I have probably have used that headline a dozen times over the last ten years of commentaries. The FOMC meets an average of 9 times per year so that means I have written about the buildup to FOMC meetings for the week leading up to each meeting for nearly 100 weeks. It seldom changes. The market rallies in anticipation the week before then begins to weaken as traders take profits as the day approaches rather than be caught flat-footed by an unexpected result. This week was no different. Volume has slowed appreciably as the analyst talk increased. Will they cut 25 points or not? Everyone has an opinion and nobody knows for sure. It makes it even more critical this week with the markets struggling to break three months of resistance at 12900, 2400 and 1400.
Dow Chart - Daily
On the economic front Consumer Confidence for April fell to 15-yr lows at 62.3. Actually March 2003 was lower by less than a point but at this level who is going to quibble over a fraction. This drop should be no surprise since the Consumer Sentiment last week fell to 26 year lows. These levels are consistent with a severe recession and not a soft landing. We have seen from recent economic reports that maybe the economic picture is not as grim as most think and the Fed may actually say that in the Wednesday announcement. This suggests both sentiment and confidence could reverse sharply once the newspapers start talking about a recovery in progress rather than a coming apocalypse. The present conditions component was the biggest drag with a drop of -9.8 points to 80.7. The expectations component actually rose .7 to 50.1 and that could be consumers starting to see the economic signs improving.
Consumer Confidence Chart
The monthly S&P/Case-Shiller Home Price Index for February was released today. The trailing 12 month number fell to -13.6% with a -2.9% drop in February according to the 10-city composite index. That was another record for the largest year over year decline since the index began back in 1988. Miami was the largest loser over the last 12 months with a decline of -21.7%. Denver, where we are actually seeing a surge in buying was down only -5.5% for the year and had the least monthly drop at -1.1%. The mortgage reset peak is expected to be in May/June of this year with a gradual decline into 2009. The cheap mortgage boom was 2005/2006 and those ARMS are all rolling over right now. There are reportedly 18.6 million vacant homes in the U.S. and 16 million homeowners are now underwater in their loan to value. By year-end there are expected to be more than one million bank owned homes on the market. To put this in perspective there are only four million homes on MLS. That would mean 25% would be bank owned and selling at a steep discount in most cases. On the bright side 94% of all mortgages are being paid on time.
Case Shiller Table
Wednesday is going to be a monster day for economic events. The Q1-GDP report at 8:30 is going to be closely watched and whisper numbers are creeping up into the +1.0% growth range. Of course this could be anywhere from +1% to as low as -2%. The official consensus is for a small fractional gain of 0.3%. That is a neutral bet by those who don't want to go out on a limb with a bearish forecast. Any number over +0.5% would be greeted warmly by the market.
The April Chicago PMI report at 9:45 is expected to show a bigger drop into contraction territory with a headline number in the 47.5 range. This would be down about a point from March. That would be the third consecutive month under 50. The PMI has a high correlation to the ISM so this should be a preview of Thursday's national ISM report.
Filler reports include the Mortgage Application Survey, Employment Cost Index, NAPM-NY report, agricultural prices and oil inventories.
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The real key for market direction will be the FOMC announcement at 2:15 pm. According to the Fed funds futures there is a 79% chance of a 25-point cut and only a 5% chance of anything larger. The Fed is widely expected to make the cut and change their bias to neutral. Analysts expect a dramatic change in their posture after the rather dire statement last month. The Fed was uncharacteristically negative in the February meeting announcement and analysts are wondering how they are going to do an about face without losing credibility.
Last month's statement said in part, "Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters." Nobody expects the economy to have done a complete about face in only a month but the Fed's liquidity measures have definitely improved the crisis in the financial system. Borrowings through the various Fed liquidity offerings have slowed and although the banks are still posting billion dollar write-downs the situation has improved.
I would say the expectations for the Fed announcement have probably risen to a point where they are too high. Nearly everyone expects one more 25-point cut to take us to 2.0% and then a change to a neutral bias. Traders feel this would be the perfect scenario suggesting the economy was already recovering or at least not getting any worse. The downside to these expectations is the potential for them to not cut again or to raise the inflation warning level to a point where an immediate reversal into a hike scenario is expected.
