Despite some negative economics, continued worries about financial write-downs and oil at $127.82 the markets pulled back from a steep morning drop to close unchanged. Several of the major indexes are in breakout mode with the others coming very close. Overall it was a relatively tame expiration Friday and we were left with a bullish setup for next week.
On Friday the first reading on Consumer Sentiment for May fell to a new 28 year low at 59.5. This was the lowest reading since June 1980. It suggests there is a much more severe recession headed our way than the other economic indicators are showing. Sentiment is already 4.5 points below the lowest level reached in the 1990 recession. I believe the two major reasons for the current reading are $3.75 gasoline and falling home prices. The majority of most American's wealth is tied up in their homes. With the falling prices and the inability to borrow against that falling equity most consumers are really down in the dumps. Add in gasoline at nearly $4 and it is putting in a serious crimp in household budgets that live paycheck to paycheck. The present conditions component fell -5.3 points to 71.7 and the expectations component fell -1.6 points to 51.7. Inflation expectations rose to 5.2% and the highest level since 1982.
The New Residential Construction report showed that housing starts jumped +8.2% in April to 1.032 million units. Before you start thinking, "bottom in homebuilding" there is a catch. Single-family starts fell -1.7% to 692,000 units but multifamily units like apartment houses spiked +36% to 326,000 units. The 1.032 million starts was still -31% below the rate in April 2007. Excessively high inventory levels still need to be reduced before the homebuilders can begin to return to business as usual.
Next week the economic calendar is relatively bare with only the Chicago Fed National Activity Index (CFNAI) and Producer Prices (PPI) on Tuesday as the only major reports. The April PPI is expected to show a decline from the +1.1% spike in March. Given the continued high prices for energy it should not be a large drop. The CFNAI rebounded slightly from -1.28 to -0.78 in March and analysts hope for a continued improvement. The CFNAI bottomed out at -1.4 in the 2001 recession. A continued improvement in the April numbers would suggest February's -1.28 was a similar bottom.
The equity markets dropped sharply at the open on Friday as a rumor about a coming jobs revision made the rounds. The rumor said the April jobs number would be revised down by 150,000 jobs when non-farm payrolls for May are reported on June 6th. The rumor started when the individual state non-farm payrolls came in showing a -151,000 drop in April. The Bureau of Labor Statistics (BLS) only showed a loss of 20,000 jobs. BLS economist John Mullins said there was always a discrepancy between the numbers because they are done on a small sampling of data and not a complete census. A JP Morgan economist said, "Since 1990 the average absolute divergence between the two numbers has been 93,000." The rumor was so strong that the US Labor Dept flatly denied it by midday. The markets quickly rebounded with the Dow recovering nearly 100 points. The dip gave traders another entry point for new longs.
Retailer sentiment fell Friday after Goldman Sachs downgraded the department store sector to neutral from attractive. Goldman said higher gasoline prices should further depress consumer discretionary spending. Goldman cut JCP and JWN to neutral from buy saying expansion efforts and product launches have placed them at a near term disadvantage. Goldman said they carried more near-term earnings risk than Kohl's (KSS) and Macys (M). Goldman still deleted KSS from their conviction list and added Wal-Mart (WMT) in its place. Goldman feels Wal-Mart will benefit more from the consumer budget squeeze with consumers trying to stretch dollars farther at the discount store. They also upgraded TJX to a buy saying its value proposition gave it an advantage.
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Yahoo (YHOO) is waging a media war with shareholder lawsuits and the Carl Icahn's board seat play. A City of Detroit retirement fund filed suit against Yahoo for trying to cover up negative points in the Microsoft discussions. In current shareholder suits Yahoo redacted broad swaths of the lawsuit proceedings in an effort to hide events that were not flattering. They redacted references to the size and disclosure of a costly employee poison pill severance plan implemented by Yahoo to deter Microsoft from going hostile. They also redacted portions of conversations between Jerry Yang and Microsoft CEO Steve Ballmer. The details are eventually going to come out and Yahoo's attempt to conceal these and dozens of other points only emphasizes Yahoo is guilty of trying to ignore shareholder interests. Jerry Yang also sent a letter to Carl Icahn claiming Icahn either did not know the real details behind the takeover offer or was misinformed. Icahn has submitted a slate of directors to replace the entire Yahoo board. Institutional shareholders are lining up on the side of Icahn and it appears Jerry Yang's days are numbered. YHOO stock has risen to $28 on the growing idea that Icahn will be successful.
