PremierInvestor.net Newsletter Monday 01-06-2003 section 1 of 2 Copyright ) 2003, All rights reserved. Redistribution in any form is strictly prohibited. The entire newsletter is best viewed in COURIER 10 for alignment ================================================================= In section one: Market Wrap: Dividend Play Watch List: D, EBAY, GUC, MSFT, QLGC, and more... Play of the Day: Multi-Year Highs ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 01-06-2003 High Low Volume Advance/Decl DJIA 8773.57 + 171.88 8800.59 8602.10 1698 mln 1369/316 NASDAQ 1421.32 + 34.24 1428.65 1390.09 1528 mln 1262/249 S&P 100 469.74 + 10.54 471.41 459.20 totals 2631/565 S&P 500 929.01 + 20.42 931.77 903.07 RUS 2000 397.00 + 6.69 397.77 390.31 DJ TRANS 2421.71 + 56.77 2425.83 2365.02 VIX 27.41 - 0.57 27.76 26.45 VIXN 43.45 - 2.26 46.91 43.45 Put/Call Ratio 0.67 ****************************************************************** =========== Market Wrap =========== Dividend Play by Steven Price The January effect still remains in tact, with the markets exploding for another leg up today. The big market mover was the release of the President's economic stimulus plan, which turned out to be twice as much as previously expected. The plan now calls for elimination of tax on all dividends, instead of the previously planned 50% reduction. This translates into $600 billion of relief over 10 years, instead of $300 billion and had investors scooping stocks that pay significant dividends. The President's plan, along with a new beginning of the year in-flow to mutual funds appeared to get the ball rolling and on a day without significant volume, there was little to stop it. That action was enough to lift the markets, in spite of a worse than expected ISM services report that came in almost two points below predictions (54.7 versus 56.6). An ISM reading over 50 still shows an expansion in the services sector. The growth rate slowed in December, but backlog was up 1.1%, so expansion should continue into the near future. After the ISM manufacturing index expanded more than expected in the last reading on Thursday, investors shrugged off this report, instead focusing on the Bush plan. The other economic news came from the Challenger report that showed a drop in layoffs from November to December. Companies said they would cut 92,900 jobs and while that number is still high, with an annual rate of 1.46 million, it is nevertheless a 41% improvement from November when the number was 157,508. We have now rallied 531 Dow points off the December low of 8242 and traders are undoubtedly wondering whether this is simply a blow-off rally before another leg down to lower lows, or whether we are really headed toward a breakout to new highs. We did see a number of technical resistance levels fall today, as the SPX headed high enough to take out the September and November highs at 925. That is significant in that shorts at those levels would have been overcome on an intraday basis. However, the Dow and OEX have yet to break those highs in the 8800 and 472 range. If traders looking to enter short are picking a top, failure in all three averages would have been more reassuring. From a bull's perspective, there is still resistance to overcome, with a big resistance level looming above at the August/December highs. Those December highs sit at Dow 9077/SPX 954/OEX 487.94. Today's high in the Dow came at 8800 and bears will point out the possible formation of a bearish head and shoulders formation. If that is the case, we could be seeing a very big drop in the near future. However, before we start piling on short, it would be nice to see some evidence of a rally failure. While we saw failures at resistance today, we also saw resistance failures on Friday and wound up 2% higher on the day today. The fact that the SPX took out the resistance that would have coincided with a right shoulder in the Dow at 8800 is also a red flag for bears, as noted above. Right now we are seeing a series of higher highs and higher lows, but the rally is extreme and looks unsustainable. While some type of pullback is due, we have to ask what it will mean if it comes above Dow 8600. In that case we may simply be seeing a higher low after Friday's late day bounce from 8550. That doesn't mean that we shouldn't go short on a breakdown from this level, waiting for a neckline all the way down at Dow 8200, but tight trailing stops are prudent to avoid a bounce from a higher low. Most after-hours announcements were positive and we could see another gap open in the morning. Chart of the Dow Chart of the SPX The Tech indices also saw a big rally today blowing through previous resistance levels and running into others. The Nasdaq Composite (COMP) took out resistance at 