Stocks put in a mixed-to-lower trade to start the week as investors mull over earnings reports amid weaker economic reports and a weaker-than-expected earnings report out of Wachovia.
Economic data released prior to today's opening bell had the Commerce Department reporting that higher gasoline prices had retail sales rising by 0.2% in March, while sales excluding automobiles rose 0.1%. Economists were looking for total retail sales to be unchanged from February's upwardly revised 0.4% decline, with sales (ex-autos) rising 0.1% from February's upwardly revised 0.1% decline.
A look inside the numbers had gasoline sales providing the bulk of the increase with a 1.1% jump, while sales at department and general merchandise stores fell by 0.6% in March.
In other economic news (10:00 AM EDT), the Commerce Department said that inventories held by business on shelves and backlots increased by 0.6% to $1.46 trillion in February after a larger 0.9% gain in January. Year-over-year, business inventories are up 5.2%.
February to January Business Inventories (Table)
As inventories rose 0.6% month-over-month, sales fell by 1.1% to $1.142 trillion. While sales were down for the month of February, they were up 6.7% from year-ago.
Banks were weak and with the S&P Bank Index (BIX.X) 223.48 -4.54% trading sharply lower after Wachovia (NYSE:WB) $25.55 -8.12% said it will raise $7 billion in fresh capital by selling $3.5 billion in common at $24/share and $3.5 billion in preferred stock with a 7.5% dividend that convert into stock at a 30% premium.
Wachovia (WB) - Daily Intervals
Additionally, the bank said it will look to save another $2 billion a year by cutting its dividend 41% to $0.375/share from $0.64/share. The bank said it posted a 1Q net loss of $350 million, or $-0.20/share caused by $2 billion in market-disruption losses and sinking credit quality. Wall Street was looking for the bank to post a profit of $0.40/share.
Wachovia was atop today's list of most actives, churning just more than 172.5 million shares, which is well above its 50-day average volume of 35.8 million shares.
Wachovia's Chief Executive Ken Thompson said that the fresh capital will be enough to cover the bank's needs and more through 2009 even if Wachovia's worst-case scenario for the housing market proves true.
Wachovia's earnings report creates further angst for the financial sector with Dow Industrial components JP Morgan (NYSE:JPM) $41.50 -2.42% and Citigroup (NYSE:C) $22.51 -3.63% set to release their recent quarterly results on Wednesday (4/16) and Friday (4/18).
Financial SPDRs (AMEX:XLF) - Daily Intervals
Also attributing to weakness in the financial sector as depicted by the Financial Select SPDR (AMEX:XLF) $24.54 -2.34%, which approaches its January 22nd relative low was comments out of Lehman analyst Jason Goldberg regarding Bank of America (NYSE:BAC) $35.58 -3.68%. Mr. Goldberg said he expects Bank of America's 1Q earnings to continue to be weighed down by collateralized debt obligation-related write-downs (CDO), as well as a heightened loan loss provision.
Bank of America (BAC), which was recently added as a component to the Dow Industrials is slated to release its recently completed quarterly results next Monday (04/21).
Other notable financial names slated to release their recently completed quarterly results this week had Well Fargo (NYSE:WFC) $27.20 -2.75% shedding $0.77 ahead of Wednesday's earnings, while Merrill Lynch (NYSE:MER) $42.88 -1.83% edged down $0.80 with earnings slated for Thursday.
The XLF was the fourth-most heavily traded security behind Wachovia (WB), the S&P Depository Receipts (SPY) $132.93 -0.33% and General Electric (NYSE:GE) $31.75 -0.93%, which nears its recent 52-week low close of $31.70 from 03/10/08.
DIA and SPY Chart Montage - Daily Intervals
While component weightings for the Dow Diamonds (DIA) and S&P Dep. Receipts (SPY) are much different, their daily interval bar charts look very similar.
