For the last week the markets have been holding their breath and waiting for the Fed meeting and decision about rates. Dueling analysts argued nonstop about the chances for a future rate hike or rate cut. Tensions built to the breaking point this morning with several noted analysts going on record as expecting a surprise rate hike. Fed policy expectations are more volatile than popcorn in hot grease and this week was no exception. The Fed funds futures for March have been projecting as little as a 20% chance of a rate cut by March to as much as an 81% chance in just the last ten days. The meeting is now history and nothing changed from the last meeting with the Fed keeping the rate at 5.25% and maintaining a bias towards tightening. All that worry was for nothing.
Dow Chart - Daily
Nasdaq Chart - Daily
The Fed statement was a carbon copy of the October statement with two minor exceptions. The only change was the addition of several words to the two key sentences. The rest of the statement was exactly identical. The phrasing of the October statement was:
Economic growth has slowed over the course of the year, partly reflecting a cooling of the housing market. Going forward, the economy seems likely to expand at a moderate pace.
It changed to this:
Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market. Although recent indicators have been mixed, the economy seems likely to expand at a moderate pace on balance over coming quarters.
The keywords there are obviously "substantial" and "mixed." The Fed does not make these wording changes haphazardly and each word and connotation is carefully structured. By adding "substantial" the Fed is letting us know they are aware the housing market has continued to weaken since October and they are ready to act if it deteriorates further. While the actual housing internals have firmed the closing of three subprime mortgage companies and distress in several others bring up the specter of a potential washout ahead if the housing sector is allowed to weaken further. The severity of the situation was not lost on the Fed and they are telling us they are aware.
Secondly the addition of the "recent indicators have been mixed" also tells us that the Fed is less convinced about the state of the economy in general. They are seeing conflicting signals now but are still hopeful the recovery will continue in 2007. The addition of "on balance over coming quarters" suggests the weakness could drag out further than previously expected. The initial phrasing suggested we were at or near a bottom and the economy seemed likely to expand from there. The current statement suggests the bottom could be lengthened and could be rocky as evidenced by the "on balance" comment.
Overall this was a more dovish statement and one that would seem to indicate they were closer to starting a rate cut cycle. The addition of weaker phraseology should mute the claims of those expecting further hikes. However, as several analysts noted the statement still contains the inflation risk paragraph although it was unchanged. After saying "Readings on core inflation have been elevated" they continue to say that inflation is the main worry.
Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.
To summarize the Fed still thinks the risks of inflation remain but also felt the economy is weaker than in October. Is this stagflation coming back to haunt us? Let's hope not! There were also those who felt the Fed was trying to balance its statement so that everyone would not be leaning towards a rate cut in the near future but the way I read it the chances of a cut are even more likely than before. Jeffery Lacker closed out his term as a voting member of the committee with his third consecutive dissention and voting for a hike of 25 points.
Many in the analyst community were not happy with the statement because many feel the economy is hurtling towards a recession in 2007. They point to the continued inversion of the yield curve as near positive proof that the Fed is ignoring. Historically an inverted yield curve of this duration has been accurate in predicting recessions 88% of the time. Six of the last seven recessions were preceded by an inverted yield curve. With the yield on the ten-year note three rate cuts below the current Fed rate they wanted the Fed to present an even more dovish statement suggesting they were willing to cut rates in Q1 to avoid a 2007 crash. The Fed did acknowledge that early 2007 was likely to be rough with the "on balance" phrase. Many analysts claim "it is different this time" but those long time market historians claim it is always different until the recession appears and the trap slams shut. Time will tell but you can expect this argument to continue to surface until one side or another is proved right.
