The Fed took another step towards stabilizing the financial sector but it was not a rate cut. The Fed said it would lend up to $200 billion in Treasury securities and allow banks to use mortgage-backed securities as collateral. This could be the silver bullet the market was looking for but the amount of the loan guarantee may not be enough. It was enough for the markets and we blasted off to the biggest gain in months. Of course you know what I am about to say. The move caught the shorts off guard and that resulted in a massive short squeeze.
Dow Chart - Daily
The Fed action was the only news in the market if you ignore the continued sound bites about Governor Spitzer's extravagant entertainment budget. The economic calendar was light with only mundane things like International Trade and weekly Chain Store Sales. One minor release was the Manpower Employment Outlook for 2008Q2. The number of employers planning on hiring in Q2 rose to 17% from only 10% in Q1. This may look positive on the surface but it is still slightly below the Q1-2007 at 12% and Q2-2007 at 21%. It is still a seasonal bounce but less than in 2007. I guess we should not question any positive signs regardless of how minor they are.
The big news was obviously the Fed announcement. The new $200 billion Term Securities Lending Facility (TSLF) is an attempt to liquefy the credit markets and especially the mortgage securities market. The Fed move was targeted towards disconnect between reality and the valuations of mortgage securities. We saw how bad it was last week then Thornburg could not make margin calls on $600 million of triple AAA mortgage debt. This are mortgages that are still showing a very low incidence of default as in 1.5% compared to 8%-14% in the subprime sector. The prime debt was sinking to ridiculous levels simply because nobody wanted to buy it. With no market the valuations were slipping into the absurd range of 70-75 cents on the dollar. The Fed wants to give value back to the mortgage securities and they are going to do this by loaning Treasury paper to holders of mortgage paper. Basically if you have $100 million or AAA mortgage paper you can use it as collateral for an equal amount of treasury paper. This effectively revalues your mortgage paper at face value less a few points for interest and shores up your balance sheet. Obviously there are a lot of details and mechanical points I am leaving out but you get the picture. This is the equivalent of the Fed buying mortgages to establish a bottom although technically they didn't buy them only provided a mechanism to solidify their value.
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A more important window into the health of the sector was the release of the results of the latest Term Auction Facility or TAF. You may remember the Fed just raised the auction amount in late February to $50 billion from $20 billion. This week's auction had banks bidding for $92.5 billion, well over the increased amount. There were 82 bidders, up from 72 in the previous auction. The interest rate for the auction came in at 2.8%. The $92.5 billion in bids shows that credit is extremely tight and there is nowhere else to turn but the Fed. This shows the Fed's $50 billion auction target is still too low but they can't afford to simply open the vault and just write a check to everybody that needs cash. They have upped the future TAF offerings to $100 billion. The Fed's balance sheet has only about $880 billion in capital and the TSLF is going to take up nearly 25% of it. These TAF auctions have sucked up another $200 billion or so already. They also added another $100 billion in term repurchase agreements. The Fed is not in danger but they may be reaching their limits of what they are willing to do to shore up the markets and the economy. By the end of March they could end up with more than $400 billion in various mortgage assets on their balance sheet.
After today's Fed action the chance of a 75-point rate cut next week fell to 88% with a 136% chance of a 50-point cut. These numbers are down sharply from the last couple weeks as a result of the recent Fed actions in the credit markets. This clearly shows the Fed is worried about adding too much inflation fuel for the economy in the form of rate cuts when it is the freeze in the credit market that is causing the problems. Given the monster amount of mortgage debt the Fed is assuming through all these vehicles there is a worry that they could be in trouble by year end if the housing sector does not recover. Mark Zandi at Economy.com said Congress and the Bush administration should be planning for the possibility the Fed is not going to be able to steer the financial system and the economy through the turmoil without help. I believe the Fed should continue to cut rates to relieve stress in the housing sector. If homeowners could refinance their mortgages at a low rate and buyers could get financing at a low rate that would go a long way towards putting a bottom under the housing market.
On the stock front WellPoint (WLP) lost -$18 after it slashed guidance. That was a 28% drop to close at $47.50. The sharp drop in guidance to $5.76-$6.01 per share was well below the prior guidance of $6.41. The earnings warning drew a host of downgrades and crushed the sector. Aetna (AET) made a point of coming out in the middle of the storm to affirm their earlier guidance in hopes of avoiding the beating. AET dropped -3.86 for the day. WellPoint said higher healthcare costs and lower enrollment would pressure profits. WellPoint expects the slowing economy to prevent consumers from spending the money on a healthcare plan and opt to tough it out when possible. A Goldman Sachs analyst said WellPoint had also miscalculated prices for 2008 and their competitors have been aggressively cutting.
