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Daily Newsletter, Wednesday, 03/30/2005

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Table of Contents

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

Market Wrap

Techs Rule

Techs Rule

Bulls were inspired today by falling oil prices, oversold conditions where price stopped on strong support, particularly for the Nasdaq, and they liked the encouraging economic data. The Dow (+1.3%) saw 29 of its 30 components in the green today and it recorded its first triple-digit gain in nearly a month while the Nasdaq (+1.6%) closed above the psychological 2000 mark for the first time in more than a week. In so doing it also broke its downtrend line from its March 7th high. Falling crude oil prices ($53.95/bbl, -$0.25, May contract), resulting from strong inventories data, eased some inflationary concerns ahead of tomorrow's February Personal Income and Spending report and Friday's March employment report. Crude oil inventories rose 5.4 mln barrels (consensus was +2.5 mln) and distillates fell only 1.1 mln barrels (consensus was for -1.5 mln), which offset a larger than expected decline in gasoline inventories (-2.9 mln barrels vs consensus of -1.8 mln). That drop in gasoline inventories is worrisomewe could see much higher prices in gasoline as the summer driving season approaches. Stand by for a Consumer Sentiment drop if gas prices keep heading higher. And the auto companies will not have an easy time selling their gas-guzzling SUVs and trucks. And with more money going to fill their vehicles, there will be less discretionary spending for all the other things in life. That will have an impact on the bottom line of a lot of non-oil related companies. But thats in the future (next month). Today was bullish.

With the increase in inventories, a lot of players who were long the oil market decided to take some profits but then at the end of the day they decided to buy their positions back. From yesterdays closing price of $54.20 (May contract), oil had dropped 3.3% to $52.40 at its lowest level today which was 9% off its most recent high of $58.20/bbl two weeks ago. It then spiked back up to close at $53.95 at the end of the day, down only $0.25 for the day. The GDP number, which came in at an unchanged 3.8% from last month, was below the higher expectations of 4.0%. But it suggested economic growth was at a pace that was not too strong to warrant more aggressive Fed tightening at the FOMC's next meeting (May 3). Traders were probably just relieved it wasnt worse since they probably planned on doing some buying today anyway. So with the market being oversold following three weeks of declines, which took the Dow and S&P to two-month lows and with the Nasdaq showing weakness not seen since last October, buyers couldnt stand it any longer and wanted to grab what they considered some good deals. The amount of selling in the past 3 weeks also had many shorts anxious to cover and protect profits and that fueled the rally as well today.


The bond market rallied today on lessening concerns about inflation. Yields are currently sitting near the flattest levels since 2001. The significance about this is that a flat yield curve and especially an inverted yield curve where 30-year yields are lower than 10-year, has always lead to past recessions. Add in a potentially aggressive Fed, which has also lead to past recessions and you can see were dancing on the edge of the cliff, potentially. Bond traders have started to talk of the Friday payrolls number, with expectations starting the inevitable creep higher in prices (drop in yields). There are some reports that temporary and recruiting agencies have seen improved hiring, or are expecting to see improved numbers. The question is whether or not their expectations will be met. The help wanted index, which had been falling steadily since late 2000, has seen some recent up-ticks (although this remains a difficult measurement due to the amount of job hunting now done over the Internet).

Tech stocks lead the way today, and in fact telegraphed that yesterday near the close when the Nasdaq got a strong bounce off its uptrend line from October 2002. One stock of particular interest today was Micron Technology (MU), up $0.36 to $10.48 or +3.6%, as strong sales to PC makers helped the chip maker offset weaker average DRAM pricing and beat analysts' Q2 forecasts by $0.03 last night. The better than expected earnings only fueled a pent up demand for tech stocks after the beating theyve been taking. The Philadelphia Semiconductor Index (SOX +2.3%) had been down roughly 5.5% in 2005 before today's surge. In other indices, the Russell 2000 (RUT) was up 1.7% today, erasing only a part of the drubbing small caps have taken this month (-6.9% since the March 7th high). The Nasdaq was up 1.6% getting above the all-important 2000 level. But it too has a ways to go to make up for the -6.4% shellacking it's taken since the March 7th high. The Dow and S&P 500 each lost -5.4% this month and got a 1.3% and 1.4% bounce today. Some of the leading sectors today were Airlines (+5.2%), Internet +3%, Networking +2.4%, Semi +2.3%, Healthcare +2.3%, Software +2.0%, Defense +1.8%, and Broker/Dealer +1.7%. Pulling up the rear, but still in the green, were Oil Service +1.0%, Biotechs +1.0% and the Oil index +1.2%. Not a bad day all around. Notice that the leaders to the upside today have been the ones most pounded recently and have underperformed in 2005--Internet Retail (+3.7%), IT Consulting & Services (+4.9%) and Airlines (+5.2%). These three have been in the Top Ten "worst" performing areas in 2005, falling 35.3%, 31.2% and 13.8%, respectively. Think maybe there were a few shorts in these sectors scrambling to cover today?

