Bulls who were brave enough to rush back into the market on stronger commodity and energy prices and the recovery in overseas markets slammed headlong into a wall of sellers. The opening ramp on a strong overnight build in the futures pushed the Dow to a high of 11202, +76 points to capitalize on the rebound from yesterday's lows at 11040 and stretch that rebound to +162 points. Unfortunately sellers were waiting just like we expected and selling into that rally was the right play for today. The Dow lost -102 points from its morning high to close at 11099. The Nasdaq rebound failed at 2200 for the second time after crashing to 2156 on Monday. After the +44 point rally failed the Nasdaq returned to close near its lows again at 2159. On Sunday I suggested we would see some range bound trading between 1250-1295 on the SPX. We hit a low of 1252 on Monday. I also suggested selling any rallies and that worked out exactly as we expected.
Dow Chart - Daily
Nasdaq Chart - Daily
The morning started out with a very strong dead cat bounce in several global markets as they shook off a very bad Monday. The Bombay Sensex index lost -9% intraday on Monday on forced margin call selling. The index rebounded +3.21% on Tuesday. Russia's market fell -10% and limit down on Monday and was closed for trading. This mirrored the declines in many global markets with emerging markets the hardest hit. The selling became severely overdone and traders rushed in to try some bottom fishing. The FTSE 100 rebounded +2.64%, Xetra Dax +2.33% and CAC-40 +2.45% to name a few. Minerals prices spiked from their severely oversold conditions and oil rose on hurricane fears and comments out of Venezuela about a production cut. Traders rushed to pickup shares that had been crushed but they may be reconsidering their actions tonight.
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On the economic side the news was market negative. The Richmond Fed Manufacturing Survey fell to a headline number of 1 for May compared to 18 in April. This was a sharp deceleration from the prior two months of very strong growth with the March reading spiking to 21. The -18 point decline in the headline number, -20 over the last two months was led by a drop in shipments from 26 to 2 and orders from 22 to 3. Order backlog fell from its already negative reading of -3 in April to -8 in May. This was a very negative report and suggests the economy is beginning to slow more quickly than previously expected. The only positive component trend was a slowdown in prices paid for raw materials to +2.95% on an annual basis compared to the +3.72% rate seen in April. This should be a Fed friendly report indicating a rising danger from future rate hikes but the component slowdown is market negative.
Richmond Fed Survey Table
The Monthly Mass Layoff report showed that layoffs increased in April to 1140 events involving more than 50 employees. The total worker layoffs totaled 121,589 compared to 921 events and 111,838 workers in March. The rise in energy prices is putting the profit squeeze on manufacturers and the rise in layoffs is not surprising as the economy slows into the second half of 2006.
The Q1 GDP revision is due out on Thursday and is expected to show +5.7% growth. However the outlook for Q2 and beyond is falling fast. Currently the consensus growth estimate for Q2 has fallen from +3.2% to +2.8% but that is just the start of the decline. Goldman Sachs was out with a note today calling for a drop to +2.5% growth for the second half of the year. High Frequency Economics also predicted today that growth for the first half of 2007 could decline to only +1.5%. If these numbers are correct and almost everyone is seeing the same trend then the Fed would be right to pass in June and for the rest of the year. If stagflation, inflation with no growth, is heading our way then the Fed is caught between the proverbial rock and a hard place. They will need to raise rates to offset inflation but raising rates slows growth even further. They are damned if they do and damned if they don't. Under this scenario they need to take a pass in June to take the rate worry off of corporations. Currently the Fed funds futures are pricing in a 25-point hike in June. That meeting is on June 28th not the 20th as I incorrectly typed in the Sunday newsletter.
In stock news today Dell, the originator of the direct sales model for its PC products, said it was going to open two retail stores. These stores will not stock any inventory but carry a complete line of Dell products to enable customers to better customize their orders for later delivery. Essentially they will be brick and mortar catalog centers. Look, touch, test, configure and then order. Dell is hoping that customers will up sell themselves into the top of the line models instead of the low cost budget models currently being ordered online. It is a big selling point to be able to play with the fastest computers with big flat screen monitors. Hard to go back to basics after you experience the best. The initial stores will be in Dallas and New York. Investors were not impressed and Dell lost ground into the close.
