The markets continued to trade mixed on conflicting economics, plenty of Fedspeak and $127 oil. There are plenty of news items crossing the wires but no clear evidence of a market direction. Acquisitions, proxy battles, LBO deals and news of further write-downs continued to confuse traders. Retail sales and home prices continue to fall but the Fed is still positive that the economy is going to recover. All this conflicting news is keeping traders on the sidelines as shown by the mixed markets.
Retail sales for April fell -0.2% but that was due mostly to plummeting auto sales. Autos and auto parts sales fell -2.8% and that dragged down the entire survey. Ex-autos sales were up +0.5% after gaining +0.4% in March. Where is that consumer slowdown? The only evidence of a consumer being crushed by today's $3.73 gasoline is the sharp drop in auto sales. Since SUV sales made a large portion of overall vehicle sales in years past the sudden halt in SUV sales is killing the sector. Strangely even with higher gasoline prices sales at gas stations declined -0.4% from March. This is the real proof that consumers are driving less. However, compared to April 2007 they are still up +16.3% on those higher prices. Food stores, warehouse clubs and restaurants showed strong gains primarily due to the higher prices for food. Electronics sales rose +1.4% and building materials dealers like Home Depot and Lowe's rose +1.9%. These numbers are expected to get better as the $100 billion in Federal stimulus filters through the economy this summer.
The National Association of Realtors released their Metro Price survey today showing median home prices declined -4.6% for the quarter and -7.7% for the last 12 months. This news should not be new for any homeowner. What is surprising is the divergence by area with the Northeast rising +3.2% while the West fell -13% over the same period, down -8.7% for the quarter. Of the 157 metro areas surveyed 48 posted increases and 9 were unchanged. Home sales totaled 4.95 million units in Q1. That was only down -1% from Q4 but -22.2% from Q1-2007.
NAR Home Sales
Wednesday's reports include the Consumer Price Index or CPI with expectations for a rise of 0.3%. Many expect that headline number to be even higher given the steep rise in energy prices. The EIA oil inventory report is expected to show a gain of 2.5 million barrels but a drop in gasoline inventories of 800,000 barrels. Thursday's major report will be the Philly Fed Survey at 10:AM.
Toll Brothers issued some Q2 guidance today and CEO Robert Toll was not encouraging. "If builders see a light at the end of the tunnel, it could be the train coming toward you." Toll Brothers average contracted price after cancellations hit a six-year low of $534,000. The price was hurt by higher incentives and a change in product mix to lower priced units. Toll expects write-downs in Q2 of $225 - $375 million to adjust the value of homes on its books that it can no longer sell at a profit. The second quarter backlog of homes ordered but not delivered was cut in half to $2.08 billion. Net contracts fell by -79% in the north, 62% in the west, 44% in the mid-Atlantic and 31% in the south. Toll said he considered merging with another company and remains open to the idea but "So far we are very happy with where we are." In what I believe could be an improvement of conditions and a clue to Toll's outlook, they said they were looking to buy land as prices decline to levels Toll likes. Any builder considering buying land rather than fleeing existing option contracts is a definite improvement in my book.
Wal-Mart (WMT) reported earnings of 76 cents that beat estimates by a penny. That was the good news. The bad news came from a cautious forecast for Q2 that sent the stock down -1.37 on the news. CEO Lee Scott said, "There are still uncertainties about the rest of the year. The economy is going to play a critical factor in 2008." Scott said higher transportation costs, gasoline prices, commodity prices and utilities remain potential headwinds for the rest of the year. Scott said consumers were shopping on payroll schedules with month end buying relatively light as consumers ran out of money. He also said consumers were spending less on credit cards. To me that suggests those cards are already maxed out. Wal-Mart guided analysts to earnings of 78-81 cents for the current quarter with same store sales flat to up +2%. Analysts were expecting 81 cents. Overall sales rose to $94.1 billion for the quarter.
After the close Applied Materials (AMAT) reported earnings of 22-cents that beat estimates by a penny. AMAT reported a drop in spending in almost every area BUT said the semiconductor equipment industry was nearing the end of its downturn. CEO Mike Splinter said he expected an improvement on spending in the next quarter and revenues and orders to rise. AMAT dropped slightly on the initial earnings news but rebounded sharply on the guidance. After the smoke cleared the stock had returned to about where it closed.
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Whole Foods (WFMI) reported earnings that missed the street by two cents. Shares fell -10% in after hours after they said sales at some stores fell in Q1. WFMI is already down -17% for the year on worries that the high priced food will have trouble selling to a depressed consumer. Whole Foods is the Neiman Marcus (Needless Markup) of the grocery sector. They did back their full 2008 forecast for sales to grow 25% to 30% over 2007. Tough talk from a store under pressure.