WellPoint Chart - Daily
Washington Mutual (WM) spiked +18% on rumors that Goldman Sachs or Warren Buffett was going to buy them or at least give them some capital. WM was at decade lows at $10 before the rumor and with an improving credit outlook it might be a good play but analysts said there was no truth to the rumor.
Washington Mutual Chart - Daily
Bear Stearns (BSC) gapped open on the Fed news to $68 and immediately dropped to $55 on rumors they could not make margin calls. BSC has been pressured with these rumors for the last couple weeks but today's was especially violent. The CEO made an unprecedented announcement that there was ABSOLUTELY no liquidity problem at BSC. He as very emphatic and said the rumor mill was complete nonsense. Buyers rushed in at $55 and volume spiked to 55 million shares or ten times normal. We could have seen a bottom in BSC today assuming the CEO does not reverse his statements.
Bear Stearns Chart - Daily
The banking sector rebounded sharply with all the positive news on the credit front. The XLF gained +6.5% for the day as shorts raced to exit the sector. Citi said it was injecting $1 billion in six of its municipal bond funds in order to protect them from margin calls. Citi (C) gained nearly 10% compared to GS +5%, JPM +6% and LEH +8%. Those most heavily shorted showed the strongest gains.
Thornburg Mortgage (TMA) spiked +120% after it restated earnings and said it was working with lenders to meet its margin calls. A +120% gain meant it jumped from 72-cents to $1.56. It has been hammered since the margin calls made the news last week.
Texas Instruments (TXN) fell -3% after warning that a key wireless customer had cut some orders. Although TXN did not say so that key wireless customer was probably Nokia since Nokia is TXN's biggest customer. Nokia said last year that it would broaden its supplier list to include Broadcom and Infineon. Nokia (NOK) dropped slightly on the news.
Despite saying, "I can't say that we are at the bottom, and that it's over and ready for recovery" homebuilder Ara Hovnanian's company HOV spiked +16%. The most positive thing he said was, "the sky is not falling, we will get through this cycle." Net contracts declined -41% and the dollar value -50% to $457 million. He hedged that initial comment slightly with "I have a feeling it is going to settle out soon but I can't say that definitively." The sector SPDR HBM rose +8%. Again, the heaviest shorted rebounded the strongest.
The energy sector celebrated the market rebound with most stocks finishing much higher. Having oil hit $109.70 intraday and close at $108.75 did not hurt. However, we saw the energy sector decline with the market over the last week despite daily gains in the price of oil. There was no specific news in the energy sector although the EIA said the slowing economy would cut another -100,000 barrels per day off of U.S. demand. This was a cut from their estimates just last month. The IEA revised its predictions for 2008 forecasting a drop of 190,000 bpd for the U.S. and Europe but said demand from China and other OECD countries would likely grow by 120,000 bpd. With the two major energy agencies cutting demand estimates you would think oil prices would fall. They rose on the expectations that the Fed move could help shorten the recession and revive growth. Summer gasoline prices are now feared to hit $4 and diesel $4.50 but the EIA estimates are only $3.50 and $3.75. Since it is already over $3.50 in some areas I would not count on their highs being gospel.
Crude Oil Chart - Daily
The Dow rebounded +417 points for the biggest point gain since Jul-2002 and the biggest percentage gain since March 2003. There have been only four 400-point Dow gains in history. This was the smallest of the four but still a great day. Unfortunately it only brought us back to close at 12156. That was only back to level where it failed on Thursday.
The rally was almost entirely on short covering as the indexes fell to the January lows on Monday. The Russell and Nasdaq fell below those January lows. By every indicator the markets were extremely oversold and ripe for this type of short squeeze.
The qualification I would put on this move is the type of Fed action they announced. It was directed at the credit freeze in mortgages and that could have a lasting impact on sentiment. This may have started as a short squeeze but it could turn into a prolonged rebound. The drop in the indexes to the January lows and then today's rebound has put in place a potential double bottom formation and that should be bullish. I am not going to say that we are only going up from here but hopefully the bottom is behind us.
The Nasdaq rebounded +86 points from yesterday's 52-week closing low of 2171 to today's close at 2252. It was the biggest percentage gain since April 2003 and point gain since last November. Like the Dow the rebound only took the Nasdaq back to Thursday's levels. Those stocks with the highest short interest were the biggest performers. GOOG +26, FSLR +21, BIDU +19, AAPL +7, RIMM +7 etc.
