What a difference a week makes! Last Tuesday the Fed announced a 50-point rate cut and the Dow surged +335 points. Today, a week later the Dow is 80 points below the high set on that post Fed surge. Volatility has died with the VIX 10 points below last week's high and volume is shrinking again. In a post rate cut world the markets are supposed to rally, right? Somebody needs to tell the bulls to start putting more money to work or all this negative economic news is going to bring the bears back from hibernation.
Dow Chart - Daily
The economic reports made headlines but the bad news was not as bad as expected. The weekly chain store sales snapshot showed another 1% drop in sales after a 1.1% drop the prior week. This was the largest two-week decline since 2004 and pushed the index to its lowest level for the year. Analysts said warmer than normal weather and higher gasoline prices were the primary cause of the slowing sales. Gasoline prices averaged $2.86 nationwide last week and that was 43 cents higher than the same period in 2006. The failure of oil to follow the normal seasonal cycle this fall is putting additional pressure on budgets.
Consumer confidence fell to 99.8 in September from 105.6 in August. This drop put the index at its lowest level since November 2005. The present conditions component fell sharply to 121.7 from 130.1 and the expectations component fell to 85.2 from 89.2. The jobs component fell -2 points to 25.7 due to the disaster in the August jobs report.
Existing home sales fell to 5.50 million from 5.75M. This was slightly better than an expected drop to 5.45M. For comparison sales hit 7.35 million units in June 2005 or nearly 2 million units more than today. Sales were down -4.3% in August and September is expected to be even worse. Condo sales were falling even faster at -8%. Home sales in the South fell -13% and Midwest -11%. The time on market for an average home grew to 10 months. Overall the median home price was flat although in many sectors prices were down from 5% to as much as 9%. The stable areas of the country are offsetting the drastically negative regions. With tougher loan requirements hindering those actually trying to buy a home this sales pattern is going to get worse before it gets better.
On the bright side the Richmond Fed Manufacturing Survey doubled its August reading of +7 with a spike to +14. This was an acceleration of the rebound, which started back in June. Shipments spiked +12 points to 22 and new orders jumped from 5 to 14. Hopefully this good news will translate into an improved ISM when it is announced on Monday. The only negatives were a -3 point drop in backorders and a -8 point drop in the six-month outlook from 25 to 17.
There are no material economic reports remaining for the week. The only items of interest are Durable Goods on Wednesday, the last look at Q2 GDP, Kansas Fed Survey and more disappointing New Home Sales on Thursday. The Chicago PMI on Friday will be the only key report for the rest of the week.
In stock news Vonage (VG) was given what some analysts were calling a death sentence. A court found Vonage guilty of violating six patents held by Sprint and fined them $69.5 million. The court also said they must pay Sprint 5% of future sales. Vonage said they would appeal. This was the second ruling against Vonage. The first was a ruling they had violated three patents belonging to Verizon. The jury in that case awarded $58 million in damages and a 5.5% royalty on future sales. Vonage says they will develop a workaround to avoid using the infringed patents but that could take a long time and seriously degrade their ability to sell their products with this cloud over their head. At today's close Vonage had a market cap of just over $100 million. Sprint should just agree to take them over in lieu of the fine and end their misery. Vonage went public at $14 in May-2006 and has never traded over its opening day spike.
Vonage Chart - Daily
Lowe's Companies (LOW), a major home building materials supplier, warned that same store sales could be well below the prior forecast and flat in 2008. They cut their full year profit forecast due to the prolonged decline in the housing sector. This should not have been a surprise but traders knocked the stock for a -6% loss on the news. Lowe's said it was scaling back on the number of new stores it would open to between 135-145 compared to the 155 pace for last year. Lowe's said consumers were putting off purchases of big-ticket projects such as kitchen renovations. Lowe's said sales would be off -3% or so compared to the projections by Home Depot for a -8% drop this year. LOW, HD and the entire sector closed sharply lower for the day.
