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Daily Newsletter, Wednesday, 11/16/2005

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Trader's Corner

Market Wrap

Driving in Circles

Equities started on a northward path this morning, but that path played out soon. Equities reversed and headed south, only to turn around again and end up only slightly south of where they started.

Indices dropped into the release of the crude inventories number and drove north with grinding gears afterward. Recent market leader, the Dow Jones Transports, drove both directions with the others, navigating across oil slicks, buffeted by winds from the airlines heading lower.

That inventories release revealed an unanticipated drop in crude and gasoline supplies. Coupled with a monthly update by OPEC that raised its forecast for oil demand for 2005 and 2006, the worse-than-expected inventories release sent crude higher, creating a slick place on the path that had been leading indices northward.

Annotated Daily Chart of the TRAN:

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

Annotated Daily Chart of the SOX:

The EIA reported that crude inventories declined by 2.2 million barrels, still remaining well above the average range for this time of year. Gasoline inventories fell 0.9 million barrels, with those inventories now in the middle of the average range for this time of year. Distillate fuel inventories increased 2.6 million barrels, with distillates in the lower half of the average range for this time of the year. After the release, many indices dropped toward or below yesterday's low and then commenced a coiling action. Even before the release, crude prices had been rising toward the 200-sma on the contract for December delivery, with that 200-sma at $58.34.

Equities didn't react to pre-market releases. October's CPI rose 0.2 percent, with higher food, medical care and shelter prices prompting a rise that was deemed higher than expected by some sources and in line with expectations by others. Core CPI, excluding food and energy prices, also rose 0.2 percent, higher than the typical 0.1 percent increases seen in recent months. The S&P 500 e-mini traded at 1232.50 immediately before the release, but then rose in what was termed a muted reaction, visually depicting the lack of reaction.

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Another release verified information garnered from last week's results. Inventories at U.S. businesses are dropping to record low numbers when compared to sales. September's inventories rose 0.5 percent, but sales climbed 0.6 percent, with the resultant inventory-to-sales ratio of 1.25 months showing a tightening. However, that 0.5 percent increase in inventories was more than the expected 0.3 percent, so even this positive number was muffled by some under-the-hood components. Part of that inventories increase was driven by a 2.1 percent increase in retail auto inventories. The retail inventory-to-sales ratio rose to 1.46 months from 1.45 months rather than dropping as did the overall number. Despite the troubling rise in the retail ratio, economists speculate that the overall number will result in a revised-higher GDP for the quarter that ended in September.

Other data in a separate release indicated strong foreign demand for U.S. bonds. That information won't be new to readers of OptionInvestor's pages, however, as Jonathan Levinson has been reporting on those treasury auctions. The TYX, the yield for 30-year bonds, dropped through the daily 21-ema, with that average having supported the TYX since September 8. Some monies were clearly being allocated to bonds today, with bonds trading in inverse relationship to yields.

If pre-market economics releases didn't seem to impact the markets, an earnings release, a warning and other developments might have done so, pressuring techs and non-techs both. Blue Coat Systems (BCSI), a Nasdaq component, dropped heavily after its disappointing earnings and guidance Tuesday after the bell. Oracle's (ORCL) acquisition of Thor Technologies and OctetString pressured that stock, too, not helping the Nasdaq.

American Express (AXP) pressured the financials, with the company saying that economists' expectations for the company were far too optimistic. Some commented that the downturn was partly due to the one-time effect of the new bankruptcy law. General Motors (GM) also dragged down the Dow, OEX and SPX, with GM being a component stock of all three. Headlines noted that the stock hit a 14-year low this afternoon.

The HMO, the Morgan Stanley Healthcare Index, and the UTY, the Utility Sector Index gained, but metals and oil majors were among the biggest gainers. The CRX, the Morgan Stanley Commodity Index, climbed 1.55 percent, and the XOI, the AMEX Oil Index, rose 1.55 percent. Components of the DJUSHB, the Dow Jones Home Construction Index, attempted to support markets, rising 1.44 percent. The housing industry was again in the news with D.R. Horton (DHI) reporting earnings and raising its forecast for the fiscal year ending next September. The company reported $1.77 a share on revenue of $5.1 billion, beating expectations for $1.63 a share and revenue of $4.7 billion. Although DHI could not hold onto all its gains, and printed a candle under its converging 200-sma and 72-ema, it posted a gain for the day.

About the same time as DHI's earnings release, the Mortgage Bankers Association released mortgage applications for the week ending November 11, with that release characterizing sales as steady during a week shortened by a holiday. Looking under the headline number showed a mixture of components increasing and decreasing from the previous week, but the four-week moving average for the seasonally-adjusted Market Index fell 2.9 percent; the Purchase Index, 1.4 percent; and the Refinance Index, 5.1 percent. The average contract interest rate for a 30-year fixed-rate mortgage climbed to 6.33 percent from the previous week's 6.31 percent, but points decreased.

Other companies reporting before the open included Tyco International (TYC) and retailers Big Lots Inc. (BLI) and Talbots (TLB). TYC doubled its profit in the fourth quarter and maintained its outlook for 2006, but missed expectations for $0.46 a share by four cents. It was light on revenue, too. The company reported further restructuring plans, and some articles characterized the company's report in glowing terms, an impression apparently shared by investors, who sent the stock higher, although it closed well off its $29.15 high. That early pop higher contributed to the early positive market sentiment.

