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Daily Newsletter, Tuesday, 07/19/2005

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Table of Contents

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

Market Wrap

IBM To the Rescue

IBM To the Rescue

IBM came to the market's rescue on Monday night with better than expected earnings. The Dow rallied nearly +100 points at the open and right back to the 10650 resistance we have seen hold firm for the last four days. The Nasdaq broke the 2160 ceiling and rallied higher on the hopes that other tech stocks were also blessed by higher profits. While the Dow weakened and rested on 10625 intraday support most of the day the Russell caught fire and rallied strongly. This small cap strength helped keep a bid under the blue chips and hold them at their highs.

Dow Chart - Daily


Nasdaq Chart - Daily


The economic news was mixed and sparse. New Residential Construction failed to reach consensus estimates and was flat for June at a 2.0 million unit annualized rate. Consensus was for another jump to as much as 2.10 million. Flat construction does not mean a slowdown in new homes. The 2.0 million rate is still strong. The lack of additional growth is likely due to the constant whining about a potential housing bubble. This could be putting a little doubt in some buyers about buying the top and having to wait years for values to return. It may also be putting caution in homebuilders about having surplus inventory on their books as fall approaches. Keeping the production at a strong but not outrageous pace also guarantees prices will remain firm as buyers compete for available homes.

Chain Store Sales rose slightly to +0.3% as a brief dip in gasoline prices provided some consumer relief. This was the third week of minor gains. Job growth is also putting more income into spender's pockets. The average sale rose slightly as consumers felt the oil cloud lift when the hurricanes failed to deliver knockout punches.


Monday's sell off came on very light volume of only 3.1B shares across all markets. This was over a billion less than last Thursday's 4.3 billion rate. Monday's breadth was 3:2 in favor of decliners. This was profit taking on a very minimal scale. It appeared nobody wanted to sell and everyone was waiting to buy the dip. The Tuesday rebound sent the VXO to a new decade low and bullishness was very strong. Analysts were tripping over themselves in an effort to get their forecast heard regarding good times ahead. With the Nasdaq and Russell breaking out over the lagging Dow and SPX it definitely appeared the bulls were alive and well.

The Nasdaq took its cue not only from the IBM earnings but also from a new survey release on Monday showing PC sales were exploding. IDC said global PC sales surged +16.6% in the second quarter with demand benefiting all hardware vendors. IDC had projected +12.3% growth over Q2-2004. Sales seemed to come from all geographic regions and across all product levels. U.S. growth lagged the global rate with only a +12% gain while Europe and Asia Pacific soared +20%. Dell saw global growth of +24% compared to HPQ growth of +16%. Dell's market share rose to 19.3% and HPQ held on to its 15.6% global share. Gateway sales jumped +26% although weak prior comparisons helped provide the boost. Apple was the growth winner at +37% for the quarter. Amazing how the Ipod revolution has rejuvenated Apple. IDC said global sales of 46.5 million PCs was the strongest second quarter in the last five years. The Gartner Group also released its study of Q2 and their numbers were slightly less. Gartner and IDC use different methods in determining sales growth.

The semi book-to-bill number came in at 0.93 for the fourth consecutive monthly increase. It is still not back to 1.0 and breakeven and shows chipmakers are still booking fewer orders than they are shipping. The order pipeline is improving but ever so slowly. We continue to hear that chip companies lack visibility for orders in 2006 but the SOX continues to climb. There has been a strong disconnect between reality and the SOX. However, with the positive news about global computer growth that picture may be changing. I view the B-T-B tonight as another weak positive as long as the number continues to climb. Eventually a demand cycle will appear.

Motorola announced earnings after the close at 26 cents and beat estimates by a penny. Ed Zander, CEO, said it was a very strong quarter with a 52% jump in earnings per share. MOT began its first stock buyback program in history during Q2. Sales of mobile devices jumped +24% during the quarter. MOT shares fell -$1.00 in after hours trading.

Where IBM, MER and AMGN pleased the street and investors, chip giant INTC spoiled the party. INTC reported a 33-cent profit, a +16% gain over the same quarter last year. Estimates were for a 32-cent gain giving them a slight beat. Unfortunately the whisper numbers were in the 35-36 cent range. Revenue was inline and guidance was inline. Given the upbeat PC sales surveys reported above there was a lot of expectation built into the stock. That expectation was removed promptly in after hours trading with the stock falling -1.25 from its closing highs at $28.84. That was a new 52-week high as investors hopped for an IBM style boost on positive results.