The two jobs reports released today both confirmed a strong employment picture and somewhat stronger than the Non-farm Payrolls we saw last Friday. As long as employment continues to firm and real interest rates remain low the potential for a successful soft landing increases. The International Trade deficit fell sharply in October to -$58.9 billion, down from -$64.3B in September. This was the lowest level in 14 months and the largest percentage decrease in five years. Exports increased, imports fell and the price of crude dropped sharply cutting outflows for oil by nearly -$5 billion. The deficit with China rose by +5.8%, Europe +21.3% and Japan +18.5%. Those deficit increases were offset by the drop in oil prices. The November Treasury budget deficit rose to -$75.6 billion from -$49.3 billion in October. This was $7.5B less than the deficit in November 2005. Receipts were up +8% year over year for the first two months of fiscal 2007. The total deficit for all of 2007 is expected to be -$300 billion.
In stock news Goldman Sachs posted earnings that soared +95% and posted its largest quarterly profit ever of $9.4 billion. Profit attributable to shareholders rose to $3.1 billion or $6.59 per share. This beat street estimates by +55 cents. This compares to profit of $3.35 per share in the comparison quarter in 2005. Goldman said it was allocating $16.5 billion for salaries, bonuses and benefits for year-end. That equates to $622,000 for each employee but the big deal makers will get the largest cut. Goldman fell -2.52 on the news as some analysts suggested they have nowhere to go but down in 2007. Goldman has been on a very strong rise since leaving the $150 range back in September to top at $206 last week. It may be time to just take profits and move on to something else ahead of year-end.
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GE made the news late in the day when they affirmed their earnings guidance for the rest of 2006 and all of 2007. They said full year earnings for 2006 would be $1.97-$1.99 compared to their prior estimates of $1.94-$2.02. For all of 2007 GE now estimates profits of $2.17-$2.23 per share. The street consensus was $2.24 but nobody seemed to care. GE also raised their dividend to 28 cents from 25 cents, a +12% increase. GE spiked +60 cents on the news but closed with only a +42 cent gain. Yawn.
Farm equipment maker Agco (AG) fell by -1.31 after giving guidance for 2007 that was below analyst estimates. Agco was expecting 2007 profit growth of +30% compared to analyst's estimates of +34%. Agco said sales in North America and Europe to be flat while South America sales were expected to decline -5% to -10%. While Agco is not a household name it prompted drops in others that were. Caterpillar was the biggest drag on the Dow with a -1.25 intraday drop as a result of the Agco warning. Deere (DE) was also weak losing -2.66.
Nucor (NUE), the country's second largest steel producer, warned that lower prices and slowing shipments would impact Q4 earnings. Nucor said shipments would fall between -12% to -15% from the third quarter. The warning hammered other metals stocks including Dow components Alcoa (AA) and Du Pont (DD). This was also a factor in the CAT drop although lower steel prices should benefit CAT. NUE fell -4.75 on the news.
Best Buy (BBY) said heavy competition lowered margins and forced them to sacrifice profit to retain market share. Q3 profits for the quarter ended on Nov-25th, rose to 31 cents from 28 cents in the prior year but analysts had expected profits of 35 cents. The company said Q4 should be good with all stores stocked and ready for the holiday rush. They said margins would improve in Q4 and said full year profits would still be in the range of $2.65 to $2.80. Analysts were expecting $2.81. Same store sales growth is expected to be in the 5% range. The positive comments about Q4 failed to help the stock, which dropped -$2.62 for the day.
Celestica (CLS) fell -1.14 after warning of slowing demand and rising inventory. They lowered their guidance for profits to be flat to a gain of +6 cents from prior guidance of +15 to +23 cents. CLS is a contract manufacturer of electronic components for computers, aerospace, telecommunications and consumer electronics. CLS lost -12% or -1.14 to close at $8.25. This pushed the SOX to retest support at 470 and weighed on chip manufacturers and box makers.
The Hewlett Packard CEO said today that HPQ was a company in transformation not a transformed company. He said that as he outlined expectations for further cost cutting efforts in 2007. HPQ has already cut -15,000 jobs but more are coming. He also made the first public forecast for 2008 saying revenue would grow between 4-6 percent to something in the $101-$103 billion range and earnings in the $2.78-$2.98 range. It appears Hurd checked analyst estimates before giving that guidance. Analysts were expecting $102B and $2.88 per share. Both numbers were exactly in the middle of Hurd's guidance. That is too precise to be an accident.
