Inflation was clearly evident in this morning's Producer Price Index and that report overshadowed positive earnings news from Goldman Sachs. Housing starts fell again, industrial production fell and the chance of a rate hike increased according to some analysts. All these factors weighed on the market ahead of next week's FOMC meeting.
Wilshire 5000 Chart - 30 min
The critical report this morning was the Producer Price Index or PPI. The headline number on the PPI rose a whopping +1.4% in June following a +0.2% increase in May. Prices were again influenced heavily by gains in food and energy. The core rate excluding food and energy rose only +0.2%. Price increases were sharp across all stages of processing. Prices for producer finished products are now +7.8% higher than May 2007. Prices for intermediate goods rose +6.2% in May and crude energy products rose +13.1%. The rise in price for heating oil and natural gas was also instrumental in boosting producer prices. Intermediate food prices rose +3.2% with the largest increases in beef and cheese prices. Prices for durable and nondurable goods rose by +4.5% and 3.2% respectively. The tame inflation in the April report was completely erased by the sharp increases in prices for June.
Housing starts declined -3.3% to 0.975 million units in May. Housing permits fell -1.3% for the month. This is the second time in three months that starts have been below 1 million units. Starts are down more than 30% from 2007 and -55% below their 2006 peak. Single-family starts decreased another 1% to 0.674 million units and this was the 13th consecutive monthly decline. Housing completions increased 11.6% in May. Homes that are started today won't be ready until Christmas and that is typically not a buying season. Odds are good most of today's starts are already presold. Builders try to start spec homes later in the year with a plan to get them ready for sale by March. The spring buying season lasts from March to June to allow moves before school starts again. I would expect starts to continue to decline for the next couple months.
Industrial production for May fell -0.2% after a -0.7% decline in April. Capacity utilization fell to 79.4% and the lowest reading since the period after Hurricane Katrina in 2005. The outlook is for more of the same for the rest of the summer. The only material report left on the calendar this week is the Philly Fed Survey on Thursday.
The recent economics have played havoc with expectations for the Fed meeting next Tuesday. The chances for a rate hike have been spiking with the comments from the various Fed speakers. However, the housing numbers today actually reduced the chance of a hike while the inflation in the PPI had the opposite impact. By day's end it appeared the weak economy won with chances for a rate hike falling about 25% for the day to put the possibility for a hike a little less than 50%.
Goldman Sachs reported earnings this morning of $4.58 per share and that beat the street's estimates of $3.42 per share. It was a case of poor earnings across the sector depressing the outlook for the best performer. They were guilty by association. Goldman earned more than $2 billion for the quarter. You would think a beat of that magnitude would produce a spike in the stock price. Goldman stock fell -$2.65 because Goldman shares had risen +$25 over just the last week. Expectations were priced in and traders were taking profits. Goldman was exactly the opposite of Lehman and their $3 billion loss they reported on Monday.
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Goldman also said the credit crunch was not over and the $300 billion in write-downs in the sector was not enough. Goldman said continuing losses and write-downs may force US banks to raise an additional $65 billion of extra capital. This produced selling in all the banks and brokers with the XLF losing another 3% and closing in on the 52-week low once again. Lehman rolled over again with another 7% loss. Traders were hoping the Goldman earnings would energize the financials but the Goldman comments on the sector did just the opposite. Goldman said a broad based rally in financials was unlikely until the earnings outlook is lowered. Morgan Stanley reports earnings on Wednesday.
The Commodity Futures Trading Commission said changes were coming for the energy sector. The NYMEX and ICE exchanges will have identical position limits within 120 days. ICE currently has no limit. Other foreign exchanges will be forced to comply with the same rules as U.S. traders. The CFTC said it would produce a paper on speculation in the sector by Sept-15th. The CFTC said they were looking into the unregulated swaps among major financials like Goldman Sachs and how those swaps are reported to the market. The chairman of the CME cautioned again against raising margin requirements any more because lower volume in futures produces more volatility not less. He also said it would push traders into unregulated markets and could actually push prices higher rather than lower. The CEO of Nymex agreed with the need to keep margin requirements low saying the data clearly indicates higher prices when margins rise. Senator Joe Lieberman is scheduled to release on Wednesday details on three draft bills designed to curb financial speculation in futures and reduces position limits by institutions.
