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Daily Newsletter, Monday, 01/31/2005

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Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap

Higher Highs, Higher Lows

Market Wrap
  01-31-2005   High Low Volume Adv/Dcl
DJIA 10489.94 62.74 10510.19 10428.76 2.07 bln 2197/ 657
NASDAQ 2062.41 26.58 2063.18 2053.47 1.83.bln 2192/ 845
S&P 100 564.88 3.93 565.78 560.95 Totals 4389/1502
S&P 500 1181.27 9.91 1182.07 1171.36    
SOX 403.96 4.50 407.24 400.06    
RUS 2000 624.02 11.02 624.31 613.00    
DJ TRANS 3598.48 52.54 3600.74 3545.80    
VIX 12.82 -0.42 13.63 12.79    
VXO (VIX-O) 12.37 -0.96 12.97 12.30    
VXN 18.43 -0.15 18.85 18.26    
Total Volume 3,901M          
Total UpVol 3,020M          
Total DnVol 830M          
Total Adv 4389          
Total Dcl 1502          
52wk Highs 310          
52wk Lows 36          
TRIN 0.88          
PUT/CALL 0.77          

Higher Highs, Higher Lows

The indices gapped higher this morning and spent the day trading sideways on lighter-than-average volume. The markets seemed set to cheer the successful Iraq elections and number of positive economic data and corporate developments.

The bloom began to fade just past midday, but the action was muted overall, with an upward surge in the last half hour restoring the indices to the middle of their intraday range.

Daily Dow Chart


 

The Dow added 62.74 points to close at 10489.94, hitting a higher high at 10510 and bouncing from a higher low of 10429. Last week's high was challenged but not broken, while the higher low advanced the daily cycle oscillators as they continued to build what appears to be a rolling bottom. Above 10510-10525, key resistance is at 10570-10580. A close above that level will confirm the new daily cycle upphase and set up the Dow for a retest of 10630-40 resistance.

Daily S&P 500 Chart


The SPX rose 9.91 to 1181.27, decisively breaking last week's high and leaving off with a bullish kiss on the daily cycle Macd. The 1189 level that acted as a magnet earlier this month looms large as upside resistance, but any strength tomorrow will have a very strong likelihood of moving the daily cycle to a confirmed upphase targeting 1189. If today represented a break above descending bull wedge resistance, then a move above 1189 will target 1195 as next resistance on the way to an implied wedge target up at the opening January 3rd high. The first sign of trouble for bulls would be a closing break of 1170.

Daily Nasdaq Chart


 

The Nasdaq gapped up and stayed above Friday's high, adding 26.61 points or 1.31% to close at 2062.4, the leader of the equity indices. This was a clean break above descending bull wedge resistance and would be a perfect bullish signal except for the lighter than average exchange volume. A bull wedge breakout is confirmed by an expansion, not contraction in volume, and today's 1.73B shares was lower than the average 1.91B. Nevertheless, price action and the cycle setup is bullish in the daily timeframe, and should so remain above the 2020-2030 level. 2070-80 is a confluence resistance zone, with immediate support at the session low of 2053.

Weekly TNX Chart


 

Ten year treasury yields broke below 4.14% support today, printing an inside day ahead of the Fed's FOMC meeting scheduled to commence tomorrow at 2:30PM. The FOMC announcement will be made at 2:15PM on Wednesday, but the Fed Funds futures have already priced in an anticipated target rate of 2.5%, which would represent a 25 bp increase from the Fed. The ten year treasury remained soft in the wake of last Thursday and Friday's strong gains, with the ten year yield (TNX) bouncing from the lower rising pennant support line. With this 2 month pennant approaching an apex no wider than 10 basis points and the daily oscillators drifting, we can hope for a directional move to give the chart some direction soon. The pennant is generally a continuation pattern, in which case we'd look for an upside break, but it's safest to simply let the market decide- a move above 4.26% or below 4.12% should be directional. For the day, TNX lost .6 bps to close at 4.132%.

