For two days the S&P tried to post a close over the historic closing high of 1427.46. For two days sellers came in at the close and stole the intraday gains. With volume likely to slow as we approach the holiday weekend it is going to be even tougher for the bulls to push higher. Volume is a weapon of the bulls and without that weapon in their arsenal the tide of battle could turn.
Dow Chart - Daily
Nasdaq Chart - Daily
The morning economics started out negative with the weekly chain store sales falling -1.5% for the week. This was the largest weekly decline since December. The ICSC survey showed 60% of consumers cut back on discretionary spending due to the high price of gasoline. This was the largest cutback since Oct-2005 when the post Katrina price spike produced sticker shock for consumers. The share of people cutting spending considerably rose to 32%. Not surprisingly the survey found that low-income respondents were making the most cuts. I doubt that was a surprise to anyone. Retail sales fell by a record amount in April and the ICSC was predicting a modest rebound in May of 2.0% to 2.5%. That target may be tough to hit after two of three in weeks in May have posted declines.
Manufacturing in the Richmond Fed region continued to languish with the headline number at -10 right inline with the prior four months. This was the sixth straight month in negative territory. The shipments component improved from -15 to -7 but that was little consolation. New Orders worsened from -11 to -13 and Order Backlog fell to -18 from -14. This was not a positive report even though the headline number remained flat. The biggest contributor preventing a further decline was the expectations component, which rose from 19 to 30. Evidently conditions are so bad manufacturers feel anything will be an improvement.
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The Consumer Comfort Index fell to a -9 last week and the lowest level since Oct-2006. The share of consumers who felt the national economy was negative rose to 60% while those who felt their own finances were negative rose to 38%. Rising gasoline prices and falling housing prices were the main drags on sentiment. The EIA reported the average gasoline price rose to $3.26 per gallon and the highest price in history even when adjusting prior highs for inflation. SUV sales rose +25% in April compared to April 2006 so quite a few new SUV owners are probably wishing they had chosen a different car.
The semiconductor Book-to-Bill report for April was finally released and it showed an increase in orders of only $176 million. That roughly equaled the dollar value of orders shipped at $162 million leaving the book-to-bill ratio flat at 1.00. Bookings were slightly lower than the same period in 2006. There are a lot of new chip plants coming online and they will require a significant jump in new business to keep them all busy. There are quite a few of new products ahead as well and nearly every manufactured product today has a chip in it.
Mergers and acquisitions continued power the market and the biggest move on Tuesday was in MGM. Kirk Kerkorian at age 90 and 56% stockholder in MGM filed notice he wanted to acquire two of MGM's premium properties. Captain Kirks firm, Tracinda Corp, wants to buy the Bellagio and the $7 billion City Center development now under construction. Since he is a majority owner it would be nearly impossible to do an arms length transaction. Tracinda said they wanted to explore strategic alternatives, which may include financial restructuring transactions involving all or a substantial portion of the company. In order to strip out roughly $12 billion of MGM assets Kirk may have to take MGM private first to avoid any minority stockholder suits. He could then split out the properties and then IPO the remainder of the assets he did not want. The MGM has just completed acquiring a large portfolio of high dollar properties when they acquired Steve Wynn's Mirage Corp, where they added several high dollar properties including the Bellagio, and another acquisition of the Mandalay Bay properties, all of which happened in just the last several years. To take MGM private again would be a huge chunk of change but with those premium assets it would not be hard to convince private equity players to line up on Kirk's side. The possibility of a privatization sent MGM shares soaring +17.03 (+27%) to $80. Kirk could quit his takeover attempt tomorrow and be well rewarded. His existing 54% stake represents 158,480,000 shares, which increased in value by $2.7 billion today alone. Not a bad payday! Of course an announcement he had changed his mind could subtract that amount in even less time. I wonder if any of the roughly 40,000 MGM calls outstanding belong to Kirk? Buying a boatload of calls ahead of his announcement may not follow the rules but stranger things have happened. I want to buy a put on him personally or maybe an even better play would be to sell calls. Can I sell LEAP calls on the 100-year age strike please? Odds are very good they would expire worthless. At age 90 he is still pushing money around like property on a Monopoly board as if he was going to live another 20 years. Maybe the thrill of victory is keeping him young. Kerkorian was running hotels in Vegas back in the early 60s and booked Elvis and Barbara Streisand as stage acts to try and pump up business. It worked then and that model has worked for several decades since.
