Santa failed to make his Wall Street appearance this morning and traders panicked as news of his demise hit the wires. It appears Santa's sleigh was shot down by the Canadian border patrol when he was mistaken for a terrorist during what Canadian officials are calling an "unscheduled border crossing." His sleigh full of goodies destined for Wall Street investors was confiscated by officials and will be held pending an investigation into the matter. Several reindeer managed to escape but three were caught in the hail of bullets. Their names are being withheld pending identification. However, none of the three had a red nose. Young children are advised to skip the news photo below due to the graphic violence depicted.
Santa and the unidentified reindeer fatalities
The markets opened with a bang on a sharp drop in energy prices but a brief inversion of the yield curve tempered those gains. It has been five years since the curve last inverted followed by a recession. The last four recessions were preceded by an inverted curve. Since 1954 a severely flattened or inverted yield curve preceded every recession and several severe economic slowdowns. This recession worry was given as a reason for the sharp sell off of the morning gains. In reality it was not selling by retail investors that caused the drop. There was a strong sell program triggered when the Dow rebounded to the December highs at the open and then failed to hold. The sell programs knocked the A/D line from +1258 to -2850 in a very short period of time for a net change of -4100 issues. The S&P rallied to 1271.83 and within four points of a new four-year high before imploding to suffer a significant loss back to near the bottom of the December range. It was not a pretty picture for the bulls and the severity of the selling could easily have ruined sentiment for the rest of the year.
Dow Chart - Daily
Nasdaq Chart - Daily
The falling oil prices caused funds to dump energy stocks they had been trying to hold until January. Many funds probably wanted to hold those energy winners until after the calendar expired in order to present the best possible shine to their year-end portfolios. The sharp drop in oil and gas prices sent funds running to the exits despite a minor rebound in oil prices towards days end. Previous big winners suffered huge losses as stop losses were hit as funds dumped positions. A sample of the big losers would be AHC -5.31, IMO -3.59, ATW -3.51, EOG -3.33, SLB -3.05, BTU -3.01, KMG -3.00 and STR -2.90. Many of those stocks were up +50% to +100% for the year and huge profits were at risk. Gas stocks were hit the hardest as warmer than expected weather was predicted for the next seven days. Natural gas prices fell from Friday's close at $12.28 to rest on $11 at the bell. This is a substantial drop from the $14.42 high last Wednesday (-23%) and the $15.78 high (-30%) just over ten days ago. This is a massive loss for natural gas prices and this time of year they are the driving force in the energy sector. Oil prices trade on a btu basis to natural gas during the winter and it is remarkable that oil closed down only -27 cents at $57.85 after trading as low as $57.30 intraday.
Crude Chart - Daily
Natural Gas Chart - daily
If you looked at a list of the top 100 losers today better than 80 of them were energy stocks but the other big drops came from other prior winners. Google (GOOG), Whole Foods (WFMI), Nutri Systems (NTRI), Hansen Natural (HANS), Garmin (GRMN), ITT Industries (ITT), PW Eagle (PWEI), Marchex (MCHX), Hurco (HURC), Franklin Resources (BEN), Terex (TEX), Freeport McMoran (FCX), Education Services (ESI) and Deere (DE) to name a few. The main reason these companies are on the list is profit taking into year-end. Some funds with big gains obviously got nervous and started taking profits early.
After the close the S&P announced changes to the S&P-500. CBX Corp (CBSwi) and the new Viacom Inc (VIA.Bwi) will replace Visteon (VC) and the old Viacom (VIA.B) at the close of trading on Friday. The "wi" means "when issued" on the new stocks above. S&P also announced that Whole Foods Market (WFMI) will replace MBNA Corp (KRB) which is being acquired by Bank America.