Target did not help the retail outlook when it issued a warning of its own today. Target (TGT) said same store sales would slump to only a minor gain of +1.5% to 2.5% from their prior forecast of 4% to 6% growth. Target cited slowing shopper traffic as the cause for slowing sales. With Wal-Mart already vowing to cut prices even further than it did for the last holiday season the rest of the retailers are going to find it tough to make a profit in Q4. The various trucking companies have already said there is no buildup of traffic from retailers ordering holiday inventory. Analysts are expecting this to be the worst holiday shopping season in over five years. Target lost -2.50 on the news.
The American Trucking Association seasonally adjusted tonnage index fell -0.8% in August pushing the index to 2.2% lower over the same period in 2006. This is evidence that the actual volume of packages being shipped ahead of the holiday season is not just flat but is dropping as a result of lower volume in holiday orders.
Lennar Homes (LEN) posted its worst quarter ever with a loss of $513.9 million. Lennar said it had cut its workforce by 35% and expects to make further cuts soon. That was the worst quarterly performance in Lennar's 53-year history. The actual loss was $3.25 per share with a charge of $3.33 per share for write-downs on land and inventory markdowns. With competing builders slashing prices 15% to 25% all the major builders are going to end up marking down their unsold inventory. Lennar's construction starts were down -62% year-over-year. The average sales price of a Lennar home fell to $296,000 from $316,000. New home deliveries fell to 7,266 in Q3 from 12,337 in Q3-2006. Cancellation rates were 32% due mostly to mortgage problems either with the new home or problems selling the buyer's existing home. None of this should be news to traders but the sector tanked again as the news broke. Deutsche Bank issued a buy on Toll Brothers (TOL) and Centex Homes (CTX) saying they were well positioned to ride out the storm. The same analyst maintained a sell rating on the other builders in the sector.
Whirlpool (WHR) dropped -4.47 on the warnings from Lowe's, Target and Lennar earnings. News that consumers were backing away from big-ticket items sent traders fleeing from the appliance maker. Sears Holding (SHLD) finally broke support at $130 with a -4.56 drop as the bloom finally shriveled on the Eddie Lampert turnaround story.
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Europe's second largest oil company, BP, was knocked for a -$2 loss today after the CEO warned of a "dreadful quarter." The CEO said he was going to shake-up the company structure after its worst performance in 15 years. Reportedly there will be some serious cost cutting including layoffs. Later in the day BP tried to correct the statements in the press saying the CEO was talking about "operating performance" not earnings. BP has been hit with a large number of refinery outages and delayed projects. The oil pipeline spill in Alaska also contributed to the rising expenses and lower profits and the ouster of John Browne as CEO on May 1st.
The news from BP and the lack of storms in the Gulf led the price of oil lower to close back under $80 at $79.45 for a loss of -1.50. I checked the hurricane spotter page as I was typing this and Tropical Storm Karen is still tracking northward and well away from Florida. Tropical depression 13 formed into a recognizable disturbance off the coast of Mexico this afternoon and could be upgraded to a storm and given a name by morning. The current storm track is north to the Texas coast. Current wind speeds are only 30-45 mph but that could change if it moves further away from land during its formation stage. Several of these localized storms have failed to develop this year but we did see one hit refinery row high on the Texas coast a couple weeks ago. You can't count them out just because they formed overnight close to shore. Oil traders don't appear to be worried as oil futures are trading flat overnight.
NRG Energy (NRG) announced plans to apply for permits to build two nuclear power plants in Bay City Texas, about 90 miles from Houston. The $6 billion plants would not begin construction until 2010 and would not be online until after 2015. This is the first application for a nuclear plant in the U.S. since the Three Mile Island accident in 1979 soured the public on nuclear power. This is the first of 29 applications expected over the next 18 months as regional power companies move away from fossil fuel to generate electricity. While coal remains cheap the long-term forecast is for stricter emissions control and that could be very expensive over the life of the plant. The cost to generate a KWH of electricity is 1.72 cents for nuclear plants, 2.37 cents for coal, 6.75 cents for gas and 9.63 cents for oil. The problem facing nuclear plants is the availability of uranium. Currently demand is greater than supply and expected to remain that way until new mines come online in 2012-2015. The shortage today is being made up by down blending plutonium from decommissioned Russian nuclear weapons. Those supplies are expected to be exhausted two years from now. The future is bright for uranium producers and companies in the plant construction and maintenance cycle. Some symbols include CCJ, ABB, MDR, GE, TOSBF and BHP.
