Option Investor

Daily Newsletter, Monday, 02/07/2005

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Table of Contents

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

Market Wrap

Bears Fumble

Bears Fumble

Friday's upward surge left off with most intraday cycles overbought and a correction due for this morning. That correction kicked off just after 10AM, but it was weak and took place on light volume across the indices. With little economic, corporate or geopolitical news, there was little to catalyze the markets and the action appeared to have been more the result of bulls taking a breather than bears actually stepping up to plate.

Declining volume exceeded advancing volume by a factor of 1.17:1 on the NYSE and 1.54:1 on the Nasdaq, with Amex bears leading the pack by a factor of 3.49:1. Once again, overall volume was light across the indices.

Daily Dow Chart


The Dow closed flat, losing less than half a point to close at 10715.76. Coming as it did at the top of Friday's huge bullish candle, which itself capped off a strongly bullish week, the lack of correction today was clearly bullish. The session high at 10733 is confluence resistance going back to December, above which next resistance starts just below 10800. To the downside, there's support at 10600, 10550 and 10440. Above the 10550 level, the so-far strong daily cycle upphase should continue its run.

Daily S&P 500 Chart


The SPX lost all of 1.31 points today, closing at 1201.72 after testing a low of 1199.27. As with the Dow, this is the shallowest of corrections after last week's strength. Above 1205, next resistance is at 1210, followed by the year's high. Support below is at 1195, with key support for the daily cycle at the 1188-89 confluence.


The Nasdaq led to the downside today, if a 4.7 point (.23%) loss can be considered downside. The session low came at 2075, confirming that first support level above the 2050 confluence trendline. 2100-2125 is stronger resistance and compared with the SPX, Nasdaq bulls have a great deal of work to do before even considering the year highs. Nonetheless, the daily cycle remains bullish off the January low, and should so remain above the 2050 level. With today's light volume, timid correction following last week's gains, the benefit of the doubt remains in the bulls' favor.

Daily TNX Chart


The Treasury auctioned 37B of new debt today via 3 month and 6 t-bills. The auction of 3 month bills generated a bid-to-cover ration of 2.12 at a yield of 2.48%, while the 6 month generated 2.43 bids to each offer at a yield of 2.71%. Of the 37B in new debt, 7B was taken by indirect bidders, being foreign central banks. Ten year treasury bonds opened on a weak note but firmed as the session progressed, with the ten year yield (TNX) retesting Friday's low and finishing the session -2.1 bps at 4.052%. The 4.05% level is support going back to September 2004, below which 4.0%-4.02% comes into view. 4.07% and 4.14% are now upside resistance.

Reuters reported that President Bush has proposed a 2.5T budget that the White House has characterized as the most austere budget since the Reagan era. Bush, who had inherited a budget surplus that became a record deficit in his first term, has yet to veto a spending bill. However, the budget proposed today targets items such as farm aid (2.9% reduction) and housing grants to the poor (4.5%), with 45B to be taken out of Medicaid and an abolition of subsidies for Amtrak. Defense spending would be increased by 4.8%, as would aid to Pakistan, Jordan, Columbia and Afghanistan. The proposed cuts would reduce the budget deficit from its current estimated 427B to 390B in 2006 (3% of GDP) and 251B in 2008. This 251B figure, which the President had promised would be a reduction of the deficit "by half", represents the promised cut based on a starting point of 521B that was forecast in early 2004.

Weekly chart of Crude oil


Secretary of State Condoleezza Rice announced the appointment of Lieutenant-General William Ward as security coordinator to oversee peace-making operations in the Middle East. In particular, Ward will assist the Palestinian Authority to consolidate and expand their security efforts with a view to enhancing Israeli-Palestinian security. As well, it was announced that Israeli Prime Minister Sharon and Palestinian President Abbas will each meet with President Bush this spring.

Later in the session it was announced that Israel and Palestine will announce a cease-fire tomorrow at the Egyptian summit, bringing an end to 4 years' fighting.

Crude oil futures declined throughout the session as the US Dollar Index rose to 3 month highs. The current daily cycle downphase kicked off from confluence resistance below the 50 level, with support first at 45, followed by 44 and what appears to be head and shoulders neckline just below 42. Crude oil finished the session lower by 2.53% at 45.30 on the Nymex.

It was a quiet day for news, with the lone economic report released at 3PM. Consumer credit rose in December from a revised 2B increase in November to 3.1B, missing estimates for an 8B increase. December's rise brought the total of outstanding 2.104T of outstanding consumer credit. The upward revision in the November number from its record low of -8.7B to a gain of 2B was the most noteworthy element in the report.

Chinese internet portal SOHU reported its Q4 results, announcing a decline in net income from 28 cents per share or 11.6M in Q4 2003 to 17 cents per share or 6.5M in the current quarter. These results matched consensus expectations, but the stock got hit for an 11.38% loss, closing at 15.26.

Toymaker HAS reported net earnings of 82M or 44 cents per share, up from 41 cents or 76M in Q4 2003. Revenue fell from 1.1B to 1.06B in the current quarter. Q4 2004's EPS missed consensus expectations by 5 cents per share, and the company's operating margin declined from 11% to 9.8% year over year. HAS cited a tougher than anticipated US retail environment. The stock lost 1.96% to close at 20.00.

Consumer and wireless electronics maker VOXX delayed the release its 2002 form 10K filing and announced that its previous auditor, KPMG, has been subpoenaed by a grand jury seeking documents relating to its former audit engagements. VOXX closed higher by .73% at 16.50.

