Daily Newsletter, Wednesday, 07/15/2009
The Intel earnings and outlook powered the markets with another giant short squeeze and set the stage for a critical resistance test when IBM and GOOG report on Thursday.
Market Stats Table
The focus was on tech stocks at the open and the short covering did not let up all day. The Intel (Nasdaq:INTC) news caused short covering in all the chip stocks and techs in general. As the indexes moved higher those that had shorted the broader market were forced to cover as well. A true short covering rally is a pleasure to watch as long as you are not short.
There were no earnings at the open to change the market sentiment as all eyes are focused on Thursday's earnings from IBM, GOOG, HOG, JPM and NOK. Today was a breather day for earnings watchers.
The economics today were led by the Consumer Price Index report for June. The headline number was a rise in prices by +0.7%. Economy.com was expecting a rise of only +0.2% compared to a gain of only +0.1% in May. Most of the June gains were due to an increase in gasoline prices. The energy CPI rose by +7.4% from May to June while the food CPI only rose +0.1%. The Core CPI, excluding food and energy, rose by only +0.2%. This is exactly what the Fed wants to see. Slightly above a deflation rate but a slow enough rise that inflation is not a problem. The year over year core rate at +1.1% is the lowest in over two years.
Consumer Price Index Chart
The NY Empire State Manufacturing Survey rose to the highest level in 11 months at only -0.6 in July. This was a substantial improvement from the -9.4 in June and the low of -38.2 in March. New orders rose to +5.9 from -8.1 and shipments rose to +11.0 from -4.8. Without a sudden deterioration of conditions the index should return to positive territory next month.
Empire State Manufacturing Survey Chart
The Industrial Production for June declined only -0.4%, up from a decline of -1.1% in May. This is the smallest decline since the crisis began in 2008. Overall production output has fallen -15.1% from its peak and ranks with the most severe recessions ever recorded. However, capacity utilization fell to 68.0% and the lowest level during this recession. That is only 0.2% below May so the rate of decline is slowing. A lot of the decline continues to be auto production which fell again by -2.6%. This should correct next month as GM and Chrysler increase output at some plants that were closed for most of Q2.
Industrial Production Chart
Crude oil inventories continued to decline with a drop of -2.8 million barrels for the week to 344.5 million barrels. Crude levels have fallen significantly in nine of the last ten weeks. Inventories topped at 375.3 million barrels back on May 1st. At 344.5 million barrels today that is still 16% above year ago levels. Distillate inventories including jet fuel and diesel are 26.7% above year ago levels. Until there is a serious increase in economic activity there is little reason for a sustained rally in crude. Global demand is still about 1 mbpd below production so global inventories are increasing. It would be even worse if China were not currently increasing their reserves by 160%.
EIA Oil Inventory Chart
The biggest report for the day was the FOMC minutes for the June Fed meeting. The minutes showed that the Fed was concerned the economy was still weak and susceptible to further shocks. The continued uneasiness in the financial markets was still a problem for the Fed. The sudden decline of CIT Group (Nyse:CIT) this week is an example.
CIT stock was halted Wednesday afternoon as rumors of a bankruptcy or bailout made the rounds. CIT has been on the brink of bankruptcy due to a decline in asset values as its loan portfolios deteriorate. The Treasury Dept, Federal Reserve and FDIC have been meeting to try and find a way to help CIT. The sharp decline in the stock this week came on increased worries that liquidity at CIT may have worsened to quickly for the regulators to be of help. Most consumers believe that the financial crisis is over but there are still a long list of companies in trouble and the Fed is concerned there may still be shocks to the system.
However, the Fed was optimistic in the minutes saying real consumer spending had firmed in the second quarter and the pace of contraction was moderating. They believed that single-family housing starts had neared a bottom although home inventories were still a problem. Despite a narrowing of credit spreads the Fed was still concerned about the health of the financial sector and interbank lending.
The Fed discussed ways to remove the rate accommodation (raise rates) and remove liquidity from the market when the time was right. Given the amount of assets they have put on their balance sheet this will be no small task. They did indicate they did not expect to begin removing liquidity or raising rates until next year.
The Fed raised its projections for 2009 GDP growth to -1.5% to -1.0% from -2.0% to -1.3%. For 2010 they raised the estimate to +3.1% from +3.0%. They also raised their projections for the unemployment rate to 9.8%-10.1% from 9.2%-9.6%. As long as the unemployment rate is rising we can expect the Fed to remain on hold.
Traders held their breath while the FOMC minutes were disseminated and the market sank only slightly before continuing its upward move. There was no sell the news event as we normally see from the minutes release. Analysts believed this was due to the slightly more optimistic tone and the comments about not changing its bias until early 2010.