Crude oil chart - daily
Crude prices fell today to close just under $134 and although the volatility was high it was less than in recent days. Crude options expired at the close today and relatively speaking it was a calm expiration. July crude futures expire on Friday. The Saudi Arabia oil conference will be on Sunday and anything is possible. Saudi was going to announce another production increase of 200,000 bpd after the conference but the news leaked early and hit the markets on Monday. The New York Times speculated today that the government should RAISE taxes on gasoline to force consumers to buy higher mileage cars. In theory it is a good idea but in practice it would be politician suicide to force that on U.S. consumers. Obama said today that the strategic petroleum reserve should not be opened for price concerns but only for major disruptions in supply. However Obama is also pushing for a windfall profits tax on oil companies and does not want to allow offshore drilling. McCain said yesterday he favored lifting the 27-year old ban in offshore drilling. This was a reversal in his position since 2000 and reflects his changing outlook for future oil prices and energy security.
The impact of fuel costs on the economy could be seen in the FedEx earnings tomorrow. FDX and UPS have already warned that fuel prices were rising faster than their fuel surcharges and package volume was slowing. The FedEx earnings guidance could be key in forming an outlook for the economy and even in the Fed's policy response next week. However, after the close today YRC Worldwide (YRCW) raised estimates for Q2 profits to 30-40 cents per share. Analysts were expecting 29 cents. The upgrade came the day before CEO Bill Zollars presentation at the Merrill Lynch transportation conference on Wednesday.
This is option expiration week and so far the markets have been tame. Volume has been minimal with barely 6 billion shares traded each day this week. Decliners are increasing and internals suggest the bullish enthusiasm is declining.
The markets are looking weaker tonight with the Dow giving back -108 points to decline to 12160 at the close. I had hoped minor Monday rally in the financials would continue after the Goldman earnings but those hopes were dashed. The Dow failed at resistance just over 12300 for the 5th time in the last eight days. That suggests we are looking at another test of support at 12100 and the outlook is not good. The fear of the Fed still exists despite a cooling of rate hike concerns. Until financials recover the Dow and S&P will have trouble posting gains. If the Saudi oil conference produces some unexpected news that depresses oil prices that will be a second anchor on the S&P. The S&P failed again at 1360 and could be headed for a retest of support at 1325.
Dow Chart - Daily
S&P-500 Chart - Daily
The Nasdaq looked slightly better with a two-day rise to 2480 but it still gave up -17 points today. You can't blame today's decline on Apple with a +4.59 gain today on top of a monster gain on Monday. A research note from RBC said that Apple is likely to have a breakout quarter and could sell 14 million iPhones in 2008. His price target is $220. America Technology Research raised its price target for RIMM to $205 saying they expected a very strong quarter from RIMM. RIMM gained +$10 over the last 2 days. Offsetting the strength in AAPL and RIMM was weakness in the semiconductor sector. Downgrades in expectations were the reason for the decline. The Nasdaq is well above support at 2400 but continued financial weakness in the Dow and S&P could be a drag on the tech sector.
Nasdaq Chart - Daily
Russell 2000 Chart - Daily
The Russell could be setting up for a head and shoulders failure at 740. The rebound from last week's closing resistance at 730 was lackluster and the small caps are probably going to take their key from the Dow. There are quite a few small banks in the Russell and continued weakness there and in the semis could continue to restrict any rebound.
For the rest of the week there is no compelling reason to be in the market. We are hitting the warning cycle for Q2 and traders will want to be cautious. With the Philly Fed on Thursday and the FOMC next Tuesday along with those earnings warnings we could see a lack of interest in buying. Options expiration could supply some volatility but the low volume so far this week suggests traders are already spending more time planning the family July 4th outing than what stock to buy tomorrow. I would continue to be cautious about any long positions until proven wrong.
Capital One - COF - close: 43.87 change: -1.77 stop: 46.41
Why We Like It:
BUY PUT JUL 45.00 COF-SI open interest=4515 current ask $3.80
Picked on June 17 at $ 43.87
E*Trade - ETFC - close: 3.68 change: -0.10 stop: 3.91
Why We Like It:
BUY PUT JUL 4.00 EUS-SH open interest=11583 current ask $0.50
Picked on June 17 at $ 3.68
PowerShares QQQ - QQQQ - close: 48.54 change: -0.26 stop: 49.26
Why We Like It:
BUY PUT JUL 49.00 QQQ-SW open interest=129276 current ask $1.53
Picked on June 17 at $ 48.54
S&P 500 SPDR - SPY - close: 135.57 change: -0.66 stop: 137.26
Why We Like It:
BUY PUT JUL 136.00 SFB-SF open interest= 53481 current ask $3.60
Picked on June 17 at $135.57
Alliant Tech - ATK - close: 105.09 change: -0.44 stop: 102.95
Tuesday proved to be a very volatile day for ATK. The stock plunged this morning on no news. Shares slipped to $103.43 before bouncing from its trendline of higher lows. ATK rebounded sharply paring its losses. Unfortunately, the wider market began to accelerate its losses into the closing bell and ATK's bounce began to roll over late in the day. A rally from here (over $105.50) can be used as a new entry point for calls. Otherwise wait and watch for another dip or bounce in the $103.50-104.00 region. We have two targets. The 200-dma is near $109.00. We're setting the first target at $108.75. Our second target is the $111.00 mark.