Next Tuesday Hewlett Packard (HPQ) will formerly release earnings although they
gave us a pre-release look last week at 87 cents. That beat the street by 2
cents if it holds up through the Tuesday report.
Crude oil spiked to another new high at $127.82 after Goldman again raised its estimates for oil prices. Goldman now expects oil prices to average a whopping $141 a barrel in the second half of 2008. Their previous forecast was an average of $107. The analysts believe that the oil market is undergoing a structural repricing that will continue to play out for some time to come. Goldman said, "We would view any pullback in oil, regardless of the size or duration - although a correction could be as large as 15% - as an opportunity to re-establish long positions in oil before the summer." This was a license to buy for traders and they sent the futures to a new high on the news. Other news from Saudi Arabia, that they increased production by 300,000 bpd to compensate for falling production elsewhere in OPEC, went ignored. Saudi raised production to 9.45 mbpd and that increase went into effect last Saturday. The announcement came during the visit by President Bush. Traders also ignored and rightfully so, news that the Dept of Energy would not contract for SPR oil deliveries for six months starting on July 1st. The 70,000 bpd trickle no longer going into the SPR will have zero impact on oil prices.
Another reason for the spike in crude was the impending expiration of the June futures contract on Monday. We could see another spike on short covering on Monday and then selling into the holiday weekend.
June Crude Futures Chart - Daily
Friday was the 8th time in 10 sessions that the crude futures contract set new record highs. The national average for gasoline rose to $3.787 on Friday with diesel rising to $4.482 per gallon. Those prices are likely to rise further because gasoline futures jumped another 6-cents on Friday. Historically gasoline prices are the highest around Memorial Day weekend and then decline through the summer. Another factor to consider for oil prices is the rapidly approaching hurricane season, which begins on June 1st. It won't be long before the hurricane forecasts begin and that will exert additional upward pressure on oil prices. The last two years have been very tame and the law of averages is working against us for another year with no storms in the Gulf.
Despite the record prices in oil the Dow transports continue to hold the high ground with resistance at 5400. The strength is not because airlines are gaining traction. Airlines are still losing the fuel battle. British Airways said on Thursday that for every $1 rise in crude oil it costs them $31 million extra in fuel. The strength in the transports is coming from the railroads, which are seen to be beneficiaries of the spike in fuel prices.
Pink slips are flying at the major brokers. Morgan Stanley (MS) cut 1500 jobs last week across its investment banking, trading and asset management businesses. That brings the total for this round of cuts to more than 4,400 workers. Morgan Stanley had 47,050 employees at the end of February. Lehman Brothers (LEH) is reportedly going to cut 5% of its 28,000 workers next week. The cuts are expected to be across all divisions and regions.
Take-Two Interactive (TTWO) closed at $27.10 on Friday with Electronic Arts (ERTS) $2 billion acquisition offer set to expire at midnight on Friday. The ERTS offer was $25.74 per share. The market appears to be expecting a higher bid and one analyst said they would not be surprised if it was over $30 per share. TTWO rebuffed a friendly offer by ERTS and forced ERTS to go directly to the shareholders with their offer. As of April 15th only 8% of TTWO shares had been tendered. ERTS shares lost -$1.92 on worries they would announce a higher offer.
Research in Motion (RIMM) just announced a new BlackBerry two weeks ago and on Friday they announced another touch screen model due out in Q3. The new BlackBerry "Thunder" will not have a keyboard but be completely touch screen. Nobody expects Thunder to replace the iPhone but it is just another weapon for RIMM in the war with Apple. The announcement last week of the 3G BlackBerry Bold gave RIMM quite a boost even though it had been expected for quite a while. The announcement of Thunder did not give RIMM a boost with the stock losing ground both Thursday and Friday.
The indexes all closed higher for the week with the Dow gaining +1.89% but well behind the Nasdaq at +3.41%. Several of the indexes are in clear breakout mode but the Dow has not managed that feat just yet. The Dow is stuck below resistance at 13000 and the 200-day average at 13014. Every pullback to uptrend support is met with buying but the resistance battle is still being fought. The Dow has been lagging the other indexes because of its narrow component base and the ability for a single stock to produce a really bad day. As a comparison the Wilshire-5000 closed at a new 5-month high on Friday although still fighting the same 200-day average.
Dow Chart - Daily
Wilshire-5000 Chart - Daily
The Nasdaq is the clear leader of the major indexes with a close over strong resistance at 2500 and the 200-day at 2516. The Nasdaq is on a run that looks very bullish. Tech stocks bullish heading into summer? Who would have ever thought it could happen? The next material resistance for the Nasdaq is 2725 but there will probably be plenty of opportunities from profit taking along the way.
