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Daily Newsletter, Sunday, 02/20/2005

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Table of Contents

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

Market Wrap

100-Day Support

WE 0218 WE 02-11 WE 02-04
DOW 10785.22 -10.79 10796.0 79.88 10716.1 288.93
Nasdaq 2058.62 -18.04 2076.66 -10.00 2086.66 50.83
S&P-100 575.42 -1.76 577.18 2.09 575.09 14.14
S&P-500 1201.59 -3.71 1205.30 2.27 1203.03 31.67
W5000 1841.71 -33.77 11875.5 9.57 11865.9 334.66
SOX 427.73 -7.79 435.52 17.36 418.16 18.70
RUT 630.13 -4.63 634.76 -2.68 637.44 24.44
TRAN 3619.97 6.94 3613.03 16.22 3596.81 51.87
VXO 11.18 11.43 10.92
VXN 17.87 17.19 18.58

100-Day Support

The markets completed another week for 2005 and they survived an onslaught of mixed economic reports and two doses of Greenspeak. Survived is the operative word here. The Nasdaq continued to be the weakest link and Friday's close was right on critical support at 2058 and just above the 100-day average. This has been support since October and there was just enough buying interest on Friday to hold that level. We may only be 51 days into 2005 but it seems like 100 and the Nasdaq holding support at the 100-day average may be appropriate.

Dow Chart - Daily


 

Nasdaq Chart - Daily


 

The Dow received a double dose of Cox-2 inhibitors on Friday with Dow components MRK and PFE seeing a strong bounce on the positive votes from the FDA committee. The committee voted to allow Celebrex and Vioxx to remain on the market but with a stronger warning label. MRK rose +3.75 and PFE rose +1.80. This accounted for over +40 Dow points. This was the biggest one-day gain by MRK since records have been kept, a period spanning 32 years. Had the committee not met on Friday the Dow would have closed in negative territory and most likely at the lows for the day around 10740. The jump in PFE/MRK produced some short covering in the associated ETFs and gave the Dow more lift than just the gains in MRK/PFE would have by themselves. Erasing the Cox-2 rebound we would have seen both the Dow and the Nasdaq close at the lows of the week and most likely the S&P would have closed below support at 1200.

Economics produced some of Friday's depression with the PPI causing some serious concerns. The headline number rose by +0.3% and inline with estimates but the core rate jumped sharply by +0.8% for the month. This was the largest jump in core prices since 1998. Inflation was broad based and included things like cigarettes, alcohol, sporting goods, clothing, autos, capital equipment and construction machinery. Core intermediate goods marked their third month out of the last six where inflation exceeded +0.8%. Crude products are still up +10.8% year over year despite the drop in oil prices from the Q4 highs. With the next Fed meeting only four weeks away there is almost no hope the Fed will take a pass on hiking rates. Inflation has been constrained on the retail front with manufacturers bearing the brunt of the price hikes but that is apparently ending. Retail prices are beginning to rise with commodities on a seemingly unrelenting upward path.

Copper, a critical commodity that is required for almost every electronic product we buy along with autos and homes hit a 16 year high this week at nearly $1.50 a pound. The building boom has been a strong factor in pushing prices higher with an average of 440 pounds of copper in pipe, wiring and other materials in each new home. The global demand has also been growing with China and India consuming vast amounts. Steel has also set new cyclical highs due to that global demand. Another overriding factor is the continued strength in oil prices. Almost every product we buy and use has depended on oil in some fashion either in its manufacture or delivery. The rising price of oil contributes to increased costs over the entire supply chain. The Fed is going to have a fight when it tries to slow the commodity inflation ahead. The Fed strategy works best against price inflation brought on by easy money, high employment and a bull market. By slapping higher interest rates on the economy those forces can be constrained. Higher rates have less impact on commodity inflation fueled by global demand. The Fed can't slow down China or force lower oil prices. This suggests a long-term battle where the Fed may have to become more aggressive to slow domestic growth to lessen the impact of global demand.

