Option Investor

Daily Newsletter, Thursday, 04/28/2005

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Table of Contents

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

Market Wrap

The Bounce That Wouldn't

The Bounce That Wouldn't

Disappointing GDP data overshadowed a benign initial claims report and triggered a rally in treasuries. Oil plunged below 50. Earnings were generally benign. The stock indices didn't care, declining throughout the session in a fitful, choppy range, closing at the lows.

Volume breadth started on a negative note and finished on an abysmal one, with nearly 5 declining shares for each advancing on the NYSE and just under 4 on the Nasdaq. Volume was strong overall, with a combined 3.6 billion shares on the NYSE and Nasdaq. Volatility rose as prices declined.

Daily Dow Chart

The Dow got hit for a 128 decline, closing less than a point off the low of 10070 and failing at a high of 10194. The close was below rising flag support, leaving little more than air between here and the 10000 low printed last week. Bollinger support has declined to 9949. However, the daily cycle upturn will whipsaw to the downside on a break of the current low, and would likely kick off the next impulsive leg down below that level, with stronger confluence support down at 9800.

Daily S&P 500 Chart

The SPX paints a similar picture, closing below flag support and suggesting a quick move from here to the 1134 lows. Today's low was at 1143.22, also the closing price. A drop past that level brings in confluence support to 1125. Bulls need to clear the 1162 barrier, above which daily cycle upphase should get going and set up a retest of the 1174 and 1179 levels.

Daily Nasdaq Chart

The Nasdaq also got pasted today, dropping 1.36% to close at its low of 1904, failing at 1927 on the bounce. Unlike its peers, which still have air separating them from last week's lows, the Nasdaq is already there. A failure here targets the bottom of the declining Bollinger channel at 1885, below which 1850 level from last September comes into view.

Daily TNX Chart

Ten year treasuries opened strongly on the 8:30 AM GDP data (see below), and rose in a high volume session to close at the highs. Ten year note yields (TNX) finished the session lower by 6.4 bps at 4.173%. On the daily chart, the drop in TNX smashed this week's lows and reached a new low for the move despite buy signals printed on the 10-day stochastic earlier this week. 4.2% had been the likely candidate for the daily cycle low, and its failure today sets up the possibility of a downside trending move, to the delight of treasury bulls. Next support is in the 4.14%-4.16% zone we recall from December-January, while 4.2% and 4.26% are now upside resistance.

Chart of Crude oil

Crude oil prices gapped lower today, aborting a daily cycle upphase in the early going and breaking briefly to a low at 49.90 before rebounding sharply to close higher by .15 at 51.75. The 49.00-50.00 level was key confluence resistance on the way up and should act as downside support. The financial press attributed the morning's shellacking to concerns about softer US growth (see below), by which reasoning yesterday's decline would be correlated with the abysmal Durable Goods Orders report. If so, however, the weakness in oil is incongruous with the strength in bonds, which would have been attributed to speculation that the Fed would have to take an easier stance in light of the economic weakness. The decline in price was repaired by the close, and the daily print was a bullish doji hammer, but the daily cycle upphase remains stalled. A rise tomorrow should be enough to change that.

Before the bell, the Labor Department reported Initial Claims, with an increase of 21,000 initial claims to bring the total for the most recent week to 320,000, matching expectations. The previous week's 296,000 figure was revised upward to 299,000. The 4-week moving average of initial claims declined 8,000 to 323,000, and the total reported number of unemployed persons declined 76,000 to 2.56 million in the week ended April 16, the lowest figure since March, 2001.

At 10AM, the Conference Board released its Help-Wanted Index, which declined to 39 in March after its consecutive 41 readings in the two preceding months. Expectations were for a reading of 41. The weaker than expected result lines up with soft payroll growth in the last Employment report, but given the predominance of the web over newsprint classified help-wanted advertising, the indicator is of minor interest.

