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Daily Newsletter, Wednesday, 02/16/2005

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Table of Contents

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

Market Wrap

Nothing Measured

Nothing Measured

Greenspan watchers poured over Greenspan's prepared testimony before the Senate Banking Committee Wednesday, expecting to see the "measured pace" language removed in preparation for its deletion from FOMC statements. They found it gone, as expected. When Chairman Shelby questioned Greenspan specifically about the likelihood of that phrase disappearing from the FOMC statements, Greenspan commented with a smile that no language was going to remain "in perpetuity."

No "measured" language appeared in that report, but markets certainly measured every word Greenspan wrote and spoke. Indices were parked at strong support before the prepared report was released and stayed there throughout the question-and-answer session. The afternoon response was less measured, with markets zooming up in a late-day stop-run that was soon to be reversed. That action was apparent on the Russell 2000.

Annotated 60-Minute Chart of the Russell 2000:


 

On a day when advancers finally outnumbered decliners but down volume remained ahead of up volume, other indices also failed to hold those late-day gains, but remained essentially unchanged for the day.

Annotated Daily Chart of the SPX:


 

Annotated Daily Chart of the Nasdaq:


 

As the two breakout attempts this week demonstrate, even such well-defined formations will sometimes see false breakouts, so market participants on a breakout either direction should be ready to jump out of a play if the move is soon reversed.

Annotated Daily Chart of the Dow:


 

On the Dow's chart, the TRAN's overbought status was mentioned. A monthly chart of the TRAN with a 30 percent envelope surrounding the 200-month ema illustrates that conclusion. The top envelope usually marks dramatic swing highs for the TRAN.

Annotated Monthly Chart for the TRAN:


 

Greenspan's testimony took precedence over other economic developments, but some homage should be paid to them, too. Other economic releases included the Mortgage Bankers Association's release of mortgage activity, with that report showing a slight 0.5 percent decrease in mortgage application activity, down considerably from the previous week's rise of 4.2 percent. Refinancing applications rose 4.1 percent, however, building on the previous week's gains, and was a higher percentage of all mortgage applications than in the previous week. The purchase index, a measure of loan requests for purchases, fell 4.8 percent, showing that home purchasing activity was not buoyed by continuing low rates for 30-year, fixed-rate mortgages. Those rates climbed 2 basis points from the previous week, but remained low by historical precedents. The decrease in mortgage application activity went counter to information to be released only a few minutes later.

Scheduled pre-market 8:30 releases included January's Building Permits, Housing Starts, Capacity Utilization and Industrial Production. Released at 9:15 rather than the expected 8:30, January's Industrial Production was unchanged from a revised-lower-to-0.7-percent December number. Expectations had been for a 0.3-0.4 percent rise from December's formerly calculated 0.8 percent rise, so that the number proved to be a disappointment. Capacity Utilization was 79.0 percent, slightly lower than December's 79.1 percent and the anticipated 79.3 percent. Capacity Utilization was the highest since 2000, according to some sources.

Against expectations of a decline, the Commerce Department noted that housing starts rose to a 21-year high, climbing 2.7 percent. The department revised December's rate higher, too. Building permits rose 1.7 percent. This evidence of activity among builders in the face of possibly dwindling new applications for loans questions what will happen to housing prices if the trend continues. Nevertheless, traders decided they liked that 21-year-high figure, sending the DJUSHB more than 2 percent higher despite a UBS downgrade of Ryland (RYL).

Mortgage rates and their impact on the housing industry were expected to be one focus on questions addressed to Fed Chairman Alan Greenspan. Some thinkers believe that the Fed's adoption of easy monetary policy created various bubbles, including one in the housing market, and now cannot let them all collapse at the same time due to deflationary risks. According to one source, an anonymous comment at the December FOMC meeting buoyed speculation about the existence of a bubble in the housing market. As discussed later in this article, Greenspan labeled the reactions of the bond markets--and by extrapolation, interest and mortgage rates--a conundrum.

Greenspan's testimony included a set of central tendencies that detailed real GDP forecasts, core prices (PCE) and the jobless rate. Some expected Greenspan to trim the 2005 GDP forecast of six months ago of 3.5-4.00 percent, perhaps to as low as 3.25 percent. That did not occur. Instead, Greenspan targeted a 4-4.75 percent real GDP, up from last July's. Many economists believed that the Fed might trim its expected inflation rate, too, and keep estimates for unemployment somewhere near the middle of its prior range, with both of those occurring as expected. With PCE an inflation measure, the estimated range was trimmed from July's 1.5-2.5 percent to a current 1.5-2.00 range. The estimates for unemployment remained at July's levels.

