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Daily Newsletter, Monday, 03/07/2005

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Table of Contents

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

Market Wrap

Nasdaq Plays Catchup

Nasdaq Plays Catchup

The bullish charge in the Dow and SPX last week mostly missed the Nasdaq, which made up some lost ground today. While the industrials struggled to hold positive, the Nasdaq added .95% for the day. Despite the bullish gains, however, it was a relatively small token and overdue. While the Dow and SPX were tagging new 52 week highs, those highs for the Nasdaq remained 91 points above today's Nasdaq high of 2101.

Volume was light on all the indices despite the QQQQ's high volume surge in the morning. The SPX hit a new 52 week high at 1229 and the Dow at 10984, but it was on light volume and without the breakout "fireworks" on might expect. Breadth was nevertheless positive, with advancing volume beating declining volume by a factor of 1.5:1 on the NYSE and 3.3:1 on the Nasdaq.

Dow Chart - Daily


 

The Dow finished 3.69 points in the red on a closing pullback after peaking at 10984. This left a small gravestone doji for the day, but the light volume and lack of range makes it an imperfect candidate for "The" high. Last week's break above the 10870-10880 level kicked off an upturn in the daily cycle oscillators that will persist so long as last Friday's lows hold. Technicians will note the lower stochastic high against the higher price highs, and the potential bearish divergence that such creates if the indicators turn down from here. Above 10825, the benefit of the doubt goes to the bulls.

Daily S&P 500 Chart


 

The SPX also broke to new highs today at 1229 and was rejected, but it closed in positive territory, +3.19 at 1225.31. The low was set at the open, at 1223. As with the Dow, last week's broken horizontal resistance looks like a rising triangle trendline, with today's action a consolidation at the highs. Provided that 1210 isn't broken from here, the potential oscillator divergence should clean itself up. A close below that level would target last week's lows, however, and a break below 1190 could set up this triangle breakout as a bull trap.

Daily Nasdaq Chart


 

The Nasdaq finally seized the spotlight today, rising 19.6 points to close at 2090.2 after tagging the 2101 high. That level lined up with channel resistance on the daily chart- a channel which resembles an extended bear flag so far. Despite today's gains, the Nasdaq's pattern is completely different from that of SPX and the Dow, and not bullishly so. Nasdaq bulls need to capitalize on the new daily cycle upphase and break north of that 2100 level to invalidate the bearish pattern. Below 2065, the daily cycle uptick should reverse.

Daily TNX Chart


 

The Treasury announced the auctions of 5- and 10-year notes to take place on March 9th and 10th, as well as a 4 week bill announcement to be held tomorrow. These combined auctions total 48B, with the 4-week bill auction the largest at 24B. At 1PM, the 3 month and 6 month t-bill auctions were held, with 38B worth of bills auctioned. Demand was strong, with the 3 month auction generating a bid-to-cover ratio of 2.67 at a yield of 2.71%, while the 6 month auction at 2.935% generated a bid-to-cover of 2.93.



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Ten-year treasury bonds traded both sides of unchanged today, with the ten year note yield (TNX) finishing the day lower by .6 bps at 4.304%. Last week saw some extraordinary upside moves for the TNX, but the shape of the daily cycle oscillators suggests that that upside was the exhaustion spike in the waning daily cycle. A break below 4.28% should be sufficient to confirm a new daily cycle downphase, while a close above 4.4% would kick off an upside trending move from here.

Daily chart of Crude oil


 

The financial press reported a statement made Sunday by John Snow on ABC's "This Week" in which he noted that high energy prices are a drag on the US economy and that, in his opinion, energy prices are "way, way too high." Today, the prices of crude oil fell as low as 52.825 on the Nymex as Reuters reported warmer than usual temperatures and attributed the decline to easing concerns about OPEC's production. OPEC is currently above its27 million BPD limit at approximately 27.63M BPD. The next OPEC meeting is scheduled for March 16 in Iran.