Nasdaq Chart - Daily
The S&P-500 is giving us the same view as the Dow and Wilshire but it still has not conquered that 200-day curse. I believe we should remain long over 1400 and future dips to support should find plenty of buyers at that 1400 level. Once over the 200-day the S&P should find more funds in the buying mood. Crossing the 200-day is an old fund signal that has worked well for decades. I doubt it has changed.
Last Sunday and again on Tuesday I pointed out that the Russell had suddenly turned bullish and suggested that was the indicator we had been looking for to signal a coming rally. The Russell did finally break over resistance at 732 and then used that resistance as support on intraday dips the following two days. I view this as very bullish and a move over that 200-day at 748 would be icing on the cake. This sudden spurt by the Russell suggests fund managers are no longer afraid to buy risky stocks. This is a bullish signal for the markets!
Russell-2000 Chart - Daily
For next week the major calendar items are the June crude expiration on Monday, PPI and CFNAI and earnings from HD and HPQ on Tuesday. After Tuesday's reports it should be holiday time for the markets and volume is going to dry up like two-week-old Mothers Day flowers. Assuming a lack of market moving news we are likely to wander the rest of the week but the bias is definitely bullish. This is the last week for the sell in May crowd to make a decision. Options have expired and their open plays are now uncovered. They either have to bite the bullet and commit to the bullish trend or bail using the "sell in May" scenario. If the markets can hold in their current ranges past Memorial Day then the bull is back.
Alliant Techsystems - ATK - cls: 111.82 chg: +0.59 stop: 109.45
Why We Like It:
BUY CALL JUN 110 ATK-FB open interest= 82 current ask $4.30
Picked on May xx at $ xx.xx <-- see TRIGGER
China Telecom - CHA - cls: 72.35 chg: +1.29 stop: 69.49
Why We Like It:
BUY CALL JUN 70.00 CHA-FN open interest=1215 current ask $5.70
Picked on May 18 at $ 72.35
Lufkin Industries - LUFK - cls: 80.59 chg: +1.42 stop: 77.85
Why We Like It:
BUY CALL JUN 80.00 UFR-FP open interest=559 current ask $4.00
Picked on May 18 at $ 80.59
Apollo Group - APOL - close: 46.71 chg: -2.02 stop: 50.05
Why We Like It:
BUY PUT JUN 50.00 OAQ-RJ open interest=926 current ask $4.70
Picked on May 18 at $ 46.71
United States Oil Fund - USO - close: 102.27 chg: +2.06 stop: *
Why We Like It:
BUY PUT JUN 103 IYS-RY open interest= 603 current ask $5.60
Picked on May xx at $ xx.xx <-- see TRIGGER
McDonald's - MCD - close: 60.53 chg: -0.33 stop: n/a
Why We Like It:
BUY CALL JUN 62.50 MCD-FZ open interest=10026 current ask $0.55
Picked on May 18 at $ 60.53
AGCO Corp. - AG - close: 59.69 change: +0.60 stop: 57.75
AG is rebounding back toward the top of its trading range and resistance near $60.00. We're still waiting for a breakout over $60.00. More aggressive traders might want to jump in early now with a stop under the May 14th low. We're sticking to our plan with a suggested entry point to buy calls at $60.40. 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.
BUY CALL JUN 60.00 AG-FL open interest=949 current ask $3.20
BUY CALL AUG 60.00 AG-HL open interest=219 current ask $5.80
Picked on May xx at $ xx.xx <-- see TRIGGER
CNOOC - CEO - close: 192.08 change: +0.57 stop: 183.49
Shares of CEO turned in an $11 gain for the week. The trend is bullish but it might be time for a little correction. A dip or bounce near $185 could be used as a new entry point to buy calls. Our target is the $199.00-200.00 range. More aggressive traders might want to aim for the highs near $215. 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: 139.79 chg: +1.06 stop: 129.90
The fertilizer-agriculture stocks are still trending higher. Potash (POT) appears to be showing a little relative strength in the group. CF keeps trying to breakout over the $142 level. The trend of higher lows suggest that it will be successful eventually. More conservative traders will want to seriously consider raising their stop loss toward the $135 level, which was short-term support last week. A dip near $135 or a new move over $142 could be used as alternative entry points to buy calls. Our target is the $155.00-160.00 range.