Headlines quickly noted that Greenspan did not include the "measured pace" language, however, and the prepared speech delved into several areas of concern, including the need for Social Security reform by 2008, reasons why household or consumer spending might slow, the continued and unusual reluctance of businesses to hire or increase capital spending beyond the recent spending to finance a backup in inventories, the effect of lowered productivity on unit labor costs if continued, the rising of import prices as a reflection of dollar weakness and the impact of higher oil prices.

Greenspan's written address acknowledged concerns that long-term interest rates have not risen along with short-term rates, with some believing that this action reflects a belief that rising oil prices will lower economic growth in the future. He cautioned that this interest-rate reaction is not an effect seen only in the U.S., however, and that it would be a mistake to attribute it only to factors relating to the U.S. economy. He calls the action a conundrum, perhaps a "short-term aberration."

Expanding on those concerns, Greenspan noted that distant-horizon oil futures contracts hinted at a "sizable permanent component of oil price increases" but comforted readers by saying that energy prices are a lower percentage component of total business expenses than they once were. In further expansion on the concerns detailed above, Greenspan reminded that both rises and declines in productivity were notoriously difficult to anticipate.

When discussing the funding of private accounts as a part of Social Security Reform, Greenspan asserted that those accounts would by their nature be more likely to be fully funded and should be studied, but he also detailed concerns that a $1-2 trillion in new federal borrowing to fund them would be significant enough that any forced savings in private accounts would not be worth the effort. During the Q&A session, he noted that the "pay as you go" system had worked well for decades, but that it was not a general system, but one that had worked because of the demographics over the previous decades. Those demographics are changing. He further noted that he didn't know and didn't know how it might be possible to know the effect of a new system on bond markets. He believes, however, that the ability to own an account that can be bequeathed to one's offspring to be an enormous benefit, bestowing wealth on those who have not had it.

Despite the concerns detailed earlier, Greenspan's prepared comments noted that the U.S. economy entered 2005 in good shape, expanding at a "reasonably good pace." Participants in financial markets appeared more willing to take on risk than business executives. He reassures that despite sometimes enormous challenges, the U.S. has seen only five quarters of GDP declines in the last twenty years. He took away that reassurance almost at the same time it was offered, only a paragraph later commenting that "people experiencing long periods of relative stability are prone to excess" and stating the need to "remain vigilant against complacency."

He reiterated his insistence that fiscal discipline be restored, that the flexibility of economic and financial systems be maintained to weather the necessary adjustments as that discipline is restored, that the inexorable demographics prompt difficult choices relating to Social Security and Medicare, and that the population be educated or trained to compete effectively on a global scale. In the Q&A session, he noted that the only thing that maintained our standard of living was our creativity, the ideas we had, and the flexibility of our economic and political system to take advantage of those ideas. That must be maintained, he asserted.

His prepared comments ended with reassurance that the U.S. could deal with the challenges facing it, but his statement sounded eerily like that of a commander reassuring his troops before sending them into a tough battle. Still, after the testimony, commentators quickly summed up the good points: the "reasonably good pace" language when describing the economy in early 2005 and the low expectations for inflation. After the Q&A session concluded, markets consolidated a while longer, then shot up into a stop-run that was soon reversed.

Shortly after Greenspan began speaking, the Department of Energy released inventory numbers. During the overnight session, crude prices had been supported by a statement from the OPEC's acting secretary general that OPEC members lean toward a production cut at the March meeting. News of a blast in Iran, although soon denied, also supported prices, and crude for March delivery rose to its morning high at $48.00 as the inventories numbers were released.

At about 10:30, both the American Petroleum Institute and Department of Energy reported inventories numbers. The DOE reported a higher-than-expected jump of 2.1 million barrels in crude inventories, while API reported an even larger 5.1 million increase. However, the DOE also reported a larger-than-expected drop in distillates of 3.1 million barrels, with the API reporting an equal 3.1 million barrel drop. According to the DOE, gasoline inventories rose 4.1 million barrels with the API reporting an increase of 4.3 million barrels.

The immediate reaction was a drop in crude prices and then a coiling just above $47.00, with the 30-dma at $47.08 having provided support on a closing basis throughout the previous three trading sessions. Prices broke out of that coil to the upside, with crude for March delivery closing above $48.00, at $48.30. The OSX, the oil service sector, was a strong performer other than a brief blip after the release of the crude inventories, closing higher by 2.60 percent.

