Hanging By A Thread
After a week of mixed results and several rebound attempts the markets traded right on the edge of the cliff until 20 min before the close. A large buy program that boosted the A/D line +800 issues appeared just before the close to pull the major indexes back from the brink. The buy program was futures based with the S&P futures spiking +7 points over several minutes. The spike was just enough to close the Nasdaq and S&P with miniscule gain for the week and prevent the S&P from stretching its string of weekly declines to four weeks. Market manipulation anyone?
Friday's economic reports did not help the bullish sentiment with the GDP headline number falling to growth of only 3.1% for Q4. The consensus estimate was +3.5% and the whisper numbers were as high as +4.5%. Several analysts have speculated that the Microsoft dividend alone would have added +1% to the number. It that was the case then the real GDP number would have been closer to +2%. The factors contributing to the growth were a +4.6% rise in consumer spending and a monster +14.9% jump in capital spending. The capital spending was undoubtedly due to the one time tax credit for equipment purchased before 12/31/04. With the one time factors of Microsoft and the tax credit unable to push the GDP into a respectable range then what is the current quarter going to bring? The biggest drag on the GDP was the record trade deficit in Q4. This subtracted -1.73% from the headline number. This is the silver lining to the GDP cloud. It means our real internal GDP was something in the +4.8% range if you ignore the deficit. Economists will tell you that it can't be ignored but investors really only care that our economy is growing and the ex-deficit number suggests the growth was not as slow as the headline number indicated. Inflation did appear to rise substantially with the personal consumption expenditure (PCE) rising +2.5% in Q4 compared to only +1.3% in Q3. The core PCE also rose at +1.7% compared to +1% in Q3. With the Fed meeting next week traders will be cautious as all indications suggest the Fed is getting nervous.
The Employment Cost Index rose slower than expected with the weakest year over year growth in wage costs on record. With the employment market still soft there is competition for positions and employers do not have to pay up to get quality people. However, benefit costs continue to soar with 60% of the growth in wage costs for the quarter going to benefits. Employment costs rose +0.7% for Q4 and were relatively tame. It would be tough to get a roaring inflation fire going without wages to feed it. This is a partial offset for the Fed to the GDP mentioned above.
Proctor Gamble (PG) announced they were buying Gillette for $57 billion and made Warren Buffet even richer. Berkshire Hathaway is a major shareholder in Gillette and the spike in the stock price provided a whopping +$800 million one day gain for Warren. He said it was a dream deal and would create a company that would have over $60 billion in sales and over $200 billion in market cap. This set off a flurry of merger speculation as to who was next. One suggested combination would be Colgate (CL) and Kimberly Clark. (KMB) Both companies are nearly the same size with KMB only slightly larger. A combination of these two companies would allow the merged company to compete better with the PG/G combination.
Thursday the Dow was shredded by the Cat and today was a bone crusher hit by Merck. A federal court invalidated a patent by MRK on Fosamax, its blockbuster osteoporosis drug. Fosamax had $3.2B in sales in 2004 and with the new ruling MRK will lose the patent in 2008 instead of 2018. This knocked MRK for a -3.16 loss and another Dow drop. Teva Pharmaceuticals stands to gain the most with its generic Fosamax once the patent expires. Combine the drop in Dow components MRK, PG and Boeing and you have a loss of over -40 Dow points from just those three stocks. The Dow closed down -40.20 for the day.
The Iraq election dominated trader chatter in the afternoon and the references on stock TV seemed to increase in intensity as the day progressed. It appeared nobody wanted to take a position before the weekend with countless unknowns ahead. Over a dozen separate car bombs were detonated in Iraq and five U.S. soldiers were killed on Friday. With the election still a day away the violence is only going to get worse. We don't know if there will be dozens killed over the weekend or hundreds or even thousands. The terrorists are determined to prevent as many people from voting as possible and officials are expecting the worst.
OPEC meets on Sunday but the outcome is already known. The OPEC president again said there would be no cut in production. This produced another drop in oil prices to $47.18 after spending most of the week near $50. A weather forecast for the northeast suggested there would be a warming trend and this also relieved demand concerns. The OPEC president again said they would look at the demand again in March to determine if they should cut production to maintain the price. Last year they cut production too much in the spring and then spent the rest of the year trying to catch up to demand shortages. In separate news the Russian oil company Yukos said it would not export any oil in February because it lacked enough cash to pay the export duties. There are no estimates for the drop in total exports because other Russian companies are expected to pick up the slack.
