Daily Newsletter, Thursday, 04/07/2005
HAVING TROUBLE PRINTING?
Oil Slides, Stocks Rise
by OI Staff
Oil Slides, Stocks Rise
Equities marched higher as oil lost some of its sheen, sinking to a new low for the week.
Breadth was strongly positive across the exchanges, with advancing volume leading declining volume 2:1 on the NYSE and 3.3:1 on the Nasdaq. Volatility declined sharply, with the Nasdaq volatility index (VXN) making a new multiyear and possibly record low at 16.56. QQQQ volatility (QQV) lost 3.67% to close at 15.73, while OEX volatility (VXO) lost nearly 4% to close at 12.23.
Daily Dow Chart
The Dow's .58% gain lagged that of its peers, but nevertheless built on yesterday's gains, strengthening the daily cycle upphase on the steady rise from the open. The morning low at 10477 held above yesterday's low, and the high in the final hour fell just short of resistance at 10560. That resistance is also the current level of the 22 day EMA. A break above this level will target the next confluence zone in the 10650 area, followed by 10710-10720.
Daily S&P 500 Chart
The SPX gained .60% t close at 1191, running up from its morning low of 1184. It is relatively stronger than the Dow, having already exceeded the 22 day EMA (and the 50 day, today). The equivalent 10710-720 level for the Dow is less than 10 SPX points away at 1200.
Daily Nasdaq Chart
The Nasdaq, which advanced .99% to close at 2018.8, also finished above the 22 day EMA within its ongoing daily cycle upphase. It finished on the session high, a very bullish close, just below 2025 resistance. Above that 2045-50 is next. Despite closing at the top of its range, the Nasdaq barely advanced above yesterday's range, printing only nominally higher highs and lows. A break below the low at 1998 would spell trouble for the daily cycle upphase.
Daily TNX Chart
Treasury Secretary John Snow testified to the Senate Banking Committee in Washington today, on the reform of government sponsored enterprises (GSEs). In his prepared comments, Snow echoed Greenspan's call for limits on the size of mortgage portfolios held by GSEs (FNM and FRE) in order to limit risks to the financial system. FNM closed higher by 1.85% at 55.15, while FRE added .05% to close at 63.83.
Later in the day, Philly Fed President Anthony Santomero presented a speech to the National Economics Club, in which he stated that the Fed should move "in a slow and cautious manner" in the face of current economic uncertainties. He stressed that his comments were philosophical, but bond traders didn't put too fine a point on it. With crude oil plunging (see below), bond yields shot higher, the ten year note yield (TNX) quickly reversing its losses and spiking briefly above the descending resistance line. This represented the first peek above the line since it kicked off from the year high last month. Despite the reversal at the intraday high, the bulk of the gains held, with the TNX closing the day higher by 3.6 bps at 4.472%.
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As expected, the Bank of England left rates unchanged at 4.75% following recent weaker than expect retail sales and manufacturing data. Shortly thereafter, the European Central Bank left euro zone rates unchanged at 2% in the wake of the European Commission's reduction of its GDP estimate for 2005 from 2% to 1.6%. Euro futures greeted the news with a yawn, holding light gains in early morning trading.
At 8:30, the Office of Workforce Security released the weekly initial claims data, showing a decrease of 19,000 claims to 334,000 claims for the week ended April 2, the largest decline in 2 months. The previous week's figure was revised to 353,000. The 4-week moving average of initial claims decreased 250 from the prior week's revised 336,750 reading to 336,500 claims. Despite the decrease in initial claims, it was reported that there were 90,000 more people receiving unemployment checks, bringing the total to 2.69 million as of the week ended March 26.
At 10AM, the Commerce Department reported that US Wholesale inventories rose 0.6%, with sales falling 0.4%, the largest drop since April 2003. The ratio of inventory-to-sales rose from 1.17 to 1.18.
At 3PM, the Federal Reserve announced February's Consumer Credit report, with US consumer credit increasing 3.1% or $5.6 billion on a 6.1% increase in credit card debt. January's increase was revised up from the $11.5 billion previously reported to $11.6 billion.
Weekly chart of Crude oil
Crude oil rose in the morning but failed to break yesterday's high, and then commenced a vertiginous decline in the afternoon, with May crude dropping through 55 support to a low of 53.875. Marketwatch reported a survey by Platts indicating that OPEC production of crude oil rose in March by 250,000 bpd to 29.83 million bpd. This is higher than most numbers being quoted recently, and, other than price technicals, coincided time-wise with the sudden plunge in price. Once again, the most recent OPEC production quota increase to 27.5 million bpd is of dubious significance, with OPEC currently pumping close to 30 million bpd.