Other market influences included a meeting of two FDA advisory panels to discuss safety and effectiveness of anti-inflammatory drugs. Pfizer (PFE) and Merck (MRK) closed lower by 1.07 and 1.12 percent, with the DRG falling 0.61 percent. Earnings Wednesday included those from Coca-Cola (KO), Caremark Rx (CMX), Moody's Corp (MCO), Cooper Tire (CTB) and Jones Apparel (JNY). KO, MCO and CMX beat expectations while JNY disappointed. KO closed higher by 1.52 percent, but JP Morgan downgraded MCO, so that it had no opportunity to benefit from the better-than-expected earnings results. MCO dropped 2.94 percent. Also impacting trading was disappointing sales guidance from Network Appliance (NTAP), with NTAP plummeting 7.65 percent.

HPQ reported after the close, with the stock climbing in after-hours trading after reporting earnings of 37 cents per share, excluding items, against an expectation of 34 cents per share. Revenue was $21.45 billion against expectations of $20.96 billion. The reaction to HPQ's earnings may not yet be concluded, as many will want to know the company's plans post-Fiorina.

Tomorrow sees WMT report before the open. Thursday's economic releases include the January 12 Initial Jobless Claims, February 5 Continuing Claims and January's Export Prices ex-ag and Import Prices ex-oil, all at 8:30. January's Leading Indicators follows at 10:00, and February's Philadelphia Fed at noon. Not to be forgotten, the SEMI Book-to-Bill number will be released Thursday at 3:00 Pacific Time.

As Jim Brown has been cautioning, watch the SOX and the RUT for keys to market behavior. A sustained SOX breakout above the 200-week moving average at 442.51 would be good for market sentiment, but such a breakout Tuesday was soon reversed and the SOX may see choppy trading behavior ahead of that book-to-bill number. Market bulls would like to see a Nasdaq upside breakout above Tuesday's high, with bears wanting to see a downturn back through the big symmetrical triangle. Market bulls also want to see a Russell 2000 breakout above the neckline of that continuation-form inverse H&S, sustained on a 60-minute close, while bears want to see a downturn and a fall below the appropriate right-shoulder level.

With WMT's earnings release tomorrow morning before the bell, the RLX's behavior may be important, too, with the RLX stocks seeming to lead general market declines in January when the RLX gapped below a bear flag. Now the RLX has come up to retest the top of that gap as WMT is due to report.

Trade carefully. Aggressive bears may now want to nibble on positions, knowing that they'll now have excellent get-out points on indices. With the TRAN looking so overbought and the Nasdaq not leading the pack higher, long positions appear somewhat iffy until those conditions are changed. Remember opex tendencies to pin indices to certain levels beginning about noon on opex Thursday when deciding whether a play makes sense.

 
 



New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
AGYSIAC
TSO 

New Long Plays

Agilysys - AGYS - close: 18.30 chg: +1.10 stop: 16.99

Company Description:
Agilysys, Inc. is one of the foremost distributors and premier resellers of enterprise computer technology solutions. It has a proven track record of delivering complex servers, software, storage and services to resellers and corporate customers across a diverse set of industries. In addition, the company provides customer-centric software applications and services focused on the retail and hospitality markets. Headquartered in Cleveland, Agilysys has sales offices throughout the United States and Canada. (source: company press release)

Why We Like It:
Tech stocks have been under performing the rest of the market lately but it looks like AGYS is poised to ignore its peers and begin its next leg higher. Shares have spent the last five months consolidating sideways in a range between $15.00 and $18.00. Today shares added 6.3 percent on volume about twice the average to breakout through the top of its range and close at a new all-time high. The technical breakout over resistance and the big volume surge is a classic bullish entry point. Plus AGYS's point-and-figure chart shows a fresh triple-top breakout buy signal with a $32 target. We want to go long at current levels or anywhere above the $18.00 mark and target a move to $20-21. Conservative traders may want to wait for confirmation (a.k.a. follow through) on today's move.


 

Picked on February 16 at $18.39
Change since picked: + 0.91
Earnings Date 02/09/05 (confirmed)
Average Daily Volume: 197 thousand

---

Tesoro Corp - TSO - close: 34.65 chg: +1.87 stop: 32.00

Company Description:
Tesoro Corporation, a Fortune 500 Company, is an independent refiner and marketer of petroleum products. Tesoro operates six refineries in the Western United States with a combined capacity of nearly 560,000 barrels per day. Tesoro's retail-marketing system includes over 500 branded retail stations, of which more than 200 are company operated under the Tesoro. and Mirastar. brands. (source: company press release)

Why We Like It:
It seems like the oil sector is the only group really showing any strength lately. Of course if you look at the OIX and OSX indices you'll see that they have become short-term overbought and they're both due for a pull back. One stock in the group that doesn't look so overbought is TSO. You could argue that TSO is lagging the group but the stock has been a huge winner over the 18 months or so. However, if you look at the daily chart you'll see that TSO has been consolidating its gains under resistance at $35.00 for the last five months. The current rally attempt is nearing resistance and TSO looks poised for a breakout. We want to use a TRIGGER to catch a breakout over the $35.00 level. If triggered TSO could race higher in an attempt to catch up with some of its peers. Our entry point will be 35.15. We'll use a wide stop initially just in case the sector does see some profit taking. Our initial target is the $39.50-40.00 range. Our time frame is six to eight weeks. If you check the P&F chart you'll see that TSO is in a buy signal with a $59 target.