Electronic Arts (ERTS) reported earnings excluding charges of +9 cents when analysts were expecting only a breakeven. Sales exploded +84% to $1.13 billion on sales of Rock Band and Burnout Paradise leading the way. Analysts had only expected $835 million. The stock lost -$2 in after hours.
Clear Channel (CCU) continued its rally by tacking on another $1.48 after news broke on Monday that the long running buyout might actually get done at $36. Reportedly the parties involved have a deal in principle but the deal would require another vote by shareholders and not close for 90 days. The original deal was for $39.20 a share but the banks balked on the financing when the credit crunch hit. They feared they would lose $2.7 billion if the deal completed on the original terms. The current agreement would avoid a long court battle.
The biggest winner in the earnings news was Fluor (FLR) which traded up +$24.67 on earnings of $1.50 per share compared to estimates of $1.26 per share. The company raised its full year guidance from $5.10-$5.50 to $6.25-$6.55 per share. Revenue grew 32% and earnings +60%. Fluor said it won $5.2 billion in new contracts. The post earnings spike sent FLR shares to $191. Before earnings when FLR was trading around $165 we were hoping for a dip to get an entry point in the LEAPS newsletter. I guess I should kiss that idea goodbye.
Hewlett Packard (HPQ) shares took another 7% hit after falling -5% on Monday when the news of the EDS acquisition hit the wires. HPQ is buying EDS for $13.9 billion. Unfortunately Hewlett's market cap has fallen by -$16 billion since the deal was announced. That is a monster hit on analyst fears HPQ paid too much for EDS. HPQ is paying $25 a share for EDS and that stock closed at $18.85 on Friday. Analysts think this is a good move for HPQ and will put the company second behind IBM in consulting services. They just think it is too much to pay for a company that is in turmoil with questionable management. (Their words not mine)
HPQ Chart - Daily
Carl Icahn is reportedly loading up on Yahoo stock in preparation for an attempt to take over the board. Icahn has reportedly acquired about 50 million shares over the last couple weeks or a 3.6% stake. He is expected to submit an alternate slate of directors before the deadline on Thursday. Icahn believes there is enough shareholder hostility to get his directors elected. He then feels he can get Microsoft back to the table and get a deal accepted. He has plenty of help in this endeavor with a major shareholder revolt underway after Yahoo turned down the massive premium initially offered by Microsoft. Yahoo shares have rebounded from $23 after Microsoft walked away last week to close at $26.58 on news of Icahn's plan. Let's see 50 million shares at $24 and a Microsoft offer at $33. That would be a $450 million profit. Not a bad payday if Carl can pull it off.
Oil prices spiked again intraday as shorts in expiring futures positions were squeezed by comments out of Iran. Iran has been having problems with its oil sector due to lack of investment into exploration and infrastructure. Production has been declining over recent years. Iran said today that it may consider cutting production and that sent oil to $126.97 intraday. I have to admit that was an excellent attempt at spin control. Production is falling for a variety of reasons. Let's call it a production cut instead of poor management. In later reports Iran denied a cut was imminent but said only a reduction has been discussed. With Iran's economy in such bad shape there is almost zero chance of any official cut because they need all the petrodollars they can get. Helping to drive prices higher is the expiration of June crude options on Thursday and June crude futures next Monday. Shorts are still getting killed on every expiration cycle.
The Dow has not cooperated in the rally this week. For 4-days now the index has been stuck hugging support at 12800. HPQ, WMT and JPM were the three Dow components holding the index back on Tuesday. If I were only looking at the chart of the Dow I would be negative on the market.
DDow Chart - Daily
S&P-500 Chart - Daily
The S&P-500 is only slightly better and has been held back by continued drops in the financial stocks. They represent 21% of the index. Oppenheimer cut estimates on the major financial stocks again today and that weighed on the S&P but the index still managed to hold over support at 1400.
The real excitement for me comes from the Nasdaq and Russell-2000. The Nasdaq traded up to 2500 once again and gave back very little of its gains with a close at 2493. The Nasdaq is quietly wedging up to that resistance at 2500 and a breakout could be imminent. Futures are down slightly in after hours from several tech companies reporting after the bell. Nothing critical but they are down.
Nasdaq Chart - Daily
Russell Chart - Daily
The Russell 2000 actually broke out today with a close at 736.85. You know I feel the Russell is the sentiment indicator for mutual funds. I reported over the weekend that the Russell was exhibiting an unusual strength on Friday and this week has been even stronger. With a rebound off 715 on Friday to close at 736 today that is a +21 point move at a time when the big cap indexes have been weak. I believe this is a critical event that could be telling us the sell in May crowd is a no show for 2008. I can't emphasize enough that should the Russell continue up from here we could see a major rally in our future. I have been recommending reversing to a short bias under SPX 1400 and today's close at 1403 is marginal at best. Over 1400 we should be long and over Russell 735 that is even a stronger signal. Get ready to back up the truck if S&P moves over 1420 and the Russell adds to its gains.
