The first of several thousand earnings reports were released after the close with Alcoa and Genentech releasing their reports. The real flood does not begin until next week and the lack of excitement in the markets suggests everybody has already placed their bets and is just waiting for the cards to be shown. Oil prices continued their downward plunge as OPEC members failed to agree on an official production cut.
Dow Chart - Daily
Nasdaq Chart - 90 min
The only economic report for the morning was the Wholesale Trade numbers for August. Inventories rose +1.1% over last month and +9.7% above last year's levels. The inventory to sale ratio remained at 1.15 months for the 4th consecutive month. That is the time required to exhaust current inventories at the current rate of sales. This is not a market moving report and barely gained a mention in the news. The next report of consequence is the FOMC minutes for September due out at 2:PM on Wednesday followed by the Beige Book on Thursday.
Traders bided their time waiting for the earnings cycle to begin and volume was low with the indexes basically flat. After the close Alcoa was the first Dow stock to report and while the numbers were good for Alcoa they were well below analyst's estimates. Alcoa reported profits that jumped +86% over the comparison quarter at +61 cents but fell well short of analyst's estimates of +79 cents. Q3 is normally a weak quarter for Alcoa but I don't think you can complain about a +86% increase. Traders after the bell thought differently knocking -$2 off AA after the report. That should give the Dow a headache if AA holds those levels into the open.
Genentech posted a +36% year-to-year jump in earnings of +53 cents that beat street estimates of +51 cents. Despite the good news DNA traded lower by -1.50 in after hours due to weaker than expected sales of Rituxan and Herceptin.
This is the problem with earnings when the markets are priced to perfection. Outstanding results are already priced into the market and short of a major street beat most companies will fail to impress investors strongly enough to keep them from taking profits and moving on to another stock. Even with great earnings the analysts following the stock will likely find something to whine about. It is their job to pick apart the earnings reports.
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DR Horton (DHI) said orders for Q3 fell -25% from year ago levels and cancellations for the latest quarter rose to 40%, up from 29% in 2005. Horton will release earnings on November 14th. Horton has sold more than 72,000 homes year to date. JPM upgraded DHI, TOL and SPF as well as the sector. UBS also made positive comments about the sector. The number of analysts and brokers seeing a bottom in the sector is rising every day. DHI is a current position in the LEAPS Trader because of a very positive presentation they gave at a recent conference on Sept-20th. According to JP Morgan inventory is flattening out and the rate of cancellations is declining. KB Homes said earnings would be delayed pending the outcome of its stock option review. KBH also said it had purchased two million shares on the market in Q3 for $90 million raising to six million its total purchase year to date.
After the close on Monday Parametric Technology (PMTC) raised guidance for the 4th quarter and that sent the stock higher at the open by nearly +10%. PMTC raised estimates to between 35-37 cents compared to analyst estimates of 29 cents. This failed to power the SOX, which rallied slightly at the open but that bounce quickly faded to a loss of just under -2 points for the day. Monday saw a significant spike in the SOX and today's close could have been profit taking on that bounce. Until Intel announces next Tuesday the chip sector may find it tough to break overhead resistance at 460 on the SOX.
Anheuser-Busch rose sharply at the open on rumors of a leveraged buyout in the works. Options volume that normally runs in the hundreds of contracts each day soared to more than 30,000 on the rumors. Eddie Lampert is rumored to be interested in BUD and neither company would comment on what would be a $40 billion deal. More than six million shares traded or more than triple its daily volume.
Oil driller Nabors Industries (NBR) also jumped sharply for more than +$2 on rumors it was the target of a leveraged buyout. Nabors has been slumping steadily for no apparent reason for months despite contracts renewing at higher day rates and a 2.5-year backlog of new rigs on order. With a market cap of $9 billion Nabors could easily be snapped up by anyone feeling that the approach of Peak Oil will keep drillers in high demand for several decades into the future.
Google gave back some of yesterday's gains as the impact of the YouTube acquisition was felt. YouTube is only 19 months old and has only 65 employees. The two founders could give each employee $10 million and still split over $1 billion between them. Of course they will have to pay back some $450 million in venture capital they had to borrow when the business took off way beyond their expectations. Showing 100 million videos per day requires a heck of a lot of infrastructure and bandwidth. I doubt anybody is complaining about that expense now.
