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Daily Newsletter, Tuesday, 05/03/2005

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Table of Contents

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

Market Wrap

Fed Still Measured

05-03-2005

High

Low

Volume

Adv/Dcl

DJIA

10256.95

+    5.30

10304.54

10208.03

2.15 bln

1581/1645

NASDAQ

1933.07

+    4.40

1944.53

1924.78

1.90 bln

1490/1589

S&P 100

554.41

-    0.36

556.83

551.87

Totals

3071/3234

S&P 500

1161.17

-    0.99

1166.89

1156.71

 

 

SOX

385.08

-    0.20

388.82

383.35

 

 

RUS 2000

584.48

-    1.38

589.26

582.20

 

 

DJ TRANS

3462.65

-  21.18

3490.28

3454.63

 

 

VIX

14.53

-    0.59

15.31

15.53

 

 

VXO (VIX-O)

14.62

+    0.18

15.10

14.58

 

 

VXN

20.14

-    0.66

20.24

20.06

 

 
Total Volume

4,339M

 

 

 

 

 

Total UpVol

2,345M

 

 

 

 

 

Total DnVol

1,935

 

 

 

 

 

Total Adv

3549

 

 

 

 

 

Total Dcl

3644

 

 

 

 

 

52wk Highs

113

 

 

 

 

 

52wk Lows

239

 

 

 

 

 

TRIN

1.07

 

 

 

 

 

NAZTRIN

0.57

 

 

 

 

 

PUT/CALL

0.85

 

 

 

 

 

Fed Still Measured

The Fed hiked interest rates by another 25 points and retained their measured pace language. As always the markets reacted with extreme volatility on the announcement with strong moves in both directions. Elsewhere there were conflicting signs once again on the health of the economy but nobody was listening.

Dow Chart - Daily


Nasdaq Chart - Daily


Before the Fed announcement we saw data about employment in the Challenger Layoff Report. The report said layoffs fell to 57,871 in April from 86,396 in May. This was a very sharp drop and the lowest level since November 2000. The layoffs have averaged over 100,000 for the last six months. Needless to say this drop was a real surprise. This could be an indicator of the actual nonfarm payroll report due out Friday. However, it does not guarantee a pickup in hiring, just a reduction in layoffs. In another component of the Challenger report they did survey hiring intentions. Those planning to hire were up +21% over the March levels. Since the Fed gets an advance look at the non-farm payrolls and they raised rates it could mean the coming jobs numbers will not be weaker than expected.

March Factory Orders rose +0.1% and was much stronger than the expected -1.5% drop. This compares to a drop of -0.5% in February. Durable goods were revised up to only a -2.3% decline for the prior month. Nondurable goods were up +2.6% to offset the other declines. Overall this was a neutral report that suggests the economy is still stuck in the soft patch. Year over year total orders are still up +4.2% with nondurable orders up +10.4% mostly on gains made in Q4.


The April Risk of Recession Index rose +4% to 22% from 18% in March. This was the sharpest move higher since June-2004. This represents a mild level of risk but the sharp jump could be an indicator that higher risk lays ahead. Nearly all the components weakened and that includes the drops in consumer confidence and sentiment, hours worked and the drop in the stock market. The flattening yield curve is also a warning of trouble ahead.

The big news for the day was of course the FOMC meeting and rate announcement. The Fed hiked rates by +25 basis points to 3.0%. They also kept the "measured pace" language despite seeing some weakness in the economy. The Fed acknowledged that spending had slowed as a result of higher energy prices. The markets reacted strongly to the inflation statement, "pressures on inflation have picked up in recent months and pricing power is more evident." They removed the preface to that sentence that said "longer term inflation remain well contained." If you read between the lines on this announcement it shows the Fed is becoming more concerned about inflation and fear it may not be as contained as originally thought. This shook the markets and all the indexes traded sharply lower. Just before 4:PM the Fed issued a correction to the statement saying the "Longer-term inflation expectations remain well contained." They actually printed it in bold on the revised statement. This prompted shorts to cover and lifted the indexes back into positive territory.

The Fed repeated the claim that its current policy is still accommodative which means there are still more hikes ahead. After the meeting the Fed funds futures were showing hikes at June, August and September but November is still too close too call. They also took out the phrase that energy prices were NOT flowing through to core inflation. They removed that statement and said pricing power is more evident. This suggests the Fed is watching the inflation gauge rise and becoming more concerned as everything related to energy becomes more expensive. The sentiment that the Fed could take a pass in June was completely erased and the end of year target is still 4%. Several former Fed members interviewed on Tuesday said Greenspan is targeting 4.5% for 2006 as neutral territory. The Fed also said labor market conditions appear to be improving gradually. It will be interesting to see the Jobs numbers on Friday to see what prompted that statement. Does "gradually" mean that jobs are going to be positive but weak as we saw in March?

