The focus on Tuesday was the potential bailout for the automakers. This is a very contentious topic and the congressional testimony was very heated. The grilling automakers took on Tuesday was ugly and odds are good there will be some serious strings on any money they receive.
Market Stats Table
Before I get to the automaker bailout I will touch on the new records being made in today's economic reports. The Producer Price Index (PPI) headline number fell -2.8% for October. That was a record one-month drop driven by a sharp -12.8% drop in finished energy products. Strangely core inflation rose by +0.4% to push core inflation at the producer level over the last 12 months to +4.4% and well over what the Fed feels is reasonable. The annualized inflation rate over just the last quarter is +5.4%. This is very troubling for those expecting the Fed to cut rates again next month. However there are signs of falling inflation in the pipeline but it just has not shown up in the current reports. The drop in energy prices is a big drag on inflation but the lag time for the price drops to be shown in the price of finished goods is months not weeks. The drop in consumer demand will also pressure prices as manufacturers discount goods to try and stimulate buying. The consumer price index (CPI) will be out on Wednesday to show how inflation is trending at the consumer level.
The NAHB Housing Market Index fell from 14 in October to 9 in November and a new record low. The index was over 70 during the recent housing boom. Since it is impossible for the index to go below zero we have to assume we are nearing a bottom at only 9. Expectations for single-family sales fell to 8 from 14 and buyer traffic fell to 7 from 11. The NAHB Index emphasizes the need for the government to provide an incentive package for qualified buyers to stimulate sales. Until sales improve, home prices will continue lower along with rising foreclosures.
NAHB Housing Market Index Chart
In the "no kidding" department the U.S. Risk of Recession report for October showed there was a 58% chance of the U.S. falling into a recession. That did not take a rocket scientist to figure out. Thirty states are already in recession and 19 others are close. Only Alaska is still growing. The forecast calls for real GDP to decline through mid 2009 and unemployment is expected to peak at 8% in early 2010. GDP in Q4 could decline by as much as -2.5%. This report is a lagging indicator and November's numbers could be over 75%.
The big report for Wednesday will be the FOMC minutes for the October meeting. This will give analysts a better idea of what the Fed was seeing behind the scenes and what chance there is for another rate cut in December.
On Thursday the Philly Fed Survey will give us another look at manufacturing in that region as a proxy for the U.S. as a whole. I am sure it will be weak again but I also think this is old news. We have had so many weak reports that anyone paying even the slightest bit of attention already knows manufacturing is in a recession. I think we are near the point where bad news will no longer have any impact on the markets. Traders are going to begin watching for signs of improvement rather than stressing over continued weakness.
Shares of Hewlett Packard spiked +10% at the open after the company reported stronger than expected preliminary results and a strong outlook for 2009. HPQ had been crushed and lost 30% of its market value on recent warnings from Intel, Microsoft, Dell and BBY. Cross Research said HP was rapidly gaining market share and were being very aggressive with cost reductions. Their preliminary earnings numbers were for $1.03 per share and analysts were expecting $1.00 per share. Final earnings are due out next Monday. HP said in September it was laying off 24,600 workers as a result of its acquisition of EDS. Today HP said it was extending its planned one-week holiday shutdown to two weeks to cut costs. HP also gave a surprisingly strong forecast for 2009 but it was still below current analyst estimates. Most had been marking estimates down but were waiting for the earnings report on Monday to make their next revisions. HP shares gained +15% for the day or +$4.37 on the news.
Hewlett Packard Chart
Yahoo stock rose +8% today after news broke that Co-Founder and CEO Jerry Yang will step down as soon as the company finds a replacement. His second term in office lasted 17 months and he presided over several failed buyout attempts by Microsoft and a botched deal by Google to provide an advertising partnership. The stock spiked because many investors feel Microsoft is just waiting for Yang to go away before making another run for the company now that there are board members friendly to their offers. After Yang steps down from the CEO job he will still retain his board position. I doubt that board position will garner much respect once somebody takes a run at Yahoo again. The board is suspected of running Yang off as the share price heads for the single digits. Yahoo traded as low as $9.76 last week. The news of Yang's departure boosted Yahoo back to $12.40 intraday and an $11.50 close.