Aviation hardware supplier GR announced Q4 earnings of 36.7M or 30 cents per share on revenue of 1.26B, up from Q4 2003's 22.6M or 19 cents on revenue of 1.13B. Despite the improvement, these results missed expectations of 38 cents EPS for the current quarter. The company attributed its improvement over last year's results to higher sales to plane makers across its range of products. The stock added 2.64% to close at 35.41.

Consumer nondurable household product maker CLX reported Q2 net income that rose to 59 cents per share excluding items, beating estimates of 53 cents. Sales rose 9% to 1B, beating estimates of 981.3M and exceeding the year-ago level of 920M. The company attributed the gains to an across-the-board increase in sales volume, with gains in "Glad" bags and Latin American sales leading the pack. CLX rose .65% to close at 58.98.

After the bell, EDS announced Q4 earnings of 53M or 10 cents per share on sales of 5.25B, up from Q4 2003's restated loss of 70 cents per share / 337M. Excluding items, the company earned 25 cents, beating expectations by 2 cents. The stock closed the session at 21.36, up 1.18%.

Activision announced fiscal Q3 earnings of 97.3M or 63 cents per share on revenue of 680.1M. Profits were up 27% from Q3 2003's 53 cents or 77M. Consensus estimates had been for 56 cents EPS on revenue of 617M. The stock was lower by .25% at 24.00 as of this writing, having risen 27 cents to 24.06 during the regular session.

Tomorrow looks to be quiet again news-wise, with no economic data due until Wednesday, and then only Wholesale Inventories for December. With little news today and light volume across the indices, traders had little to which to react and were slow to initiate new positions. Unfortunately for bears, this manifested itself on the heels of Friday's strong upward move, and suggests no more than corrective downside action within the ongoing daily cycle up-phase.

The potential fly in the bullish ointment is the auction activity from the treasury, with more auctions scheduled each day until the ten year note auction on Thursday. With the Fed's open market desk having drained reserves aggressively last week and the treasury draining liquidity via new debt issuances this week, the primary fuel for rallies will be getting skimmed. However, as we saw Friday, that's not always an impediment for the bulls. So long as the daily cycles continue to point north, oversold intraday readings should continue to indicate good buys at support- always with active stops, of course.


New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays

New Long Plays

Anheuser Busch - BUD - close: 48.32 chg: +0.35 stop: 50.11

Company Description:
Based in St. Louis, Anheuser-Busch Cos. Inc. is the leading U.S. brewer and holds a 50 percent share in Grupo Modelo, Mexico's leading brewer. In a survey of 10,000 business leaders and securities analysts, Anheuser-Busch ranked first overall in quality of products and services among nearly 600 companies researched in FORTUNE magazine's 2004 "America's Most Admired Companies" listing. The company also is one of the largest theme park operators in the United States, is a major manufacturer of aluminum cans and is the world's largest recycler of aluminum beverage containers. (source: company press release)

Why We Like It:
BUD may have had some of the best commercials during this past Sunday's Super Bowl. Unfortunately for shareholders the stock price looks a lot less entertaining. The stock has been consistently trending lower since it built a top near the $55 level back in the summer of 2004. Of course this top was a long-time in forming as BUD struggled with the $55 level back in 2002 as well. Long-term BUD is breaking down on multiple levels whether you look at the weekly or monthly chart. Short-term the stock produced a failed rally bearish reversal last week as investors reacted to its latest earnings report. Now BUD is hitting new relative lows with technical oscillators pointing lower. The P&F chart points to a $43 target. We're going to target the $43.00-44.00 range with an eight-to-ten-week time horizon. This will take patience as we let BUD drift lower.


Picked on February 7 at $48.32
Gain since picked: + 0.00
Earnings Date 02/02/05 (confirmed)
Average Daily Volume: 2.4 million

Smurfit-Stone Container - SSCC - close: 15.82 chg: -0.35 stop: 16.55

Company Description:
Smurfit-Stone Container Corporation (NASDAQ: SSCC) is the industry's leading integrated manufacturer of paperboard and paper-based packaging. Smurfit-Stone is the leading producer of containerboard, including white top linerboard; corrugated containers; multi-walled and specialty bags; and clay-coated recycled boxboard. SSCC is the world's largest paper recycler, annually processing and selling more than 6.5 million tons. In addition, Smurfit-Stone is a leading producer of solid bleached sulfate, folding cartons, flexible packaging, labels, and point-of-purchase displays. With approximately 38,600 employees working at nearly 260 manufacturing facilities, Smurfit-Stone can provide paperboard and packaging solutions for any customer, large or small, anywhere in North America. (source: company website)

Why We Like It:
The new year has been a tough one for SSCC. The stock sank during the sharp early-January market sell-off and continued to sink during the latter half of the month as well. The last few days have produced an oversold bounce that failed almost exactly at the 38.2 percent Fibonacci retracement of its January decline. Short-term oscillators like the RSI and stochastics are producing short-term peaks and shares look ready to retest the $15 level with the potential to breakdown. The Point & Figure chart shows a bearish sell signal with an $11 target. We want to target the $14.00 level and we fully expect some congestion as it struggles near the $15 mark but our time frame is about six to eight weeks.


Picked on February 7 at $15.82
Gain since picked: + 0.00
Earnings Date 01/25/05 (confirmed)
Average Daily Volume: 1.7 million

New Short Plays

None today.

Play Updates

Updates On Latest Picks

Call Updates

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Put Updates

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Watch List


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


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