The January depression in the markets impacted Consumer Sentiment with the initial February reading dropping to 94.2 from 95.5. Estimates were split from expecting a small decline to a small gain. The drop was not earth shaking and we are still in the range we have seen since last July. The final election battles had dropped it to a low of 91.7 but once past we have returned to the recent norm. However, this was the second monthly decline. A third down month could cause self induced acceleration so next month should be the key. If employment continues to improve, the Fed continues it's measured pace and the weather turns warmer the consumer sentiment should move higher and break the trend assuming the markets don't implode. The wildcard here is the new flurry of geopolitical concerns over Syria and Iran.

On Friday Bush was queried on potential military action against Iran. He responded that a president should "never say never" and left a veiled threat on the board. This was in response to news that Iran and Syria had agreed to stand together to resist any pressure from the United States. Russia jumped into the fray saying Iran had no nukes and was not a threat in an attempt to deflect U.S. comments. Are we supposed to believe anything Russia says? This is the government that just perpetrated a complete scam that included deception, outright lies and misdirection to recover the Yukos assets so they could sell them to China. Sure, Iran has no nukes and Russia respects property rights.

Friday was a calm day for trading and expiration week ended with a whimper. Volume slowed even further ahead of the three-day weekend and was aided by an early close in the bond markets. Were it not for the MRK/PFE gains it would have been losses across the board. However, those losses would have been minimal. We saw several periods of selling this week but they lacked conviction and we ended the week at strong support. Since this was an expiration week in front of a three-day weekend I believe the selling was mostly option related with a little profit taking adding to the weakness. We have seen some strong gains over the last couple weeks and the failure to make new highs took some of the excitement and conviction away from the bulls. Fund flows were positive with +$2.4 billion flowing into funds over the last week, +7.5B since Jan-27th. We are seeing those flows into domestic funds continue to slow. However, historically fund flows follow performance. When the market is moving strongly higher money flows increase. When it is weak fund flows decrease. January is the only month where funds lead because of the end of year retirement contributions. We all know what happened to January. There is a bright spot on the horizon. This was the 13th consecutive week of outflows from tech funds but the outflows only amounted to -$85 million. This was down from -$145 million last week and -$160 million the prior week. Is the tide about to turn?

The SOX acted very well to the horrible book-to-bill number Thursday night and only lost -2 points on Friday. Several analysts suggested this was the cycle low for chips and suggesting it was time to buy. Obviously not many traders took that advice but there were enough to hold the SOX to only a minor dip to 427. The uptrend support from the January lows is 420 so we could still see some weakness and maintain the upward trend.

Sox Chart - 60 min


 

Dow Chart - Daily


 

Last Sunday I showed you how the 100/130 exp averages impacted the S&P-500. In the chart above you can see how they also provide key support/resistance on the Dow and that support was tested on Friday and held.

The Nasdaq came to rest at 2058 and just above the 100-day average at 2055. This has been support since October. With the SOX still in an uptrend and the Nasdaq holding above strong support on expiration Friday I am actually seeing some upside potential. If the weakness this week was option related profit taking ahead of a long weekend then Tuesday should be the turning point. This is a big "IF" but the gains have been on strong volume and the declines on weak volume. Money flows are still positive and tech flows are improving. It is entirely possible this week was just another consolidation pause. This potential scenario will go down in flames if the Nasdaq breaks below support at the 100-day average. Currently 2055 but we will use Nasdaq 2050 as our line in the sand. There is support from 2020-2040 but the 100-day break should provide enough bearish sentiment to make that 2020-2040 support much less likely to hold.

