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Daily Newsletter, Saturday, 04/09/2005

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Table of Contents

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

Market Wrap

April Streak Ends


WE 04-07


WE 04-01

 

WE 03-24

 
DOW

10461.34

57.04

10404.30

- 38.57

10442.90

-186.80

NASDAQ

1999.35

14.54

1984.81

-   6.25

1991.06

-  16.73

S&P 100

562.18

   4.69

557.49

-   0.22

557.71

-  10.23

S&P 500

1181.20

   8.28

1172.92

  1.50

1171.42

-  18.23

W5000

11634.59

65.86

11568.73

  7.05

11561.70

-168.08

SOX

416.95

   5.73

411.22

-    4.66

415.88

   1.75

RUT

610.75

-    0.80

611.55

-    3.71

615.26

-    7.31

TRAN

3596.70

-  89.91

3686.61

-  58.06

3744.67

-    5.91

VXO

12.62

 

14.09

 

13.42

 
VXN

16.96

 

17.61

 

17.15

 

April Streak Ends

Oil fell to 53.45 and extended its streak of down days to five but equities reversed after four days of gains. With the weekend looming traders elected to take profits rather than risk hard fought gains as resistance held. The four-day equity bounce attracted a lot of press attention but it failed to break the resistance we have discussed for two weeks.

Dow Chart - Daily


Nasdaq Chart - Daily


Our week was devoid of any material economic reports and traders took that opportunity to buy critical support and we saw four days of gains. There was no excitement and no volume with volume across all markets less than 4B shares every day. While the up days were on low volume Friday's drop was the lowest volume of the week. The Dow managed only 1.6B shares and the Nasdaq only 1.5B. The indexes stuck to their support/resistance range as traders wait for earnings to begin next week.

Taking heads on TV credited the drop in oil prices as the reason for the jump in equities. We have theorized about this for many weeks but the rotation out of oil was very weak as was the move into equities. There was a complete lack of conviction on both sides and the week ended with a whimper. Despite the drop in oil prices we saw almost no drop in oil stocks. Every recent drop in oil has produced a corresponding drop in oil stocks and I fear the lack of movement this week is suggesting investors believe it will be brief.


Interest rates also declined early in the week but rebounded on Thursday and posted their highs on Friday at 4.52%. This drop in rates along with the drop in oil drew some reluctant investors off the sidelines earlier in the week but once those rates rebounded the interest in equities faded. The FOMC minutes for March will be released on Tuesday and most analysts expect it to portray an anxious Fed and one that is poised to move aggressively if conditions don't change soon.

The biggest contrarian factor for the markets on Friday was the drop in the transports. 19 of the 20 Dow transport stocks finished in the red despite five days of declines in oil. A research report saying shipments fell -1% in March and an earnings warning from USFC soured the sector and the TRAN lost -3% on Friday. USFC said its quarterly earnings would be less than half what analysts expected and analysts were quick to jump to the conclusion that trucking volumes were slipping. Up until now everyone had used the constant upside guidance from the truckers as evidence the economy was improving despite the lack of vision in the economic indicators. With oil down -$5 for the week you would think transports would be rejoicing but there was no joy in Mudville after USFC struck out. YELL -4.39, USFC -2.72, USFC is being acquired by YELL, CNF -4.36, UPS -1.36, FDX -1.94. Even railroads were down on the news as investors trashed the sector rather than the individual issues, NSC -2, UNP -1.85, BNI -1.71. The damage would have been worse but Overnite (OVNT) raised guidance to the high end of their prior estimates and said it was seeing a continued improvement in customer mix and a stable pricing environment.

Transportation Chart - Daily


Copper Chart - Daily


To decide if overall economic demand is slowing we can look at the commodity stocks to see how investors there see the future. Copper has ceased rising and has been holding for over a month at its $1.50 highs. It is not rising but is still poised to move higher soon. This suggests economic growth is still holding. Steel, a lesser indicator for growth given the dumping of cheap, low quality steel on the markets, is showing an ugly pattern. Using US Steel (X) as our proxy we see that the highs came in late February and Q4 support at $50 has broken. Nucor (NUE) has also rolled over and is testing support at the 100-day average. Cleveland Cliffs fell -2.77. I think it is too soon to say the boom is over but a failure in copper on the heels of steel would be a strong sign.

