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Daily Newsletter, Thursday, 03/31/2005

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Table of Contents

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

Market Wrap

The Numbers

In a very uneventful and sideways trading day, the Dow lost -37.17 points closing at 10503.76. The SPX lost -0.82 to close at 1180.59. The Nasdaq composite lost -6.44 to close at 1999.23 and the Nasdaq 100 lost -9.21 to close at 1482.53. On the NYSE 1.6 billion shares traded, 1,977 stocks rose and 1,373 fell. On the Nasdaq Stock Market 1.6 billion shares traded, 1,365 stocks advanced and 1,714 declined.

All in all it was an uneventful and sideways day. Well at least for the equities. The bonds on the other hand had a very eventful and volatile day.

The 8:30 personal income report showing inflation is well under control shot Treasury prices higher this morning. As a matter of fact at 8:30 the 10-year was trading at 108 51/64 and within 3 minutes they were 109 13/64ths. The 30-year was trading at 110 20/32 and by 8:33 they were 111 11/32. Those are huge moves in the bonds.

The 10-year Treasury note closed at 109 19/64 up 35/64ths. The 30-year bond was up 25/32 to close at 111 15/32.

Today's news

Terri Schiavo died at the Pinellas Park hospice where she had been connected to a feeding tube for 15 years. The battle between her husband and her parents over her fate is the nation's longest, most bitter right-to-die dispute. She died 13 days after the feeding tube was removed. She was 41.

Although many think a death by starvation and/or thirst would be a horrible way to die, it really is not. Without brain waves you feel nothing so it is the most natural and humane way to go for those in a permanent vegetative state.

For the first time American International Group (AIG) has acknowledged the existence of serious accounting "errors" behind the seemingly rock solid financial giant.

The accounting errors have to do with the offshore businesses AIG controls, but the focus of the investigation deals with a transaction with Berkshire Hathaway unit General Re. AIG has admitted the transaction included no transfer of risk, so that the money it received should have been booked as deposits rather than income that inflated AIG's reserves. This does not look good for ousted AIG leader Maurice "Hank" Greenberg, whose legal liability "would rest on what he understood about the transfer of risk in the General Re deal and whether he believed the transaction to be questionable."

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Standard & Poor's cut Morgan Stanley credit outlook from positive to stable because of its continuing battle between Chief Executive Philip Purcell and a growing number of unhappy Morgan veterans. Leaders of the revolt against Mr. Purcell hope to persuade directors to replace him.

US Air is looking to find an investor to inoculate the company with $100 million so it can finalize its exit financing and emerge from bankruptcy protection. Finding an investor in an environment of rising fuel prices, operational problems, low employee morale and rising customer complaints is proving to be quite hard, so US Air is finding.

A presidential commission, headed by Judge Laurence Silberman, a Republican, and former Democratic Sen. Charles Robb of Virginia found U.S. intelligence about Iraq's weapons capability was "dead wrong" and that the intelligence community knows "disturbingly little" about the capabilities of North Korea, Iran and other potential enemies.

Research done by Goldman Sachs energy analysts stated that we could head into a period similar to the 1970's when supply disruptions led to a huge rise in oil prices and plunged the U.S. into a crippling recession. The 1970's high oil prices put a gash into oil demand, which eventually led to over-investment in production, which in turn ushered in a period of over supply that kept oil prices below average. This is just your basic supply and demand from Economics 101. Fast forward to the year 2005 and the Goldman Sachs energy analysts are saying we may need another upward correction to create another supply cushion. Unfortunately this may also take oil prices a lot higher than they are now, and a lot higher than in the 1970s and early 1980s, because the U.S. economy is less dependent on oil now.

Economic Reports

At 8:30 we saw the weekly release of the Jobless Claims, first-time claims for unemployment benefits, put out by the Department of Labor for the week ending March 26, 2005. This report showed claims rose last week by 20,000 to 350,000, well above the consensus expectation and an 11-week high. Economists say we are at a pivotal point between expansion and contraction in the job market.