YHOO also announced earnings at 13 cents after items and exactly inline with estimates. Revenue was lighter than expected and investors were not pleased. YHOO gave guidance for Q3 in the range of $880-$930 million and analysts had expected $922 million. Guidance for Q3 earnings was given as $350-$380 million and this was below analyst's estimates of $390 million. YHOO stock was slapped down to $32.90 from its $38 close but that dip was immediately bought. YHOO rebounded to just over $34 when the initial smoke cleared but that still represented a -$4 drop from the closing levels. GOOG was dropped for nearly a -$10 loss in reaction to the YHOO news. GOOG recovered somewhat to $303 from a $310 close.

Intel Chart - 15 min


YHOO Chart - 60 min


AMGN Chart - 60 min


As you can see from the after hours drop in MOT, INTC and YHOO stock prices there was a lot of bullish expectations built into stock prices. Those expectations had built to an unreasonable level after the IBM results. You need to realize that IBM was expected to under perform so the strong results generated a strong short squeeze. MOT, INTC and YHOO were expected to beat estimates, strongly in the case of INTC and YHOO and the failure to hit the high bar resulted in a massacre in after hours trading.

On the flipside AMGN reported blowout earnings after the close and spiked +$6 in after hours. AMGN reported a +38% increase in profits and raised estimates for the year by as much as +40 cents. AMGN posted +88 cents for the current quarter and well above analyst's expectations for 72 cents. Had Intel or Yahoo had the same level of performance the results to their stock prices would have been much different.

As of Tuesday morning 86 of the S&P 500 stocks had reported earnings with 66 beating and 17 meeting estimates. Only 17 had missed estimates. So far the earnings surprises have been mainly on the upside and it is holding the markets at their recent highs. More commentators are beginning to focus on Q3 earnings currently estimated for +13.5% to 15% growth. Despite the better than expected earnings so far for Q2 the guidance is questionable given the higher expectations. It is still too soon to tell but by Friday we should have a good estimate.

Oil prices fell below $57 intraday losing about a buck but spiked back into positive territory just before the close and finished the day at $57.46. Oil stocks ended their three-day decline with some serious gains as oil earnings begin to appear. Diamond Offshore (DO) jumped +2.89, Noble (NE) +3.20 and Ultra (UPL) +2.80 with many others putting in rebounds nearing that +2 mark. Oil had declined on the lack of damage from Dennis and the prospects that Emily would not hit the Gulf fields. I suspect that the prices firmed on Tuesday as traders positioned themselves ahead of Wednesday's inventory reports. This is the inventory report that covers the week where platforms were shutdown in advance of Dennis. Up to 5 million bbls of production was said to have been lost due to the Dennis shutdown. Emily did shutdown 3 mbpd in Mexico's Campache Sound field as it roared through Mexican waters. The shutdown there lasted three days for nearly -10 mb of lost production. Much of that production comes directly to the U.S. This sets up next weeks inventory levels to also show a drop. On a side note BP says the Thunder Horse platform has been recovered and is no longer in danger. Got to be some sighs of relief from officials at BP with $2 billion of heavy iron floating upright again. That platform is expected to provide 250,000 bbls per day when it starts producing late this year. BP moved higher by a buck on the news.

December Crude Chart - Daily


IBM led the Dow at the open with a jump to $85.10 from yesterday's close at 81.88. That bounced eased later in the day to close at 83.74. Merrill Lynch also beat estimates and jumped from yesterday's close at $56.67 to open at $58.68. These two Dow performers got the day off to the right start but the Russell and the Nasdaq made the sprint to the close. Tomorrow's open could be very different. With INTC and YHOO trading down substantially there is likely to be some sympathy drops in the chip and Internet sector. Futures are trading down about -5 points in after hours. The conference calls are still in progress as I write this so anything is possible.

There are several potholes in our path for Wednesday in addition to the negative sentiment from tonight's earnings. Greenspan will give his biannual testimony to the House Finance Committee and the odds are good he will be hawkish on rates. His comments from earlier in the week suggested the Fed was still planning on raising rates possibly into 2006. He said the economy was improving despite the high energy prices and used several keywords indicating the Fed had not wavered. It is almost a 100% sure thing now that rates will be 4% by year-end and odds are growing that we will see 4.5% in 2006. The other pothole is the oil inventories on Wednesday. If there was truly a significant decline then oil prices could spike sharply.

We have more earnings ahead that could follow the Intel/Yahoo pattern. Wednesday has EBAY, QCOM, MO, UTX and about 200 more. Thursday is headlined by MSFT, GOOG, MRK and over 250 others. EBAY would be my next risk target followed by Google. EBAY has not been posting the kinds of growth numbers that please investors despite being a global monopoly of sorts. Google could report strong earnings but expectations are already sky high for that Internet gorilla. Both could post earnings that burst expectation bubbles.