Weekly chart of Crude oil


 

Over the weekend, millions of Iraqi voters cast their ballots. Interim Prime Minister Allawi vowed to work to unite the country's competing ethnic and religious factions. The strong turnout cost insurgents heavily, as Zarqawi had "declared war" on the elections and stated that voters were "infidels". Nevertheless, voter turnout was weaker in areas populated by Sunni Arabs, where the insurgency is strongest. Shiite voter turnout was stronger, and the true test of the election will be whether the anticipated Shiite win is leveraged to the benefit of all factions, or whether it serves only to further divide the country. Allawi's comments were encouraging and in the right direction.

The market voted too, with crude oil continuing lower for most of the session on the good news from Iraq. It reversed higher in the last hour of the session, however, with the financial press attributing the surge to stronger than anticipated economic growth in the anticipated US GDP revision following the Statistics Canada announcement (see below). The daily downtrend remains unchallenged, with March crude oil futures trading both sides of the 50 day EMA, but today's print engulfed Friday's negative candle in for a key outside reversal day, with the 48.20 settlement above Friday's high. Next resistance is between 49-50, which bulls will need to see broken in order to overcome the daily cycle downphase that kicked off last week. For the day, crude oil rose 2.16% to close the daytime session at 48.20.

It was a busy news day today, with a number of economic reports and developments as well as corporate news and results.

The markets received the December Personal income and Personal spending data at 8:30 this morning. The Commerce Department announced that US Personal incomes rose a record 3.7% in December, exceeding estimates of 3.4%. 3.1 of that 3.7% resulted from the one time 32B dividend from MSFT- ex-dividend, the increase was .6% for the month. Consumer spending rose .8%, meeting expectations. Consumer spending on durable goods rose 4.3%, while nondurables spending rose .6% and on services, .4%. The Personal Consumption Expenditure price index (PCE) fell .1%, while the core PCE (ex-food and energy) was unchanged.

At 10AM, the Commerce Department reported an increase in New Home Sales of .1% in December, bringing the seasonally adjusted annual rate to 1.098M from the downwardly revised 1.097M rate in November and missing expectations of 1.18M. The inventory of unsold homes rose for sale 2.6% to 432K or a 4.8 month supply, the highest level in 31 years.

Also at 10AM, the Chicago Purchasing Managers Index rose to 62.4%, exceeding estimates of 59.6% following December's 61.9% reading.

Later in the session, a surprise announcement from Statistics Canada revealed that it had mistakenly undercounted the value of US exports to Canada by approximately 1B for the month of November. This data is apparently used in the computation of the US GDP for Q4, and, according to RBS Greenwich Capital, would have resulted in the understating of the US GDP by roughly .2% to 3.3%.

In corporate news, SBC announced this morning that it will purchase AT&T for approximately 16B, comprised of 14.7B in SBC stock and a special dividend of 1.04B to be paid by AT&T to its shareholders on closing. AT&T shareholders will receive .78 SBC shares for each AT&T share which, combined with the special dividend, values AT&T without premium to its closing price on Friday. By reuniting the its former parent with the Baby Bell, SBC will move from regional telco to international telecom giant. Analysts speculated that MCI will become the next potential takeover target as the #2 long distance provider. SBC closed higher by .93% at 23.84, while AT&T lost 2.44% to close at 19.23. MCI rose .84% to close at 28.88.

In other merger news, MetLife (MET) announced that it will acquire Travelers Life & Annuity from Citigroup for 11.5B in cash and stock 1B-3B in MET stock will be paid to C, with the remainder in cash to be raised via a debt or convertible security deal, or via asset sales. MET expects its EPS to rise between 4%-6% in 2006 as a result of the deal. UBS applauded the transaction for C, with analyst Glenn Schorr telling clients, " "We think the deal will be well received as selling (Travelers) is additive to Citi's return on equity, pretax margins and overall growth an simplifies the Citi story." MET closed lower by .58% at 39.71, while C added 1.47% to close at 49.09.