Citigroup gave back some of its gains from Friday after there were rumors top management would be shuffled. The only announced shuffle today was the appointment of Robert Druskin to the post of COO. Druskin was already the head of corporate and investment banking for Citigroup. Citigroup pulled back from its 6-year high hit on the rumor of changes in the wings.
UPS offered severance packages to 650 more employees at its headquarters and Supply Chain Solutions division. Those receiving offers were at least 50 years old and had 10-years with the company. UPS announced 1200 job cuts back in October. CEO Mike Eskew said we know we have to reduce costs and execute better than in the past. UPS fell -$1 on the news.
Notice how many companies are warning and lowering guidance? The warnings cycle doesn't really kick off for another week or so but we have seen numerous companies confess early rather than wait for the crowd. Is it that they are just trying to get business handled before the staff leaves for the holiday break or is it a warning that we have a flood of confessions ahead. I think it is too early to tell but a couple more of these high profile events and the markets are going to find it very tough to rally into year-end.
The SEC announced today they are planning on changing the rules for hedge fund investors. They are going to require accredited investors to have a liquid net worth of $2.5 million compared to the current $1 million requirement. That will be exclusive of your primary residence or any business property currently in use. This could take a lot of current hedge fund investors out of the hedge fund market. How that will impact the broader market is unknown and it is not an immediate event. The SEC is expected to present the rule change to a full vote of the SEC commissioners as early as Wednesday. There has been no mention of an effective date or any grand fathering of current investors. Removing personal homes from consideration is expected to be a sharp blow to the many thousands of investors stretching to join the club.
Oil prices fell to a two-week low at $61 and -2.65 below Friday's high. We expected this as I warned in the weekend commentary. The January crude contract ceases trading next Tuesday and those who were hoping for some event to cause a break of the strong resistance at $63.50 were disappointed. Now it is time to bail on their long positions but I am sure many are still clinging to hope that OPEC will announce another cut overnight on Wednesday. At this point I doubt it will help the January contract since any actual cut will likely be slated to start on Jan-1st and have zero impact on the currently expiring futures contract. I view any decline into Friday as a buying opportunity. With OPEC looming I would be surprised to see support at $58 retested but anything is possible.
Crude Oil Chart - Daily
The EIA said today OPEC reduced production to 26.97 mbpd in November compared to 27.4 mbpd in October. However the official production target was for a cut to 26.3 mbpd. In other words they produced 670,000 bpd more than they said they would. Cheating is still a common method of operation in the OPEC fold. EIA also said OPEC is expected to further reduce production another -800,000 bpd in December as the cuts announced in October continue to take effect. That has nothing to do with any potential new cut announced this Thursday. Venezuela and Nigeria, both countries that aggressively pushed for the production cut left their output unchanged. A prime example of "do as I say, not as I do." The comments out of OPEC this week claim there is still 700,000 bpd of excess production, which they are planning adjust at this week's meeting. Since talk is cheap and action is limited it could be just another exercise by the OPEC spin-doctors to try and talk the price higher.
I am not sure any effort by the equity spin doctors to talk up the markets into year end will have any impact. The Dow plunged to 12250 at 11:30 and well before the Fed announcement. It was a decent sell program and could have been profit taking from somebody hoping for a pre Fed rally that did not occur. Dow 12250 is decent support but 12350 is much stronger resistance. With warnings and lower guidance stealing the headlines it may be tough to manage a move higher. After the Fed announcement there were three distinct buy programs but they were unable to even recapture the lethargic highs from earlier in the morning.
The Nasdaq suffered even more and failed to mount a credible rebound on those same buy programs. The TXN and CLS warnings after a string of weak chip guidance last week have taken all the bounce out of the techs. Support is 2420 followed by 2400 and it gets positively ugly if both those levels break.