Toll Brothers (TOL) reported earnings that rose only +3% and cut its outlook once again for the remainder of 2006. Toll lowered its full year estimates from $4.69 to $5.16 from its prior cut in January to $4.77 to $5.26. Analysts had lowered their estimates to an average of $4.83 per share. Toll said increased materials costs, higher Q2 markdowns and a lack of urgency among buyers would contribute to the decline. Toll said fear of a bursting housing bubble and the future of housing prices was keeping buyers on the sidelines. Toll did say they would end 2006 with 295 communities under construction compared to 230 at the end of 2005. This jump in construction locations is the result of land acquisition, approvals and pre-construction planning that has been in the works for years. Toll feels this broadening of offerings across the country will lead to increased sales through greater choices in more sales arenas. Some Toll communities with very high demand are still under a lottery system to determine buyers. Toll rose slightly on the day despite the slowing profits. Toll is starting to look like a buy in my book. Don't try to catch the falling knife but I would buy a move back over $29.
Vonage priced its IPO tonight and is expected to offer 31.25 million shares at $17, right in the middle of its expected $16-$18 range under the symbol VG. This IPO is receiving a lot of heat by analysts saying Vonage is not offering any product that Ebay, Google or any major telecommunication carrier can't offer tomorrow. Google and Ebay already have products in place that compete with Vonage. The potential for increased competition is very high and I would not be surprised to see it trade down very quickly.
MasterCard is set to price its IPO to begin trading on Thursday. It will issue 61.5 million shares between $40-$43 for about $2.6 billion. MasterCard is also coming public under a cloud of criticism and a flood of class action lawsuits. While MasterCard is not expected to have as rocky a start as Vonage the outlook is questionable. It is an established, highly profitable company with a lock on its portion of the card business but there is a revolt brewing. Many major banks are considering offering a card of their own rather than continue building the MasterCard/Visa brands. This would provide higher profits for the banks and cut into the card market for the established products of MC/Visa, AXP, Diners Club and Discover. Citigroup, Chase and Bank America would lead the list of those considering a private offering once the current anti competitive restrictions are removed.
July Crude Oil Chart - Daily
In the oil sector prices rose for multiple reasons to a high of $72.15 intraday. Initially oil prices rose based on the official hurricane outlook released on Monday which confirmed the prior predictions of a stronger than normal season. The U.S. National Oceanic and Atmosphere Administration, try writing that name 50 times a day, said we could have up to 10 hurricanes. Also putting upward pressure on prices was talk from Venezuela saying a cut in production was justified at the OPEC meeting in Caracas next week. Nobody expects any OPEC country to turn off the spigots when they are getting over $70 a bbl today. Venezuela has repeatedly argued for a more active policy of price fixing through production cuts to push prices higher. Venezuelan production is slowing and they can't make their current OPEC quotas. The only way they can get more money is if everyone else slows production to push prices up. The oil inventory report on Wednesday is expected to show a gain in crude of +300,000 bbls, +800,000 in gasoline and +100,000 in distillates. Valero had a fire in a refinery over the weekend that cut diesel production by -55,000 bbls per day. Valero expects to recover +10,000 bbls when some production is restored next weekend. Gasoline production was reduced by -25,000 bbls.
Energy prices had taken a substantial tumble on a reduction in positions by speculators. The Commodity Futures Trading Commission's Commitment of Traders report showed a substantial liquidation of open positions. We knew this was happening last week as funds unwound the bond/commodity carry trade. What is unclear is whether or not the selling is over. This morning's sharp spike in energy stocks was quickly erased in many issues. There were some winners with the Petrochina (PTR) the largest gainer (+5.90) and my current favorite. The copper and coal stocks also came back and for the most part held their gains. I would continue to be cautious until we see a new trend develop. What we got was a simple oversold bounce and oil is trading about -$1 off its intraday highs in the overnight market. One day does not make a trend but we did see many successful tests of support at the 100-day averages. We may test it again and I would consider a successful test a new buying opportunity.
Bernanke was in the news today with an apology of sorts for his offhand comment to Mari Bartiromo on CNBC. Several weeks ago he mentioned to her at a New York event that the markets got him wrong during his congressional testimony. Maria reported he felt the markets had misunderstood his stance as dovish on inflation on CNBC and the market imploded in fear of another rate hike. He was questioned by a member of the Senate Banking Committee today on the wisdom of the comment to Bartiromo. He said, "That episode you refer to was a lapse of judgment on my part. In the future, my communications with the public and with the markets will be entirely through regular and formal channels." The timing of the remark and the casual revelation to Bartiromo attracted substantial criticism and was seen as a rookie mistake that cost him some of his previously high credibility. He is expected to revert to a more hawkish mode to recover credibility and that could be dangerous to the markets. He did reiterate again that future hikes would be data dependent. Based on current data the expectations are for another hike but there is more than a month of additional data due before they meet again.
