Daily Newsletter, Tuesday, 08/04/2009
Positive economic news pushed interest rate sensitive stocks higher to overcome early declines. The major indexes continued to flirt with losses until only minutes before the close but the bulls finally won out.
Market Stats Table
The economic news providing a market lift this morning was the Pending Home Sales report. The Pending Home Sales Index rose +3.6% between May and June to 94.6. This was well over the prior month at 90.7 and the consensus of 91.2. At 94.6 this is higher than August 2008 when the housing panic began. Since hitting its lows in January the index has rebounded +17.7%. This is a lagging number for June but it was the second monthly increase and the fifth consecutive month for year over year gains. May was also revised higher by +0.8%. All four geographical regions posted gains with the South the strongest area with a +8.9% gain.
Pending Home Sales Chart
That was the only material economic report for the day. On Wednesday the key reports will be the Challenger Employment Report, Factory Orders and ISM Nonmanufacturing Index. The big report for the week remains the Non-Farm Payrolls on Friday. There is likely to be some uneasiness in the market ahead of that event.
In stock news Caterpillar (Nyse:CAT) was up +2.77 and responsible for about +29 Dow points on news that earnings were going to explode over the next three years. CEO Jim Owens told analysts that sales were expected to double from $32 billion in 2009 to more than $60 billion in 2012. More importantly because of drastic cost cutting measures over the last year their earnings were likely to be in the range of $8 to $10 per share in 2012. The analyst consensus for 2009 is only $1.43. Of course there was an escape clause in the forecast. Owens said that forecast was based on a global economic recovery that they believe will come. If the recession lingered for three years their profit would remain in the $2.50 per share range.
Caterpillar was one of the first companies to warn of the impending recession. Now they claim conditions are improving in the manner of a classic post recession rebound. Owens said there was a very high demand for infrastructure projects. He said the United States had been under investing in infrastructure for a long time and would need to accelerate construction. Owens said the emerging markets remained strong despite the recession and produced 67% of CAT's profits last year. Sounds like CAT would be a great long-term buy on decent market pullback.
Intel (Nasdaq:INTC) was in the news with JMP Securities saying the semiconductor industry was undergoing a "classical cyclical recovery" given the recent data from the Semiconductor Industry Association released on Monday. That data showed chip sales rose +3.7% in June. JMP has a $24 price target on Intel and a market outperform rating.
Building on that topic Ericsson's VP of system architecture said online devices could rise to more than 50 billion within the next ten years. He said nearly everything would be connected including cars, cameras, refrigerators, televisions, heating and cooling systems, water meters, electric meters and of course phones, notebooks, netbooks and dozens of things we have not even considered yet. All of these items will need chips and circuit boards. Intel's global director, John Woodget, was slightly less bullish saying more than 20 billion devices by 2020 and a 300-fold increase in Internet traffic. However, he warned that even at that level of growth the challenge of keeping up with growth could be "far greater that we expect."
Homebuilder DR Horton (Nyse:DHI) reported earnings today and beat the street on revenue despite posting a loss of 45-cents including land charges. Revenue dropped to $914.1 million, -36%, while analysts were only expecting $792 million. DHI stock fell sharply at the open but recovered quickly after DHI said new home orders rose +22% for the quarter. DHI sold 4,240 homes in the quarter even after 26% of orders were cancelled. New orders came in at 5,089. That was still down -7.5% from Q2-2008 but definitely an improvement over the prior two quarters. This was the same story as Centex (Nyse:CTX) and Pulte Homes (Nyse:PHM) both of which reported earnings on Monday. It definitely appears the housing sector is improving.
DHI Chart - Monthly
It is surprising that the homebuilders are doing so well. So far in 2009 there have been 1.9 million foreclosures and only 400,000 loan modifications. Those foreclosures have cost the builders dearly since the competition of cheap home inventory forced them to significantly lower their prices.
Electronic Arts (Nasdaq:ERTS) reported better than expected results after the bell and the stock traded up in after hours. ERTS reported a loss of 2-cents compared to analyst estimates of -12 cents. Revenue jumped +34% to $816 million. ERTS also affirmed its guidance for $1.00 per share in 2010.