After the close Leg Mason warned that earnings would fall short of estimates. LM said earnings would be in the range of 96-102 cents and analysts had expected +$1.16. LM gave back more than -$10 in after hours trading. This should produce a significant impact on tomorrow's market opening as other financials take the heat. Owens and Minor (OMI) also warned that it was going to take a charge of -$4.5 million to increase its allowance for doubtful accounts. OMI acquired Access Diabetic Supply in 2005 and a significant number of consumer direct accounts. Those accounts are showing increasing delinquency rates.
Despite the slow start to earnings the estimate for Q3 at +14% earnings growth has not changed. Analysts felt that corporate profits would remain solid despite the economic slowdown in Q3. That slowdown is expected to continue but hold only slightly below current levels. The forecast for 2007 earnings is not as rosy compared to the outlook for economic benchmarks. In the table below are the estimates for 2007 compared to 2006. You will notice that the only category with a substantial decline is corporate earnings. If these earnings estimates start to appear in the corporate guidance you can bet that equity prices will immediately begin to correct to reflect that guidance. This is not expected to occur until Q1-2007 but you can bet all eyes will be on Q4 guidance just in case.
Oil prices collapsed once again to $58.50 as squabbling among OPEC members kept them from actually announcing a firm production cut. The unofficial target is for a cut of 1 mbpd. However, like I pointed out before, the EIA said a headline cut of 1 mbpd would likely mean far less in real terms. Historically production cuts are shared proportionally across all members based on their current quotas. Since several members already can't meet their present quota any reduction in their quota would not actually impact oil moving to market. According to the EIA OPEC produced an average of 29.64 mbpd in September. The current quota is 28 mbpd. Obviously there is a lot of cheating in progress since several nations can't even produce their share. OPEC President Edmund Daukoru is trying to get the quota below 27.5 mbpd and according to a letter sent late Tuesday he is also trying to make it apply to real production rather than the fictional quota. Good luck with that attempt.
Saudi appears to be the sticking point. Evidently Saudi wants to see oil prices lower, possibly due to fears about Iran. Iran is the second largest exporter in OPEC and a major geopolitical threat to the country of Saudi Arabia. It is widely felt that once the US leaves Iraq Iran will immediately overrun the country and that will put it border to border with Saudi. Saudi is friendly to the US and has little defensive capability compared to Iran. It is thought that Bush would have already folded up the American tent in Iraq except for the need now to maintain a buffer zone between Iran and Saudi. Saddam was that buffer zone despite his various faults. With the country fractionalized and unable to withstand any attack from Iran the US is stuck there for years to come. On October 3rd the Washington Times ran an editorial claiming Bush has no choice but to attack Iran over the next two years to remove their ability to make war against Iraq, Kuwait and Saudi Arabia. The writer felt Bush could not fall any further in the polls and would need to do it before his term ends to sew up the loose ends in the region. The nuclear confrontation now building was the obvious trigger point. Various analysts feel the administration is just laying low until after the elections then will escalate the events once the election smoke clears.
November Crude Oil Chart - Daily
The price of oil fell despite news from BP of a power outage in Prudhoe Bay that knocked 330,000 bpd of production offline. Winds in excess of 65 mph knocked out electricity to the field. Flooding from 6.5 inches of rain on Sunday and Monday near the southern end of the pipeline shut the pipeline down temporarily. Fiber optic communication lines running along with the pipeline were knocked out. These lines allow operators to monitor pipeline flow and close valves remotely in case of a leak. When communications are down those valves must be immediately manned in person by real people until communications are restored. The pipeline had to be shutdown until these backup personnel were in place. The Alaska Dept of Transportation had closed 65 miles of highway running alongside the pipeline due to flooding and that hampered the restart effort.
The mainstream press continues to harp about the glut of oil and showing the numbers in the table below compared to 2005 levels. We should remember last year we had a monster hurricane season that took millions of bbls of oil offline for months. That makes these comparisons to 2005 worthless for more than a sound bite on TV. Due to the Monday holiday oil inventories will be delayed until Thursday.
Today is the four-year anniversary of the Nasdaq bottom at 1108.49 on October 10th, 2002. The QQQQ was $20 at that bottom. The Nasdaq has rebounded more than +100% in those four years but is still trading below the 2375 high set back in April. Tech stocks have been on a roll the last week or so helping to hold the Dow at its record levels. The Dow closed at 11867.17 and that was a new closing high by less than a point. For four days the Dow has bumped along just shy of resistance at 11870 and I thought it had a good chance of breaking out tomorrow until the Alcoa and Legg Mason news broke tonight. All of the financials are trading lower in after hours and Alcoa will make about a 20-point dent in the Dow at the open. Futures are trending lower as I type this around 8:PM ET and we are setting up for a morning dip.