Energy names in both indices continue to provide the bulk of these two major averages gains with Exxon/Mobil (NYSE:XOM) $89.70 +1.21% gaining $1.08 on the session, while Chevron (NYSE:CVX) $89.30 +0.56% added $0.50/share.
May Crude Oil futures (cl08k) settled at a new record, finishing up $1.62, or 1.42% at $111.76 on supply disruption concerns.
American Depository Receipts (ADRs) of Brazil's Petroleo Brasileiro (NYSE:PBR) $122.18 +8.26% reversed earlier session losses from $110.92 on heavy volume of just over 36.6 million shares (50-day Avg. Volume= 8.12 million) on reports that an offshore find by the state oil company in partnership with BG Group and Repsol (NYSE:REP) $43.33 +17.04% may be the world's biggest discovery in 30 years.
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Brazil's head of the government's oil and fuel market regulator Haroldo Lima told reporters the find, known as Carioca, could contain 33 billion barrels of oil equivalent, five times the recent giant Tupi discovery. That would further boost Brazil's prospects as an important world oil province and the source of new crude in the Americas.
International Business Machines (NYSE:IBM) $117.28 +1.10% crept back above its 80.9% retracement (10/11/07 high to 1/11/08 low) ahead of Wednesday's earnings.
Having witnessed the sharp decline in shares of GE last week, I'd strongly suggest IBM bulls take some profits even though the firm offered bullish guidance earlier this year at the $110 level.
IBM is the most heavily weighted component in the PRICE-weighted Dow Industrials index of 30 stocks. (Top 10: IBM, XOM, CVX, MMM, BA, CAT, PG, UTX, JNJ and KO).
IWM and QQQQ Montage - Daily Intervals
Buyers stood their ground to the close in the iShares Russell 2000 (IWM) at my 19.1% conventional retracement, but not unlike the DIA and SPY have slipped back below their 50-day SMA.
Big caps at the NASDAQ as depicted by the QQQQ once again slip back below their 19.1% conventional, but exhibit some sign of relative price strength with a close above their more intermediate-term 50-day SMA of $43.82.
Aggressive bulls can play both at current level, while more conservative bulls will look for DIA and SPY to trade their upward trends (currently $118.70 and $128.80).
Additional stock-specific news had Blockbuster (NYSE:BBI) $2.81 -10.22% making a $1.billion offer for Circuit City Stores (NYSE:CC) $4.97 +27.43% for at least $6 a share, a 54% premium to Friday's close. Blockbuster projects a 1Q profit and says its turnaround is generating results.
Industrial manufacturer Eaton Corp. (NYSE:ETN) $80.03 +1.38% reported earnings of $247 million, or $1.64 a share, in the first quarter of 2008 as acquisitions helped drive net sales up 12% amid continuing strong international sales. The company raised its full-year earnings outlook saying it now see 2Q net of $1.80-$1.90, or $1.90-$2.00 a share excluding charges and full year 2008 EPS to $7.30-$7.80 per share.
One today's Treasury auctions had the U.S. Treasury awarding $22.00 billion in three-month bills at a high rate of 1.060%.
The Treasury said it received bids totaling $63.63 billion and accepted $22.00 billion, including $1.57 billion of noncompetitive tenders. The dollar price was 99.732056 and the investment rate, or bond-equivalent return, was 1.078%.
The Treasury also sold $25.0 million of bills to foreign and international monetary authority accounts on a noncompetitive bidding basis.
The bid-to-cover ratio, an indication of demand, was 2.89, Treasury said.
Tenders submitted at the high yield were allotted 98.78%.
The median rate was 1.050%; that is, 50% of the amount of accepted competitive bids were tendered at or below that rate.
Of the competitive bids accepted, 5% were tendered at or below the rate of 0.990%.
The 13-week Treasury Yield ($IRX.X) did see a low trade of 1.00%, but finished down 8.5 basis points at 1.075%.