Borland warned on Friday that earnings would fall short of expectations. This was another in a long string of warnings by software stocks. Borland said it was taking longer to close deals and they were seeing weaker IT spending by its customers. This is not a good sign for tech stocks in general but keep in mind software stocks typically have a rocky start in Q1/Q2.

Despite Friday's drop in the indexes the SOX held near its highs and very close to 420 resistance. The SOX was the strongest indicator of bargain hunting by investors ahead of earnings. This strength helped hold up the Nasdaq and probably was instrumental in keeping the Nasdaq over 2000 for most of the week.

After the close on Friday Ford warned that earnings for the full year would be well below prior estimates. Earlier this year Ford said that earnings would be in the $1.75-$1.95 range. According to Ford that new range is now $1.25-$1.50. Problems included higher steel prices, all time highs in oil and escalating health care costs. GM is also suffering from rising health care with $1500 of the cost of each car attributed to health care for current and retired employees. I believe we need to face the facts that U.S. automakers are in serious trouble long term as gas prices eventually hit and exceed $3 a gallon. Toyota (TM) is expected to eventually become the world leader in production.

Oil prices fell to $53.40 at Friday's close and the low for the week. This appears to have produced a clear double top at $58 but is far from a material sell off. The Q2 demand slump is underway and inventories are building as evidenced by the seventh consecutive weekly increase in API inventory numbers. Levels have risen from 296.4 mb on Feb-11th to 317.1 mb on Apr 1st. This steady climb comes as demand for heating oil weakens but the ramp up into the summer gasoline demand has not yet started. This is a historical period for weakening demand but once the summer driving season begins that inventory level should decrease once again. The key this year will be how much gasoline demand weakens with prices holding over $2 a gallon. I am relieved to see the drop in oil prices as expected but individual oil stocks have not yet cracked. COP is holding over $109 and very close to its $112 resistance highs. The same holds true with most of the stocks with the refiners literally pinned to their highs given the flurry of refinery outages over the last two weeks. Only XOM and CVX are showing any weakness. XOM as the hulking behemoth has been weak since March 9th when a single investor dumped 25 million shares about 30 min after the CEO made cautionary comments at the shareholder meeting. That dump knocked -$5 off the price of the stock and positive sentiment has yet to return to XOM.

Chevron, rumored to be an acquirer of Unocal had also been weak since early March and their eventual announcement this week punctuated that weakness with a drop back near $56. CVX is the only stock of the group to return to support at its 100-day average. That would be a buy signal for me but caution is warranted on CVX. Until the deal is done there is the risk of somebody bidding higher for the Unocal assets. This is not likely since there was an informal bidding process including Italian oil group Eni and China's offshore producer CNOOC Ltd. According to insiders CVX and CNOOC were the top two bidders with CNOOC offering the most cash. However, CNOOC was unable to complete the terms of their offer in time and they cancelled their bid at the last minute. A CNOOC official quit after they failed to complete the deal. This bidding process should have eliminated any surprise bidders appearing now but it never hurts to be cautious. CVX is rumored to be planning to sell $3 billion of Unocal assets as soon as the deal is completed. Those assets will include much of Unocal's onshore assets in the U.S. and Canada, which are mature and costly to maintain. Another potential sale could be its Asian power plants. Chevron's main interest in Unocal was their proven reserves in the Gulf of Mexico, Indonesia and Thailand. Chevron is the fifth largest oil company and the 20th largest company in the world. This acquisition gives them a sizeable boost in reserves at a time when buying future production makes very good sense. Chevron has an average cost per produced barrel of $27 and we are not likely to see that number on the open market ever again. Chevron acquired 1.7 billion barrels of proven reserves plus numerous other properties, gas fields, power plants, etc. Just valuing the 1.7B bbls of proven reserves at $50 a bbl equals $85 billion not accounting for production costs. Chevron acquired Unocal for $18 billion and will likely end up selling more than $3B in non-core assets. Not a bad deal to get $85B in reserves for $15B of mostly stock. That works out to about $9 a bbl. I believe CVX is a buy at these levels as long as you realize it could return to something in the $50-52 range while the acquisition news plays out.