The 8:30 Commerce Department's monthly Personal Income for February showed U.S. incomes and spending rose but not quite as high as expectations. February personal income was up 0.3%, slightly below forecasts of 0.4%, while personal spending was up 0.5%, in line with expectations. The small 0.2% gain in the price index for personal consumption expenditures excluding food and energy showed that inflation pressures remain at bay. The preferred inflation barometer of Federal Reserve policy makers, the year over year reading, rose 1.6%.

The Fed suggested earlier this month that it was watching for any signs of a surge in prices, and that it would act aggressively to raise interest rates should this come to pass. The Fed is expected to continue to raise the Fed Funds rate this year, but reports like this will keep them doing so at a relatively leisurely pace.

At 10:00 the Chicago PMI gave a surprise to the upside. In March, the business barometer jumped to 69.2, a huge increase over February's 62.7. The stronger figure was due to a surge in production and new orders, while both prices paid and delivery backlogs eased. The employment gauge jumped to its best reading since 1983. An excellent report.

The 10:00 Bureau of the Census' Factory Orders for February reported factory orders increased 0.2% in February after been flat in January, and that orders for long-lasting manufactured goods rose 0.5%, an upward revision from an earlier estimate of an 0.3% advance. Non-defense capital goods orders excluding aircraft, a proxy for business demand, slipped 1.7%.

The Conference Board Help Wanted Index was also released at 10:00. The index, a gauge of labor demand, collected from the help-wanted sections of several U.S. newspapers, held steady in February, but at a level many economists consider high.

Charts

The last time I did a Market Wrap I posted support and resistance Point and Figure charts. I would like to do an update on those charts and try to see if we can tie them into bar charts.

Daily Bar and Point and Figure Chart of SPX

The Point and Figure chart of the SPX has not changed much. It will need to trade to 1160 or below to make another O in the last column and so far the yearly lows have been 1163. If SPX does trade down to 1160 it would give a P&F sell signal but not a very strong one because this market is still above its blue support line and a red resistance line has not yet begun to form. This is still our strongest market. That is the good news.

The bad news is that if SPX were to trade to 1160 and give what I consider a weak P&F sell signal, it would translate to a nasty break of a double bottom on the bar chart. Then add the fact that the double bottom was met with a lower low on the MACD and you can see that the sell signal on the P&F chart becomes a little more ominous. I expect this market to make a 50% retracement from the March high to low, which would be a return to about 1200 and would build a column of Xs. However, I expect the next drop will break the P&F blue support line and the Bar chart's double bottom.

Daily bar and Point and Figure Chart of the DOW

The DOW has added a few Os to the last column but not enough to break the blue support line. This chart gave a sell signal back at 10600 so it is weaker than the SPX, which has not yet given a sell signal. This is once again the good news.

The bad news is this chart. See how predictive the MACD negative divergence in February was (Red lines)? Now look a the MACD divergence this market is currently building (green lines). I expect the DOW to also bounce approximately 50% of the move from March highs to March lows, which would take it to about 10700 and then reverse and take out the March lows. This would put the P&F chart back into a column of Xs, build a red resistance line and then the next column of Os will break the blue support line.

Daily bar and Point and Figure chart of COMPQ

As I stated in my last Market Wrap this is a bearish chart, the red resistance line as started to form and the blue support line has been broken. It has even had its required bounce and made a small column of Xs setting up a picture perfect short entry below 1970.

On the Bar chart, the Nasdaq Composite broke a wedge to the downside (bottom green line). Technical analysis says that this market should return to this line to test it as resistance, a revisit to about 2035, which just happens to be a 50% retracement of the March highs to lows. However, one should take note of the positive MACD divergence from the January lows to March lows (red lines). This is telling me the bounce back to the 50% level I have been talking about so far will most likely be lead by the techs.

Daily bar and Point and Figure Chart of the NDX

This chart hasn't changed too much from the last one I showed you except for the column of Xs that it has started to build fortifying my thought any bounce will be lead by the techs.

Notice how much the NDX bar chart looks like the COMPQ bar chart but when you look at the P&F charts you see a different picture. The P&F charts shows a much more bearish chart of NDX than it does of the COMPQ

Tomorrows Economic Releases

Tomorrow starts off with a bang with the 8:30 release of the Employment Situation. Last month we saw payroll employment increase to 262,000, which was an upward surprise and the consensus for March is a substantial drop to 225,000.