The Federal Reserve purchased $4.89 billion in bills for its own account in Monday's three- and six-month bill auctions. When the auction was announced, the Fed held $7.61 billion of maturing bills.
The bills awarded to the Federal Reserve are in addition to the public offering amount.
Accepted indirect bids for the three-month bill were 54.9% of the total competitive amount, up from 25.5% in last week's three-month auction.
The high rate was up from 1.450% at the previous three-month bill auction.
The high rate was the lowest since the rate of 1.05% on May 24, 2004.
The issue is dated April 17 and matures on July 17, 2008.
Play Editor's Note: The fertilizer-agriculture stocks continue to show relative strength. The group is starting to look a little short-term overbought and due for a dip. However, one stock, Monsanto (MON), doesn't look quite so extended and might be a new bullish candidate here or over $125. Railroad stock UNP continues to look set for a rally higher. We would be tempted to buy calls now with a tight stop. However, rival CSX is due to report earnings tomorrow after the closing bell. Readers may want to wait and see market reaction to CSX earnings before launching positions. Last, we are still considering bullish positions on MTL. This dip to $140 today really looks like a potential entry point for calls.
Ashland Inc. - ASH - close: 51.01 change: +0.38 stop: 47.95
ASH continued to motor sideways and holding above what should be support at its 10-dma and the $50.00 level. If we see any market weakness a dip near $50.00 (or a bounce) can be used as a new entry point but more conservative traders may want to tighten their stops. There is potential resistance at its 200-dma in the $54 zone. Our target is the $57.00-58.00 range. We do not want to hold over the late April earnings report.
Picked on April 06 at $ 51.25
Bunge Ltd - BG - close: 109.42 chg: +6.05 stop: 102.45 *new*
Commodity-related stocks are still soaring and BG broke out over resistance at its 50-dma and the $105 mark. We were suggesting that readers buy calls at $105.25. It looks like BG opened at $103.00 and quickly surged past resistance posting a 5.8% gain by day's end. Shares of BG are now testing short-term resistance near $110 and its 100-dma. We would expect some profit taking tomorrow. A dip near $106-105 can be used as a new entry point for calls. We are raising the stop loss to $102.45. Our target will be $114.50-115.00. The Point & Figure chart is bullish with a $129 target. We do not want to hold over the April 24th (before the opening bell) earnings report.
Picked on April 14 at $105.25 *triggered
Baker Hughes - BHI - close: 73.07 chg: +1.26 stop: 69.45
BHI out performed the markets on Monday with a 1.7% gain. We remain bullish on BHI and would still suggest new call positions here. If you wanted to be picky more conservative traders could wait for a stronger breakout past the 100-dma (near today's high). The P&F chart is bullish as the stock has broken through resistance and points to an $89 target. Our target is the $78.50-80.00 range. We do not want to hold over the April 22nd earnings report.
Picked on April 10 at $ 72.76
CONSOL Energy - CNX - cls: 79.27 chg: +3.64 stop: 69.49
Coal stocks and CNX continue to show amazing relative strength. We are adjusting our strategy again. This time we're moving our suggested buy the dip entry point to $73.50-72.50. We are also adding a buy the breakout entry point at $80.55. If CNX breaks out then buy calls at $80.55 and we'll put our stop loss at $74.99. Our upside target is being adjusted to $88.00-90.00. Remember, we do not want to hold over the late April earnings report, which does not give us much time left.
Picked on April xx at $ xx.xx <-- see TRIGGER
Fluor - FLR - close: 148.30 chg: -1.16 stop: 144.45
We do not see any changes from our weekend comments on FLR. The dip to $146.50 this morning is probably a new bullish entry point but we'd rather wait for a dip or bounce closer to $145.00 or look for a new rally past $151.00-152.00 instead. Our first target is the $159.00-160.00 zone. Our second target is the $168.00-170.00 zone. We do not want to hold over earnings in early May. FYI: The P&F chart is bullish with a $184 target.