If you are an active trader and live on the west coast then get ready to set your alarm an hour earlier each day. The NYSE is considering opening at 8:00 or 8:30 ET each day and very few traders are happy about it. The traders on the floor are negative about the change saying it will not increase their profits and only increase their costs. The NYSE is hoping to capitalize on the current premarket trading from news events, earnings, etc. The electronic markets open for trading at 8:AM and the NYSE wants part of this volume. On days were there are significant developments many millions of shares are traded on the electronic exchanges. The current betting line on the time change is an 8:30 open and it will start on May-1st.
It was announced after the bell on Friday that Lockheed Martin won the $1.7B contract to build the next generation of presidential helicopters. LMT beat out Sikorsky on the deal and breaks with tradition by using a foreign-designed aircraft. The aircraft will be assembled in Texas but about a third of the work will be done in Europe. The first helicopter will be ready by 2009 and will eventually be a fleet of 23. Just how many helicopters can one person use at a time?
The markets swooned on Friday despite a flurry of decent earnings on Thursday night. The bulls can't get any traction and money is still flowing out of funds. AMG Data confirmed on Friday what TrimTabs has been saying for two weeks that January will end with negative flows for the month. With the average inflows over $20 billion since 1990 and recent years over $40 billion the complete absence of any flows is a major market negative. Several recent reports suggest that large investors are moving to defensive positions ahead of looming uncertainty. With $900 billion in hedge funds the rising bearish sentiment is shifting much of that money to the sell side as well.
The Dow is only off -4% for the year despite the strong decline. It seems stronger because of the extreme bullishness as we entered 2005. A -4% drop is just a blip in the long run but there is increasing worry that this could turn into a real correction instead of just minor profit taking. For the Dow to experience a normal -10% correction it would need to trade down to 9800. Friday's close at 10427 was right on the neckline of that head and shoulders I mentioned on Thursday. Were it not for the last 15 min buy program that added +35 points it would have closed under 10400. It literally was hanging on by the slimmest of threads to that 10400 level and the market manipulation at the close was the only saving grace.
The challenge now is determining if the weakness was due to the impending Iraqi elections or just another bout of the defensive selling we have seen since January began. Fortunately we will have that election answer very soon but that is not the last word. The Fed meets on Tuesday for a two-day session and there is come real confusion over what direction they will take. There was considerable speculation about three weeks ago that the Fed would make one more cut and then pause. However, over the last two weeks the comments have been running more towards removing the measured pace language in anticipation of larger rate hikes to head off inflation. This uncertainty has the bond groupies in a tizzy and traders unsure of where to place bets. This, along with the Iraq elections could be the major reason for the lack of buyers. Those who want to be long the market are slowly ticking off the January events and earnings guidance and waiting for the all clear signal before jumping into the game. That all clear may not be until after the Jobs numbers next Friday.
Dow Chart - 180 min
With the Dow clinging to the 10425 neckline by the slimmest of margins we could be looking at another leg down if the Iraq news is worse than expected. Most expect dozens if not hundreds of attacks over the weekend. We might actually find that much worse projections were already priced into the market and a low death toll actually positive for Monday. Should the Dow lose its grip on 10400 there is light support at 10370 and the 100-day average. The 200-day average is slightly lower at 10279, which corresponds with the 50% retracement of the October rally. If the bears are fixated on forcing a full -10% correction neither of those support levels will matter for long. If the market weakness was due to the election cloud then Monday's open should see a move back to retest 10500 resistance while we wait on the Fed.
The Nasdaq is holding on slightly better than the Dow to the weeks gains. After +10 point buy program at the close the Nasdaq ended just above the middle of its range for the week at 2035. Since the Nasdaq is compromised of more than 30 stocks it is less reactive to a major drop in a single stock than the Dow. Resistance remains 2055 and support at 2020. The Nasdaq was helped by a firming SOX this week. The flood of positive chip earnings had pushed the SOX back over 405 by Friday morning despite the somewhat cautious earnings guidance for the sector. The morning sell program at 10:40 knocked it back to 397 but it clung to that level and refused to go lower despite some decent volume in chips. The closing buy program pushed it back to 400 and nearly +20 points over last Monday's lows. I was impressed by the SOX strength over the last three days and I believe it is suggesting tech sellers are running out of ammo.
SOX Chart - Daily
SOX Chart - 15 min
The Russell is lost and can't find its way home. For three weeks the Russell has shown some very uncharacteristic intraday volatility. Conflicting fund money flows are whipping it around like a butterfly in a windstorm. The range of movement has been from 605-625 and we closed right in the middle at 613. January is normally a small cap month but the tide has turned. Funds are being forced to sell the small caps to raise money for withdrawals. Any excess cash is being invested in highly liquid large caps where it can be extracted on a moments notice. That strategy is also failing with numerous large cap favorites seeing sudden news related drops. There appears to be no safe port in this storm.
