Unfortunately the financials led us down not up. Three major investment banks, GS, UBS and JPM either made confessions of their own or were downgraded by influential analysts. The declines in these stocks deflated the sector and prompted a day of profit taking ahead of option expiration.
Wilshire-5000 Chart - Daily
It was a busy morning for economic reports but none were of interest to the markets so I won't dwell on them. Chain Store sales were down -1.1% and Job Openings fell -15%. The International Trade deficit shrank to $56.8 billion due to a 4% increase in exports. Imports grew by only 1.8%. This was the second month of shrinking trade deficits. The Treasury Budget deficit rose to $103 billion and slightly larger than the $97 billion estimate. Drags on the budget included the slowing economy, strong spending growth and economic stimulus package. A second stimulus package would increase the size of the deficit.
Today's Economic Results
The big news impacting the market was not economics but another round of bad news in the financial sector. Dow component JP Morgan was hit by multiple downgrades after saying it would take another $1.5 billion write-down in Q3 on mortgage-backed securities saying, "Trading conditions have substantially deteriorated in the second quarter." That is a quarter to date number and more than all of Q2 losses. Noted analyst Richard Bove cut his estimates for 2008, 2009 and 2010 and lowered his price target from $43 to $39. JPM lost nearly $4 for the day and was a major drag on the Dow. Bove said "the original concept is not working" referring to the concept behind the bank's creation with two segments of a consumer finance bank and a capital markets company. He said both cycles tend to be contra-cyclical where one is up while the other is down. In this environment both areas are down at the same time. He also warned that the purchase of Bear Stearns might have accentuated the negative impact of the downturn in the capital markets. Bove said, "This was as close to a perfect storm as the bank can get." Bove said Goldman's business had "dried up." On Monday Attorney General Andrew Cuomo said he was targeting JPM, WB and MS in his probe of auction rate securities.
Goldman Sachs, the poster child for escaping the slowdown unscathed, was hit by multiple downgrades. Worries persist that the current financial crisis could eventually drag Goldman down into the muck with the rest of the sector. Bank analyst at Oppenheimer, Meredith Whitney, cut her estimates for Goldman by 40% citing customer volumes, overall weak global equity markets and weak advisory and underwriting revenues. Mike Mayo at Deutsche Bank cut Goldman from a buy to a hold saying the slowdown in European economies was hitting Goldman hard. Recent weakness in terms of equity underwriting, equities trading and private equity is hitting Goldman at its core strength. The result will be earnings from Goldman that will be weaker than expected. Goldman was seen as the Teflon bank in a sector imploding. It appears that Teflon is wearing thin with Goldman losing $10.70 for the day.
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UBS announced it was reorganizing into three distinct businesses after reporting a large quarterly loss. UBS said it was taking another $5.1 billion in write-downs. UBS has taken write-downs of $37.4 billion over the previous nine-months. UBS also reported it was losing market share as customers took their business elsewhere to banks assumed to be more stable. I can see where a $37 billion loss would not be seen as a position of strength and an institution where I would want to deposit my money. UBS lost $1.39 in regular trading.
On the tech front the Nasdaq resisted the selling with Apple (AAPL) supporting the Nasdaq with a +3.45 gain. Lehman upgraded Apple to overweight with a price target of $220. Apple closed today at $176.73. I guess Lehman didn't see the posts on the new 3G-iPhone dropping calls up to 50% of the time on 3G networks. Reportedly the number of dropped calls is increasing as the number of iPhones increases the depth of the 3G system. Nomura International analyst Richard Windsor said the problem was Apple's use of a chip set from Infineon (IFX). Windsor said the chipset was immature and in locations were the 3G signal was weak it would show that immaturity by dropping calls. AT&T admitted it has received complaints and they were working to resolve the problem and were happy as possible with the device. Windsor said there were no problems being reported for other devices on the AT&T network suggesting it was strictly an Apple problem. Windsor did not reduce expectations for shipments due to the extreme demand despite the problems.
