Apple and its forward-thinking Chief Executive Steve Jobs have been the apples of investors' eyes over the last several months. How quickly an apple can turn rotten, however, as APPL investors dumped the stock in after-hours trading yesterday, as reported by Jim Brown in last night's Wrap. During pre-market trading this morning, AAPL remained sharply lower, revealing how vulnerable markets were to declines once the shine had been dulled.
Pre-open earnings reports from HDI, AIT, FAST, HMT, MEG, MTG and MON were perceived as strong reports, but they couldn't ameliorate the disappointment. Neither could other developments, detailed below. After a short-lived attempt to bounce, markets rolled over and selling accelerated.
Annotated Daily Chart of the SPX:
Despite the damage done to the markets, AAPL managed to hold to its 50-sma, producing a long-legged doji for the day. That's a potential reversal signal but one that needs confirmation by a strong gain tomorrow, and preferably a gain that sees a gap higher in the morning.
Annotated Daily Chart of AAPL:
Anticipation that AAPL would unveil a video version of its iPod helped AAPL hold to that potential support. The new model was unveiled, a 30-gigabyte version that will be priced at $299 and a 60-gigabyte version priced at $399. Last week, one analyst had commented that a price above $299 might harm the outlook for rapid sales, a warning that AAPL seems to have heeded. That analyst posited that the first video content was likely to be music videos and video podcasts with movies possibly being introduced at a later time. In addition, Jobs introduced an iMac with remote-control access to music, movies and photos.
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Many had also considered Intel (INTC) lining up to be the next apple in their eyes as it sank into levels some considered attractive. During the pre-market period, Prudential Equity Group took the shine off that apple, too, along with dirtying up the whole semiconductor sector. Before the market opened, the firm downgraded INTC to an underweight rating from its previous hold rating and cut its price target to $20 from its previous $31. With INTC at $23.42 as of yesterday's close, that $31 target was long gone, but better late than never, some might propose. Despite already steep losses, there appeared to be room for more, and INTC dropped in pre-market trading on Instinet and then fell to a $22.79 low for the day, before bouncing and closing at $23.24, down 11.72 percent. Like AAPL, however, INTC was to produce a potential reversal signal, a candle that sprang up from that low of the day, leaving a long tail behind. That reversal signal also needs confirmation tomorrow.
Prudential cut the semiconductor industry's ratings to an unfavorable rating from its former neutral rating, and the SOX was to lose 0.39 percent.
Annotated Daily Chart of the SOX:
The RUT was an early decliner, too, dropping straight through the 50 percent retracement of its rally off the spring low, straight to the 61.8 percent level and almost to the weekly 72-ema. While the RUT also produced a spring on its daily chart, its daily candle was not a convincing potential reversal signal. Yet the weekly chart suggests that declines might soon slow, at least temporarily.
Annotated Weekly Chart of the RUT:
Like the RUT's bounce, the Nasdaq's tepid bounce was not particularly convincing.
Annotated Daily Chart of the Nasdaq:
Pre-market movers other than Nasdaq stocks INTC and AAPL had included Advanced Micro Devices (AMD), dropping after its earnings and revenue beat expectations, falling perhaps due to valuation concerns according to one source. AMD was to close 12.50 percent lower. Harley-Davidson jumped after Tuesday's after-the-close earnings report, and the stock closed 2.85 percent higher. Deutsche Bank upgraded GM to a hold rating from its previous sell rating, and GM climbed in pre-market trading, closing higher by 1.05 percent. While Deutsche Bank mentioned several already-known pressures on GM, the firm believed the bad news was already mostly priced into the stock.