Picked on April 01 at $146.50 *triggered
CurrencyShares Euro - FXE - cls: 158.43 chg: -0.14 stop: 156.45
This morning, before the opening bell, we heard reports that the U.S. dollar was rising and we were expecting the Euro and the FXE to show more weakness today. It appears that the strength in the dollar was a little under-whelming and the FXE merely traded sideways. The trend remains bullish and we would still consider new call positions. Shares have been following a strict trendline of higher lows so we can use a relatively tight stop loss at $156.45. We're suggesting call positions now. However, there is some resistance in the $159 region and more conservative traders may want to wait for a new high to launch positions. Our target is the $164.00-165.00 range. Our time frame is three to five weeks.
Picked on April 13 at $158.57
Hovnanian - HOV - close: 10.52 chg: -0.57 stop: 9.69
Homebuilders were one of the worst performers today and HOV lost more than 5%. Shares hit an intraday low of $10.51 although we want to point out that volume was pretty low. We suspect that HOV could dip toward our entry point tomorrow. Our suggested entry point to buy calls on HOV is the $10.25-10.00 zone. We're using a stop loss at $9.69 but you might want to try and tighter stop closer to $10.00. If triggered at $10.25 our first target is the $12.75-13.00 range. Our second, more aggressive target will be the $14.50-15.00 zone.
Picked on April xx at $ xx.xx <-- see TRIGGER 10.25
Joy Global - JOYG - close: 69.10 chg: +0.44 stop: 68.45
JOYG is essentially trading sideways. Traders bought the dip near $68.00 this morning. If felt aggressive you could buy today's bounce with a stop loss under $68.00. We are suggesting readers wait for a breakout higher. Shares have resistance in the $72.00-72.50 zone so we're suggesting readers buy calls at $72.55. If triggered our target is the $79.50-80.00 range. The P&F chart is already bullish with an $88 target.
Picked on April xx at $ xx.xx <-- see TRIGGER
Lincoln Elec. - LECO - cls: 69.67 chg: -0.00 stop: 67.90
There is no change in the price of LECO today and we don't see any changes from our weekend comments. We are still considering an early exit, cut-your-losses now kind of move. Another rally past $71.35 might convince us as a move to go long calls again. The good news is that there hasn't been a lot of follow through on the failed rally but neither has there been any follow through as traders buy the dip near $70.00. Our first target is the $74.85-75.00 range. Our second target is the $78.00-80.00 zone. The Point & Figure chart is bullish with a $91 target. We do not want to hold over the late April earnings report.
Picked on April 07 at $ 73.73 *triggered/gap higher
Arcelor Mittal - MT - close: 83.41 chg: +0.51 stop: 79.45
MT spent Monday moving sideways. We don't see any changes from our weekend comments. The trend is still bullish but we suspect that MT will pull back toward what should be support near $80.00. Wait for the dip near $80.00 or a bounce from $80.00 as a new bullish entry point to buy calls. Our target is the $89.00-90.00 zone. The P&F chart is very bullish and just saw its price target jump from $101 to $113 this past week.
Picked on March 31 at $ 82.03 *triggered/gap open
Potash Corp. - POT - close: 181.90 chg: +3.43 stop: 159.90
POT continues to taunt us by posting a series of new all-time highs. We've been trying to buy a dip since the April 3rd breakout where POT closed near $168.00. Shares are now up 8% from its April 3rd breakout. We did not want to chase the move on April 3rd and we don't want to chase it now. We love the relative strength in this group but nothing goes up in a straight line for very long. We're sticking to our plan for now. Right now we're suggesting readers buy calls in the $170.50-167.50 zone. Honestly, if the market really sees a sell-off we'd rather buy bullish positions in POT near $160 and its 50-dma. We have a very wide stop because the stock and this group has been so volatile. If triggered near $170 we have two targets. Our first target is the $184.00-185.00 range. Our second target is the $194.00-200.00 zone. FYI: The P&F chart is bullish with a $218 target. POT is due to report earnings in the last half of April and we do not want to hold over the report, which doesn't give us a lot of time so don't count on hitting that second target.