Dell announced a new line of ultra-portable laptop computers similar to those produced by Apple. The smallest has a 12.1-inch screen and weighs about two pounds. That is lighter than the MacBook Air, which debuted earlier this year. Jeff Clarke, SVP of Dell Product Groups joked at the event, "I believe this will easily fit in an envelope." He was poking fun at Steve Jobs bringing the MacBook Air onstage in an envelope to show how small it was. The new Dell laptops don't have regular disk drives and use solid-state flash memory in place of the drive. The laptops are capable of up to 19 hours of battery life with an add on device called Battery Slice. Dell dumped AMD and said all the new Lattitude notebooks will be powered by Intel chips. Dell rallied off its morning lows but closed only fractionally positive thanks to the down market.
Nividia (NVDA) reported earnings that beat the street but sales missed estimates on weakness in the global personal computer market. Profits per share fell 80% to 13 cents. NVDA spiked over 10% in after hours trading to $12.25.
Amazon (AMZN) held on to its gains from Monday after several analysts made positive comments on the Kindle reader. A Citi analyst doubled his estimates of Kindle sales to 380,000 units. He pointed out that was exactly how many iPods were sold in its first year. He said overall customer reviews of the Kindle had been overwhelmingly positive. He expects it to contribute $1 billion in sales by 2010. A Piper Jaffray analyst, Gene Munster, said Amazon's opportunity to continue taking share from Ebay and other e-commerce sites is still large. Munster said third party sellers have sold something over $6 billion on Amazon over the last 12 months compared to $62 billion on Ebay.
GM made news with an announcement they would increase the gas mileage on their SUVs and trucks this year in an effort to boost slowing sales. The increase? One mile per gallon. Yes, pardon me while I laugh. The new vehicles will average 15 mpg in the city and 21 highway. They are going to lower the front under bumper spoiler, swap the steel wheel spare tire for an aluminum wheel and create firmer tires to provide less rolling resistance. I am under whelmed by those efforts. Some cars will also have an aluminum engine to reduce weight. Meanwhile 33,000 people have signed up on the waiting list for the Chevrolet electric car, the Volt. The average price they claim they are willing to pay is $31,261. Chevrolet is planning on asking over $40,000.
Casino stocks suffered with Wynn Resorts (WYNN) dropping $6.31 after a JP Morgan analyst cut the stock to neutral and suspended his $115 price target. Joseph Greff said the benefits from the Macau business and from falling gasoline prices were already priced into the stock. WYNN had risen for five straight sessions prior to today's loss. MGM dropped -2.31.
Remember the spring floods in the Midwest and the limit up spike in grain prices for several days? There were fears that the corn crop would be decimated due to flooding and the inability of farmers to get into the fields. The Dept of Agriculture said today that weather since the flood had been almost perfect and they are now expecting the 2nd biggest corn crop in history and the 4th largest crop of soybeans. Those farmers that were not impacted by the floods and hedged into those record prices back in the spring should pocket a pile of cash this year while those that didn't will end up getting the lower prices now expected due to the record harvest. Odds are good our food prices are not going to decline.
Crude Oil Chart - Daily
Oil prices continue to fall with a dip under $112.50 overnight and a close just over $113 today. The conflict in Georgia and the closing of two pipelines representing capacity of about 1.3 mbpd appears to have been ignored. Instead traders are focusing on last week's 3.8% decline in demand over the same week in 2007. MasterCard's Spending Pulse saw a drop in spending on gasoline for the 16th consecutive week. The EIA said demand for the first half of 2008 fell by 800,000 bpd compared to H1-2007 and was the biggest volume decline in 26 years. The EIA said "Prospects of improved oil market fundamentals over the next 18 months point to an easing in the market balance and price weakness over the near term." Another six month high for the dollar also pressured crude prices.
