Thank You AIGToday's bounce was brought to you by AIG and we thank them for it! AIG beat the street by +6 cents on Wednesday night with a very strong performance after a year of negative events. The hurricane season in 2004 will be remembered by many for a long time but AIG shook it off and an attack by the Spitzer tornado to beat the street and that suggest better times ahead. Helping the bounce by the Dow component was the beginning of lawsuit reform and strong results from Aetna. Aetna said profits rose +22% and raised estimates for the current year and declared a 2:1 split. The news from AET helped accelerate the AIG short covering and the Dow reaped the rewards. AIG gained +3.28 and accounted for nearly 30 of the Dows +85 points.
Other Dow stocks gaining more than a point included UTX +2.16, CAT +1.42, MO +1.12 and HON +1.06. The real key here was AIG. I explained last week how the Exchange Traded Funds like the QQQQ, DIA, SPY, etc are growing rapidly in volume and are favored by hedge funds and program traders. A +3.28 spike in Dow component AIG triggers a big jump in the ETF and that triggers short covering and buying in those ETFs. A major move in just one Dow stock can cause a major buying cycle in the corresponding ETF as stops are hit and that floats all the Dow stocks. Strong buying in the DIA also ripples down into the SPY and the futures as the Dow components are also major components in the other indexes. Once the dominos begin to fall it is a chain reaction until all the programs reach price parity once again. Program trading has grown to such significant levels we will continue to see broader market volatility when these single stock moves occur. According to the NYSE for the week ended Feb-4th 52% of the volume was from programs. This was actually down from 59% in the week ended Jan-14th.
Nobody is complaining about the bounce after yesterday's drop but it was purely a Dow day. The Nasdaq failed to rally and barely made it to positive territory before the close. Like Cisco on Tuesday the tech buyers were afraid to venture into the market ahead of Dell's earnings tonight. Dell did beat the street by a penny but the earnings were far from clear. Revenue slowed despite the gain in earnings per share and Dell continued to express concerns about the future. They guided up on earnings for the current quarter but down on revenue. Component prices are dropping and the average PC selling price is shrinking. This is good for consumers but not good for Dell's revenue number. A -$100 drop in PC prices means Dell must sell +10% more computers just to break even on revenue. With HPQ showing weakness with the exit of Fiorina Dell is going to press the attack on prices in an effort to steal more market share while HPQ restructures. IBM is selling its PC division to Lenovo who will likely challenge Dell on the price front. All this is good news for consumers but will continue to pressure Dell on the revenue front and eventually on earnings. Dell fell about -$1.40 in after hours on the news.
Analog Devices also reported earnings and missed street estimates. ADI said the lower sales were due to a glut of cheap cell phones manufactured in China. ADI traded down only slightly in after hours but this could setup some more profit taking in chips. With Dell predicting flat sales and lower component prices and ADI admitting cheap chips from China are a growing problem, the semiconductor sector could be under pressure on Friday. The SOX rallied through Tuesday with a strong try at testing the resistance at 430 but has weakened over the last two days to close at 420. The SMH fell slightly after the Dell/ADI earnings and could be indicating some further weakness tomorrow. This could be just some consolidation from the +11% rebound off the January lows but caution would be the key here. A SOX bounce over 430 would go a long way towards pulling the Nasdaq out of its slump.
New Long Plays
New Short Plays
Long Play Updates
Arkansas Best - ABFS - close: 39.20 chg: -0.60 stop: 40.75
We remain spectators in ABFS as the play is not yet opened. The stock failed at the $42 level and its 50-dma and is now challenging support at the bottom of its recent trading range. Technicals are negative and today's decline was fueled by strong volume. We will probably close this play unopened tomorrow if it continues to decline.
We don't like the action in AMMD. Yesterday the stock broke down below the $40.00 level and its technical oscillators are turning bearish. Odds are that AMMD will retest support at its rising 100-dma shortly. Conservative traders may want to consider exiting now to avoid further losses. We're going to keep the play open to see if shares can rebound from support.
Picked on February 1 at $40.55
We are raising our stop loss to $10.99. Look for EP to continue higher tomorrow, especially given the strong performance for the natural gas index today. Right now we're planning to close the play at 11.70.
Picked on January 13 at $10.61
We are raising our stop loss to $37.99. We suggest that short-term or conservative traders strongly consider exiting here for a profit. We are adjusting our target to $39.90.
Picked on January 27 at $36.10
We suggest that short-term or conservative traders strongly consider exiting here for a profit. We are raising our stop loss to $27.99. We do plan to exit at our target of $29.85.
Picked on January 27 at $27.05
Be careful here with WAT. The drop back under the $50.00 level puts us on the defensive. Technical oscillators and indicators are pointing south. We might choose an early exit if WAT drops under the $48.50 level to avoid further losses. Bulls can always exit and re-enter on a rebound.
Picked on February 2 at $50.20
Short Play Updates
Smurfit-Stone - SSCC - close: 15.27 chg: -0.01 stop: 16.06 *new*
SSCC has continued to sink as we expected yet now the stock is challenging support at the $15.00 level. It's probably time for another bounce. Watch for SSCC to bounce probably into the 15.50-15.65 range before rolling over again. We're lowering our stop loss to $16.06 near the 21-dma.
Picked on February 7 at $15.82
Closed Long PLays
Canadian Nat. Res. - CNQ - close: 50.75 chg: +2.98 stop: 42.75
Target achieved! CNQ rocketed out of the gate this morning with a small gap higher and then a run throughout the rest of the session to breakout above round-number, psychological resistance at the $50.00 mark on above average volume. These are new all-time highs for the stock and shares have closed above our target range of $49.50-50.00. We're closing the play at the $50 level and suggest readers do the same as the stock looks short-term overbought. We cannot find any specific news to account for the super strength today. Yet we did see a news release from the company this morning. In it CNQ talks about how financially stable they are and how they have built their plans around crude oil at $28 a barrel. Thus with oil this high near $47-50 CNQ's returns should be very profitable.
We're feeling cautious with the major averages right now even with today's show of strength. The lack of participation by GE in today's rally is disappointing and indicators suggest that GE is going to pull back soon. Patient traders willing to take the heat can let GE dip back toward rising technical support at the 100-dma where we would expect it to bounce. Right now we're being more defensive and would prefer to exit early to avoid further losses and choose to re-enter at a later date.
Picked on January 31 at $36.13
Closed Short Plays
Silver Std. Res. - SSRI - close: 13.01 chg: +1.09 stop: 12.55
Ouch! The price of silver soared with a 5.5 percent gain on Thursday helping push the XAU gold & silver index to a 3.9 percent rally. Helping fuel the move was a drop in the U.S. dollar. Shares of SSRI vaulted higher to breakout over the top of its descending channel and technical resistance at the 50-dma. We were stopped out at $12.55 for a 58-cent loss.
Picked on January 30 at $11.97
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Today's Newsletter Notes: Market Wrap by Jim Brown, and all other plays and content by the Option Investor staff.
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