Nasdaq Chart - Monthly
Ordinarily I would take a negative view of this setup but the dips on bad news have been bought faithfully for weeks and the depth of the dips has grown progressively shallower. Personally, looking at the Dow chart above I can't believe that traders can continue to push the Dow higher given the obvious overextension but the bad news bulls are in control. Eventually we will trip over some event that will change the delicate balance but I don't think Alcoa is it. Everyone knew metals prices had weakened and Q3 was typically tough for Alcoa. The Legg Mason thing could be more problematic. The saving grace may be that they have already missed estimates twice in 2006 and nobody really expected them to beat. Legg said the earnings shortfall came from a shift in mutual fund assets under management from equities to fixed income assets with lower fees. Investors were voting with their money on the potential for an economic slowdown by moving money out of equities and into bonds. This should not be a surprise to anyone, only that it impacted LM to such a strong degree.
We saw today that even a threat from North Korea to launch a missile with a nuclear payload failed to get a reaction from the market. Granted that is like a mouse standing in front of a tank with a rock in its paw and warning the tank to back off. North Korea has even drawn the ire of its neighbor and sometimes protector China so this bad boy is likely to find himself on the receiving end of some serious sanctions in the very near future. Some even doubt the explosion on Monday was nuclear and if it was nuclear most claim it probably was a dud. In late news tonight Japan is saying North Korea may have conducted another nuclear test late today based on a sudden tremor from inside North Korea. Other countries have not yet confirmed this event. Based on the low yield and doubts about the first test many had expected a quick retest of larger proportions to put aside the doubts about their nuclear capability. Iran claimed the US was responsible for Korea's nuclear test saying other nations had to protect themselves against the aggression of the US. Both the Iranian president and the Supreme Leader claimed there would be no halt to their nuclear efforts.
On the positive side we are finally seeing some confirmation of the Dow move in the Dow transports. They broke out today for a +59 point run and a new three-month high at 4640. This is bullish on a technical basis but the real cause is the plunging oil prices rather than a banner shipping season.
SPX Chart - Weekly
With oil crashing on somewhat bullish OPEC news and current events failing to influence the market I am probably more bullish today than last week. Unless some big companies like Intel or IBM really stink up the place with their earnings it appears we are on track for Dow 11900 and eventually 12000. The potential potholes this week will be the FOMC minutes on Wednesday and the Beige Book on Thursday. As long as those reports don't show a Fed ready to move back into the market or a sharper than expected slowdown in the Beige Book conditions we should continue moving higher. Regardless of what events transpire I would continue to monitor S&P 1340 as your long/short indicator. Buy the dips above 1340 but be prepared to reverse positions below that level. Based purely on the chart above it would appear the next resistance test could be decisive. Until that decision is made for us we should stick to the plan.
I would be a buyer of energy stocks on any further dip in oil. $55 is my worst-case target for oil unless we get some further negative news. Oil stocks have already started to rebound despite the decline in oil prices. Funds seeing blue chips and techs near their highs and very over extended are seeing energy at these levels as a safe haven once again. Earnings for the rest of the week are a mix of names you probably would not recognize with YUM and PEP the standouts for Wed/Thr and GE on Friday. GE will be our first read on the health of the earnings cycle and no surprises are expected. Until something changes, buy the dips above 1340 but be prepared to reverse positions below that level.
Peabody Energy - BTU - close: 39.89 chg: +2.12 stop: 37.24
Why We Like It:
BUY CALL OCT 35.00 BTU-JG open interest= 7765 current ask $5.20
BUY CALL NOV 35.00 BTU-KG open interest= 2838 current ask $5.90
Picked on October xx at $ xx.xx <-- see TRIGGER
Beazer Homes - BZH - close: 42.30 change: +1.68 stop: 39.85
Why We Like It:
BUY CALL NOV 40.00 BZH-KH open interest=1341 current ask $4.00
Picked on October xx at $ xx.xx <-- see TRIGGER
Carpenter Tech. - CRS - cls: 109.31 chg: +1.69 stop: 104.95
Why We Like It:
BUY CALL NOV 105.00 CRS-KA open interest=228 current ask $9.20
Picked on October xx at $ xx.xx <-- see TRIGGER
Ambac Fincl. - ABK - close: 84.23 chg: -0.58 stop: 81.99
We have been suggesting that ABK would find short-term support at the $84.00 level. The stock pulled back again toward the $84 region this afternoon, which is also bolstered by support at its 50-dma. Bulls need to see a bounce from here and we would definitely wait for some sign of a bounce from here before initiating new positions. Our target is the $88.00-90.00 range. We do not want to hold over the October 25th earnings report.