The markets were sunk by a salvo of negative financial news. That was the bottom line on all the analysis by dozens of analysts on TV and on the net. I completely agree. Having Dow components JPM fall $4 and Bank America lose another $2 was a bad start the markets could not overcome. Remember, the financial sector is the largest component in the S&P. Where semiconductors are the leading sector in the Nasdaq the financials lead in the S&P. Picture the financial sector as the head of a snake. Wherever that head goes the body will follow. Today that head was seeking a darker environment safe from the glare of analyst scrutiny.
Dow Chart - Daily
The Dow declined from Monday's 11,867 high to close back at prior resistance at 11650. Last week we saw the Nasdaq fall back to its prior resistance at 2350 and then use it as support to blast off to a new high. Let's hope the Dow mimics the Nasdaq and uses 11,650 as support for a new move higher tomorrow. Despite today's decline the Dow uptrend is still intact with 11400 the point where it would start to breakdown. The S&P chart is a carbon copy of the Dow simply because of the financial influence. Support is 1265 and resistance about 1310.
The Nasdaq broke over 2450 on Monday and struggled to remain even for most of today. The final Dow drop on the Richard Bove comments on JPM was too much for the Nasdaq to handle and it gave up -9 points for the day. Not bad when you realize the Dow was down -180 at 3:30. I will take that divergence every day. Tech stocks are in a bullish trend and Nasdaq futures are positive in overnight trading. Support is still 2350 but that is well below today's close at 2430.
Nasdaq Chart - Daily
The Russell continues to be the Michael Phelps of the market. Monday's ramp to 757 was extremely unexpected but still appreciated for those of us long the Russell from the last dip. Today's minor 6-point decline came right at the close when the Dow was heading south at a high rate of speed. The close at 745 was just under that prior resistance at 750 and the Russell futures rebounded +5 points off their lows at the close. Because of the Russell strength and the help from the Nasdaq I am still cautiously bullish and will continue to buy the dips back to Russell 720 as a trade. Unless something new appears in the financials to totally tank the market I believe the Russell will continue higher.
Russell-2000 Chart - Daily
Financial write-downs are now well over $500 billion and there is at least one more write-down cycle coming. Fortunately everyone not living in a cave already knows this and I expect the impact to be minimal. The market had been on a strong two-day buying binge and the JPM/GS/UBS news provided an excuse for profit taking. Volume was very weak at only 7.9 billion and you want to see low volume on a down day. The next material economic report is the CPI on Thursday. The rest of the week could be choppy because of option expiration on Friday. Market makers are going to try and pin the individual stocks to their favorite strike price in hopes the maximum amount of options expire worthless. Let's hope your options are at a strike that is in the money.
Play Editor's Note: I'm not adding any new plays tonight but readers may want to check these stocks out:
GWW just broke out over its long-term trendline of lower highs dating back to July 2007. The P&F chart is bullish with an $108 target.
ITRI is showing some relative strength the last few days. A move over $101.50 might be a new entry point for bullish positions. The P&F chart is bullish with a $122 target.
LNN looks like a bearish candidate. The stock's failed rally at the 50-dma and its bearish engulfing candlestick pattern presents an entry point for put plays. Looking at the intraday charts you could argue for support near $85.00 but if I owned puts I'd aim for the 200-dma near $81.50.
Adobe Systems - ADBE - close: 45.62 chg: -0.27 stop: 41.50
The rally is starting to struggle a tiny bit in ADBE. However, overall the stock held up very well and maintained its previous gains. If ADBE does see a dip watch the $44 level as potential short-term support followed by the $42.00 zone. We are not suggesting new bullish positions at this time and more conservative traders may want to take some money off the table. Our target is the $47.50-50.00 zone. The Point & Figure chart is positive with a $71 target.
Picked on August 05 at $ 43.34
Illumina - ILMN - cls: 90.37 chg: +1.53 stop: 86.45
ILMN displayed some relative strength today with a 1.5% gain and a close above the $90.00 level. Yet the stock is still struggling with its 10-dma directly overhead. The intraday high was $90.88. We're still waiting for ILMN to hit our suggested trigger to buy calls at $91.55. If triggered we have two targets. Our first target is $95.25. Our second target is $99.50. FYI: ILMN has a 2-for-1 stock split scheduled for September 23rd. Traders might also want to note that ILMN's short interest is about 19% of the 50 million-share float. That's high enough to spark some short squeezes.