1400 like it didn't exist and the Semiconductor Index (SOX.X) ran through its 50-dma of 318 and horizontal resistance at 330. After reaching an intraday high of 335, it fell back to close above that resistance at 331, indicating we may now see support at that level. Chip equipment stocks jumped after Deutsche Bank upgraded the sector to BUY, saying that multiple delivery and order pull-ins would lead to quarterly growth of 15% to 20% versus than expectations of flat to 10 percent growth. The next level of resistance in the NASDAQ is 1426, which it broke on an intraday basis and put a cap on the index back in August. The COMP reached a high of 1428 intraday, before falling into the close to finish at 1421.33. The last time we broke through that 1426 level on the way up, the COMP didn't stop until it hit the December high of 1521. Of course the previous time it hit that level and failed to hold, we saw a sell-off of 100 points in the COMP. We are likely to see a continued rally in the COMP again tomorrow, following comments from storage giant EMC. The company pre-announced better than expected earnings for the fourth quarter, saying it expects a profit of $0.01-$0.02 per share, versus previous expectations of a loss of $0.02. It said customer spending was better than expected and revenues would come in above $1.47 billion, versus previous expectations of $1.27 billion. Chart of the NASDAQ Composite Chart of the SOX The rally that follows a big news event, such as today's change in the dividend tax-cut plan, certainly would seem to indicate a short opportunity. However, this news event was one with direct stock market implications. Dividends suddenly got potentially much larger, as they could become tax-free vehicles, making stock investments more profitable and most likely bringing more 401(k) dollars back into the equity market. The other benefit to shareholders is that if companies are not taxed on dollars put into dividends, there will be a bigger incentive for cash-rich companies such as Cisco (with $21 billion in cash) to begin paying a dividend. That kind of potential could actually give a rally some legs. However, the Democrats have a plan of their own and it calls for tax incentives of far less than the $600 billion proposed by Bush. This is far different than an announcement regarding Iraq, which has shorter-term implications and the market may continue to react to developments in the negotiations between the two sides. One thing was clear from today's action, however, and that is that the stakes just went in stockholder's favor. If the President is going to start bargaining from a lower tax level, then the middle ground is likely to end up closer to a financial boon for bulls. The Democrats outlined their plan this afternoon, which was a far more conservative economic stimulus plan at a cost of $136 billion and focused on a one-year economic boost. The democratic plan said nothing about dividend tax relief and instead focused on tax-rebates to individuals, extension of unemployment benefits and investment depreciation acceleration for businesses. Representative John Spratt said it was about helping the economy, not the stock market. The depreciation acceleration is also a part of the Bush plan. After the democratic statement, the markets hardly budged, apparently on the assumption that a President controlling both houses of Congress was the one dealing from a position of strength. The GOP was listening however, and said it would offer an extension of jobless benefits on Tuesday. Another factor figuring into today's rally is the price of oil. After OPEC President Abdullah al-Attiyah said Sunday that the group would use its production power to keep the price of oil within its targeted range of $22-$28 per barrel, in response to the supply shortfall resulting from the Venezuelan strike. Venezuela is world's fifth largest oil exporter and the six week general strike has reduced exports from that country to 500,000 barrels per day, from an average of 2.7 barrels. The drop in Venezuelan oil has caused a 9 million barrel drop in U.S. crude oil inventories, reducing domestic supplies to near 26-year lows. "An increase could be anywhere between 500,000 barrels per day (bpd) to one million. It will depend on consultations," Attiyah said Crude Oil futures dropped almost a dollar per barrel and fueled stocks as the news signaled lower costs for almost all businesses. A look at the chart of Crude Oil futures has shown an inverse relationship to equities, as it reflected both operating costs and world events. If we get a continued sell-off in oil prices at the same time stocks can break out above August/December highs, then there may be hope that this bounce is the start of something bigger. We have