Just failing to cut again would not be the end of the world. If the reason not to cut is due to an improving economy traders would cringe but then celebrate the end of the recession. The worst scenario is the Fed playing the inflation card. We already had two FOMC members vote against the last rate cut for inflation reasons. If the inflation hawks suddenly outnumber the cooler heads then trader elation over an improving economy will quickly turn into rising fear of an overasctive Fed. Memories of the inflation in the late 70s with rates in the mid teens was forever seared into the investor consciousness. While nobody expects that today the memory always comes back to haunt us whenever the Fed switches to hike mode.
The markets normally do ok when the Fed switches to a hike bias because that means business is booming and profits are growing. It is only when the inflation monster gets up to full speed that rapid Fed rate cuts greases the slide into correction mode.
All of those alternate scenarios will probably not come to pass but depending on Wednesday's Fed statement they will be cussed and discussed over and over in the business news. Most likely the Fed will cut 25, say the economy is no longer weakening, as opposed to recovering, and the Fed does not want to over stimulate inflation by continuing their easing bias. They also don't want to endanger the peak in mortgage resets expected in May/June. Those people need a cheap rate to refi their homes and avoid foreclosure. They will likely mention the success of their various liquidity programs in breaking the logjam in the financial markets. It will be a neutral statement because the Fed will not want to damage the fragile recovery. All the buildup and hype will be forgotten by Thursday morning and traders will be back to the sell in May and go away decision.
I heard a statistic this week that the sell in May strategy has produced winning returns in all but four of the last 27 years. This kind of repeatable low risk return definitely has appeal in normal years. I continue to believe this year is an entirely different ball game. The setup for a recovery rally is almost perfect. I would bet very few institutional investors are willing to miss out on what could be huge gains if the market takes off next week with the Fed's blessing. This could be one of those rare years when the strategy tanks.
The earnings cycle is still in full swing with roughly 1075 companies reporting this week. In the news today BP and Shell both posted strong profits on the rise in oil prices. BP posted a profit of $7.6 billion compared to $4.4 billion in the same quarter last year. Shell reported a 25% rise in profits to $9.08 billion. Shell's profits would have been much higher except for the massive amount of oil production offline in Nigeria. Shell is taking a monster hit with about 600,000 bpd offline on any given week. Some of that has been offline for the last year. Goldman upgraded several of the oil stocks saying they believe oil will continue to rise and with it so will profits. They raised estimates on Exxon (XOM) and Hess (HES) both of which report later this week.
Refiner Valero was not so lucky. Profits fell -85% on record crude oil costs. They have to buy the expensive crude and sell the refined products. Unfortunately despite $3.60 gasoline and $4.10 diesel the price for refined products has not risen nearly as fast as the price of crude. Valero warned several weeks ago that a zero or sometimes negative crack spread would depress profits.
Deutsche Bank (DB) reported its first loss in five years after taking $4.2 billion in write-downs for the quarter. DB ended the quarter with a $220 million loss. This brought their write-down total to $7.8 billion. The banks are still reeling from the total lockdown of the system when Bear Stearns crashed in March.
MasterCard (MA) reported earnings that more than doubled to $3.38 per share, up from $1.57 in the comparison quarter. Cardholder spending rose slightly in the U.S. but grew sharply overseas. That number did have some special items but after items they still earned $2.59 per share and well above the $2 analysts expected. U.S. card purchases rose +8.9%. MA stock rose +$31 on the news. Visa reported earnings on Monday and guided for 20% growth. Analysts were expecting 29% and Visa's stock was punished. It was a quick trip to the woodshed and Visa gained +5.25 today on the positive MasterCard results and guidance.
Countrywide (CFC) posted a loss of $893 million for the quarter due to sharply rising loan loss provisions and deliquent loans. Bank America is buying them for $4 billion in stock. The loss equated to $1.60 per share and revenue fell to $679 million from $2.4 billion in the comparison quarter. Countrywide took $3.05 billion in credit related charges. Chargeoffs rose to $606 million compared to only $39 million in Q1-2007. Deliquencies rose to 9.3% with 4.8% more than 90 days behind. In separate news BAC said it sold $6 billion in debt in an effort to increase capital to cover loan losses. BAC said profits declined -77% due mostly to real estate loans to developers and consumer mortgage problems. On the bright side Countrywide said applications jumped 27% in Q1.
High profile earnings due out tomorrow include PRU, PG, SBUX, TWC, FSLR, GRMN, GM, SYMC, JDSU and CMI.