Taking a look at some charts for clues, starting with the DOW:

Dow Chart - Daily


The DOW found support between its 200-ema and 200-sma and just above its January low. It was not quite as weak as SPX which did drop to, and slightly below, its January low yesterday. This bounce now needs to hold--if it were to drop again through the 200-sma, the 200-ema and January low would be significantly threatened.

SPX Chart - Daily


The SPX chart shows how price bounced off the January low which also coincided with the uptrend line from March 2003 through the October 2004 low. Its 200-dma is slightly below at 1159 if there is to be one more push lower.

Nasdaq Chart - Daily



The Nasdaq also found support at a very important longer term uptrend line from October 2002, which coincided with the bounce high back in October 2004. This was after breaking below both the 200-ema and 200-sma. The 200-sma at 2013 could act as resistance now. If it does and the uptrend line gets retested I'm not sure it will hold this time. If it breaks, there's a downside Fibonacci projection for this leg down to 1913, or near the October 2004 low.

Oil Chart - May Contract - Daily


All eyes have been on oil for a while now. It could potentially have a serious impact on our economy if it continues to climb. It will rob people of their discretionary income which will have a negative impact on all other businesses. As depicted in the chart, it appears oil has more upside work to do before it's ready for a deeper correction. I expect oil to get a little above $60 before we see a pullback towards $50 after the summer, and then probably ramp back up even higher as we head into the winter.

OIX Chart - Daily


If oil heads higher I suspect the oil stocks will follow it. The oil index has been in a steep parallel up-channel and probably is not finished looking for new highs, just like oil. If price were to break below 450, there's a good chance it will head to the bottom of its longer term up-channel. If this were to happen sooner rather than later, it would likely be giving a heads up that oil price will also correct lower.

U.S. Home Construction Index Chart - DJUSHB - Daily


Looking similar to the oil charts with the steeper parallel up-channel out of the longer term up-channel, the difference here is that price has fallen out of the steeper channel and is back inside the longer up-channel. Even though a drop to the bottom of the longer term up-channel would still maintain the long term uptrend, that would be a steep correction and would likely prompt much hand-wringing about what's going on with the housing market and what it would mean for the broader market. It would likely be coincident with rising bond yields.

In addition to short-covering today there was some genuine buying interest as we head into month and quarter end. New money, or expected new money in April, prompted many fund managers to put some money to work and they've got their collective fingers crossed that they're buying some good deals and hoping they're not going to be disappointed with a continuing decline. Tomorrow and Friday are big days for economic reports and these always make it a little riskier positioning in front of them. Tomorrow we have initial claims (320K est), personal income (0.4% est), personal spending (0.5% est), Chicago PMI (60.5% est), help wanted index (41 est), and factory orders (0.5%). Needless to say we have some potential market movers in there. Highlighting the session will be the PCE Deflator (2.3%), a Greenspan favorite, and will have the markets on alert after the Fed's recent bullish-inflation tone and the recent PPI and CPI releases. After today's strong rally we could see a pullback tomorrow morning, especially if any economic reports are considered bearish. But if we get some positive numbers, that could ignite some additional short-covering. Be careful of the early whipsaws.
 

 
 



New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None None

New Long Plays

None today.
 

New Short Plays

None today.

Play Updates

Updates On Latest Picks

Long Play Updates

Amer. Egl Outftr - AEOS - cls: 29.10 chg: +0.42 stop: 26.55

No change from previous update.

Picked on March 28 at $28.19
Change since picked: + 0.91
Earnings Date 05/14/05 (unconfirmed)
Average Daily Volume: 1.1 million

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Cox Radio - CXR - close: 16.83 chg: +0.18 stop: 16.45

No change from previous update.

Picked on March 01 at $16.53
Change since picked: + 0.30
Earnings Date 02/23/05 (confirmed)
Average Daily Volume: 334 thousand

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Fresh Del Monte - FDP - close: 30.38 chg: +0.20 stop: 29.89

Lack of participation in today's market bounce is somewhat discouraging. Be careful and look for a move back over $31 before considering new longs.

Picked on March 22 at $30.82
Change since picked: - 0.44
Earnings Date 02/15/05 (confirmed)
Average Daily Volume: 201 thousand

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Syneron Medical - ELOS - close: 31.08 chg: +0.13 stop: 29.99

Lack of participation in today's market bounce is somewhat discouraging. Technicals continue to weaken. Look for a bounce back over $32.00 or 32.50 before considering new longs.