I think cash is still a position while the SPX remains in neutral territory between 1160-1175. For five days we have been unable to hold over 1175 resistance and the rebound attempts were lifeless at best on the S&P. There appears to be an effort to hold the S&P over 1167 but baring an Iraqi relief rally on Monday that effort may fail. The January downtrend is still intact and critical support at 1160 could be the next causality.
While we wait on Iraq, the Fed and Friday's Jobs Report I am still recommending only small long positions over 1175 and remaining flat between 1160-1175 with a strong short under 1160. This takes the worry out of picking a market direction and eliminates getting chopped to pieces with the numerous range bound head fakes.
Enter Very Passively, Exit Very Aggressively!
New Short Plays
Silver Std. Res. - SSRI - close: 11.97 chg: -0.28 stop: 12.55
Why We Like It:
Picked on January 30 at $11.97
Bullish Play Updates
Arch Coal - ACI - close: 36.50 change: -0.66 stop: 33.00
ACI soared more than seven percent Thursday on some positive earnings news from a rival coal-miner. Now that the tone has been set investors are looking for ACI to turn in a similar earnings performance. Friday's 1.7 percent pull back is normal profit taking after Thursday's big gain and we're encouraged to see that broken resistance at $36.00 acted as new support on Friday. We have six trading days before ACI's earnings report on February 8th. Wall Street is expecting 29 cents a share. We plan to exit before the report either next Friday or the Monday before earnings. Nimble traders willing to go long with such a short time frame can use a bounce from the $36 level as a new bullish entry point. Our target is the $39-40 range.
Picked on December 13 at $34.71
BP Prudhoe Bay - BPT - close: 52.54 chg: -1.06 stop: 47.99
Shares of BPT have been very strong almost all week after breaking out over resistance at the $50.50 level. The breakout solidified the ascending triple-top breakout buy signal in its P&F chart, which currently points to a long-term $82 target. We are only targeting a move to the $55.00 region. Short-term the stock looks a little overbought and Friday saw some profit taking. We would look for a dip back toward the $50.50-51.00 region or the 10-dm (51.15) as a new bullish entry point, although we'd wait for signs of a bounce first.
Picked on January 24 at $50.51
Cyberonics - CYBX - close: 25.44 chg: -0.15 stop: 22.99
CYBX is a new play we added on January 26th given the breakout over round-number resistance at the $25.00 mark. There hasn't been any new news on the VNS Therapy challenge with the FDA in the last couple of days. Yet were are encouraged by what appears to be traders buying the dip to the $25.00 level on Friday. Look for a confirmation next week before initiating new bullish positions. Remember this is a short-term play and we have just ten trading days left before we need to close this play ahead of CYBX's earnings report.
Picked on January 26 at $25.91
El Paso Corp - EP - close: 10.84 change: +0.01 stop: 10.29
Natural gas play EP continues to display a bullish trend but shares have been consolidating between $10.60 and $11.00 the last few days. Short-term technicals are on the verge of turning bullish again and its P&F chart remains positive. We would still consider new positions at current levels or wait for another move past the $11.00 mark. We are going to keep our stop at $10.29 just under the rising 50-dma.
Picked on January 13 at $10.61
Encore Acquisition - EAC - close: 36.11 change: -0.79 stop: 33.49
After highlighting EAC on the watch list earlier this week we decided to add the stock to the play list on Wednesday to capture any future strength in oil and the oil service sectors. We used a trigger at $36.10 to open the play which was triggered on Thursday's breakout over major resistance. The move produced a new triple-top breakout buy signal on its P&F chart. The stock does look a little short-term overbought and EAC felt some profit taking on Friday. Fortunately, traders bought the dip to $35.40 and the stock was bounce off its lows before the close. We notice that the weekly chart shows a new MACD buy signal. The dip on Friday looks like another entry point but remember we plan to exit before EAC's February 15th earnings report.
Picked on January 27 at $36.10
Frontier Oil - FTO - close: 27.70 change: +0.11 stop: 25.99
FTO is another new bullish play in the oil sector and shares broke out major resistance at $27.00 on Thursday. Our entry point was a trigger at $27.05. FTO experienced some profit taking on Friday morning but traders bought the dip here too as the stock bounced from broken resistance now new support at the $27.00 level. Our target remains the $30.00 region.
Picked on January 27 at $27.05
Bearish Play Updates
Intel Corp - INTC - close: 22.24 change: -0.07 stop: 23.01
It has been a boring week for INTC traders. Monday started off in the right direction with a breakdown under the $22.50-22.25 support region. Our entry point was to short INTC at $22.24. The stock actually traded to 22.89 on Monday and looked poised for more weakness. Unfortunately, shares rebounded on Tuesday and proceeded to trade in a range between $22.60 and 22.00 the rest of the week. The overall trend remains bearish and its P&F chart continues to point to a $17.00 target. We would consider new short positions on a drop below the $22.00 level. We'll exit if INTC can trade into the $20.50-20.00 range.