Although the fund selling was strong and the internals terrible it was on very light volume. If you recall I mentioned on Sunday that we expected very low volume this week due to the back-to-back three-day weekends. Volume today barely broke three billion shares across all markets and much of that volume was due to stops being hit rather than a sudden burst of activity from investors getting cold feet. The real selling pressure came from two sell programs, one at 11:20 and the other at 1:20. This was not an all day event or a massive change in investor sentiment. It was two large sell programs on a very light volume day and there were no traders around to buy the dip. The result was a -105 point Dow loss and the worst day after Christmas ever according to market historians.
Where we go from here is a different matter. After having the stuffing knocked out of the holiday turkey we may have suffered a sentiment blow that could be terminal. The odds of an offsetting day of buy programs this late in the year are very slim. The tape painters will probably be content with holding the averages in the current range rather than trying to repair the damage. Dow 10725 is an area likely to be defended as long as selling volume does not increase substantially. I believe retail traders may be scared enough to stay on the sidelines until they see what January will bring. Given todays sell programs I think we just got a preview of what is to come.
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The airwaves were full of news about pockets of weak holiday sales although several stores including Wal-Mart and Federated were still on track to meet estimates. Retail analysts were cool to the idea that buyers were strong enough to push profits higher. Retailers appeared to have discounted earlier and deeper in hopes of selling to buyers strapped by higher energy/gasoline bills. This is likely to be a prevailing story as we move into January and more retail info becomes available.
There were some news standouts today headed by a warning from Overstock.com. OSTK issued a press release warning that they were no longer expecting to make a profit in Q4 due to higher expenses and slower than expected growth. The CEO, Jack Byrne, said Overstock decided to build the brand instead of focus on profits. During the period Overstock would have negative cash flows and rising inventory levels. Byrne said the excessive ad spending was necessary to get above the noise. The noise he was referring to was his fight with the mythical "Sith lord" he claims is responsible for the decline in his stock price. Bryne appeared in an interview on Bloomberg on Friday and today he lashed out at Bloomberg for editing out comments they deemed unnecessary. It is going to be progressively difficult to get good press if every interviewer ends up getting ripped by the Overstock CEO. Byrne said Overstock would announce its Q4 results "sometime in late January or early February." That vagueness in earnings dates is less than comforting to investors accustomed to having companies announce a firm date months in advance. OSTK closed at a new 52-week low at $31 with an -8% loss. We bought puts on Overstock in the LEAPS Trader at $38.50 in early December. For comparison Amazon said it had its best holiday season ever with a record number of items shipped.
OSTK Chart - Daily
WFMI Chart - Daily
Whole Foods Markets (WFMI) closed at $150.81 today and split 2:1 after the close. Whole Foods would be a good candidate for some of those year-end investment dollars at its new price of $75 sometime after Wednesday. Since there is likely to be some January profit taking on WFMI I would hesitate to enter until a new uptrend begins. Waiting for any January dip would be a good idea but let the trend tell you when it is time to enter.
Guidant dropped -2.29 to $64.69 after saying it received a warning letter from the FDA about its manufacturing center in Minnesota. On Friday Guidant said earnings would fall below expectations. This is bad news for Boston Scientific and its $25 billion bid for the company. BSX made the bid after Johnson and Johnson lowered its prior offer to $21.5B after a rash of negative news hit Guidant. Will BSX lower its bid as well? Traders appeared ready to take profits now rather than wait to see if another round of bidding or bid cuts would come first.
The potential inverted yield curve had been cussed and discussed for months and its arrival today was blamed for the drop. However, this indicator of future economic weakness is far from perfect. While all prior recessions on record were preceded by a flat or inverted yield curve there have been inversions without a recession. There is a Wall Street adage applied to many indicators as the situation warrants. In this case the adage would be applied like this. "An inverted yield has correctly predicted 10 of the last five recessions." This would mean the indicator appeared much more often than recessions actually occurred. For us it is not as much a worry about a potential recession as it is about how funds will react to the news. If today's selling was the nervous Nellie's bailing on the news then we could see some more tomorrow as the curve is debated ad nauseum on stock TV and in print. The key for us is to trade what the markets give us rather than try to guess in advance.