Picked on August xx at $ xx.xx <-- see TRIGGER
Research In Motion - RIMM - cls: 128.29 chg: -3.13 stop: 122.50
RIMM experienced another day of profit taking. Shares lost about 2.3%, which is somewhat surprising. Given the news headlines today that Apple (AAPL) might be having some connection issues with some of its new 3G iPhones one could think that should be good news for RIMM who sells the rival Blackberry phone. Look for a dip or a bounce near $125 or its 50-dma as a new entry point to buy calls in RIMM. RIMM has already exceeded our early target at $129. Our secondary target is $137.00.
Picked on July 31 at $120.50 /1st target exceeded
CBOE Volatility Index - VIX - close: 21.17 chg: +1.05 stop: n/a
Market weakness today fueled a 5% bounce in the VIX but the four-week trend is still lower. Remember, this is a very speculative bet that the market will see another sharp sell-off before October option expiration. We do not see any changes from our weekend comments. At this point I would look for two things. Wait to buy calls on the VIX until we see the S&P 500 back under the 1260 level. Or wait for a very clear, can't be denied, sort of failed rally/bearish reversal pattern in the major indices. We had suggested the October calls. Our exit target is 29.75 on the VIX.
Picked on August 03 at $ 22.57
Bank of Amer. - BAC - cls: 31.13 change: -2.25 stop: 34.15
Another round of worries swept across the financial sector and the BKX and BIX banking indices fell 6.4% and 5.8% respectively. Shares of BAC lost more than 6% and closed back under its 10-dma. This looks like a new entry point for bearish positions although more conservative traders may want to wait for a new relative low under $30.50 before initiating positions. Technical traders will note that the daily chart's MACD is on the verge of a new sell signal. We have two targets. Our first target is $28.00. Our second target is $25.50.
Picked on August 07 at $ 31.52
Focus Media - FMCN - cls: 23.91 chg: +0.45 stop: 28.75
FMCN delivered an oversold bounce today. If the bounce continues look for a failed rally under $26.00 as a new entry point for puts. More conservative traders will want to consider tightening their stop losses. We should expect to see some support around $22.65-22.50 but our target is the $20.50-20.00 zone. This is going to be a short-term play. We do not want to hold over the August 17th earnings report. We'll plan to exit by Friday, August 15th at the closing bell if FMCN hasn't hit our target yet.
Picked on August 10 at $ 25.00
Freddie Mac - FRE - close: 5.37 change: -0.23 stop: n/a
FRE lost another 4% and closed under $5.50 for the first time in weeks. We don't see any changes from our prior comments. We are not suggesting new put positions at this time but if you think FRE is going to fall toward $2.50 or lower then you may want to consider a speculative position. We still consider this a very high-risk play. The stock has been extremely volatile and we're not using a stop loss. More conservative traders may want to take some money off the table now. We consider this a lottery-ticket style of play. The put option is our ticket. If we win, we should win big. If we lose, we lose it all. Our short-term target would be a move back to $5.00. More aggressive traders may want to aim lower.
Picked on July 20 at $ 9.18
(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.)
Apple Inc. - AAPL - close: 176.73 chg: +3.17 stop: n/a
Positive comments about iPhone demand from Lehman Brothers helped lift shares of AAPL to $179.29 intraday. The stock is now up five out of the last six sessions with a $23 bounce since its August 4th low. The August $180 calls spiked to $2.75 intraday. We're not suggesting new strangle positions on AAPL and if the stock doesn't get above $180 soon our chance to recoup some capital is going to vanish. Due to our dwindling time frame (3 days) we have adjusted our exit target to $4.00 in an attempt to recoup some of our capital. The options we suggested were the August $180 calls (APV-HP) and the August $150 puts (APV-TJ). Our estimated cost is $8.90.