More compelling than John Snow's cogitation or Reuters' speculation is the stochastic sell signal that has been developing in the wake of last Wednesday's doji spike to the 55 level. While the trend on the daily chart remains higher, the indicators in this timeframe are signaling a downphase. The previous downphase was corrective within the broader climb off the 41 level, and rising trendline support is in the vicinity of 48.20. A break below 52 should be sufficient to confirm the downphase.

Despite this, crude oil closed the day higher by dime at 53.875, just off a session high of 53.925.

It was a quiet day for economic data. The US Department of Transportation's Bureau of Transportation Services (BTS) announced that the Transportation Services Index (TSI) fell .2% in December following November's .7% rise. This was the first decline in 3 months, but December's reading nevertheless represents a 5.1% rise from December 2003's levels. The BTS describes the TSI as "a single seasonally adjusted index of the month-to-month changes in the output of services provided by the for-hire transportation industries, including railroad, air, truck, inland waterways, pipeline, and local transit."

Consumer Credit was the big economic news for the day at 3PM, with US December Consumer Credit revised up to a 5% annual rate at 8.7B from the Fed's previously reported 1.8% rate at 3.1B. That rose to a 6.6% annual rate with January's 11.5B gain, blowing away estimates for 5.2B. Total Consumer Credit was reported at a seasonally adjusted $2.12 trillion.

The corporate news ticker was more active. Before the bell, QCOM raised guidance for fiscal Q2 from EPS of 25-27 cents to 26-28 cents while lowering its revenue forecast from 1.35B-1.45B to 1.35B-1.4B. The company upped its estimates of wireless phone chip shipments and CDMA/WCDMA shipments for the December quarter.

Boeing (BA) CEO Harry Stonecipher resigned as a director and officer at the request of the Board of Directors, with CFO James Bell named as interim CEO on the heels of an investigation into a personal relationship between Stonecipher and a female executive. The executive in question did not report directly to him. The Board determined that the facts indicated that Stonecipher's "actions were inconsistent with Boeing's Code of Conduct" and requested his resignation. Following the announcement, Fitch Ratings felt compelled to stipulate that BA's "A+" credit rating and "stable" outlook remain unchanged. The Air Force added that it sees the matter as internal to BA and won't be revisiting its decision to lift its 20-month ban on rocket-launch contracting by BA.

For the day, BA lost .14% to close at 58.30 on lighter-than-average volume of 6.139M shares.

Another shakeup saw SNE Chairman and CEO Nobuyuki Idei step down in the wake of a difficult 5-years at Sony, to be replaced by the British-born Howard Stringer. Stringer will be the first foreign ever to lead SNE since its inception in 1946. Also handing over the reigns is President Kunitake Ando, who will be replaced by Ryoji Chubachi. SNE rose 2% to close at 39.31 on nearly 5x the average daily volume.

Citing increases in sales from its joint venture with SNE for Spiderman movie merchandising, Marvel Enterprises (MVL) beat estimates for Q4 earnings by 11 cents. The company reported earnings of 30.1M or 27 cents per share, up from 13.49M or 12 cents and blowing away estimates for 16 cents EPS. MVL reiterated its estimate for 2005 EPS between $1.07-$1.12, and places sales $370M and $390M. The company expects Q1 earnings of 25-29 cents compared with 27 cents in Q1 2004, but expects revenue to fall from 122M in Q1 2004 to 88M-99M. MVL did not comment as to its rationale for the projected drop. MVL lost 2.44% to close at 18.

Capital One (COF) announced its agreement to purchase retail banker HIB for a 24% premium to Friday's closing price in a deal worth 5.3B. As a result of the acquisition, COF expects its 2006 operating earnings to decline 1% to $7.64 per share, but told analysts that the deal should boost earnings in 2007 to $8.86. Fitch Ratings responded by placing COF's senior debt and preferred shares on ratings watch positive, and affirmed its short term debt ratings. HIB rose 21.34% to close at 32.24 on volume of 19M shares (compared with its ADV of 776,500 shares), while COF lost 2.66% to close at 76.