With nearly two months until the Fed meets again on June 28th the markets are free to wander on speculation about their next move. We will see two months of economic data and a lot can happen in that period.

The April auto sales came in at 17.5 million units and well over the 16.8 million in March. The local automakers did not fare well and were again outdone by the Asian trio. GM sales fell -7%, Ford -5.2% and DCX -5.2%. Honda rose +13%, Toyota +21% and Nissan +27%. The Asian automakers gained +4% of market share in just the last month and accounted for 29.3% of all vehicles sold. This is an all time high and was done with higher incentives and strong sales of hybrids. The bright side of the report was a lack of production cutback announcements from Ford and GM. Several analysts had been expecting a new round of cuts. This may mean sales are picking up for the American models. With oil prices weakening the sales of SUVs have picked up slightly and a new round of higher incentives are probably planned for the summer selling season.

In stock news Tyco posted earnings inline with estimates but warned that the higher cost of commodities and steel would lower earnings for the rest of 2005. Tyco is paying off debt at a rapid pace and trying to settle with the SEC over complaints stemming from the Kozlowski era. They are also considering selling their plastics and adhesives business as they streamline their business model. The CEO did stress the strong balance sheet and said Tyco is now strong enough to buy new businesses and healthcare was on the top of their list. Now if he had given us a couple names we could have made some money on that comment.
TYC was knocked for a -7% loss to $27.50 and a new 52-week low but it recovered to $28.60 by the close. This is a strong support level and a decent entry point if you have a long-term view. Resistance highs are back in the $36 range.

ERTS posted earnings inline with lowered estimates but said future quarters will likely fall far short of their prior forecast. They posted earnings of +9 cents compared to +25 cents for the same period last year. For the current quarter they now expect to lose -22 to -28 cents. Analysts were expecting a profit of +4 cents. ERTS dropped -$4 to $48.60 in after hours trading.

Crude Oil Chart - Daily


Oil prices have been very volatile of late and dropped back to close under $50 once again at $49.50. Traders fear another inventory build when numbers are reported on Wednesday. This is still related to the normal spring demand slump and I would still recommend adding to oil positions under $50. Boone Pickens was on TV yesterday claiming Saudi Arabia production has peaked and their claims of plans to invest $50 billion to increase it by 2009 will be too late to head off the decline. Even Jim Jubak has gotten on the Peak Oil bandwagon with a clear description of the problem at this link: http://moneycentral.msn.com/content/P113996.asp

The markets traded sideways on very little volume until the Fed announcement. It was one of the lowest volatility periods ahead of an announcement that I have seen in recent years. The Dow stabilized just below resistance at 10265 and then slowly bled points into the announcement. When the first press release hit the airwaves we saw the normal post announcement volatility with wide swings in both directions. As the TV commentators pointed out that the key "inflation contained" phrase had been removed from the statement the indexes imploded. They had declined to their support levels, around 10200 on the Dow and appeared ready to take a long dive. When the Fed took the unprecedented step of correcting their statement the shorts were squeezed once again. Suddenly the Fed went from concerned about inflation to unconcerned and the markets celebrated. A buy program 5 min before the bell squeezed the shorts even more and the Dow closed +50 points off its lows at 10256. The Dow still has strong resistance at 10265 but we are slowly chipping away at that level. None of the recent declines have held with dip buyers appearing every time we see the Dow under 10100. I believe we have been fighting the negative trend for so long that excessive pessimism may have taken hold and a short-term rally could appear. When the bears can't press their advantage to the downside it encourages the dip buyers.

The Nasdaq pattern is slightly weaker than the Dow with a close right in the middle of its recent range at 1934. Short-term overhead resistance remains 1960 with support at 1900. The SOX was no help but at least it was not a drag either with another close at 385. This has turned into a goal line stand for the SOX. The S&P, like the Dow, also closed at the high end of its recent range at 1161. With resistance at 1165 it is either poised for a breakout OR another trip back to support at 1140. We have seen five round trips from top to bottom and the close right at the top is a fat pitch waiting to be hit.

