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Daily Newsletter, Tuesday, 04/05/2005

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Table of Contents

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

Market Wrap

Oil Support Finally Cracking\?

04-05-2005

High

Low

Volume

Adv/Dcl

DJIA

10458.46

+ 37.30

10476.49

10419.44

1.86 bln

1823/1380

NASDAQ

1999.32

+   8.30

2002.35

1991.88

1.70 bln

1596/1442

S&P 100

562.11

+   2.62

563.07

559.49

Totals

3419/2822

S&P 500

1181.39

+   5.27

1183.56

1176.12

 

 

SOX

409.91

+   0.50

413.96

408.09

 

 

RUS 2000

614.50

+   0.74

616.40

613.11

 

 

DJ TRANS

3721.18

+ 13.40

3731.23

3707.25

 

 

VIX

13.68

-    0.43

14.11

13.66

 

 

VXO (VIX-O)

13.29

-    0.20

13.55

13.16

 

 

VXN

17.67

-    0.40

18.22

17.59

 

 
Total Volume

3,760M

 

 

 

 

 

Total UpVol

2,145M

 

 

 

 

 

Total DnVol

1,523M

 

 

 

 

 

Total Adv

3706

 

 

 

 

 

Total Dcl

3114

 

 

 

 

 

52wk Highs

145

 

 

 

 

 

52wk Lows

195

 

 

 

 

 

TRIN

0.88

 

 

 

 

 

NAZTRIN

0.91

 

 

 

 

 

PUT/CALL

0.66

 

 

 

 

 

Oil Support Finally Cracking?

It is far too soon to tell if we are going to get the normal Q2 price drop but signs are starting to appear suggesting price support is weakening. Wednesday's inventory numbers could be the push needed to produce a real downtrend. Lower crude prices today gave some relief to equities but the excitement was still lacking. A late cycle flurry of earnings warnings helped dampen excitement but good news from Pfizer helped keep the Dow in positive territory.

Dow Chart - Daily


Nasdaq Chart - Daily


The only economic report this morning was the Challenger Layoff report and it showed a drop in layoffs to 86,396 in March compared to 108,390 in February. This drop in layoffs completed the quarter where -287,134 workers lost their jobs. Despite the drop in March the rate for the quarter was +9.2% higher than the same period in 2004. Plant closings took the lead in reasons for the layoffs at 29%. February's main reason for layoffs was mergers and acquisitions at 43%. That number fell to 14% in March but with the recent surge in mergers it is likely only a temporary drop.

There are no material economic reports on Wednesday but the oil and gas inventories will be closely watch by stock traders. Oil fell back from its highs just over $58 on Monday to close at $56. This -$2 drop is still well above last week's low at $52.40 and the oil inventories could provide the added push to get a real drop started. Greenspan took to the airwaves today to discuss oil prices and his comments helped cool the buying urge. Greenspan noted that futures prices for the fall months were higher than current spot prices and that trend could not continue. He suggested that higher futures prices would prompt more production and eventually dampen current prices from excess inventory. He called the current ramp in prices a "frenzy" and indicates he may not be fully aware of the acceleration of the long term technicals. I never cease to be amazed at the comments from so called analysts and people in authority suggesting this is just a bubble and prices will return to normal eventually. This represents a complete lack of real research on their part because the numbers are there for anyone willing to spend 15 min to look for them. However on Greenspan's part I believe he is trying to avoid a panic by slowly turning up the heat as time passes. He did mention several key points but the message was downplayed to avoid crying wolf too soon. Greenspan is a gradualist and has been all his political life. Give the public the bad news one tidbit at a time until the entire mosaic completes the picture. I believe those who were paying attention got a couple more energy tidbits from him today. Full text at this link: http://www.federalreserve.gov/boarddocs/speeches/2005/20050405/default.htm


Regardless, Greenspan's comments did manage to take the excitement out of the crude market but there was definitely no selling surge. Nobody wants to be short oil and there are plenty of buyers waiting for every dip. Greenspan said that higher prices were already leading to a reduction in demand as consumers put off driving and turned down their thermostats to conserve money. He pointed out that the lack of new discoveries in natural gas had led to all time highs in prices that had all but priced the industrial consumer out of the market. Consumption of natural gas by industrial users has dropped -12% since 1998 as prices increased. This is good for U.S. consumers since gas fired electrical plants have been increasing in number and rate of consumption and all new gas production is being burned faster than it can be discovered. The peak gas scenario is now expected to be in 2007-2008 where supplies of natural gas will begin to decline rather than increase. This will produce monster spikes in utility bills as the gas-fired plants compete for dwindling supplies.