In stock news trucker JB Hunt (Nasdaq:JBHT) lost more than 10% after its second quarter profit fell by more than half and missed street expectations. JBHT earned 23 cents after items and analysts were expecting 31-cents. JBHT said customer shipping bids were particularly low.
Capital One (Nyse:COF) said credit card delinquencies had improved and defaults were less than expected. COF said this was the fourth straight month of improvements in delinquencies. Defaults in June fell to 4.77% from 4.9% in May.
American Express (Nyse:AXP) said accounts 30 days past due shrank to 4.4% of total loans for June after a 4.7% rate in may and 4.9% in April. AXP charge offs improved slightly to 9.9% from 10.0% the prior month. Capital One's charge off rate rose to 9.73% from 9.41%. The news prompted yet another short squeeze in COF with a +12% gain and +11% in AXP.
Boeing (Nyse:BA) said it would have to lay off 1,000 additional workers because of cutbacks in Defense Department spending. Boeing is the second largest defense contractor and said they would have to bring the staffing requirements inline with government spending. Lockheed said it would cut 600 workers for the same reason. The administration is cutting back on missile defense programs and the Future Combat Systems program is being restructured.
In the "you can't make this up" category the former stock of GM prior to bankruptcy changed symbols again to (MTLQQ). It is now called Motors Liquidation Company. The symbol changed because regulators were concerned that people were buying the stock of GMGMQ and thinking it was tied to GM in some way. I have told you here several times that the old GM stock is worthless. Now regulators are also saying it is worthless but changing the symbol so people can still trade it. Go figure? FINRA and the SEC issued a full page warning about it. Read Warning Here FINRA said as recently as last Friday newsletters and promoters were touting the purchase of the GMGMQ stock. The price of he stock dropped -52% because of the warning but 102 million shares still traded. There is a sucker born every minute.
Motors Liquidation Chart
American Airlines (Nyse:AMR) posted earnings that beat the street with only a -$1.14 loss compared to analyst estimates for a -$1.28 loss. Passenger revenue fell -21% and obliterated the savings coming from the cheaper fuel. If you could have looked into the future last July 11th with oil at $147 you would have thought that $60 oil on July 11th 2009 would be a major windfall for the airlines and they would surely make money. You would have been wrong despite the massive downsizing of the U.S. route system and available capacity. Planes are flying full with long lists of standby passengers but there are dramatically fewer planes flying. AMR said bookings for the rest of 2009 are still falling and running behind 2008 levels. AMR said revenue from additional fees like checking bags and onboard food rose +7.4% to $565 million for the quarter. American is rated as the third most likely to fail during a liquidity crisis behind US Airways and United.
My wife came back from Chicago O'Hare to Denver on Monday night and there were 130 standby passengers trying to get on her United flight to Denver. United has a flight from Chicago to Denver almost every hour and there was still not enough capacity. To top that off they lost her luggage and the luggage of about 10 other passengers on the same flight. Fortunately it arrived a couple hours later on another United flight.
American Airlines Chart
Late today computer industry tracker IDC announced that PC sales fell less than expected in Q2. IDC said shipments fell by -3%, which was better than the forecast of -6% decline. Gartner, which also tracks computer sales, estimated Q2 sales declined -5% but that was better than their forecast for a -10% drop. Both now expect positive PC growth by Q4.
Earnings are still going to be the focus on Thursday with IBM, and HOG. So far there have been 33 S&P-500 companies report. 67% beat estimates, 24% missed expectations and 9% reported inline. Beat in mind that the best earnings are normally those first to report. For tomorrow most analysts believe Google (Nasdaq:GOOG) will beat estimates and they also believe GOOG is priced to perfection with the +$43 gain over the last week to close at $438 today. Resistance is $440 so most players would be taking profits here.
(Nyse:IBM) is widely expected to beat expectations but like Google they have risen about 10% over the last week to close at $107 today. Resistance on IBM is $110.
Harley Davidson (Nyse:HOG)is the wild card. This high-ticket consumer discretionary item could show some weakness in sales. Getting a loan for a $20,000-$40,000 bike could be a challenge and many workers who would normally be lusting over the new models are just trying to make the house payment after losing their jobs. If Harley says anything positive about sales trends it would be a very positive economic indicator. Expectations are low so volatility could be high.
Fund flows for Q2 totaled $136 billion and the biggest influx of cash in over two years. This cash came in on the rebound and some believe that means the eager money is already invested. However, there is still plenty of cash on the sidelines and you can bet those investors are watching this weeks rally and praying they will get another chance for a better entry later this summer.
Remember, this is option expiration week and much of this rally is related to short covering of option positions. If you were writing covered calls on your long stock and thinking the spring rally was over then you are really stressing today. After three days of gains it appears those calls that were comfortably out of the money last week are now in the money and you are in danger of losing your stock. You can bet that thousands of investors are clawing back those calls or buying additional stock to use when those calls are exercised. Never underestimate the power of an option expiration in the same week as a major earnings surprise. The best laid plans of mice and men sometimes go astray.