Crude Oil Chart - Daily


SPX Chart - Daily


The markets rebounded from critical support on Monday and managed to trend slightly higher as the week progressed but there was no excitement. To call it a rally would be a misnomer. It was more likely traders just marking time until earnings appear. Resistance held across all indexes and the week ended up just repeating the range from the prior week. It was hardly an exciting rebound. Fund flows were flat with only $100 million hitting mutual funds in the week ended on Thursday. This was very anemic considering the typical fund inflows ahead of the April 15th deadline for retirement contributions. It was also announced that fund flows for March totaled only $6.7B compared to $10.5B in February and $10.1B in March of 2004. $10.8B flowed out of money markets for the last week in what could have been tax payment outflows. That suggests that traders are being hit with tax bills on the 2004 rebound and with the drop so far in 2005 they are having to dip into cash to pay the bill. Typically traders count on having the Q1 bounce produce enough profits to cover those taxes for the prior year. That plan failed badly in 2005 and it is putting a crimp in cash flow into the markets.

The Dow rebounded from Monday's lows at 10365 to fail at almost exactly the spike high from last week at 10555. Friday's drop put it right back in the middle of that range at 10460 and in neutral territory. The Dow was dragged down on Friday by the transports and by the cyclicals. There was a lot of profit taking in those sectors that have been hot and it appeared traders saw the bounce back to resistance as an opportunity to lighten up once again. Support remains at 10380-10400 and resistance at 10550. Until that range breaks there is nothing to get excited about.

Last Monday the Nasdaq rebounded off its double bottom at 1975 and retraced its entire range back to top at 2020 resistance once again. Like the Dow this was a complete retracement of the prior weeks drop but it came on low volume and very little excitement. The Nasdaq fell back to rest right in the middle of the range at 2000 and just above the 200- day average at 1994. With the SOX providing support it appears to be setting up for a potential earnings related bounce but there is very little upward pressure from anything but the SOX. A rally over 2020 would run into very serious resistance at 2080-2100 and I would not hesitate to short that level. I seriously doubt we will see a rebound of that magnitude but I mention it here so you can be prepared for that best-case scenario. A short there could run for several months into the summer doldrums.

The SPX moves duplicated the Dow/Nasdaq moves for the week with Friday's close at 1181 right in the middle of its current 1165-1195 range. The 30/50/100 day averages have converged at 1992 and are providing strong short-term resistance. That 1192 level is going to continue to be resistance but the uptrend support is rising at 1175. This should produce confusion now that it has risen over the horizontal resistance levels we saw touched since late March in the 1165-1170 range. I would continue to key on a break of 1165 as a critical breakdown and one that would signal a potential plunge into summer. On the upside a break over 1195 finds shortable resistance at 1210-1215.

My market sentiment heading into earnings remains "don't fight the Fed." Inflation is rising and we have increasing indications that the Fed may remove the measured pace language and possibly hike 50 points instead of 25 sooner than previously expected. Most analysts now believe the Fed is only half done and could accelerate hikes for the second half of the cycle. Cyclical stocks have begun to roll over on fears this will happen soon. Homebuilders are weakening as mortgage rate fears increase. Retailers are slipping on slowing consumer sales due to higher gas prices. Tech spending is in doubt after the dozen or so software warnings this week. We are moving into a historically weak period on the market calendar after a 28-month bull market. Unless earnings guidance is a blowout to the upside I believe it is time for the markets to rest. This rest could take the form of continued range trading or a return to long-term support as the summer doldrums appear. May is just around the corner and the "sell in May and go away" crowd could be hoping for one last earnings bounce before they exit. Next week is expiration week and volatility should increase given the short option month. Economic reports return with a vengeance with 12 key reports and several minor ones. The most watched could be the FOMC minutes of the March meeting on Tuesday. This will give traders a clue for how aggressive the Fed might be in the near future. This is week where a direction could appear with Friday my target for a turning point. Definitely enter passively and exit aggressively.
 