S&P-500 Chart - Daily
The S&P-500 continues to hold the high ground but it too is showing its age. The recommendation from Sunday was to remain long over 1405 but reverse to a short/flat position on a break below that level. We saw a good test of 1405 on Friday and another strong support test again today that saw a low of 1404.75. Obviously there are plenty of traders watching that level besides us. One reader emailed today after the dip to 1404.75 asking if my recommendations were for daily closes under a specific level or just a move below that level. For my index recommendations I believe they are valid for any move past the trigger point. We could easily see a -10 to -20 point move under the right circumstances so I would not want to wait for an end of day close to act. It should also be obvious that you can't just set a programmed stop at 1404.75 and dump everything and revert to a short. These are general recommendations and I expect traders to exercise a little judgment in managing their positions. If we move below 1405 on decent volume and internals are weakening then I would not hesitate to make the switch. However, if we have another day like today where support is tested then it is just a test not a break. Since everyone is likely in long options on individual stocks or indexes you can watch the event evolve for a few minutes while you make your decision. It is not like dodging a bullet where the decision has to be instantaneous or its fatal. Fortunately nothing surrounding a trading decision at 1405 is fatal. Any decision made can be reversed just as easily if it turns out to be a head fake rather than a solid break.
For the rest of the week I am still recommending a reversal to a flat/short position on a break below 1405. Historically the market trades lower nearly 80% of the time after a Fed meeting regardless of the decision. Will it repeat this time is anybody's guess? There is a lot of profit at risk from the summer rebound and a lot of bonuses at risk as well. There are probably quite a few tax sales, which have yet to occur. Then of course there are the bulls eager to climb the wall of worry ahead of expected year-end cash inflows. Nothing is ever certain so we need to just let the market tell us how to trade. Remain long over 1405 and short/flat below that level. This takes all the guesswork out of our decision and let's us sleep at night.
B.P.Prudhoe Bay - BPT - close: 75.30 chg: -0.13 stop: 73.75
Crude oil continued to see some profit taking. Investors were reacting to comments that OPEC was unlikely to actually meet its proposed production cuts. The upward momentum in the oil and oil service sectors has stalled out and it's very evident in shares of BPT. Shares of BPT have been consolidating sideways above support/resistance at the $75.00 level. Unfortunately, BPT now has a short-term bearish trend of lower highs to accompany the bearish turnaround in the technical indicators. There is still a chance that BPT will bounce from support near $75.00 and its 200-dma but we would definitely wait for a bounce, probably over $75.75, before considering new bullish positions. Our target is the $79.75-80.00 range. The P&F chart is bullish with an $85 target.
Picked on November 29 at $ 75.25
Biosite - BSTE - close: 48.90 change: -0.04 stop: 47.95
BSTE is still flirting with a breakdown under its bullish trend of higher lows. The technical picture has turned bearish and the lack of strength in the broader market doesn't help. We are not suggesting new positions and quite honestly more conservative traders may want to exit early right here. If we don't see a bounce soon we'll close this play early to limit any losses. We would wait for a rally past $50.25 before considering new call positions. Our target is the $54.50-55.00 range. FYI: The P&F chart points to a $65 target.
Picked on December 05 at $ 50.05
Centex - CTX - close: 56.20 change: +0.05 stop: 53.99
We still don't see any real change in CTX. The stock, like the sector index, is consolidating sideways. The group has seen a consolidation lower the past few days and upward momentum has vanished which is turning the technical indicators toward bearish signals. CTX is still above support near $55.00 so we're not ready to abandon the play yet. However, we would be very cautious and hesitant about opening new positions. Currently we have two targets. Our conservative target is the $59.50-60.00 range. Our aggressive target is the $63.50-64.00 range. Be aware that the bottom of CTX's April 2006 gap down near $57.25 might be resistance as may the to of its gap near $60.00. FYI: The Point & Figure chart points to a $77 target.