I warned on Sunday that the markets had serious resistance at Dow 10900-10950, SPX 1275-1280 and Nasdaq 2270-2280. The Dow spiked right into the middle of that Dow 10900-10950 range with today's 10932 high. The SPX could not make the grade to 1275 but came close right at 1272. The morning gap down on the entire energy sector kicked the props from under the SPX preventing it from hitting that 1275 resistance level. The Nasdaq also failed to reach its resistance highs and topped out at 2260 due mostly to the implosion on the Russell-2000. The Russell dropped nearly -10 points or -1.43% compared to only -0.9% on the Dow, S&P and Wilshire-5000. This Russell drag on the market is what concerns me the most. The Russell is a favorite proxy for mutual fund buying and selling. Funds like to buy the smaller companies when markets are expecting a multi month rise in hopes they will become larger. In times where the markets are expected to be choppy or down those same funds exit the small caps and rotate into the highly liquid blue chips. A larger drop in the Russell than the rest of the indexes suggests to me that funds are not planning on rising markets in early 2006. The January effect helped the Russell to a long bounce from the 615 low in October to the +690 levels we saw as resistance for the entire first two weeks in December. That boost to small caps from January expectations is now behind us and funds are starting to worry if the yield curve is right or wrong this time around. If there is a recession ahead the place you do not want to be as a fund is small caps. They are too illiquid and they tend to react sharply to bad economic news. Meanwhile multinational blue chips are safe havens for large amounts of cash.
The rest of the week is likely to remain volatile with buying volume declining as the week comes to a close. However, selling volume could rise if more funds start getting nervous. As a trader I plan on shorting weakness on any bounces in anticipation of a January dip. The Dow Transports dropped -50 points today after setting a new all time high on Friday. This was -50 points when oil was down sharply and a reason for them to be celebrating. If you read my weekend commentary you know I am expecting a sharp drop in the Transports once the calendar expires. A drop in Transports typically drags on the Dow and the manufacturing stocks. From where I sit tonight I see more negative potential on the horizon than I see positives and visibility is decreasing. In cases like this it is best to be overly cautious and go with the trend for short trades. Just remember to enter passively and exit aggressively and definitely don't get married to your positions.
Biogen Idec - BIIB - close: 44.92 change: -0.60 stop: 43.45
The BIIB has been opened. This morning's market strength helped propel shares of BIIB through significant resistance at the $46.00 mark. The stock hit a high of $46.72. Our trigger to buy calls was at $46.11 so the play is open. Unfortunately, the market's rally reversed course as did the rally in shares of BIIB. That makes today's move look like a bull-trap pattern. We are not suggesting new bullish plays at this time. More conservative traders may want to tighten their stop loss toward the $44 level. We're going to leave ours at $43.45 for now. Wait for another move over $46.50 or today's high at $46.72 before considering new bullish positions. Currently our target is the $49.85-50.00 range. We do not want to hold over BIIB's late January earnings report.
Picked on December 27 at $ 46.11
Chicago Merc. Exhg. - CME - cls: 378.70 chg: -1.05 stop: 372.49
CME showed the same early morning strength that the major averages did. The stock also turned lower and failed to hold any of its gains. This failed rally pattern does not bode well and we would not suggest new bullish positions at this time. Unfortunately, we were not more specific with our suggested entry point. The stock gapped up this morning to open at $382.00 so our trigger at $380.55 to buy calls would have immediately filled us. More conservative traders may want to tighten their stops toward the $375 region to reduce their exposure. The bad news is that CME is so volatile that shares could dip to $370 or even $368 near its 50-dma before rebounding higher again. As we expected the move over $380 produced a new triple-top breakout buy signal on the P&F chart that now points to a $416 target.
Picked on December 27 at $382.00
Cytec Ind. - CYT - close: 47.10 chg: -0.45 stop: 44.99
CYT pulled back with the rest of the market today. The stock lost 0.9% and we suspect it will continue to dip until it has retested support in the $46.60-47.00 region. Wait for a bounce before considering new long positions. The P&F chart points to a $65.00 target. Our target is a modest move into the $49.85-50.00 range.