 
 



New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None LOW
  XMSR

New Long Plays

None today.
 

New Short Plays

Lowes Companies - LOW - close: 54.81 change: -1.53 stop: 56.51

Company Description:
With fiscal year 2004 sales of $36.5 billion, Lowe's Companies, Inc. is a FORTUNE 50 company that serves approximately 11 million customers a week at more than 1,100 home improvement stores in 48 states. Based in Mooresville, N.C., the 59-year old company is the second-largest home improvement retailer in the world. (source: company press release)

Why We Like It:
Home improvement retailer LOW is struggling to maintain altitude. The stock has been channeling sideways between $55.00 and $60.00 for the past five months. After a long-slow, six-week drift toward support near $55.00 the stock broke down under the $55.00 level and its 200-dma after being downgraded this Friday. The move helped produce a new triple-bottom breakdown sell signal on its P&F chart with a $50.00 target. We are willing to short the stock at current levels and target a move to the $51.00-50.00 range. More conservative traders may want to wait for LOW to breakdown under potential support at the $54.00 mark before initiating positions.

Picked on April 10 at $54.81
Change since picked: - 0.00
Earnings Date 05/16/05 (unconfirmed)
Average Daily Volume: 3.0 million

---

XM Satellite Radio - XMSR - cls: 30.67 chg: -0.86 stop: 32.21

Company Description:
XM Satellite Radio is America's number one satellite radio service with 3.77 million subscribers. Broadcasting live daily from studios in Washington, DC, New York City and Nashville, XM offers more than 150 digital radio channels of choice from coast to coast: 67 commercial-free music channels; 64 channels of premier sports, news, talk, comedy, children's and entertainment programming; and 21 channels of the most advanced traffic and weather information for major metropolitan areas nationwide. XM Satellite Radio is the satellite radio leader in sports programming, offering thousands of live sporting events every year. (source: company press release)

Why We Like It:
Like many stocks that turned in scorching returns during the second half of 2004 XMSR is suffering in 2005. Shares appear to be declining in a very volatile descending channel. On this past Friday the stock just produced a failed rally near the $32.00 level of resistance, which coincides with the top of its descending channel. We also like the bearish P&F chart that points to a $20.00 target. We believe that XMSR could trade into the $26-25 range before its early May earnings report. We are willing to short the stock here at current levels. More conservative traders may want to strongly consider waiting for XMSR to breakdown under round-number support at the $30.00 mark.

Picked on April 10 at $30.67
Change since picked: - 0.00
Earnings Date 05/05/05 (unconfirmed)
Average Daily Volume: 5.2 million
 


Play Updates

In Play Updates and Reviews

Long Play Updates

Amer. Egl Outftr - AEOS - cls: 29.81 chg: +0.04 stop: 27.65 *new*

AEOS is holding up pretty well given the weakness in the broader markets. The stock hit our short-term target at $30.00 a few days ago but it hasn't seen much follow through since then. Right now we would not suggest new bullish positions. If AEOS dips back toward the $28.00 level we might consider buying a bounce. Alternatively more conservative readers, if you haven't taken any profits yet, you might want to consider exiting here and then just looking for a dip again to re-enter. Our secondary target remains the $31.50-32.00 range. We are raising the stop to $27.65, just under the 50-dma.

Picked on March 28 at $28.19
Change since picked: + 1.56
Earnings Date 05/14/05 (unconfirmed)
Average Daily Volume: 1.1 million

---

Fresh Del Monte - FDP - close: 31.71 chg: +1.13 stop: 29.99

We cannot find any news to account for the strong session on Friday but we're not complaining. Shares added 3.69 percent with volume rising as FDP broke through the $31.50 level. Friday's gain is a technical breakout to a new five-week high. Its RSI technical oscillator also shows a new bullish breakout. We would buy dips back to the $31.50 level if you don't feel like chasing it here. Our short-term target remains the $33.00 level.

Picked on March 22 at $30.82
Change since picked: + 0.89
Earnings Date 02/15/05 (confirmed)
Average Daily Volume: 201 thousand

---

Forest Oil - FST - close: 41.70 chg: -0.35 stop: 38.49

We have been expecting a pull back to the $40.00-41.00 levels and with crude oil prices slipping we could see FST pull back to support this coming week. We would not suggest new bullish entries at this time. Readers can choose to wait for a dip and bounce from the $40.00 level and its rising 40-dma. Or readers can wait for a new relative high over the $43.00 mark.