Picked on April 03 at $ xx.xx <--see TRIGGER
Ultra Petrol. - UPL - close: 83.35 chg: +1.45 stop: 77.95
UPL rallies again. The stock hit another new high today. We would still consider new positions here although a dip near $80 would be a preferable entry point. Our target is the $89.50-90.00 zone. The P&F chart has broken through resistance and points to a $95 target.
Picked on April 10 at $ 81.50
United States Oil - USO - close: 89.64 chg: +1.16 stop: 84.45
Crude oil continues to rally and spiked toward its highs today. USO also posted a gain and a new all-time closing high. The USO looks poised to breakout past round-number resistance at $90.00 soon. Our first target is the $92.50 mark. Our second, more aggressive target is the $97.50-100.00 zone.
Picked on April 07 at $ 86.49 *triggered/gap higher
Ambac Fincl. - ABK - cls: 5.06 change: -0.27 stop: n/a
A negative earnings surprise from WB today just reinforced investors' fears about the financial sector. Shares of ABK lost another 5% and are now testing the $5.00 level. We suspect that the financials could see a real sell-off this week as the market reacts to and digests a wave of earnings information and guidance. ABK is due to report earnings on April 23rd. If ABK does not see a steep sell-off this week or in reaction to its earnings report we're going to want to exit since we are down to the last five weeks of May options. Option price premiums see their decay speed up as we enter the last 30 days to expiration. We don't have a stop loss on this play because the stock has been so volatile in the past. However, we're considering a stop loss at $6.51 to close the play on any unexpected strength. We are not suggesting new bearish positions in ABK. 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).
Picked on January 27 at $ 11.54
Capital One - COF - close: 47.12 chg: -1.18 stop: 52.55
The Wachovia (WB) earnings also undercut shares of COF today. Investors are concerned about consumer credit and rising default rates, which should significantly impact COF's earnings. Normally we never want to hold over a company's earnings report but we're strongly considering an exception with COF. The company reports on April 17th after the closing bell. Our target is the $41.50-40.00 zone. The Point & Figure chart is bearish with a $38 target.
Picked on April 13 at $ 48.30
eBay Inc. - EBAY - close: 31.37 chg: +0.50 stop: 32.26
Not one but two analyst firms came out with bullish comments for EBAY's upcoming earnings report. The pre-morning comments contributed to the early morning spike in EBAY but the rally stalled at $31.75. Meanwhile the after market comments from another firm were not having much affect in after hours trading. The company's earnings report is coming up and we don't believe the results are going to please the street. Normally we do not hold over an earnings report. This is an exception to that rule and we're betting on a post-earnings sell-off. This does raise our risk since an earnings surprise could obviously send shares higher. Because of this unknown risk variable (earnings, whisper number, etc) we're labeling this an aggressive play. EBAY reports earnings on April 16th after the closing bell. Our initial target is the $26.00 mark.
Picked on April 13 at $ 30.87
Fannie Mae - FNM - close: 25.34 chg: -0.70 stop: 30.26 *new*
Target exceeded. The Wachovia earnings missed helped fuel another sell-off in shares of FNM. The stock dipped to $24.66 this morning. Our initial target was the $25.25-25.00 zone. FNM does look short-term oversold and due for a bounce so we're not suggesting new positions. We are adjusting the stop loss to $30.26. Our second target is the $21.00-20.00 zone.
Picked on April 08 at $ 29.00 /1st target exceeded 25.25
Humana Inc - HUM - cls: 42.42 chg: +0.21 stop: 45.76
HUM spent Monday's session trading sideways and digesting Friday's losses. The stock certainly looks poised to fall toward our target but lately it's been up one day and down the next. Our target is the $40.50-40.00 zone. More aggressive traders may want to aim lower. Currently the P&F chart is so bearish it points to a target of zero ($0.00).