Crude oil finally lost its traction. The price of oil fell over $3 to close at $115 after spiking to $119.93 on Sunday night. Reportedly this was due to the end of the strike in Scotland that shut down the 700,000 bpd Forties pipeline. Unfortunately that is not the whole story. The strike is over but it could take weeks to get the entire system back up again. The Grangemouth refinery was nearly 100 years old and had not been shutdown completely since World War II. To say there may be problems restarting all that old equipment would be an understatement. They should be able to get the power and steam process running quickly and that is what caused the pipeline shutdown. Yes, the strike is over but some problems may linger. Since the market runs on news events and not reality it was no surprise to see oil finally correct. It will only be temporary but hopefully we will see it drop significantly to provide all of us who did not want to buy energy stocks at $120 oil a chance to enter some new positions.
Crude Oil Chart - Daily
The markets ended the day mixed and still within striking distance of their recent highs. The Dow lost -39, S&P -5 and the Nasdaq gained nearly 2. Both days this week have been lackluster to say the least. Volume on Monday was only 5.8 billion and the lowest day in 2 weeks. Today was only marginally better at 6.2 billion shares. The markets are clearly waiting on the Fed.
The Dow traded over 12900 twice in the last several days only to retreat at the close to its current comfort zone around 12835. I actually think this is bullish. The minor retreat suggests nobody wants to sell and there are plenty of dip buyers waiting in the wings. One analyst said last week there was $3.5 trillion in cash that was earmarked for stocks once a recovery begins. If the Dow can move over 12900 with conviction after the Fed meeting then some of that cash will be put to work.
Nasdaq Chart - Daily
The Nasdaq has become the leading index of late. It has been comfortably over 2400 for a week now although never straying far from that prior resistance. The big cap momentum techs consisting of APPL and RIMM refuse to slow down and they are dragging the Nasdaq higher. Even the chip stocks are creeping higher. It is a clear sign that bargain hunters are getting antsy as they wait for the Fed.
The S&P spent most of Monday just over strong resistance at 1400 but caved in to selling at the close. It did not retreat far to close at 1391 and well within striking distance if the Fed does not spoil the party. The Russell actually broke out slightly yesterday to hit 728 but sellers hit it hard this morning and it closed with a 6 point loss. I believe this was just profit taking ahead of the Fed because exiting on the news from a small cap stock can be painful. This was caution in motion rather than any change in sentiment.
S&P-500 Chart - Daily
I would plan not to be in the market over the Fed announcement but assuming they don't rain on our parade I would continue to buy the dips or any breakout over SPX 1400. The next economic trap is the non-farm payrolls on Friday but assuming the Fed is neutral tomorrow the jobs won't matter unless there is a monster surprise. Please excuse any typing/spelling errors tonight. My spell check in Word suddenly quit working today. You forget how much you rely on it to correct those errors where your brain is thinking one thing and your fingers another.
Mastercard - MA - close: 273.98 chg: +31.48 stop: 281.01
Why We Like It:
BUY PUT JUN 250 MAL-RV open interest= 216 current ask $5.90
Picked on April 29 at $273.98
Aracruz Celulose - ARA - cls: 75.76 chg: -3.91 stop: 74.75
Ouch! Shares of ARA lost 4.9% following yesterday's failed rally over $80.00. The media is claiming that strength in the U.S. dollar weighed on the Brazilian currency and this sparked a sharp sell-off in Brazilian markets. The Brazilian Bovespa index lost 2.8%. With ARA still trading near its highs the stock was a big target for investors to sell in a hurry to try and lock in a profit. Shares of ARA look poised to test support near $75.00 soon. A bounce from $75.00 would be another bullish entry point and we'd have a much better risk-reward ratio with a tight stop. If you do buy a dip near $75.00 I suggest locking in some gains near $80.00, which is still resistance. We have two targets. Our first target is the $84.50-85.00 range. Our second target is the $88.50-90.00 zone. As expected the rally over $80.00 did produce a new P&F chart buy signal, which currently points to a $94 target.
Picked on April 28 at $ 80.25 *triggered
Alliant Tech - ATK - close: 109.57 chg: -0.64 stop: 105.99
We don't see any changes from our previous comments on ATK. The dip may not be over. Look for the $108 level to be short-term support. More conservative traders may want to use a tighter stop in the $107.50 region. Our second target is the $114.00-115.00 range. FYI: As expected a rally over $110 has produced a new P&F chart buy signal that now points to a $133 target. We do not want to hold over the May 8th earnings report.