After the bell, TXN gave its midquarter update and slammed the QQQQ below 38 support. The company expects total revenue to come in at $2.91B-3.03B compared with prior guidance of $2.90B-3.14B. The company expects earnings per share between 22 cents and 24 cents, compared with its prior estimate of $.22-$.26.

There are no major economic reports scheduled for tomorrow, and Wednesday's slate is quiet as well with the Fed Beige Book due at 2PM. The earnings calendar is also quiet for tomorrow, and other than the Treasury auctions, the markets will be on their own. On the one hand, last week's breakouts in the Dow and SPX were blessed by the Nasdaq today, but the light volume and persistence of resistance remain troublesome, as does the afterhours selling in QQQQ following the TXN update.

Still, the daily cycles on all 3 indices have executed a "Crazy-Ivan," now on young buy signals, and unless bulls completely drop the ball here marked by a failure of Friday's lows, those daily cycles will continue to point higher. Provided that the Friday lows are not revisited, these new signals need to strengthen- even a sideways consolidation in today's range would do it for the bulls.

 
 



New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None None

Play Updates

Updates On Latest Picks

Long Play Updates

CB Richard Ellis - CBG - cls: 36.90 chg: -0.10 stop: 35.39

We didn't have to wait very long for CBG to breakout over the $37.00 level. The stock quickly hit our entry point at $37.11 this morning. Actually, the stock gapped open ABOVE our entry point to $37.15 so we have to adjust our entry to this morning's open. While it's unfortunate that CBG didn't maintain its midday gains the trend remains intact.


 

Picked on March 07 at $37.15
Change since picked: - 0.21
Earnings Date 02/02/05 (confirmed)
Average Daily Volume: 466 thousand

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Catellus Dev. REIT - CDX - close: 28.79 chg: +0.34 stop: 27.15

Our new play in CDX also quickly hit our trigger to go long at $28.76. We are suggesting bullish positions here and out target is $30.50-31.00.


 

Picked on March 07 at $28.76
Change since picked: + 0.03
Earnings Date 02/25/05 (confirmed)
Average Daily Volume: 397 thousand

Short Play Updates

None today

Closed Long PLays

Agilysys - AGYS - close: 19.95 chg: +0.12 stop: 18.49

Target achieved. This morning AGYS experienced enough strength to trade over the $20.00 level but then faded into the early afternoon. Then surprisingly the stock shot up again late in the afternoon and hit a new higher high at $20.08 on rising volume. We're going to close the play out at the bottom edge of our target at $20.00 but more aggressive players might want to consider tightening their stops and letting the stock keep running.


 

Picked on February 16 at $18.39
Change since picked: + 1.56
Earnings Date 02/09/05 (confirmed)
Average Daily Volume: 197 thousand

Closed Short Plays

Cisco Systems - CSCO - close: 18.24 chg: +0.20 stop: 18.26

The rebound continues for CSCO and the stock has broken out above technical resistance at its 50-dma but not above price resistance at $18.50. Today's spike higher was boosted by a Barron's article suggesting that CSCO could almost be considered a "value" play in the technology sector. Our stop loss was $18.26 but CSCO opened at $18.28 immediately closing our play.


 

Picked on February 20 at $17.30
Gain since picked: + 0.94
Earnings Date 01/27/05 (confirmed)
Average Daily Volume: 61.1 million

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IAC/InterActiveCorp - IACI - close: 23.31 chg: +1.03 stop: 24.51

Reversal alert! We are cutting our losses here in IACI. The stock has not yet broken through resistance at the $24.00 level nor has the NASDAQ broken through resistance at the 2100 level. However, if the NASDAQ does decide to catch up to the Industrials and S&P 500 then IACI could become a target for tech investors looking to do some bargain shopping. We'll exit here.


 

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

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