Nasdaq Chart - Daily
S&P-500 Chart - Daily
Remember all the worry about the possible S&P break of support last week at 1320? Guess where it stopped today. The rebound of +47 points from Monday's test of the January lows at 1274 took us right back to 1320, which is now resistance. It was the strongest percentage gain since Oct-2004 and point gain since April 2001. It was a strong gain but still well below a breakout.
Analysts were hoping for a 90% day. That means 90% of the volume would be advancing volume. We came very close at 88% so we should be looking for signs of conviction to appear on Wednesday. Because of the size of the short interest I believe analysts were wrong to celebrate the lack of an end of day sell off. That has been the pattern of late and a one-day change is not a trend. With many shorts caught unprepared and hoping for an end of day decline to cover they were disappointed to see that early afternoon decline reversed and the second bout of short covering began. Volume was the strongest since Jan-24th but it was still 2 billion shares below the Jan-24th level.
The Fed meets next Tuesday and expectations for a 50-point cut are now at 136%
and 88% for a 75-point cut. The recent Fedspeak seems to indicate the Fed is
moving away from a string of further cuts although there are still positive
expectations for next week. The markets have been expecting another cut for two
weeks and today's TSLF announcement moves the Fed even farther away from a
continued rate cut scenario. The Fed has said all along that rate cuts were not
the answer for the
logjam in the credit markets. Now that they are taking direct
action towards the credit markets they are less likely to be aggressive in rate
cuts. The market has not yet factored this in and we could see some weakness
heading into next week. How much weakness is the $64 question? I would love to
see signs of a bottom here because it is exactly the right place on the charts.
We retested the January lows and the bulls need that retest to stick. The next
major economic report is the Consumer
Price Index on Friday. That leaves the
market free to determine its own fate. I am neutral here. I suggested buying a
dip back to 1275 and we got it now we just need to sit tight and see what
Play Editor's Note: I haven't had the chance to read tonight's wrap so hopefully I'm not contradicting anyone. I've been warning readers for a few days now that I've been worried we were near a market bottom. I was looking for a capitulation event, which we have still not seen. Today's news from the Federal Reserve was a surprise. Does it count as a short-term bottom? Maybe. There were a lot of bullish engulfing candlestick patterns produced today. These are usually one-day bullish reversal signals. However, they normally need to see some confirmation. Essentially, one big up day does not represent a new trend but it definitely puts traders on notice that the trend "could" be changing. I know that a few market pundits believe this new tool by the fed is a potential sea change for the financials. I am not 100% convinced this news will lift us out of the bear market but it could definitely spark a multi-day and maybe a multi-week rally. No one knows yet. Again, I don't want to say anything that conflicts with tonight's wrap but I would watch the 12,500 level or the 50-dma on the DJIA and the 50-dma on the S&P 500. A failed rally under these levels would look like a new entry point for bearish positions. A breakout over these levels would look like a potential change to a new bullish trend. Now the challenge for traders, especially if you have bearish positions is this - do you tighten your stops significantly to cut your losses if the rally continues tomorrow? Or do you keep a wide, aggressive, higher-risk stop loss strategy and try to weather the rebound with the expectation it is just temporary short covering. The answer depends on you! What is your trading strategy, style and risk tolerance.
Goldman Sachs - GS - close: 163.07 chg: +7.49 stop: 154.99
Why We Like It:
FYI: If you're bullish on GS, an alternative strategy could be to sell deep, in-the-money naked puts. Example: You could sell the April 180 put (GPY-PP) currently going for $20.70. Buy it back as GS trades into the $175-180 zone. You'll capture a bigger dollar-for-dollar move. You still need a stop loss. If GS turns lower, pick a spot where you buy the put back. Do NOT hold over earnings.
BUY CALL APR 160 GPY-DL open interest=2126 current ask $12.70
Picked on March 11 at $163.07
Research In Motion - RIMM - cls: 100.74 chg: +7.15 stop: 94.49
Why We Like It:
BUY CALL APR 100 RUL-DT open interest=3985 current ask $8.70
Picked on March 11 at $100.74
Ingersoll Rand - IR - close: 43.08 change: +1.86 stop: 39.74
IR bounced sharply higher, along with the rest of the market, and the stock ended Tuesday's session with a 4.5% gain. We remain bullish on the stock but repeat our comments from this weekend. More conservative traders might want to wait for a new relative high over $43.50 to open position. There is potential resistance near $45.00 and its 100-dma but our target is the 47.00-47.50 zone.