Google (GOOG) traded as low as $285 today after CEO Eric Schmidt was heard complaining about revenues in Q4 and 2009. He spoke on the sidelines of the CEO Council Conference. He is one of a dozen executives and government officials meeting to discuss the opportunities for the incoming Obama administration. Schmidt said nobody knows when the financial system will unlock and companies need to act responsibly. That means companies have to cut back on spending if they don't know where their future capital is coming from. Schmidt declined to comment specifically on Google revenues saying Google provides no guidance but the inference seemed to be "everybody" was seeing lower revenues for Q4 and 2009. Google trades as low as $285 but rebounded to close at $297 on the end of day buy program.
Research in Motion (RIMM) closed up +$5.21 or +12% at $47.25 on positive news about the new Blackberry Bold and Blackberry Storm. The Bold copied some features from the iPhone and added some new ones including a true 3G network instead of the AT&T Edge. The bold has a half-VGA color display, 1Gb of memory, GPS and WiFi connectivity. The Storm is a touch screen device that includes tactile feedback for easier typing and it will run on the Verizon high-speed network. RIMM was also out last week saying their outlook for 2009 was not as bad as others and expected new products to keep the growth alive. I said last week I thought $40 was strong support for RIMM and a good entry point and a $7 rebound has not changed my mind although I would try to buy a dip.
GM tanked -11% intraday on fears that any bailout of the automakers would involve so many strings they would be unable to actually work their way out of trouble. Lawmakers were so hostile at the thought of giving automakers money that CEOs of the big three were walking into the lion's den when they showed up to testify. Executives warned of "costs to society that would be catastrophic" if the automakers were allowed to fail. GM CEO Risk Wagoner said 3 million jobs would be lost in the first year and U.S. personal income would fall by $150 billion. Automakers said a minimum of $25 billion should be handed out immediately. Some lawmakers fear it could run over $100 billion before they could operate profitably again. There is a real dislike of having to bail out the automakers and that dislike runs deep even in consumers.
The market wandered all over the board on Tuesday before catching a bid at the close to push the Dow up +151. Unfortunately that was a onetime buy program thanks to the Budweiser-Inbev deal. Inbev completed its purchase of BUD at Thursday's close and the S&P swapped Wyeth (WYE) in the S&P-100 in place of BUD. Wyeth had a market cap of just over $40 billion where BUD was just over $52 billion. Wyeth was already widely held but index funds needed to grab more to rebalance their portfolios to the new weighting. Stericycle was named to replace BUD in the S&P-500. Here is where the buy program came in. SRCL only has a market cap of $5 billion where BUD's was $52 billion. That means index funds had to not only raise their position on SRCL but add the equivalent of $47 billion of other S&P-500 stocks to bring their index funds into balance with the index ratios. I would love to tell you that investors rushed into the market at the close because of a successful retest of the market lows but I don't believe it to be so.
The Dow rallied +151 points, +315 off the lows, to close at 8421. Unfortunately it was a pure S&P-100, S&P-500 rally. The tech stocks barely made it back to green after being down -35 late in the afternoon. Even worse the Russell closed down -3.79. This is a clear sign there are no legs to this rally unless there is some news event that changes investor sentiment all at once. The trend on the Dow is down with support at 8200 and 8000. The S&P is struggling to hold over support at 820-840. Even the afternoon rebound did not take it out of range for new lows.
The Nasdaq continues to be weak with support at 1450 looking very fragile. Were it not for the S&P buy programs at the close it could have been a very different ending. I hate to keep repeating this twice a week but without a rally in small caps the blue chip rally is just noise. When the Russell failed to return to positive at day's end it set off clear alarm bells for Wednesday's open.
