The rumors over the content of President Bush's State of the Union speech tonight produced a rebound across all markets. Traders anticipating various environmental topics in the speech sent energy, ethanol and agriculture stocks soaring. Reportedly Bush will recommend doubling the size of the strategic petroleum reserve from its current 700 million barrel size to 1.5 billion barrels. That would take 8,000 days to fill at the current rate of 100,000 bpd. Obviously filling it sooner rather than later would require a faster fill rate and add to current oil demand for a long time. Ethanol is also expected to be discussed and the stress it is putting on the agriculture system to produce more corn. Companies that are developing a non-corn method of producing ethanol are expected to be rewarded with additional subsidies in the billions of dollars. Traders attempt to game the speech may have produced a bounce today but tomorrow may bring a different result.
Dow Chart - Daily
Nasdaq Chart - Daily
The economic reports today failed to impress investors but may have helped on the Fed front. The Richmond Fed Manufacturing Survey fell to a headline reading of -11 for January compared to -6 for December. The survey showed a sharp decline in the conditions in the Richmond district. The two components showing the sharpest dip were Shipments, which fell from -4 to -13 and Orders with a -12 from last month's -8 reading. Order backlogs remained level at -16. You have to go back to April 2003 to find a lower headline number. The only component to rise was the six-month outlook, which rose to 45 from 30. The weakness in this report should help keep the Fed on the sidelines longer but that same weakness casts a shadow on the current rebound expectations.
Offsetting the decline in the Richmond Fed numbers, the Conference Board Leading Economic Indicators (LEI) rose +0.3% and the third monthly gain in four months. The index has risen to levels that suggest a continued firming in the economy. Typically the LEI leads the economy by 1-2 quarters and the current level is consistent with a 3% GDP. This should be Fed neutral given the long lead-time.
Homebuilders led the market today after DR Horton beat the street and made some cautious comments about an improving market. Goldman also helped with an upgrade on multiple builders and the sector in general. Goldman upgraded DHI, TOL, MDC and RYL but cut HOV to neutral and LEN to a sell saying they had the most exposure to the remaining risk. Goldman said the worst was over for the builders despite continued weak sales ahead.
Homebuilders SPDR Chart - Daily
After the bell there were several high profile earnings announcements. Sun Microsystems posted earnings of 3 cents compared to estimates for only a penny. SUNW also beat revenue estimates thanks to the growing popularity of its newest operating system for servers. After years of losses this could be a sign they are finally turning the corner back into favor with the corporate IT world. SUNW also announced a private equity placement of $700 million to Kohlberg Kravis Roberts (KKR). The capital injection of $700 million is seen to be a significant vote of confidence for the struggling computer maker by a very knowledgeable firm. Shares of SUNW spiked significantly in after hours trading.
AMD reported a loss of -$1.08 per share including charges. Net of charges that translates into a profit of only a penny a share and below the guidance AMD gave when it warned back on the 12th. Gross margins fell to 40% from 51.4% due to the price war with Intel. AMD also warned that future earnings and revenue would be below estimates. AMD fell more than $1 in after hours trading. I recently saw a speed test comparing the top line AMD and Intel quad core processors and Intel has beaten them very badly in just the last 12 months with multiple increases in processing power. A year ago I had a nearly state of the art dual Xeon 3.6ghz desktop computer. The new top line Cloverton quad core Xeon is nearly 10 times as fast as my current dual Xeon PC. Intel is also rumored to be preparing an octal-core processor announcement for later this year. With benchmark testers finding it hard to find any software to stress the quad-core models I can't imagine how much power a chip with 8 imbedded processors will contain. AMD has its work cut out for it to even catch up with Intel much less pass it again.
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Yahoo reported profits of 19 cents but was helped by a tax benefit that added +3 cents. Without the tax help Yahoo earned 16 cents and that beat analyst estimates of 13 cents. This was a drop of -61% compared to the 46 cents Yahoo earned in Q4-2005. YHOO dropped sharply in after hours until Yahoo said its new advertising system code named Panama would debut ahead of schedule on Feb-5th. That produced a rebound from $26 to $28.50 in after hours. Google is still seen taking market share and Yahoo is struggling to find new revenue. Yahoo also gave guidance that was seen as light by analysts.
DuPont (DD) reported earnings that beat the street but disappointed analysts with its outlook. The drop in the housing market and the bear market in autos is putting pressure on profits. Overseas sales were the saving grace in Q4 erasing the -3% drop in US revenue. DD sees that trend continuing in 2007. They also said they felt the auto business had hit bottom and a rebound could appear in 2007.