Greenspan suggested that the long-term outlook for oil and gas was conjectural at best. "Should prices continue to increase the use of energy would decline over time." The 200 million light vehicles in the U.S. consume 11% of total global oil production. $5 gas would definitely slow that consumption but not by 50% or even 25%. New drivers from adolescents to emigrants will continue to swell that overall demand for gasoline in the U.S. Greenspan also pointed out what I have been saying for the last year. Current proven reserves are congregated in geographic areas where substantial capital would be required to build the production infrastructure but where that capital investment is prohibited or restricted. Russia leads that list where proven oil reserves exist but little attempt is being made to produce them due to the political climate. Eventually they will come to market but not in this decade. By the time that oil begins to flow it will only replace oil supplies that are already shrinking.

Greenspan said advances in production technology were helping to extend recovery amounts despite "ever-fewer new discoveries of major oil fields." There you have it from the Fed head himself. "Ever fewer discoveries of major fields." There have been no major discoveries since the 1970s and there will not be any in the years ahead. All the big deposits have already been discovered. There are no oceans of oil that have escaped detection. This is what will continue to drive prices higher for the rest of our lives. Oil futures for September hit $60 on Monday and I believe that contract will hit $70 before it expires. September crude closed today at $58.30. This is a sure sign that refiners are already concerned about adequate supplies once the ramp up into the heating oil season begins.

Crude Chart - Daily


While the Greenspan comments on energy were the highlight of the day for the markets there was other news. Pfizer told analysts that although there were many struggles underway they would return to double-digit profitability in 2006 and accelerate after that. Pfizer warned that current earnings would fall short of analyst's estimates but they were taking steps to solve the problems. They plan on cutting up to $4 billion a year in costs by 2008. They also said they were going to accelerate their $5 billion share buyback program with 50% of it going into Q2. That alone should provide significant upside for Pfizer. PFE jumped +1 on the news but failed to break resistance at $27. I believe PFE is no longer a caution and may have turned into a long-term buy but problems still exist. Pfizer has dozens of drugs going off patent over the next couple of years and those drugs will have to be replaced.

Tech stocks managed a +8 point rebound on the Nasdaq but they were hindered by a flurry of earnings warnings by software stocks. More than a dozen software stocks warned that quarterly results would disappoint and customers were not focusing on capital spending. SBYN, BVEW and VNWK said orders failed to appear because customers were too preoccupied with accounting issues to upgrade software. That sounds a lot like the dog ate my homework to me. I have a hard time making that connection but that was the excuse they used and blaming it on Sarbanes Oxley. Mentor Graphics (MENT), Altiris (ATRS) and RSA security (RSAS) said a general slowdown in sales was to blame for their warnings. Siebel Systems warned after the close that lower license revenue would result in a loss for the quarter. Analysts were tripping all over themselves to downgrade individual stocks and the sector and reiterated that this was historically the slowest quarter for the industry. Several companies failed to give future guidance saying future visibility was very bad. You can translate that into "we don't have any orders and we don't see any in the pipeline."

Analysts were quick to remind investors that the software sector can be a leading indicator for the overall health of techs. Weak economics and higher rates tend to depress software acquisitions more than other investments. Software is somewhat of a luxury purchase for those with existing systems in place. It typically produces higher productivity for the acquiring company but the expense is down on the priority list for tight budgets. Typically the "if it is not broken, don't fix it" rule applies. It is an easy budget item to strike if companies are unsure about the future. The flurry of warnings today would be more alarming if it were not a typically weak quarter. This bears watching as the earnings parade continues.

RIMM announced earnings after the close and promptly lost -$5 in after hours. The company said the cost of settling the patent lawsuit with NTP pushed them into a loss for the quarter. Without the charge RIMM earned +71 cents and well over the +65 cents analysts expected. The lawsuit charge was not the real problem. Revenue appeared to be slightly less than expected and guidance for the current quarter and the next quarter was below analyst estimates. Subscribers were up strongly to 2.51 million from only 1.07 million the same time last year. The company said it would surpass 3 million this quarter and they planned to launch BlackBerry with an additional 100 carriers this year alone. Personally I would love to see a drop back to $60-65 for a long entry. With the suit behind them and sales poised to explode I think the sky is the limit once again. I also heard an analyst talking about a potential RIMM takeover. They are growing very fast and in the right space for a big telecom company to decide they would be a nice snack and gobble them up.