Besides Monday being a holiday the economic calendar is light for next week with the major reports being a repeat of Consumer Sentiment with the Consumer Confidence on Tuesday. Also we will get the CPI on Wednesday, Durable Goods on Thursday and GDP on Friday. All of those should be market neutral as long as they are close to their expected ranges. The main focus by traders will be the ISM, PPI, Factory Orders and nonfarm payrolls the following week. This week will be consigned to the last dribble of earnings reports and whatever geopolitical events occur. Bush will be traveling abroad so anything is possible. My recommendation still stands to remain flat/short under Nasdaq 2100 with a trading long at Nasdaq 2020. If we do break the 100-day this will be our last chance support to prevent a major breakdown and I believe there could be at least a minor bounce if not a double bottom rebound. Under 2020 and the bears will come out to play.

The Dow and S&P failed to reach new highs and the Nasdaq is facing a serious retest of support. This is a heck of a market to try and pick stocks. The economic and geopolitical concerns making the rounds are simply a smoke screen for analysts that don't have a clue and excuses for traders trying to avoid the reality of bad trades. The real problem facing the markets today is the age old question "Why Buy?" Earnings are over for Q4, guidance was choppy at best and the economic picture looks more like a splatter painted Picasso than a Rembrandt. Investors are staring at it for long periods and still coming away confused as to its meaning. If this is how you feel then you are not alone. In times like these cash is a position and you do not have to be in a trade. We only want to be in a trade when it is profitable to do so. Just because the market is open does not mean you have to place bets. Sit back and relax and wait for the real market to appear. Remember to enter passively when there is no trend and this market would definitely qualify as lacking direction.

 
 



New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
WPSC CSCO
  NYT

New Long Plays

Wheeling-Pittsburgh - WPSC - cls: 40.07 chg: +2.22 stop: 35.95

Company Description:
Wheeling-Pittsburgh Steel Corporation is a metal products company with approximately 3,100 employees. It has facilities in Steubenville, Mingo Junction, Yorkville and Martins Ferry, OH; Beech Bottom and Follansbee, WV; and Allenport, PA. (source: company press release)

Why We Like It:
If you haven't noticed yet almost the entire iron and steel industry has seen their stocks breaking out and hitting new relative highs in the last few days. WPSC is one such stock with shares cracking round-number, psychological resistance at the $40.00 mark on Friday. If you read Barron's you may have noted the article a couple of weeks ago discussing the rosy future for WPSC and Wall Street's expectations that the company is a potential takeover target. The company issued a press release too stating that stronger demand would improve its results. Bulls should like the strong and steady climb higher and shares just recent bounced from its rising trendline of support. The P&F chart shows a new double-top breakout buy signal with a $51 target. We want to target a move into the $44-45 range. We are starting the play with a stop a little bit wider than we'd like and true support is closer to the $35 level. Conservative traders can wait for some confirmation. More aggressive types can hope for a dip and buy the bounce from $38.00. FYI: be aware that we could not confirm an earnings date. The best information would could find suggest WPSC reports in mid-March. Once a date is secured we'll plan to exit before its earnings announcement.


 

Picked on February 20 at $40.07
Gain since picked: + 0.00
Earnings Date 03/14/05 (unconfirmed)
Average Daily Volume: 122 thousand

New Short Plays

Cisco Systems - CSCO - close: 17.30 chg: -0.15 stop: 18.26

Company Description:
Cisco Systems, Inc., the worldwide leader in networking for the Internet, celebrates 20 years of commitment to technology innovation, industry leadership, and corporate social responsibility. (source: company press release)

Why We Like It:
We normally hesitate to suggest shorts on CSCO because there is such a huge fan base for the stock even though the share price is light years from where it was in the bubble days and almost half what it was in early 2004. The trend of lower highs has prevailed ever since its 2004 peak and now after more than six months of consolidating above the $17.50 level the stock is breaking down for what looks like another leg lower. While technicals are negative and its MACD has produced a new sell signal we really like the P&F chart and its new quadruple-bottom breakdown sell signal with a $14.50 target. Our target is the $15.00 level, which is bound to be round-number support. Our time frame is six to eight weeks.