Picked on April 21 at $106.00 /1st target hit $109.90
Cytec Ind. - CYT - close: 59.35 change: -1.40 stop: 57.95
CYT spiked lower this morning but traders bought the dip (twice) in the $58.75 region. The afternoon bounce looks like a new bullish entry point to buy calls. We're starting the play with a stop loss at $57.95 but you could probably try a stop at $58.45 instead. We have to label this a more aggressive play because the spreads on the options are pretty wide. There isn't much we as traders can do about that except try to minimize its impact with good entry and exit strategy. We're listing two targets. Our first target is the $64.75-65.00 range. Our second target is the $68.00-70.00 zone.
Picked on April 27 at $ 60.64
Fluor - FLR - close: 155.89 chg: -2.95 stop: 152.49
FLR just hit a second day of profit taking. We've been suggesting that readers do that with their calls for over a week now - profit taking. A bounce from $155 could be used as a new bullish entry point but consider ratcheting up your stop loss a little. The momentum looks like it's fading a bit and while it's only Tuesday the current weekly candlestick is looking bearish. The stock has already hit our target at the $159.00 level. 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 /1st target hit $159
HSBC - HBC - close: 85.75 change: -0.10 stop: 83.90
HBC continues to trade sideways. Yesterday we suggested that a bounce near $85.50 or $85.00 could be used as another bullish entry point and HBC dipped to $85.43 this morning. An alternative entry point would be to wait for another rally over $86.25 again. We have two targets. Our short-term target is the $89.75-90.00 range. Our more aggressive, longer-term target is the $94.00-95.00 zone. The P&F chart is bullish with a $113 target.
Picked on April 28 at $ 86.19 *triggered/gap higher
Hovnanian - HOV - close: 12.19 chg: +0.15 stop: 10.45
The homebuilders delivered a quiet day in spite of some negative industry news. The S&P/Case-Shiller home price index of 20 cities is showing a 12.7% drop in year-over-year price declines in February. That's worse than the 7.7% median drop we saw a few days ago. This 12.7% plunge was the largest decline since the index started in 2001 (source:AP). The hottest markets during the boom like Las Vegas, Phoenix and Miami, were the hardest hit with 20% declines in home prices. Shares of HOV weathered the news and actually posted a gain today. We have two targets. Our first target is the $13.50-14.00 zone. Our second, more aggressive target is the $14.75-15.00 zone. FYI: The P&F chart is bullish with a $25 target. HOV still has a high amount of short interest. The most recent data listed short interest at almost 65% of the 37.2 million-share float. That really raises the odds of a short squeeze, which would be great for us.
Picked on April 16 at $ 11.86
Intl.Bus.Mach. - IBM - cls: 122.85 chg: +1.16 stop: 118.49
IBM was starting to correct yesterday with the drop under $122 but shares rebounded today on news the company is raising its dividend. IBM announced it was upping its dividend by 25% to 50 cents a share. Our suggested entry range is the $120.75-120.00 zone. If triggered we'll have two targets. Our first target is the $124.90-125.00 range. Our second target is the $128.00-130.00 zone.
Picked on April xx at $ xx.xx <-- see TRIGGER
iShares Russ.2000 - IWM - cls: 71.74 chg: -0.64 stop: 69.49
As the market waits for the latest Fed decision the small cap stocks slipped to their 10-dma and bounced. We remain bullish and don't see any changes from our prior comments. Our four to six-week target is the $77.50-80.00 zone. The P&F chart is bullish with an $87 target.
Picked on April 28 at $ 72.55 *triggered
iShares DJ Transports - IYT - cls: 93.18 chg: +0.74 stop: 87.79
A sharp plunge in the price of oil helped the transports post another gain lead by big rebounds in the airline stocks. The IYT hit another new relative high and closed near its highs for the session. We have two targets. Our short-term target is the $94.85-95.00 range. Our longer-term eight-week target is the $98.00-100.00 zone.