Picked on March 21 at $33.65
Change since picked: - 2.57
Earnings Date 05/09/05 (unconfirmed)
Average Daily Volume: 329 thousand

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Innovative Solutions. - ISSC - cls: 32.57 chg: +0.07 stop: 29.25

No change from previous update.

Picked on March 22 at $31.50
Change since picked: + 1.07
Earnings Date 01/19/05 (confirmed)
Average Daily Volume: 193 thousand

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Technical Olympic - TOA - cls: 29.43 chg: +0.02 stop: 28.95

Be careful here. The home construction index did not participate in the market rally and neither did TOA. Look for a move back over $30.00 or $30.50 before considering new bullish positions.

Picked on March 22 at $30.45
Change since picked: - 1.02
Earnings Date 02/16/05 (confirmed)
Average Daily Volume: 135 thousand
 

Short Play Updates

Anheuser Busch - BUD - close: 47.50 chg: +0.24 stop: 49.01

No change from previous update. Bear Stearns downgraded BUD to a "peer perform" today.

Picked on February 7 at $48.32
Gain since picked: - 0.82
Earnings Date 02/02/05 (confirmed)
Average Daily Volume: 2.4 million

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Countrywide Fncl - CFC - close: 32.47 chg: +0.81 stop: 34.05*new*

The banking stocks bounced with the market and CFC produced its own oversold bounce. Watch the $33.00 level for potential resistance. We are lowering our stop loss to $34.05.

Picked on March 09 at $33.36
Change since picked: - 0.79
Earnings Date 02/02/05 (confirmed)
Average Daily Volume: 3.8 million

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Flextronics - FLEX - close: 12.25 chg: +0.09 stop: 12.55

We are encouraged that FLEX did not join the market or the SOX index in today's bounce. However, FLEX's technicals are starting to turn positive and if the market continues to bounce FLEX could easily join it. Double-check your stops. We would not suggest new bearish positions unless FLEX traded under $12.00 again.

Picked on March 16 at $11.95
Change since picked: + 0.30
Earnings Date 04/28/05 (unconfirmed)
Average Daily Volume: 5.5 million

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Nabi Biopharma - NABI - close: 12.35 chg: +0.36 stop: 13.11

If NABI trades over its 50-dma again or the $12.75 mark we may exit early to cut our losses. Double-check your stop loss.

Picked on March 06 at $11.80
Change since picked: + 0.55
Earnings Date 02/15/05 (confirmed)
Average Daily Volume: 436 thousand

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Companhia Vale - RIO - close: 30.84 chg: +1.23 stop: 32.01

No change from previous update.

Picked on March 29 at $29.61
Change since picked: + 1.23
Earnings Date 05/11/05 (unconfirmed)
Average Daily Volume: 2.8 million

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Symyx Tech. - SMMX - close: 22.36 chg: -0.20 stop: 24.51

No change from previous update.

Picked on March 21 at $23.79
Change since picked: - 1.43
Earnings Date 02/03/05 (confirmed)
Average Daily Volume: 173 thousand

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United Industrial Crp. - UIC - cls: 29.65 chg: +0.57 stop: 31.51

UIC erased yesterday's 57-cent loss. Technicals are starting to turn positive. Consider waiting for UIC to trade at $28.70 or lower before considering new bearish positions.

Picked on March 17 at $29.23
Change since picked: + 0.42
Earnings Date 03/16/05 (confirmed)
Average Daily Volume: 181 thousand

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West Marine - WMAR - close: 21.40 chg: +0.30 stop: 23.11

No change from previous update.

Picked on March 17 at $21.20
Change since picked: + 0.20
Earnings Date 03/03/05 (confirmed)
Average Daily Volume: 155 thousand
 

Closed Long Plays

None
 

Closed Short Plays

NY Times - NYT - close: 36.42 chg: +0.41 stop: 37.35

We are choosing an early exit in NYT. Today's follow through on yesterday's high-volume bounce does not look good for the bears. Yes, the long-term trend and intermediate trend are both bearish but NYT is very oversold. Look for the $38.00 level to be the next significant level of resistance.

Picked on February 20 at $37.20
Gain since picked: - 0.78
Earnings Date 01/25/05 (confirmed)
Average Daily Volume: 516 thousand

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ScanSource - SCSC - close: 51.64 chg: +0.06 stop: 55.45

SCSC continued lower through the first half of Wednesday's session and traded below our target at $51.00. Today's low was $50.28 before traders finally stepped in to buy the dip. The stock looks very oversold and we would expect the bounce to continue, at least short-term. We are closing the play at $51.00 as previously discussed.

Picked on March 13 at $ 57.58
Change since picked: - 5.94
Earnings Date 04/28/05 (unconfirmed)
Average Daily Volume = 95 thousand
 

Today's Newsletter Notes: Market Wrap by Keene Little and all other plays and content by the Option Investor staff.

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