The market outlook for the rest of the week is very cloudy. At 1:30 the Dow was trading at 11200 and advancing volume was 3:1 over declining volume. Advancers were 2:1 over decliners. Everything appeared right with the world except for the third intraday failure at 11200. The first came at the open and the second at 10:30. The third time was the charm and that failure brought the sellers out in force. Selling volume shot up sharply adding 2.5 billion shares of down volume in the last two hours of trading to finish 3:2 declining volume over advancing. This was a very sharp reversal that erased 102 Dow points and sent it back to near the lows for the week. This type of internal reversal, intraday spike failure and closing at the lows for the day typically indicates further declines to come. The Dow tested 11060 twice on Monday with an 11050 test in the middle. On the surface it would appear we are going back for another test of that 11050-11060 level and a successful second test could be a sign for buyers to return. However, I am not convinced. The setup appears too convenient.
The afternoon decline today was blamed on possible human-to-human transmission of the bird flu in Sumatra. The World Health Organization was quick to the scene and claims the initial tests rule out a virus mutation but a cluster of six humans did come down with the virus and died quickly. Research is continuing into how each got the virus and whether or not the virus has mutated. Any mention of the possible beginning of a bird flu pandemic will be very detrimental to the markets. Everyone with a futures account will be shorting heavily due to the potentially earth shaking impact of a pandemic the way a bird flue pandemic has been described.
S&P futures are down overnight but appear to have stabilized at 1247 at 7:30ET and are beginning to firm. If the bird flu had anything to do with the drop then the sudden reassurance by the World Health Organization may continue to cool that selling pressure. However, we were expecting rallies to be sold and the bird flu could have been just another straw on the market camel's back. This unknown at a time when the market is already very nervous could lead to further cautionary declines even if the rumor of flu transmission turns out to be untrue.
The Nasdaq can't afford any further reasons to sell. The tech index closed back on tentative support at 2160 and a break here targets 2100 pretty quickly. The -10% correction point at 2137 could be just a fleeting blip in the downdraft if investors are starting to worry more about geopolitical concerns than growth and earnings outlooks. Nasdaq 2160 is going to be a critical test of conviction by the bulls and a break there could find a lot more bears jumping on the bandwagon.
The SPX returned to support at 1250-1255 and this is also a critical level to be monitored. This represents multiple support points dating back to early December. It is also the 200-day average (1258) and so far this support has held. Like the Nasdaq at 2160 a break of SPX 1250 could get ugly very quickly. A -10% correction would take us back to 1192 and that could easily become the target if 1250 breaks.
SPX Chart - Daily
Another problem facing our markets is the current selling overseas. We did see a dead cat bounce today in several markets but the severity of the selling has been extreme. Volatility has increased substantially and much of it has to do with the exchange traded funds and iShares. Years ago the foreign exchanges lacked the volume currently attributable to the billions of dollars now managed by the funds. The foreign markets are much more fragile in many cases than the U.S. markets and can't absorb strong sell programs if those funds wanted a quick exit. Today's bounce averaging +3% in many was actually weak given the prior weeks carnage. If the overseas markets fail to continue their rebound overnight the odds are good we will see another leg down as everyone runs for the sidelines. Since overseas markets normally mimic our results at the open they should be setup for a negative start and an uphill battle.
My recommendation for Wednesday would be to buy a bounce from SPX 1255 and short a break under 1250. If a bounce does appear I would look to reverse to a short on any weakness around 1275. A break over 1275 would target a rally failure at 1295. It would be a nice run from 1255 to 1295 but I would not count on it. We had the perfect opportunity for buying to trigger a massive short covering rally at Tuesday's open. It did not appear and was quickly sold. That suggests to me there is risk of further selling ahead even without the bird flu scare. The lack of any material futures rebound as of 7:45ET on the multiple reports the bird flu breakout was not human-to-human is simply another sign that traders are very nervous. It may still be early and traders are just waiting to see how the overseas markets react before buying the futures.
Don't fight the tape. I know many traders have given back substantial sums trying to buy the dips over the last couple weeks. The market can always remain "wrong" far longer than most traders can remain liquid. It is not a question of your bias being right or wrong but more a matter of successful money management. If you take small losses you will never have to take the big ones. Trade the trend or step aside and wait for the market to conform to your bias. Either strategy works well.