now reached yet another crucial level in the broader indices. If the Dow and COMP both break above the resistance levels highlighted above, then we may see a re-test of the December highs. There is more room for the techs to go before hitting those levels, so tech longs may have more room to run on a breakout in the Dow. Traders can watch to see if we get another leg up on the open through resistance tomorrow. If that is the case, then traders can either hop on the speeding train for a short ride to those December highs, or get out of the way if they are looking to enter short. ================================================================== WATCH LIST ================================================================== The PremierInvestor.net watch list is not designed to be read as full fledged stock picks. Rather we would prefer to offer it as an extra tool in today's investor toolbox. Think of it as a radar screen with your own radar operator pointing out interesting developments, technical patterns or potential plays that you may or may not have seen on your own. Due to time constraints we do glance at the news but rarely do we have time to fully read pertinent news stories, due background research and other necessary screens that investors should do before making a decision. A common exercise is to read the entry, glance at the sector and other stocks in that industry and then compare what's happening in the stock to what's happening in the broader market indices. We hope you enjoy the Watch List and that it proves to be a useful tool for your own trading success. STOCKS WORTH WATCHING --------------------------------- Dominion Resources - D - close: 58.62 change: +2.92 WHAT TO WATCH: Reports that President Bush would call for the elimination of taxes on stock dividends sent the major indices soaring to short-term highs on Monday. Utility stocks, which typically offer large dividends, responded especially well to this news. The UTY.X utility index shot higher by 4.4% and closed at levels not seen since September. This sector strength pushed D above its 200-dma at $57.74. Should the stock remain above this moving average, there isn't much overhead resistance to prevent a rally to the $62-$64 area. However, D is usually a pretty slow mover and today's steep gains were the exception to the rule. We'd expect the stock to revert to its more gradual uptrending pattern that has been intact for the past two months. Long entries could be considered on a pullback to the 200-dma. --- eBay Inc - EBAY - close: 72.96 change: +3.03 WHAT TO WATCH: We'd be remiss if we didn't mention EBAY. The stock broke to the upside today after trading under resistance at $70.00 for several weeks. This 4.3% rally, which created a triple-top buy signal on the p-n-f chart, also took shares above the 2001 high of $72.74. Pulling back to the weekly chart we see that the next area of resistance is the mid-2000 highs near $77.00. The bullish MACD crossover and p-n-f breakout indicate that this level might be tested in the near future. Longer-term bulls might be aiming for the bullish vertical count of $91. But in light of the steep gains today, we think the best strategy for entering long positions would entail waiting for a pullback to $70.00. --- Gucci Group - GUC - close: 92.90 change: +1.07 WHAT TO WATCH: Shares of Gucci moved slightly lower in early December after the company announced that weak pre-Christmas sales would result in lower-than-expected earnings. The company met these reduced expectations when it announced Q3 earnings on December 19th. Judging by how the stock has traded since then, investors seem to believe all the bad news is already out of the way. Shares moved higher towards the end of the year before leveling out below short-term resistance at $92.00. Today's trading saw GUC tack on 1.1% and move above that mark. With shares sitting at multi-month highs, the bulls may be able to muster a retest of the 52-week highs near $99. Note, however, that GUC tends to be a slow mover. If shares were to continue in the recent uptrend it would still take about a month to reach the 52-week highs. --- Phillip Morris - MO - close: 39.51 change: -0.29 WHAT TO WATCH: Big MO was one of only three Dow components to finish with a loss on Monday. The source of this relative weakness was a note from Solomon Smith Barney, who said that there is a good chance that Phillip Morris will announce an aggressive price-cutting program for its largest four brands. While the steep market gains helped shares to recover from the intraday low of $37.77, the rally lost momentum once the morning gap was filled. MO faces overhead resistance at its 50-dma ($40.25) and its p-n-f chart has reversed into a column of "O's." The oscillators are