The Dow tried twice on Tuesday to break overhead resistance highs and closed at 10663 on the strength of IBM and MER. Dow futures are indicating a -40 point drop at tomorrow's open but that could change before morning. This stall right at the highs with the VXO closing at a new decade low at 9.73 is a recipe for disaster given the investor disappointment from YHOO and INTC. Bullishness is extreme and bears are almost invisible.

The Nasdaq close at 2173 was ever so close to the 2005 high set on Jan-3rd of 2191. The tech stocks have failed to buckle under to any profit taking since that early July dip to 2050. The +123 point gain in just a couple weeks and ahead of the seasonal August swoon is simply amazing. Up until now earnings have been great and Intel and Yahoo earnings were still up strongly, just not as strong as investors had expected. Nothing has really changed in the Q2 earnings view other than some irrational hopes were dashed. How much impact that will have once the markets open tomorrow is unknown. Any weakness could be seen as a buying opportunity by the bad news bulls assuming they are not bloated from their strong July diet.

Our key index that we are watching for a confirmation signal is still the SPX. Today's move on the strength in IBM, MER and the rebounding oil stocks pushed the SPX to close just over 1229. The continuing recommendation is to remain cautiously long over 1225 and short under that level. With the futures down as I type this we could drop back below that 1225 resistance at the open. If sentiment has been damaged it is possible we could see 1220 again. Add in the Greenspan danger on both Wednesday and Thursday and any fallout from EBAY and this promises to be a volatile week.

SPX Chart - Daily


I still see Dow resistance at 10675 and SPX at 1225-1230, both levels being tested almost daily. The wild card is the Nasdaq with room to run to 2191. The Russell is also behaving very well with a new run almost to resistance at 670. Were it not for the impact of INTC and YHOO I would have thought we were in for a retest of the highs on both the Nasdaq and Russell this week. Now I would be surprised to see it and even more surprised if they were broken.

This is the week I had mentally targeted for a market turning point. So far it is shaping up well with extreme bullishness (VXO 9.73) running headlong into earnings that failed to please. Historically this is an ideal setup for the August slump. I have not changed my viewpoint and will continue to watch SPX 1225 as our signal point. Short below and cautiously long over that level. We are at a perfect inflection point where a real summer rally "could" break out or a real slump begin. I am thinking the odds are better for the slump as I am sure a lot of other traders and hedge funds are as well. With this many contrarians looking to short resistance at multi month highs it could easily backfire on them. The market exists to confound the maximum number of traders at any given time and that makes the next week or so particularly dangerous for both sides. Need further proof bullishness is excessive? A friend, who has not invested in several years, called today after the close to say he just bought Intel stock and it was going to the moon. I asked him why he bought it the day before earnings? The answer, "when do they announce earnings?" If dormant retail traders are being sucked back into the market without a clue as to why then the end could be near. Don't get married to your positions regardless of which direction you choose. Exit aggressively if the market goes against you.
 

 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
None FDX
  MMM

New Calls

None today.
 

New Puts

Fedex - FDX - close: 82.16 chg: +0.05 stop: 85.01

Company Description:
FedEx Corp. provides customers and businesses worldwide with a broad portfolio of transportation, e-commerce and business services. With annual revenues of $29 billion, the company offers integrated business applications through operating companies competing collectively and managed collaboratively, under the respected FedEx brand. Consistently ranked among the world's most admired and trusted employers, FedEx inspires its more than 250,000 employees and contractors to remain "absolutely, positively" focused on safety, the highest ethical and professional standards and the needs of their customers and communities. (source: company press release or website)

Why We Like It:
It may seem counterintuitive to add new shorts to our play list when many of the sector indices are hitting new relative highs. We see these new bearish play candidates as a chance to get prepared for the coming consolidation. The current rally is looking pretty long in the tooth so we're going to add a couple of stocks that have been showing a lot of relative weakness and already trending lower. The thinking here is that the market's strength has been stalling their declines and when the market finally runs out of gas these stocks (FDX and MMM) will pick up the pace on their declines. Now that doesn't mean you have to immediately buy puts on these. The market may continue up tomorrow or may be Thursday, who knows. What we do know is that these summer rallies tend to peak during the first week or two of earnings season. We like FDX because the stock is already showing a lot of weakness. The stock has been trending lower since March and really broke down in late June when the company missed its earnings estimates and guided lower. The action over the last three weeks looks like an oversold bounce and we see resistance at the $85.00 level. Technical oscillators are weak and its MACD is nearing another sell signal. The Point & Figure chart is bearish and points to a $71.00 target. We are going to suggest puts here and target a drop into the $77.00-76.00 range. Our time frame is six to eight weeks. The biggest risk we probably see with this play would be a serious decline in oil, which would translate to lower fuel costs for FDX.