Picked on March 09 at $ 42.87
Yahoo! Inc. - YHOO - close: 29.00 change: +0.49 stop: n/a
YHOO's suitor MSFT surged more than 4% today but YHOO only managed a 1.6% gain. We are still waiting for a revised bid higher by MSFT. We need to see a higher bid from MSFT before March expiration (unless you've bought the April calls). This remains a very risky, aggressive bet. Our suggested calls were the March $30 or March $32.50 strikes. If you want to speculate now we would choose the April strikes. MSFT's current bid is $31 a share and the street expects that they will raise their bid into the $33-35 zone.
Picked on February 17 at $ 29.66
Ambac Fincl. - ABK - cls: 7.73 change: +0.44 stop: n/a
ABK produced a 6% gain today. That was enough to out perform the S&P 500 but the overall trend continues to look weak. Volume behind today's move was above average but nothing noteworthy. We are not suggesting new positions at this time. This remains a very speculative play. We will definitely hold over the April earnings if we get the chance. Previously we had been suggesting the May out-of-the money puts ($5.00 and $2.50 strikes) and an optional speculative out-of-the money March ($20) call as a hedge should a bailout plan come to pass.
Picked on January 27 at $ 11.54
Cytec Ind. - CYT - close: 55.50 chg: +1.56 stop: 58.15
Shares of CYT gapped open higher at $55.08 but the rally ran into resistance near the descending 50-dma. This is a good sign for the bears. The market's rally may not be over yet but CYT has plenty of resistance to work through. Our readers have a decision to make. You can either tighten your stop to something like $56.05, reduce your risk, and cut your losses early. Or keep a wide stop and try to weather the bounce if this ends up being just a bounce. That's the challenge. We have an aggressive, higher-risk stop loss at $58.15. Conservative traders should seriously consider a lower stop. The $50.00 level looks like nearest support so we are targeting a drop into the $50.25-50.00 zone.
Picked on March 09 at $ 54.72
Express Scripts - ESRX - cls: 58.61 chg: -0.17 stop: 63.55
The earnings warning from Wellpoint (WLP) last night pulled shares of ESRX lower. ESRX spiked lower at the open and dipped to $56.36 before rebounding thanks to the market's strength. This move might be interpreted as a short-term bullish reversal. More conservative traders may want to tighten their stops toward the 10-dma near $61.00. We would wait for signs of a failed rally before considering new bearish positions. We have listed two targets. Our first, short-term target is the $55.50-55.00 zone. Our second, more aggressive target is the $51.50-50.00 zone. Currently the P&F chart is bearish with a $54 target. FYI: The most recent data listed short interest at 3.8% of the 251 million-share float, which is about 3.4 days worth of short interest.
Picked on March 09 at $ 58.51
FedEx - FDX - close: 88.16 change: +3.19 stop: 90.05
The bounce in FDX seems a little overdone considering a spike in oil futures to $109 a barrel. FDX's rebound back above resistance near $86.00 and $88.00 is definitely a warning for the bears. More conservative traders may just want to cut your losses early and wait to see if the stock rolls over again under its longer-term trend of lower highs. FYI: The most recent data lists short interest at 3% of the 289 million-share float.
Picked on March 10 at $ 85.95 *triggered
Harley-Davidson - HOG - close: 36.67 chg: +1.99 stop: 40.26
Short covering in HOG lifted the stock to a 5.7% gain. Yet volume failed to hit normal levels. Watch for HOG to run into resistance in the $37-39 zone. A failed rally there can be used as a new entry point for shorts. Our target is the $30.50-30.00 zone although it wouldn't surprise me to see a drop closer to $25. The P&F chart is bearish with a bearish triangle breakdown sell signal. FYI: The most recent data lists short interest at 9.6% of the 236 million-share float. That is an above average amount of short interest and raises our risk of a short squeeze.
Picked on March 10 at $ 34.69 *triggered
MBIA Inc. - MBI - close: 12.14 change: +1.37 stop: n/a
As the market's rally just continued to steam higher this afternoon the shorts began to cover in MBI and the stock posted a 12% gain. We're not suggesting new bearish positions at this time. We had been suggesting the out-of-the-money May puts (7.50, 5.00 and 2.50 strikes) and an optional March $22.50 (or $20.00) call as a hedge in case a bailout plan for the bond insurers does get done. We will definitely hold over the April earnings if we get the chance.