giving conflicting signals, with the MACD showing a bearish crossover while the daily stochastics (5,3,3) begin to rise from the oversold region. Overall it looks like MO could resume its downward journey if the Dow begins to retrace today's rally. Watch for a rollover from the $40.00-$40.25 area to provide a bearish action point. --- Microsoft - MSFT - close: 54.75 change: +0.96 WHAT TO WATCH: Shareholders of MSFT got a scare last week when the stock briefly traded below its 200-dma at $52.15. However, a test of support at $51.00 is the best the bears could muster. MSFT has since traded nicely higher with the Dow and NASDAQ. Today's 1.7% gain put the stock above its 50-dma ($54.81) on an intraday basis and reversed the p-n-f chart into a column of X's. What's particularly interesting about this move is the fact that shares also cleared resistance at $55.00. This level had stymied the bulls on mutliple rally attempts in December. The next area of noteworthy resistance is up at the multi-month highs near $59.00. Although shares look a little extended on a short-term basis, there's no reason why MSFT couldn't continue higher if the market keeps up its winning ways. We'd be looking to enter long positions on a move above today's high of $55.23. --- PeopleSoft - PSFT - close: 20.04 change: +1.04 WHAT TO WATCH: PSFT grabbed our attention last week when it began to form the right shoulder of a head-and-shoulders formation. This bearish pattern was rendered obsolete by the recent gains, which have come in tandem with a sharp rally in the GSO.X software index. The technical picture saw a significant improvement today when shares closed above $20.00 for the first time since November. The steadily rising volume and bullish daily stochastics (5,3,3) might portend a retest of the November highs near $22.00. Long entries could be evaluated at current levels, but be aware of possible resistance at $20.50. --- SLM Corp. - SLM - close: 107.56 change: +2.03 WHAT TO WATCH: Today's broader market strength helped shares of Sallie Mae break through resistance at $107 and rally to an all- time high of 108.40. The bullish catapult buy signal on the p-n- f chart, along with the rising oscillators, indicates that this breakout might have staying power. Long entries could be gauged on a move above today's high or on a pullback to the $107.00 area. In terms of upside potential, the p-n-f bullish vertical count of $120 offers a reasonable target for short-term traders. SLM announces earnings on January 16th. --- QLogic Corp. - QLGC - close: 40.13 change: +2.36 WHAT TO WATCH: Semiconductor bears have been broadsided by the past three days of gains in the SOX.X; the index has rallied roughly 15% off of last Thursday's lows! Today's 5.5% move took the SOX.X above both its 50-dma (318) and resistance at 330. This breakout has cleared the way for a possible rally to the 200-dma at 377. Of course nothing goes up in a straight line and the sector may be overdue for some profit-taking. If a pullback does take place, we'd be looking for the SOX.X to find support at the 315-318 area. This would probably lead to a similar pullback in shares of QLogic. QLGC is looking strong after moving above its converging 50-day and 200-day moving averages near $39.00, which also acted as resistance in December. Technical bulls can be pleased with the rising volume, MACD crossover, and bear trap alert on the point-and-figure chart. The daily chart shows no heavy resistance until the $44-$45 region. Watch for a pullback to $39.00 to yield a bullish action point. We also noticed that IRF (International Rectifier) looks like a good long play in the chip sector. ========================= Play-of-the-Day (BULLISH non-tech play) ========================= Boston Scientific - BSX - close: 44.67 change: +0.87 stop: 40.99 Company Description: Boston Scientific is a worldwide developer, manufacturer and marketer of medical devices whose products are used in a broad range of interventional medical specialties. (source: company press release) - ORIGINAL WRITE UP: December 19th, 2002 - Why We Like It: A glance at the daily chart for BSX reveals that investors have had an insatiable appetitive for shares of this medical device company. What's driving the stock higher? The current uptrend can be traced back to early-October, when a federal judge ruled against Guidant (GDT) in a case involving drug-coated heart stents. Guidant is competing with Boston Scientific to bring the lucrative gizmos to market. The judge's ruling significantly delayed GDT's research, effectively leaving BSX and JNJ as the only major players. Meanwhile, BSX has moved ever-closer to FDA approval of its own stents. On November 18th the company reported that its TAXUS IV product had shown