Texas Instruments said profits rose only 2% and were pressured by a trend in cell phones to lower priced models. TXN makes about $5 on a cheap phone and $25 on the more expensive models. TXN said consumers were trending towards the less expensive phones despite the huge feature list on the expensive models. Once the iPhone hits the market those current high priced models will likely take another hit as the consumer shifts to the iPhone model. Like nearly everyone else TXN guided lower for Q1 to a range of 28-34 cents compared to analyst's estimates of 35 cents. Ironically an upgrade led to a +4% jump in TXN as investors bet that TXN will turn the corner in 2007 to higher profitability. Noted Merrill Lynch analyst Joe Osha said "TXN will hit a bottom in Q1 and its shares are "too cheap considering the likely improving trajectory of the business in 2007." Shorts were stunned as TXN gapped open to near $30 on the upgrade.
Dow Transports Chart - Daily
The transports were flirting with the resistance highs at 4870 until oil spiked higher late in the day. The transport gains were on the back of the railroads and not the airlines. The rebound in oil prices and weak earnings from United Airlines sent the airline sector crashing back to earth. Losses included AMR -3.39, CAL -2.61 and UAUA -3.94. UAUA lost $61 million (-55 cents) for the quarter on revenue that rose +5%. Analysts were only expecting a loss of 35 cents. United is the second largest airline by traffic and said a series of crippling winter storms lowered revenue by $40 million. More than 4000 UAL flights were cancelled in December when the Denver airport was closed for two days. An earlier storm in Chicago caused the cancellation of 900 flights.
Oil prices rose +$2.46 to close at $55.04 after OPEC said there was no need to meet again because inventories were already declining thanks to their production cuts. There was also more violence in Nigeria where an American was kidnapped and held hostage. The Nigerian rebels pledged to step up their attacks in 2007. The president of OPEC also said he felt $55 was a fair price for the OPEC basket of crude. That equates to something in the $60 range for the benchmark contract of light sweet crude. AG Edwards also weighed in on oil prices saying last week's touch of $50 should be strong support.
March Crude Futures Chart - 30 min
Late in the day the Department of Energy (DOE) said it was going to begin adding to the Strategic Petroleum Reserve at the rate of 100,000 bpd. The DOE plans to add 11 million barrels over the coming months. Plans are underway to increase the size of the SPR to 1.5 billion barrels and Secretary Bodman said further additions would be made with fill rates determined by market conditions. Bodman said oil would be added in a way that would not increase gasoline prices or impact the market. Exactly how they would add 800 million bbls without impacting the market is still unclear. The current 691 million bbls in the reserve equates to a 55-day supply. In 1985 that same amount covered a 118-day supply. It was also reported that China had taken advantage of the drop in prices to add more than 25 million bbls to its SPR over the last 90 days. China is rapidly constructing three more SPR locations to contain 30 million bbls each. They are also in the planning stages for some monster SPR locations to be constructed over the next ten years to bring their SPR to as much as 800 million bbls. Since there is no reason to build them if you are not going to fill them the combination of China's build out and the new US decision equals something in the 1.5 billion bbl range for additions over the next few years. It would take 6000 days or 16.5 years to fill them at the rate of 250,000 bpd. Obviously neither country is going to wait 16 years to complete their fills. That suggests we could see some strong auxiliary demand over the next 6-7 years.
The Dow transports have been rising sharply since late December when it reached strong support at 4500. The rebound stalled at 4870 early last week and the outlook is not good if the price of oil continues to rise. The 4870 level is strong resistance and a failure here could weaken the Dow. The rise in the Transports had been a confirming influence on the recent Dow rally and a collapse in transports could have a negative impact on any further attempts for the Dow to rally.
The Dow fell more than -100 points intraday on Monday on multiple concerns including earnings. The Dow fell from last Wednesday's high just over 10600 to initial support at 12450 yesterday. Today's rebound failed at 12550, which was last week's support now turned into resistance. Today's rebound was primarily due to traders buying that dip and trying to game the president's speech. That suggests Wednesday's action could be negative. Buy the rumor, sell the news. A break of 12450 would be a confirmation of a negative outlook.
The Nasdaq managed to close positive for the day but only barely at +0.34. The intraday gains were sold hard and were it not for expiring time on the clock we could have returned to yesterday's lows. Techs have a lot against them today with multiple earnings disappointments and more than likely others to come. Initial support is 2420 with critical support only slightly lower at 2400.
The S&P-500 performed yet another rebound to 1430 and a dead stop at that resistance level. This range is getting plenty of airtime but little resolution. Monday saw a dip to 1420 and very little bounce into the close. Today's monster gains by energy stocks and stocks expected to benefit from tonight's speech produced the rebound. Again, we could easily see a sell the news event on Wednesday. The president has a tough road to travel tonight and the odds of him pulling a rabbit out of his hat that appeases everyone is nearly zero. If anything the potential exists for a negative response to the speech rather than the beginning of a new bull run. Listen intently for references to Iran because repeated linking of Iraq and Iran could be a clue that a military confrontation with Iran is in our future.