Far from being the apple in investors' eyes lately, Microsoft (MSFT) was the subject of speculation in a Wall Street Journal article. Many thought that MSFT and Yahoo (YHOO) would announce the capability of their instant messenger services to communicate directly with each other, perhaps polishing up MSFT's outlook in investors' eyes. Although that announcement was made Wednesday morning, MSFT dropped 0.45 percent, and YHOO, 0.49 percent. The new service will support computer-to-computer Net phone calls, and will be launched in the second quarter of 2006. Reporters questioned whether a partnership with AOL had been considered and whether the new IM service would interoperate with Google's (GOOG) Google Talk. A spokesperson said that combining two IM communities had proven difficult and adding AOL would have intensified those difficulties, and further suggested that Google founders use the MSN/YHOO new service.
Pfizer (PFE) also did its part to add polish, at least to the Dow, leading the healthcare sector higher in earliest trading after the U.K.'s High Court of Justice ruled in its favor on one patent on Lipitor. The court said that generics could not compete until November 2011. PFE closed higher by 2.22 percent. Although it couldn't provide enough polish to close the Dow higher, the Dow did bounce off a potential support level pegged in last Wednesday's Wrap.
Annotated Daily Chart of the Dow:
It was going to take a lot to polish the reputation of Refco Inc.'s (RFX) chief executive Phillip Bennett after the WSJ speculated that he might have hidden the fact that he owes Refco hundreds of millions of dollars. The article proposed that he had used his control of an investment firm to pay a hedge fund in New Jersey to help him hide the fact that he owed that money. Later CNBC reports said that a third company might also be involved. Refco reported yesterday that Bennett had been put on leave and the money had been repaid. By early afternoon, reports surfaced that he had been charged with securities fraud. A research note by Fox-Pitt Kelton noted that Goldman Sachs might have legal exposure to the Refco case, perhaps as high as $208 million, and GS dropped 1.9 percent. The XBD dropped 2.3 percent.
FOMC Chairman Alan Greenspan did his best to polish up sentiment in a Wednesday morning speech before the National Italian American Foundation. Greenspan reiterated some thoughts from a speech given in late September, saying that the U.S. economy was flexible and could recover from stresses that might have caused recessions in previous periods. He pointed to the stability of the economy in the face of steep rises for oil and natural gas as one example of the economy's flexibility. Greenspan was only one of a number of FOMC members scheduled to speak throughout the day, through Governor Mark Olson's address at 3:45 ET in Vancouver. Olson was to comment that the industrial sector was beginning to recover, among comments on the need for Congress to address the budget deficit, perhaps by the adoption of new rules.
Like a consumer disdaining the wax put on grocery-store apples to make them shine, the Department of Energy was trying to take the shine from Greenspan's polishing act in the early morning period. Ahead of the natural-gas inventories release later in the week, the Department of Energy was reporting that U.S. households should expect a 48 percent increase in natural gas bills, with heating bills to rise 5 percent and propane heating bills to rise 30 percent. Although the crude inventories release had been delayed until Thursday because of the government holiday on Monday, crude muddied up those shiny apples, too, rising overnight and then climbing straight up into the resistance near $64.00. It paused there but closed at a one-week high. The energy services sector still remained the worse-performing sector today according to one source, with refiners still reeling.
The Mortgage Bankers Association shined up its report, too, noting for at least the second week in a row that its figures were steady. It released mortgage applications for the week ending September 30 at 7:00 EST. The Market Composite Index dropped 1.1 percent on a seasonally adjusted basis and 1.2 percent on an unadjusted basis, 1.8 percent below the year-ago level. This number measures mortgage loan application volume. The Purchase Index fell a seasonally adjusted 1.9 percent. The Conventional Index fell 1.8 percent but the Government Index climbed a strong 11.4 percent. Refi's increased by 0.1 percent, climbing to 44.5 percent of total applications. AMR's climbed to 29.8 percent of total applications. The average interest rate for a 30-year fixed-rate mortgage climbed to 5.94 percent from 5.85 percent of the preceding week. Points increased, too. The MBA noted that the spread between the interest rate for the 30-year fixed-rate mortgages and one-year ARM's was the lowest in more than four years.