Picked on December 03 at $ 55.89
Diamond Offshore - DO - close: 80.60 change: -0.90 stop: 76.99
Yesterday's relative strength in DO failed to make an appearance today. The stock lost 1.1% and is nearing short-term support at its rising 10-dma and the $80 level. The stock's upward trend is still intact but we're concerned that shares might see a stronger consolidation. We would look for a dip back toward the $78 region near the 200-dma (around 78.55). Our target is the $85.00-86.00 range near its early July high. The P&F chart points to a $92 target.
Picked on December 03 at $ 80.59
Enerplus - ERF - close: 46.06 change: -0.25 stop: 44.45
ERF erased yesterday's gains with some profit taking this morning. The stock is struggling to maintain its bullish momentum and we would hesitate to open new positions at this time. A dip back toward the $45 level might be around the corner. Traders may want to tighten their stop loss toward the $45.00 level. The Point & Figure chart is bullish and points to a $64 target but shows potential resistance near $52. We are aiming for a rise into the $50.00-51.00 range.
Picked on November 29 at $ 46.01
KB Home - KBH - close: 51.19 change: -0.45 stop: 49.45
As KBH continues to consolidate lower it is turning the technical picture more and more bearish. Today's 0.8% decline helped produce a new MACD sell signal on the daily chart. Yet we're not quite ready to close this play with KBH still trading above support near $50.00 and its simple 200-dma. A bounce near $50 could be used as a new entry point but right now we'd probably look for a relatively significant bounce.
Picked on December 03 at $ 52.04
L-3 Comm. - LLL - close: 81.73 change: -0.70 stop: 79.99
LLL did not escape the selling in tech stocks on Tuesday. Shares lost 0.8%. More importantly the stock broke down under what should have been support at the $82.00 level. Due to this breakdown more conservative traders may want to exit early right here to cut their losses. We still see additional support near $80, which is underpinned by its rising 50-dma. We're not suggesting new positions at this time. Our target is the $88.00-90.00 range.
Picked on December 04 at $ 83.81
Lockheed Martin - LMT - cls: 90.92 change: -0.41 stop: 87.65
LMT is still consolidating lower toward what should be support at the $90.00 level. We are somewhat concerned by the bearish turnaround in the technical indicators. We've already warned readers about a bearish divergence between price and its MACD and now the MACD is nearing a new sell signal. More conservative traders may want to tighten their stops toward $90.00. We have two targets. Our conservative target is the $94.85-95.00 range. Our more aggressive target is in the $99-100 range.
Picked on November 29 at $ 90.62
Sepracor - SEPR - close: 57.23 chg: +0.66 stop: 54.69
SEPR displayed some relative strength as traders bought the bounce from $56.00. Aggressive traders might want to consider new bullish positions. We're not suggesting new plays at this time. Our target for SEPR is the $59.50-60.00 range.
Picked on November 19 at $ 54.69
Valero Energy - VLO - close: 54.71 change: -1.03 stop: 53.45
VLO completely erased yesterday's gains and once again closed under what should have been support in the $55.00-54.75 region. More conservative traders may want to exit early right now. We are going to wait and see if VLO bounces from the $54.00 level. Our target is the $59.50-60.00 range.
Picked on December 03 at $ 55.85
MEMC Electronic - WFR - close: 42.11 change: -1.21 stop: 39.49
WFR is another stock that erased yesterday's gains. This morning before the bell on analyst firm downgraded the stock. Shares of WFR gapped open lower but the stock did manage to bounce from its intraday lows. We would watch for a bounce from its rising 10-dma or even the $40 level as a new entry point. Our target is the $47.50-50.00 range. The P&F chart is bullish with a $48 target.
