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Daily Newsletter, Thursday, 02/24/2005

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Table of Contents

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

Market Wrap

2020 Almost on the Nose

  02-24-2005   High Low Volume Adv/Dcl
DJIA 10748.79 75.00 10755.74 10647.34 1.88 bln 2194/1067
NASDAQ 2051.70 20.50 2051.81 2023.00 2.04 bln 1903/1257
S&P 100 573.77 3.34 574.18 568.96 Totals 4097/2324
S&P 500 1200.20 9.40 1200.42 1187.84  
SOX 434.15 10.10 434.23 423.14  
RUS 2000 627.56 7.02 627.60 616.91  
DJ TRANS 3680.25 68.50 3680.25 2606.80  
VIX 11.57 -0.82 12.51 11.48  
VXO (VIX-O) 11.30 -0.98 12.45 11.17  
VXN 17.61 -0.83 18.64 17.52  
Total Volume 4,204M        
Total UpVol 2,921M        
Total DnVol 1,203M        
Total Adv 4583        
Total Dcl 2749        
52wk Highs 301        
52wk Lows 127        
TRIN 0.78        
NAZTRIN 0.70        
PUT/CALL 0.83        

2020 Almost on the Nose

Wednesday's lows have held and the buy programs have returned. What a difference two days can make. Tuesday night it appeared we were on the verge of a major breakdown after a -174 point Dow drop. However, the Dow failed to break 10600 and the Nasdaq rebounded from the 2020 level as we have been expecting. The current move would hardly be described as a rally but the upward creep is gaining strength.

Thursday was a busy day for economics and they continue to paint a mixed picture. Starting off the list was Jobless Claims which jumped +10,000 to 312,000 from last weeks cycle low of 302,000. This is likely just normal volatility in the numbers and possibly just a filing anomaly that offset last weeks lows. The longer term trend is still down and this is a market positive.

Supporting this downward trend in jobless claims was a jump in the Conference Board Help Wanted Index to 41 from 38. This is the highest level of job ads since Jan-2003. Advertising increased in eight of the nine regions with only the Pacific region declining. This surprising strength confirms the drop in jobless claims and bodes well for the non-farm payrolls for February. Of the 51 major markets covered by this index 71% of them are seeing rising advertising volume. The biggest gainers were Denver +26, Tulsa +20 and Indianapolis +12. Ironically Gary, also in Indiana was the biggest loser at -19. The strong gains suggest that the flow of unsolicited resumes has slowed and companies no longer have the option of sifting through the mail for new hires. Having to advertise for positions will increase costs and increase the average wage as the job market becomes less competitive.

Proving the mixed message of the various reports was a contrary employment report also announced today. The Monthly Mass Layoffs rose by +246 events to 1,457 and worker layoffs increased +31,341 to 150,990 for the January period. The manufacturing sector was still the area losing the most jobs with a loss of -108,985 jobs. This data is contrary to the help wanted index and the weekly jobless claims but it may boil down to the reporting period. Companies normally announce layoffs in early January as they try to restructure for the coming year. It is entirely possible the majority of the announced layoffs were early in January and conditions improved as January closed and we moved into February. Recent labor conditions appear to be improving sharply but the proof will be in the non-farm payrolls next Friday.

Durable Goods orders fell unexpectedly by -0.9% in January compared to estimates for a flat to slightly higher number. The same internal component problems we have seen in other reports continue to appear. Back orders decreased and inventories are growing. This continued pattern of slowing commerce is producing concern when we should be looking forward to a period of strong growth. That growth has not yet appeared despite what the Fed is projecting. Computer equipment fell -3.9%, communications -1.8%, aircraft and autos -5.2% with commodities and non-defense capital goods the only gainers.

The Chicago Fed National Activity Index dropped sharply in January to 0.21 from 0.59 in December. This number has been very volatile of late with a low of -0.28 in September and December's high of 0.59. It is tough to draw many conclusions from today's CFNAI as most eyes will be on the ISM next Tuesday. This is the primary indicator for U.S. economic health.