Halliburton lost 40 cents after saying they would like to find a deep pocket investor to help them launch $80 billion in new projects over the next five years. HAL is tracking 60 projects worth $80 billion out of $100 billion in potential oil service deals. Most of those projects would be in the Middle East simply because they control better than 65% of the remaining global oil reserves. HAL announced a move to Dubai in March to be closer to the center of activity. HAL is going to launch a secondary listing in the area but has not decided which exchange will provide the most liquidity. HAL claims it will remain a registered U.S. company. HAL is going to hire 14,000 employees in 2007. Baker Hughes (BHI) said on Tuesday that Saudi Arabia's state oil company Saudi Aramco, will become its largest customer in 2007. They will replace BP and XOM as past holders of the number one position.
OSI Restaurant Partners (OSI), the holding company that operates OutBack Steakouse and several other chains said Kangaroo had sweetened its offer to $3.18 billion or $41.15 per share. Kangaroo is a group of private investment companies including Bain Capital Partners. This offer is a 27% premium to the OSI price when the offer was first announced.
Monster Worldwide (MNST) fell -2.53% after an ex CEO sold one million shares last week. Goldman Sachs said the sale suggested there is no pending buyout in the company's future. There have been quite a few rumors suggesting Microsoft, Google, Yahoo or even Amazon could have been interested in acquiring the company.
Dynegy (DYN) fell slightly on news that Chevron was selling 96.9 million shares it currently owns. Chevron (CVX) would receive approximately $940 million from the sale. Chevron previously owned 20% of DYN but after a recent merger between DYN and LS Power, Chevron's stake fell to 12%. Goldman Sachs will sell the shares for Chevron.
Research In Motion (RIMM) and PALM both jumped about +4% on rumors that a major provider, specifically Nokia, might be interested in buying RIMM. RIMM jumped $7.06 to $159 and would be a large bite for Nokia but definitely doable. Late in the day a report surfaced suggesting Nokia had thrown cold water on the rumor.
Thomson Financial said this is the longest and strongest M&A streak on record. For the last five weeks transactions have been reported for more than $100 billion per week. Nearly $70 billion have already been announced this week and it is just Tuesday. Year to date more than $2.1 trillion in deals have been announced. Over $470 billion has been announced in just the last five weeks. One deal that just self-destructed today was the Alcan offer by Alcoa. Late today the Alcan (AL) board rejected the $27 billion Alcoa offer as inadequate.
The homebuilders spiked higher again after Treasury Secretary Henry Paulson said in an interview the current housing slowdown is "largely" over and "contained" meaning it should not spread any further to other segments of the sector. The chief of the Mortgage Bankers Association claimed the problem with subprime defaults only represented one-quarter of 1% of all loans. He reported in 2006 35% of all originations were subprime and that was well over the 13% rate seen in 2003. With more than 50 million loans outstanding he feels the subprime meltdown has been vastly overstated. Only three million of those have been subprime and while recent ARM defaults have reached 14.44% only 5.1% of borrowers have ARMs. The fixed rate subprime loans are still experiencing normal default rates and are not a problem. Builder Standard Pacific (SPF) added to the rally on heavier than average call volume suggesting a buyout deal may be in the works. I bet the option market makers love all these rumors and the spike in option volume. This is pure profit for most and on the outside chance a rumor comes true they are normally hedged anyway.
June crude futures expired today and they closed on a bout of profit taking that knocked the price back to $65 after yesterday's $66.38 high. The new contract, July, hit $67.10 on Monday and fell to meet the expiring June contract to $65.56 today. The drop was powered by news that the Colonial gasoline pipeline from the Gulf of Mexico to New York was full and could not accept any more fuel. This suggested refining production had ramped up sharply and demand might have slowed. With inventory reports due out tomorrow traders took profits from last week's spike. Gasoline futures fell nearly 4% on the news to $2.30. Platts is expecting crude inventories to rise by +1.2 million barrels, gasoline to rise +1.4 mb and distillates to add +1.2 mb. Refinery runs are only expected to rise by +0.4% to 89.9% and that is still well below the normal 93% to 94% for this period. Global gasoline demand has increased by +2% but production has only increased by +1% in the same period. Late in the day BP reported that 100,000 bpd of production from Prudhoe Bay for a "few days" to repair a leak in a separation facility. That is 25% of their daily output.