Picked on May 05 at $137.50 *triggered
Carbo Ceramics - CRR - close: 49.02 change: +0.48 stop: 44.89
We're actually a little surprised that CRR hasn't performed better. The oil service stocks soared to new highs and yet CRR is still trading under resistance near $50.00. The trend is bullish but until CRR clears the $50.00 level bulls are facing a potential double-top pattern. We're not suggesting new positions at this time. We're aiming for the $52.00-52.50 zone.
Picked on May 11 at $ 47.45
Cytec Ind. - CYT - close: 63.77 change: +0.77 stop: 59.95 *new*
CYT was not off to a fast start back in late April but shares have delivered two weeks of gains. This past week saw CYT breakout over resistance at its 200-dma and the $62 level. The stock hit an intraday high of $64.15 on Friday. Our initial target is the $64.75-65.00 range. We do have a secondary, aggressive target at $68.00 but we strongly suggest you do some profit taking at our first target. We're inching up our stop loss to $59.95. 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: 71.11 chg: -1.06 stop: 69.75 *new*
We are suggesting that readers turn a little defensive on ESRX. The rally seems to have stumbled a bit on Thursday and Friday. Looking at the intraday chart ESRX has not yet broken its trendline of support and that actually makes this dip a new entry point to buy calls. However, we're inching up our stop loss to $69.75. If ESRX breaks down we want to be stopped out pretty quickly. Short-term technical indicators have rolled over so more conservative traders might want to wait for a bounce before initiating new positions. 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: 71.36 change: +0.18 stop: 69.45 *new*
Last week was definitely bullish for FO. The stock finally broke through resistance near $70.00 after more than two weeks of trying. Most of the technical indicators have turned positive. The short-term trend in the stock suggest a bullish move over $71.50 soon. We are adjusting our stop loss to $69.45. Broken resistance at $70 should be new support. Our target is the $74.00-75.00 range. The 200-dma is technical resistance near $74.50. The P&F chart is bullish with a $95 target.
Picked on May 07 at $ 70.05 *triggered
Harsco - HSC - close: 62.98 change: +0.09 stop: 59.85
The trend in HSC is still bullish. The stock's pattern of higher lows suggest it will break through resistance near $63.00 eventually. HSC tried to rise past the $63 zone twice on Friday. We're not suggesting new positions at this time. Our target is the $64.50-65.00 range but more aggressive traders may want to aim higher.
Picked on May 01 at $ 60.38
Intl.Bus.Mach. - IBM - cls: 127.82 chg: -0.64 stop: 123.49*new*
Last week was positive for IBM. The stock broke out from a three-week trading range and past resistance near $125. While the trend is bullish shares look a little tired and like they want to pull back to retest $125 as new support. Short-term traders could buy a dip near $125 but consider raising your stop to the $124-125 zone. We are adjusting our stop loss to $123.49. Our target is the $129.50 mark so prepare to exit.
Picked on April 30 at $120.75 */1st target achieved 124.90
iShares Russ.2000 - IWM - cls: 73.95 chg: +0.40 stop: 70.90*new*
The trend in the Russell 2000 small cap index is bullish. The IWM mirror of the RUT has found support near $73.00 more than once in the last few days. This is encouraging. We're raising our stop loss to $70.90. It's possible the $75.00 level might offer round-number resistance but technically shares look strong following last week's breakout over the exponential 200-dma. 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: 81.93 chg: +1.63 stop: 76.90 *new*
It was a rocky week for JOYG but the stock rallied of its lows near $77 and ended at new all-time highs. We are still suggesting that readers take profits now. Our secondary, more aggressive target is the $84.00-85.00 range. We will plan to exit ahead of the May 29th earnings report. The P&F chart is already bullish with an $88 target. Note: We are raising the stop loss to $76.90.
Picked on April 16 at $ 72.55 */ fist target exceeded
Mosaic - MOS - close: 129.66 change: +0.73 stop: 123.24 *new*
The fertilizer-ag stocks want to go higher but MOS gave back most of its early morning gains on Friday. Shares are trying to breakout over the $130.00 level. The trend of higher lows suggests MOS will breakout. We are suggesting new positions now although a dip in the $127-126 zone could be an alternative entry point. Or you could wait for a new rise over $130 again. We are raising the stop loss to $123.24. Our first target is the $138.00-140.00 range.
Picked on May 05 at $126.75 *triggered/gap higher entry
Nucor - NUE - close: 82.07 change: +0.63 stop: 77.45 *new*
NUE was actually downgraded on Friday morning but shares shrugged it off and spiked to a new high at $83.10. The stock's bullish trend of higher lows is forecasting another surge higher soon. We're adjusting our stop loss to $77.45 and we're still suggesting that readers take profits right now even though NUE has not yet hit our second target at $84.00.