Kraft (Nyse:KFT) reported earnings that rose +11% due mostly to aggressive cost cutting. However, they also raised their full year guidance. KFT stock initially fell nearly a buck in after hours because investors expected a little stronger results and were disappointed event though Kraft beat estimates.
The big earnings news for Wednesday will be Cisco (Nasdaq:CSCO). Deutsche Bank predicted last week that Cisco will beat estimates and raise guidance. Pacific Crest believes that Cisco's enterprise customers will produce an order wave once the recession is clearly over. A Jefferies & Co analyst reiterated a buy rating saying his channel checks indicate improving demand in routing, switching and the advanced technology areas. Estimates for Cisco are 29-cents and $8.6 billion.
You can bet John Chambers will be pounding the drum for the bulls if there is anything to be bullish about. Unfortunately the market is already factoring in a positive earnings report. It will need to be very strong or the market could kick Cisco to the curb.
Goldman Sachs (Nyse:GS) CEO Lloyd Blankfein told senior management to spread the word to employees to avoid conspicuous consumption to avoid attracting attention of lawmakers. Blankfein wanted employees to stay under the radar while the government is on the compensation warpath. Reportedly the employees were asked to avoid the high cost trendy restaurants in favor of inexpensive fast food. There were also comments to avoid the high dollar retailers and extravagant purchases. I am guessing the BMW and Porsche dealers were off limits until the smoke clears. No reason to be a lightning rod attracting attention from lawmakers.
The uranium sector is in disarray after President Obama went back on his commitment to USEC (Nyse:USU) loan guarantees. The President promised to support $2 billion in loan guarantees for USEC when he campaigned in Ohio. Now that he is president he has reneged on that promise (according to USEC) and USEC can't get the loans in the public market. Last month the DOE asked USEC to withdraw its loan application so the DOE could postpone consideration until a later date.
In the analyst conversations surrounding the broken promise to USEC the plight of the uranium sector was again discussed. I am talking about the shortage of uranium. For the last 22 consecutive years the world has consumed more uranium than it produced. The only reason there is not a shortage today is the decommissioning of U.S. and Russian nuclear weapons. The enriched uranium in those weapons is removed and down blended (reduced in strength by blending with other ingredients) so that it can be used in nuclear power plants. The U.S. went on a frantic acquisition program from the 1940s through 1970s and stockpiled uranium for weapons and power plants. Many of the current fleet of navy ships and submarines are fueled with uranium. The rest of the world does not have that stockpile to draw from.
The decommissioning of Russian weapons only has two more years to go and that source of high-grade uranium will disappear. The price of uranium ore will rocket higher once this high-grade supply is gone. Currently there are more than 400 active nuclear power plants in the world and more than 50 under construction. There are another 100+ in the planning stages. It is estimated that could more than triple over the next decade as more countries try to move away from coal and natural gas. Gas fired plants will become uneconomical to run by 2020 and coal plants could see costs more than triple if the Cap and Tax plan goes into effect. The demand for nuclear power is going to explode over the next decade and that will benefit companies like Cameco (Nyse:CCJ).
I have long been a fan of CCJ as one of the world's largest uranium producers. They had some problems with a couple mines over the last couple years that impacted their stock price on fears of production delays. That appears to be behind them now and the stock is threatening a breakout over resistance at $30. This is a long-term hold but given the direction of nuclear power it is very close to a sure thing.
Chart of CCJ
Oil prices weakened slightly after Monday's strong gains. The price of crude closed at $71.40 and about a 20-cent loss. The weakness was due to a slight rebound in the dollar and concern over tomorrow's inventory report. Inventories are expected to have risen by +1.6 million barrels. Compared to last week's surprise gain of +5.2 million barrels that is a drop in the reserve bucket.
The sharp gain in the price of oil has been directly related to the falling dollar. The dollar index has fallen to a new 10-month low of 77.45 and despite the fractional gain today the trend is still lower. If you have any doubt that the dollar controls the price of oil simply look at the comparison chart below. The movements are a complete inverse of each other.