Picked on January 24 at $22.24
Kohl's - KSS - close: 45.62 change: -0.07 stop: 47.01
KSS is a new bearish play we added to the list a few days ago. The original play description mentioned how Wall Street was very optimistic that KSS would out perform during Q4 last year and the first couple of quarters this year because year-over-year comparisons would be so easy (because the previous year went so poorly for KSS). Those expectations were short down when KSS issued a warning in early January. Now the stock is sinking under a pattern of lower highs but is also nearing support with a rising trendline dating back to April 2004. We have a trigger at $44.49 to capture a breakdown below this trendline and the $45.00 level. Our target is the $41-40 region, which is a little less bearish than the P&F chart that points to a $38 target.
Picked on January xx at $xx.xx <-- see TRIGGER
Nuveen Investments - JNC - cls: 37.22 chg: -0.06 stop: 39.01
Our high-risk, speculative, call-the-top play in JNC is growing more risky. The XBD broker-dealer index is trying to mount a rebound. Meanwhile shares of JNC churn sideways between 37.75 and 37.00 all the while holding support at the simple 50-dma. If we don't see some downward momentum soon traders may find it prudent to exit early. Conservative traders (who probably shouldn't be playing this to begin with) may want to tighten their stops toward the $38 level. Our target remains the $34 level near the 38.2 percent Fibonacci retracement of its August to December rally although we may end up adjusting the target to its 100-dma. We would not consider new bearish positions until JNC traded back under the $37 level.
Picked on January 24 at $36.90
Synopsys - SNPS - close: 17.12 change: -0.07 stop: 17.55*new*
The week has also proved somewhat boring for SNPS traders. Shares of churned sideways between $16.70 and $17.40 all week. We do note a high-volume sell-off late Friday morning but SNPS rebounded from the lows of the session by the afternoon. We remain bearish on the stock and its P&F chart is bearish with a $14 target. Our own target is only $15.50 but we would not consider new bearish positions until SNPS traded under $16.70. We're going to turn somewhat defensive and lower our stop loss to $17.55 to reduce our risk. More aggressive traders may want to leave SNPS room to maneuver and put their stop above the $18 mark.
Picked on January 21 at $16.95
AFL $39.07 -0.68 - Insurance stock AFL has spent the last two months unsuccessfully trying to breakout over its long-term trendline of resistance, which dates back to April 2004. Now that AFL has this top in place Friday's weakness look like a potential entry point for shorts. Combine that with a similar top and breakdown in the IUX insurance index and AFL looks even more attractive. We would consider shorts at current levels of under $38.75 with a stop loss at $40.51 and a target in the $36-35 range. Unfortunately, we need to wait until after its February 2nd earnings report.
CCJ $33.18 -1.73 - Uranium miner CCJ has been a consistent winner for months. Fundamentally we expect it will continue to be a winner for years to come. However, right now the stock looks very overbought and shares have seen some huge volume and some relative volatility with its recent earnings report. Thus far CCJ is holding at technical support with the 50-dma. A breakdown at the 50-dma could portend a serious round of profit taking. What makes us cautious is the fake breakdown in December where CCJ gapped under the 50-dma and immediately rebounded. Watch for a drop under 32.50 and target the 100-dma near $30.00.
MOH $48.62 -1.08 - Shares of MOH are at a pivotal juncture. After two weeks of declines it looks short-term oversold but long-term the stock is way overbought. MOH is testing support at its 40-dma and its $48 level. We might consider shorting it under $46 with a $42-40 target. Or we may consider longs on a bounce back over $50.00.
AMMD $38.50 -0.37 - AMMD has pulled back to technical support at the rising 100-dma. Some of the technical indicators suggest a possible bullish rebound soon but we would wait and watch for AMMD to trade over the $40 level.
PXLW $9.35 -1.49 - We don't like to chase a big percentage move but the 13.7 percent drop on huge volume in PXLW might be an exception. The stock broke support at the $10.00 mark after being downgraded. The P&F chart shows a bullish-signal reversed sell signal with a $6.00 target. We would watch for an oversold bounce back toward $10 and then watch for the failed rally. Our short-term target would be the $80.00 region.
LSI $5.82 -0.08 - We're watching LSI for a bullish breakout over the 200-dma and the $6.00 mark.
CDIS $42.30 -0.72 - We're watching CDIS to see if the stock just produced a bearish double-top.
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