The updated hurricane forecast released today predicts 13-17 named storms, 7-10 of which would turn into hurricanes producing 3-5 storms of category 3 and above. According to the forecast there is a 75% chance of a stronger than normal hurricane season. Futures saw a slight bounce on the news but it was not much different than the earlier predictions.
Richmond Fed President Jeffery Lacker has not given up on his inflation warnings even though he is not a voting member of the FOMC for 2007. Lacker voted for a rate hike in each of his last four meetings before the board changed members earlier this year. Core inflation has declined to 2.1% from 2.4% in 2006 but Lacker feels inflation needs to be driven to something in the 1.5% range before the Fed can rest. He said the current drop in inflation is statistically insignificant and feels the next Fed move will be a rate hike. He feels higher gasoline prices will eventually filter through the system and produce stronger overall inflation. He also said the Q1 GDP at +1.3% would be the low point in the cycle with moderate gains ahead. The market took his bearish inflation comments in stride.
CChinese leaders meeting in the US had a strong warning for US leaders. The Vice Premier warned "any effort to politicize the economic relationship between the two nations would be "absolutely unacceptable" and "We should not easily blame the other side for our own domestic problems." Chinese leaders speak with a forked tongue when they warn about not politicizing trade issues. When our leaders go to China to talk trade it is 100% political. Chinese leaders are expected to meet with Speaker Pelosi and other lawmakers to avoid a flurry of trade sanctions aimed at lowering the trade deficit. China was expected to throw the U.S. a couple trade bones when the meeting started but the tough talk has dampened expectations. When the Chinese government hardly lets a month go by without somebody repeating the phrase that "war with the U.S. is inevitable" it is tough to see why they would want to bow to our whims. China constantly disregards trade rules around the world and only obeys them when it suits China. I heard two analysts/traders this week suggesting a short of the FXI due to the expected decline when the talks end without any material concessions.
Despite the minor dip in the Dow the rally continues. The Nasdaq had been a lackluster performer for two weeks but the last three days have been spectacular. The Nasdaq Composite gained +70 points from Wednesday's lows to close at a new 6.5 year high. Today's Nasdaq high was exactly to resistance but that has not stopped any indexes for the last few weeks.
The Dow traded in a 60-point range but ended up almost exactly where it started. Two consecutive days without a new historic high but the rally is still intact. Initial support is 13525 and resistance 13585. Nothing has changed other than no green numbers at the end of the day.
S&P-500 Chart - 60 min
The S&P-500 has rallied past its historic high close at 1527.46 twice this week but failed to hold those gains. No harm no foul but this number has now taken on cult like meaning. It is just another line on the chart but that resistance high dates back to March of 2000. Breaking it to the upside supposedly confers added confidence to the current rally and projects gains of hundreds of more points according to one TV personality. Initial support has risen to 1522 making that 1527 target closer every day.
Russell-2000 Chart - Daily
The biggest change for me is the breakout on the Russell. After more than a month of fighting resistance at 835 including both days this week the Russell finally broke out and closed at a new historic high at 840. That +30 point gain from last Wednesday's low is a +4% rebound and it came on the back of several large buy programs. Retail traders like you and I cannot impact the Russell even if we pooled all our trades together but fund managers can move it with their program trades. It appears several funds decided support at 815 was going to hold and there was no reason to watch from the sidelines going into the holiday. This was a very brave move on their part. Another reason the Russell exploded is the extreme level of short interest. The Russell iShares (IWM) are the most heavily shorted symbol on the NYSE.
The NYSE reported on Monday that short interest spiked 7% last week to a historic high of 11 billion shares or 3.1% of all shares listed on the exchange. The rate of increase was the 10th largest over the last 16 years. The last spike that hit the top 10 list was in March. The three largest shorts are the Russell-2000 ETF (IWM) at 237 million shares (4 days of volume), Ford (F) at 208 million shares (6 days) and Motorola (MOT) at 125 million shares or 4 days to cover.