All eyes were on the preliminary Q1 GDP data, however. At 8:30 AM, the Commerce Department reported that GDP rose 3.1%, below consensus estimates of 3.6%. The Core PCE Index rose 2.2% vs. 1.7% in the previous quarter, the weakest growth since Q1 2003. Consumer spending rose 3.5%, slowing its pace of growth from last year Q4's 4.2% and Q3's 5.1% rates. The combination of rising Core consumer prices (the Fed's preferred measure of inflation) and a slowing rate of spending with lower overall output has stagflationary overtones, but the market initially took the data in stride, with bonds rising and equities falling lightly in the premarket. Presumably, yesterday's poor Durable Goods Orders data provided a heads-up as to today's preliminary GDP report. Also factored in is the expectation that weaker-than-expected economic growth and vulnerable consumer picture will help moderate the Fed's policy going forward. The strength in bonds noted above lines up with this picture, as did the sudden strength in oil in the afternoon.

Earnings reports came fast and furious today, with positive results from the defense sector, as well from big names such as PG, GR, DOW, AET, AEP and BDK. Raytheon (RTN) reported Q1 earnings that rose 30% over last year's Q1, up from 30 cents or $128 million on revenue of $4.9 billion to $166 million or 36 cents per share. The company cited strong demand from government and defense-related sectors. The results beat EPS expectations by 3 cents. RTN closed higher by 1.43% at 37.63.

Government spending also boosted Titan (TTN), which grew earnings 633% y-o-y from $3 million to $19 million in the current quarter. EPS rose from 3 cents to 22 cents per share, missing consensus estimates by a penny. Revenues rose from $454 million to $558.9 million. NOC beat estimates as well. Analysts were looking for 91 cents EPS on $7.54 billion revenue, with the company reporting earnings of $1.08 per share on revenues of $7.5 billion. TTN gained 1.84% to close at 17.68.

El Paso Electric (EP) announced earnings of $4.8 million or 10 cents per share, up from $2.9 million or 6 cents in last year's Q1 and beating by a penny. Revenues declined $500,000 from last year's Q2 $104 million figure to $103.5 million. EP cited lower operating and interest expenses for the positive EPS growth. Marathon Oil (MRO) also reported strong earnings that rose from $258 million or 83 cents per share in the year-ago quarter to $324 million or 93 cents per share. Excluding items, EPS was $1.02, missing expectations by 4 cents. Revenues rose 22% from $10.69 billion to $13.01 billion. EP finished lower by 1.96% at 10.03, while MRO lost 2.94% to close at 45.86.

Exxon Mobil (XOM) disappointed, however. It reported earnings that rose from 83 cents or $5.44 billion to $1.22 per share or $7.86 billion, a 44% gain. Excluding a one-time gain from the sale of its stake in Sinopec, earnings EPS was $1.15 per share, missing estimates by 5 cents. Revenues rose 21% to $82.05 billion, but on weaker sales. XOM lost 4.08% to close at 56.00.

Alongside the rise in energy prices, Canadian Pacific Railway (CP) grew net income more than threefold, from $24 million CDN or 15 cents per share to $81 million CDN or 50 cents on revenues that rose from $886.6 million CDN to $1.01 billion CDN. Estimates were for 42 cents EPS. CP closed lower by 2.98% at 34.15.

Coca-Cola Enterprises (CCE) reported a Q1 profit of $46 million or 10 cents, from last year's $104 million or 22 cents per share, missing estimates by a penny. Revenues declined from $4.24 billion to $4.2 billion in the current quarter. The company cited higher costs, waning European sales, and the fact that this year's Q1 was 2 days shorter than the year-ago quarter. Later in the session, Coca-Cola bottling (COKE) reported earnings which fell from 31 cents per share or $2.8 million to 8 cents or $719,000, a 74% decline despite revenues which rose from $287.7 million to $306.3 million in the current quarter. CCE closed higher by 3.78% at 20.32, while COKE lost 1.84% to close at 46.90.

Kulicke & Soffa (KLIC) reported a loss this morning, with last year's Q2 profit of $29.1 million or 44 cents per share falling to a loss of $7.7 million or 15 cents, exceeding analyst estimates for a loss of 14 cents. Revenue fell from $221.8 million to $124.8 million, exceeding estimates of $114.5 million. KLIC expects next quarter's revenues to come in between unchanged and a 10% gain. KLIC closed higher by .39% at 5.15.

Goodrich (GR) grew profits from 39 cents per share or $47 million to 47 cents per share or $58 million in the current quarter, on revenues that grew 10% to $1.28 billion. Analysts were expecting EPS of 40 cents on revenue of $1.23 billion. The company cited strong demand for commercial aerospace parts and upped its full-year estimate from $1.60-$1.80 per share to $1.80-$1.95. GR gained 5.94% to close at 40.13.