Picked on December 10 at $ 42.40
Expeditors Intl.- EXPD - close: 42.51 change: -0.54 stop: 46.05
EXPD slipped lower again for the sixth day in a row. The above average volume on the decline is a big clue that EXPD should have more weakness to come. Our short-term target is the $40.15-40.00 range. More aggressive traders may want to aim for the August lows.
Picked on December 10 at $ 43.68
Genzymme - GENZ - close: 61.01 change: -1.11 stop: 64.55*new*
Today's decline in GENZ could be another bearish entry point. The stock produced a failed rally under its descending 10-dma. Plus, today's session produced a bearish engulfing candlestick pattern and did so on above average volume. We are going to adjust our stop loss to $64.55. The Point & Figure chart looks pretty bearish with a quadruple-bottom breakdown sell signal with a $51 target. Our target is the $58.00-56.00 range.
Picked on December 03 at $ 62.77
NewMarket - NEU - close: 59.81 change: -1.26 stop: 62.25
The bears are probably circling shares of NEU. The stock looks weak and shares lost over 2% to close under the $60 level and its simple 100-dma both of which should have been short-term support. Aggressive traders may want to buy puts now. We are suggesting a trigger to open plays at $58.25. If triggered our target will be the $53.50-52.50 range, which is an adjustment from our original target due to potential support at its rising 200-dma.
Picked on December xx at $ xx.xx <-- see TRIGGER
Yahoo! Inc. - YHOO - close: 26.75 chg: +0.26 stop: 27.05
YHOO spiked higher at the open this morning after news hit that the company opened its new "Panama" ad system to the public. Unfortunately for shareholders the rally faded from its highs but still managed to close with a 0.9% gain. We are suggesting that readers wait for a breakdown under support near $26.00 and its 50-dma. Therefore we're suggesting a trigger to buy puts at $25.85. If triggered our target is the $22.65 level near the October low. More aggressive traders may want to aim lower.
Picked on December xx at $ xx.xx <-- see TRIGGER
YUM Brands - YUM - close: 57.98 change: -1.52 stop: 60.51
The ongoing E.coli scare at its Taco Bell outlets continued to undermine investor confidence in the stock. Giving YUM a little push lower this morning was an analyst firm downgrade. Shares gapped open lower at $59.15 and then plunged to a 2.55% decline. Our suggested entry point to buy puts was at $58.49 so the play is now open. Our target is the $55.75-55.00 range.
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.)
Caterpillar - CAT - close: 62.28 chg: -0.79 stop: n/a
CAT's industry rival AGCO (NYSE:AG) issued a sales warning for 2007 and the news impacted shares of CAT, which fell 1.2%. This is bad news for our strangle play that was already suffering. At this point the strangle play is pretty much buried and we're just shoveling dirt on its grave until Friday. CAT has three days to stage a revival or a significantly steeper sell-off, which we don't see happening at this time. We're not suggesting new positions. Our estimated cost was about $0.75. We want to exit if either options rises to $1.50. The options in our strangle are the December $65 call (CAT-LM) and the December $55 put (CAT-XK).
Picked on November 08 at $ 60.10
Blue Nile - NILE - cls: 34.53 chg: +1.04 stop: n/a
As expected shares of NILE gapped open higher and closed with a strong gain (+3%) following yesterday's news that the stock will replace STAR in the S&P smallcap 600 index. More conservative traders may want to exit now. We're not suggesting new positions at this time. Our estimated cost was $2.40 and we're planning to sell if either side of our strangle rises to $3.90. The options in our suggested strangle are the January $45 call (JWU-AI) and the January $35 put (JWU-MG).
Picked on October 29 at $ 38.92
General Dynamics - GD - cls: 73.79 chg: -0.83 stop: 73.39
We have been stopped out of GD at $73.39. The stock broke down under the $74.00 level and under technical support at its simple 50-dma to dip to $73.31. We didn't see any specific news that might account for today's weakness in GD. The company did win another multimillion dollar contract from the military. We do note that today's decline helped produce a new MACD sell signal.
Picked on November 29 at $ 74.35
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