The U.S. dollar sank to another 15 year low today at 78.21 and came within 3 cents of an all time low. The current low was set in 1992 at $78.19 and it is a pretty good bet that low will be broken this week. With the threat of another Fed rate cut and the potential for a slowing economy the dollar could get a lot cheaper before 2008. This is pushing up the price of commodities, metals, oil, gold, etc, and will add to the risk of inflation.
Chart of U.S. Dollar Index
S&P announced several additions to the S&P-500 effective at the close today. The Intercontinental Exchange (ICE) will replace First Data (FDC). Tesoro (TSO) will replace Maxim Integrated Products (MXIM). Maxim is scheduled to be delisted from the Nasdaq this week. Teradata will be added to the S&P on Friday after its spin off from NCR is complete. NCR will replace Beazer Homes (BZH) on the S&P Midcap 400. Expedia (EXPE) will replace Solectron (SLR) in the S&P-500 on Oct-1st. SLR is being acquired by Flextronics (FLEX). OptionsXpress (OXPS) will be added to the S&P Smallcap 600 after the close on Friday replacing RARE Hospitality (RARE), which is being acquired by Darden (DRI). I hoped you paid attention; there will be a test on these changes later this week.
Microsoft added another 50 cents on a choppy trading session as sales of Halo 3 continue to be strong. However, it was reported this afternoon that the packaging on the extra cost "special edition" version had scratched the disks. Evidently the disks came lose during transport and were scratched by their hard metal surroundings. Microsoft was quick to put in place a disk swap program where users could send in any damaged disks and get new ones in return. Microsoft expects for the Xbox division to eventually turn a profit and the broad acceptance of the Halo 3 game is a vital part of that effort.
GM is making no progress on its strike and there was news of further plant closings outside the U.S. as parts ran out. Roughly 80,000 workers are on strike and there are fears that a prolonged strike could make the economy even worse. GM is already losing more than $100 million per day in lost production but they do have an 87-day backlog of inventory. Letting the strike run and selling down their inventory would not be that bad for GM as long as it was resolved in two weeks or so. After two weeks the costs and restart problems will begin to mount. GM has $32 billion in cash and investments on hand so burning off a few bucks to get a batter contract and reduce inventory is not a bad deal. The acquisition of auto parts maker Dana Corp (DCNAQ) could be in jeopardy because of the strike according to a letter delivered to the CEO on Friday. Apparently there was a clause in the contract saying a strike by any major carmaker could invalidate the deal.
It was a choppy market today with all the retail news but tech leaders were still leading. Apple (AAPL), Research in Motion (RIMM), Garmin (GRMN), Expedia (EXPE) and BIDU all made new highs and helped power the Nasdaq to a +15 point gain. Tech stocks are still in favor with investors eager to add risk to their portfolios in a rate cut environment. No subprime worries there and tech innovations are still flowing. Nvidia (NVDA) appears about to breakout of a resistance top at $36 after announcing a new GPU chip for Intel motherboards to produce high quality graphics beyond what they currently deliver. I am an avid Nvidia fan, I bought a new 4-monitor Nvidia card this week, and a stanch opponent of their competitor ATI. I am recommending a buy on Nvidia over $36.
The Nasdaq has held the high ground from last week's post Fed short covering bounce. It appears the Nasdaq is about to break out of its weeklong consolidation just under 2690 and rocket higher to test the five-year high at 2722. The QQQQs already made the break to a new high today and that appears to be a sign of another move higher on the Nasdaq composite index about to begin. QQQQ support at $50 should provide a launch pad on any interim pullback.
The Dow continues to lag techs but is still holding in its post Fed consolidation range. We need to see the Dow move over 13875 to trigger additional short covering and give us a chance of a retest of the highs at 14022. WMT, MCD, CAT, HD and GM were the drags on the Dow today.