Then at 9:45 we have the release of the University of Michigan Consumer Sentiment Survey. For March the index fell slightly to 92.9 from Februarys 94.1 and the consensus for April is 92.8 down slightly from March's number.

Then the fireworks start again with the 10:00 release of the ISM Index. Last month the index saw most of the component indices decline and the index itself fall more than a full point to 55.3. Consensus for March is down again to 55. This release is important because the Ism is good leading indicator of overall economic activity.

Also at 10:00 is Construction spending. In January construction spending increased to 0.7%, slightly edging out the consensus forecast. The consensus for February is up slightly to 0.8%

At around 2:00 or so we will get the Semiconductor Billings

After hours

Pope John Paul II has been given the last rites of the Roman Catholic Church as his health deteriorates, a Vatican source tells CNN.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
TLB None

New Long Plays

Talbots - TLB - close: 31.98 chg: +0.42 stop: 30.49

Company Description:
Talbots is a leading national specialty retailer and cataloger of women's, children's and men's classic apparel, shoes and accessories. The Company currently operates 1,051 stores throughout the U.S., Canada and the United Kingdom. Its catalog operation circulated approximately 46 million catalogs worldwide in fiscal 2004. (source: company press release)

Why We Like It:
The RLX retail index may not look so hot thanks to a breakdown in retail titan Wal-Mart (WMT) but that's not stopping shares of TLB. TLB broke through major resistance at the $30.00 level and its 200-dma in early March. Since then the stock has consolidated backwards but found new support near the $31 level. If you look at its daily chart you can see how TLB is climbing in a channel-like pattern (see chart below). Currently the stock is beginning to bounce off the bottom of this rising channel, which offers traders a great bullish entry point. There is resistance near $34 but we suspect that TLB will be able to trade higher thanks to the current bullish pattern. Our target is the $35.50-36.00 range. Our time frame is about six weeks.

Picked on March 31 at $31.98
Change since picked: + 0.00
Earnings Date 05/18/05 (unconfirmed)
Average Daily Volume: 408 thousand
 

New Short Plays

None

Play Updates

Updates On Latest Picks

Long Play Updates

Amer. Egl Outftr - AEOS - cls: 29.55 chg: +0.45 stop: 26.55

AEOS continues to rally and shares are nearing our initial target and resistance at the $30.00 level. Short-term traders may want to consider an early exit and quick profit here or near $30.00. We are going to hang on to the stock and see if shares can breakout.

Picked on March 28 at $28.19
Change since picked: + 1.36
Earnings Date 05/14/05 (unconfirmed)
Average Daily Volume: 1.1 million

---

Cox Radio - CXR - close: 16.81 chg: -0.02 stop: 16.45

No change from previous update.

Picked on March 01 at $16.53
Change since picked: + 0.28
Earnings Date 02/23/05 (confirmed)
Average Daily Volume: 334 thousand

---

Fresh Del Monte - FDP - close: 30.52 chg: +0.14 stop: 29.89

No change from previous update.

Picked on March 22 at $30.82
Change since picked: - 0.30
Earnings Date 02/15/05 (confirmed)
Average Daily Volume: 201 thousand

---

Syneron Medical - ELOS - close: 31.86 chg: +0.78 stop: 29.99

ELOS is bouncing and its RSI oscillator is turning somewhat bullish again. We suggested new entries on a bounce back over $32.00 or $32.50 and shares did trade over $32.00 today. Unfortunately there was not much volume behind today's 2.5 percent rally, which should tell traders to be skeptical.

Picked on March 21 at $33.65
Change since picked: - 1.79
Earnings Date 05/09/05 (unconfirmed)
Average Daily Volume: 329 thousand

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Innovative Solutions. - ISSC - cls: 31.75 chg: -0.82 stop: 29.25

ISSC's strength is fading and we're almost back to where we started. It is possible that ISSC could pull back to $31.00 or even $30.00 before bouncing again. We would be hesitant to consider new bullish plays at this time. The best-case scenario is that ISSC is producing a short-term bull-flag pattern. If this is true then we'd wait for a breakout from the flag before going long again.