Picked on October 04 at $ 84.40
Amgen Inc. - AMGN - close: 73.73 change: -0.19 stop: 69.99
Biotechs could be in for a dip. AMGN spent the day consolidating sideways again on low volume. Investors were probably waiting on earnings news from rival Genentech (DNA). DNA reported Q3 earnings after the bell tonight and beat estimates but the stock was trading lower in after hours. AMGN might trade lower in sympathy tomorrow in spite of DNA's positive results and positive guidance. At this point in the game we'd wait for a bounce from the 10-dma or the $72 region before considering new positions. Our target is the $79.00-80.00 range. We do not want to hold over the October 23rd earnings. FYI: More conservative traders might want to adjust their stop loss closer to the $72 level.
Picked on October 04 at $ 72.97
Deere & Co. - DE - close: 87.20 change: -0.80 stop: 82.99
Shares of DE plunged about $1.50 just after high noon today. We caught the tail end of some comments on CNBC about the weakness in DE and it sounded like there was a report on lower tractor sales. We couldn't find any news to confirm those comments. Fortunately, for the bulls traders bought the dip in DE at the $86.00 level. We're not suggesting new positions and more conservative traders might want to adjust their stop loss toward the $85 level. Our target is the $89.50-90.00 range. We do not want to hold over the November earnings report. FYI: The P&F chart points to a $108 target.
Picked on October 04 at $ 85.39
Emerson Electric - EMR - close: 84.45 chg: -0.61 stop: 82.99
Tuesday failed to see any upward follow through on EMR's bounce from the 10-dma on Monday. Unfortunately, today's weakness puts more of a bearish curve on some of the short-term technicals. In the last week EMR has seen three false starts over the $85 level and it looks like the move may have been a bull trap. More conservative traders may want to consider an early exit given today's lack of follow through. At this point we're expecting a dip back toward short-term support near $83.00. We're not suggesting new plays with EMR under $85.25. Our target is the $89.00-90.00 range. We do not want to hold over the late October earnings report.
Picked on October 05 at $ 85.15
Entergy - ETR - close: 81.88 change: +1.20 stop: 78.99 *new*
Tuesday proved to be a strong session for ETR. The stock soared to new highs with a 1.48% gain. The relative strength is definitely encouraging and shares look poised to continue higher. Our short-term target is the $84.00 level. We do not want to hold over the late October earnings report. FYI: We are raising our stop loss to $78.99.
Picked on October 03 at $ 80.33
Greenbrier - GBX - close: 29.79 change: -0.16 stop: 27.99
We are starting to wonder about the rally in GBX. Another drop in oil prices today helped the Dow Transportation average add 1.28%. The railroad index rose just over 1.1%. Yet shares of GBX under performed with a 0.5% decline. Volume came in very low today so it's hard to put any weight behind today's move, which was mostly flat. The overall pattern remains bullish but more conservative traders may want to wait for a move over today's high (30.23) before initiating new positions. Our target is the $33.00-34.00 range. We do not want to hold over the early November earnings report. FYI: The P&F chart is still bearish but it's seeing a strong bounce near support. More conservative traders could always tighten their stops - we'd consider moving ours toward the $29 level.
Picked on October 05 at $ 30.05
Mettler Toledo - MTD - close: 66.45 chg: +0.08 stop: 64.95
There is no change from our previous update on MTD. We're still not suggesting new positions and more conservative traders may want to lock in a gain now. Many of the technical indicators are suggesting that the next move will be lower. The daily chart's MACD indicator actually produced a new sell signal on Tuesday. Our target is the $68-69 range. We do not want to hold over the late October earnings report.
Picked on September 13 at $ 63.66
Omnicom - OMC - close: 94.98 chg: +0.96 stop: 92.95
OMC displayed another day of relative strength on Tuesday. The stock climbed more than 1% on above average volume after investors digested some positive comments coming from industry insiders on the ad industry's ability to weather any future downturn. Shares look poised to move higher but more conservative traders may still want to lock in some gains here. Our target is the $96.00-97.00 range. We do not want to hold over the late October earnings. FYI: The P&F chart points to a $131 target.