NYSE Short Interest Chart
If we have a breakout on the Russell, Nasdaq Comp and Nasdaq 100, the S&P and the Dow what is to keep us from just charging higher on the back of all that short interest? Only one thing I can think of and that is volume. Volume the rest of the week should drop sharply as traders head off for an early holiday. Expiration is over, earnings are over and M&A is actually becoming routine. Traders should want to just leave everything as it is for the rest of the week but you never know when lightning will strike. Now that the Russell is over 835 I would remain long above that level but I would be seriously concerned if volume increases later this week and the advance falters.
Play Editor's Note: We continue to urge caution with bullish positions. The markets remain very overbought. One of these days there's going to be a big market sell-off and we will easily see half of our call positions get stopped out. Unfortunately, if we are going to trade, we have to ride the trend until it changes. Bears have been getting killed in this market. Watch your stops carefully and don't be afraid to take a profit if you have one. In some of our plays we're starting to see a chunk of our potential gains vanish.
Allegheny Tech - ATI - cls: 112.65 chg: -1.92 stop: 109.99
Warning! The steel and metal stocks displayed relative weakness on Tuesday. Shares of ATI slipped 1.6% and look poised to dip toward support near $110 and its rising 50-dma (near $110.80). We are not suggesting new positions at this time. More conservative traders may want to exit early or tighten their stops toward $110.80 or $111.00. Our target is the $119.00-120.00 range. FYI: The Point & Figure chart forecasts a $122 target.
Picked on May 08 at $113.45
Baidu.com - BIDU - cls: 135.14 chg: +0.48 stop: 127.49 *new*
A negative earnings report from Chinese company KongZhong
Picked on May 14 at $130.51
General Dynamics - GD - cls: 80.56 chg: -1.40 stop: 78.85
Shares of LMT plunged 4.6% after being downgraded this morning. The big sell-off in a major defense contractor weighed on shares of GD. Today's 1.7% decline in GD is a technical breakdown under its rising 10-dma. Watch for potential support at the $80.00 level. We have two targets. Our conservative target will be the $84.75-85.00 range. Our aggressive target will be the $89.00-90.00 range. The P&F chart has produced a triple-top breakout buy signal with a $96 target.
Picked on April 29 at $ 80.27
Goldman Sachs - GS - cls: 230.71 chg: +1.48 stop: 224.25
GS has spent the better part of three days churning sideways in the $228.50-231.50 range. Volume on today's gain was low probably due to the upcoming holiday weekend. A new relative high over $232 would be encouraging. Our target is the $238.00-240.00 range. The P&F chart points to a $244 target.
Picked on May 13 at $227.50
W.W.Grainger - GWW - close: 85.82 chg: +0.42 stop: 83.24
GWW continued to show relative strength. The stock rose another 0.5% to confirm yesterday's bullish breakout over resistance at the $85.00 level. We would still consider new positions here although a dip back towards $85 would work well. The target is the $89.75-90.00 range. The P&F chart currently points at an $88 target.
Picked on May 21 at $ 85.255
Monster Worldwide - MNST - cls: 47.25 chg: -2.53 stop: 45.89*new*
Hmm... traders might want to consider an early exit in MNST and cut our losses. There were more analysts comments out today suggesting that MNST isn't a takeover candidate and the fact that a former top manager just sold one million shares is a good indication that they're not talking to anyone. The stock did bounce from its intraday lows but the 5% decline on big volume is definitely bearish. We were expecting some short-term support near $48.00 but MNST plowed right through it. We are going to raise our stop loss to $45.89. More conservative traders may want to cut their losses now. We're not suggesting new positions at this time.
Picked on May 20 at $ 50.08
Precision Castparts - PCP - cls: 115.42 chg: -1.01 stop: 110.91
PCP suffered some minor profit taking on Tuesday. A dip toward the simple 10-dma near $112.90 would not be unusual. More conservative traders may want to lock in a gain now. We're not suggesting new positions. Our target is the $118.00-120.00 range. Last Friday there was chatter about PCP becoming a candidate to be added to the S&P 500 index.
Picked on May 13 at $110.91
Sempra Energy - SRE - cls: 64.50 chg: +0.18 stop: 61.45
SRE displayed relative strength again but it's worth noting that the rally struggled to breakout past the $65.00 level. We would expect a dip soon. A bounce above $63.00 can be used as a new entry point to buy calls. Our target is the $68.00-70.00 range.