The internals are suggesting this rally is over extended. The TRIN at 0.34 and TRINQ at 0.32 are definitely in seriously overbought territory. These levels suggest an immediate bout of profit taking but that could be resolved in just a few minutes at the open. The VIX actually went up on Wednesday instead of down. Normally when there is a strongly bullish rally the VIX implodes because everyone is bullish. This was not the case today. The VIX gain nearly a point and that indicates there was a lot of put buying as the rally progressed. Quite a few people are not convinced this rally has staying power.
The Dow rallied +256 points to close just over strong resistance at 8600. This is a critical resistance level and it will probably take another serious earnings surprise to keep it going higher. JPM, BIIB, MAR, MTG and HOG all report in the morning before the open so that will be the focal point for the continued rally. JPM and HOG are probably the most critical for continued market sentiment.
IF the Dow can move over 8600 then it will find very strong resistance at 8800 and again at 9000. The S&P is a clone of the Dow with major resistance at 930-950. It is too early to tell if the change in market sentiment from the earnings surprises will power a summer rally over those levels once the short covering ends. The Dow is up +625 points or roughly +8% in the last three days. The S&P gained +7%. By any metric this is seriously overbought in the short term. Even if there is a major sentiment reversal in progress we should see a pause to reload. That is especially true because this is an expiration week. I would definitely not chase the market here and let's see what happens after expiration week passes.
The Nasdaq rallied +3.5% or +63 points after the Intel earnings. Add in the comments from Gartner and IDC and tech appears bullet proof. The rally overcame the downtrend that had produce a new lower low the prior week. Now the Nasdaq appears ready to test critical resistance at 1870 and a breakout there would be very bullish. Coming the day before expiration with IBM and GOOG earnings anything is possible.
For external events on Thursday we have former Treasury Secretary Hank Paulson giving testimony to lawmakers on the BAC/MER acquisition controversy. That testimony begins at 9:AM and is sure to be contentious but probably not market moving. At 10:00 we get the Philly Fed Survey and official expectations are for a sharp decline in activity with the headline number falling from -2.2 to -10.0. This could be a brown shoot that could cool economic expectations. However, an upside surprise could be very positive. I suggest not chasing the market and another strong day could set the stage for a short term put play for a brief pullback. The strongest earnings are the first ones and the sentiment can change just as quickly to the downside. I am a watcher today rather than a buyer.
New Option Plays
Bunge Ltd. - BG - close: 63.55 change: +3.43 stop: 57.49
Why We Like It:
BUY CALL AUG 60.00 BGW-HL open interest=1140 current ask $6.10 BUY CALL AUG 65.00 BGW-HM open interest=4257 current ask $3.30 BUY CALL AUG 70.00 BGW-HN open interest= 224 current ask $1.55
SPX Corp. - SPW - close: 51.72 change: +3.28 stop: 47.45
Why We Like It:
BUY CALL AUG 50.00 SPW-HJ open interest= 313 current ask $3.90 BUY CALL AUG 55.00 SPW-HK open interest= 152 current ask $1.50
In Play Updates and Reviews
There were a lot of investors, both big and small, that were short stocks (and the market) going into this week. A lot of them were still short this morning. When the global markets around the world began to rally and the U.S. markets opened higher there was a rush for the exits that never slowed down. We had several bearish plays get stopped out.
AutoZone Inc. - AZO - close: 158.00 change: -0.77 stop: 151.49
AZO refuses to cooperate no matter what direction we pick. The market explodes higher on short covering and AZO fails to participate. If the stock isn't going to cooperate I am not suggesting new positions. We can deploy our money elsewhere. Our target is $169.00.
Euro Currency ETF - FXE - close: 141.07 chg: +1.69 stop: 137.90
If looks like the U.S. dollar is finally breaking down from its multi-week consolidation. This is good news for the euro and the FXE. If you're looking for an entry point look for a dip near $140. I would use the September calls.
Our first target is $144.50. Our second target is $148.50. The P&F chart is bullish with a $168 target.
Gold Miner ETF - GDX - close: 38.29 change: +1.53 stop: 33.99
The weakness in the dollar also helped gold futures. The GLD gold ETF gained 1.5%. The XAU gold & silver index rose 4.6%. The GDX gold-miner ETF rallied 4.1%. I am adding a second target at $42.40. Due to our gap higher entry point I'm adjusting our first target to take profits from $39.00 to $39.50.
O'Reilly Automotive - ORLY - close: 40.88 change: +0.74 stop: 38.49
ORLY has broken out into blue-sky territory. These are all-time highs. Volume was above average on the rally, which is good news. Our first target is $44.00.