Somewhat tied to the health of the housing industry is the health of retailers such as Lowe's Companies, Inc. and Bed Bath & Beyond. Tuesday, Credit Suisse First Boston cut its outlook on LOW to a neutral rating from its previous outperform and trimmed its price target to $66.00 from its previous $73.00. CSFB mentioned higher oil and gas prices, as well as other inflationary pressures. It also cut BBBY's outlook to a neutral one. LOW nevertheless managed a 0.62 percent climb, although BBBY dropped 2.38 percent and sector peer Home Deport (HD) fell 0.28 percent.
While the shine comes off some companies, brokers were digging into the bottom of the apple barrel and finding some apples that they deem ready for polishing. Before the open, Deutsche Bank upgraded Goodyear Tire & Rubber Co. (GT), Lear Corp. (LEA) and American Axle (AXL) on valuation reasons, and Johnson Controls, Inc. (JCI) at least in part due to belief that 2006 and 2007 earnings will be strong. GT fell 0.15 percent, and LEA, 1.01 percent. AXL climbed 0.66 percent, and JCI, a heftier 4.51 percent.
After-hours developments included speculation about an unexplained drop of nearly 13 percent in former apple-in-investors'-eyes company, Krispy Kreme (KKD). The company has not released any information that would clarify the drop as of the time this report was prepared. Systems distributor and storage products company Bell Microproducts (BELM) fell after warning that it would likely not meet analysts' forecasts for the third quarter. It expected earnings of 7-9 cents per share and revenue of $760 million, a shortfall from analysts' expectations of 16 cps and revenue of $832 million. Lam Research (LRCX) was climbing in after-hours trading after beating expectations for its earnings but disappointing on sales. Net income dropped to 35 cents per share from the year-ago 64 cents per share while revenue dropped to $320.9 million. Expectations had been for profit of 30 cps against revenue of $325 million. Supplier of thin-film disks Komag (KOMG) and Nabi Biopharmaceuticals (NABI) both climbed strongly in after-hours trading, with KOMB guiding earnings expectations higher and NABI announcing positive results on a study for its StaphVAC, a staphylococcus vaccine.
Earnings expected tomorrow include such diverse companies as Fairchild Semiconductor (FCS), Winnebago (WGO) and Capital Corp of the West (CCOW), with CCOW after the close and the other two before the open. Thursday's economic releases begin with the usual 8:30 release of jobless claims, but that time period will also include September's Import/Export numbers and August's Trade Balance. August's trade balance is forecast to widen to -$59.0-59.3B from the previous -$57.9B. With such steep declines into this report, there's the potential for a sell-the-rumor, buy-the-fact reaction, but steep declines can gain momentum that is hard to stop, and there's a further potentially market-moving release tomorrow. The crude inventories release was delayed for release until tomorrow, and should appear at its usual 10:30 time period. September's Treasury Budget will be released at 2:00, with that expected to expand to expand to $36.0-37.0B from the prior $24.6B.
Several indices and stocks printed potential reversal signals today, but those must be confirmed by strong performances tomorrow, and some still show the potential for further downside before they hit convincing support. I would pay particular attention to SPX 1171.50, Dow 10,195 and RUT 612-615, and the SOX 200-sma, as those indices have reached or approached levels at which some steadying might be expected. If those levels collapse, then longs are running for cover and far deeper declines might be expected. Recoveries of indices such as the RUT and SOX will be needed to buoy sentiment and send the Nasdaq higher, as it looks to be the shakiest of the indices right now. I'm watchful for the possibility of a bounce, but a countertrend bounce, and my hands got sliced up several times today trying to catch the falling knives. The wisest action may be to wait for bounce-and-rollover bearish entries, perhaps still several days away.