SPX Chart - 30 min


The only major economic report left for the week is the Jobs Report on Friday. The current estimate is +175,000 jobs and nobody is going out on a limb with wild estimates. A lower number could be market friendly in hopes of a slower Fed but I am beginning to believe that no amount of weakness is going to slow the Fed from its appointed task. A higher number could help convince investors the soft patch is ending and improve consumer confidence. For me this week I am watching the 1156 level on the S&P. This is the convergence of the 100/130 exponential averages on the 30 min chart and this level was support twice this week. I would be cautious about any longs over 1165 but I would get short under 1156. With earnings mostly over, the Fed behind us and summer coming fast, the next test of 1140 may not hold. Volume is going to begin fading but the bulls are trying to muster strength for one more breakout attempt for that greener pasture above. If they manage to hold any break over 1165 for more than a day it could attract some idle sideline cash. While I am still thinking we will see 9800 before long there is enough sentiment building that my short term bias is neutral over 1156.
I would continue to remain cautious and definitely, enter passively and exit aggressively.
 

 
 



New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None None

New Long Plays

None today.
 

New Short Plays

None today.

Play Updates

Updates On Latest Picks

Long Play Updates

Archstone-Smith - ASN - close: 35.87 chg: -0.10 stop: 34.85

We remain on the sidelines waiting for ASN to confirm the bullish breakout. Our trigger to go long is $36.26. No changes from our previous update on 05/01/05.

Picked on May xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/26/05 (confirmed)
Average Daily Volume: 811 thousand
 

Short Play Updates

Biomet - BMET - close: 38.155 chg: -0.40 stop: 39.51

There are no changes from our previous update on 05/02/05. Our trigger to go short is at $37.45. More conservative traders may want to wait for a drop under $37.00 instead. Our target is the $33.00-32.00 range. Our time frame is six-to-eight weeks.

Picked on May xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 03/22/05 (confirmed)
Average Daily Volume: 2.4 million

---

Broadcom - BRCM - close: 30.15 chg: +0.52 stop: 31.11

BRCM remains under technical resistance at the 200-dma near $30.50. We see no changes from our previous update on 05/01/05. Our target remains the $27-26 range.

Picked on April 27 at $29.90
Change since picked: + 0.25
Earnings Date 04/21/05 (confirmed)
Average Daily Volume: 7.9 million

---

Boston Scientific - BSX - cls: 29.84 chg: +0.48 stop: 31.51

BSX produced a decent bounce today but the rally failed to breakout over the $30.00 level. Plus, BSX has technical resistance at its 50-dma near $30.20. No changes from our previous update on 05/01/05.

Picked on April 19 at $29.05
Change since picked: + 0.79
Earnings Date 04/19/05 (confirmed)
Average Daily Volume: 5.4 million

---

Novellus - NVLS - close: 23.63 change: +0.02 stop: 25.01

The markets went sideways today waiting for the FOMC announcement. Shares of NVLS followed suit with a sideways session. We remain bearish. No changes from our previous update on 05/01/05.

Picked on April 29 at $23.40
Change since picked: + 0.23
Earnings Date 04/18/05 (confirmed)
Average Daily Volume: 4.0 million

---

Catalina Mktg - POS - close: 24.43 chg: -0.16 stop: 25.25

There was no follow through on Monday's rally in POS and resistance at the exponential 200-dma is holding. We see no changes from our previous update on 05/02/05.

Picked on April 22 at $23.80
Change since picked: + 0.63
Earnings Date 05/18/05 (unconfirmed)
Average Daily Volume: 468 thousand

---

Westlake Chem. - WLK - close: 26.95 chg: +0.41 stop: 28.01

WLK's 1.5 percent rally today looks like an oversold bounce. The stock remains in its downtrend. We would look for short-term resistance near $27.50. The last few days we've been suggesting that more conservative traders exit early for a profit. That suggestion is still valid. In the news WLK filed to sell up to $750 million in debt. We see no change from our previous update on 05/01/05.

Picked on April 08 at $29.19
Change since picked: - 2.24
Earnings Date 05/04/05 (confirmed)
Average Daily Volume: 207 thousand
 

Closed Long Plays

None
 

Closed Short Plays

Sina Corp - SINA - close: 28.95 chg: +1.61 stop: 28.52

Bears appeared to panic yet again on rumors that SINA would be bought by Shanda Interactive (SNDA). The rally today hit our stop loss at $28.52 closing the play. The move also pushed SINA above technical resistance at the 200-dma. We are stopped out at breakeven. Don't forget that SINA is due to report earnings on May 5th and we do not suggest holding over the report.

Picked on April 13 at $28.52
Change since picked: + 0.43
Earnings Date 05/05/05 (confirmed)
Average Daily Volume: 3.5 million
 

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

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