Agrium Inc. - AGU - close: 38.44 change: +1.30 stop: 40.05
The market's rally was very widespread and AGU was not immune. The stock gained 3.5% and reclaimed the $38.00 level and its 200-dma. I suggest more conservative traders STRONGLY consider an early exit right here. I am not suggesting new positions at this time. Our first target is $35.10. Our second target is $31.00.
FYI: Readers should note that AGU is trying a hostile takeover for CF Industries, which is itself trying a hostile takeover of Terra Industries.
Compass Minerals Intl. - CMP - cls: 49.68 change: +0.67 stop: 52.55 *new*
CMP delivered a nice pop this morning but it failed under $51.50. I am lowering our stop loss to $52.55. I'm not suggesting new positions at this time. CMP has exceeded our first target at $47.50. Our second target is $43.00.
Sears Holdings - SHLD - close: 62.95 change: +3.26 stop: 64.25
The retailers also experienced some short covering. SHLD gained 5.4% and rallied just past resistance near $62.00. This is worrisome! More conservative traders may want to consider an early exit right now! I'm not suggesting new positions at this time. Our first target is $55.10. Our second target is $50.50.
United Parcel Serv. - UPS - close: 50.53 change: +0.95 stop: 51.05 *new*
This is it! UPS has broken resistance at $50.00 and is now testing technical resistance at its 200-dma. I am lowering our stop loss to $51.05.
Our first target to take profits is $45.50. I am setting a secondary target at $43.00. We do not want to hold over the late July earnings report.
Weyerhaeuser - WY - close: 30.42 change: +1.38 stop: 31.51
We were looking for WY to roll over under the $30.00 level. Today's breakout over the $30.00 level and its 100-dma is bullish and a warning for the bears. More conservative traders may want to exit early right now. I'm not suggesting new positions at this time. There is still additional resistance at $31.00. Our first target is $26.00. Our second target is $23.00. The P&F chart points to a $24 target.
UltraShort SP& 500 - SDS - cls: 53.22 chg: -3.34 stop: 55.90
Investors were essentially short going into earnings season. The S&P 500 had just produced a bearish head-and-shoulders pattern. It was the logical trade to be short. Now the market is soaring on a short squeeze as investors rush to cover on these better than expected earnings results. The SDS gapped open lower at $55.12, way below our stop loss, and it continued to fall for a 5.9% loss.
Due to this inverse ETF's volatility it was suggested that readers only trade half or less than their normal position size.
Ultra-Short REIT - SRS - close: 19.00 change: -1.47 stop: 19.45
Our high-risk aggressive trade on the REIT sector has failed. The market's rally this week has been too strong and bears are running for cover. The security has broken down under the $20.00 level and all of its key moving averages. We were stopped out at $19.45. We knew this was a volatile trade and suggested readers only buy half or less than their normal position size.
Core Labs - CLB - close: 86.49 change: +3.21 stop: 85.25
A 3% surge in the price of oil coupled with a broad-based market rally fueled a 3.8% pop in CLB. The stock gapped open higher at $85.56, which was above our stop loss at $85.25.
Costco - COST - close: 46.90 change: +1.87 stop: 46.10
We have been waiting for COST to break support so we can open bearish positions at $43.90. It looks like that is not going to happen any time soon. The stock is surging higher but look for resistance at its 200-dma.
Freeport McMoran - FCX - close: 50.91 change: +2.73 stop: 50.51
Mining stocks were hot today and it started in Europe. By the time the U.S. markets opened shares of FCX gapped open higher at $50.30 and quickly hit our stop loss. A breakdown in the dollar helped push commodities higher and that really boosted the rally in the miners. FCX had already hit our first target at $45.25.
MetLife Inc. - MET - close: 30.90 change: +1.62 stop: 30.35
Financial stocks continued to be a bright spot in the market and the insurers were not that far behind. MET has broken through resistance at its 200-dma and now at the $30.00 level hitting our stop loss at $30.35.
Mosaic - MOS - close: 44.55 change: +1.33 stop: 45.05
We cautioned traders that MOS was a volatile stock. Shares managed to rise just enough over the $45.00 level to hit our stop loss and close the play.
NII Holdings - NIHD - close: 20.34 change: +1.08 stop: 20.10
The market's short-covering fueled rally was enough to push NIHD to a 5.6% gain and a breakout over resistance near $19.50, at its 30-dma and at the $20.00 mark. Our play was stopped at $20.10.
Wynn Resorts - WYNN - close: 36.19 change: +2.39 stop: 35.25
The short-covering in gambling stocks continued and WYNN rose more than 7% to breakthrough the $35.00 level and its 30-dma. We were stopped at $35.25. WYNN had already exceeded our first target at $30.25.
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