Picked on December 22 at $ 47.01
Femsa Fomento - FMX - close: 72.38 chg: +0.22 stop: 67.75
FMX continues to inch higher and looks ready to set a new three-month high soon. We do not see any change from our weekend update. We are only looking for a move into the $74.75-75.00 range so it may not be wise to initiate new positions right here. Look for a dip back into the $70.50-71.00 region before considering new call positions.
Picked on December 19 at $ 70.65
Gilead Sciences - GILD - close: 54.18 chg: -0.38 stop: 49.99
The BTK biotech index hit a new multi-year high today but like the rest of the market the BTK could not hold its gains. Shares of GILD also experienced some profit taking with a 0.6% decline. In the news GILD announced that its Board had approved the repatriation of $280 million in foreign earnings. So far shares of GILD are still holding the $54 level but given the weakness in the markets we would hesitate to initiate new positions right now. The P&F chart points to a $66 target. Our target is the $59.00-60.00 range. We do not want to hold over GILD's mid January earnings report. That doesn't give us much time (maybe three weeks) before we have to exit.
Picked on December 22 at $ 54.51
Ryland Group - RYL - close: 73.23 change: +0.21 stop: 71.85
Homebuilding stocks were one of the very few sectors that closed in the green today. While we aren't complaining about the relative strength the move in RYL on Tuesday isn't very inspiring. The stock traded sideways in a narrow range most of the session. Plus, RYL remains near its rising trendline of support. A breakdown could be bad news indeed. We would not consider new bullish positions until RYL traded over $74.70 or even the $75.00 mark.
Picked on December 13 at $ 73.96
Tractor Supply - TSCO - cls: 53.17 chg: -0.83 stop: 52.65
There was a positive upswing for retailers early on today but the strength didn't last long. Shares of TSCO barely participated at all and were weak for most of the session. We are not suggesting new bullish positions at this time. Our target is the $57.00-58.00 range. The Point & Figure chart still points to an $87 target.
Picked on November 30 at $ 52.75
United States Steel - X - close: 47.51 chg: +0.01 stop: 44.65
It wasn't much but X's close in the green today is a sign of strength. Unfortunately, the stock's intraday chart suggest that if the major averages continue lower then X will follow suit and probably retest the $46 level and maybe the $45 level. Readers may want to wait and watch for a day or two before considering new positions. Our late January target is the $52.00-52.50 range. The Point & Figure chart for X points to an $86 target. We do not want to hold over the January earnings report.
Picked on December 23 at $ 47.05
PACCAR Inc. - PCAR - close: 70.13 change: -0.47 stop: 72.51
PCAR failed to rally past the $71.50 level again this morning and the stock is once again testing the $70 level and its 200-dma. We don't see any changes from our weekend update. Our target is the $65.25-65.00 range.
Picked on December 20 at $ 69.49
Progressive Corp - PGR - cls: 118.19 chg: -1.08 stop: 121.25
Heads up! PGR is closing in on our trigger to buy puts. The stock's failed rally this morning is also a lower high and the 0.9% decline managed to breakdown under PGR's simple 50-dma. Shares are now nearing short-term support near the $118 level. Our strategy involves a trigger to buy puts at $117.45, which is under current support near $118. If triggered we'll target a decline into the $110.50-110.00 range. We do not want to hold over the January earnings report.
Picked on December xx at $ xx.xx <-- see Trigger
(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.)
Amer. Eagle Out. - AEOS - cls: 22.00 chg: -0.02 stop: n/a
We do not see any change from our weekend update on AEOS. More conservative traders may have to decide to cut their losses here and move on. We hesitate to exit early because our bias for January is growing more bearish. We're not suggesting new plays. The current strangle has an estimated cost of $2.35 with the January $27.50 calls (AQU-AY) and the January $22.50 puts (AQU-MX). We are targeting a rise to $4.70.