There was more good news from Black & Decker, which grew earnings from $86.6 million to $148.7 million y-o-y and beat estimates by two pennies, and PG which reported a 13% rise in Q3 earnings, beating estimates by 2 cents. GlaxoSmithKline (GSK) reported a 17% increase in Q1's profit and closed up 4.96% at 49.76. BDK closed +.54% at 83.34, while PG added .86% to close at 53.99.

After the bell, KLAC, the US' 2nd-largest semiconductor equipment maker, reported a big jump in earnings from 33 cents or $66 million to 61 cents or $123 million on sales that rose from $390 million to $542 million. Expectations were for 56 cents per share and sales of $528 million. KLAC was up 16 cents from his 40.02 close as of this writing.

MSFT reported Q1 profits of $2.56 billion or 23 cents per share, up from 12 cents or $1.32 billion in Q3 last year. The EPS figure included a 5 cent charge for legal items, however. Revenues were up from $9.18 billion to $9.6 billion. Expectations were for 32 cents earnings compared with the 28 cents (excluding items) and for revenues of $9.83 billion. The stock had closed at 24.45, -2.16%, but was up to 24.73 as of this writing.

For tomorrow, we'll open with the Employment Cost Index for Q1, Personal Income and Personal Spending for March, followed by Michigan Sentiment for April at 9:45 and the Chicago PMI for April at 10AM. Today was a troublesome day for equities, which declined despite the tentative daily cycle buy signals, the big morning drop in oil prices and the drop in treasury yields. On the one hand, the daily cycle picture continues to favor an upside turn in treasury yields and the stock indices. Today's plunge did not break last week's lows, despite the Nasdaq's, and so it looks like a bottom trying form at these levels. But the bounce has been very slow to arrive, with the Nasdaq peering over the edge of the cliff tonight and the indices closed right on their session lows. If bulls fail to put something together tomorrow, it could get downright ugly.


New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays

New Long Plays

None today.

New Short Plays

Novellus - NVLS - close: 23.66 change: -0.21 stop: 25.01

Company Description:
Novellus Systems, Inc., an S&P 500 company, manufactures, markets and services advanced deposition, surface preparation and chemical mechanical planarization equipment for today's advanced integrated circuits. Our products are designed for high-volume production of advanced, leading-edge semiconductor devices at the lowest possible cost. Headquartered in San Jose, Calif., with subsidiaries throughout the United States, as well as in the United Kingdom, France, Germany, the Netherlands, Ireland, Israel, Italy, India, China, Japan, Korea, Malaysia, Singapore and Taiwan. (source: company press release)

Why We Like It:
Technology stocks, especially semiconductor stocks, look poised to begin a new leg lower. The SOX index is trading right near precarious support and the NASDAQ Composite is barely holding on to the 1900 level. Likewise shares of NVLS have been consolidating mostly sideways above the $23.50 region. Is this a new "bottom" or is NVLS merely biding its time as bears rest up for another round? Currently the Point & Figure chart for the SOX is bearish. NVLS also has a bearish P&F chart that currently points to a $17.00 target. Short-term technical oscillators on NVLS are bearish and the daily chart shows a breakdown under its multi-month trendline of support. Tomorrow is an important day for chip companies or at least their stock prices as Wall Street waits for the latest semiconductor billings data. If the data is positive then NVLS and the SOX are likely to rebound. If negative then chip stocks should begin their next leg lower. That's why we want to use a TRIGGER to open the play in NVLS. If shares of NVLS trades at $23.40 or below then we'll open the play as a short. Our target is the $20.50-20.00 range. Our time frame is six weeks.

Picked on April xx at $xx.xx <-- see TRIGGER
Change since picked: - 0.00
Earnings Date 04/18/05 (confirmed)
Average Daily Volume: 4.0 million

Play Updates

Updates On Latest Picks

Long Play Updates


Short Play Updates

Broadcom - BRCM - close: 29.56 chg: -0.34 stop: 31.11

No change from our previous update on 04/27/05. However, we want to remind readers that the semiconductor billing data comes out tomorrow morning and this could create some volatility for the group. One way or the other we expect to see BRCM react to it. Plus, we have the NASDAQ at the 1900 level and the Industrials at the 10,000 level. Traders will be trying to buy a bounce or short a breakdown around these levels. Be prepared.