Suggested Options:
We like the September strikes although Octobers, which have more volume and open interest, would work well too.

BUY PUT SEP 85.00 FDX-UQ OI=104 current ask $4.10
BUY PUT SEP 80.00 FDX-UP OI= 20 current ask $1.50
BUY PUT SEP 75.00 FDX-UO OI= 15 current ask $0.50

Picked on July 19 at $ 82.16
Change since picked: - 0.00
Earnings Date 06/23/05 (confirmed)
Average Daily Volume = 2.1 million

---

3M Co. - MMM - close: 74.92 change: -0.24 stop: 77.51

Company Description:
Every day, 3M people find new ways to make amazing things happen. Wherever they are, whatever they do, the company's customers know they can rely on 3M to help make their lives better. 3M's brands include Scotch, Post-it, Scotchgard, Thinsulate, Scotch-Brite, Filtrete, Command and Vikuiti. Serving customers in more than 200 countries around the world, the company's 67,000 people use their expertise, technologies and global strength to lead in major markets including consumer and office; display and graphics; electronics and telecommunications; safety, security and protection services; health care; industrial and transportation. (source: company press release or website)

Why We Like It:
MMM is another under performer that is not participating in the market's strength. Investors are concerned over MMM's profit growth and the reaction to its earnings out this past Monday has been pretty muted. Technically we notice that MMM has filled the gap from late June. Plus, shares are trading under its April-June trading range. We also see that MMM's Point & Figure chart is bearish and points to a $63.00 price target. Our initial target is the $70.00-68.00 range but we may adjust once the major indices finally begin to consolidate some of their gains. We'll start with a stop loss over Friday's high. Remember, you may want to wait a day or two before initiating new bearish positions here. The market may continue to rally for another day or two.

Suggested Options:
We like the September puts although the October strikes would also work well.

BUY PUT SEP 80.00 MMM-UP OI= 15 current ask $6.30
BUY PUT SEP 75.00 MMM-UO OI=377 current ask $2.55
BUY PUT SEP 70.00 MMM-UN OI=150 current ask $0.70

Picked on July 19 at $ 74.92
Change since picked: - 0.00
Earnings Date 07/18/05 (confirmed)
Average Daily Volume = 3.4 million
 


Play Updates

In Play Updates and Reviews

Call Updates

Chubb Corp - CB - close: 87.14 change: +0.38 stop: 84.99 *new*

CB's lack of participation in today's market rally has us thinking it may be time to exit this play. We're going to give it a couple of more days to perform or we're exiting. We are raising the stop loss to $84.99.

Picked on June 10 at $ 85.05
Change since picked: + 2.09
Earnings Date 07/26/05 (confirmed)
Average Daily Volume = 1.2 million

---

Coventry Hlth Care - CVH - cls: 71.55 chg: -0.56 stop: 69.49

The healthcare sector index (HMO.X) was one of the few sectors that closed in the red today. This relative weakness could be bad news for bulls here. We noticed that Aetna (AET) a popular stock in the sector broke down under round-number support today and fellow health insurer Cigna (CI)'s stock looks poised for more profit taking too. That leaves us feeling pretty cautious here with CVH, which is still bouncing above round-number support at the $70.00 level. There is only a couple of weeks left before CVH reports earnings so we hesitate to suggest new bullish plays.

Picked on July 05 at $ 72.75
Change since picked: - 1.20
Earnings Date 08/02/05 (unconfirmed)
Average Daily Volume = 1.0 million

---

Quanex - NX - close: 58.38 change: +2.44 stop: 54.99 *new*

We have good news to report today. NX really soared with today's market rally. The stock added 4.3 percent with a sharp rebound off the $56 level to break through minor resistance at the $58.00 level and close at new 3 1/2 month highs. The stock is nearing our target in the $59.50-60.00 range. We are raising the stop loss to $54.99.

Picked on July 07 at $ 55.10
Change since picked: + 3.28
Earnings Date 08/25/05 (unconfirmed)
Average Daily Volume = 337 thousand

---

Pediatrix Med Group - PDX - cls: 76.92 chg: +0.86 stop: 72.34

It was a mixed news day for PDX. The company pre-announced better than expected Q2 earnings today. Wall Street's consensus was at $1.11 for the quarter and PDX expects results at $1.14. We're surprised that PDX didn't respond more positively to this news. Also in the news PDX reported that it will be expensing $4.6 million in the third quarter and $5.5 million in the fourth quarter for 335,000 shares of stock it is awarding to some of its employees in part of its incentive compensation plan. We're going to keep the play open and will continue to target the $80.00-82.00 range.