S&P-500 Chart - Daily
Nothing has changed with my recommendations. I still believe we should short failures at S&P 1430 and be prepared to go long over that level. The market risk in my opinion is to the downside and every touch of 1430 just gives us one more opportunity to get short again. The next material economic report is the Kansas Fed Survey on Thursday. Next week there is a two-day Fed meeting and there is little possibility for a positive result. The Fed is likely to say the economy is recovering but inflation is still a problem. Depending on how they say it we could see fear of the Fed come back into the market. They will want to talk tough to apply pressure rather than be forced to raise rates. That fear of what they may say could filter into the markets later this week. This emphasizes my downside risk assumptions. Trade cautiously until this indecision at 1430 is resolved.
Chaparral Steel - CHAP - cls: 46.79 chg: +2.09 stop: 41.99
Steel stocks turned in one of the market's best performances today. Positive comments from A.K.Steel (AKS) that they expected a +4%-5% rise in their average selling price lit a fire under the industry's stocks. Shares of CHAP responded with a 4.6% gain and a bullish breakout over any potential resistance in the $45.50-46.00 region. Shares of CHAP look poised to run towards our target in the $49.00-50.00 range. More aggressive traders may want to aim higher since the Point & Figure chart projects a $64 target.
Picked on January 14 at $ 45.16
iShares China Index - FXI - close: 108.90 chg: +1.90 stop: 99.49
Shares of FXI, a Chinese-focused ETF, rose more than 1.7% on Tuesday and closed at a new two-week high. The short-term technicals are definitely improving and FXI looks ready to challenge potential resistance at the $110 level. Please note that we're raising our stop loss to $102.45. Our target is the $115.00-117.00 range. Remember, this is an ETF focused on a foreign market and it tends to gap open every day as it adjusts to how the Chinese markets traded the night before.
Picked on January 14 at $105.40
KB Home - KBH - close: 53.20 change: +1.73 stop: 49.75 *new*
Investors responded positively to DHI's earnings report this morning and that fueled a sector-wide rally in the homebuilders. The DJUSHB index rose 2.3%. Shares of KBH out performed many of its peers with a 3.3% gain on above average volume. Traders were quick to buy the dip near $51.00 this morning. It will be interesting to see if Centex's (CTX) earnings that came out tonight (beat by 4 cents) will fuel the rally or undermine it with negative guidance. Our target for KBH is the $54.90-55.00 level. More aggressive traders may want to aim higher. Please note that we're raising the stop loss to $49.75.
Picked on January 21 at $ 51.74
Lehman Brothers - LEH - cls: 82.50 change: +0.38 stop: 78.95
The XBD broker-dealer index under performed the rest of the financials today. Yet we're encouraged to see the bounce (+0.4%) in shares of LEH. Given the lack of upward momentum we would hesitate to open any new call positions in LEH at this time. There is still a good chance that LEH may see a stronger dip toward support near the $80 region. We have two targets for LEH. Our conservative target is the $84.85-85.00 range. Our aggressive target is the $89.00-90.00 range. FYI: LEH has a very bullish pattern on its Point & Figure chart called a bullish triangle breakout and it forecasts a $111 target.
Picked on January 11 at $ 80.25
China Life Ins. - LFC - close: 46.70 change: -0.41 stop: 44.89*new*
Shares of Chinese life-insurance company LFC continue to under perform both the U.S. markets and the Chinese markets over the last several days. The quick rebound that we were expecting has failed to materialize. More conservative traders may want to exit early right now. We are going to raise our stop loss to $44.89. We'd probably wait for a rise past $47.75 or $48.00 before considering any new positions since such a move would be a breakout above its trendline of resistance. Our target is the $52.50-55.00 range. We want to remind readers that this is an aggressive, higher-risk play. Most of LFC's technical indicators are bearish and the P&F chart is bearish with a $36 target.
Picked on January 14 at $ 46.86
Lockheed Martin - LMT - cls: 98.74 change: +1.97 stop: 94.99*new*
Defense stocks surged on Tuesday with the DFI index rising more than 2%. Shares of LMT paced the move with a 2% gain to another new all-time high. The breakout over short-term resistance near $98 is bullish as is the strong volume on today's rally. We are exiting tomorrow one way or the other. LMT will either hit our aggressive target in the $99.00-100.00 range or we'll exit at the closing bell to avoid holding over LMT's earnings report on Thursday. We suspect that the only thing that would undercut LMT's chances of hitting our target tomorrow would be a negative earnings report from General Dynamics (GD) who reports earnings tomorrow morning. Please note that we're adjusting our stop loss to $94.99.