The S&P mirrors the Dow with a series of slightly lower lows over the last week but still holding within 20 points of its post Fed spike high. The S&P was hampered by the retail, homebuilding and energy components today and still managed to close only fractionally down by -0.52 points. Uptrend support is around 1500 and overhead resistance at 1540. That gives the S&P a 40-point range and the close today at 1518 was right in the middle of that range.
The Russell 2000 remains the weaker index with another -3 point decline today to
804. This is below the 200-day average at 807 and only marginally above what
should now be support at 800. As I have said before a breakdown below 800 would
be very bearish and signify a move by funds away from small caps. That would be
a bearish turn of events ahead of October. There is one qualification on that
decline. With Friday the quarter end we could be seeing fund adjustments ahead
of those quarterly
statements. That is also a good reason we are seeing the tech
leaders spring higher. Everybody wants to show those leaders in their portfolios
in their October statements. Once the quarter ends I would look for volatility
to increase and a swap out of those leaders to capture profits and potentially a
move into the small caps for a longer-term position. "That is my outlook for
today and I am sticking to it at least until the market opens tomorrow," he said
Ceradyne - CRDN - cls: 74.61 change: +1.79 stop: 71.74
Why We Like It:
BUY CALL OCT 70.00 AUE-JN open interest=543 current ask $5.90
BUY CALL NOV 75.00 AUE-KO open interest=280 current ask $4.80
Picked on September 25 at $ 74.61
L-3 Comm. - LLL - cls: 100.96 chg: +1.64 stop: 95.99
Why We Like It:
BUY CALL OCT 100 LLL-JT open interest= 906 current ask $3.30
BUY CALL NOV 100 LLL-KT open interest= 25 current ask $4.90
Picked on September 25 at $100.96
Terex - TEX - cls: 86.50 change: +2.05 stop: 79.99
Why We Like It:
BUY CALL OCT 85.00 TEX-JQ open interest=2528 current ask $4.50
BUY CALL NOV 85.00 TEX-KQ open interest= 18 current ask $6.80
Picked on September 25 at $ 86.50
Whole Foods - WFMI - cls: 45.72 change: +0.66 stop: 42.49
Why We Like It:
BUY CALL OCT 45.00 FMQ-JI open interest=4808 current ask $1.79
BUY CALL NOV 45.00 FMQ-KI open interest= 8727 current ask $3.10
Picked on September xx at $ xx.xx <-- see TRIGGER
Broadcom - BRCM - cls: 36.92 change: +0.40 stop: 33.95
BRCM is looking pretty strong today in spite of being downgraded to a "market perform" before the opening bell this morning. Traders bought the dip near $36.00 and the stock rallied toward resistance near $37.00. The $37 level is significant resistance so more conservative readers may want to wait for a breakout over $37 before initiating new positions. Our target is the $39.85-40.00 range. The Point & Figure chart is bullish with a $49 target. Please note that we do not want to hold over the mid October earnings report.
Picked on September 12 at $ 35.85
Citigroup - C - clos: 46.31 change: -0.28 stop: 45.65
Shares of C continued to slide today along with most of the financial stocks. Yet it looks like C might have found some short-term support near the $46.00 level midday. A rebound from here could be used as a new bullish entry point to buy calls. Considering the stock's relative weakness the past few days readers might want to tighten their stops toward $46.00. Our initial target is the $49.85-50.00 range but we might decide later to add a more aggressive target at the 200-dma. Please note that we do not want to hold over the October 19th earnings report.
Picked on September 16 at $ 46.64
Intl. Bus. Mach.- IBM - cls: 116.51 chg: +0.26 stop: 113.90
We're still cautiously optimistic on IBM but today's session is a bit worrisome. Traders did buy the dip near $116 this morning but the rebound struggled all day long near $117.50. Momentum indicators are mixed and the chart is starting to show a pattern of higher lows and lower highs. A rebound near $115 and its rising 50-dma could be used as a new entry point but bear in mind that IBM is finding resistance in the $117.50-119.00($120) range. The stock has already hit our $118-120 target range. Our second, more-aggressive target is the $124.00-125.00 zone. FYI: The Point & Figure is very bullish with a $177 target. We do not want to hold over the mid October earnings report.