On the daily chart, today's steep bearish engulfing came down to test rising trendline support at the 53.875 low. A break of this line would undo the current uptick in the 10 day stochastic. Oil bears need to see this occur, because so far the daily cycle downphase been weak and corrective compared with the force of the upphases that preceded it. For the day, May crude oil closed lower by 3.13% or 1.75 at 54.10, a new low for the week.
In corporate news, WMT issued a profit warning this morning, stating that it is expecting Q1 EPS at the low end of its prior 56-58 cent range. Analysts were looking for 57 cents. Same store sales are expected to rise 3%-5% from Q1 2004. As far as profit warnings go, this one was pretty tame- consider GM's (which company was downgraded again, today by Citigroup) bunker-buster warning announced a few weeks ago. However, WMT was hit for over 1.5% in premarket trading, and Reuters had the warning running as the top headline on its homepage.
My own suspicion is that the financial press failed to connect the dots with what should have been the night's headline story: that Senators Schumer and Graham introduced an amendment to apply a 27.5% tariff on Chinese imports if China does not release its currency peg within 180 days. You'll recall that China recently scaled back its participation in the upcoming G7 meeting, and has been utterly inflexible and dismissive in the face of US demands on the currency issue.
For WMT, this appears to me to be a frying-pan / fire proposition, as any increase in the cost of imports from China, whether due to currency devaluation or tariff, will increase the prices it must pay to its offshore suppliers. Later in the day, AG Edwards downgraded WMT to "hold" from "buy" citing the speed of checkouts, lack of creativity in mechandising, and higher oil prices. The possibility of trade friction with China didn't make the grade. WMT closed the day lower by .57 or 1.15% at 48.93 on volume of 23.9M shares, compared with the average of 13.9M shares.
Pier-1 (PIR) announced disappointing earnings for Q4 of 18.8M or 21 cents per share, down from 48.3M or 53 cents per share in Q4 the previous year. Sales fell from 555.3M to 525.8M, and comparable store sales declined 10.7%. The EPS results missed expectations by 5 cents, and analysts were looking for revenue of 535M. Declining to provide projects for Q1 2005, PIR forecast a Q1 loss of 3-10 cents per share. PIR got clocked for a 5.5% loss at 17, on nearly 5x its average daily volume.
In other corporate news, PFE was requested by regulators in Europe and the FDA to suspend sales of its Bextra arthritis medication, and to include a black box warning on its other Cox-2 inhibitor, Celebrex. The FDA stated that Bextra was singled out because it can cause a potentially deadly skin reaction called Stevens-Johnson Syndrome. As well, other manufacturers of painkillers such as Aleve, Advil and Motrin, were requested to increase their warnings of heart risk and intestinal bleeding. PFE closed lower by .22% at 26.80.
Rite Aid (RAD) announced Q4 earnings that rose from 9 cents per share or 59.4M this quarter last year to 35 cents or 228.6M, a huge gain resulting from a tax benefit of 179.5M or 29 cents. The company cited increasing purchases of prescription medicine by mail order as the reason for a difficult quarter, with sales falling 1.3% to 4.34B. RAD rose 6.63% to close at 4.02.
After the bell, Accenture (ACN) announced Q2 earnings that rose from this 123.1M or 22 cents in the year-ago quarter to 209.8M or 35 cents on revenue that rose from $3.1 billion to $3.8 billion. Expectations were for 32 cents EPS on $3.71 billion. The stock, which had closed lower by .32% at 24.89, was higher by 3.46% at 25.75 as of this writing.
With no economic data scheduled for tomorrow, market participants will be free to continue focusing on the decline in oil. Rising intraday bond yields had dragged somewhat on equities, and the indices broke to new highs after the cash close at 3PM. Tomorrow is also scheduled to be a light day for earnings announcements. Currently, stocks are looking strong within daily cycle upphases that have plenty of room to run before reaching overbought territory. Provided that the pattern of higher highs and higher lows isn't violated (as it nearly was today on the Nasdaq), the benefit of the doubt goes to the bulls.
Most Recent Plays
by OI Staff
New Long Plays
OSI Pharma - OSIP - close: 45.15 chg: +0.95 stop: 42.49
OSI Pharmaceuticals is a leading biotechnology company primarily focused on the discovery, development and commercialization of high-quality pharmaceutical products that extend life or improve the quality of life for cancer and diabetes patients worldwide. OSI's primary business remains oncology, but the Company has a second business interest in the area of diabetes through its Prosidion subsidiary based in the United Kingdom. Tarceva(TM), OSI's flagship product, is the first OSI drug discovered and developed by OSI to obtain FDA approval and the only EGFR inhibitor to have demonstrated the ability to improve survival in non-small cell lung cancer and pancreatic cancer. OSI exclusively markets Novantrone (mitoxantrone concentrate for injection) for the approved oncology indications and markets Gelclair for the relief of pain associated with oral mucositis. (source: company press release)
Why We Like It:
OSIP is on the verge of a trend change. The stock has been stuck in a narrow, descending channel since the reversal back on January 3rd, 2005. After three months of declines the stock is very oversold and way overdue for a bounce. Now that the BTK biotech index has broken through its 200-dma and its short-term trendline of resistance we believe OSIP has a chance to really move higher. Currently, it looks like OSIP has already broken through the top of its descending channel. However, we want to see some confirmation. That's why we are suggesting a TRIGGER at $45.51 to open the play. If OSIP trades at or above our entry price of $45.51 we'll target a move to round-number, psychological resistance at the $50.00 level.