Picked on March 22 at $31.50
Change since picked: + 0.25
Earnings Date 01/19/05 (confirmed)
Average Daily Volume: 193 thousand

---

Technical Olympic - TOA - cls: 30.20 chg: +0.77 stop: 28.95

Good news! TOA bounced from technical support at the 40-dma to add 2.6 percent and push the stock back above the $30.00 mark. This looks like a new bullish entry point but keep a wary eye on the DJUSHB home construction index. Tomorrow TOA should begin trading split-adjusted for its 5-for-4 stock split. That should put the stock just over $24.00. Our entry point will be adjusted to $24.36. We're going to adjust our target to $25.50-26.50.

Picked on March 22 at $30.45
Change since picked: - 0.25
Earnings Date 02/16/05 (confirmed)
Average Daily Volume: 135 thousand
 

Short Play Updates

Anheuser Busch - BUD - close: 47.39 chg: -0.11 stop: 49.01

No change from previous update.

Picked on February 7 at $48.32
Gain since picked: - 0.93
Earnings Date 02/02/05 (confirmed)
Average Daily Volume: 2.4 million

---

Countrywide Fncl - CFC - close: 32.46 chg: -0.01 stop: 34.05

No change from previous update.

Picked on March 09 at $33.36
Change since picked: - 0.80
Earnings Date 02/02/05 (confirmed)
Average Daily Volume: 3.8 million

---

Flextronics - FLEX - close: 12.04 chg: -0.21 stop: 12.55

FLEX loses 1.7 percent to under perform the SOX index on Thursday. The stock is poised right at $12.00 support and could be ready to breakdown tomorrow. We are suggesting new bearish positions when shares break $12.00. Our target is the $10.00-10.25 range. We will close the play before its April earnings report.

Picked on March 16 at $11.95
Change since picked: + 0.09
Earnings Date 04/28/05 (confirmed)
Average Daily Volume: 5.5 million

---

Symyx Tech. - SMMX - close: 22.05 chg: -0.31 stop: 24.51

No change from previous update.

Picked on March 21 at $23.79
Change since picked: - 1.74
Earnings Date 02/03/05 (confirmed)
Average Daily Volume: 173 thousand

---

United Industrial Crp. - UIC - cls: 29.62 chg: -0.03 stop: 31.51

No change from previous update.

Picked on March 17 at $29.23
Change since picked: + 0.39
Earnings Date 03/16/05 (confirmed)
Average Daily Volume: 181 thousand

---

West Marine - WMAR - close: 21.26 chg: -0.14 stop: 23.11

No change from previous update.

Picked on March 17 at $21.20
Change since picked: + 0.06
Earnings Date 03/03/05 (confirmed)
Average Daily Volume: 155 thousand
 

Closed Long Plays

Nabi Biopharma - NABI - close: 12.48 chg: +0.13 stop: 13.11

We are choosing an early exit in NABI. The stock is still in a downtrend and remains under its trendline of resistance dating back to the December peak. We don't like the relative strength in its current consolidation. Readers may want to keep an eye on it and watch for a drop under $11.75 as a new bearish entry point. Or even consider bullish positions if shares breakout over $13.25.

Picked on March 06 at $11.80
Change since picked: + 0.68
Earnings Date 02/15/05 (confirmed)
Average Daily Volume: 436 thousand

---

Companhia Vale - RIO - close: 31.61 chg: +0.77 stop: 32.01

We expected a bounce and outlined where RIO could bounce to in our original play description. We even suggested potential entry points on a failed rally. Today's pop over the $32.00 level and its 50-dma looks like we put our stop loss too close. Of course we could blame Goldman Sachs and their $100 oil forecast this morning but we won't. We are stopped out at $32.25, which is where RIO opened at this morning.

Picked on March 29 at $29.61
Change since picked: + 2.00
Earnings Date 05/11/05 (unconfirmed)
Average Daily Volume: 2.8 million
 

Closed Short Plays

None

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

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