 

Picked on February 20 at $17.30
Gain since picked: - 0.00
Earnings Date 01/27/05 (confirmed)
Average Daily Volume: 61.1 million

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NY Times - NYT - close: 37.20 chg: -1.05 stop: 38.61

Company Description:
The New York Times Company, a leading media company with 2004 revenues of $3.3 billion, includes The New York Times, the International Herald Tribune, The Boston Globe, 16 other newspapers, eight network-affiliated television stations, two New York City radio stations and more than 40 Web sites, including NYTimes.com and Boston.com. For the fourth consecutive year, the Company was ranked No. 1 in the publishing industry in Fortune's 2004 list of America's Most Admired Companies. The Company's core purpose is to enhance society by creating, collecting and distributing high-quality news, information and entertainment. (source: company press release)

Why We Like It:
Shares of NYT have been struggling for months with a steady trend of lower highs. The challenge of shareholders now is that the consolidation above the $38.00 level has now broken down and on big volume. Of course the volume was sparked by news Thursday night that NYT will purchase About.com for $410 million. Most seem to agree that NYT's expansion of its Internet presence is a good thing but that the deal was too expensive. We're focusing on the technical breakdown with the new MACD sell signal and the P&F chart with its sell signal and $28 target. We suspect that NYT will drift toward the $32.50-33.50 range before finding significant support so this region will be our target. Patient traders may want to wait and see if NYT bounces a little. Then readers could short a failed rally under $38.00. Our time frame is six to eight weeks.


 

Picked on February 20 at $37.20
Gain since picked: - 0.00
Earnings Date 01/25/05 (confirmed)
Average Daily Volume: 516 thousand

Play Updates

Updates On Latest Picks

Long Play Updates

Arkansas Best - ABFS - close: 40.42 chg: -0.60 stop: 40.75

ABFS remains a bullish candidate but the play is still unopened. The stock has not yet managed to build up enough steam to power through resistance at its 50-dma and the $42.50 mark. Our entry point to go long is at $42.51. We are keeping an eye on the Dow Jones Transportation index, which looks poised to breakout (or fail) at its own 50-dma. The level to watch is 3650. If the TRAN can trade through this level then it may give ABFS enough of a boost to power higher.


 

Picked on February 2 at $xx.xx <-- see TRIGGER
Gain since picked: + 0.00
Earnings Date 01/27/05 (confirmed)
Average Daily Volume: 259 thousand

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Agilysys - AGYS - close: 18.69 chg: +0.02 stop: 16.99

AGYS is trading near all-time highs following Wednesday's powerful breakout over resistance at the $18.00 level. We like the technical breakout and its new P&F chart triple-top breakout buy signal with the $32 target. Our target is only the $20-21 range within the next six to eight weeks. Currently we would watch for AGYS to fill the gap from Thursday or pull back and retest the $18.00 level as support. Readers can watch for a drop back into the $18.00-18.30 range and then buy the bounce.


 

Picked on February 16 at $18.39
Change since picked: + 0.30
Earnings Date 02/09/05 (confirmed)
Average Daily Volume: 197 thousand

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Benchmark Electronic - BHE - cls: 31.73 chg: -0.16 stop: 31.49

We are still in a wait and watch mode with BHE. The stock has pulled back from its Tuesday breakout over the 50-dma and its MACD indicator doesn't look very healthy. At the moment we don't care since our entry point to open the play is at $33.51. However, we'll grow more concerned if BHE trades under the $31 level and may drop the stock from our play list.