The oil inventories for the week showed a slight gain in crude levels but the price or oil did not crack. An interview with the Saudi Arabian Oil Minister, Ali Al-Naimi, provided support for a weakening price. Al-Naimi, who rarely makes predictions, suggested prices would remain high the rest of 2005. He said current inventory and production levels coupled with rising demand would keep oil prices stable but higher than previous levels. Saudi just embarked on its first major exploration program in over 30 years in an effort to bolster sagging production. I keep repeating this oil crisis message but I still doubt it is getting through. Exxon also said this week that it ended 2004 with lower reserves than a year earlier despite billions spent on exploration and development. If Exxon, a global explorer, can't increase reserves with all their efforts then it should be a warning signal for anyone who cares to listen. The Russian visit by Bush did produce one positive energy event. Putin agreed to allow greater expansion by U.S. companies in Russia. ConocoPhillips (COP) was mentioned specifically by Putin and will benefit from their major investments in Russian assets last year. That assumes of course Putin does not nationalize them once their efforts produce new production.

In stock news today the leading losers were the Internet stocks after RBC Capital Markets threw cold water on the search space. Jordan Rohan cut his price target on GOOG to $200 from $250 and his price target on Yahoo to $34 from $43. Rohan said paid search prices are down by double-digits at Google and -20% at Yahoo. Yahoo receives 40% of its revenue from Overture search placement. He said competition from shopping sites like Shopping.com, Overstock.com, Amazon and Ebay was driving down prices. Ad buyers have plenty of space available on hundreds of prime sites. PWC said on Tuesday that Internet advertising only grew at a +24% pace in Q4 compared to +32% for all of 2004. Rohan expects Google to produce net revenue for Q1 of $686 million, a decent gain of +5% but well below estimates on the street of $731 million. Analysts are split on the future of search with many still recommending strong buys and others shifting to sells. GOOG closed down -$5 at $189 but well off its -$11 lows.

TIVO benefited from speculation that Apple Computer might be ready to go shopping for another cult brand. TIVO bounced from $3.70 to $5.00 over the last two days over speculation that AAPL could snap up TIVO at the bargain price of $350 million. Both companies enjoy a cult following for their products and Apple has the cash to push TIVO to the next level. Once you become a TIVO user you are hooked for life. I have three of them and wonder how I ever managed with just a VCR. It works wonders with being able to instantly back up CNBC when a "what did he just say?" moment arrives.

The homebuilders soared to new highs in the case of Toll Brothers and Pulte Homes after Toll Brothers announced earnings that more than doubled the same period from last year. Toll said strong demand and record backlogs would continue to power results going forward. That killed the bursting bubble theory in the housing sector. Toll beat estimates by +18 cents. Toll said demand for luxury homes continued to exceed supply and it was pushing prices higher. Toll raised guidance for 2005 growth to a +60% growth rate from their prior forecast of a +40% growth rate. TOL jumped +3.21 on the news. Pulte also guided estimates higher but at a less aggressive rate of only +20% annual growth through 2007. PHM said it could reach $13-$14 per share in earnings by 2007 compared to the $7.67 it earned in 2004. The CFO said these estimates could turn out to be conservative and earnings could top even today's estimates despite rising interest rates. PHM rose +6 to a new high at $73.42. I am sure glad I went long TOL in the LEAPS section last Sunday.

Mystery Chart - Weekly


 

Would you buy the stock represented by the chart above? Most of us bring a bias to the market that tends to last much longer than the real fundamental or technical reasons for trading. I removed the name and labels from the chart to force everyone to look at it objectively. If I told you that chart was MMM, EBAY, MCD, TOL, etc, everyone would immediately have a bias based on the sector, history and their prior dealings with the stock. I am personally allergic to FRE after losing a pile of money back in the late 1990s in a series of trades. I am also allergic to MSTR despite its remarkable turnaround due to a similar brush with financial death back in 2000 in an over leveraged MSTR trade. My personal bias has nothing to do with the actual reality of those stocks and their outlook today.