Biotech HOLDRs - BBH - close: 181.64 chg: -4.21 stop: 185.25
Why We Like It:
BUY PUT NOV 185.00 GBZ-WQ OI=1060 current ask $7.70
Picked on October xx at $xxx.xx <-- see TRIGGER
Teleflex Inc. - TFX - close: 67.30 chg: -1.55 stop: 69.01
Why We Like It:
BUY PUT NOV 70.00 TFX-WN OI= 10 current ask $3.80
Picked on October xx at $ xx.xx <-- see TRIGGER
Legg Mason - LM - cls: 102.59 chg: -2.46 stop: n/a
Why We Like It:
BUY CALL NOV 110.00 LM-KB OI=4414 current ask $1.65
This would put our investment around $2.40. Try not to pay more than $3.00. We plan to exit if either option trades in the $7.00 to $8.00 range, more than doubling our investment. Our time frame is five weeks.
Picked on October 12 at $102.59
3M Co. - MMM - close: 70.38 chg: -0.17 stop: n/a
Why We Like It:
BUY CALL NOV 75.00 MMM-KO OI=11157 current ask $0.45
This should put our investment around $0.80. We plan to exit if either option trades in the $1.60-2.00 range.
Picked on October 12 at $ 70.38
Verifone Holdings - PAY - cls: 19.98 chg: -0.02 stop: n/a
Why We Like It:
If you choose to play Novembers:
BUY CALL NOV 22.50 PAY-KX OI=132 current bid 0.20 ask $0.50
We would look for a $3.00 or better move in the stock.
If you choose to play Januarys:
BUY CALL JAN 22.50 PAY-AX OI= 38 current bid 1.00 ask $1.45
We would look for a $4.25-5.00 move in the stock.
Picked on October 12 at $ 19.98
Cardinal Health - CAH - close: 62.25 chg: -0.21 stop: 59.85
There is not much change in CAH. The stock continues to churn sideways above the $62 level like it has for the last couple of sessions. We are not suggesting new bullish positions in this bearish market environment. More conservative traders may want to think about exiting early if CAH trades under $62 or $61.
Picked on September 25 at $ 61.95
Pre Paid Legal - PPD - close: 39.02 chg: -0.49 stop: 37.85
Danger! We've been telling readers to look for a probable dip back toward the $39.00 level. PPD gave us that dip today. The problem is the lack of any attempt at a bounce. The move today also produced a small, bearish-engulfing candlestick, which is normally bearish. Keep an eye on the 200-dma near 38.88. We would not suggest new positions at the moment considering the bearish market environment. Wait for a new relative high over the 50-dma now at 40.38.
Picked on October 10 at $ 40.10
Ryland Group - RYL - close: 63.07 chg: -0.27 stop: 66.75
Wednesday marked another day of declines for the homebuilders. The DJUSHB index lost 1.49%. Shares of RYL spent most of the session churning sideways but its trend remains bearish. Our target is the $60.50-60.00 range.
Picked on October 05 at $ 65.70
(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)
General Dynamics - GD - cls: 119.44 chg: +0.03 stop: n/a
We continue to see no change from our weekend update. GD is a strangle play. We're trying to capitalize on any post-earnings reaction. The company is expected to report on October 19th and we will hold over the report. We are suggesting readers buy the November 125 call and the November 115 put.
Picked on October 09 at $119.59
O'Reilly Auto. - ORLY - close: 26.32 chg: -1.13 stop: n/a
ORLY was downgraded to a "neutral" rating by CSFB and the stock reacted by gapping lower at the open. Today's drop below technical support at its simple and exponential 200-dma's also produced a new MACD sell signal. Today's 4% decline is also a breakout from its neutral consolidation pattern, although our bias has been bearish and it's why we list ORLY with the puts. Readers should also note that now ORLY has broken out from its consolidation pattern we are no longer suggesting new entry points for this strangle play (where traders buy both an OTM call and an OTM put). ORLY is due to report earnings on October 26th. We will hold over the report.
Picked on October 09 at $ 28.23
BP Prudhoe Bay - BPT - close: 71.30 chg: -1.11 stop: 72.49
Looks like we should have stuck with the trigger over $80.00. Oil's rally on Tuesday failed to see any follow through on Wednesday. The energy sector experienced another strong day of profit taking as the OIX index lost almost two percent and the OSX services index lost about 1.6%. Shares of BPT followed with a 1.5% decline and a drop back toward support at the bottom of its trading range near $70.00. We've been stopped out at $72.49.