Oil Services HOLDRs - OIH - close: 206.78 chg: +3.29 stop: 199.00
Why We Like It:
FYI: Another way to play this sector is the DIG ETF but the spreads for options on the DIG are very wide.
BUY CALL JUN 200 OIH-FT open interest=2868 current ask $13.50
Picked on May 13 at $206.78
Reliance Steel - RS - close: 65.75 chg: +2.16 stop: 59.99
Why We Like It:
BUY CALL JUN 65.00 RS-FM open interest=1618 current ask $3.50
Picked on May xx at $ xx.xx <-- see TRIGGER
AGCO Corp. - AG - close: 60.05 change: +1.69 stop: 57.75
The bounce in AG is starting to look a lot more healthy here. Shares really began to gain some momentum heading into the closing bell and actually closed above round-number resistance at $60.00. Our suggested entry point to buy calls is at $60.40 but we would strongly consider jumping in right here. If triggered at $60.40 our short-term target is the $64.90-65.00 range. FYI: The P&F chart is bullish with a $71 target.
Picked on May xx at $ xx.xx <-- see TRIGGER
Aracruz Celulose - ARA - cls: 87.03 chg: +0.41 stop: 79.45
We don't see any changes from our previous comments on ARA. Honestly, we're surprised that ARA did not see more profit taking today after yesterday's big gain. The fact that ARA did not trend lower is bullish but we would still strongly suggest readers take some profit off the table here. ARA has exceeded our target in the $84.50 zone and is nearing our second target at $88.50-90.00. The intraday high today was $87.22. Volume came in above average on the rally for the second day in a row, which is bullish.
Picked on April 28 at $ 80.25 *1st target hit $84.50
CNOOC - CEO - close: 184.75 change: +4.39 stop: 174.75
The path of least resistance is still up for CEO. The stock added 2.4% and is challenging short-term resistance near $185.00. We would still consider new positions now or on a dip anywhere between $185 and $180. Our target is the $199.00-200.00 range. FYI: We have to label this a more aggressive play because the option spreads are so wide!
Picked on May 06 at $183.47
CF Ind. - CF - close: 137.04 chg: -2.31 stop: 129.90
Most of the fertilizer stocks were all trending down today. The group is essentially consolidating sideways and today just happened to be a tick lower. We remain bullish on CF but more conservative traders might want to wait for another rally over $140 or $141 before initiating positions. You might also want to raise your stop loss. Our target is the $155.00-160.00 range. FYI: CF announced that its annual shareholder meeting will be held on Tuesday, May 13th. We didn't see any significant headlines arise from the meeting.
Picked on May 05 at $137.50 *triggered
Carbo Ceramics - CRR - close: 49.14 change: +1.14 stop: 44.89
CRR continues to show relative strength. The stock rallied again marking its fourth gain in a row. CRR is nearing potential resistance at the $50.00 level. We're aiming for the $52.00-52.50 zone.
Picked on May 11 at $ 47.45
Cytec Ind. - CYT - close: 61.77 change: +0.11 stop: 58.45
With the major market averages churning sideways today CYT didn't make much progress. The trend is still bullish but the stock has to push past potential resistance near $62.00. More conservative traders could inch up their stops. 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. 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.
Picked on April 27 at $ 60.64
Express Scipts - ESRX - close: 72.49 chg: +1.03 stop: 68.19
ESRX continues to rebound from the bottom of its bullish channel. We would still consider new positions here. We do expect some resistance at $74.25 but our target is the $77.00-80.00 range. More conservative traders will want to consider taking some profits off the table near $75.00. The Point & Figure chart is bullish with a $81 target.
Picked on May 08 at $ 70.96
Fortune Brands - FO - close: 70.10 change: +0.26 stop: 67.95
FO is still inching higher. The good news today is that shares closed over round-number resistance at $70.00. This looks like a new entry point to buy calls. Our target is the $74.00-75.00 range. The 200-dma is technical resistance near $75.00. The P&F chart is bullish with a $95 target.
Picked on May 07 at $ 70.05 *triggered
Foster Wheeler - FWLT - cls: 68.90 chg: -0.07 stop: 69.45 *new*
Target exceeded. Shares of FWLT soared higher as the entire construction industry reacted to positive earnings from FLR and MDR. FLWT actually gapped open at $71.46 and ended the session up 9.2%. We had been suggesting a trigger to buy calls at $70.51 but today's gap higher would have triggered us at the open. Our short-term target was the $74.90-75.00 range. We're not suggesting new positions at this time. Our secondary target is the $79.50-80.00 range. Please note that we're adjusting the stop loss to $69.45. The P&F chart is bullish with an $84 target.