Amgen Inc. - AMGN - close: 66.85 chg: -0.94 stop: 70.01
Why We Like It:
BUY PUT JUN 70.00 YAA-RN open interest=3134 current ask $3.60
BUY PUT JUL 70.00 YAA-SN open interest=8513 current ask $4.30
Picked on May 23 at $ 66.85
Burlington NorSantaFe - BNI - close: 75.06 chg: +0.22 stop: 77.51
Why We Like It:
BUY PUT JUN 80.00 BNI-RP open interest=2684 current ask $5.90
BUY PUT JUL 80.00 BNI-SP open interest=5918 current ask $6.80
Picked on May 23 at $ 75.06
Femsa Fomento - FMX - close: 87.47 chg: +2.34 stop: 90.05
Why We Like It:
BUY PUT JUN 90.00 FMX-RR open interest= 14 current ask $4.70
BUY PUT JUL 90.00 FMX-SR open interest= 52 current ask $5.50
Picked on May 23 at $ 87.47
3M Co. - MMM - close: 83.44 chg: -0.29 stop: 85.01
Why We Like It:
BUY PUT JUN 85.00 MMM-RQ open interest=4619 current ask $2.40
Picked on May 23 at $ 83.44
SanDisk - SNDK - close: 58.98 chg: -0.59 stop: 63.05
Why We Like It:
BUY PUT JUN 60.00 SWF-RL open interest=9718 current ask $2.90
BUY PUT JUL 60.00 SWF-SL open interest=9422 current ask $5.10
Picked on May 23 at $ 58.98
Carpenter Tech. - CRS - cls: 110.94 chg: +1.83 stop: 111.45
The volatility continues in CRS. Shares gapped higher to open at $115.45 but failed to make it much higher. The stock churned sideways much of the session before succumbing to the market-wide sell-off late in the day. We remain wary. We listed CRS as a potential hedge versus our put candidates in the iron/steel/metals industry. So far the stock continues to look bearish in spite of today's bounce. We'll keep our trigger to buy calls at $116.51 active for now but this remains a high-risk, aggressive play. If triggered we'll target a rebound into the $123.00-125.00 range.
Picked on May xx at $ xx.xx <-- see TRIGGER
Deere Co - DE - close: 84.62 chg: +1.34 stop: 83.29
Shares of DE produced a strong bounce this morning. The stock traded to $86.18 at its peak. Our trigger to buy calls was at $84.71 so the play is now open. However, we are NOT suggesting new positions. As a matter of fact, today's failed rally late this afternoon looks so bearish that anyone who opened bullish positions this morning should strongly consider closing them. Odds look good that we'll be stopped out tomorrow at $83.29. If you think this bounce has legs then consider putting your stop under the recent lows near $82.00.
Picked on May 23 at $ 84.71
Getty Images - GYI - cls: 64.38 chg: -0.27 stop: 63.39 *new*
Danger! We have been ambushed by market and stock volatility again. GYI has been trying to breakout over resistance at the $65.00 level for days now. Shares gapped higher this morning to open at $65.80 after the company announced it has increased its stock buy back program from $100 million to $250 million. Our trigger to buy calls was at $65.15 but we're forced to take today's open instead. The stock tried to maintain the breakout over $65.00 for most of the day but the late-day market sell-off was too much and GYI slipped into the red. This looks like a bull trap. We are not suggesting new positions at this time. If GYI could bounce back into the $65.25-65.50 region then we might reconsider but right now we're expecting shares to slip back toward the simple 10-dma near $63.50. We are going to try and reduce our risk by raising the stop loss to $63.39.
Picked on May 23 at $ 65.80 *gap higher*
Komag - KOMG - close: 42.71 chg: -1.69 stop: 41.99
KOMG tried to breakout over resistance at $46.00 and its 50-dma again this morning. The stock hit $46.05 but the rally quickly vanished. Shares ended up losing 3.8% on strong volume. This looks like a short-term double-top (bearish pattern) at the $46.00 level. We remain on the sidelines for now. Our trigger to buy calls is at $46.11. However, if KOMG closes under $42.00 we'll probably drop the stock as a bullish candidate.
Picked on May xx at $ xx.xx <-- see TRIGGER
Omnicom - OMC - close: 91.80 chg: +0.28 stop: 90.64
OMC continues to buck the trend. The stock displayed relative strength again as it bounced back toward resistance near $92.00. We are not suggesting new plays at this time and more conservative types may just want to jump out now to protect their capital. You can always re-enter should OMC breakout to new highs later.
Picked on May 15 at $ 92.05
Occidental Petrol. - OXY - cls: 93.67 chg: +0.56 stop: 91.99
OXY is yet another oil-related issue that was strong this morning only to give back most of its gains this afternoon. We are not complaining with the rise in crude oil to over $71 a barrel but the oil stocks failed to hold their gains. Shares of OXY gapped higher to open at $95.90. Our trigger to buy calls was at $95.05 and we're forced to take today's open as our entry point. We are not suggesting new positions at this time. The market weakness this afternoon looks ready to follow through into Wednesday and that suggests that we could be stopped out soon. More conservative traders may want to tighten their stops here!