Picked on October 11 at $ 75.05
Bear Stearns - BSC - close: 101.46 chg: -1.89 stop: 102.49
Amazing! BSC just posted its eight straight day of losses. This looks like a new record for the stock. Helping push BSC to a new four-week low was a sharp 2.3% sell-off in the XBD broker-dealer index. Today's decline in the XBD broke through technical support at its 50-dma. Meanwhile shares of BSC fell through its own 50-dma and traded under its simple 200-dma on an intraday basis. Odds of an oversold bounce have grown very high especially with the stock testing its 200-dma but we have been stopped out at $102.49.
Picked on October 02 at $109.75
Cameco Corp - CCJ - close: 51.25 chg: -1.27 stop: 49.49
We're choosing to exit early in CCJ. The stock dipped to $50.20 and managed a meager bounce from the $50 level and its rising simple 50-dma. CCJ might manage to hold support at the $50.00 level but we're choosing to exit early to minimize the damage. Some of the technical indicators are suggesting further declines in the stock.
Picked on September 18 at $ 53.30
Cigna - CI - close: 108.86 change: -3.56 stop: 111.49
The action in Cigna looks very bearish! Yesterday the stock broke down below support at its simple 50-dma but it still had price support near $112. Today the stock continued to decline and this time fell through additional support at the $110 level and its simple 100-dma. Today's decline was fueled by very strong volume suggesting even more weakness ahead. Plus, today's loss also reversed its P&F chart into a new sell signal. We have been stopped out at $111.49.
Picked on September 29 at $116.51
Altria Group - MO - close: 70.92 change: -1.14 stop: 69.90
Another failed rally at the $73 level, a new closing low for the month, and a bearish engulfing candlestick all sound like a good reason to exit early in MO. The stock "should" still have support at the 50-dma near 70.65 and again at the $70.00 level but we're not counting on it in this market.
Picked on September 18 at $ 73.14
Black & Decker - BDK - close: 77.11 chg: -1.11 stop: 82.01
Target achieved. Another day of market declines was good news for the bears. Shares of BDK sank below short-term support at the $78 level and hit 76.03. Our target was the $78.00-77.00 range.
Picked on September 14 at $ 83.31
Wynn Resorts - WYNN - close: 42.77 chg: -0.98 stop: 45.11
It's just not our day for stop losses is it? Shares of WYNN rallied intraday to $45.25 before promptly turning tailing and losing 2.2% on the session to perform a perfect failed rally. Today's action looks like a new bearish entry point. The problem is that we have been stopped out at $45.11.
Picked on October 06 at $ 42.18
From my morning E-mail bag.
RESPONSE: Finding a bottom is sure harder than finding a top usually. Tops tend to 'hang' up there for some time very often. This is in the nature of investor habits and psychology. Most market participants are not playing the short side so there some less selling that goes on that way and tops tend not to be as abrupt.
Institutional investors especially tend to gradually accumulate stock and buy buybacks. They're used to this in a generally rising market. However, it may be that this market, given the break of some key longer-term trendlines, is no longer in the long-term uptrend in effect since the late-2002/early-2003 low.
When market 'sentiment' as you mention finely turns pessimistic-bearish and stocks keep falling, selling tends to come all at once. There is not more buying on pullbacks. Stock money is mostly 'herd' money, as the trend ITSELF tends to force more and more selling. Professional investment managers today manage so much money in equities.
These managers can't UNDERPERFORM their peers, at least not consistently, or they won't have their high paying job managing our funds anymore. Having been there I know that money talks!
What is our poor manager to do when the market heads south, but keep exiting some percentage of their stock portfolio as the market falls. There tends to be more dumping all at once this way as the institutions dump mega amounts of stock collectively. This used to be called "portfolio insurance". This selling then creates more selling and it snowballs, more likely to a SINGLE climatic low. But, the 'bell' rings at the bottom for very few!