Picked on July 20 at $165.15
Popular Inc. - BPOP - close: 7.65 change: -0.40 stop: n/a
Sector-wide weakness in the financials undercut the recent strength in BPOP. The stock lost more than 4% after spiking to $8.20 intraday. We only have three days left before August options expire. We are adjusting our suggested exit to $0.50 in an attempt to recoup some of our capital. The August $7.50 calls are currently trading around $0.35. More conservative traders may want to exit now. We are not suggesting new strangle plays on BPOP. The options we listed were the August $7.50 calls (BQW-HU) and the August $5.00 puts (BQW-TA). Our estimated cost was $0.65.
Picked on July 16 at $ 5.82
DIAMONDS - DIA - close: 116.57 chg: -1.23 stop: n/a
We do not see any changes from our previous comments on the DIA. The August $115 calls are currently trading around $2.00. We will probably close this play tomorrow at the closing bell no matter what direction the DIA goes. We recently lowered our exit target to $4.00-4.35 in an attempt to recoup our capital. We're not suggesting new strangle positions at this time. The options we suggested were the August $115 calls (DIA-HK) and the August $109 puts (DIA-TE). Our estimated cost is $4.35.
Picked on July 07 at $112.21
Corning Inc. - GLW - close: 21.44 chg: -0.14 stop: n/a
The recent bounce in GLW is struggling as the stock tags the 40-dma. We don't see any changes from our previous comments. Our new target to exit is $0.40 in an attempt to recoup some capital. We are not suggesting new strangle positions. The options we suggested were the August $22.50 calls (GLW-HX) and the August $17.50 puts (GLW-TW). Our estimated cost is $0.75.
Picked on July 10 at $ 20.16
Google Inc. - GOOG - close: 502.61 chg: + 1.77 stop: n/a
GOOG isn't moving much and that's bad news for our strangle play. We don't see any changes from our weekend comments. We are lowering our exit target to $10 in an attempt to recoup some of our capital. We're not suggesting new strangle positions in GOOG at this time. The options we listed were the August $590 calls (GOO-HR) and the August $480 puts (GOP-TI). Our estimated cost was $19.10.
Picked on July 16 at $535.60
Internet Holders - HHH - cls: 52.66 change: -0.70 stop: n/a
After yesterday's big pop in the HHH the ETF endured some profit taking today. We don't see any changes from our weekend comments. We are not suggesting new positions at this time. The options we suggested were the August $55 calls (HHH-HK) and the August $45 puts (HHH-TI). Our estimated cost is $1.65. Note: We have adjusted our exit target to $0.75-0.80.
Picked on July 03 at $ 50.50
Lehman Brothers - LEH - close: 16.21 chg: -2.23 stop: n/a
Shares of LEH got crushed today as another wave of fears washed over the financial sector. The stock lost more than 12% and broke its short-term trend of higher lows. We don't see any changes from our weekend comments. We have six weeks left before September options expire and need to see LEH significantly above $24.00 or under $10.00. We're not suggesting new positions at this time. The options we suggested were the September $24.00 calls (LYH-IR) and the September $10.00 puts (LYH-UB). Our estimated cost is $2.15. We want to sell if either option hits $3.50 or higher.
Picked on July 27 at $ 17.05
Legg Mason - LM - close: 41.03 chg: -3.75 stop: n/a
Ouch! LM got clocked for an 8.3% drop on Tuesday. We're almost out of time as August options expire in three days. We don't see any changes from our weekend comments. We recently adjusted our exit price to $2.00 in an attempt to recoup some capital. We are not suggesting new strangles at this time. The options we listed were the August $45 calls (LM-HW) and the August $35 puts (LM-TG). Our estimated cost was $3.15.
Picked on July 23 at $ 40.20
MarketVectors Agribusiness- MOO - close: 50.00 chg: +0.85 stop: n/a
Many of the fertilizer stocks in the agribusiness industry bounced today. The MOO only managed a 1.7% gain. We recently adjusted our exit target to $2.00. We're not suggesting new positions at this time. The options we suggested were the August $62 calls (MYV-HJ) and the August $50 puts (MOO-TX). Our estimated cost is $2.10.