Picked on August 26 at $113.24
Lockheed - LMT - cls: 104.96 change: +2.61 stop: 98.99 *new*
The DFI Defense index was one of the market's best performing sectors today. Helping lead the charge higher was LMT, which soared 2.5% and closed at a new six-week high. LMT won a couple of new contracts today, one from the Australian navy and one from NASA. Please note that we're inching up our stop loss to $98.99. Our target is the $109.50-110.00 range. More aggressive traders may want to aim higher. The P&F chart points to a $117 target. We do not want to hold over the late October earnings.
Picked on September 24 at $103.81 *gapped higher
Stryker - SYK - cls: 67.67 change: +0.39 stop: 65.90
SYK looks like it's still trying to rebound. More aggressive traders might want to consider new positions if SYK can rise past the 10-dma. We're sticking to our plan which calls for a trigger at $70.65 to open positions. If triggered at $70.65 our target is the $74.90-75.00 range. Given the length of SYK's consolidation we would actually aim higher, maybe the $77.50-80.00 range, but we don't have much time and plan to exit ahead of the mid October earnings report. The P&F chart is bullish with an $83 target.
Picked on September xx at $ xx.xx <-- see TRIGGER
Alexander & Baldwin - ALEX - cls: 48.97 chg: +0.53 stop: 52.01
ALEX recouped half of yesterday's losses with a rebound from the $48 level. The sector got a boost after an analyst firm raised their earnings estimates on another company in this industry. Readers can watch for a failed rally near resistance at the $50 level as a new entry point for puts. The P&F chart is already bearish with a $36 target. There is some support near $47.50 but we're aiming for a decline into the $45.50-45.00 range. We do not want to hold over the late October earnings.
Picked on September 23 at $ 49.50
Cephalon - CEPH - cls: 72.47 chg: -0.96 stop: 74.25
CEPH continues to creep closer and closer to a breakdown under support at the $72.00 level. Shares produced another bearish failed rally near its 50-dma today. We're waiting for a breakdown under short-term support at $72.00. We want to see a new relative low so we're suggesting a trigger to buy puts at $71.70. Please note that any time we trade a biotech stock it should be considered higher-risk. You never know when there is going to be a surprise announcement about an FDA approval or lack thereof or a surprise announcement on some new breakthrough or clinical trial. It's tough to defend against this sort of headline risk that could send a biotech stock gapping one way or the other. If we are triggered at $71.70 our target will be the $68.00-67.00 range. More aggressive traders could aim for the $65 region. The P&F chart is very bearish with a $50 target.
Picked on September 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.)
Bear Stearns - BSC - cls: 114.24 chg: +1.25 stop: n/a
BSC managed to out perform most of its peers with a 1.1% bounce today. We're not suggesting new positions at this time. Currently our strangle involves the October $115 call (BSC-JC) and the October $95 put (BVD-VS). Our estimated cost was $9.50 and we want to sell if either option hits $14.00 or more. This should be considered a more aggressive play.
Picked on September 09 at $105.37
Dow Jones Industrial Avg. - DJX - cls: 137.79 chg: +0.20 stop: n/a
We have nothing new to report on for the DJX. We are not suggesting new positions on the October version of our strangle. The options listed for our October strangle were the October $137 calls (DJY-JG) and the October $132 puts (DJW-VB) with an estimated cost of $4.75. We want to sell if either option hits $6.75.
Picked on September 16 at $134.43
Trina Solar - TSL - cls: 57.16 chg: +1.00 stop: 47.49
Target achieved. The rally in TSL continues. The stock hit an intraday high of $58.19. Our target was the $58.00-60.00 range. More aggressive traders might want to stay with it since the afternoon rebound today looks like TSL is poised to trade higher tomorrow.
Picked on September 23 at $ 51.89
Today's Newsletter Notes: Market Wrap by Jim Brown and all other plays and content by the Option Investor staff.
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