Tyson Foods (TSN) missed expectations, reporting a "difficult" quarter . The chicken and beef producer announced Q1 net income of 48M or 14 cents per share, down 16% from its 2003 Q1 57B or 16 cent profit. Revenue declined 500M to 6.45B. Expectations were for 25 cents EPS on revenue of 6.69B. TSN lost 3.27% to close at 17.17.

Exxon Mobil (XOM) announced a record quarter, earning 8.42B or $1.3 per share in Q4 2004 on revenue of 83.4B, up from $1.01 on revenue of 65.95B in Q4 2003. These results blew away estimates of $1.07 per share. The company cited high prices for crude oil and natural gas. Oil and gas driller RIG warned that Q4 results will be lower than Q3's, however, based on idling deepwater rigs and costs to repair damaged rigs. Analysts are expecting earnings of 9 cents per share on revenue of 665M when the company reports on February 15. Back in Q3, the company had expected earnings at 8 cents on revenue of 651.8M. XOM rose .70% to close at 51.63 while RIG gained .92% to close at 43.91.

Drugmaker Wyeth (WYE) reported a loss for Q4 of 1.76B or $1.32 per share, down from a profit of 335M or 25 cents per share in Q4 2003, in which the company had incurred significant restructuring charges. In the current quarter, the company cited costs of 4.5B associated with its recalled fen-phen diet drugs (Pondimin and Redux). Excluding these items, WYE earned 861M or 64 cents per share, missing expectations by 3 cents. WYE got slammed for 7.79% to close at 39.63.

Dow Corning (GLW) announced adjusted Q4 earnings of 74.8M, up 88% from 39.7 in Q4 2003. These results exclude restructuring costs associated with the company's June 2004 emergence from Chapter 11 bankruptcy. Sales were higher by 13% at 876.7M for the quarter. GLW gained 1.86% to close at 10.94.

Hilton Hotels (HLT) announced Q4 earnings of 65M or 16 cents on revenue of 1.05B, down from 67M or 17 cents in Q4 2003. Revenue was higher by 7.3%, meeting analyst expectations. Excluding non-recurring items, HLT earned 18 cents, beating expectations of 16 cents per share. HLT lost 1.98% to close at 22.25.

New York A-G Elliot Spitzer announced that insurance broker MMC has agreed to a settlement in the amount of 850M in connection with charges that it accepted payoffs from insurers in return for business referrals. Spitzer specified that the company will also issue a public apology for its "unlawful" and "shameful" behavior, and will publicly promise to adopt administrative reforms. CEO Michael Cherkasky hastened to add that private litigation won't be ended by this settlement, stating that "We hope our corporate clients will see this offer and see a fair and fulsome opportunity and choose to opt into this agreement, but we're not going to suggest that this will end all litigation." MMC rose 4.54% to close at 32.50.

Later in the afternoon, the treasury reported that it intends to borrow a record 147B in the 1st quarter of 2005, exceeding analyst estimates of 136B.

Tomorrow is scheduled to be another heavy news day, with Auto and Truck sales to be released throughout the session and Construction Spending for December to be released with the January ISM Index at 10AM. Despite the high anxiety that dominated today's intraday session, the fact remained that the indices printed higher highs and higher lows over Friday's levels. With the daily cycle as oversold as it's been and beginning to tick up, that's enough to have traders looking for the next 2-3 week upphase to kick off. Barring a close south of Friday's lows, there's reason to expect an admittedly corrective upphase from here. I say corrective because the weekly cycles (not shown) are just at the outset of their own downphases, and so even a strong daily cycle bounce within them should have trouble beneath the January highs. With earnings still coming fast and furious and a full slate of economic data due, including the FOMC announcement and the President's State of Union address, anything can happen- but so long as the indices continue to print higher lows, the daily cycle bias should continue its so-far slow move back to the upside.