Picked on May 20 at $ 64.05
USEC Inc. - USU - close: 24.30 chg: +0.22 stop: 21.99
USU spiked higher at the open and traded to a new high at $24.96 before paring its gains. The move looks like a short-term failed rally pattern. We would not be surprised to see a dip into the $23.25-23.50 zone. This is an aggressive, speculative play and readers should consider it higher-risk. We'll try and limit our risk with a stop under $22.00. Traders might be able to get away with a stop near $22.35. Our target is the $27.00-30.00 range. The P&F chart points to a $28 target. FYI: USU has relatively high short interest at more than 11% of the float.
Picked on May 20 at $ 23.56
Vangard Emergy Mkts ETF -VWO- cls: 87.20 chg: +0.23 stop: 83.45
The VWO hit another new high late this afternoon but for the most part the ETF traded sideways. Volume came in very low probably due to the upcoming three-day holiday weekend. Our target is the $89.85-90.00 range. More aggressive traders may want to aim higher since the P&F chart points to $113.
Picked on May 16 at $ 86.15
Essex Property - ESS - cls: 122.62 chg: +1.95 stop: 126.55
The oversold bounce in ESS continued on Tuesday with a 1.6% gain. The stock was heading lower in the last thirty minutes of trading. ESS should encounter some overhead resistance near the 10-dma around $123.75 and around the $125 zone. We're not suggesting new positions at this time. Our target is the $115.50-115.00 range. FYI: The P&F chart points to a $100 target.
Picked on May 16 at $124.65
Las Vegas - LVS - cls: 80.19 change: +4.28 stop: 82.55
Ouch! The news we mentioned last night had a much bigger impact that expected. The Tracinda Corp., which is the investment firm run by billionaire Kirk Kerkorian, wants to buy two high-profile casinos, including the Bellagio, from MGM. This send shares of MGM up 25% and the rest of the casino stocks soared. LVS, which had been down almost four points quickly erased our potential gains. Volume on today's move in LVS was huge. We would strongly suggest that readers consider an early exit right here to limit their losses. We are going to wait and see if there is any follow through on today's rally. We're not suggesting new positions.
Picked on May 07 at $ 79.85
Vital Images - VTAL - cls: 28.60 chg: +0.25 stop: 30.05
VTAL is still bouncing around the $28.00-29.00 range. A failed rally under $30 or its descending 10-dma could be used as a new entry point for puts. Our target is the $25.15-25.00 range.
Picked on May 16 at $ 27.99
Johnson Controls - JCI - cls: 109.36 chg: -0.86 stop: 107.45
We are quitting early with JCI. There has been no follow through on last Friday's rally past $110. Momentum is fading and indicators are turning bearish. Today's decline has produced a bearish reversal with the bearish engulfing candlestick pattern. Aggressive traders might even want to switch directions and buy puts with a trigger under $109 or $108.50 and a stop above today's high. We are suggesting readers exit any call plays even though JCI has not yet broken technical support at its rising 10-dma.
Picked on May 20 at $110.60
Sears Holding - SHLD - cls: 178.62 chg: -0.97 stop: 174.74
We are throwing in the towel with SHLD and suggesting readers take an early exit now. The oversold bounce did not have enough fuel to breakout past resistance at the $180 level. The stock tried for multiple days but just couldn't do it. Now short-term indicators are turning bearish again.
Picked on May 13 at $177.96
Itron - ITRI - cls: 68.81 change: +1.06 stop: 69.35
Abandon ship! ITRI continued to rally and broke out over its short-term trend of lower highs. Today's move also looks like a bullish breakout from its more recent sideways consolidation. We're suggesting an early exit immediately.
Picked on May 08 at $ 65.85
Russell 2000 Ishares - IWM - cls: 83.27 chg: +0.51 stop: 83.55
Unfortunately, our put play on the IWM didn't last long. We were triggered at $82.90 yesterday but the rally continued and the IWM has broken out over significant resistance near $83.00. The intraday high was $83.64 and our stop loss was at $83.55.
Picked on May 21 at $ 82.90
Today's Newsletter Notes: Market Wrap by Jim Brown and all other plays and content by the Option Investor staff.
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