The Dow rebounded at the open from its Monday low for the year at 10356 but plateaued at 10470 and below the resistance at 10525 that has held for the last two weeks. While the Pfizer/Oil news allowed the markets to recover some lost ground it was a minor victory. There is still strong overhead resistance and investor sentiment has yet to really improve. The Dow has a tough road ahead between today's close and a breakout over 10600 and it would take a lot of faith to go long at this level. The Monday dip pierced the 200-day average at 10378 but the afternoon bounce saved the day. The 200-day average is more critical for the Nasdaq than the Dow but it is still a technical level traders would rather not see the Dow break.

The Nasdaq continues to trade across its 200-day average at 1992 on an intraday basis as it has for the last two weeks. It refuses to release its grip to the downside but also refuses to move back over the 2000 level for more than brief spurts. Like the Dow, the Nasdaq has tough resistance from 2000-2020 and it appears to be marking time until the earnings parade begins. We have seen two strong sell offs to 1975 and both were quickly bought. I do mean quickly! Both sparked strong buy programs for a +20 point rebound but the second dip spent most of the day at 1975 before the buy program appeared. It was as though the program traders wanted to make sure 1975 was going to hold before pulling the trigger.

The SOX is still supporting the Nasdaq with its hold on 410 support but it is starting to look very heavy. We are in that neutral zone between warnings and earnings and the Sox appears to be cringing in fear of a potential problem ahead. With the book-to-bill at .78 for the last two months investors had hoped a bottom was forming for chip demand. The software warnings plus several recent downgrades on the chip sector are starting to take their toll. Positive news had better appear quickly or the SOX could be headed for a test of 400. This would not be a disaster for the Nasdaq as 400 has long been acknowledged as real support but it would be just one more weight for tech stocks to carry.

SOX Chart - Daily


SPX Chart - 30 min


Since last Tuesday's test of critical support at 1165 the S&P has traded in a narrow range between 1170-1185. There appears to be no interest in moving higher but buyers appear on every dip to 1170. The SPX has a love/hate affair with the 100/130 period exp averages on the 30-min chart. They act as magnets in times of indecision and act as a launching point for major moves in both directions. The averages are converging at 1180 and the SPX used them as support all afternoon with hardly a wobble.

The small spark in the market today on the dip in oil prices suggests we could see a few bargain hunters if tomorrow's oil inventories continue to show an inventory buildup of crude. This is the make or break week for crude prices and it could be the make or break week for equities as well. The earnings calendar starts building in intensity as the week closes with the lineup increasing as we start next week. The earnings are not going to be as key as the guidance and it will not take several weeks of earnings to see how the guidance is trending. If it appears less than exciting then April 15th would be my target for a market turning point. With inflation building and the Fed gearing up for a protracted battle I don't see the catalyst for a real rally once earnings are known. The next couple of weeks should be critical and until something changes I am still bearish heading into summer. Definitely, enter passively and exit aggressively.
 

 
 



New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
GISX None

New Long Plays

Global Imaging - GISX - close: 36.50 chg: +0.87 stop: 34.65

Company Description:
Global Imaging Systems offers thousands of middle-market customers a one- stop shop for office technology solutions from 184 locations in 30 states and the District of Columbia. The company provides a broad line of office technology solutions including the sale and service of automated office equipment, network integration services and electronic presentation systems. The company is also a disciplined, profitable consolidator in the highly fragmented office technology solutions industry. (source: company press release)

Why We Like It:
GISX turned in an impressive run during the third and fourth quarters of 2004. Yet like many stocks it sank quickly in January this year. Fortunately, the sell-off paused near the 50 percent retracement of its previous climb. Now after two months of consolidating sideways it appears that GISX is ready for the next leg higher. The stock is breaking out over the $36.00 level and its 100-dma on above average volume. Short-term technical oscillators are positive and its P&F chart is very bullish with a $67 target. We would like to target a move to round-number, psychological resistance at the $40.00 mark. However, earnings are expected (but unconfirmed) on April 25th and we will not hold over the earnings report. We want to go long at current levels and just see how far GISX can climb before it reports.

Picked on April 05 at $36.50
Change since picked: + 0.00
Earnings Date 04/25/05 (unconfirmed)
Average Daily Volume: 114 thousand
 

New Short Plays

None today.

Play Updates

Updates On Latest Picks

Long Play Updates

Amer. Egl Outftr - AEOS - cls: 30.13 chg: +0.58 stop: 27.25*new*

Ding! AEOS has achieved our short-term target at the $30.00 level. We suggest that conservative traders consider exiting here or significantly tighten their stop. We're setting a secondary target at $32.00 and raising our stop loss to $27.25.