 
 



New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
GE None
LSI

Section 2 Title

New Long Plays

General Electric - GE - close: 36.13 chg: +0.38 stop: 35.15

Company Description:
From jet engines to power generation, financial services to plastics, and medical imaging to news and information, GE people worldwide are dedicated to turning imaginative ideas into leading products and services that help solve some of the world's toughest problems. (source: company website)

Why We Like It:
Shares of Dow-component GE have been in a rocky up trend since it bottomed in May 2004. Now after six weeks of declines and two weeks of consolidating sideways above its 100-dma the stock is beginning to rebound from short-term oversold levels. Its MACD has produced a new buy signal and its short-term oscillators like the RSI and stochastics are both bullish. We like today's breakout over resistance at $36.10 and its simple 50-dma. Plus, the P&F chart is bullish with a long-term $50 target. We want to go long with today's move and target the $37.75-38.00 range. Our time horizon is about six weeks. Conservative traders can wait for confirmation with a move over $36.50.

Picked on January 31 at $36.16
Gain since picked: + 0.00
Earnings Date 01/21/05 (confirmed)
Average Daily Volume: 18.1 million

LSI Logic - LSI - close: 6.11 change: +0.29 stop: 5.74

Company Description:
LSI Logic Corporation focuses on the design and production of high- performance semiconductors for Consumer, Communications and Storage applications that access, interconnect and store data, voice and video. LSI Logic engineers incorporate reusable, industry-standard intellectual property building blocks that serve as the heart of leading-edge systems. LSI Logic serves its global OEM, channel and distribution customers with Platform ASICs, cell-based ASICs, standard products, host bus adapters, RAID controllers and software. In addition, the company supplies storage network solutions for the enterprise.
(source: company press release)

Why We Like It:
It looks like LSI has put in a significant bottom over the last six months. Shares hit a low of $4.01 in late September and have spent the last 2 1/2 months consolidating sideways after a decent October-November rally. Now LSI is breaking out over major resistance at the $6.00 mark and its simple and exponential 200-dma's. Volume on today's move was bullish with approximately 50 percent more shares traded than normal. Earnings were last week and the company beat expectations and raised guidance. We would label a high-risk speculative play for multiple reasons. LSI's P&F chart is currently bearish with a target of $0.00. Second, the SOX semiconductor index is in a two-month downtrend inside a longer 13-month downtrend. We suspect that LSI will continue to buck the trend in the SOX and make a run for the $7.00 level. We're going to use a relatively tight stop at $5.74. If LSI reverses on us we want to be out quickly. More aggressive players might consider a wider stop near under $5.60.

Picked on January 31 at $ 6.11
Gain since picked: + 0.00
Earnings Date 01/27/05 (confirmed)
Average Daily Volume: 4.3 million

New Short Plays

None today.

Play Updates

Updates On Latest Picks

None today.


Watch List

OSG $55.81 +1.00 - The oil tanker/shipping industry turned in strong gains this Monday. Shares of OSG have been consolidating sideways between $51 and $55 the last few weeks and look ready to breakout to the upside.

HAS $19.60 +0.80 - We are still watching toy-maker Hasbro for a breakout over long-term resistance at the $20.00 mark. Volume was pretty strong on today's rally.

LIN $25.90 +0.61 - LIN is pushing against resistance near the top of its trading range at $26.00. Shares appear to have closed above the exponential 200-dma. We would wait and watch for a move over $26.65, which would create a breakout over the simple 200-dma and its November high.

JH $36.40 +0.70 - After two months of consolidating between $34.00 and $36.50 shares of JH are on the verge of a breakout to hit new all-time highs.

SAFM $43.71 +0.75 - We would watch SAFM for a breakout over the $45.00 level and use one as a bullish entry point for a run towards $50.00. The bullish P&F chart points to a $68 target.

BOOM $12.17 +1.91 - BOOM has spent the last eight weeks consolidating its explosive November rally. Now shares are breaking out above its trend of lower highs on big volume. The MACD has produced a new buy signal. Aggressive players only!

EXM $27.00 +2.00 - EXM is another volatile stock that appears to be breaking out with strong volume behind the move. Today's move pushes past the 50-dma and EXM looks poised for a quick ramp toward resistance at the $30 mark.

Today's Newsletter Notes: Market Wrap by Jonathan Levinson, all other plays and content by the Option Investor staff.

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