Picked on July 03 at $ 57.25
Netflix - NFLX - close: 30.81 change: -1.39 stop: n/a
Yesterday's big gain in NFLX gave us hope that this play might actually turn profitable. Today's bearish reversal and 4% decline crushed those hopes. We have three days left before August options expire. Over the weekend we adjusted our exit target to $1.00. Today we are moving that exit target to $0.60. We're not suggesting new strangles at this time. The options we suggested were the August $32.50 calls (QNQ-HT) and the August $22.50 puts (QNQ-TX). Our estimated cost is $1.20.
Picked on July 23 at $ 27.98
PowerShares QQQ - QQQQ - cls: 47.80 chg: +0.05 stop: n/a
The Qs failed to make any progress today. We don't see any changes from our previous comments. We recently adjusted our exit price to $1.50-1.80. More conservative traders may want to exit early right now. We are not suggesting new strangles. The options we suggested were the August $47 calls (QQQ-HU) and the August $43 puts (QQQ-TQ). Our estimated cost is $1.80.
Picked on July 07 at $ 44.90
UBS Ag - UBS - close: 20.30 change: -1.39 stop: n/a
Today's sharp reversal in UBS may be the final nail in the coffin for this strangle play. The stock has pulled back to the $20 zone and it wouldn't surprise me to see UBS hover around the $20.00 strike price until after option expiration. We have adjusted our exit targets in an attempt to recoup our cost.
UBS Strangle #1) This uses the August $22.50 calls (UBS-HX) and $17.50 puts (UBS-TW). Our estimated cost was $1.90. Our new exit target is $0.95.
UBS Strangle #2) This uses the August $25.00 calls (UBS-HE) and $15.00 puts (UBS-TC). Our estimated cost was $0.90. Our new exit target is $0.40.
Picked on July 13 at $19.49
Valero Energy - VLO - close: 33.78 chg: -1.08 stop: n/a
Oil refiner VLO can't keep any upward momentum even though crude oil keeps slipping lower. With only three days left our strangle appears doomed. We have adjusted our suggested exit price to $0.80. We are not suggesting new strangle positions. The options we suggested were the August $37.50 calls (VLO-HU) and the August $27.50 puts (VLO-TS). Our estimated cost is $1.38.
Picked on July 27 at $ 31.88
Washington Mutual - WM - close: 4.30 chg: -0.44 stop: n/a
Banking stocks dove lower as investors reacted to new fears regarding write downs and the ongoing credit crisis. Shares of WM lost another 9%. The August $4.00 puts are trading around 10 cents. We need to see WM crack the $4.00 level very soon! August options expire soon so we've adjusted our suggested exit price to $0.40 in an attempt to recoup some capital. We are not suggesting new positions at this time. The options we suggested were the August $8.00 calls (WM-HV) and the August $4.00 puts (WM-TH). Our estimated cost is $0.72.
Picked on July 20 at $ 5.92
Intl. Bus. Mach. - IBM - cls: 125.22 chg: -1.38 stop: 127.45
IBM is under performing and shares dipped intraday under what should have been support near $125 and its 50-dma. We were suggesting readers buy calls on a new relative high at $131.05. That hasn't happened yet and may not happen for a while. We're dropping IBM as a bullish candidate.
Picked on August xx at $ xx.xx <-- see TRIGGER
FosterWheeler - FWLT - close: 46.30 chg: -3.58 stop: n/a
FWLT continues to plummet! The stock lost another 7% today on strong volume. The stock closed at new four-month lows. Yesterday we lowered our exit target to breakeven at $2.60. Today's drop in FWLT pushed the August $50 puts to an intraday high of $4.70. If you were able to exit above $4.00 congratulations! The play is closed for us. The options we suggested were the August $70 calls (UFB-HN) and the August $50 puts (UFB-TJ). Our estimated cost was $2.60.
Picked on July 15 at $ 61.24 /exited strangle at breakeven
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