positive results in a safety study. More positive news arrived nine days later, when Guidant's appeal of the previous decision fell flat. This second ruling helped to propel the stock to new 52-week highs. Technically, we like how BSX has bounced back after pulling back to the bottom of its ascending regression channel. The stock showed good relative strength today and closed at levels not seen since 1999. The rising volume and MACD (which is poised to give a bullish crossover) bode well for a continuation of the existing uptrend. In terms of upside potential, we'll be aiming for a rally to the $50.00 level. Shorter-term traders may want to target a move to the all-time highs near $47.00. Our entry trigger for this play will be set at $44.01. If shares reach this level our stop will be located at $40.99, just below the December lows. This creates a risk/reward ratio of roughly 1:2. Those with slightly more conservative strategy could use a stop just below $41.50. - Last Update: January 3rd, 2003 - The drug-coated stent market has been narrowed to just two players: Boston Scientific and Johnson & Johnson. Guidant (GDT), already reeling from a negative court decision in October, was dealt another blow on Thursday night when the company said that a clinical trial of privately-held Cook Group's stent had failed to yield desired results. This prompted GDT to cancel its plans to acquire Cook, effectively delaying the release of its drug-coated stent until at least 2005. BSX and JNJ will now be able to duke it out without having to worry about a sudden resurgence from Guidant. While today's news didn't come as a huge surprise, investors nonetheless responded by bidding BSX higher by 1.8%. The stock is now within striking distance of its multi-year high at $44.30. This is a very encouraging development. Shares have successfully tested support at $42.00, and the recent reversal has the oscillators moving higher once again. Bulls can also be pleased with the steadily increasing volume. Going forward, we'll be watching for a breakout to take BSX to the $47-$50 region. New entries can be targeted on a move above $44.30. - Play-of-the-Day Comments: January 6th, 2003 - We had high hopes for this play after last week's strong performance, and today's action didn't disappoint. BSX moved higher in tandem with the Dow Jones, broke above resistance at $44.25, and pegged a new multi-year high. The stock finished with a gain of 1.9% and outpaced the DRG.X pharmaceutical index by a full percentage point. Although shares have covered a decent amount of ground over the past three days, the daily stochastics have additional room to move before they reach overbought levels. We're also pleased to see that the MACD is started to curl higher. A bullish crossover could be forthcoming very soon. If the broader market continues to move higher we'd expect BSX to move towards our target area of $50.00. Shorter- term traders may want to target a move to the 1999 highs near $47.00. New entries can be targeted on a move above today's high ($44.69) or a pullback to $44.00. Picked on December 20th at $44.01 Results since picked: +0.66 Earnings Date 10/22/02 (confirmed) ================================================================= To stop receiving this PremierInvestor.net Newsletter, send email to Contact Support ================================================================= DISCLAIMER ================================================================= This newsletter is a publication dedicated to the education of stock traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock but an information resource to aid the investor in making an informed decision regarding trading in stocks. It is possible at this or some subsequent date, the editors and staff of PremierInvestor.net may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. PremierInvestor.net staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control. Please read our disclaimer at: http://www.optioninvestor.com/page/oin/aboutus/disclaimer.html ***************************************************************** ADVERTISING INFORMATION For more information on advertising in PremierInvestor.net Newsletter, or any Premier Investor Network newsletter please contact Contact Support. ***************************************************************** Copyright ) 2003 PremierInvestor.net. and The Premier Investor Network. Do not duplicate or redistribute in any form.