Picked on July 11 at $ 76.10
Change since picked: + 0.82
Earnings Date 08/03/05 (unconfirmed)
Average Daily Volume = 158 thousand

---

Reynolds American - RAI - close: 82.10 chg: +0.20 stop: 77.75*new*

We see no change from our previous update. In the news UBS started coverage on RAI with a "buy" rating and a $100 price target. Our short-term price target is the $84.00-85.00 range. We are raising the stop loss to $77.75.

Picked on July 10 at $ 78.83
Change since picked: + 3.27
Earnings Date 08/01/05 (unconfirmed)
Average Daily Volume = 664 thousand

---

Toll Brothers - TOL - close: 56.90 chg: +0.60 stop: 51.98

The homebuilding sector hit yet another new all-time high today. TOL did as well with an intraday high of $57.31. That's getting pretty close to our target in the $57.50-60.00 range. We strongly suggest that more conservative traders consider taking some profits off the table here. We're not suggesting new plays at this time.

Picked on July 10 at $ 51.98
Change since picked: + 4.91
Earnings Date 08/22/05 (unconfirmed)
Average Daily Volume = 2.4 million
 

Put Updates

Ishares Global Energy - IXC - cls: 89.39 chg: +1.04 stop: 91.61

Heads up! The oil sectors surged today with the OIX index adding 1.2 percent and the OSX services index adding 3.7 percent. This helped pull the IXC to a 1.1 percent gain. We want to remind readers that this is an aggressive play and we may exit early if the IXC can breakout again over the $90.00 level. There is additional resistance near $91.50 but it wouldn't take much to see the oil group hit another new high. Our plan was to try and scalp some profit taking in the sector before the next leg higher.

Picked on July 14 at $ 89.15
Change since picked: + 0.24
Earnings Date 00/00/00
Average Daily Volume = 33 thousand

---

Martin Marietta - MLM - cls: 69.00 chg: +0.42 stop: 70.51

So far we remain on the sidelines. We're suggesting that traders wait for a drop under the $68.00 level before buying puts on MLM. Our trigger is at $67.85. Our target is the $63-62 range.

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/03/05 (unconfirmed)
Average Daily Volume = 313 thousand

---

Children's Place - PLCE - cls: 47.19 chg: +0.38 stop: 47.51

No change. We are still waiting for PLCE to breakdown under technical support at its 100-dma and price support at the $45.00 mark. Our trigger to buy puts is at $44.90. Our target is the $40.50-40.00 range.

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/11/05 (unconfirmed)
Average Daily Volume = 775 thousand

---

Wellchoice - WC - close: 69.49 chg: -0.64 stop: 72.51

It was an interesting session for WC today. The stock gapped higher and then quickly failed. This weakness on a day that the broader market was trading higher is good news for the bears. The two-day candlestick pattern looks like "dark cloud cover", which might suggest a bearish reversal here. It takes guts to open bearish positions with the market hitting new highs but this could be a new entry point to buy puts.

Picked on July 14 at $ 69.46
Change since picked: + 0.03
Earnings Date 08/03/05 (confirmed)
Average Daily Volume = 268 thousand
 

Dropped Calls

Fortune Brands - FO - close: 94.58 chg: -0.05 stop: 90.51

Target achieved. Another strong day for retail stocks was a boon for FO. The RLX retail index actually hit a new all-time high today. Shares of FO followed suit and hit its own new all-time high at $95.87. Our target was the $95.00-96.00 range so we're closing the play. Don't forget that FO is due to report earnings on Friday.

Picked on July 03 at $ 90.51
Change since picked: + 4.07
Earnings Date 07/22/05 (confirmed)
Average Daily Volume = 648 thousand

---

Rio Tinto - RTP - close: 125.01 chg: +0.63 stop: 123.33

Nimble traders may want to give RTP another look here. We were stopped out this morning on the gap lower but RTP did bounce from its simple 50-dma. The entire session painted a small bullish engulfing candlestick, which may prove to be a new bullish entry point. While we are stopped out at $123.04 (this morning's opening trade) we hope some of our readers did exit for a profit (we suggested multiple times) when shares traded near $128 last week.

Picked on June 27 at $123.33
Change since picked: + 1.68
Earnings Date 08/03/05 (unconfirmed)
Average Daily Volume = 160 thousand
 

Dropped Puts

None
 

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