That brings me back to the chart above. After a remarkable recovery out of the depths of the 2002 bear market it rose to just a hair over the 2002 highs and then fell back again. Over all of 2004 it struggled again to rise and in December-2004 it finally managed another very slight break of that Jan-2004 high but again failed almost immediately. This gives us a clear line of overhead resistance as well as clear uptrend support. What it does not give us is a clear reason to buy it as we head into March. Obviously a trader without a bias would want to buy the next dip to uptrend support given the current retreat from the overhead resistance. This ignores things like earnings, interest rates, high oil prices and geopolitical fears. It is pure technical analysis, which assumes all those things are already priced into the stock and the current trend is the result of those internal and external pressures. There is a clear lower high over the last few weeks and we are very close to testing/breaking the January low. I urge you to look at the chart once more before continuing to the next paragraph. Form a long/short/flat opinion about that chart before continuing to the next paragraph. Would you buy it, sell it or watch for a retest of the uptrend support before putting your money on the table?

If everyone has now formed their opinion I will tell you that given a perfect world I would want to buy the next touch of the uptrend line as a path of least risk and maximum reward. Nothing says the support line will hold but it is the place most traders would be willing to make a stand. Which stock is this? If you have not already figured it out from my comments it is not a stock but a chart of the Nasdaq. That uptrend support line is currently around 1950 and at the current pace the price and support should converge around 2000. Given the current environment that would be where I expect buyers to come back into the market just in time for a Q1 earnings bounce led by the Intel mid-quarter update on March 10th. A positive report from Intel would be a green light for Q1 earnings and an all clear for investors to return. Lowered guidance by Intel could break that uptrend support and send us spiraling down into the summer doldrums. Just rebounding off support does not guarantee a breakout given the converging overhead resistance over 2100 but that would be the next problem for the bulls. A break of support either over the next two weeks or after April earnings would be very disheartening.

Nasdaq Chart - Weekly


 

Now that we have looked at the markets objectively from a purely technical basis and I am grinning as I type, we can look at the rebound off this weeks lows from a more objective basis. First, I was glad to see the Nasdaq rebound from its dip to 2020 just as I expected, actually 2023 but that was close enough for me. Had you taken my suggestion over the last two weeks to short 2090, take profits at 2025 and buy a bounce from 2020 you would have had the nearly perfect trade. Now we are faced with what to do next. The Nasdaq found favor with several large institutional buyers today and buy programs generated most of the upward motion. This was not retail traffic but institutional short covering from an oversold dip of nearly -80 points. We are right back at 2050 and in the middle of the congestion zone from 2020-2100. The main benefactor for the Nasdaq was the SOX and it is nearing strong resistance at 440 once again. In fact all the indexes, Dow, S&P, Russell and SOX are still below significant resistance levels from last week.

In short it will be harder to move higher from here than move lower but not impossible. For retail traders the question still remains, why buy? We have moved away from support but remain under resistance and in the congestion zone we have seen all year. Despite several strong days in both directions the S&P closed within .6 of where it closed last Thursday and the Dow within 5 points of its close. This is the second consecutive Thursday that the Dow closed within 5 points of its prior Thursday level. In English we are stuck in a range and there is still no direction. It is a trading market not a market for investors. For traders the roadmap is clear. Buy support between 2000-2020 and sell resistance from 2090-2110. I am using the Nasdaq for guidance because it remains the weakest link.

According to TrimTabs things could get better soon. $2.2 billion flowed into equity funds in the week ended yesterday and that +$2B level seems to be a floor for inflows in February. Investors sitting on cash in their retirement accounts should be getting antsy with that money earning a less than satisfactory rate of interest while they wait for a sign. Eventually they will get bored of watching and buy something if it appears we are not going lower. A bounce from that uptrend support at Nasdaq 2000 might be just what the doctor ordered.

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
NoneNone

Play Updates

Updates On Latest Picks

Long Play Updates

Dow Chemical - DOW - close: 55.40 change: +1.05 stop: 51.95

Shares of DOW continue to soar and the stock has closed above what could have been round-number, psychological resistance at the $55.00 mark. Our target is the $56.00 region and we're planning to exit in the $55.90-56.00 range. The big volume on today's move is very bullish but we would suggest that conservative traders consider exiting now or anywhere over the $55 level as the stock is starting to look a bit short-term over extended.


 

Picked on February 11 at $52.01
Gain since picked: + 3.39
Earnings Date 01/27/05 (confirmed)
Average Daily Volume: 3.5 million

Short Play Updates

None Today

Closed Plays

None Today

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

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