Picked on September 10 at $ 90.97
Sepracor - SEPR - close: 50.90 chg: +0.11 stop: 47.95
It was another day of indecision with SEPR. The stock traded sideways flirting on either side of resistance at the $51.00 level and its 200-dma. Lack of follow through higher on yesterday's breakout doesn't help off set the stock's short-term overbought condition. More aggressive traders may want to consider buying a bounce near $50.00. We are not suggesting new plays with the stock under $51.00. The stock's failure to hold its early gains actually looks a little bearish! Our target is the $55.50-56.00 range. We do not want to hold over the late October earnings report. We'll leave the stop loss at $47.95 for now. FYI: The latest (September) data put short interest at more than 13% of SEPR's 108 million-share float. That's a relatively high amount of short interest.
Picked on October 09 at $ 51.25
Unibanco - UBB - close: 81.95 change: +2.24 stop: 76.45 *new*
The rally in UBB has reached its fifth day in a row. The stock gapped open higher and closed with a 2.8% gain to breakout past potential round-number resistance at the $80.00 level. The stock is starting to look a little overbought here. Readers may want to wait for a dip back toward $80 before considering new positions. Please note that we're raising the stop loss to $76.45. Our target is the $85.00-86.00 range. We do not want to hold over the early November earnings report.
Picked on October 08 at $ 79.12
Vulcan Materials - VMC - close: 81.45 chg: +1.40 stop: 76.95
Good news! VMC finally broke out over resistance at the $80 level with some confidence. Volume wasn't so hot but shares close near their best levels of the session. The move back over $80.26 or $80.50 could have been used as a new entry point to buy calls. Our target is the $84.50-85.00 range. We do not want to hold over the late October earnings report.
Picked on October 09 at $ 80.26
FreightCar Amer. - RAIL - cls: 52.88 chg: +0.78 stop: 54.55
Another decline in crude oil prices on Tuesday helped fuel the rally in transportation stocks. RAIL, which has been under performing its peers the last couple of weeks, is starting to bounce. We are not suggesting new positions at this time. More conservative traders may want to strongly consider tightening their stops toward the $53.50 region. Currently we have two targets on RAIL since the stock appears to have some support near $50.00. We suggest selling half or more of your position at our first target in the $50.25-50.00 range. Sell the rest at our second target in the $46.00-45.00 range. The P&F chart points to a $42 target.
Picked on September 21 at $ 54.50
(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.)
Boston Properties - BXP - close: 104.75 chg: -0.48 stop: n/a
BXP's early morning attempt to breakout over resistance near $106 failed. While the failed rally is bearish traders were quick to buy the dip this afternoon at $103.40. We're not suggesting new strangle positions at this time. The play was labeled as aggressive and higher risk due to our short three-week time frame. We need to exit before October options expire on October 21st. Our suggested options were the October $105 call (BXP-JA) and the October $100 put (BXP-VT). Our estimated cost is about $1.90. We're suggesting an exit if either option rises to $3.80 or higher.
Picked on October 01 at $103.34
Google - GOOG - close: 426.50 chg: - 2.50 stop: n/a
GOOG finally hit some profit taking after spiking to $437.85 this morning on the YouTube.com acquisition news that came out last night. Today's session definitely looks like a short-term top and we'll be watching the $420 level and $410 level as potential levels of support. We're not suggesting new strangle plays at this time. The options in our strangle strategy are the November $440 call (GOP-KH) and the November $360 put (GGD-WL). Our estimated cost for this position is about $13.00. Our suggested exit is at $24.00 or higher. FYI: The November $440 call is already trading at $17.40ask/$17.00bid.
Picked on October 01 at $401.90
Legg Mason - LM - close: 105.31 change: +3.23 stop: n/a
The volatility in LM continues. Here's the odd thing. Shares of LM soared 3.1% after issuing an earnings warning for the third quarter. Today marks a breakout over the top of its recent consolidation and a new four-month high. We're not suggesting new strangle positions at this time but a dip back near the $100 mark could be used as an entry point. The options in our strangle strategy are the November $105 calls (LM-KA) and the November $95.00 put (LM-WS). Our estimated cost is $5.15. We're suggesting an exit if either options rises to $7.25.
Picked on October 03 at $ 99.72
Maxim Integrated - MXIM - cls: 28.60 chg: +0.07 stop: 29.05
We are calling it quits on MXIM as a put candidate and suggesting readers exit early. The stock is still trading under resistance at its 50-dma and the $29.00 level but the stock has developed a short-term pattern of higher lows over the last few days. We would rather exit now and cut our losses early. It might pay off to keep an eye on MXIM. A move over $30.00 might be a bullish entry point and a decline under $27.50 could be used as a new bearish entry point.
Picked on September 25 at $ 27.90
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