Crude Oil Chart
Crude Oil - Dollar Chart
The hurricane experts at Colorado State University downgraded their predictions for the 2009 hurricane season. They now expect only 10 named storms and four hurricanes with two of them major. This is less than the 11 named storms, 5 hurricanes and two major that were predicted back in June. The season runs from June 1st to Nov 30th. So far this year we have had no storms and only a couple tropical disturbances. The U.S. is leading a charmed life with very few storms since the summer of 2005 when Katrina hit New Orleans. In Sept 2008 hurricane Ike came ashore in Texas and the biggest storm since Katrina. The short term forecast map is still relatively clear with only a light disturbance well east of the islands. Forecasters claim changes in El-Nino are responsible for the drop in storms.
You read about many of the earnings reports above and other than Cisco tomorrow the cycle is nearly over. So far 74% of the S&P-500 have beaten their reduced estimates and that is much stronger than usual. However, estimates were reduced so low that it is surprising the number was not 100%. Those missing on the revenue targets rose to 54%. That is also a much higher than normal number and proves how dramatic cost cutting provided stronger earnings on weaker sales. It has been a rough few quarters with earnings declining for seven consecutive quarters. That is about to change. In the graphic below the bottom number is NOT a misprint.
S&P Earnings History/Forecast
The fourth quarter of 2009 is now expected to produce earnings growth of +185%. Obviously that is a factor of not only a rebounding economy but also very favorable comparisons to 2008-Q4 when earnings were down -67%. Any earnings would be an improvement over 2008-Q4 and given the dramatic cost cutting any rebound in the business environment is going to produce some strong results.
This is why the markets refuse to die. Investors are looking six months ahead with dollar signs in their eyes. Recession rebounds are normally good for stocks and despite the gains since March there could be some enormous gains in our future. Maybe not the immediate future but 3-6 months out.
The S&P has recovered to the pre-election level of 1005 and anyone counting the days and kicking themselves for not getting out of the market before the election can now pull the rip cord and bail without losing too much money.
There are some technical events that should have everyone strapping on parachutes just in case. The S&P-500 hit 667 at the March lows. A 50% rally from that level is 1001. A 38% Fibonacci retracement level from the all time high is 1014. The combination of the return to the pre election resistance level of 1005, the fib retracement of 1014 and the 50% rebound from the March lows at 1001 provides a very strong convergence of resistance. Add to that the sentiment index at an extremely bullish 88% and the markets "should" be living on borrowed time.
SPX Chart - Weekly
However, we appear to be in the middle of a market melt up instead of a melt down. There are anecdotal reports of brokers everywhere getting phone calls saying put me back in the market. The herd is finally biting the bullet and throwing away hopes of a new entry point on a summer sell off. Nothing seems to phase the market. Bad news or good news the indexes are slowly creeping higher.
Hedge fund managers have got to be losing sleep over the constant gains. If they were not in on the rebound they are under performing with a market up +50% from its lows. You can imagine those phone calls. Hey Bill, markets up 50% from the lows, how are we doing? Well John, I have been afraid to commit capital until we get a sell off. I am afraid we are only up about 10%. What? Ok, give me your wire transfer instructions and I will close the account. You can bet those calls are occurring every day. In order to prevent those calls managers are forced to hold their nose and buy every intraday dip just like they did this morning.
The internals are also bullish. The average volume over the last week is about 9.5 billion shares. This is well over the summer volume we saw back in July in the 7.5B to 8.0B shares. Is this volume because we are churning at the top? Could be but it could also be new money coming into the market. The A/D line has been strongly bullish for the last week. New 52-week highs are expanding. 254 today alone while there were only 38 new lows. Monday saw 329 new highs and the largest number since September 19th 2008. That was the day before the crash into October began. Advancers were 5900, decliners 1256, new highs 474 and 15.6 billion in volume. This was the second nearly identical rebound day after a massive sell off on Sept 17th. That sell off day saw only 930 advancers, 6196 decliners on 15.5 billion shares. The two rebound days produced a climax spike to 11483 on the Dow. Three weeks later the Dow was below 8000.
The point I am making here is that a market is never immune to selling following a strong market session. We have to weigh our bullish hopes against the reality of a 50% rally and converging resistance at 1000+ on the S&P.
Fund managers are replaying that rationalism in their mind every day and praying for a serious dip but when the indexes erase the morning losses and start moving higher they have to buy something in self-defense. They can't afford to be flat today much less short. Shorts are becoming an endangered species.