Picked on November 13 at $ 25.47
Abercrombie&Fitch - ANF - close: 65.62 chg: +0.64 stop: n/a
ANF displayed some impressive relative strength today with a 0.98% gain and a more convincing breakout over resistance at the $65.00 level. We are not suggesting new strangle positions at this time. The options in our strangle are the January $65 calls (ANF-AM) and the January $55 puts (ANF-MK). Our estimated cost was $5.15. We're looking for a rise to $8.50.
Picked on November 13 at $ 59.67
Blue Coat Sys. - BCSI - cls: 43.51 chg: -0.29 stop: n/a
We do not see any changes from our weekend update for BCSI. In the news today Standard & Poor's said that BCSI will replace VRTY in the S&P smallcap 600 index after the close of trading this coming Thursday. That event could put a bullish bias in the stock as funds who try and mirror the smallcap index buy shares of BCSI. At this time we are not suggesting new plays. FYI: currently the Point & Figure chart for BCSI is pretty bearish with a $27 target. Our current play involves the January $50 call and the January $40 put. Our estimated cost is $3.25. We're aiming for a rise to $5.50. Remember we have about four weeks left before January options expire.
Picked on December 04 at $ 45.43
Building Materials - BMHC - cls: 79.74 chg: -1.10 stop: n/a
We do not see any change from our weekend update on BMHC. The options we were suggesting are the March $90 calls (BGU-CR) and the March $70 puts (BGU-ON). Our estimated cost is $8.20. Our target is $12.50 by March expiration.
Picked on December 18 at $ 80.95
Chicago Merc. Exchg. - CME - cls: 378.70 chg: -1.05 stop: n/a
We do not see any changes for our CME strangle play. We only have four weeks left before January options expire. Our current play involves the January $400 calls (CMJ-AK) and the January $350 puts (CMJ-MA). Our estimated cost was $26.70. We're aiming for a rise to $40.00 in the strangle before January options expire.
Picked on November 20 at $375.90
D.R.Horton - DHI - close: 36.26 chg: +0.05 stop: n/a
Homebuilders were some of the best performers today but that isn't saying much. Shares of DHI failed to hold on to most of its gains and continues to consolidate sideways with a precarious grip no support near $36.00. We only have four weeks left before January options expire. We are not suggesting new strangles in DHI at this time. Our current play involves the January $35 calls (DHI-AG) and the January $30 puts (DHI-MF). Our estimated cost was $3.15. We're aiming for a rise to $6.00.
Picked on November 13 at $ 32.56
Four Seasons - FS - close: 49.03 chg: -0.89 stop: n/a
FS produced yet another failed rally. This time the stock lost 1.78% and looks poised to challenge the recent lows. We are not suggesting new strangles at this time. The options in our strangle were the January $60 calls (FS-AL) and the January $50 puts (FS-MJ). Our estimated cost was about $2.60. We're aiming for a rise to $5.00 or more.
Picked on November 08 at $ 55.37
Lear Corp - LEA - close: 28.16 chg: -0.37 stop: n/a
We do not see any change from our weekend update on LEA. We are no longer suggesting new strangle positions. The options in our strangle are the January $35 calls (LEA-AG) and the January $25 puts (LEA-ME). Our estimated cost was $1.60. We are lowering our target to $1.60. We have about four weeks left before January options expire.
Picked on November 06 at $ 30.24
Verifone Holdings - PAY - cls: 25.91 chg: -0.86 stop: n/a
We do not see any change from our weekend update on PAY. We have less than four weeks before January options expire. We're not suggesting new positions. Our current strangle involves the January $22.50 calls (PAY-AX) and the January $17.50 puts (PAY-MW). Our estimated cost was $2.60 and we're aiming for a rise to $4.50 or more.