Picked on April 22 at $ 74.63 /1st target exceeded 79.50
Oil Services HOLDRs - OIH - close: 214.96 chg: +5.72 stop: 199.00
The oil service sector was a market leader on Friday. The OIH rallied 2.7% and the OSX index soared almost 3%, both to new highs. The breakout over $210 on the OIH is definitely bullish. We'd be tempted to skim some profits off this play right now. Our current target is $219.00-220.00. FYI: The Point & Figure chart is forecasting a staggering $306 price target.
Note: Crude oil might see some profit taking after Monday this week. Any significant drop will probably spark profit taking in the oil service stocks as well. Monitor your stops and consider taking some money off the table, especially if the OIH rises again on Monday.
Picked on May 13 at $206.78
Reliance Steel - RS - close: 68.15 chg: +0.47 stop: 59.99
I don't want to disagree with Jim in his wrap this weekend but I suspect that the market might see a dip this week. I agree that the trend is up but stocks look like they need a rest. We are going to stick to our plan to buy a dip in RS. It may take a few days. If RS doesn't hit our trigger by the end of the week we'll drop it. Our suggested entry point is a pull back into the $64.75-64.00 zone. If triggered we're setting two targets. Our first target is the $69.50-70.00 range. Our secondary, more aggressive target is the $73.00-75.00 range. The P&F chart is bullish with a $73 target.
Picked on May xx at $ xx.xx <-- see TRIGGER
Foster Wheeler - FWLT - cls: 79.60 chg: +0.97 stop: 71.46
Target achieved. FWLT continued to rise on Friday and shares hit $79.97 with bulls challenging resistance near $80.00 twice during Friday's session. Our second target was the $79.50-80.00 zone. The play is now closed.
Picked on May 13 at $ 71.46 *gap higher entry/1st target hit
"It's gone parabolic!" traders sometimes say when a trend develops curves like this one's.
Annotated Daily Chart of VISN:
Note: Articles are first written in advance of the publication date and so charts do not depict current prices.
The curve away from the trendline is marked by the dotted red line. Some traders consider such curves to be the beginning of the end for a trend, whether that trend is an uptrend or a downtrend. A trader believing that VISN was topping would have to wait until a drop below $12.00, where a trendline drawn off the January and March lows would have crossed, to see a trendline break, however, and confirm that it had changed its trend.
Or maybe not.
Annotated Daily Chart of VISN:
Note: As this article was edited Friday, May 16, VISN had continued its climb and was at 21.40, although the day's candle was looking decidedly ugly.
A couple of years ago, I wrote an article about the differences in arithmetic and semi-log charts. I also mentioned them obliquely in a more recent article. However, fellow writer Keene Little has been talking about them in the Market Monitor, the live portion of the Option Investor site, and I thought it might be time to review them again on these pages.
Old-timer chartists sometimes suggest that you chart weekly or monthly intervals on what they call a log chart, but what they really mean is a semi-log chart. A semi-log chart is one that employs a regular arithmetic scale for the horizontal time axis but a logarithmic scale for the vertical price axis. What does this accomplish? A couple of charts point out the major difference.
Annotated Daily Chart of AA, Arithmetic Scale:
Annotated Daily Chart of AA, Semi-Log Scale:
On a chart with an arithmetic scale, equal vertical distances represent equal price changes; on one with a semi-log scale, equal vertical distances represent equal percentage changes. That can become important when measuring big moves or ones that occur over a long period of time.
Annotated Monthly Chart of WMGI:
Now that a few of the reasons why and the instances when we might use a semi-log versus an arithmetic chart have been established, it's time to follow that parabolic curve back to its apex, the beginning of the article.
When a move is a long-term one or a big one, trendlines drawn on a semi-log chart may prove more trustworthy than those drawn on an arithmetic chart. Most charting services have arithmetic charts as the default choice, but most also allow for quick switching of charts to semi-log scales and allow traders to toggle back and forth between them. Check with your charting service to determine how to go about them. For me, it's easy to toggle between one type of chart and another, and you'll probable find that it is on your charts, too.
Sometimes, particularly if the move is a big one so that the percentage gains or
losses vary more than the ones depicted on AA's chart, an arithmetic chart
distorts what happened.
Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Linda
Piazza, and all other plays and content by the Option Investor staff.
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