Dow Chart - Weekly
The Dow inched over 9300 at the close for another new high after spending most of the day in negative territory. I am wearing out the keys on my keyboard typing "this is a strong resistance" but every resistance level continues to fail. We have Caterpillar to thank today for +29 Dow points but if it were not CAT it would have been somebody else. Support is well below at 9000 and the Dow is showing no indications of wanting to go there.
The Nasdaq is imitating the S&P in its battle with resistance at 2000. For two days we have garnered only a handful of points but the freight train continues to push against that long-term downtrend line from Oct 2008. The Cisco earnings on Wednesday is the last major opportunity for a blowout surprise. If Cisco fails then the Nasdaq could turn into the anchor for the market. The techs are in favor with investors but eventually this streak will have to pause for a couple days of needed rest. Note the 38% retracement level on the Nasdaq at 1877. Note how the Nasdaq respected that level on the first attempt. That is where the S&P is now.
Nasdaq Chart - Weekly
I am sure readers are having the same psychological battle as I am. My analytical mind is weighing the 50% gains and the converging resistance but with $4.4 trillion in investable cash still on the sidelines this may be a situation where technical resistance is simply overwhelmed by cash coming into the market. The resistance levels are clear but so are the continued gains and the shallow dips. Sometimes you just have to hold your nose and buy something and sometimes that is the right move.
New Option Plays
Trina Solar - TSL - close: 29.97 change: +0.74 stop: 26.69
Why We Like It:
Furthermore I am labeling this an aggressive play because TSL can be a volatile stock and the closest level of possible support is $27.00 and Friday's low at $26.71. I am suggesting calls here at current levels or on a dip near $29.00. Our first target is $34.00.
BUY CALL AUG 30.00 TSL-HF open interest=4761 current ask $2.15 BUY CALL AUG 35.00 TSL-HG open interest=2621 current ask .65
In Play Updates and Reviews
Fluor Corp. - FLR - close: 53.80 change: -0.21 stop: 47.45
FLR is still trading under resistance near the $55.00 level. The stock could see some volatility tomorrow. Rival construction company FWLT reports earnings Wednesday morning. Their results could have an impact on FLR.
I am still suggesting we wait for a dip. The plan is to buy calls on FLR at $50.50. If triggered our first target is $54.80. Our second target is $59.00.
Euro Currency ETF - FXE - close: 143.95 chg: -0.11 stop: 139.95
The U.S. dollar managed to halt its fall today and that stalled the rally in the FXE. I am not suggesting new bullish positions at this time.
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: 41.08 change: +0.31 stop: 36.90
Gold futures and the gold miners were still inching higher. Today's close over $41.00 looks like a bullish breakout over the neckline to the inverse H&S pattern. GDX has already exceeded our first target. Our second target is $44.00.
IDEXX Labs - IDXX - close: 50.79 change: +1.21 stop: 44.95
The market's rally continues and that's starting to draw in more money. I still believe the smarter move is to wait for a correction before launching new bullish positions. However, stocks can always get more overbought than we think is possible. I am keeping our plan to buy calls on IDXX at $47.50 but I'm now adding an aggressive, higher-risk entry point.
If the stock market continues to rally we want to be a part of it. I'm suggesting a trigger to buy calls at $51.10 with a stop loss at $48.99. Our first target is $54.85. I will repeat that this is an aggressive entry point and I only suggest very small positions sizes (about 1/4 of your normal trading size).
The original plan is to buy calls at $47.50 with a stop at $44.95. If triggered at $47.50 our first target is $52.00. Our second target is $54.90. Our time frame is four to eight weeks.
J.C.Penney - JCP - close: 31.04 change: -0.32 stop: 28.40
JCP spent the session trading sideways. The stock did provide another entry point with the dip to $30.52 this morning. I would prefer to open new positions around the $30.50-30.00 region.
Our first target is $32.75. Our second target is $34.90. I would be tempted to aim higher but JCP is due to report earnings on August 14th and we do not want to hold positions over the announcement. Traders should consider this a more aggressive bullish play with the market overbought. I would trade half your normal position size.