 

Picked on February xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/03/05 (confirmed)
Average Daily Volume: 1.0 million

New Short Plays

IAC/InterActiveCorp - IACI - close: 22.55 chg: -1.45 stop: 24.51

Company Description:
IAC operates leading and diversified businesses in sectors being transformed by the internet, online and offline ... our mission is to harness the power of interactivity to make daily life easier and more productive for people all over the world. (source: company press release)

Why We Like It:
IACI reported earnings this morning that beat Wall Street's estimates but analysts and investors were not happy with what they found in the details or on the conference call. The stock produced a bearish engulfing candlestick pattern on volume about three times the average. Today's drop also broke through the bottom of its recent trading range helping push the MACD to a new sell signal. We normally don't like to chase a move this big but IACI has been trending lower for the last 18 months with a series of lower highs. If you check the weekly chart you'll actually see what closely resembles a wide, descending channel and IACI just failed near the top of the channel. Checking the P&F chart will reveal a bearish pattern with a $4.00 price target. No one can argue that the prevailing trend is down but we want to protect ourselves and use a trigger to open the play. Currently IACI is close to filling the gap higher from November and the top and bottom of a gap tend to act as support or resistance. Our plan is to short the stock on a breakdown below $22.00 (bottom of the gap). We'll target a drop into the $19.00-20.00 range. The November low was $19.16 but the $20.00 level would be seen as round-number support. We are using a very wide stop to begin this play making this an aggressive or higher-risk endeavor. Truthfully if IACI trades back above the $23 level after being triggered we may make for an early exit. Our entry point will be $21.95. Another risk to consider is IACI's relatively high short interest at more than 22 percent of the float. That makes the stock a risk should there be any spikes higher that could spook weak-handed shorts into covering.


 

Picked on February xx at $xx.xx <-- see TRIGGER
Change since picked: - 0.00
Earnings Date 02/16/05 (unconfirmed)
Average Daily Volume: 4.4 million

Play Updates

Updates On Latest Picks

Long Play Updates

None today

Short Play Updates

Smurfit-Stone - SSCC - close: 15.88 chg: +0.52 stop: 16.06

Danger! Danger Will Robinson! If we had a personal robot to protect our trading account it would be shouting a warning with SSCC's action today. The stock was churning sideways the first half of the session. Then without warning SSCC surged higher with a flood of volume to push past the 21-dma and the 15.70 level, which was minor resistance. This is not a good sign for the bears and the stock came within 3 cent of our stop today. We are not suggesting new positions at this time and readers need to make sure their stops are in place -OR- exit now to minimize losses.


 

Picked on February 7 at $15.82
Gain since picked: + 0.06
Earnings Date 01/25/05 (confirmed)
Average Daily Volume: 1.7 million

Closed Long PLays

American Medical - AMMD - close: 41.01 chg: +0.66 stop: 38.50

Time is running out. AMMD is due to report earnings after the closing bell tomorrow and we don't want to hold over the event. Wall Street is looking for the company to report profits of 28 cents a share. Given the recent bounce from technical support at the 100-dma we'd be tempted to stay long but there are too many unknowns with an earnings announcement and it's not worth it. We're closing the play per our plan to exit at Wednesday's close.


 

Picked on February 1 at $40.55
Gain since picked: + 0.46
Earnings Date 02/17/05 (confirmed)
Average Daily Volume: 286 thousand

Closed Short Plays

Infocrossing - IFOX - close: 19.30 chg: +0.04 stop: 19.51

It looks like our warnings last night has been fulfilled. IFOX hit our stop loss intraday at $19.51. Unfortunately, we cannot seem to find out what caused the move. Shares were languishing sideways most of the session until around 2:00 PM ET time and WHAM! Suddenly a very big surge of volume flooded into the stock sending it to $20.15 before it fell back again. Today's action also looks like a top but now we're gun shy about trying to short it again. Readers who agree that IFOX looks overbought can watch for a drop under the $18.00 mark as a potential bearish entry point.


 

Picked on February 09 at $18.39
Change since picked: + 0.91
Earnings Date 03/14/05 (unconfirmed)
Average Daily Volume: 277 thousand


Watch List

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

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