Picked on May 13 at $ 71.46 *gap higher entry/1st target hit
Gilead Sciences - GILD - close: 53.47 chg: -1.01 stop: 49.99
The biotech sector was weak today and GILD slipped 1.9% following yesterday's all-time closing high. If you're looking for a new entry point then a dip near $52.00 might work. Our target is the $57.50-60.00 range. Don't forget that any time we play a biotech company it should be considered an aggressive, higher-risk trade. There is always risk of some FDA decision or clinical trial result surprising the market and sending the stock gapping one direction or the other.
Picked on May 04 at $ 53.63
Harsco - HSC - close: 62.57 change: +0.57 stop: 59.85
We don't see any changes from our previous comments on HSC. The stock continues to bounce. Shares are nearing previous resistance around $63.00. If you're looking for a new entry point then wait for a dip near $61.00. Our four-week target is the $64.50-65.00 range.
Picked on May 01 at $ 60.38
Intl.Bus.Mach. - IBM - cls: 126.58 chg: +1.34 stop: 119.75
IBM continues to show relative strength. The stock closed at new multi-year highs today. We're raising our stop loss to $120.75. IBM has already hit our early target at $124.90. Currently our secondary target is the $129.50-130.00 zone.
Picked on April 30 at $120.75 */1st target achieved 124.90
iShares Russ.2000 - IWM - cls: 73.49 chg: +0.42 stop: 69.85
Small caps were out performing today. The IWM rallied to its exponential 200-dma and closed at a new three-month high. More conservative traders might want to raise their stop loss closer to $71.00. Our multi-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
Joy Global - JOYG - close: 79.28 chg: -0.68 stop: 74.99
After hitting our target near $80.00 yesterday JOYG hit some profit taking today. We're not suggesting new positions at this time. Readers are encouraged to do some profit taking of their own. Our secondary, more aggressive target is the $84.00-85.00 range. We will plan to exit ahead of the late May earnings report. The P&F chart is already bullish with an $88 target.
Picked on April 16 at $ 72.55 */ fist target exceeded
Mosaic - MOS - close: 125.25 change: -1.74 stop: 119.75
Hmmm... the general trend in MOS is still bullish but we're seeing some bearish signals develop in the short-term momentum indicators. That really shouldn't be a surprise. Momentum has stalled over the last week as the entire group of fertilizer stocks trend sideways. We would still consider new call positions on dips or better yet bounces near $122-120. Our first target is the $138.00-140.00 range.
Picked on May 05 at $126.75 *triggered/gap higher entry
Nucor - NUE - close: 81.39 change: +0.05 stop: 75.95
NUE is still trading near its highs. Traders bought the dip near $80.00 this morning. We're not suggesting new positions at this time but the stock's relative strength is certainly a positive. The stock has already surpassed our target in the $79.50-80.00 range. If you haven't done any profit taking yet we suggest you do so now. Our second target remains the $84.00-85.00 range. FYI: NUE made some headlines this morning. The company announced it was investing about $655 million for a 50% stake in a new joint venture with Italian steelmaker Duferco.
Picked on April 22 at $ 74.63 /1st target exceeded 79.50
POSCO - PKX - close: 131.31 change: +1.49 stop: 119.75
PKX continues to drift higher. The U.S. traded ADR shares of PKX just broke through technical resistance at their 100-dma today. If PKX sees any profit taking we'd buy a dip in the $127-125 zone. Our target is the $139.00-140.00 range. More conservative traders may want to raise their stop loss toward $122.25 under last week's low. NOTE: We would consider this a slightly more aggressive play for two reasons. First, PKX is prone to gap openings as the U.S. traded shares adjust to trading overseas the night before. Second, the spreads on the options are pretty wide and that immediately puts us, as option traders, at a disadvantage.
Picked on May 05 at $125.55 *triggered
Deere & Co. - DE - close: 90.19 change: +0.82 stop: 86.45
Target exceeded. DE continued to rally and actually broke through resistance at the $90.00 level. Our short-term target was the $89.95-90.00 zone. We had planned to exit anyway since DE reports earnings tomorrow morning. Wall Street is expecting a profit of $1.75 a share.
Picked on May 06 at $ 86.08 *target hit $89.95
Arcelor Mittal - MT - close: 97.23 chg: +1.34 stop: 92.45
Target exceeded. MT continued to rally up into its earnings report. Shares added another 1.3% and set a new all-time high at $97.47. Our target was the $96.50 mark. We already had plans to exit if MT didn't hit our target. The company is due to report earnings tomorrow. Wall Street is looking for a profit of $1.82 a share.
Picked on May 05 at $ 90.25 *target exceeded
Today's Newsletter Notes: Market Wrap by Jim Brown and all other plays and content by the Option Investor staff.
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