I don't want to be bearish here but I see no signs of a material rebound ahead. I really want to be bullish but I am just not seeing it, yet. Just look at the internals in the opening market stats graphic. Ten new 52-week highs and 1,344 new 52-week lows and this was technically a positive day. TrimTabs said company buybacks were a "mere $400 million a day" over the last seven trading days. This compares to an average of $3.6 billion a day in Nov-2007. This suggests companies are expecting further weakness due to falling revenues. If companies were seeing a light at the end of the tunnel they would be scooping up shares at this cheap price. Secondly, shrinking cash flows are making it difficult for companies to buy stock even if they wanted to take advantage of the market weakness. I know Keene is starting to talk about why a bottom could be near but I have bought the bottom several times now and low and behold a new bottom appeared a couple days later. At this point I would rather wait until a bottom appears instead of trying to pick one in advance. This would be a good spot for one to form based on both technicals and fundamentals but markets tend to move to extremes in both directions. This may not be extreme enough to pull investors back into the market just on bargain pricing alone. There is plenty of cash on the sidelines and once a bottom does appear the rebound could be explosive. When that happens we won't have to ask, "Is this rally real?"
New Option Plays
Range Resources - RRC - close: 41.77 change: +0.93 stop: 39.45
Why We Like It:
We are suggesting readers buy calls right here following today's afternoon bounce from the $39.60 level. More conservative traders may want to wait for a new rise over $43.00 or the $44.00 mark before initiating positions. There is potential technical resistance at the 100-dma (currently $44.85) and at the exponential 200-dma (currently 48.01). We're going to aim for the exponential 200-dma, since that is where the rally failed back in September. We'll use the $47.50-48.00 zone as our exit target for now.
NOTE: Investors need to remain defensive. This is still a very tough market. That means trade smaller position sizes. Be extra vigilant with your stop loss management.
BUY CALL DEC 40.00 RRC-LH open interest= 423 current ask $6.00 BUY CALL DEC 45.00 RRC-LI open interest=3356 current ask $3.50
In Play Updates and Reviews
*Currently we do not have any call plays*
Bard CR - BCR - close: 80.92 change: -0.84 stop: 85.25 *new*
The trend in BCR continues and shares under performed compared to the market's late afternoon bounce. A failed rally in the $82-83 zone could be used as a new entry point for puts. We are lowering the stop loss to $85.25.
The Point & Figure chart is bearish with a $69.00 target. Our target is $75.50.
Capital One Financial - COF - close: 29.25 change: -0.62 stop: 35.01
COF sank to new relative lows under $27.00 before paring its losses to close with a 2% decline. Watch for another failed rally in the $31.00-32.50 zone as a new entry point for put positions. We don't see any additional changes from our previous comments.
COF appears to have some support near $25.00 dating back a few years ago. We're targeting a drop to $25.50. The Point & Figure chart is very bearish with a $15.00 target.
iShares Brazil - EWZ - close: 33.21 change: -0.59 stop: 36.55
The Brazil ETF continued to slip lower but managed to pare its losses with a minor bounce at the closing bell. We would watch for another failed rally near $35.00 as a new entry point to buy puts.
At a minimum I would expect the EWZ to retest its lows near $28.50. The Point & Figure chart is bearish with a $23.00 target. Our target is $29.00 target.
Readers should consider this an aggressive play. The EWZ can be very volatile. On Thursday it's range was almost $31.00 to $37.50.
Intl. Business Machines - IBM - cls: 80.08 change: +2.60 stop: 85.55
Positive earnings news from Hewlett Packard (HPQ) was enough to spur some buying or at least some short covering in other big name tech stocks. IBM almost erased yesterday's losses. We would wait and watch for another failed rally near its 10-dma in the 82.50-83.00 zone as another entry point to buy puts. More conservative traders may want to start adjusting their stop loss lower.
We are suggesting puts with a stop loss at $85.55. We're setting two targets. Our first target is $75.50. Our second target is $71.00.
iShares Russell 2000 - IWM - close: 45.03 change: -0.22 stop: 49.01
Yesterday the small caps showed a little relative strength. Today they showed a little relative weakness and under performed the big cap indices. It's worth noting that the IWM dipped to last week's lows near $43.00 before bouncing back. Today's bounce may not be over but we would watch for resistance near the 10-dma around $48.00 or even the $47.00-47.50 zone. A new failed rally can be used as an entry point to buy puts.
Our target is the $41.00 mark. FYI: The P&F chart points to an $18 target.