Picked on January 27 at $ 14.20
3M Co. - MMM - close: 77.95 change: +2.47 stop: 80.25
As a DJIA component it would be tough for MMM to not trade higher today. Shares added 3.2% and reversed most of the last couple of sessions. The larger trend is still bearish. Look for a failed rally near $80.00 or its 50-dma as a new entry point for puts. We have set two targets. The first target is the $72.25 level, just above the January 2008 lows. Our second target is the $68.00 level, which should be closer to the bottom edge of MMM's bearish channel. The P&F chart is currently bearish with a $62 target. FYI: The most recent data lists short interest at just 1.5% of the 707 million-share float.
Picked on March 09 at $ 76.51
NII Holdings - NIHD - close: 35.07 change: +0.67 stop: 40.05
NIHD sank to a new relative low of $32.98 midday before finally reversing and turning green. This does look like a short-term bottom. The question now is where will NIHD run into resistance. The easy areas to look for resistance would be $36, $38, and $40. We would also keep an eye on the 10-dma near $38.50. More conservative traders may just want to exit completely at this time. We would not suggest new bearish plays at this time. NIHD has already surpassed our initial target in the $35.50-35.00 zone. Our aggressive target was the $31.00-30.00 range. The Point & Figure chart is bearish with a $19 target. FYI: The latest data lists short interest at 3.8% of the 171.7 million-share float, which is only about 1.5 days worth of short interest.
Picked on March 04 at $ 38.95 *triggered
Everest Re Group - RE - close: 95.03 chg: +1.89 stop: 98.26
RE almost seemed like a reluctant participant in today's widespread rally. Shares did manage to close over potential resistance at $95.00 but not over its 10-dma. We would not be surprised to see RE challenge short-term resistance near $96 or $97 soon. We are not suggesting new positions at this time. The stock has already hit our first target at $93.50. The intraday low on Friday was $92.50. Our second, more aggressive target is the $91.00-90.00 zone. FYI: The P&F chart is bearish with a $74 target.
Picked on February 28 at $ 97.93 /1st target surpassed 92.66
Sears Holding - SHLD - close: 93.30 change: +2.30 stop: 100.51
SHLD was not immune to the market's contagious rally on Tuesday. We would expect the rebound to continue tomorrow. Watch the $95.00 level to be short-term overhead resistance. If you're feeling concerned then consider a stop loss closer to $95.00. Our target is the $85.50-85.00 zone. There are a lot of investors who believe SHLD is going lower. The most recent data puts short interest at more than 19% of the 65 million-share float. That is almost 7 days worth of short interest. Naturally that raises our risk of a short squeeze.
Picked on March 06 at $ 94.00 *triggered
Wynn Resorts - WYNN - close: 96.45 chg: +5.04 stop: 100.51
Today's bounce in WYNN seems a bit overdone. It looks like shorts started to panic when the stock traded through what should have been stronger resistance at $95.00 this afternoon. Look for additional overhead resistance at the 10-dma near $98 and again near $100. Wait for the rally to fail before considering new puts. The P&F chart is bearish with a $64 target.
Picked on March 04 at $ 94.27 *gap down
iShares Transportation - IYT - cls: 82.44 chg: +3.36 stop: 82.55
Personally the bounce in the IYT seems overdone if you consider that crude oil hit $109 a barrel today. However, the market didn't ask my opinion. The IYT bounced sharply adding more than 4% albeit on below average volume. The rally back above resistance near $80.00 and its 50-dma is a bad sign for the bears. The stock has not yet hit our stop loss at $82.55 but it's almost a guarantee it will tomorrow. We're going to exit early now and just look for a new entry point on a failed rally near its 200-dma or maybe a new decline under $80.00.
Picked on March 10 at $ 79.25 *triggered
Praxair Inc. - PX - close: 83.26 chg: +5.52 stop: 81.05
PX delivered a one-two punch to the bears today. Not only did PX benefit from the market's huge rally but the company announced it had won a big contract in China. PX said it will be the sole supplier of oxygen to three wastewater treatment plants in China during the 2008 Olympic Games in Beijing (source:AP). PX gapped open at $79.33 and quickly rallied through our suggested top at $81.05. PX didn't stop until it had cleared the 50-dma.
Picked on March 10 at $ 77.90 *triggered /stopped 81.05
Today's Newsletter Notes: Market Wrap by Jim Brown and all other plays and content by the Option Investor staff.
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