Picked on March 28 at $28.19
Change since picked: + 1.94
Earnings Date 05/14/05 (unconfirmed)
Average Daily Volume: 1.1 million

---

Fresh Del Monte - FDP - close: 30.75 chg: +0.27 stop: 29.99*new*

We have been suggesting that readers wait for a move over $31.00 before considering any new bullish entries. FDP did trade over $31.00 and its simple 50-dma this afternoon. Unfortunately, shares were unable to maintain these gains. We would have gone long this afternoon anyway and readers still looking for new positions can watch for another rally through today's high at $31.07. We're inching up our stop loss to $29.99.

Picked on March 22 at $30.82
Change since picked: - 0.07
Earnings Date 02/15/05 (confirmed)
Average Daily Volume: 201 thousand

---

Forest Oil - FST - close: 41.98 chg: -0.64 stop: 38.49

No change from our previous update on 04/04/05.

Picked on April 03 at $42.00
Change since picked: - 0.02
Earnings Date 05/09/05 (unconfirmed)
Average Daily Volume: 1.0 million

---

Talbots - TLB - close: 32.80 chg: +0.55 stop: 30.49

No change from our previous update dated 04/03/05.

Picked on March 31 at $31.98
Change since picked: + 0.82
Earnings Date 05/18/05 (unconfirmed)
Average Daily Volume: 408 thousand
 

Short Play Updates

Anheuser Busch - BUD - close: 47.44 chg: +0.28 stop: 48.41

It was another boring day for BUD bears during the regular trading hours. However, after the closing bell BUD reported that Q1 domestic beer sales volumes were below expectations. The company guided Q1 profits into the 63-64 cent range. Analysts consensus estimates are at 64 cents. The stock was trading close to $47.00 after hours and we expect this weakness to carry through into tomorrow's session.

Picked on February 7 at $48.32
Gain since picked: - 0.88
Earnings Date 04/27/05 (unconfirmed)
Average Daily Volume: 2.4 million

---

Countrywide Fncl - CFC - close: 31.55 chg: +0.01 stop: 34.05

No change from our previous update dated 04/04/05.

Picked on March 09 at $33.36
Change since picked: - 1.71
Earnings Date 04/26/05 (confirmed)
Average Daily Volume: 3.8 million

---

Flextronics - FLEX - close: 11.92 chg: -0.03 stop: 12.55

No change from our previous update dated 04/03/05.

Picked on March 16 at $11.95
Change since picked: - 0.03
Earnings Date 04/28/05 (confirmed)
Average Daily Volume: 5.5 million

---

West Marine - WMAR - close: 20.96 chg: +0.47 stop: 22.01 *new*

There isn't much change in WMAR but the stock is bouncing from the $20.00 level today. We are going to lower our stop loss to $22.01. WMAR should have short-term resistance near the $21.50-21.65 range.

Picked on March 17 at $21.20
Change since picked: - 0.24
Earnings Date 03/03/05 (confirmed)
Average Daily Volume: 155 thousand
 

Closed Long Plays

Innovative Solutions. - ISSC - cls: 33.79 chg: -0.11 stop: 29.49

Target achieved. ISSC continued yesterday's rally into Tuesday morning and the stock climbed to $35.85 before turning lower. This was more than enough to hit our target and exit point at $35.00. The bad news for those who did not exit was the afternoon sell-off. Volume was pretty strong today and the move looks like a short-term top. We are closing the play per our exit at $35.00.

Picked on March 22 at $31.50
Change since picked: + 2.29
Earnings Date 01/19/05 (confirmed)
Average Daily Volume: 193 thousand

---

Technical Olympic - TOA - cls: 24.73 chg: +0.63 stop: 23.45

Target achieved! TOA gapped higher to open at $25.45 and then traded to a high of $25.69 before turning lower today. We don't see any specific news or catalyst to explain the gap higher but volume was very heavy at the opening bell. The stock traded up and through our target and exit at the $25.50 level. Traders who did not exit need to be prepared for more weakness. TOA looks poised to fill the gap from this morning and probably trade back to the $24.00 level. We're closing the play per our target at $25.50.

Picked on March 22 at $24.36
Change since picked: + 0.37
Earnings Date 02/16/05 (confirmed)
Average Daily Volume: 135 thousand
 

Closed Short Plays

Symyx Tech. - SMMX - close: 22.70 chg: +0.47 stop: 24.51

The pop in SMMX may not look like much but the stock is just now starting to breakout from its narrow descending channel. The overall picture remains bearish but short-term SMMX is oversold and the two-day bounce has turned technical oscillators bullish. We would rather exit here with a small (hypothetical) gain and watch SMMX for another failed rally-bearish-entry point at resistance near $24.00 and its 200-dma.

Picked on March 21 at $23.79
Change since picked: - 1.09
Earnings Date 02/03/05 (confirmed)
Average Daily Volume: 173 thousand
 

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

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