Picked on April 03 at $42.00
Change since picked: - 0.30
Earnings Date 05/09/05 (unconfirmed)
Average Daily Volume: 1.0 million

---

Global Imaging - GISX - close: 36.02 chg: -0.35 stop: 34.95*new*

GISX is still struggling to produce any kind of follow through on its bullish breakout four days ago. This lack of strength makes us cautious, especially in the current market. Right now we'd expect GISX to pull back and retest the $35.50 level. More aggressive traders may want to consider buying a bounce from $35.50. We would suggest that most investors wait for a move back over $36.50. We are going to raise the stop loss to $34.95.

Picked on April 05 at $36.50
Change since picked: - 0.48
Earnings Date 04/25/05 (unconfirmed)
Average Daily Volume: 114 thousand

---

OSI Pharma - OSIP - close: 45.30 chg: +0.15 stop: 42.49

OSIP is a new play from the Thursday night newsletter. We had a trigger to go long if OSIP traded at $45.51 or better. The stock hit our trigger early on Friday morning so the play is now open. We are a little bit concerned that OSIP was unable to maintain most of its gains and it would not surprise us to see OSIP fall back toward the $44.00-43.50 levels before bouncing higher again. A reprint of the original play description follows:

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 08 at $45.51
Change since picked: - 0.21
Earnings Date 05/10/05 (unconfirmed)
Average Daily Volume: 1.5 million
 

Short Play Updates

Anheuser Busch - BUD - close: 46.00 chg: -0.10 stop: 47.01

Good news! It looks like the oversold bounce in BUD is already failing. For those who missed the news earlier this week BUD guided earnings to at or under analyst estimates. Plus, BUD reported worse than expected sales numbers. Shares gapped down as at least one analyst downgraded the stock to a "sell". We continue to target a drop into the $44.00-43.00 range but that may be overly optimistic. We will exit the play before its late April earnings report.

Picked on February 7 at $48.32
Gain since picked: - 2.32
Earnings Date 04/27/05 (unconfirmed)
Average Daily Volume: 2.4 million

---

Flextronics - FLEX - close: 12.14 chg: +0.15 stop: 12.55

FLEX continues to vacillate in no man's land under resistance at $12.50 but above the $11.80-11.90 support level. The P&F chart remains bearish with a $9.50 target but there's been no follow through lower. Which way FLEX eventually breaks is probably up to the SOX index. Another challenge is the upcoming earnings season. FLEX doesn't report until late April but any big earnings news in the semiconductor sector is likely to spark a reaction in FLEX. Conservative traders may want to consider just exiting now to avoid any surprises. We may consider an early exit if FLEX trades over $12.40.

Picked on March 16 at $11.95
Change since picked: + 0.19
Earnings Date 04/28/05 (confirmed)
Average Daily Volume: 5.5 million

---

Westlake Chem. - WLK - close: 29.32 chg: -1.08 stop: 32.01

Shares of WLK trended lower through most of the session. The stock dipped under Wednesday's low and hit $29.10 about midday. This was more than enough to open the play. Our trigger to go short was $29.19. The close under the $30.00 level is encouraging and we would open new bearish positions at current levels.

Picked on April 08 at $29.19
Change since picked: + 0.13
Earnings Date 05/09/05 (unconfirmed)
Average Daily Volume: 207 thousand

---

West Marine - WMAR - close: 20.82 chg: -0.21 stop: 22.01

We remain bearish on WMAR and the stock's recent bounce appears to have failed under the descending 21-dma. The technical indicators are mixed but the trend is still bearish. The next test will be at the $20.00 level again. Our target remains the $19.00 level near the 200-week moving average.

Picked on March 17 at $21.20
Change since picked: - 0.38
Earnings Date 03/03/05 (confirmed)
Average Daily Volume: 155 thousand
 

Closed Long Plays

None
 

Closed Short Plays

None

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

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