Picked on October 12 at $ 19.98
Questar Corp. - STR - close: 75.90 chg: -2.90 stop: n/a
A warm weather forecast from the weather service pushed natural gas prices lower and shares of STR responded in king with a 3.6% loss today. This is a technical breakdown below support at $78 and its 50-dma. More conservative traders may want to abandon this play right here and try to salvage some of their trading capital. We do not have a lot of confidence that STR will trade under the $70 level, which is bolstered by its rising 200-dma. We are no longer suggesting strangle positions in the stock. Our strangle involves the January $80 calls (STR-AP) and the January $70 puts (STR-MN). Our estimated cost was $5.10 and we're aiming for a rise to $9.50 or more. We only have four weeks left before January options expire.
Picked on November 20 at $ 76.25
Texas Ind. - TXI - close: 50.00 chg: -1.00 stop: n/a
Unfortunately we have nothing new to report on for TXI. The stock is still a lame duck with shares churning sideways between $45 and $53 over the last ten weeks. Hopefully the earnings report expected on January 5th will produce enough volatility for us to exit near breakeven or even score a potential gain. We are not suggesting new strangle positions. The options in our strangle are the January $55 calls (TXI-AK) and the January $45 puts (TXI-MI). Our estimated cost is $2.70. We're looking for a rise to $5.00 or more.
Picked on November 27 at $ 49.57
Valero Energy - VLO - close: 50.90 chg: -1.93 stop: n/a
VLO turned lower with today's sector wide sell-off in energy. The stock is testing support near its 50-dma and could end up testing the $50.00 mark soon. Today's decline doesn't help our concern that VLO may end up being stuck in a trading range between $45 and $56. We only have about four weeks left before January options expire. More conservative traders may want to think about exiting early to cut their losses. We are not suggesting new strangle plays. Our current play involves the January $110 calls (VLO-AB) and the January $90 puts (VLO-MR). Our adjusted cost is $2.93. Our adjusted target is $4.75.
Picked on November 21 at $ 50.50
Apache - APA - close: 67.54 change: -2.77 stop: 67.99
The energy sector was weak across the board. Crude oil was lower but natural gas really lead the declines today. A new report from the weather service suggested that warmer weather would translate into less demand for heating oil/gas in the next couple of weeks. Weakness in the commodity prices played out in stocks and the OIX oil index lost 2.8% to breakdown under its simple 50-dma. The OSX oil services index lost more than 3% and looks poised for more selling. The XNG natural gas index fell 2.6% and closed under support at the 400 level. Meanwhile shares of APA dipped to $66.43 and closed with a 3.9% decline, which proved to be a significant breakdown below its multi-week trendline of support. We would have been stopped out at $67.99.
Picked on December 08 at $ 70.98
Kerr Mcgee - KMG - close: 89.21 chg: -2.96 stop: 88.99
KMG could not escape the sell-off across the energy sector today. The stock gapped lower to open at $91.10 and then dripped to $88.58 near its 100-dma. We have been stopped out at $88.99.
Picked on December 02 at $ 90.26
Questar Corp - STR - close: 75.90 chg: -2.90 stop: 77.85
Natural gas stocks were some of the worst performers on Tuesday after the commodity gapped lower at the open. The turn lower for natural gas was fueled by a recent report from the weather service forecasting warmer temperatures and thus less demand for heating fuel. Shares of STR broke down under support near $78.00 and its 50-dma to close with a 3.6% decline. We've been stopped out at $77.85.
Picked on December 13 at $ 80.85
Total S.A. - TOT - close: 125.86 change: -1.98 stop: 126.49
TOT is another casualty of the energy sector sell-off. The stock broke down under technical support at its 50-dma and the bottom of its recent trading range. We've been stopped out at $126.49.
Picked on December 13 at $130.25
Valero Energy - VLO - close: 50.90 chg: -1.93 stop: 50.90
Refining stocks were not immune to the energy sector sell-off. As a matter of fact they were some of the worst performers. Shares of VLO dipped to $50.62 and closed with a 3.6%. We've been stopped out at $50.90.
Picked on December 08 at $ 53.28 (split adjusted)
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