PremierInvestor.net Newsletter Monday 01-06-2003 section 2 of 2 Copyright ) 2003, All rights reserved. Redistribution in any form is strictly prohibited. The entire newsletter is best viewed in COURIER 10 for alignment ================================================================= In section two: Split Trader/Stock Splits Stop Adjustments: FRX (bullish) Trading Ideas Value Plays With Bullish Signals Breakout to Upside (Stocks $5 to $20) Breakout to Upside (Stocks over $20) Breakout to Downside (Stocks over $20) Recently Overbought With Bearish Signals (Stocks over $20) ================================================================= Split Trader Stock Splits (ST) section ================================================================= =============== ST Play Updates =============== Stop Adjustments ---------------- Forest Labs - FRX - cls: 105.59 chg: -0.48 stop: 104.79 *new* In response to Friday's large upward gap, we collared FRX with a tight trading range by using a stop at $103.99 and an exit target at $108.00. As it turns out neither one of these levels was hit during today's session. FRX traded an Inside Day and finished with a small loss. The DRG.X pharmaceutical index, on the other hand, moved higher by nearly 1.0%. This relative weakness suggests that perhaps the bulls were a little exhausted after Friday's gains. In any case, the 2-for-1 split is approaching and we're going to exit this play before that occurs. Some traders may want to keep a partial position open. If shares do not reach our profit-target or our stop-loss during tomorrow's session we'll be closing all of our hypothetical long position as of Tuesday's final trade. Note that we've bumped our stop up to $104.79 in order to protect a slightly larger gain. ================= Trading Ideas ================= This section contains stocks that meet criteria which may make them of interest to long and short side traders. These are not recommendations, nor have they been reviewed by PremierInvestor editors for investment potential. However, each of them has technical and fundamental characteristics that make them worthy of further review by traders and investors looking for fresh ideas. New stocks will appear daily following the market close. Value Plays With Bullish Signals --------------------------------- Ticker Company Name Close Change EP El Paso Corp 8.34 +0.60 BMY Bristol-Myers Squibb 25.27 +0.52 EDS Electronic Data Systems 20.08 +0.58 ICPT Intercept Inc 18.91 +1.20 AEP American Electric Power 30.50 +1.75 PNW Pinnacle West Capital 37.06 +1.75 SCSS Select Comfort Corp 10.80 +0.60 --------------------------------------- Breakout to Upside (Stocks $5 to $20) --------------------------------------- Ticker Company Name Close Change SEPR Sepracor Inc 12.24 +1.99 NBTY NBTY Inc 19.21 +1.57 NTES Netease.com 15.26 +2.12 GSOF Group 1 Software 15.12 +1.41 --------------------------------------- Breakout to Upside (Stocks over $20) --------------------------------------- Ticker Company Name Close Change ROL Rollins Inc 28.21 +1.73 EK Eastman Kodak 38.67 +1.24 EBAY Ebay Inc 73.00 +3.07 GUC Gucci Group 92.90 +1.07 JPM JP Morgan 27.98 +2.04 TTC Toro Co 67.25 +3.92 TMX Telefonos De Mexico 33.98 +1.03 TOT Total Fina 74.90 +2.63 UOPX Univ. of Phoenix Online 39.30 +1.22 FBF FleetBoston Financial 27.46 +1.65 ------------------------------------------- Breakout to Downside (Stocks over $20) ------------------------------------------- Ticker Company Name Close Change EXPE Expedia Inc 63.97 -6.93 AAP Advance Auto Parts 45.94 -3.13 ----------------------------------------- Recently Overbought With Bearish Signals (Stocks over $20) ------------------------------------------- Ticker Company Name Close Change RECN RSCS Connection 21.30 -0.70 ================================================================= To stop receiving this PremierInvestor.net Newsletter, send email to Contact Support ================================================================= DISCLAIMER ================================================================= This newsletter is a publication dedicated to the education of stock traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock but an information resource to aid the investor in making an informed decision regarding trading in stocks. It is possible at this or some subsequent date, the editors and staff of PremierInvestor.net may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. PremierInvestor.net staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control. Please read our disclaimer at: http://www.optioninvestor.com/page/oin/aboutus/disclaimer.html ***************************************************************** ADVERTISING INFORMATION For more information on advertising in PremierInvestor.net Newsletter, or any Premier Investor Network newsletter please contact Contact Support. ***************************************************************** Copyright ) 2003 PremierInvestor.net. and The Premier Investor Network. Do not duplicate or redistribute in any form.
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