Buyers never get faster out of the way as when getting a dose of FEAR about losing on stocks. It may just be paper profits that get shredded but it feels like a loss none the same. When Apple (AAPL) first got to $45 I suggested its sale to someone I advise and this person took a fat profit relative to their purchase price. Then when AAPL went to $55 it couldn't be helped that this person had some gnashing of teeth. Not me. Today's break could easily be the start of a slide that takes the stock back to $40. At 40 there will be many owners of the stock that would be HAPPY to sell at 45.
BBottoms tend more often than tops to complete themselves with a single sharp downward 'thrust'; these type turning points, bottoms in this case, can be aptly called a 'spike-low' and are most often referred to as 'V-bottoms'; or, V-tops in the case of tops, but this pattern is less common at tops. With bottoms there is a tendency to try to anticipate where the stock or index will reverse. With stocks it can sometimes be much easier.
If we look at just what the PRICE trend has been doing in the OEX weekly chart up above, it's clear that the market has stopped maintaining its same rate of forward/upward momentum; the falling 'fan' lines of up trendlines show visually the FALLING trend now.
The 'V' type pattern is common at reversal-bottoms. It reflects this tendency for the market to turn around and surge back up so quickly because so much stock has been dumped that, with the sellers 'out' of the market, relatively small amounts of buying drive prices up fast.
The most money is made when buying when no one else wants to. It's been forever this way in trading, going back to those rice markets in Japan. Not for nothing did they try to find patterns that suggested a (trend) 'turning point' high or low. If a low or high is true, the advantage gained is tremendous. It's all information. Rothschild got his carrier pigeon word that Napoleon was defeated at Waterloo and bought up cheap English bonds and started the family's banking fortune.
All this said it's darn hard to 'see' a final down-thrust that is scary and deep AS a bottom, and is also one you are going to buy into. The great traders do this, you can do, but it's helpful to develop some skill in technical analysis.
MORE ON THE OEX
The steepness of the recent decline is suggesting some 'panic' selling, which happens with most bottoms. How far this will go is just a guess. At 540 the OEX is likely to garner substantial buying interest in normal conditions. Given the oversold level on the RSI indicator, the market is oversold.
Tough to pick bottoms and this one is no exception! What gets me surer of an approaching reversal, is me going AGAINST the opposing view. I most like to buy index calls when traders have gotten much more bearish than was the case over the course of the Sept decline. We're much closer to that point and, speaking of down 'spikes', we just recently got a couple of sharp drops to close to an oversold ('extreme bearishness') reading. Bearish 'sentiment' or outlook is growing.
After even 1-day readings at the 'extreme' zones shown in the lowermost frame of the chart above, there is often a buying surge within 1-5 days after. The 'CPRATIO' line measures graphically the 'fear' part, in bearish phases. Two flavors on the Street of Dreams when they get extreme: bull markets where greed takes over good sense at major tops, versus bearish 'fear' of loss in bear markets.
I have an attraction now toward buying calls on a dip to 1480-1485, especially if it happened after a final build up of bearishness, as I've been writing about. A low in this area would be a double bottom, out of an oversold condition.
You can't know if it's going to be a double bottom, but if you risk to just UNDER the prior low, the upside when RIGHT (a strong rally follows) is huge relative to risk. Rallies like this tend to come after some major discouragement and we've had plenty.
If the prior 1485 low is taken the index goes OUT of the realm of how an uptrend is defined: higher rally peaks AND progressively higher pullback lows. NDX failed to make a new high above 1620-1630 it's true, but technically the index is not defined as being in a downtrend UNTIL a prior low is exceeded. Stay tuned on that!
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Today's Newsletter Notes: Market Wrap by Linda Piazza, Trader's Corner by Leigh Stevens, and all other plays and content by the Option Investor staff.
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