Picked on June 12 at $105.28
Peabody Energy - BTU - close: 78.97 change: +1.67 stop: 74.90
Energy stocks, including the coal stocks, were strong today. BTU climbed back to the $80 level. Volume was a little light on the day but it is summer, which means we should expect low volume. We're still suggesting that readers tread cautiously here. The group as a whole continues to grow more overbought. This stock has exceeded our target near $80 several times. Our secondary target is the $84.00-85.00 zone.
Picked on June 01 at $ 73.92 /1st target exceeded 79.75
Bucyrus - BUCY - close: 78.44 change: +0.89 stop: 71.65
BUCY almost hit our first target today. The stock spiked to $79.50 this morning but after the initial burst the stock merely traded sideways. The $80 level could be round-number resistance so we would expect a dip soon. If you're looking for a new entry point wait for another pull back near $75.00. More conservative traders may want to tighten their stop loss. We have two targets. Our first target is $79.85. Our second target is $83.50. The Point & Figure chart is bullish with a $92 target.
Picked on June 15 at $ 75.41
Research In Motion - RIMM - cls: 142.16 chg: +1.18 stop: 132.49
Target exceeded! RIMM rallied to $145.94 this morning but eventually settled with a 0.8% gain. The stock exceeded our first target at $144.00. Shares look short-term overbought and today's action looks like a top. Readers should expect some profit taking in RIMM. A bounce in the $137-135 region might be a new entry point for bullish plays. Our second target is $154.50.
Picked on June 16 at $136.05 *1st target exceeded $144
United States Oil - USO - close: 108.68 chg: -0.31 stop: 105.95
Crude oil has been acting somewhat erratically. Monday saw a big intraday range and today it was quiet. Investors could be waiting for tomorrow's oil inventory numbers. Honestly, we were expecting more short covering ahead of tonight's option expiration for crude oil. Futures expiration is Friday so oil could see some short covering between now and then. Remember, we are only playing this week and plan to exit on Friday if we're not stopped out or at our target by then. Our first target is the $114.90 mark. Our second target is $118.00. We strongly suggest you take some profits at the first target.
Picked on June 12 at $111.27
Emerging Markets 50 ADR - ADRE - cls: 53.12 chg: +0.51 stop: 55.01
ADRE's oversold bounce is nearing what should be resistance at its trendline of lower highs. This stock should see a reversal soon. More conservative traders may want to tighten their stops. Our target is the $51.00-50.00 zone.
Picked on June 03 at $ 54.69
Caterpillar - CAT - close: 80.69 change: -0.22 stop: 83.55
This looks like a new entry point to buy puts on CAT. The broader market indices are rolling over and CAT is setting another lower higher. More conservative traders could use a tighter stop loss and you might still want to wait for a decline under $80.00 before initiating positions. Our target is the $75.25 mark. The stock "should" see some technical support at its 200-dma near $75.00.
Picked on June 11 at $ 79.45 *triggered
Deere & Co. - DE - close: 79.20 change: -1.40 stop: 82.55
The rebound in DE has failed at its trendline of lower highs. This looks like a new bearish entry point to buy puts. Our target is the $70.50 mark. The Point & Figure chart is forecasting a $72 target.
Picked on June 12 at $ 78.49 *triggered
DaVita Inc. - DVA - close: 50.06 chg: -0.20 stop: 52.01 *new*
It doesn't look like DVA is going to bounce high enough to hit our trigger at $51.00. We are adjusting our entry strategy and suggesting readers buy puts now or on a dip under $49.50. We're also adjusting our stop loss to $52.01. We have two targets. Our first target is 47.75-47.50. Our second target is the $45.15-45.00 zone. The P&F chart is bearish with a $45 target. FYI: Last month DVA announced a $250 million stock buy back program. At $50 a share that's about 5 million shares. DVA has about 104 million shares outstanding.
Picked on June 17 at $ 50.26
Electronic Arts - ERTS - close: 46.76 chg: -0.30 stop: 49.05
The bounce in ERTS is also growing weaker. The next move looks like it's going to be lower. More conservative traders might want to tighten their stop closer to the $48 level. Our target is the February lows near $44.50-44.00.
Picked on June 06 at $ 47.75 *triggered
3M Co. - MMM - close: 74.97 chg: -0.23 stop: 77.05
MMM looks poised to take its next step lower. Shares closed under round-number support at $75.00. Yesterday's update suggested waiting for a new move under $74.75 to buy puts. That strategy still works. We have two targets. Our first target is the $70.25-70.00 zone. Our secondary target is the $67.00-65.00 range. The P&F chart is bearish with a $69 target. FYI: If you are aiming for the $67 target then you might want to consider the October puts.