Picked on April xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/10/05 (unconfirmed)
Average Daily Volume: 1.5 million
New Short Plays
Updates On Latest Picks
by OI Staff
Long Play Updates
Amer. Egl Outftr - AEOS - cls: 29.77 chg: -0.41 stop: 27.25
No change from previous update on 04/05/05. Early morning weakness was caused by a downgrade from "out perform" to "market perform". Yet it looks like traders bought the dip to the $29.00 level today. AEOS reported March same-store sales growth of +29.2 percent, which was above analyst estimates. AEOS also raised their earnings guidance for Q1.
Picked on March 28 at $28.19
Change since picked: + 1.52
Earnings Date 05/14/05 (unconfirmed)
Average Daily Volume: 1.1 million
Fresh Del Monte - FDP - close: 30.58 chg: -0.29 stop: 29.99
No change from previous update on 04/05/05.
Picked on March 22 at $30.82
Change since picked: - 0.24
Earnings Date 02/15/05 (confirmed)
Average Daily Volume: 201 thousand
Forest Oil - FST - close: 42.05 chg: -0.70 stop: 38.49
No change from our previous update on 04/04/05. We are expecting FST to see some weakness. Look for a bounce from the $40-41 range.
Picked on April 03 at $42.00
Change since picked: + 0.05
Earnings Date 05/09/05 (unconfirmed)
Average Daily Volume: 1.0 million
Global Imaging - GISX - close: 36.36 chg: +0.66 stop: 34.65
Good news. GISX did not see any follow through on yesterday's bearish engulfing candlestick pattern. The stock is bouncing. More aggressive traders can use the bounce as a new entry point. We still suggest waiting for a move over $36.50.
Picked on April 05 at $36.50
Change since picked: - 0.14
Earnings Date 04/25/05 (unconfirmed)
Average Daily Volume: 114 thousand
Short Play Updates
Anheuser Busch - BUD - close: 46.10 chg: +0.45 stop: 47.01
BUD produced an oversold bounce today and shares look poised to continue bouncing tomorrow. Look for resistance at $46.50 and again near $47.00.
Picked on February 7 at $48.32
Gain since picked: - 2.22
Earnings Date 04/27/05 (unconfirmed)
Average Daily Volume: 2.4 million
Flextronics - FLEX - close: 11.99 chg: -0.17 stop: 12.55
No change from previous updates on 04/03/05 and 04/06/05.
Picked on March 16 at $11.95
Change since picked: + 0.04
Earnings Date 04/28/05 (confirmed)
Average Daily Volume: 5.5 million
Westlake Chem. - WLK - close: 30.40 chg: +0.38 stop: 32.01
No change from previous update on 04/06/05. Our entry point to go short is at $29.19.
Picked on April xx at $xx.xx <-- see TRIGGER
Change since picked: - 0.00
Earnings Date 05/09/05 (unconfirmed)
Average Daily Volume: 207 thousand
West Marine - WMAR - close: 21.03 chg: -0.13 stop: 22.01
No change from our previous update dated 04/05/05.
Picked on March 17 at $21.20
Change since picked: - 0.17
Earnings Date 03/03/05 (confirmed)
Average Daily Volume: 155 thousand
Closed Long Plays
Talbots - TLB - close: 29.30 chg: -3.55 stop: 30.49
Ouch! TLB lost more than 10 percent on big volume. The company reported March same-store sales that were under analysts' estimates. To make matters even worse TLB guided its Q1 earnings lower, slightly below analysts' estimates. The stock gapped open lower to open at $30.05, which is below our stop loss. We would have been immediately taken out at $30.05 and that's where we close the play. This is a dramatic reversal and traders can look for TLB to continue lower.
Picked on March 31 at $31.98
Change since picked: - 2.68
Earnings Date 05/18/05 (unconfirmed)
Average Daily Volume: 408 thousand
Closed Short Plays
Today's Newsletter Notes: Market Wrap by Jonathan Levinson and all other plays and content by the Option Investor staff.
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