Picked on April 27 at $29.90
Change since picked: - 0.34
Earnings Date 04/21/05 (confirmed)
Average Daily Volume: 7.9 million


Boston Scientific - BSX - cls: 29.47 chg: +0.10 stop: 31.51

Hmm... we're a little bit surprised by BSX's relative strength today. The markets were weak and biotech-related stocks lost more than two percent with the BTK index breaking down below its 200-dma. We didn't see any unusual moves in BSX's rivals today. Keep an eye on the $30.00 level as resistance. No change from our previous update on 04/26/05 and 04/24/05.

Picked on April 19 at $29.05
Change since picked: + 0.42
Earnings Date 04/19/05 (confirmed)
Average Daily Volume: 5.4 million


Lowes Companies - LOW - cls: 51.74 change: -0.54 stop: 54.01

No change from our previous updates on 04/24/05 and 04/27/05. LOW is trading near the bottom of its recent range and if the markets continue lower tomorrow then LOW could fall into our target/exit range of 51.00-50.00. We are preparing to exit.

Picked on April 10 at $54.81
Change since picked: - 3.07
Earnings Date 05/16/05 (unconfirmed)
Average Daily Volume: 3.0 million


Catalina Mktg - POS - close: 22.85 chg: -0.31 stop: 25.25

Another day, another decline. No change from our previous update on 04/24/05 although the stock does look a bit oversold and due for a bounce. Look for the $23.50 level to act as new short-term resistance. Our target remains $21.25-21.00.

Picked on April 22 at $23.80
Change since picked: - 0.95
Earnings Date 05/18/05 (unconfirmed)
Average Daily Volume: 468 thousand


Sina Corp - SINA - close: 27.69 chg: +1.61 stop: 28.61

Ouch! Today's rally in SINA was certainly a surprise. We can't find any hard evidence as to what caused the spike but a couple of sources suggest that buyout rumors have sprung up again for SINA. Fortunately, the rally couldn't make it past the $28.50 level or its simple 200-dma. A drop back under $27.00 could be used as a new bearish entry point but do so carefully.

Picked on April 13 at $28.52
Change since picked: - 0.83
Earnings Date 05/05/05 (confirmed)
Average Daily Volume: 3.5 million


Westlake Chem. - WLK - close: 25.90 chg: -1.10 stop: 28.01 *new*

It looks like the lackluster GDP number helped spur another round of selling in shares of WLK. The stock lost more than four percent to close at a new relative low. Shares are very close to our target in the 25.50-25.00 range and support at 25.00 with its 200-dma's. We are lowering the stop loss to $28.01. We are preparing to exit and suggest readers do the same. More conservative traders may want to exit now.

Picked on April 08 at $29.19
Change since picked: - 3.29
Earnings Date 05/04/05 (confirmed)
Average Daily Volume: 207 thousand

Closed Long Plays

Northfield Labs - NFLD - close: 14.36 chg: -0.24 stop: 14.14

The BTK biotech index really took a turn for the worse today. The BTK lost more than two percent to breakdown below its 200-dma. The index's MACD has also reversed into a new sell signal. In a similar fashion shares of NFLD are reversing course. The stock could not hold the $14.50 level today and we're choosing to exit early.

Picked on April 25 at $15.39
Change since picked: - 1.03
Earnings Date 04/11/05 (confirmed)
Average Daily Volume: 471 thousand

Closed Short Plays

Greenbrier Co - GBX - close: 30.01 chg: -0.90 stop: 34.25

Target achieved. Another tough day for transport stocks but GBX under performed most of them with a 2.9 percent decline. Shares broke down below its 50-dma and traded right to the $30.00 level. Our target has been the $30.00-28.00 range so we're closing the play now that the target has been reached. However, traders may want to seriously consider holding on to GBX for another day maybe two. The Dow Transportation index looks vulnerable to more declines which could lead GBX deeper into our target range.

Picked on April 11 at $33.20
Change since picked: - 3.19
Earnings Date 03/30/05 (confirmed)
Average Daily Volume: 123 thousand

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


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