TLB's report was characterized as an upside one. BLI's loss was not as deep as expected. The company said that softer sales and gross margins still challenge the company. Positive sentiment in the retailers helped hold the S&P Retail Index, like the DJUSHB, in positive territory even when other indices were showing losses.

In other pre-market reactions, Gilead Sciences (GILD) rose in pre-market trading after reports that it had settled a dispute with Roche Holdings (RHHBY). GILD had licensed Tamiflu to Roche in 1996, and the dispute involved that drug. RHHBY had dropped Monday after reports that two Japanese teens had died after taking Tamiflu, exhibiting strange behavior before their deaths. Roche denied that the drug had anything to do with their deaths, and the stock printed an inside-day candle yesterday.

By midday, the Senate Banking Committee had approved Ben Bernanke's nomination to be the next chairman of the Federal Reserve, with only one senator, Jim Bunning R-KY, voting against the nomination on grounds that Bernanke could be a Greenspan clone. Bernanke's own words raised that concern as he assured the senators yesterday that he would not swerve too much from Greenspan's policies. Bernanke wants to move slowly, base his decisions on economic and not political realities, and build a consensus. Many believe that he will have a difficult job, facing a need for budget constraints, for a trimming of the trade deficit and to engineer a soft landing for the housing market. The committee recommended his confirmation to the full Senate, where his nomination is widely expected to be greeted with a positive vote.

Earnings reported after the close included AMAT's, NTAPS and MDT's. As this report was prepared, AMAT was trading at $17.45, down from its $17.77 close. The report was characterized as beating expectations, although profit fell to $0.15 a share and sales dropped 22 percent. NTAP was trading at $29.40, down from its $27.88 close after reporting earnings of $0.21 a share on revenue of $483 million against expectations of $0.18 a share on revenue of $476 million. MDT was down to $56.00, from the close of $56.99 after reporting earnings characterized as in line with expectations.

Earnings are slowing, but tomorrow's include retailers such as GPS, FL and WMS. BEAS, DIS and SBUX also report tomorrow.

Tomorrow is a busy day for economic releases but not all will prove market moving. Initial claims and October's building permits and housing starts will be released before the market open, at 8:30. October's capacity utilization and industrial production will be released at 9:15, with those numbers of some importance to the market, especially as sales-to-inventories figures show a need to ramp up production. Natural gas inventories will be released at 10:30. The November Philly Fed, probably the most closely watched of all tomorrow's numbers, will be reported at noon.

The doji printed on many equity charts demonstrated the indecision in the markets, indecision that might be complicated by the usual pin-them-to-the-number action typical of an option-expiration Thursday. Several indices ended the day perched just above their 10-sma's, including the TRAN. As is shown below, the crude contract for December delivery ended the day just below its 10-sma.

Annotated Daily Chart for Crude, December Delivery

Bulls and bears are unsure what will happen next with crude and how that might impact equities. Will a rise in oil majors help indices or will the fear of inflation due to higher crude drive equities lower? Is crude just rising to retest former resistance and will prices roll lower temporarily again, dropping the oil majors that have helped support markets? For tomorrow, that indecision might result in choppy market action. If inclined to trade, the crude contract and TRAN might be watched, with market sentiment toward equities perhaps worsening if the TRAN sustains a move below its 10-sma and crude sustains a movement above that average on its chart. A move to retest recent index highs cannot be precluded, but if there's a bounce, bullish profits should be protected as recent highs are approached. On rollovers below the 10-sma's, or to the 10-sma in the case of the Dow, likely bounce points have been marked on the charts. For tomorrow, the best benchmark on the SPX and Nasdaq might be bullish above the 10-sma and bearish below it, with the knowledge that ranges might be tight and choppy. Be particularly careful of drawing too-quick impressions in the early morning period, as professionals have been particularly active in driving the market one direction or the other, only to see a reversal after the first thirty minutes or so.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
AHC None None

New Calls

Amerada Hess - AHC - close: 128.49 chg: +3.55 stop: 121.49

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

Why We Like It:
We remain long-term bullish on the oil stocks but with the crude oil prices in a two-month bearish trend we've been hesitant to suggest new bullish positions in the sector. Thus this new play in AHC should be considered a more aggressive, higher risk strategy. We like AHC because the company also has exposure to the natural gas markets. Natural gas is still poised to turn higher as we move deeper into the beginning of winter, especially with significant amounts of our domestic natural gas production still offline in the gulf of Mexico. AHC's daily chart is starting to shows of a new up trend and today's gain pushed the stock over technical resistance at its simple 50-dma. The Point & Figure chart for AHC is very bullish with a clear buy signal and a $160 target. We are going to target a move into the $139.85-140.00 range over the next eight weeks. We'll start the play with a stop at $121.49 but we'd seriously consider exiting if AHC traded under $124.50. We do expect some resistance near 131.50.

Suggested Options:
We are going to suggest January calls.

BUY CALL JAN 125.00 AHC-AE open interest=614 current ask $9.60
BUY CALL JAN 130.00 AHC-AZ open interest=543 current ask $6.90
BUY CALL JAN 135.00 AHC-AY open interest=478 current ask $4.80

Picked on November 16 at $128.49
Change since picked: + 0.00
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume = 1.9 million
 

New Puts

None today.
 

New Strangles

None today.
 

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