picked on June 26 at $ 97.80
Change since picked: + 3.00
Earnings Date 08/10/05 (unconfirmed)
Average Daily Volume = 102 thousand 

---

KLA-Tencor - KLAC - close: 43.68 chg: -0.20 stop: 45.76

The good news here is that the SOX semiconductor index did breakdown under support at the 420 level. The less than good news is that KLAC's 20-cent decline today was not the sort of follow through we were expecting on yesterday's breakdown. KLAC did close near its lows for the session and we remain optimistic that the stock is headed lower. If you're a technical trader the next immediate challenge is the 50-dma near 43.36.

Picked on June 29 at $ 43.88
Change since picked: - 0.20
Earnings Date 07/28/05 (unconfirmed)
Average Daily Volume = 5.4 million 

Dropped Calls

Goldman Sachs - GS - close: 102.02 chg: -0.77 stop: 101.89

Our bullish play in GS did not pan out very well. The breakout over resistance at the $104.00 level proved to be a bull trap. The stock continued to decline today and broke down under its exponential 200-dma. The technical oscillators for GS have turned sour and its MACD indicator is nearing a new sell signal. We also notice that the XBD broker dealer index's upward momentum has stalled and looks prone to profit taking. We would keep an eye on GS for a dip toward the $100 level. We are stopped out at $101.89.

Picked on June 28 at $104.35
Change since picked: - 2.33
Earnings Date 06/16/05 (confirmed)
Average Daily Volume = 4.8 million 

Dropped Puts

None

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