Picked on March 30 at $ 45.20
iShares Financial - IYF - close: 80.68 chg: -1.83 stop: 85.55
The Wachovia (WB) earnings miss this morning lead to another 2.2% decline for the IYF. The IYF is now testing round-number, psychological support near $80.00. We would still consider new put positions here but a bounce and failed rally near $83-84 would be a better entry point. Our target is the $76.00-75.00. We're adding a second target in the $71.50-70.00 zone.
Picked on April 13 at $ 82.51
iShares Fincl.Servcs. - IYG - cls: 84.50 chg: -2.76 stop: 92.26
The IYG under performed its IYF brethren with a 3.1% loss today. Again, it was the earnings miss from WB that accelerated the decline. We have two targets. Our first target is the $82.00-80.00 zone. Our second, more aggressive target is the $76.00-75.00 zone.
Picked on April 13 at $ 87.26
Juniper Networks - JNPR - cls: 23.11 chg: +0.28 stop: 24.55
JNPR is trying to rebound and managed a 1.2% gain today. Look for a failed rally under $24.00 as a new entry point for puts. The move under $23.00 has reversed the P&F chart into a new sell signal with a $16.00 target. We do not want to hold over the late April earnings report. Our target is the $20.15-20.00 zone.
Picked on April 09 at $ 22.95 triggered
MBIA Inc. - MBI - close: 11.72 change: -0.08 stop: n/a
We received some reader email on MBI today and in it were two good questions. One question regarded the upcoming earnings date for MBI's report. We had it listed as an unconfirmed date in late April. We checked two sources today and found MBI's Q1 earnings date to be May 13th, most likely before the market opens. The second question was about MBI's estimated earnings for Q1. Reuters and Thomson are listing Wall Street consensus estimates for MBI to be a loss of 16 cents (-0.16 EPS) for the quarter compared to $1.48 Q1 2007. Now how are we as option traders supposed to trade around this news event? May options expire after May 16th. MBI reports on the morning of May 13th. That doesn't give us a lot of time. Here is our suggestion. This week, April 14-18th, will see a lot of earnings news out of the financial sector and we're expecting the news to be worse than expected. This should push financials, including MBI, lower. If we do not see a sell-off in financials this week then Friday afternoon (April 18th) or Monday (April 21st) would probably be a good time to exit early and cut our losses. Right now we're five weeks out from May option expiration and option premium decay really speeds up when we hit the last 30 days. One idea might be to reduce your position to just a very small, speculative play to go ahead and hold over the May announcement just in case MBI disintegrates on the news. We're not listing a stop loss at this time but would still consider a stop loss at $14.55 to close the play on any unexpected strength. We are 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).
Picked on January 27 at $ 14.20
(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.)
Goldman Sachs - GS - cls: 163.59 chg: -3.71 stop: n/a
GS continues to sell-off and is nearing potential support at its late March low around $163.00. Of course our expectation is for financials to trade lower this week. We are not suggesting new strangles at this time. The options we suggested for this strangle were the May $190 calls (GPY-ER) and the May $160 puts (GPY-QL). Our estimated cost was $8.70. We want to sell if either option trades at $14.50 or higher. FYI: The May $160 puts hit a high of $7.70 today.
Picked on April 06 at $175.40
Core Labs - CLB - close: 135.33 chg: +3.93 stop: 122.45
We are giving up on our buy the dip play in CLB. The stock has just been too strong and we don't want to chase it. Of course technically the breakout over $130 is a bullish move and confirmation of the inverse head-and-shoulders pattern. We've been waiting for a dip since April 2nd and it hasn't occurred. Nothing goes up in a straight line for very long so we're going to keep CLB on our watch list and try to be patient about a new bullish entry point.
Picked on April xx at $ xx.xx *never opened
Today's Newsletter Notes: Market Wrap by Jeff Bailey and all other plays and content by the Option Investor staff.
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