Kohl's Corp. - KSS - close: 28.13 change: +0.68 stop: 32.05
As expected high-end retailer SKS missed its earnings estimates this morning. The news didn't have much affect on KSS. Shares of KSS dipped to $27.12 and then bounced to close up 2.4%. If KSS see any follow through on this bounce watch for a failed rally near $30.00 as a new entry point to buy puts.
We have two targets on KSS. Our first target is $25.50 since KSS appears to have some long-term support around $25.00. Our second target is $22.00. Believe it or not the P&F chart is still bullish from the late October rally but a new move under $26.00 would change that. FYI: More conservative traders may want to use a tighter stop near the late Friday rebound around $31.15.
L-3 Communications - LLL- close: 69.31 change: +0.81 stop: 73.25
LLL was working on its seventh loss in a row until the late afternoon bounce broke the trend and the stock ended up 1.1%. If this bounce continues then readers can look for short-term resistance near $72.50 or $73.00 around its 10-dma. A failed rally near resistance can be used as a new entry point to buy puts.
We're listing two targets. Our first target is $65.25, which would be a new relative low. Our second target is $61.00.
Northern Trust - NTRS - close: 43.57 change: +1.41 stop: 50.05
NTRS hit new multi-year lows today at $40.60 before bouncing back late in the session. If this bounce continues we would look for it to run out of gas around the $47.00-48.00 zone. More conservative traders may want to tighten their stops a bit.
Our first target is the $40.00-38.50 zone. The Point & Figure chart is bearish with a $34.00 target.
Potash Corp. - POT - close: 69.94 change: +0.79 stop: 74.51
It ended up being a quiet day for POT. The stock traded in about a $4.00 range. If shares bounce tomorrow look for a failed rally near $74.00 as a new entry point for shorts.
We are suggesting a stop loss at $74.51, just above Friday's high. Our target is the $61.50 mark. More aggressive traders may want to aim lower. The P&F chart is bearish with a $48 target.
SPDR GOLD Trust - GLD - close: 72.51 change: -0.14 stop: n/a
As the U.S. dollar ticked higher the GLD gold ETF ticked lower. There was nothing out of the ordinary in trading today. Given the trend in the dollar we're expecting the GLD to move lower.
Remember that we don't care what direction the GLD moves as long as it picks a direction and goes. We're not suggesting new positions at this time.
NOTE: lack of any real directional movement is bad news for our November play. Readers may want to exit early right now!
We listed two strangles back on Nov. 9th to take advantage of what appeared to be an imminent breakout, up or down, in gold prices.
The first strangle uses November options, which expire this week. Thus it's much more risky. The second strangle uses December options.
What is a strangle?
Ultra S&P500 ProShares - SSO - close: 24.63 change: +0.18 stop: n/a
The S&P 500 continues to bounce around its lows. Eventually it will see a significant move one way or the other.
If you want to open new positions we would pick anywhere in the $25.50-24.50 zone but the closer to $25.00 the better.
Note: The SSO is an ultra-long ETF that typically moves twice the daily performance of the S&P 500 index.
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.
-December Strangle Details-
ConocoPhillips - COP - close: 49.89 chg: +3.13 stop: 50.05
By 2:00 p.m. COP had produced another bearish failed rally pattern under the $50.00 level. The stock was ready to roll over into a new leg lower. Then the programmed buying commenced and thanks to the BUD deal closing with Inbev funds were buying S&P 500 components. Shares of COP surged to the $50.00 level and hit our stop loss at $50.05.
Joy Global - JOYG - close: 21.31 change: -1.38 stop: 27.51
Target achieved. Shares of JOYG sank to $20.24 intraday before bouncing late in the afternoon to settle with a 6% loss. Our target was a drop to the $20.50 mark. JOYG found support near $20.00 in October and this may be significant support.
Volatility Index - VIX - cls: 67.64 chg: - 1.51 stop: n/a
The VIX spiked to new four-week highs before reversing course today. The Volatility index closed a lot higher than we expected when we were looking at it a couple of months ago. Today was the last day of trading for November VIX options. All of our VIX put positions have closed with a loss after an unprecedented rise in volatility that this market has never seen before.
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