Picked on November 29 at $ 90.62
Mohawk Ind. - MHK - close: 79.86 chg: +1.11 stop: 76.49
A strong day for the homebuilders rubbed off on shares of MHK. The stock rose 1.4% and is challenging resistance at the $80.00 level. We have been suggesting that more conservative traders wait for a breakout over $80.00 before opening call positions. Our target is the $84.00-85.00 range. We do not want to hold over the February earnings report.
Picked on January 21 at $ 78.38
Altria Group - MO - close: 87.76 change: +0.69 stop: 85.95
Shares of MO rose 0.79% with a bounce from its multi-week trendline of support. The three-day candlestick pattern also looks like a short-term bullish reversal. We are suggesting new call positions here. However, traders should note that MO is due to report earnings on January 31st and we do not want to hold over the report. More aggressive traders might want to hold over MO's earnings report. Forbes.com reported on one analyst's opinion at Goldman Sachs who suggests that investors buy MO before the upcoming earnings report because the company is likely to announce the Kraft (KFT) spin-off with earnings. There have been plenty of positive comments about the KFT spin-off being good for MO and that shares would probably see a 5% gain (or more) on the news. Then again MO is already up significantly from its lows last quarter and the spin-off news may already be price in. We are targeting a rally into the $92.50-95.00 range. The P&F chart currently points to a $114 target.
Picked on January 04 at $ 87.65
Marathon Oil - MRO - close: 90.22 change: +2.73 stop: 84.85 *new*
Rumors that President Bush would announce plans to double the country's strategic oil reserve lead crude oil to a significant rally, where the commodity closed back above $55 a barrel. The oil strength fueled a widespread rally in the energy sector. Shares of MRO surged 3.1% and confirmed the breakout from its trading range. The rise past $88.00 was another entry point for readers to buy calls. Currently MRO is now challenging resistance near $90 and its simple 50-dma. If there is any profit taking tomorrow we'd look for a dip/bounce anywhere above $88 as a new entry point. Our target is the $93.50-94.00 range. Please note that we're raising the stop loss to $84.85.
Picked on January 22 at $ 88.05
Teleflex - TFX - close: 66.43 chg: +0.04 stop: 64.75
Industrial stocks managed a bounce today yet shares of TFX failed to truly participate. Looking at the intraday chart we can see that bulls were trying to buy the dips and, as expected, the $66.00 level is thus far acting as support. We would use the dip as a new entry point to buy calls but more conservative traders might feel more comfortable waiting for TFX to show a little more conviction and rebound back above the $67 level first. Normally we would expect the $70.00 level to act as resistance but looking at TFX's history the stock seems to encounter resistance in the $72.00 region. Our target is the $71.00-72.00 range. FYI: The P&F chart points to an $81 target. We plan to exit ahead of the mid February earnings report.
Picked on January 14 at $ 67.11
Celgene Corp. - CELG - close: 53.94 change: -0.23 stop: 57.01
Biotech stocks under performed the market on Tuesday. The BTK index lost just over 1% and odds are growing that the BTK is in the process of forming a bearish double-top pattern. CELG continued to slowly drift lower and shares closed with a 0.4% loss. We do not see any changes from our previous comments. We are suggesting put positions with CELG under $56.00 (the 10-dma). Our target is the $50.50-50.00 range, near its rising 100-dma. We do not want to hold over the February 1st earnings report.
Picked on January 18 at $ 54.98
eBay Inc. - EBAY - close: 28.62 change: -0.70 stop: 31.26
Internet stocks, as a group, under performed the broader market. The INX Internet index lost 0.6% and broke down under technical support at its rising 50-dma. Yahoo was the big story today. Shares of YHOO posted their sixth loss in a row as traders exited ahead of earnings. YHOO reported after the closing bell and beat estimates but warned for the first quarter. The after hours reaction has been surprising. At first YHOO sold off even further but now shares of YHOO are bouncing strongly in after hours markets on positive comments and an early debut for Yahoo's "Panama" service. The Yahoo's earnings warning for the first quarter could weigh on EBAY and we are expecting new relative lows for the online auction giant. We would suggest that more conservative traders exit tomorrow afternoon to avoid holding over EBAY's earnings announcement. We've recently changed our strategy and plan to hold over EBAY's results. Our target is the $26.00-25.00 range. Wall Street is looking for EBAY to report earnings of 28 cents a share.
Picked on January 08 at $ 29.70
Whole Foods - WFMI - close: 43.64 chg: -0.55 stop: 46.55
WFMI continues to under perform and the stock sank to another new one-year low. We do not see any changes from our previous comments. Readers can choose to buy puts now or look for a failed rally under $45.00 as a new entry point. Our target is the $40.25-40.00 range. We do not want to hold over the early February earnings report. FYI: The P&F chart points to a $26 target.
Picked on January 19 at $ 44.85
Today's Newsletter Notes: Market Wrap by Jim Brown and all other plays and content by the Option Investor staff.
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