Picked on June 06 at $ 74.95 *triggered
(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.)
We are down to three days left before June options expire. We are not suggesting new positions at this time. We have suggested a July strangle and a more aggressive June strangle. The options in the July strangle are the July $45 calls (AMQ-GI) and the July $40 puts (AMQ-SH). Our estimated cost for the July strangle was $1.65. We want to sell if either option hits $3.50. The options in the June strangle are the June $45.00 calls (AMQ-FI) and the June $40.00 puts (AMQ-RH). Our estimated cost on the June strangle was $0.56.
Picked on May 22 at $ 42.77
Alpha Nat. Res. - ANR - close: 96.13 chg: +1.71 stop: n/a
ANR hit $98.63 before paring its gains. The $100 level should be round-number, psychological resistance. We would suggest strangle positions in the $94-96 zone. The closer to $95.00 the better. This is a higher-risk strangle play with the options so expensive. The options we suggested were the July $105 calls (ANR-GA) and the July $85 puts (ANR-SQ). Our estimated cost was $9.40. We want to sell if either option hits $14.50.
Picked on June 15 at $ 94.25
Fording Cand. Coal - FDG - close: 87.00 chg: +1.26 stop: n/a
Coal stocks continue to hit new highs. We're not suggesting new strangle positions at this time. We were suggesting the July $90 calls (FDG-GR) and the July $75 puts (FDG-SO). Our estimated cost was $5.45. We want to sell if either option hits $ 8.00 or higher.
Picked on June 15 at $ 82.91
Garmin Ltd. - GRMN - close: 43.48 chg: -2.37 stop: n/a
It looks like GRMN is breaking down from its sideways consolidation. If you did not open positions yet we suggest waiting for a bounce back into the $44.50-45.00 zone. The options we listed were the July $50 calls (GQR-GJ) and the July $40 puts (GQR-SH). Our estimated cost was $2.55 We want to sell if either option hits $ 4.75 or higher.
Picked on June 15 at $ 44.91
Holly Corp. - HOC - close: 40.60 chg: +0.75 stop: n/a
There was no follow through on HOC's bearish candlestick from Monday. Investors are probably waiting to see how oil reacts to Wednesday's inventory report. We would try and use the $41.00-39.00 zone as your entry range. The options we listed were the July $45 calls (HOC-GI) and the July $35 puts (HOC-SG). Our estimated cost was $2.00. We want to sell if either option hits $ 3.00 or higher.
Picked on June 15 at $ 41.25
McDonald's - MCD - close: 59.21 chg: -0.73 stop: n/a
We are almost out of time. June options expire in three days. MCD looks like it just produced a bearish reversal with today's candlestick. We are not suggesting new positions. The options we suggested were the June $62.50 calls (MCD-FZ) and the June $57.50 puts (MCD-RY). Our estimated cost was $1.10.
Picked on May 18 at $ 60.53
Tyco Intl. - TYC - close: 43.40 change: +0.12 stop: n/a
There is no change from our previous comments. We are not suggesting new strangle positions in TYC at this time. The options we suggested were the July $47.50 calls (TYC-GW) and the July $42.50 puts (TYC-SV). Our estimated cost was $1.30. We want to sell if either option hits $1.95 (50% gain).
Picked on June 03 at $ 44.89
Valero - VLO - close: 45.02 change: +0.90 stop: n/a
VLO bounced this morning and ended the day with a 2% gain. We would still open new strangles in the $44.50-45.50 zone. The options we suggested were the July $50 calls (VLO-GJ) and the July $40 puts (VLO-SH). Our estimated cost is $1.89. We want to sell if either option hits $2.75 or higher.
Picked on June 15 at $ 44.84
Diamonds - DIA - close: 121.93 change: -0.73 stop: 120.85
Warning! The DIA has produced a short-term bearish reversal with today's bearish engulfing candlestick pattern. We were trying to capture a short-term pop to the $124.50 level but that may not happen any time soon. We're suggesting an early exit now to avoid or minimize any losses.
Picked on June 12 at $121.63
Monsanto - MON - close: 142.69 change: +6.77 stop: 140.55
We have been stopped out of our aggressive, higher-risk put play in MON. The fertilizer stocks continue to show relative strength and almost the whole sector hit new all-time highs today. MON broke through resistance near $140 and broke through its trendline of higher highs.
Picked on June 11 at $133.40 *stopped out 140.55
Today's Newsletter Notes: Market Wrap by Jim Brown and all other plays and content by the Option Investor staff.
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