Picked on May 23 at $ 95.90
Apollo Group - APOL - close: 51.03 chg: -0.74 stop: 54.45*new*
Yesterday's bounce in APOL has failed and this looks like another entry point to buy puts on the stock. Our target is the $47.75-47.50 range near its early March lows. We do expect some support at the $50.00 level so it would not surprised us to see shares bounce around the $50-52 region for a while. We are inching the stop loss down to $54.45, near its 100-dma.
Picked on May 17 at $ 51.75
Franklin Res. - BEN - close: 87.78 chg: +0.22 close: 92.55
Like most stocks in the investment sector shares of BEN were strong this morning only to see the early rally fade away. We remain bearish and continue to target the $85.00-84.50 range. If you're looking for a new entry point consider today's failed rally as an opportunity but also consider using a tighter stop loss. The $90.00 mark looks like short-term resistance followed by the 200-dma near $91.75.
Picked on May 14 at $ 89.30
CB Richard Ellis - CBG - cls: 76.15 chg: -0.41 stop: 80.65 *new*
CBG turned in a somewhat volatile session. Shares spiked this morning to $79.00 only to fall to $74.20 before bouncing back again. Our target has been the $73.75-73.00 range to account for the rising 100-dma. Currently the 100-dma is at $73.63. We're going to adjust our target to the $74.00-73.50 range. We're also going to try and reduce our risk by putting the stop loss at $80.65, just over the 10-dma. More conservative traders may want to put their stop closer to $80.00 or today's high.
Picked on May 17 at $ 77.93
IDEXX Labs - IDXX - close: 76.38 chg: +0.33 stop: 78.05
Volume came in above average on today's session but IDXX did not make much headway. The stock barely bounced and failed to even test the descending 10-dma. We are not suggesting new put positions at this time. Our target is the $74.00-73.50 just above the simple 200-dma. FYI: the P&F chart points to a $64 target.
Picked on May 11 at $ 77.93
Ipsco Inc. - IPS - close: 91.31 chg: +1.61 stop: 97.55*new*
As we feared shares of IPS snapped back higher this morning but fortunately the rally stalled under the $95.00 level. By the closing bell IPS has given back much of its gains. This failed rally is good news for the bears but we hesitate to suggest new positions. If you do open a new put play consider using a stop near $95.00 or even above today's high (94.45). We are lowering our stop to $97.55. The P&F chart points to an $83 target. We are targeting the $85.50-84.50 range, which is above what we suspect will be support at its rising 200-dma.
Picked on May 18 at $ 93.95
Nucor - NUE - close: 102.32 chg: +2.07 stop: 108.41 *new*
Yesterday we warned readers to look out for a bounce back toward the $105-106 region. Shares of NUE made it to $106.25 before bowing under the weight of the market's afternoon sell-off. This failed rally is good news for the bears but NUE remains short-term oversold. We are going to lower our stop loss to $108.41, near the 10-dma and 50-dma. More conservative traders who have chosen to play this aggressive, high-risk candidate, might want to place their stop closer to today's high. Our target is the $95.50-95.00 range. FYI: NUE is due to split 2-for-1 on June 1st.
Picked on May 17 at $105.40
(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.)
Fedex - FDX - close: 107.68 chg: -2.37 stop: n/a
Be ready! FDX tried to bounce this morning like many stocks but the rally failed and shares have produced a bearish engulfing candlestick pattern. The move looks pretty bearish and the stock is poised to drop toward $105.00-102.50. Currently the June $110 puts (FDX-RB) is trading at $3.80bid/$4.00ask. We have been suggesting that readers exit if the option rises to $4.50 or more. We will close the play if that occurs. More aggressive traders may want to aim higher since FDX looks weak right here! Just remember that we have less than four full weeks before June options expire. Our estimated cost was $2.60
Picked on April 30 at $115.13
Anadarko Petrol. - APC - close: 97.10 chg: -1.60 stop: 97.99
We have been hit with a worst-case scenario here. A strong rebound in crude oil fueled a big bounce in the oil stocks this morning. Shares of APC gapped open higher at $101.00, which was above our trigger to buy calls at $100.15. This move opened our play. Unfortunately the strength was short lived and oil stocks sold off again. APC fell back through our stop loss at $97.99 closing our play in the same session. The move looks very bearish and we are seriously considering a put play if APC trades under $95.00 or yesterday's low (95.86). FYI: APC is due to split 2-for-1 on May 29th.
Picked on May 23 at $101.00 *gap higher*
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