 

Picked on February xx at $xx.xx <-- see TRIGGER
Gain since picked: + 0.00
Earnings Date 02/08/05 (confirmed)
Average Daily Volume: 453 thousand

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Broadcom Corp - BRCM - close: 31.85 chg: -0.52 stop: 31.99

Our bullish play in BRCM remains unopened. There was no follow through on Tuesday's breakout above the 200-dma and shares never got close to pushing through the $34.50 level. Our entry point to go long is currently at $34.55. BRCM has been sliding backward mainly because of weakness in the SOX index. You may remember that we pointed out how the SOX was testing major resistance at its 200-week moving average. Unfortunately for the bulls the SOX failed at this technical resistance (again). Keep an eye on both BRCM and the SOX together. If BRCM closes under $31.00 or if the SOX closes under the 200-dma we'll drop BRCM from the play list (at least as a potential long).


 

Picked on February xx at $xx.xx <-- see TRIGGER
Gain since picked: + 0.00
Earnings Date 01/27/05 (confirmed)
Average Daily Volume: 9.2 million

---

Dow Chemical - DOW - close: 53.64 change: +0.09 stop: 51.50*new*

Shares of DOW were stronger early in this past week and have managed to maintain most of its gain. The new trading range appears to be the $53-54 region. However, we suspect that DOW may pull back and retest the $52 level before trading higher. We are going to raise our stop loss to $51.50 to reduce our exposure. Be sure to check out the chart below. You'll notice that DOW is testing a long-term resistance trendline dating back to 1999.


 

Picked on February 11 at $52.01
Gain since picked: + 1.63
Earnings Date 01/27/05 (confirmed)
Average Daily Volume: 3.5 million

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Tesoro Corp - TSO - close: 34.38 chg: +0.73 stop: 32.00

Oil stocks or at least the OIX and OSX sector indices continued to climb into the weekend closing at all-time highs. Unfortunately, TSO, while inching higher, is still stuck under major resistance at the $35.00 level. Our entry point to open the play is at $35.15 so we're currently waiting for the breakout. We are a little bit worried that the oil sectors will pull back soon since they look overextended and readers should take that into account before considering a new position in TSO.


 

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

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Waters Corp - WAT - close: 48.60 change: -0.23 stop: 47.75*new*

WAT's three-and-a-half month up trend is still in place but shares are currently consolidating its January-February gains. We're disappointed with the breakdown under the $50.00 level but we suspect that WAT will bounce from support at the $48.00 level, which is underpinned by the 50-dma. However, we're going to reduce our risk by tightening the stop to $47.75. We would not consider new bullish positions until TSO bounced back above its simple 10-dma near the $50 mark. More aggressive traders can buy a bounce from $48.00.


 

Picked on February 2 at $50.20
Gain since picked: - 1.60
Earnings Date 01/27/05 (confirmed)
Average Daily Volume: 643 thousand

Short Play Updates

Anheuser Busch - BUD - close: 47.95 chg: -0.05 stop: 50.11

Slowly but surely BUD is sinking lower. The stock got a little help on Thursday when Barron's ran a negative article on the company. The reporter outlined concerns over lagging beer sales and tough competition for the king of beers. The long-term bearish trend remains intact and we want to remind our readers that this is a longer-term play. Our eight-to-ten week target is the $43-44 range.


 

Picked on February 7 at $48.32
Gain since picked: - 0.37
Earnings Date 02/02/05 (confirmed)
Average Daily Volume: 2.4 million

---

IAC/InterActiveCorp - IACI - close: 22.21 chg: +0.19 stop: 24.51

Believe it or not we are still not triggered in IACI. Shares saw some follow through on Thursday but held at the $22.00 level. The stock dipped again on Friday but only hit $21.97. Our entry point/trigger to go short is at $21.95. Don't be surprised to see IACI rally back toward the $23.00 level but we will be surprised if it trades above this mark. The $23 level was support in late January so it should be resistance today. Aggressive traders can use such a move as a new bearish entry point. We'll wait for the breakdown under $22.00. No change in target. Remember, this is somewhat higher risk given the above average short interest that makes IACI a potential short squeeze.


 

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

Closed Long PLays

None today

Closed Short Plays

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

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