Legg Mason - LM - close: 27.82 change: +0.31 stop: 23.99
Nothing has changed for our LM play. We are waiting for LM to correct back toward support near $25.00. Our trigger is $25.55. If triggered our first target is $29.75. Our second target is $33.40. My time frame is four to eight weeks.
Lorillard Inc. - LO - close: 73.08 change: -0.37 stop: 69.45
There is no change from my prior comments on LO. We are looking for a dip back toward $70.00, which should be new support. Buy calls on a dip in the $70.50-70.00 zone. Our first target is $74.50. Our second target is $77.00.
S&P 100 index - OEX - close: 467.31 change: +1.04 stop: 458.10 *new*
The OEX and SPX continue to creep higher. If the markets are positive tomorrow the OEX will probably hit our target at $469.00. I am raising our stop loss to $458.10 (our entry point). More aggressive traders may want to aim for the 480 region.
Polaris - PII - close: 38.10 change: +0.10 stop: 31.95
There is no change for our PII play. We're waiting for a correction. The plan is to buy calls at $34.15. Our first target is $37.50. Our second target is $39.90. FYI: The Point & Figure chart is bullish with a $43.50 target.
Valmont Industries Inc. - VMI - cls: 74.52 chg: +0.64 stop: 69.94
The bounce in VMI continues. The stock gapped down this morning but rallied past $74.00 by the closing bell. I don't see any changes from my Monday night comments. This is a very aggressive, short-term trade that I expect will be over in another two or three days. We want to use very small position sizes because this is a higher-risk trade. Our target is $78.50.
Alliant Techsystems - ATK - close: 79.34 change: -0.17 stop: 81.15
ATK is still not participating in the market's rally yet neither is the stock declining. It appears that readers are waiting for ATK's earnings report Thursday morning. While I don't have big expectations for the earnings report we do not want to hold over the announcement. We will have to exit tomorrow (Wednesday) at the closing bell. I am inching the stop loss down to $80.35.
Our first target is $75.25.
Genzyme - GENZ - close: 49.80 change: -0.58 stop: 52.55
GENZ is still under performing and finally closed under support at the $50.00 mark. This is another entry point for puts. Our first target to take profits is $45.25. Our second target is $41.00. The P&F chart is bearish with a $40 target.
Biotech Ishares - IBB - close: 79.42 change: +0.26 stop: 80.75
Hmm.... the BTK biotech index gained 2.2% yet the IBB only gained 0.3%. They have different components but I'm a little surprised to see the big difference. The trend is the same with both bouncing from their Monday lows. A failed rally in the 80.00-80.50 zone would be a great new entry point for puts on the IBB. Our target on the IBB is $75.50.
LEAP Wireless - LEAP - close: 25.00 change: +0.04 stop: 26.55 *new*
We have two days left for our LEAP play. The company reports earnings after the closing bell on August 6th. We plan to exit at the closing bell on Thursday. I am adjusting our stop loss down to $26.55. I am also adjusting our target to exit up to $23.25. I'm not suggesting new positions at this time.
QQQ ProShares - QLD - close: 45.90 change: -0.03 stop: 46.55
The QLD traded near its highs from last Thursday and began to trim its gains. The trend is up and if the market can manage any sort of decent rally tomorrow we'll be stopped out pretty quickly at $46.55. I would wait for a new drop under $45.00 or the 10-dma near $44.60 before launching new positions. We want to trade very small position sizes given the aggressive nature of this play. Our target is $40.50.
VistaPrint - VPRT - close: 42.59 change: +0.03 stop: 42.05
VPRT has filled the gap from July 31st and the rally stalled. I am suggesting aggressive traders open very small put positions now with a stop loss at $44.05. Our normal trade with the trigger to open positions at $38.80 still applies. If triggered at $38.80 our first target is $35.20. Our second target is $31.50.
(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.)
McDonald's - MCD - close: 55.01 change: -0.12 stop: n/a
There is no change from my prior comments on MCD. The stock continues to under perform but it might try produce a little oversold bounce from the $55.00 level. We're not suggesting new strangle positions at this time.
I suggested the August $60 calls (MCD-HL) and the August $55 puts (MCD-TK). Our estimated cost is $1.25 (0.70 + 0.55). We want to sell if either option hits $2.75 or higher. This may take a few weeks to succeed.
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