Picked on April 27 at $ 91.48
Joy Global - JOYG - close: 73.82 chg: -3.08 stop: 69.95
No one said the stock market was logical. This morning an analyst raised their earnings estimates and their price target on JOYG but the stock plunges instead. Obviously we don't think the analyst opinion had any affect on the stock. JOYG joined a lot of recent winners that suddenly ran into some profit taking. The $72.00 level is short-term support and another bounce north of $72 can be used as a new entry point. More conservative traders might want to raise their stop toward $72.00. Our target is the $79.50-80.00 range. The P&F chart is already bullish with an $88 target.
Picked on April 16 at $ 72.55 *triggered
Nike Inc. - NKE - close: 68.23 chg: +0.41 stop: 66.74
Yesterday we suggested that readers buy a bounce in NKE and the stock delivered one today. We remain bullish but more conservative folks may want to wait for a rally over $69.00 or $70.00 to initiate positions. More aggressive traders may want to use a stop under true support near $65.00. Our target is the $74.00-75.00 range. The P&F chart is bullish with an $83 target.
Picked on April 27 at $ 68.74
Nucor - NUE - close: 75.08 change: -1.92 stop: 69.75
NUE just erased a good chunk of our unrealized gains with 2.5% drop in the stock price. Almost anything commodity-related including steel stocks were trading lower as the U.S. dollar rallied. Traders did step in to buy the dip in NUE near its rising 10-dma. We remain bullish here. More conservative traders may want to consider a stop closer to $72.00 instead. Our initial target is the $79.50-80.00 range. Our second, more aggressive target is the $84.00-85.00 zone. The Point & Figure chart is bullish with a $93 target.
Picked on April 22 at $ 74.63
Public Storage - PSA - cls: 92.80 change: -2.70 stop: 91.95
What happened to PSA? We just went from +1.40 to -1.30 with today's 2.8% decline. Most of the weakness was this morning and we can't find any news or catalyst that might explain the relative weakness. Many of the short-term technicals have naturally started to turn bearish. We're not suggesting new positions at this time. We do not want to hold over the early May (unconfirmed) earnings report. Note: the May earnings report is still a mystery. One source is suggesting PSA reports on May 1st while another is suggesting the company reports in the May 5th-10th range. If we don't see something soon to confirm an announcement date we may end up closing the play early just to be safe.
Picked on April 22 at $ 94.10
Textron - TXT - cls: 60.69 change: -0.39 stop: 58.90
We don't see any changes from our previous comments on TXT. The stock is trading sideways and we would still consider new positions here. Our short-term target is the $64.85-65.00 zone. Our secondary, more aggressive target is the $68.00-70.00 range. The Point & Figure chart is bullish with an $83 target.
Picked on April 27 at $ 61.39
United States Oil - USO - cls: 92.99 chg: -2.70 stop: 96.55
The rally in oil may finally be starting to break down. Crude oil plunged about $3 a barrel after flirting with highs near $120 the last few days. The USO lost 2.8% and closed under its 10-dma. We would consider new put positions here. Our first target is the $88.50-88.00 zone. Do not be surprised to see the USO bounce on its initial test of $90.00.
Picked on April 21 at $ 94.38
(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: 192.68 chg: +2.44 stop: n/a
GS continues to show relative strength as it tries to push past the exponential 200-dma. We have less than three weeks left for May options so we need to see GS continue higher. We're not suggesting new strangle positions. 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.
Picked on April 06 at $175.40
Merrill Lynch - MER - cls: 49.82 chg: +0.02 stop: n/a
MER has run into something of a road block with resistance near $50.00. Bulls can be somewhat optimistic here. The stock does have a short-term trend of higher lows suggesting it will breakout higher. We're not suggesting new strangle positions at this time. The options we listed in the May strangle were the May $50 calls (MER-EJ) and the May $32.50 puts (MER-QA). Our estimated cost was $1.76 and we want to sell if either option hits $3.00 or more.
Picked on April 15 at $ 43.34
Express Scripts - ESRX - close: 71.47 chg: -2.09 stop: 69.99
It was our plan to exit today in ESRX to avoid holding over the company's earnings report. We've been suggesting readers take profits for a couple of days now. ESRX has already exceeded our first target at $72.50 and traded to $74.25 twice but it wasn't enough to tag our secondary target at $74.85. The company reported after the closing bell this evening and beat estimates by 3 cents but missed the revenue estimate. The stock is currently trading lower near $69.00 in after hours markets.
Picked on April 21 at $ 67.50 *1st target achieved 72.50
Today's Newsletter Notes: Market Wrap by Jim Brown and all other plays and content by the Option Investor staff.
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